What might Nick Clegg’s tax plans cost?

Nick Clegg’s plans for raising tax thresholds could be quite expensive. The coalition would’ve expected to get within £1,000 of the current £10,000 tax threshold target through indexation so its current plans aren’t quite as expensive as you might expect.

Going beyond those current plans to, say, something like a £12,500 threshold by 2015/16 could cost something like £10bn extra. So even though David Cameron and George Osborne are probably sympathetic to the idea, the costs involved mean no new target has been agreed internally or touted externally by Nick Clegg.

At the moment, the government is on a trajectory to increase the threshold in annual instalments of £630 that get you to £10,000 by 2015/16. One possible compromise could be to “up” the next instalment without committing to a new ambitious target for 2015/16.

The fact that Nick Clegg hasn’t spelled out a specific new target might be because he’s been warned he risks embarrassment if the Treasury can’t stomach it. But he could point at a new rate of instalment and say the government’s on a faster trajectory while the Treasury would’ve retained some flexibility.

Another problem is how you keep such a move progressive. In the second instalment of the threshold hikes already announced, the government brought down the 40p threshold to nick back from higher earners what it had just given them. Bring it down again and you increase “fiscal drag” pulling some very unhappy households into the 40p tax bracket. But you have to find some way to make those “redistribution” charts in the Budget move in roughly the right direction.

Amongst other suggestions to cover the costs of raising the tax threshold higher than planned, the Lib Dem leader mentioned a general anti-avoidance rule to clamp down on tax avoidance. At their boldest these can be quite radical measures and the government would certainly need something chunky to pay for the tax break. Budgets tend to come in with around £1b in tax avoidance measures.