With gloomy forecasts for the economy, the government needs to undertake radical tax cuts to avert a recession, not the ones demanded by the Confederation of British Industry (CBI) and the mega-rich, but those that would help people at the bottom of the ladder.
The income of ordinary people is being squeezed from every direction. The super-rich continue to get even richer and there is no plan to curb fat-cattery at the top end of the wage scale. Ordinary people barely keep pace with the rate of inflation. The pre-tax annual median income (pdf) of full-time UK workers is around £23,674. Some 25% of full-time employees earn less than £17,000 a year. Millions of workers are not even paid the minimum wage that they are entitled to. Buying a house is a virtual impossibility for most workers.
An ordinary person's spending power is further sapped by price increases. The average family's food bill has increased by £750 a year. Train fares have jumped by 15%. There are double-digit price rises for utilities such as gas and electricity. The credit crunch has seen mortgage payments rise. Ordinary people can't dip into some reservoir of savings, as the savings ratio is low, and consumer debt stands at around £1.3 trillion. The sub-prime crisis and the related credit crunch will take its toll. Banks have an exposure of around £1.5 trillion, bigger than the size of the UK gross domestic product (GDP). Credit is more expensive and not so plentiful. Shops are already complaining about the slowdown in economic activity and it could become worse.
The economic downturn calls for a boost in the income of those at the bottom of the pyramid. This has beneficial effects for the whole economy. Ordinary people spend money on everyday items and this has a greater multiplier effect on the entire economy. Yet the government's solution is to force ordinary workers to accept a wage increase of just 2%; a real cut in their spending power. Such policies will hasten a recession, exacerbate income inequalities, increase social tensions and also make it impossible to meet government targets for reducing child poverty.
The government needs to pursue a radical agenda. Currently, the poorest fifth of the UK households pay 36.4% of their income in taxes: 9.5% in direct taxes and 26.9% in indirect taxes. The top fifth pay 35.5% of their income in taxes: 24.7% in direct taxes and 10.8% in indirect taxes. A redress should begin through progressive taxation and by expanding the value of tax-free personal allowances that have been eroded in recent years.
Action also needs to be taken to address the regressive nature of NIC. The NIC is a highly regressive tax. The government's own figures confirm that someone earning £12,000 a year, slightly above the minimum wage, pays £745.80 or 6.21% of income, in NIC. For those earning £24,000, nearer the median wage, this rises to 8.61%. Because of the artificial ceiling, those earning £50,000 and £100,000 pay 6.82% and 3.91% of their incomes respectively in NIC. The reason for this is that, in general, no NIC is levied on income above £34,840 per year, set to rise to £40,040 per year from 2008-2009.
The current annual tax-free personal allowance is £5,225 and is set to rise to £5,435 from April 2008. A 10% increase in all personal allowances could cost (pdf) the chancellor around £3.5bn. Since the benefit of any increase in personal allowances would also be received by higher tax taxpayers, the government can recover that by adjusting tax rates at the top-end, ie the proposals can be revenue neutral. A marginal rate of tax of 50% on income over £100,000 can yield over £5bn a year in tax revenues. The removal of the artificial ceiling on NIC contributions can generate additional revenues of nearly £9bn. This can be used to increase tax-fee allowances and thresholds for NIC. Currently the tax relief on pension contributions is nearly £21bn and over half of this goes to just 3 million higher-rate taxpayers. An additional £5bn can be raised by restricting the tax relief on pension contributions to the basic rate of tax. These proposals can generate £19bn to exempt those at the bottom end from taxes and NIC and will go some way towards alleviating poverty, averting a recession, helping pensioners and combating child poverty.
Any government not controlled by corporations and the mega-rich has much more scope for action. It can focus on the £97bn-£150bn a year that is lost through tax avoidance schemes. It can require billionaires living in the UK to pay the taxes that ordinary people already do. It can eliminate the tax perks enjoyed by private equity groups and hedge funds, go after the $11.5tn stashed in offshore tax havens (pdf), curb corporate stamp duty, transfer pricing games and much more. The money could be used to raise all tax-free allowances, reduce basic rates of income tax and increase pensions.
None of the above is demanded by the CBI and the corporate sector, even though those companies would benefit from the higher spending power of ordinary citizens.