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””
Alix
Would it be fair to say that you’d just rather the £17bn was spent on benefits and/or public services? (as suggested somewhere above)
Rupert Read
Basically, the implications of Wilkinson et al are that we need to do everything we can to increase equality across the board. This means first increasing the income / wealth of the poorest (and/or decreasing the income / wealth of the richest), and then doing the same for the poor more generally (and the rich more generally). The problem with increasing the income of (say) the second least-well-off quintile without increasing the income of the poorest quintile is that you ARE increasing inequality among the less well-off in general. So I agree with the thrust of this post.
[However, there is a catch: we need to ensure that there are at least some government interventions which enable the better-off to feel that they too benefit from ‘the social contract’. Otherwise, they will be able to feel fine about opting out from government, privatising everything and paying for everything, etc – and that way lies disaster for the welfare state.]
Alix
I ask because, if that is essentially what you want, then at least we have arrived at a point of ideological difference that I can respect, if not agree with. You want a bigger safety net, I want a fairer tax system. I can deal with that.
What is insupportable is your apparent belief that people who don’t pay much tax should somehow magically and by sheer force of will be enabled to benefit from a tax cut more than people who pay more tax. And this “regressive” nonsense. Again, a “regressive” tax means a tax that takes proportionately more from a low income than a high income. I’m very sorry, but I didn’t invent this definition. This proposal actually improves on the current situation.
Matthew, you’re right to say I don’t mention the perfect liberal solution here, but there’s a whole ragged band of land value taxers would disagree with your assertion that no perfectly liberal solution exists 😉
Incidentally, if, as you suggest, you would rather the £17bn was spent on benefits amongst other things, I would plead with you (assuming we are playing magic chancellor) to reconsider prioritising Housing Benefit. I’ve been on this bastard, and I’ll tell you, it very quickly becomes clear who the “benefit” really accrues to. I’m not anti-benefit on principle but HB is about the only one which seems to me to do more harm than good. The inequality-increasing effects of HB are so well known they even made it into a storyline in Our Friends in the North.
Will Straw
Thanks for all the comments (and especially to Sunder and Alix for such an informed argument).
I’m really pleased that this report has sparked such a fascinating debate although disappointed that some people (rob for example) saw this as a partisan attack – it certainly wasn’t. Tim and Howard give a great deal of credit to other Lib Dem policies in their paper and I have given credit the Lib Dems on a range of policy fronts, most recently in my assessment of their other 3 tests last week.
The analysis was intended, as a critical friend, to show that against its own objectives to “cut taxes for people on low and middle incomes” it fell short. If Clegg had said we want to cut taxes for low income tax-payers it would have been a different story but excluding the 3m poorest people is a significant failure.
I think Alix and Sunder eeked out a significant philosophical divide. Alix says “designed to make the tax system fairer and flatter”. That’s a very legitimate and consistent statement if you’re a libertarian but not if you’re a social democrat. To social democrats, a flatter tax system is by its nature less fair.
Also, since the policy would widen inequalities, it is by nature a regressive move. As Rupert points out, that has a number of damaging consequences. This is not a tautological argument.
Finally, beware support for any tax policy from Guido Fawkes!
Matt Sellwood
This is very interesting – and excellent food for thought.
Forgive me if this doesn’t follow, as I’ve only pondered it briefly – but couldn’t the same criticism that is being aimed at this policy be aimed at the 10% basic tax band, the removal of which caused so much anger among progressives? After all, that too only helps those who earn above the tax threshold, and also provides a benefit to rich households as well as poor?
Matt
P.S. For the record, I am very much on the ‘spend the £17 billion on public services, not on a tax cut’ side of the argument – but I am intrigued by the ramifications of this paper for other policies which are traditionally championed by the centre-left…