tpa post budget briefing 2012

8/2/2019 TPA Post Budget Briefing 2012

1/10


2/10

Budget 2012

55 Tufton Street, London, SW1P 3QL www.taxpayersalliance.com 0845 330 9554 (office hours) 07795 084 113 (24 hours) 2

Introduction

In response to the Budget, Matthew Elliott, Chief Executive of the TaxPayers Alliance, said:

There is a lot of good news in the Budget for families who have struggled in the

recession. The cuts in corporate and top rate taxes will improve the incentive to

invest and innovate, meaning higher wages before tax. Then a higher personal

allowance will mean they can keep more of the money they earn. Unfortunately

some of the money is coming from higher taxes on pensioners; there is no relief for

motorists from terribly high taxes on petrol and diesel; higher taxes on tobacco will

be a boon for criminals selling dodgy cigarettes; and yet another higher rate on

Stamp Duty is an unfortunate hike in an ugly tax. But overall this is a Budget thatshould ease the pressure on peoples living standards and allow most of them to

keep more of their money.

This report provides further analysis on a number of the changes made in the Budget. It

looks at the following areas:

1. Easing pressure on li ving standards2. The personal allow ance and marginal income t ax rat es3. Age-related allow ances4. Progress t ow ards merging I ncome Tax and National I nsurance5. Contr ibut ing t o the il l icit t rade in cigarett es


3/10

Budget 2012


1.Easing pressure on living standardsThe critical challenge for the Government as it attempts to restore the public finances to

health while maintaining economic growth is to ease the pressure on living standards.

There are essentially three ways that pressures on living standards can be eased:

Higher pre-tax incomes Lower taxes Lower prices

Tax changes can increase pre-tax incomes if they increase the underlying rate ofproductivity growth, or if they cut taxes on business where the incidence is likely to be on

workers in the form of lower wages.

There are two key measures that will increase pre-tax incomes: the cut in Corporation Tax

rates to 22 per cent by 2014-15; and the cut in the additional rate of income tax to 45 per

cent in 2013-14.

There is extensive evidence that the incidence of corporate taxes is largely on labour in the

form of lower wages. For example, a 2006 US Congressional Budget Office report foundthat domestic labour bears slightly more than 70 per cent of the burden of the corporation

income tax.1

In a study for the OECD, Johansson et. al. report that higher top marginal income taxes

reduce total factor productivity growth. [Industry-level] evidence covering a sub-set of

OECD countries suggests that there is a negative relationship between top marginal

personal income tax rates and the long-run level of [total factor productivity]. And

Gemmell et. al. have looked at the impact of corporate taxes on productivity. They found

that a five percentage point cut in corporate tax rates would increase total factorproductivity by 3.8 per cent in the long-run. That effect occurs relative quickly (within 4-5

years rather than over decades) and firms in innovation intensive industries are affected

more severely. Higher corporate tax rates, via their effect on the post-tax user cost of

capital, have significant adverse effects on firms investment levels.2

As a result, we can expect that the measures announced at the Budget will increase pre-tax

incomes, but less than if there were more substantial cuts to Corporation Tax or top

1 Randolph, W. C. International Burdens of the Corporate Income Tax, August 20062 Gemmell, N., Kneller, R., Sanz, I. & Sanz-Sanz, J. F. Corporate Taxation and the Productivity and InvestmentPerformance of Heterogeneous Firms: Evidence from OECD Firm-Level Data, Documentos de Trabajo FUNCAS, 2010


4/10

Budget 2012


marginal tax rates, or cuts to other taxes where the incidence is on labour such as

Employers National Insurance.

Cuts to Income Tax such as the increase in the Personal Allowance, covered in the next

section, will mean a larger share of those pre-tax incomes remain with taxpayers. However

that is not true for those pensioners who do not receive an age-related allowance.

Prices are likely to rise as a result of the changes announced thanks to a rise in taxes on

motor fuel; tobacco and a number of other products (including those now being included in

VAT).

Overall the Budget should ease the pressure on living standards for most families,

particularly over time as higher productivity growth increases wages.


5/10

Budget 2012


2.Personal allowance and marginal income tax ratesTo understand the full picture about how marginal rates have changed over time it is

necessary to adjust thresholds for changes in average earnings and add together all three

taxes on earned income: Income Tax, Employees National Insurance contributions and

Employers National Insurance contributions. That means we get a complete picture of the

marginal tax rate on labour income and correct for fiscal drag, as tax thresholds become

less valuable with rising earnings over time.

Changes to the Personal Allowance and the additional rate of Income Tax were announced

at the Budget:

Personal Allowance 2011-12: 7,475 Personal Allowance 2012-13: 8,105 Personal Allowance 2013-14: 9,205 Additional rate of Income Tax: 50 per cent down to 45 per cent, starting in 2013-14

That will mean that the combined marginal tax schedule has changed in a number of ways,

shown in the graph below:


6/10

Budget 2012


The higher rate starts earlier at around 43,000 of earnings rather than around49,000 in 200102 (adjusted for 2013-14 average earnings).

Marginal tax rates for all those earning above the Personal Allowance earners haveincreased substantially. Those earning at the basic rate pay around 40 per cent and

those earning above the higher rate threshold pay around 50 per cent, including

national insurance contributions. The increase is largely due to an increase in the

rate of Employers NI contributions.

There are much higher marginal rates between 107,000 and 122,000 and above150,000 thanks to the clawing back of the personal allowance and the additional

rate respectively. When combined with national insurance the 50p rate is actually a

marginal income tax rate of nearly 60 per cent. With the new 45p rate, it will benearly 55 per cent in 2013-14.


7/10

Budget 2012


3.Age-related allowancesTwo groups are affected quite differently by these changes: those who are 65 already or

turn 65 in 2012-13; and those who turn 65 in 2013-14 or later.

Those w ho are 65 already, or t urning 65 in 2012-13

Those born on or before 5 April 1948 will still get a special age-related personal allowance.

It will be frozen at 10,500 for those born between 6 April 1938 and 5 April 1948. And

10,660 for those born before 6 April 1938. Those people are worse off than they might

have expected to be, in that the allowance wont rise with inflation. That is unfortunate

given the pressure on savers already but they arent actually having their allowance cut

from the existing rate.

Those turning 65 in 2013- 14 or lat er

Those born on 6 April 1948 or later wont get an age-related personal allowance. In 2013-

14, they will get the same personal allowance as everybody else 9,205 instead of

10,500 if they had been born earlier. That implies they will get 1,295 less in personal

allowance than they would under the current rules, which means they are about 259worse off at the basic rate of tax.

They will only receive the same treatment as those who have already reached 65 when the

personal allowance, which the Government are expected to keep increasing, catches up

with the frozen age-related allowances.

The Chancellor of the Exchequer made a powerful case in his Budget speech that removing

the age-related allowances would produce a simpler tax system. But, particularly for that

group now not getting an age-related allowance who expected to get it, that simplicity isbeing achieved at the expense of a substantial rise in taxes for many struggling elderly

people from what they would have expected to pay.

That wont affect the many pensioners who dont earn enough to exceed the Personal

Allowance anyway. But for some it will be quite tough. It could have been fairer to either:

Increase the age-related allowances in line with inflation, and let the working age Personal

Allowance catch up as it increases above inflation. Or, just freeze the age-related allowance

and let the increase in the working age Personal Allowance erode the difference without

cutting it off for new entrants.


8/10

Budget 2012


4.Progress towards merging Income Tax and NationalInsurance

Before Budget 2011, it was reported that the Chancellor was considering merging Income

Tax and National Insurance. However at the Budget he announced a more moderate

alignment of the operation of the two taxes. Two objections to an actual merger of the two

taxes are normally most important:

It might result in pensioners and the self-employed paying more. It would end the contributory principle where benefits are tied to contributions.

The TaxPayers Alliance has produced research showing how a complete merger of Income

Tax and National Insurance is possible without disadvantaging pensioners and the self-

employed, and arguing that the contributory principle does not exist in a meaningful way.3

Changes to benefits announced at the budget would make a full merger easier:

Reforming the State Pension into a single tier pension for future pensioners willreduce the need for a record of National Insurance contributions.

The additional transparency with annual tax statements will be a critical opportunity,which the Government should look to take, to make clear that the burden of

Employers National Insurance falls on labour. This should, more broadly, be a part

of ensuring that those statements do not just provide greater clarity over the taxes

people pay directly, but also informing them about the range of taxes they pay

indirectly through lower earnings or higher prices.4

3 Available to download from: http://www.taxpayersalliance.com/nicit.pdf4 The TPA Tax Buster App illustrates the full extent to which taxes make it harder for people to afford a range of goods:http://tpataxbuster.co.uk/


9/10

Budget 2012


5.Contributing to the illicit trade in cigarettesThe Chancellor decided to increase the duty on tobacco by 5 per cent above inflation.

Tobacco duties are probably the single most regressive taxes there are, disproportionately

affecting people on lower incomes. For many smokers it will account for all or most of the

saving from the decrease in direct taxes between 2011-12 and 2012-13:

Grossincome

AnnualIncomeTax andNI ,2011-12

AnnualIncomeTax andNI ,2012-13

Tax cut Theextracost ofsmoking20 a day

Newsaving

Theextracost ofsmoking40 a day

Newsaving

7,500 40 0 40 135.05 -95 270.10 -230

10,000 840 670 170 135.05 35 270.10 -100

15,000 2,440 2,270 170 135.05 35 270.10 -100

20,000 4,040 3,870 170 135.05 35 270.10 -100

30,000 7,240 7,070 170 135.05 35 270.10 -100

40,000 10,440 10,270 170 135.05 35 270.10 -100

50,000 14,390 14,220 170 135.05 35 270.10 -100

This is not the first time that tobacco taxes have been increased substantially above

inflation, but such tax hikes can increase the trade in illicit substitutes. A World HealthOrganisation report in 2004 found that:5

In 1998 and 1999, taxes increased by 5% over inflation, but revenues declined because of

continuous growth in smuggling. By 1999, the revenue lost through tobacco smuggling was

estimated to be about 25% of all tobacco revenue.

Another study in 2004 found that the tax avoidance response to tax changes is at least

twice the consumption response. That is the equivalent of two people simply switching to

the illicit market for every one person who stops smoking because of higher prices.

This is a serious problem in other countries, too. In the 2010 Irish Budget, the Minister for

Finance Brian Lenihan froze the duty on cigarettes. He outlined in his speech why:6

I have decided not to make any changes to excise on tobacco in this Budget because I

believe the high price is now giving rise to massive cigarette smuggling. My responsibility as

Minister for Finance is to protect the tax base. I have full confidence in the effectiveness of

5 World Health Organisation Taxation of tobacco products in the WHO European Region: practices and challenges, 20046 Brian Lenihan T.D. Financial Statement of the Minister for Finance, 9 December 2009


10/10

Budget 2012

55 Tufton Street London SW1P 3QL www taxpayersalliance com 0845 330 9554 (office hours) 07795 084 113 (24 hours) 10

the current multiagency approach but early in the New Year I want to explore what further

measures we may need to stem the illegal flow of cigarettes into this country.

That was a frank acknowledgement that the high duty on cigarettes had not necessarily

curbedconsumption but had led consumers to purchase substitute illicit goods instead.

Gabler and Katz carried out a study in Canada in 2010 and their findings were stark:7

Contraband cigarettes are perceived to be a nearperfect substitute for lawfully purchased

cigarettes. As such, contraband tobacco use neutralizes the deterrent effect of higher taxes.

When taxes on cigarettes were increased in 2002 in New York City, the combined state and

local taxes were $3 a pack. But during the four months that followed, sales of taxed

cigarettes fell by 50 per cent compared to the same period the previous year.8 It is not

plausible that this was due to a fall in the number of smokers; again it suggests that the

measure was a considerable boon to the illicit market.

7 Gabler, N. & Katz, D. Contraband Tobacco in Canada: Tax Policies and Black Market Incentives, Studies in Risk andRegulation, Fraser Institute, 20108 Fleenor, P. Cigarette taxes, black markets, and crime lessons from New Yorks 50-Year losing battle, Cato Institute PolicyAnalysis number 468, 2003

tpa post budget briefing 2012

Documents