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””
Liberal Conspiracy » Who benefits from Lib Dem tax cuts?
[…] Don Paskini March 14, 2010 at 3:19 pm Our friends at Left Foot Forward are hosting an excellent debate in the comments on this post between critics and supporters of Lib Dem plans to raise the starting threshold at which people pay […]
Matthew
Alix, housing benefit was just an example. I could have said ‘nuclear defence’.
I think Sunder’s terminology is OK, if the policy was to scrap the higher rate tax then that would make the tax system flatter (not something raising the personal allowance to £10k does) but it would be peverse if a cricitism of the move as being mainly of benefit to the rich was consider illegitimate.
Libdem tax policy attacked from the Left « Freethinking Economist
[…] income decile graph, and a quick eyeballing of whether the poorest 2-3 deciles get the most. What LeftFootForward call the Fairness Test is not the only test to be applied, as the dismal quality of some Robin Hood Tax arguments has […]
John77
An interesting paper but a pity that these “experts” could not get their numbers right. Graph 4 was obviously ridiculous so I looked at the ONS paper and I find that income tax is 3.2% of gross income and 3.6% of disposable income for the bottom quintile not the 1.6% shown on the graph. The HMRC figures quoted in the latest Social Trends show that £1.5bn not £1bn would be spent on lifting the lowest earners out of tax altogether.
Their comments about the percentage of income consumed by indirect taxes is based on data that ONS HAS STATED TO BE WRONG and ignores the facts that (i) a significant proportion of those in the bottom decile/quintile by income at any point in time are those with no/negligible income because the state has decided that they should live off their savings until they run out.(ii)if you look at those with income the percentage is lower, (iii)the only reason why indirect taxes are regressive are taxes on alcohol, tobacco and petrol, all of which have been jacked up by Gordon Brown. The simplest way to level up would be to abolish mean-testing on benefits – NO, I am not advocating that, just pointing out the fallacy in their argument.
There IS a moral reason why the income tax threshold should be raised which is that income tax is levied according to ability to pay and those with incomes below than the minimum wage are not able to pay. It is also beneficial because it saves a vast amount of hassle for low-earners in filling in tax returns and, for low-earning self-employed keeping detailed accounts down to recording buying a book of stamps. Howard Reed thinks we all have our PAYE sorted out by our employer – in fact there are more self-employed than full-time employees in the bottom decile although full-time employees outnumber the self-employed by more than 5 to 1. Again a gap in his research.
Owen Meredith makes the point that more benefit for the lowest earners (albeit not for non-earners) would have been achieved by raising tax thresholds in line with earnings than reducing basic rate tax. Nick Clegg is trying to reverse this but ducks advocating a rise in basic rate (which could be political suicide despite being economic sense)
The paper says that it has looked at the impact of the LibDems proposals to pay for the raising of the personal allowance by taxing the rich more heavily but then does not tell us the result – this is unfair, like saying Italy scored more points than France in the last half-hour and omitting the overall score!
Jen
So three lots of tax allowance is more than one lot of tax allowance, but if you contort it into an arbitrary graph you can mislead the casual reader. Lumme, who’d’ve thunk?
Meanwhile I’m failing to find the equivalent article condemning every year’s uprating of basic JSA/dole over the last umpty years of Lab-Con rule for failing this “fairness test” o’yours, on which basis no government has lifted a finger to help the poorest for as long as I can remember. I’m sure those blog posts will be along any day now.