Lib Dem tax policy “fails the fairness test”

Nick Clegg's planned policy of "tax cuts for people and families on low and middle incomes" would be deeply regressive according to a new report.

Nick Clegg’s planned policy of “tax cuts for people and families on low and middle incomes” would be deeply regressive according to a detailed analysis by Tim Horton and Howard Reed for Left Foot Forward.

In December, the Liberal Democrats set out a policy to “raise the threshold at which people start paying income tax from current levels to £10,000”. They have made this policy one of four central “tests” for cooperation with a minority government in the event of a hung parliament and Nick Clegg has said:

“This will be a huge change to our society, to make the tax system fair. Offering real help – and hope – to millions of low income families. A vital step towards delivering real social justice for all.”

But a detailed report, ‘Think again, Nick! Why spending £17 billion to raise tax thresholds would not help the poorest’ (pdf) by Tim Horton and Howard Reed for Left Foot Forward shows that:

• the measure would do nothing to help the very poorest, who don’t have income large enough to pay tax;

only around £1 billion of the £17 billion cost (6 per cent) actually goes toward the stated aim of lifting low-income households out of tax;

• households in the second richest decile would gain on average four times the amount than those in the poorest decile; and

• the policy would increase socially damaging inequalities between the bottom and middle.

Horton and Reed conclude that:

“the Liberal Democrats’ proposed tax cut fails the fairness test.

“Spending £17 billion on increasing the personal allowance is a very poor way to help those on low incomes. It could actually harm the welfare of low-income households by increasing inequality and relative poverty.”

While debates about tax and spend will no doubt be animated at the Lib Dems’ conference in Birmingham, Left Foot Forward hopes that this factual analysis will assist the discussion.

Download the report by clicking here.

135 Responses to “Lib Dem tax policy “fails the fairness test””

  1. Ben Surtees

    fabians attack lower taxes for the low paid – http://cli.gs/BynM9

  2. Sunder Katwala

    * The objection to a household analysis: can anybody point me to Institute of Fiscal Studies analysis of tax changes which doesn’t do this?

    * On the partisanship point:
    – we are confident that the modelling is accurate. So it is not in the power of the authors to decide what the distributional impact will be.
    – can it be a bad thing for policy and public debate for such evidence to be in the public domain? Perhaps the LibDems’ political opponents don’t want to draw attention to the scale of the middle-class tax cut for higher earners; the LibDems have not emphasised the £17 billion cost of the policy. Everybody can take their view as to whether it is good or bad.

    – Guido Fawkes is in favour of the policy, because he wants to see middle-class tax cuts and is happy that they are larger “Middle earners pay disproportionately more tax after all”. He argues this because he is philosophically in favour of flatter taxes (perhaps a flat tax). This is one idea of “fairness” on the libertarian right: it would be fairer to pay the same rate, so you pay more tax, but not a higher rate at higher incomes. The argument for progressive taxes (banded rates) is opposed to this:, based on higher earners having more disposable income and ability to pay.

    – The Fabians have a long record of detailed analysis of tax plans, since the Fabian Tax Commission in 2000. Labour’s flagship proposal in 2001 and 2005 was pledging not to increase the upper rate. We produced evidence and arguments against it, and advised Blair to drop it. By contrast, we praised the LibDems on the 50p rate. When Labour emulated much of Osborne’s policy on inheritance tax in 2007, we published critically on that. We then advocated freezing the thresholds last year, and that was adopted.

    The Fabians have consistently analysed and argued positions based on their distributional impact, not on which party is proposing them.

  3. Sunder Katwala

    The charge of not mentioning the other proposals: “I remain interested in why you did not mention the mansion tax, pension relief reform or green taxes in the course of making this point (even if only to dismiss them as insignificant). You had every opportunity to do so. Why not? Again, did it interfere with the overall message of “regressive tax” you wished to convey?

    ===
    This falls on the grounds that the paper does discuss the other proposals: both page 4 and section 3.14 (p13-14)

  4. Alix

    “- we are confident that the modelling is accurate. So it is not in the power of the authors to decide what the distributional impact will be.”

    You still don’t get it. No-one’s querying your numbers. What’s wrong is your basic premise that a tax cut should behave like a benefit. You can’t make a tax cut do that. It’s a tax cut, designed to make the tax system fairer and flatter. To say it’s “regressive” is simply untrue – regressive would be, for example, lowering the basic rate but getting rid of the 10p tax band, which actually made the poorest worse off. Your graph just reflects the fact that the lower down the deciles households fall, the less tax they will be paying in the first place. I just don’t know how to put this any more simply.

  5. Alix

    Sunder, I get that the paper discussed the proposals. I was asking why you didn’t, right there, in that sentence I quoted. Seemed an odd omission is all.

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