Income tax: Healey’s budget leaves thresholds frozen again. How much more will you pay?
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Fiscal policy, Taxes, subsidies and price controls, Wages and income inequality
What happened
Chancellor John Healey's first budget keeps income tax thresholds frozen rather than changing the rates at which people are taxed.
The economics
Freezing thresholds is a stealth tax: as earnings rise with inflation, more income is pulled into higher tax bands, so take-home pay falls and the effective tax burden rises. This shows how fiscal policy can affect household incomes and government revenue without any change in headline rates.
Evaluation
The burden is uneven: those whose earnings grow faster are hit harder, and lower earners may be relatively worse off because thresholds do not rise with inflation; while freezing thresholds raises revenue, it may also dampen consumer spending.
Practice question
Using this example, analyse the effect of frozen income tax thresholds on households' take-home pay and on government tax revenue, and evaluate its fairness.
Where it fits in the syllabus
- Fiscal policy: The government changes spending and taxation to influence aggregate demand and economic activity.
- Taxes, subsidies and price controls: Indirect taxes, subsidies and maximum or minimum prices that governments use to change market outcomes.
- Wages and income inequality: How labour markets set wages, and how income and wealth are shared across people.
- IB Economics: Fiscal and Monetary Policy, Government Intervention and Market Failure, Aggregate Demand and Supply
- A-Level Economics: Economic Policy, Government Microeconomic Intervention
- AP Macroeconomics: National Income and Price Determination, Long-Run Consequences of Stabilisation Policies
- AP Microeconomics: Supply, Demand and Market Equilibrium, Market Failure and the Role of Government, Factor Markets and Income Distribution
- IGCSE Economics: Government Macroeconomic Policy, Government Intervention, The Allocation of Resources