The middle class isn't so docile everywhere
To paraphrase Willie Sutton, the reason Chancellors rob the middle class is because that's where the money is.
Sure, politicos like to wave their arms and pledge to tax the undeserving rich, but in reality that never raises enough cash. For one thing, there aren't enough undeserving rich to go round, and for another, the rich have an anti-social tendency to move their cash out of harm's way. For example, the new 50p tax on incomes over £150 grand may show we're all in this together, but in reality it's likely to reduce tax revenue (see this blog).
So as Darling/Osborne run through the options for closing our £100bn fiscal gap, the middle class finds itself right back in the crosshairs.
Much of the action will be on tax. The middle class can expect to see income tax allowances and thresholds frozen (just like Howe did in his famous 1981 budget), and you certainly wouldn't rule out Darling extending his 50p tax rate further down the income scale (nicely stitching up Cam and Oz in the process).
The middle class will also be whacked by the forthcoming increase in VAT to 20% (watch this space). The VAT net may even be extended: the National Institute calculate that abolishing the reduced rate of VAT on fuel, and extending VAT to cover everything except food and childrens' clothing would raise £28bn pa by 2015. True, VAT is highly regressive, so proportionate to income, the poor will suffer most. But it's the middle class who will pay most.
The same goes for the planned further increases in eco-taxes, which also tend to be highly regressive. However with a little hippy ingenuity, such taxes can be shaped to hit the middle class especially hard: today's proposal to impose a £3,300 tax on new cars (heavily promoted this morning on the good old BBC) shows the way.
And then there's the sharp hike in business rates facing many small business owners after the government's recent revaluation exercise.
But of course, it isn't just through higher taxes that the middle class can expect to see their incomes cut. There's also the thorny issue of cash benefits.
Last week Tyler attended an interesting session organised by the ever-excellent Reform to launch their new paper on welfare reform - The End of Entitlement. Its key proposals include handing benefit rules and operation to social enterprises and companies, flexible Personal Protection Accounts modelled on ISAs, and replacing social security benefits with private provision.
But the headline item was a further refinement of Reform's proposal to abolish middle class welfare.
According to Reform, £31bn pa is currently being spent on welfare benefits for people who are not in need. Which is a quarter of the entire cash welfare bill.
They define the need threshold on the basis of every adult having an income of £15,000 pa and every child £5,000 pa, so that for example, a two adult two child household needs an annual income of £40k. On that basis they identify the following benefits as being the least well targeted, with high percentages of the benefits spend going to those above the threshold:
As well as pushing up the state pension age to 68 more quickly than currently planned, they recommend eliminating a raft of benefits for those above the needs threshold, including:
- Scrap Child Benefit and streamline the Child Tax Credit - net saving £7.2bn pa after increase in means tested child support
- Scrap the Child Trust Fund, Employer Supported Childcare Schemes, Health in Pregnancy Grants, the Healthy Start Scheme and the Sure Start Maternity Grant - saving £1.3bn pa
- Abolish winter fuel allowance and free TV licences for pensioners - saving £3.2bn pa
- End concessionary bus fares - saving £1bn pa
- Charge student loan borrowers at the market rate - saving £1.2bn pa
- Abolish the Educational Maintenance Allowance - saving £0.5bn pa
In other words, Reform propose an end to Beveridge-style universal benefits, and a much greater reliance on means testing.
Now, whatever you think about more means testing - and several people in Reform's meeting were aghast at the idea - this proposal means a £31bn pa cut in middle class incomes.
As it happens we like Reform's idea. But that's because the state should not be in the business of churning money from tax to benefits for people who don't need the help. It should cut both benefits and taxes (eg see this blog where we estimated the deadweight cost of fiscal churn at £5-6bn pa). .
But unfortunately, that's not where we are today. We have a huge fiscal hole to fill, and while benefits will be cut, there is no immediate prospect of a corresponding tax cut. For the middle class, their benefits cut will come on top of all their tax increases.
So are they going to sit there and just pay up? Put country before themselves?
Or are they going to shout and scream and demand that government cuts its own spending first? Like our middle class American cousins have long done.
Your call.
But you can join the TaxPayers' Alliance here.
And unlike Big Government, it's free.
PS Talking of the TPA, their latest research report is published this morning. Snappily entitled ACA-to-YJB: A Guide to the UK Semi-Autonomous Public Bodies, it's a comprehensive guide to what you and I know as Britain's 1,152 quangos. Here are the key facts:
- Direct cost to taxpayers - £90bn pa (2007-08)
- Additional fees and charges levied by quangos - £32bn pa
- Staff - 534,000, which is more than the entire civil service
It is a fantastically useful survey - everything you ever wanted to know about the cost of these unaccountable, crony-stuffed excrescences. Well done to Ben, John, Katherine, and James for wrestling the facts to the ground. We'll be keeping a copy at our bedside for easy reference.
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