Clegg’s £10k tax allowance is no Tory concession; it’s a Tory dream

The Lib Dem income tax plans will usher in the biggest increase in income inequality in the UK of any single policy since Nigel Lawson’s 1988 tax-cutting budget.

Our guest writers are Tim Horton, research director of the Fabian Society and Howard Reed of Landman Economics

Has anyone noticed how the Lib Dems’ catchy proposal to raise the income tax threshold to £10,000 has very quietly changed? Back in the old days – when the Libs were a progressive party of the left – the proposal was for a ‘tax switch’, taking £17 billion off the super-rich (highly progressive) to fund the cut in income tax (itself highly regressive).

But now it’s just become the tax cut. The Lib Dems have agreed to drop many of the progressive measures to pay for it, such as a mansion tax and scrapping higher-rate pension relief. And it looks instead as if the revenue will come mainly from public spending cuts – making the overall effect even more regressive.

If delivered, it could usher in perhaps the biggest increase in income inequality in the UK of any single policy since Nigel Lawson’s 1988 tax-cutting budget.

Perhaps most concerning, though, is that we seem to be getting an uncritical acceptance by many news correspondents of the Lib-Con spin – that this is somehow a tax cut “targeted on those on low incomes” or “particularly to help the low paid” (to name but two we’ve heard in the last 24 hours).

But – as we pointed out in our analysis of this tax cut before the election – this claim is totally bogus:

• First, raising tax thresholds doesn’t help the poorest because they don’t have enough to pay income tax. Though the tax cut would cost £17 billion, three million households in the poorest quarter of the population would get not a penny of help. That includes the majority of pensioners. We notice some Lib Dem election leaflets sold this policy as “£100 for pensioners”. But it wouldn’t be. It would be £100 for the richest 40% of pensioners and nothing for the poorest 60% of pensioners.

This is why, lest we forget, Labour introduced the Winter Fuel Payment – not just to help with heating costs, but to provide a universal flat-rate payment that would help all pensioners without excluding the poorest. Let’s hope the Tories and Lib Dems don’t follow through on their sabre-rattling hints that they’d like to cut it.

• Second, the vast majority of this revenue goes not on cutting tax for the low paid, but cutting taxes for richer households. Some 70% of the benefit goes to the top half of society. And only £1 billion of the £17 billion cost – just 6% of the total – actually goes on the often-stated aim of “lifting those on low incomes out of tax”.

In a nutshell, saying you want to raise the tax allowance to £10,000 to help the low paid is a bit like saying you want to eat the cake with the cherry on top to increase your fruit intake. It is disingenuous. For any given amount of revenue, you could help those on low incomes far more by spending it on tax credits or public services than you could by spending it on increasing the personal allowance.

By the way, we have absolutely no problem with doing more to help middle-class households. Quite the opposite. But we think there’s something unfair about spending billions on financial support to middle-income households while excluding the poorest, particularly when there are alternative vehicles that avoid this problem, such as tax credits.

If the Lib Dems and Tories were serious about helping the low paid, they would strengthen the near-universal system of tax credits, not undermine it by cutting it back.

• Finally, the Lib Dem tax cut would give more to richer households than to poorer ones, as the graph below shows. Households near the top of the income spectrum would get on average four times as much as the poorest. The result would be a large increase in income inequality in society – especially between the bottom and middle (relative poverty).

Lib-Dem-regressive-tax-plans

Interestingly, Michael Howard considered an increase in the personal allowance for the Conservative manifesto in 2005. He rejected it as being too unfair. Meanwhile, many on the Tory right have long been campaigning to get this policy adopted – most recently Norman Tebbit, and before that Maurice Saatchi. (Indeed, if anyone wants a forensic analysis of why this Lib-Tory tax cut would be unfair, we can do no better than direct them to David Willetts’ excellent response to Lord Saatchi in 2005.)

The truth is that this tax cut was not a painful concession that the Tory right had to make. It is something they have wanted for years. The Taxpayers’ Alliance are delighted it has survived the horse-trading: “It’s good news that the Liberal Democrats have forced the Conservatives to take up their Income Tax policy,” they have just announced, adding that “it was among the most radical tax policies put forward during the campaign, and the Conservatives really missed a trick by not making it their own in the first place.”

And what about the Lib Dems themselves? When we produced our analysis in March, we were treated to a barrage of criticism from Liberal Democrat activists (even though our main points were subsequently validated by the Institute for Fiscal Studies’ own analysis). Their central complaint, however, was that we hadn’t taken into account the fact that the measure was being funded by taking huge amounts of money off the super-rich.

James Graham’s comments over at the Social Liberal Forum were typical:

“The fact that raising the tax threshold helps people on higher incomes more than people on low incomes is not, believe it or not, a startling revelation. We know. The party has never tried selling this policy in isolation; we’d be mad to attempt to because people would rightly ask where we propose trying to find £17bn. The two are meant to balance each other; that’s why we are calling for a tax shift and not either a rise or reduction in taxes overall.”

Well, sadly, it now looks as if the Lib Dems were only really interested in the tax cut. We don’t hold out any hope for the Libs to change their minds on this now they’ve teamed up with the Tories. But could the media please stop describing it as ‘a measure to help the poorest’?

For full analysis of the Lib Dem tax cut, see our report, “Think again, Nick! Why spending £17 billion to raise tax thresholds would not help the poorest”.

200 Responses to “Clegg’s £10k tax allowance is no Tory concession; it’s a Tory dream”

  1. piombo

    'Clegg’s £10k tax allowance is no Tory concession; it’s a Tory dream' http://bit.ly/bhk0Ab #camelegg #ge2010 (daytime rpt)

  2. Will Melia

    People need informing of this: RT @leftfootfwd: Clegg’s £10k tax allowance is no Tory concession; it's a Tory dream http://bit.ly/bTw8DI

  3. Christopher Mahon

    Clegg’s £10k tax allowance is no Tory concession; it’s a Tory dream http://tinyurl.com/3yx2eyr << very disappointing

  4. Debbie

    RT @leftfootfwd: Clegg’s £10k tax allowance is no Tory concession; it's a Tory dream http://bit.ly/bTw8DI #takeitback #ukvote #condem

  5. pferron

    #bbcqt 10K tax policy a great concession by the Tories?? are we really sure? http://bit.ly/9fRAPH @bbcquestiontime

  6. Robert

    Excellent informative analysis. I adding leftfootward to my favourites list.

  7. Alex

    “And it looks instead as if the revenue will come mainly from public spending cuts – making the overall effect even more regressive”

    Where is that said, anywhere? Remember the policies that were to pay for it:

    * Capital gains tax
    * Per Plane duty
    * Tax avoidance crackdown
    * Mansion tax

    Of that, only the mansion tax has gone. And there’s no indication that the money needed to replace that will come from spending cuts. Could do, but nothing on it in their agreement.

    And saying “even more regressive” implies that it was regressive initially, but as has been pointed out to them time and time again, the threshold isn’t being raised in isolation, the rich are being hammered to pay for it with rises to capital gains tax etc.

    So LFF are dishonest.

  8. Hugh

    I look forward to reading Labour proposals to reduce the poverty trap. That is how to move from benefits to full work without benefits. I am not an Research Director. I just live in the middle of one of the most deprived parts of the country and live it.
    I just hope that your new leader gets it. Increasing the starting rate of tax from 10% to 20% was the end for Labour. Why should a pensioner pay extra tax to give a tax cut to the bankers in the city who got us into this mess. Our Labour MP looked at the floor when asked this question – and lost the seat.

  9. Aidan

    I assume its a Labour party PPC or candidate who wrote this.
    If you put this on an internet forum it would be trolling, you’ve not mentioned anything to do with marginal tax rates being too high for the lowest paid, a major aim of the policy. Of course labour wish to take money away from people to give it back to them in tax credits, its about control. No matter that it costs huge amounts to administer the tax credit, the £50 required to cash each cheque for instance, as long as they can decide who gives what alls well even if the poor get poorer. The fact of the matter is that if we were to help the poorest in work by tax credits are your suggesting then some people would be faced with a marginal tax rate of over 100%, clearly an unacceptable scenario. Moreover those who will recieve the greatest percentage income are those on £10k a year, hardly the ‘super rich’. The real reason why the Labour party can’t stand this policy is because it puts people in the driving seat of their lives, and not the government.

  10. James

    yes it doesnt help the poorest people because they have no jobs. there is already plenty of support for people who dont work. but what about the people who do work low paid jobs scraping not far above minimum wage?
    the people earning min wage tend to earn around £12k. this tax break means that around 33% more of their income is untaxed. that does help people who are in work and rewards the fact they have a job. it was never liberal policy for this to be paid for by spending cuts in the public sector.
    we need to stop the mentality “Why would i get a job when i’ll earn more on benefits because of all the tax il pay?” … this goes some way to helping that

  11. Web links for 14th May 2010 | ToUChstone blog: A public policy blog from the TUC

    […] Clegg’s £10k tax allowance is no Tory concession; it’s a Tory dream Howard Reed and Tim Horton have written for Left Foot Forward on how the Lib Dems £10k tax threshold policy has changed in its adoption by the Conservatives, and how it's now much less likely to help towards its stated objective of rebalancing the tax system to the poorest. Related posts (automatically generated):Budget 2010 must include support for industrial investmentBudget 2010: Progressives Liveblog – 24 March, 12pmPre-Budget Report LIVE: Online coverage from noon […]

  12. Andrew Curry

    Surprised? Child benefit cuts hurt the poor. http://bit.ly/d899cu And the £10K #tax threshold helps the top 30% most. http://bit.ly/a99QoV

  13. Fair taxes: A possible lesson for Japan? « Chrisjw133's Blog

    […] this idea but it is interesting none the less and perhaps the 10k tax move is a start towards this. Left Foot Forward did put out a response to the idea of raising the tax allowance which showed how having a higher […]

  14. coexist

    RT @nextwavefutures: Surprised? Child benefit cuts hurt the poor. http://bit.ly/d899cu And the £10K #tax threshold helps the top 30% most. http://bit.ly/a99QoV

  15. Tim Horton

    Alex – I think you’re wrong. I think it’s not just mansion tax that’s gone, but also the proposal to scrap higher-rate pensions relief. And while the element of the CGT tax rise that remains is good, I’m afraid it is only part of what the Lib Dems were originally planning on CGT to finance this.

    I think the clue is that we have been told this tax cut is being made with the revenue that was previously going to finance the Tory proposal to increase the NI threshold. And that came from public spending cuts (the same ones the Lib Dems were attacking during the election campaign).

    Finally, the reason we have described the measure as regressive is that the average gain per decile as a percentage of household income increases as you move up the income spectrum – and that regressive gradient remains across the bottom 90% of the population even when you take the tax-raising measures into account. (I think we’ve had this exchange before?)

    By all means check with your Tory coalition partners, but I somehow suspect the rich won’t ‘be hammered’ to pay for it.

    By the way, this tax cut looks even more grotesque when you consider that the Lib-Con coalition are planning to increase VAT too. You’ll be pleased to know we’ll be doing a distributional analysis of that too!

  16. Tax Research UK » Clegg’s 10k tax allowance is no Tory concession; it’s a Tory dream

    […] Clegg’s 10k tax allowance is no Tory concession; it’s a Tory dream | Left Foot Forward. […]

  17. Mr Public Health

    RT @leftfootfwd: Clegg’s £10k tax allowance is no Tory concession; it’s a Tory dream: http://bit.ly/bTw8DI

  18. Peter Roberts

    RT @georgeowers: Lib Dems support 'biggest increase in income inequality of any single policy since Nigel Lawson's 1988 budget' – http://tiny.cc/chsk6

  19. Phelim Brady

    Excellent piece on what I've been telling Lib Dems for weeks.Tax plans weren't good to start with, now they're even worse http://is.gd/ca3xN

  20. Peter Roberts

    RT @Phelim: Excellent piece on what I've been telling Lib Dems for weeks.Tax plans weren't good to start with, now they're even worse http://is.gd/ca3xN

  21. George Irvin

    Excellent piece … throughly demistifies what has passed as a ‘progressive’ measure. Keep up the good work.

  22. Henrique

    “For any given amount of revenue, you could help those on low incomes far more by spending it on tax credits or public services than you could by spending it on increasing the personal allowance.”

    Why not just cut tax for those on lower incomes? By the way, it is not “spending money” to cut taxes, it is simply not raising that money.

  23. Jason Keen

    Excellent analysis here – maybe why Labour weren't very keen in negotiations. http://bit.ly/9fRAPH

  24. Georges

    “Though the tax cut would cost £17 billion…”

    Always keen to understand how this works. Would the new system cost individuals £17 billion -or- cost government £17 billion?

  25. Matt Wallace

    @lrhnsm27 http://bit.ly/dpkJqR or that is a shorter link

  26. Rory Doona

    RT @leftfootfwd: Clegg’s £10k tax allowance is no Tory concession; it's a Tory dream http://bit.ly/bTw8DI

  27. Jay Baker

    RT @JaneWatkinson: RT @leftfootfwd: Clegg’s £10k tax allowance is no Tory concession; it's a Tory dream http://bit.ly/bTw8DI

  28. Jane Watkinson

    RT @leftfootfwd: Clegg’s £10k tax allowance is no Tory concession; it's a Tory dream http://bit.ly/bTw8DI

  29. Steve P

    Not following how taking the poorest workers out of the tax system is a “regressive” move?

    So you are making 10K per annum = no tax / 200,000 per annum = 190K at 20/40/50 percent bands?

  30. Newfred

    I have attempted to rebut this article here:

    http://blog.newfred.com/2010/05/tax-and-spend.html

  31. The Government must hold its nerve on Capital Gains Tax | Left Foot Forward

    […] is due to raise the lower threshold to £10,000, effectively giving everyone a tax cut, however regressive). Increasing corporation tax is inadvisable at a time when Britain must retain and attract […]

  32. The Red Under The Bed » Blog Archive » Time for reform

    […] that the Lib Dem’s proposed to pay for it and to ensure a fairer distribution of wealth, it has been suggested that this is in fact a regressive move which will only serve to widen the gap between rich and […]

  33. Ash

    Aidan

    “Of course labour wish to take money away from people to give it back to them in tax credits, its about control.”

    But many of the poorest – including many part-time workers as well as people out of work – already don’t pay tax. And many who *do* pay tax, pay less tax than they receive in tax credits. So it’s just false to claim that tax credits for the poorest are simply a way of giving their own money back to them.

    “No matter that it costs huge amounts to administer the tax credit, the £50 required to cash each cheque for instance, as long as they can decide who gives what alls well even if the poor get poorer.”

    For the poor to get poorer is for their incomes to fall relative to the median income – relative poverty being defined as 60% of median income. Increasing the tax threshold to £10,000 would raise the median income, but not the incomes of the poorest (who do not pay tax and so do not benefit from the raised threshold). Therefore the proposed rise in the threshold would mean the poor getting poorer. The same cannot be said for tax credits, since these serve to raise the incomes of the very poorest as well as the median income.

    “The fact of the matter is that if we were to help the poorest in work by tax credits are your suggesting then some people would be faced with a marginal tax rate of over 100%, clearly an unacceptable scenario.”

    I don’t think this is right. Tax credits don’t just get taken away as soon as your income rises – there’s a gradual taper.

    “Moreover those who will recieve the greatest percentage income are those on £10k a year, hardly the ’super rich’.”

    …and insofar as it puts £700 into the pocket of someone on £10,000, the policy is of course a good thing. What’s unacceptable is that it gives the same amount to someone on £50,000, £80,000, £100,000, but *less* to someone on £8,000, and nothing to someone on £6,000.

    James –

    “there is already plenty of support for people who dont work. but what about the people who do work low paid jobs scraping not far above minimum wage?”

    Well, we could (and do) help them with tax credits (which might very well be worth a lot more to them than £700 a year!). And note that even if there’s currently enough help in place for poor non-taxpayers, that amount of help will have to be increased if the median income is raised – if we don’t want poverty and inequality to increase.

  34. Tim Horton

    Taxpayers Alliance: “good news that the Lib Dems have forced the Tories to take up their income tax policy” Analysis at http://bit.ly/aMjh2B

  35. Bruce Jamieson

    It surprises me how many intelligent people have completely missed the point. What is the reason for taxation – is it to hit the rich? Of course not; it is to assist in raising the money to run the country. So once again the old chestnut of the Law of Diminishing Returns is conveniently ignored. Firstly, the point of the lowest paid not being benefited is totally obvious; that is what tax credits are for which is a form of negative income tax. You cannot suddenly do huge amounts for such peopel. Then there are the next echelon. I am a chartered financial planner and tax consultant. yesterday I saw a postman who retired last year. On income of about £8000 he is thrilled at the new proposal. Finanlly in the USA when they dropped the tax rate radically the TAKE shot up which is what I would expect.

    If you drive the rich away you have less source of cash both in tax and in the velocity of money to help everyone else. This is why the latest European Directive on Hedge Funds is such a disaster – it will drive these money makers into USA and Switzerland. Gordon Brown had appreciated that as now has George Osborne. Clearly Angela Merkel has not and has angered the French, Germans and others by banning certain shorting which will reduce liquity and could even lead to the collapse of the Euro – which I predicetd several years ago anyway.

    It is far better to have a huge cake to distribute than to attempt fairness by distributing a small cake equally.

  36. Left Foot Forward

    @typejunky @LisaQuattromini Did you mean this? http://bit.ly/c1P8KL

  37. Big public spending cuts await… « My Political Ramblings

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  38. FactCheck: Liberal Democrat’s ’23 policies…’ «

    […] ‘fairness’ means robbing Peter to pay Paul and picking Paul’s pocket after as Left Foot Forward helpfully […]

  39. The anti-statist approach is preventing needed economic/social reform… « My Political Ramblings

    […] the opposition to capital gains tax, the now regressive nature of the rise in income threshold (http://www.leftfootforward.org/2010/05/clegg’s-10k-tax-allowance-is-no-tory-concession-its-a-tory-…). Broken promises and a reinforcement of a damaging status […]

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    […] an increase in the personal allowance for income tax – a Lib Dem priority which does nothing for the poorest […]

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  42. James

    Budget hits poorest hardest whilst leaving top earners unscathed http://bit.ly/9fRAPH

  43. First XI: The Tory MPs committed to narrowing the gap between rich and poor | Left Foot Forward

    […] which will hit Britain’s poorest families six times harder than the richest – and the regressive changes to the tax threshold, which would give more to richer households than poorer ones, among other measures. Share | […]

  44. Clegg fails in desperate attempt to deny an alternative to the current economic machismo… | My Political Ramblings

    […] in more public spending cuts to fund it as the tax the wealthy ideas to fund it have been dropped click here. This policy doesn’t help the poorest, only the richer sectors of […]

  45. Jane Watkinson

    @Dyslexic_Trojan read that http://bit.ly/bTw8DI -it's at the bottom with links. Notably; Michael Howard considered an increase…

  46. ann morgan

    The Lib Dem tax cut spends the vast majority of revenue on cutting taxes for richer households http://t.co/JNtQwVn7 #as11

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