For the sake of our children, stand firm on tax by stealth
The amendment reduced taxation by stealth. Before indexation, people’s tax burden would increase as a result of increases in earnings not being matched by increases in tax allowances.
However, we desperately need a modern version of the Rooker-Wise amendment as ever-more stealthy politicians find ever-more ingenious ways to tax us.
Let’s start with wealth taxes. By the next election, the level of assets that somebody can pass on to their children before paying Inheritance Tax will have been stuck at £325,000 for six years: meanwhile, it is a fair bet that the Retail Prices Index will have been increased by about 25 per cent over that period.
There are now very few London postal districts (for example, Forest Gate, Plaistow and Thornton Heath) where somebody could die and leave a house of average value to their children without paying Inheritance Tax. Inheritance Tax is, of course, a tax on wealth accumulated out of income that has already been taxed. It should be reduced or eliminated and certainly not increased by stealth.
There are similar problems with Stamp Duty. Since 2003, anybody buying a house for £250,000 has paid Stamp Duty of 3 per cent. This is a lot of money and a serious impediment to mobility.
However, at least back in 2003 the average house price in London was around £250,000 and there were plenty of houses available for less than that figure; today, the average house price is over £400,000 – indeed, the average flat costs well over £250,000.
It is not surprising that Stamp Duty revenues have gone from being a pimple on the public finances to a major revenue raiser. Stamp Duty is now a serious cost for ‘hard-working people’ (as the government likes to describe them).
However, perhaps most surprising, given the brave rebellion by Rooker and Wise, is what has happened to personal tax allowances.
From 1979 until 2007, the personal allowance increased in real terms but it did not keep pace with wages – under ostensibly tax-cutting governments. The situation for married couples has been much worse than that for single people as the married couple’s allowance fell rapidly in real terms before being abolished. Of course, since 2010, the Liberal Democrats have forced the coalition to implement a huge increase in the personal allowance, rectifying some of this damage.
So, Rooker and Wise succeeded in ensuring that the government could not increase taxes simply by increasing inflation, but they did not ensure that the basic rate tax threshold kept up with increases in wages, at least up until 2010.
But, even worse has been the impact of stealth taxes on the higher-earning middle classes such as senior policemen and deputy heads of schools. Higher rate tax was once the ‘privilege’ of the rich.
However, the level of income you can earn before higher rate tax became due fell by nearly one third relative to earnings between 1979 and 2010.
And, since then, things have got worse.
George Osborne has actually cut the amount of income you can earn before paying higher rate tax and he will preside over an increase in the number of people paying higher rate tax of well over one million. When Nigel Lawson was Chancellor of the Exchequer, one in twenty people paid higher rate tax; now the figure is one in six.
Furthermore, Osborne has decided to increase the tax thresholds in future in line with increases in the CPI rather than the RPI. That rather arcane change means that tax thresholds are likely, on average, to go up by less than RPI, which is a broader measure of inflation.
By a small technical change, the Chancellor has condemned future generations to an increasing tax burden.
So, where do we go from here? We need a new Jeff Rooker: a backbencher from the governing party with a backbone.
It is interesting that the government has decided to commit the resources of future generations to increasing pensions year-on-year by the highest of wage inflation, price inflation or 2.5 per cent.
Of course, spending promises are cheap when it is future governments that will have to fulfil them.
We need a backbencher who will move an amendment to the 2014 Finance Act to increase all income tax, Stamp Duty and Inheritance Tax bands by the higher of wage inflation and retail price inflation in future years unless there is a specific vote by parliament to overturn it. Any volunteers?
This article was originally published by the Daily Telegraph.