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Few things win as much public approval as the notion of progressive tax changes. When the government is raising revenue, those with the broadest shoulders should bear the biggest burden. When there is a giveaway, it feels right that the biggest gains go to the poor.
Since they are in the business of pleasing the electorate, politicians of all flavours choose to use such language. Take Labour chancellor Alistair Darling’s decision in the 2008 pre-Budget report to start withdrawing the income tax personal allowance from those earning over £100,000. The restriction in the value of the relief for the richest, he said, was needed because it was “worth twice as much to higher-rate than to basic-rate taxpayers”.
In his first austerity Budget in June 2010, Conservative chancellor George Osborne told the nation we were all in the same fiscal mess together and all had to bear a burden. But he went out of his way to insist that the rich bore the largest burden. “We are a progressive alliance governing in the national interest,” Osborne said. And in 2012, when he removed the child benefit from better-off taxpayers, Osborne said this was necessary on fairness grounds.
Similar statements have been made by almost all subsequent chancellors, including Rishi Sunak, who used his 2021 Budget to freeze the income tax personal allowance until 2026, saying it was “progressive and fair”. Rachel Reeves used a comparable justification in proposing to means-test the winter fuel payment element of the state pension in 2024.
In the early 2010s, mainstream political parties agreed that one of the benefits of the 2012 “Plan 2” student fees and loans system was the progressive element of repayments. Having an interest rate that was linked to the artificially high retail price index, with additional increments for higher earners, ensured that the best-paid graduates contributed more to the system and that allowed greater generosity to those with lower lifetime earnings.
When it comes to tax changes, the word “progressive” has become a synonym for “good”. That is, at least, how it works in theory. In practice, all economists know that adding progressive elements to a tax system generally involves higher tax rates for some people, or for all people over certain ranges of income. And this is not necessarily good.
At best, people have responded by shovelling money into tax-relieved electric vehicle and bike salary sacrifice schemes alongside pensions to keep their salaries below the various income tax thresholds where child benefit, childcare entitlements and the personal allowance are withdrawn. At worst, people are choosing to work less, reducing the UK’s productive potential.
You cannot open a newspaper or watch a news report without being bombarded with angry graduates saying that their higher interest rates are demoralising and unfair. The arguments are powerful.
But it is important to recognise the underlying irony of what has happened to the UK tax system since the early 1990s. Everyone wanted the rich to bear a bigger burden and politicians responded. The tax system is much more progressive than it was. And now people hate the results.
Well-to-do pensioners paid more into the system and do not see why they should get refused winter fuel payments still given to those who were not as successful or hard-working in life. The well paid hate the income tax thresholds that trigger high marginal tax rates so much that they have coined an acronym for themselves. These Henrys and Henriettas — a shorthand for young professionals who are High Earners, but Not Rich Yet — object to losing child benefits and childcare as their salaries rise. They also dislike having to contort their finances to avoid paying tax rates often well over 50 per cent. Younger graduates hate the idea that if they work hard and get better jobs, the interest rate on their student loans rises.
The most aggrieved are relatively high-earning graduates, who form the most socially and economically liberal parts of society. But when it comes to tax changes, they and we are a nation of progressive tax Nimbys. Rich, poor, conservative and especially liberal, we love progressive taxation until we face the consequences.
Such is the level of resentment over the complexity and perceived unfairness of Britain’s tax system that there might soon be an opening for some politicians to make the case, once again, for simplicity in taxation even if the outcome was not as progressive as the one it replaces. Society would benefit from having that argument again. It might prove surprisingly popular.
