Raising the personal allowance: a Mephistophelean idea
The Economist has repeatedly criticised the Conservative Party’s proposal to permit married couples to pool their income tax allowances. The plan would benefit single-breadwinner families, who, under the present system, are effectively waiving the Personal Allowance of the non-working partner. The magazine deemed the proposal both paternalistic, for trying to “tempt couples down the aisle” and regressive: “most of the poorest families would not benefit. […] of the 3.9m children living in poverty only 11% would stand to gain.”
The first criticism is fair. In a free society, government should have no role in promoting or discouraging particular family structures. (Through the “couple penalty” in the benefits system, it currently does the latter.) But this is not necessarily a reason to dismiss the plan. At least for some people, it amounts to a tax cut, and as the late Milton Friedman put it: “I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” Like Goethe’s Mephistopheles, the Tories want the right thing for the wrong reason.
In a more indirect way, this may also apply to the second point The Economist raises. Their 3.9m-figure refers to children living in households with an income below 60% of median household income. True, most of those falling below this poverty line do not pay income tax, and those who do are the ones not far below. But this does not mean that raising the Personal Allowance would only reach the not-so-poor among the “poor”.
As the Institute for Fiscal Studies shows, those with the lowest incomes are generally not the ones with the lowest living standards. Plotting income against Material Deprivation (MD), a consumption-based measure of poverty, they find a roughly arch-shaped relationship: starting in the middle of the income distribution and moving downwards, MD-poverty increases. But towards the very bottom, MD-poverty falls again. Very far below the poverty line, living standards are generally higher than in closer proximity to it, or just above. The reasons probably include short-term income fluctuations and misreporting.
Therefore, to those who could really do with a bit of extra income, raising the Personal Allowance might do more good than the Conservatives realise, and this is without even mentioning dynamic effects. The real criticism of the Tory tax plan should be: why so little, and why only for some?