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What on earth do you think you are doing, Darling?

Speeding up company busts and pummelling the poor

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Comment Well, wasn't that a wonderful little budget? We're broke, borrowing the entire output of many a small nation, and this as a result of the policies from the man who promised to abolish boom and bust. But it's not all bad news. Some of it is worse.

Take, as a minor example, the increase in statutory redundancy pay announced. Some will point to the huge numbers losing their jobs and say ah, how lovely, they'll get a little more money when they get shipped out the door. Few will note that such an increase is likely to increase the number losing their jobs.

As the dismal science continually tries to point out, there are very few actual solutions, there are only trade offs. And here the trade off is one that we might not really want to be making in such troubled times. For a company, if it wants to continue trading, must have enough money to cover its bills. To not have such dosh available is to be trading insolvently and yes, the sum you have available does indeed have to cover the statutory redundancy pay.

Raising the amount that would have to be paid in the event of an unfortunate bankruptcy is therefore going to increase the likelihood of such a bankruptcy occurring. At this time, when it's terribly difficult to make a profit or get capital, we've increased the requirement to have such.

The top tax rate rise has the class warriors cheering, of course. But it's a little unfortunate that the Institute for Fiscal Studies has pointed out that the earlier planned tax rise might actually lose the Treasury money. This is all very contentious of course, but the basic idea of the Laffer Curve is obvious. There's a tax rate which raises the maximum revenue. Too high and you'll get less money as people change their behaviour, too low and you could get more.

That is uncontroversial amongst economists. What exactly the rate is for a specific tax in a specific situation is the controversy. The IFS did make a few slightly heroic assumptions to get to the conclusion that the mooted 45p tax rate (now increased to 50p) on high earners would lose revenue, it's true, but who do you believe in such circumstances? The politician whose lips are moving or the independents?

Yes, quite.

So that £2bn predicted, which is a pittance in the larger scheme of things, might well not turn up at all. Bit like the internet boom really, lose money on every transaction and then make it up in volume.

But the worst news is what was not done. We need to have a thorough overhaul of the UK's income tax system. It's not that many decades ago that you only started to pay income tax as your income approached the average. Now you pay income tax if you're working part time on the minimum wage (no, really, 20 hours a week or so will get you into that tax net).

The mechanism that has been used to get us to this horrible state is "fiscal drag". In most years (the current perhaps excepted) and certainly over time, wages rise faster than inflation. This is the end result of that useful thing which capitalism alone amongst economic systems manages: a general and sustained increase in the standard of living. But successive Chancellors have raised the personal allowance in line with general inflation and not the higher rises in wages. So ever more people on ever lower wages get to pay income tax, with the absurd result that for many we are now taking income tax away and then paying it back to the same people in the same week in benefits.

The Budget itself recognises this: there are some 2 million people who face marginal tax rates of over 60 per tax. Hundreds of thousands face even higher rates than this with the combination of income tax and benefits being withdrawn as their working income rises. Yes, just as we think that there are Laffer Curve effects on the rich, we also believe that exactly the same happens to the poor. Yet in this monstrosity of a tax system we tax the working poor at higher marginal rates than we do the rich.

The solution to this is well known: to raise the personal allowance. The Adam Smith Institute (where I'm a Fellow) has been shouting in the wilderness about this for years. As a simple rule of thumb the personal allowance should be the same as working full time all year on the minimum wage. Some £11,500 or so. At the moment it's around £6,400.

The Joseph Rowntree Trust produced a survey on what it is to be poor in the UK. It concluded that you needed a pre-tax income of £13,400 in order not to be poor. That's just about that £11,500 after tax. Yes, we really do insist that those we define as poor pay income tax. UKIP (where I'm also involved) has had the same policy for some years. Last week Oxfam urged the same and Nick Clegg of the Liberal Democrats unveiled his third tax policy of the past year and urged the allowance be raised to £10,000.

As happens so often, good ideas start out way way out there, and then as people consider their merits they approach the mainstream. Or at least, they can do. And that's what I think has been the biggest mistake of this budget. Sure, bashing the rich for a few pennies here and there will always get cheers from Labour backbenchers, but we should really be concentrating our attention upon the poor. And the best thing we can do for them is to stop bloody taxing them.

That's my complaint: that Darling's allowed a good crisis to go to waste. ®

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