Lib Dem tax policy: Our response to your responses

The authors of the 'Think Again, Nick!' report on the wisdom of increasing the personal allowance respond to comments across the blogosphere.

Our guest writers are Tim Horton and Howard Reed, authors of ‘Think Again, Nick! Why spending £17 billion to raise tax thresholds would not help the poorest

As the authors of the report that kicked off the debate last weekend about the wisdom of increasing the personal allowance, we wanted to take up Will’s offer to reply to some of the comments that have been posted in response – both on Left Foot Forward and on other sites, best summarised at Next Left or Liberal Democrat Voice.

First, we wanted to say thanks to everyone who has offered comments on our analysis.

Before we reply to some of the substantive points, a quick word about our motivation. It is a shame that some have interpreted our report and subsequent commenting as somehow disrespectful to the Lib Dems. In fact, it should be taken as quite the opposite – a mark of respect. In days gone by, people would dismiss Lib Dem policies on the grounds that they would never be implemented or that the sums didn’t add up. (Indeed, most criticism to date of this Lib Dem tax cut from other parties has been based on deliverability and credibility – namely, that it is a fantasy to think that the measures proposed to raise the revenue for this tax cut would actually deliver the £17 billion claimed.) By contrast, we have taken the proposal at face value and asked: assuming the necessary revenue were available, would it be the right thing to do? Some people might not have liked our conclusions, but if we’re genuinely into three-party politics, then we should also be up for critiquing all three parties’ policies.

Now some responses to points that have been made.

There were basically three sets of responses to the report. A first set challenged the legitimacy of assessing an individual policy. A second set queried our claim that the proposal was unfair or regressive. (Some respondents mixed both: Alix Mortimer shifted rather tortuously from arguing that the allowance increase was progressive in its own right, to arguing that it was of course regressive if we didn’t also take the compensating tax rises into account. Interesting…) We offer some thoughts on each of these two complaints below.

A third set of responses (in our view, the most coherent) challenged the political significance of our findings and the value-orientation of our argument. We do not address these here, since these are matters of opinion, and everyone is entitled to their own view. We would just say this. It is perfectly coherent for people on the right to argue that inequality doesn’t matter, or that the negatives of coercive taxation outweigh the benefits. But bear in mind how far away this is from the philosophy being espoused by many progressive Liberal Democrats around the country. It is to this group that our challenge was really addressed.

1) Is it legitimate to consider the wisdom of individual policies?

One complaint was that we only sought to evaluate the impact of the personal allowance increase in isolation. This is not true – our report does try to consider the effect of the package as a whole (Section 3.1.4), and finds that taking the corresponding tax-raising measures into account does not affect our key concerns arising from an examination of the tax cut in isolation (specifically, that it is a way of using £17 billion that ignores the poorest and also that it increases socially damaging inequalities between the bottom and middle of society).

A more commonly heard complaint, however, was from those criticising the fact that we sought to isolate the impact of the personal allowance increase at all. The standard complaint here was that it is not legitimate to look at individual policies and that you can only look at policies in terms of the impact of the whole package (usually followed by denunciations that the work was therefore ‘biased’, ‘partisan’, ‘misleading’, and so on).

This is a ludicrous claim. Where individual policies are discretionary decisions, like this tax cut, then of course you can consider the wisdom of pursuing them. There is nothing about the tax rises that the Lib Dems are proposing that then compels them to increase the personal allowance to £10,000 – it is a discretionary decision.

Yes, one should also consider the impact of the combined effects of different policies – as we did. (And at no point in our report did we claim that the impact of the personal allowance increase was the impact of the entire package.)

But that does not make it illegitimate to consider individual policies on their own merits. (Imagine this argument in other contexts. It would be like saying just because the personal tax and benefit reforms Labour has pursued have, taken together, been highly progressive, that this meant you couldn’t criticise individual decisions like their 2007 cut in inheritance tax. What nonsense.)

In particular, to pretend that a collection of policies is a take-it-or-leave-it package, rules out the possibility of ever improving that package. We made it quite clear in our report that we support the Lib Dems’ proposals to ask those on very high incomes to pay more in tax, by restricting higher-rate pensions relief, closing avoidance loopholes, and so on. But we also think there are much fairer ways to use this revenue than this increase in the personal allowance, which is why we are calling on the Lib Dems to replace it with other possible alternatives.

Indeed, the Liberal Democrats themselves have in the past done just this with this particular tax policy. Between July 2007 and April 2009, the equivalent Lib Dem policy was to use the revenue-raising package of tackling tax avoidance / green taxes / etc. to fund a 4p cut in the basic rate of income tax. Then, on 20 April 2009, it was announced that this revenue would now be used to fund an increase in the personal allowance to £10,000 instead. In the words of the Guardian at the time:

“Until today the Liberal Democrats were committed to rebalancing the tax system by cutting the basic rate of income tax by 4p in the pound. Instead, in what Clegg said was a response to an ‘evolving situation’, the party wants to use the money that would have funded the 4p cut to increase the tax allowance by £3,525 instead. Clegg said that this policy was ‘even fairer’, that it would take 4 million people out of income tax altogether, and that it would be worth £705 a year to anybody earning up to £100,000, the point at which the benefit starts to taper out.”

All credit to Clegg for considering the distributional impact of the component parts of his policy package. I’m not sure why so many Lib Dem activists think this is illegitimate (such as James Graham at Social Liberal Forum).

What we are proposing is that such a process of consideration should happen again. We think, to quote Nick Clegg, the package could be made “even fairer”.

Finally, Peter Kunzmann goes a step further and argues that you can only assess fairness in terms of all of the other policies a party is planning to enact. Clearly we don’t agree with this. Among other things, it would close down the space in politics to discuss the justifiability of individual policy decisions. Peter is right that if one were claiming to produce an assessment of an entire party platform then it would be necessary to consider all these policies. But that wasn’t our objective, Peter. It was to analyse this tax measure and try to illustrate that it isn’t as great as many people think. It’s no good denouncing our work as misleading because it doesn’t conform to your separate objective.

(It would be an interesting exercise to analyse the impact of an entire party platform, though difficult this time round as no-one’s really put the details of their deficit-reduction plans on the table other than talking about the relative contribution of tax rises and spending cuts. What would taking all other Lib Dem policies into account look like? It’s a good question. We know the Libs have some good proposals in various policy areas. Would they do enough to eliminate the regressivity of this £17 billion tax cut across most of the population? We really don’t know. But, Peter, we’ll tell you this; whether or not the picture overall looked good or bad, our point to you would still be the same: it could be so much better if this ludicrous £17 billion tax cut were replaced by something fairer.)

As a footnote, it should also be said that – while credit is due to the Lib Dems for being ahead of the curve with proposals to tackle inequality at the top – other parties are also looking at similar policies on closing loopholes and pensions tax relief. (We’re told even the Tories are thinking about some of this stuff!) So we would also encourage other parties to think about the distributional impact of possible ways of using those resources, and not assume – as some respondents here seem to – that, simply because the revenue has been raised from the very wealthy, any subsequent use of the resources is impervious to criticism.

2) What does ‘regressive’ mean and is this policy regressive?

We call a tax change ‘regressive’ when it gives more on average to households higher up the income distribution as a proportion of their net household income than it does to households lower down the income distribution.

As Graph 2 in our report illustrates, this tax cut would be regressive because the gain households get from it as a percentage of their net household income tends to increase as you move up the household income distribution (though falls away again in the top decile). For example, households in the middle of the income distribution would see an increase of about 3% in their net household income from this tax cut, whereas households in the poorest fifth would see an increase of only around 1.6% (that is why it would increase inequality between the bottom and the middle).

(When you take into account the tax rises on the super-rich that you mention, those in the richest 10% are losers, certainly; but this regressive gradient would still remain across the bottom 90% of the population.)

The distributional gradient across the population reflects a variety of factors. One is that there are a lot of working-age households on only modest earned income or no income at all. Another is the fact that two-earner households (which tend to be richer) get more than single-earner or no-earner households from the tax cut. Another is that pensioners don’t gain as much from the reforms as those of working-age.

Note that analysis is done at the household level, because that is the level at which welfare is meaningfully assessed. (Think about it this way: the Duke of Westminster’s wife would not be in poverty if she had zero income. As far as I know, no party is planning to change the household basis on which the government assesses welfare and poverty.)

Specifically, the analysis has been done over ‘equivalised’ household incomes, that is, incomes adjusted to take the composition of households into account – such as number of children, pensioners etc. (So a household with a single individual earning £30,000 has a higher ‘equivalised income’ than a household with a single individual earning £30,000 with two children.) The distributional gradient therefore also reflects the pattern of characteristics like this across the population.

(Some people have asked about the analytical technique. The analysis is based on microsimulation modelling of the tax and benefit system over a representative dataset of UK households, ordered by their equivalised net disposable household income. It is a similar technique to that the Treasury and the Institute for Fiscal Studies use for modelling.)

While there was a lot of discussion about this analysis, we haven’t seen any comments that substantively challenge our figures.

Instead, the major criticism seems to have been that what we are saying is ‘obvious’ and so shouldn’t be take as a sign of a bad policy. For example:

• on the measure not benefitting the poorest, we have ‘rob tennant‘: “[your point that it] ‘does nothing to help those who don’t pay tax’ – durrrr, it’s supposed to help those who do pay tax”; or

• on the regressive nature of the policy, we have ‘Alix’: “You’re standing there shouting that households who pay more tax stand to benefit more from a tax break, and expecting it to mean something. It doesn’t, it’s just a fact.”

We have to apologise to those who think our analysis is too obvious to be worth saying (though its puzzling that many of the same individuals have been furiously posting other comments trying to argue the figures are wrong – they can’t both be wrong and obvious).

But, unlike Rob and Alix, we do think they mean something. We think they mean that the Lib Dems have the wrong priorities. We suppose we were saying them less for their analytical insight than to highlight how extraordinary it is that a party affecting to claim the mantle of ‘fairness’ is proposing to spend £17 billion (six times the cost of its ‘pupil premium’ for disadvantaged kids) on a regressive measure that also excludes the very poorest from help at all. That is appalling.

12 Responses to “Lib Dem tax policy: Our response to your responses”

  1. House Of Twits

    RT @leftfootfwd The authors of the report on the Lib Dems' tax policy respond to the criticism across the blogosphere //cli.gs/8qs6n

  2. Mark Davids

    Lib Dem tax policy: Our response to your responses | Left Foot Forward: Between July 2007 and April 2009, the equi… //bit.ly/aPBRRV

  3. First Income

    Lib Dem tax policy: Our response to your responses | Left Foot Forward //bit.ly/aPBRRV

  4. Trade Income

    Lib Dem tax policy: Our response to your responses | Left Foot Forward //bit.ly/aPBRRV

  5. James Graham

    I’m not sure why so many Lib Dem activists think this is illegitimate (such as James Graham at Social Liberal Forum).

    More smears? That isn’t what I wrote at all. Perhaps, rather than knocking down your own Straw(sic) men, you might want to address the three main substantive points in my article:

    1. Raising personal allowance will be pro-jobs and help reduce inflationary pressures on wages at a time of economic fragility – this benefits the low waged most of all.

    2. The difference in wages between the first four quintiles is significantly lower than the difference in wages between the fourth and fifth quintile. It makes sense to build solidarity between people on middle incomes and low incomes.

    3. It represents a shift away from taxes on income and onto taxes on wealth, thereby addressing the even bigger problem of wealth inequality.

    A side point: in your article in the Guardian this week, you criticise Nick Clegg for “praising Margaret Thatcher.” In fact, his comments were limited to her attack on vested interests, drawing parallels between the unions of the 70s and the banks now. On that basis, how can you remain the member of a party lead by a man who not only takes tea with Maggie but states that:

    “I think Lady Thatcher saw the need for change.

    “And I think whatever disagreements you have with her about certain policies – there was a large amount of unemployment at the time which perhaps could have been dealt with – we have got to understand that she saw the need for change.

    “I also admire the fact that she is a conviction politician … I am a conviction politician like her.”

    Since you are at pains to emphasise how this is not a partisan attack, where is your vociferous attack on him, or on the Labour policy a couple of years ago to cut income tax by 2p and to scrap the 10p rate?

  6. Peter Kunzmann

    Dear Tim and Howard. Thank you for your response, especially your detailed response to my own points.

    I will try to make my response as balanced as possible.

    Firstly, I would like to reiterate that I believe if all Lib Dem tax and benefit changes are taken into account the results are much more progressive than those proposed by any other party. This you have not disputed (at least not yet!)

    Such an evaluation may not have been your goal, but the headline on the ‘Left Foot Forward’ website was “Lib Dem tax policy fails the fairness test”, which I think most people would take to imply you are discussing (at the very least) Lib Dem tax policy as a whole. This is certainly the impression that most of my Labour friends got. And, if I’m honest, I believe was the impression that ‘Left Foot Forward’ were trying to give.

    Even if you ignore my issues regarding benefits. The Local Imcome Tax remains a key aspect of Lib Dem tax policy and, I believe, would address your concerns about the middle benefiting too much.

    I also think James’ point about the real income differentials being much greater between the fourth and fifth quintile than between the lower quintiles is also a very important point to emphasise. Even taking just the aspects of the Lib Dem Tax changes you discuss in your paper, Lib Dem policy does address what appears to be the greatest inequality.

    Secondly, I would also still contend that the graphs you produce are misleading. The graphs (unlike the text) do not show the effect of the tax changes on the wealthiest. If you view these changes as worthy to inclusion in the, it should be in the graphs – especially the headline graph on the website. Such graphs would have shown all lower deciles benefitting except the very top – again giving a very different impression to the casual reader.

    However, all that said, I do accept your central point that the £17 Billion the Liberal Democrats intend to raise from the wealthiest members of society could be spent better to help the poor and the poorest. I argued this myself at the time the policy was passed and have continued to argue it ever since.

    Like I said, personally I find a Citizen’s Income policy very attractive – which would ensure that those at the very bottom got a good boost. £17 Billion could fund a citizen’s income of around £450 per year per person to the country’s working age population. Other ideas, like more funding for public services would also be extremely worthy… and even, dare I say it, tax credits, if anyone could get them to work without messing up many people’s lives with complication, confusion, overpayments and clawbacks.

    Nevertheless, current Lib Dem policy does help those on low incomes at the expense of the very top. Sure it is not in the best way possible. And there is a case to be made for addressing the difference between the bottom and the middle.

    Your comments in isolation are good… but presented in the way they are is bound to mislead people about the Lib Dem policies as a whole.

  7. Peter Kunzmann

    > Just to develop the point about the Local Income Tax, this would mean that under LD tax policy (assuming a 3% LIT) the personal allowance would be £10,000, the lower rate would be 23% the middle rate 43% and the upper rate 53%. This is in addition to the lowering of the 40%/43% threshold the reforms at the very top. This really does need factoring in to your equations, becuase it would significantly change the results of your analysis.

  8. John77

    “While there was a lot of discussion about this analysis, we haven’t seen any comments that substantively challenge our figures.”
    I thought that saying you had got the numbers wrong was a substantive challenge.
    According to ONS, the bottom decile pays on average £190 (over 3% of net disposable income) in income tax and receives £73 in tax credits, the next decile pays £368 in income tax (again over 3% of net disposable income)and receives £303 from tax credits.
    The Lib Dem proposal does more for the poorest than your suggestion of increasing tax credits which principally help those in the middle of the income distribution (fifth decile receive £705 on average, nearly ten times as much as the bottom decile). Your alternative would do MORE to increase the differential between the bottom and the middle.
    The credit that benefits the bottom decile most disproportionately is the contribution-based Job Seekers Allowance (the income-based JSA and Widows’ benefit decline more slowly). Also the council tax rebate is much smaller in absolute terms and as a percentage of Council tax due for the bottom decile than the second decile. So your argument about the amount of income absorbed by indirect taxes is unsound – much of this (eg the stamp duty on purchase of expensive house) is from people, often temporarily unemployed or taking an MBA course, who have considerable savings making them ineligible for means-tested benefits: those who are living on their income have much less absorbed by indirect taxes. Indirect taxes as a percentage of expenditure are lower for the bottom quintile by equivalised income than for the next quintile.
    Taking 4.34 million people out of income tax entirely would have cost £1.45bn, not £1bn in 2008/9, according to HMRC. The number and amount is practically certain to be higher now as a result of short-time working to protect jobs and the fall in self-employment income (the self-employed are a relative high proportion of the bottom income quintile). Currently over two-thirds of all adults not in full-time education including those with incomes barely one-quarter of median earnings pay income tax – this proposal would take out 14% of those who jointly pay less than 1% of the total.
    Please could you look again at graphs 8 and 9 which imply that there are people paying higher rate tax in households with aggregate gross income less than £10,000? They also assume that there are more people paying income tax than there are adults in the household in the top two deciles (where one might expect some wives without paid employment).

  9. Lee Griffin

    “(though its puzzling that many of the same individuals have been furiously posting other comments trying to argue the figures are wrong – they can’t both be wrong and obvious).”

    That’s not what was said. What was said is that your figures are wrong (i.e. how it will effect those it effects) and that your statement about it not helping those that don’t pay tax is obvious (as it’s a tax cut). So your analysis can be wrong and obvious at the same time because your analysis covered more than one statement.

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