How to cut taxes for people on low incomes?

Nick Clegg repeated his calls for raising the income tax allowance today. Handily enough, we were discussing this at JRF just the other day. So here are two quick points. 

First, in 2010, we funded a Demos report, called How to Cut Taxes for Low Income People. This may be of interest, particularly for anyone wondering how to cut taxes for low-income people. 

Second, the conversation at JRF was partly about what counts as a straightforward idea. The appeal of raising the income tax allowance lies partly in its simplicity – £10,000 is a nice, neat number at which you start paying tax. 

Except, by its nature, tax is complex. 

To give a fuller discussion, here's an extract from 2011's Minimum Income Standards report:

"Another way to look at living wages would be to consider how much a family would need to earn, before any intervention by the state, in order to provide for their needs. This would show the extent to which employers are covering needs. In the case of a single person, without having to pay tax or national insurance contributions, the earnings requirement would be around £12,600 rather than £15,000 – implying a wage requirement of £6.42 an hour, only 49p more than the minimum. For a single-earner couple with two children, who at the MIS level must pay more tax than they get back in benefits and tax credits, the requirement without these transfers to and from the state falls from £31,600 to £26,100. Where both are working and the couple uses childcare, the requirement remains the same at £36,800 (that is, taxes and benefits/tax credits balance out). A lone parent using childcare receives much more from the state than is given back, and the parent would need £24,300 rather than £18,200 were it not for these transfers.

Some critics of the role of the state argue that this shows that lower taxes for people on low incomes would reduce the need for tax credits and make it easier to link a 'living wage' to the behaviour of employers rather than the state. However, under an individual system of taxation, the principle of not taxing people whose incomes are below an acceptable minimum would also require substantial tax cuts for many people whose households are well above the minimum. For example, a couple with two children, with each partner earning £18,400, paying for full-time childcare, gets almost exactly as much back from the state as they pay in tax and national insurance contributions, and this family is able to cover its minimum costs exactly. In theory, they could achieve the same result with no transfers to or from the state, but this would require the tax allowance for everybody to rise to £18,400, necessitating huge increases in tax rates or cuts in spending. The only way to avoid this would be to switch to a family rather than individual basis for taxation."

Depending on what you think the purpose of tax is, you can probably react to that in different ways. This debate will rumble on, and I think it's a good thing that we’re talking about tax in an explicitly pro-poor way. But at the very least, we do need to understand we’re dealing with a complex beast.