David Laws, former chief secretary to the Treasury, who left office after an expense scandal that left many feeling quite sympathetic, has just about uttered some of the most important and telling words by a politician all year.

He was writing in the Telegraph, and argued that middle class households must see tax cuts within five years. His key point is this: we keep hearing about lack of incentives for the super rich, how they will leave these shores if they have to pay more tax, and how a 50 per cent income tax is unacceptable. We keep hearing about the plight of the poor, and how the benefit system is skewed against them working. But in all the debate, the cause of those in the middle has been forgotten. It is questionable whether Messrs Cameron and Osborne have the slightest inkling of this problem. The real disincentive applies to those who are working on middle-ish incomes.

But we would go further than Mr Laws. This problem is more serious than even he realises.

What Laws said

The Liberal Democrat, who won fine praise from George Osborne and David Cameron when he was forced to resign from the coalition, said: “Once the £10,000 personal allowance is delivered, there will be a strong case for looking at the burden on those in employment on low and middle incomes.

“After tax, national insurance, graduate contributions, and pension payments, some of these individuals will face marginal deduction rates of almost 50 per cent. That may be necessary in the tough times, but it will hardly be acceptable once the deficit is eliminated.”

Laws is the architect of much of the coalition government’s economic policy, and it is thought he is trying to angle his way back into government.

Frankly, while this column does not tend to offer political opinion, in this case we will make an exception, and say let’s hope he does return. His ideas seem to be spot on.

The middle-class disincentive

Working is expensive. If you are lucky enough to get a job within walking distance of your home, then, actually, the cost of getting a job is not too bad. But for many middle-income earners, the cost of commuting can eat quite significantly into disposable income.

This is a point that gets overlooked. The government talks about rearranging the benefit system so that it always pays to work. But has it really taken into account the cost of travelling to work, buying a new suit, and all the other extra costs associated with working?

But then, as you rise up the income scale, a host of means tested benefits are taken away either from you or your kids.

So, if you are a first-time buyer, property share ownership schemes are removed.

Soon, child benefit will be withheld from those paying 40 per cent income tax. But the government seems to have forgotten that child benefit was brought in to replace the married person’s allowance. Kids are the future. The UK is suffering from a demographic crisis in the making as it is. How the diminishing labour pool will be able to fund the pension payments of the rising number of people entering retirement will be one of the big challenges for the UK over the next few decades. The truth is, people with kids are subsidising the future pension of those who don’t have kids. Children are expensive, incredibly expensive. In terms of bridging the gap between overheads experienced by couples without children and those with, child benefit is tiny. To develop a system that is both fair and economically efficient, in that it does not pose a penalty on those who contribute to society by doing their bit to diminish the cost of the demographic shift, families with children should have much higher personal allowances.

But when children get a little older, and go to university – something which seems essential these days – then the cost to parents on middle income is horrific. The eligibility threshold for means tested student loans and bursaries is way, way too low. And the allowances made for extra income that can be earned by a family with more than one child, in calculating the means testing threshold, is an insult.

But there is another point, too, and this takes us more solidly into the world of economics and financial crises. Not only is the current system of income distribution unfair, it could be disastrous for the economy, too.

See: Why the super rich should pay more tax, and the rest should pay a lot less

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

© Investment & Business News 2013