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Put this all together, though, and there are significant implications for the distributional effects of the personal allowance policy. The good news is that families with children who earn around the higher rate threshold may do better than previously thought. They’d previously not looked likely to benefit from the allowance policy – or even to potentially lose out, as they were shunted into higher rate tax and made ineligible for Child Benefit from January 2013. Now, it looks more likely that, as things move forwards, these kinds of families will see small gains.
But the more dramatic result of not ‘netting off’ gains for higher rate taxpayers is that personal allowances become an even less efficient way to raise living standards for low-to-middle earners. The £48 tax-cut represented by today’s allowance move will go to all individual taxpayers on incomes up to £100,000. That means some households on incomes of £200,000 will gain around £100 a year.
It’s very hard to square that with the government’s claim that deep cuts to tax credits for low-to-middle income working families are absolutely necessary. In particular, it’s hard to understand why money is being taken out of childcare support for working parents – which not only raises incomes, but also enables low-to-middle income mothers to raise their own living standards by staying in work.
For Nick Clegg, ultimately it will be pleasing to see his tax agenda dominating debate. But he also faces growing risks. More people are coming to realise that his flagship tax-policy, billed as a tax-cutting measure for low income people, is focused increasingly on higher income households.
And for Osborne too there are challenges. His eyes are on a legacy as a reformer, not just an axe-man. To gain credit, he – and like-minded Lib Dems like David Laws – needs to leave Britain with a simpler, lower, more efficient tax system fit for low-to-middle income Britain, the people at the sharp end of today’s squeeze of wages and inflation.Today’s Budget didn’t do much to reassure on that front.
James Plunkett is Secretary to the Resolution Foundation Commission on Living Standards, a wide-ranging investigation into the pressures facing low-to-middle earners. Twitter: @jamestplunkett
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