Politics: Lets get Income Tax and NI sorted before thinking of any new spending

With predictions of economic growth now standing at over 3.5% for the last quarter of 2013, and overall growth for the year  now standing at 1.5% the siren voices can already be heard calling for a loosening of the belt and an increase in public spending.

 These are the very siren voices that drew the British economy onto the rocks in the first place, and drowned so many young hopes and dreams as the deficit expanded and more and more debt flowed into the economy.

 On of the reasons that the economy has been slow to recover has been as much due to the decision of individuals to spend within their means and pay down their personal debts before spending more money as it has to the Government taking the same action with the national deficit and debts.

 Regardless of how fast the economy is picking up, we still have a massive personal debt problem and a massive national debt problem with both individuals and the nation still spending beyond their means and we must ensure that the increased revenue from the growth in the economy is not squandered.  We have got to grow the economy to the point where we have eliminated the deficit and are paying off our national debts before we even think of increasing our spending.

 However, there are things that we can do to help people on low and middle incomes to cope with the rising inflation that will come as interest rates finally lift from rock bottom and borrowing becomes more expensive.

 The first would be to continue to ensure that low cost loans are available to people struggling to pay down their debts whilst still on low pay, and that is best done by having the Bank of England set a new interest rate for Credit Unions.  Such a measure would be a massive boost in the fight against pay-day loans and loan sharks.

 The second would be to increase the basic income tax threshold, the lower earnings level for paying national insurance and the national minimum wage all to 50% of the aggregate National Average Earnings for men and women in the previous year.  Such a move would have the triple effect of taking the national minimum wage marginally above the living wage for the first time, helping to ensure that it pays to be in work and ensuring that if the people at the top get a pay increase it is reflected at the bottom as well.

The third measure would be to remove the upper earnings level on National Insurance in order that everyone pays the same percentage of their income towards the health and wellbeing of the nation.  If we are to do this then we may as well merge Income Tax and National Insurance into a single Income Tax code with a hypothecation of the NI element.

 A combined Income Tax and NI could then be made more progressive by introducing 10% band increases from 0% to 50%, with the thresholds for each band being set in line with the aggregate National Average Earnings for men and women in the previous year.

 If we take 2013 as the being the previous year, the National Average Earnings for 2012 was in the region of £ 26,500 (the exact figure would need to be calculated and aggregated for part and full time workers).

The proposed tax bands would be:

  • Band 1: 0% on all earnings up to £ 13, 250
  • Band 2: 10% on all earnings between £ 13, 251 and £  26,500
  • Band 3:  20% on all earnings between £ 26,501 and £  53,000
  • Band 4:  30% on all earnings between £ 53,001 and £  79,500
  • Band 5:  40% on all earnings between £ 79,501 and £106,000
  • Band 6:  50% on all earnings above £106,001

 This change would lower the overall percentage of tax paid by the poorest, and marginally increase  the percentage of tax paid by the richest, but most importantly for the people who are in charge of setting wages the fact that their own tax banding would increase in line with aggregate earnings for men and women would be a bigger incentive to equalise men and women’s pay and part-time and full time pay than all the equalisation legislation of the past 50 years.

 The increase of tax on earnings above the upper tax threshold to 50% would although being symbolic not actually be that great a jump.  The combined Income Tax and NI for people earning over the higher rate threshold at present is 47% which means that the increase is just 3% and for that they know that they get the satisfaction of having an income tax system that is progressive, simple and linked to earnings.

(NB: These are example figures, the final figures would be dependent upon complex miscalculations by HMRC).

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