Winners and Losers from Personal and
Indirect Tax Changes
Mike Brewer
Those personal tax reforms in detail
• Big tax cuts: - £13.2bn
• Cut basic rate to 22p to 20p (- £9.6bn)
• Higher tax allowances for over 65s (- £1.0bn)
• Increase threshold above which higher-rate tax due (£0.3bn)
• Increase threshold above which tax credits withdrawn (£1.3bn)
• Higher child element of child tax credit (- £1.0bn)
• Big tax rises: + £10.7bn
• Replace 10p band with 20p (+ £8.6bn)
• Increase UEL to point at which higher-rate tax due (charge
NI for longer) (+ £1.5bn)
• Increase withdrawal of tax credits (+ £0.6bn)
• Net giveaway: - £2.4bn (in 2009/10)
Duties and motoring taxes
• Fuel:
• Above inflation rise, but postponed to October
2007
• Above inflation rises in April 2008 & 2009
• Costs - £0.3bn this year, raises + £0.7bn by
2009/10
• Alcohol, tobacco
• Freeze spirits, others up with inflation
• VED
• Cuts for less polluting cars, rises for more polluting
cars (raises + £0.3bn in 2009/10)
Other changes
• IHT: threshold to £350,000 in 2010
• ISAs: thresholds up
• Corporate tax rate on small business will rise
from 19% to 22%
• reduce the distortion in favour of
incorporation
Principled tax reform? Or smoke and
mirrors?
• Welcome simplification
• Never clear what was justification for 10p band
• Little for marginal rate at £35K being lower than at £33K
• Would have been much simpler if 10p band on savings
income been abolished
• Revenues recycled to minimise losers
• Tax credit changes
• Help poorest children
• Higher WTC mitigates adverse impact on incentives to work
• Higher taper saves money maintains focus on poor
• Fuel duty: first real rise since 1999
2007
2009
Win/loss (RH axis)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
£350
£250
£150
£50
-£50
-£150
-£250
£0
£10,000
£20,000
£30,000
Annual earnings
£40,000
-£350
£50,000
Annual gain/loss
Marginal rate
Income tax & National Insurance
changes
80%
2007
£700
70%
2009
£600
60%
Win/loss (RH axis)
£500
50%
£400
40%
£300
30%
£200
20%
£100
10%
£0
0%
£0
£10,000
£20,000
£30,000
Annual earnings
£40,000
-£100
£50,000
Annual gain/loss
Marginal rate
Income tax, national insurance and tax
credit changes: family, 2 children
So who might win or lose? (1)
• IT & NI changes mean
• 65+ paying IT gain
• Those earning £18.5K - £39K gain
• Those earning £5.2K - £18.5K & £39K £40.5K lose
• Those earning £40.5K + unaffected
• Tax credit changes mean
• Low-income families gain
So who might win or lose? (2)
• Overall, 20% lose, 40% unaffected, 40% gain
• Main losers
• Single adults on <£18.5K, no children, not on tax credits
• Families with two earners whose tax credit rise not sufficient
to compensate for income tax losses
• Taxpaying women aged 60-64
• Main winners
• Tax-paying adults 65 or over
• Non-working parents and single-earner families with children
• Those earning £18.5K - £39K
• Most changes are small
IT & NI only...
Distributional effect in 2007/8 of reforms in Budget 2007
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
R
ic
h
es
t
9
8
7
6
5
4
3
2
t
-0.4%
Po
or
es
% change in income
1.2%
IT & NI only
...and now with tax credits...
Distributional effect in 2007/8 of reforms in Budget 2007
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
IT, NI, TCs
R
ic
h
es
t
9
8
7
6
5
4
3
2
st
-0.4%
Po
or
e
% change in income
1.2%
Worst case: no take-up by those without children
Overall impact of Budget 2007
Distributional effect in 2007/8 of reforms in Budget 2007
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
Personal tax
es
t
9
8
7
6
5
4
3
2
st
-0.4%
R
ic
h
Po
or
e
Change in net income
1.2%
Plus duties
Plus other tax changes
Change by household type
Distributional effect in 2007/8 of reforms in Budget 2007
Including
indirect
taxes
Average
Other with kids
Other w/o kids
Couple pensioner
Single pensioner
2-earner couple with
2-earner couple w/o kids
1-earner couple with
1-earner couple w/o kids
0-earner couple with
0-earner couple w/o kids
Lone parent, work
Lone parent, not working
Single, working
Single, not working
-0.5%
No take-up
by families
without
children
All personal
taxes
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Brown’s record
14.0%
12.0%
8.0%
6.0%
4.0%
2.0%
he
st
9
8
7
R
ic
-4.0%
6
5
4
3
or
es
t
-2.0%
2
0.0%
Po
Change in net income
10.0%
-6.0%
-8.0%
Brown: before Budget 2007
Brown: the record
Brown’s record
Average
Other with kids
Other w/o kids
Couple pensioner
Single pensioner
2-earner couple with kids
2-earner couple w/o kids
1-earner couple with kids
1-earner couple w/o kids
0-earner couple with kids
0-earner couple w/o kids
Lone parent, work
Lone parent, not working
Single, working
Single, not working
-10.0%
Brown: the
record
Brown: before
Budget 2007
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Child poverty
• Agree with HMT that Budget lifts 200,000
children out of poverty
• Welcome, but previous work suggested “gap”
of a million in 2010/11
• Previously thought £4.5bn a year extra
spending needed by 2010/11, now think
around £4bn
Conclusions
• Sensible tax reforms with revenue recycled to
minimise losers
• Higher-rate tax-payers unaffected, 65+s paying tax
gain, hard to generalise about others
• Tax credit rises for low-income families generally
exceed income tax losses
• Around a fifth lose, two-fifths gain, two-fifths
largely unaffected
• As usual, low-income families with children gain, but
still much to do to hit 2010 child poverty target
• Overall impression of Brown’s record unaffected
• Highly redistributive, especially to families with
children and pensioners
End