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. alixmortimer

    LFF "analysis" gets more hilarious. Seems their "regressive" graph really does show rise in PA & not rises to pay for it http://is.gd/aGLU2

  2. jdennis_99

    So, what you’re basically saying is, cutting tax will benefit taxpayers?

    Good – where do I sign?

  3. Lee Griffin

    I find it amazing that LFF is still trying to peddle their brazenly anti-Lib Dem agenda despite the evidence to the contrary. The fact is that a tax cut is being planned that will cost £17bn, and it will be entirely funded by £17bn of extra taxes in other areas that are almost exclusively going to be felt by medium to high earners (with the emphasis being on high earners). What is happening, in effect, is a small redistribution of wealth from the richest to the poorest where almost exclusively the middle to high earners will be putting an extra £17bn in to the pot and, if we’re to believe your figures (a practice a little hard given how devious you’ve already been in this report), only take £16bn back out AT WORST. It’s probably more likely that those actually funding the tax cut take even less out of the pot as I fail to believe that the second and possibly third decile would pay much in these extra taxes either. Meanwhile the lowest decile get an extra £1bn, paid for by taxes on the middle-high earners…and yet this is supposedly regressive and widening the gap?

    You’re having a laugh.

    You can (as Alix has most eloquently put across) disagree with the idea of using the £17bn raised to provide a tax cut, but that’s besides the point. Lib Dems believe that sorting out the tax system so that at the point of taking home a salary no-one earning less than what is considered by the public to be the income that breaks the poverty barrier will have any of that money taken away from them by the state. This is *completely independent* of the welfare situation that they would still receive because neither Nick Clegg nor the Lib Dems have stated anywhere that they’re going to be cutting welfare OR front-line services, something that can’t be said for either Labour or the Tories.

  4. Sunder Katwala

    Lee,

    “What would you spend £17 billion on” is a refreshingly counter-zeitgeist debate.

    The LibDems have a revenue neutral package of reforms. They spend £20 billion on the tax threshold change and the pupil premium. They mostly raise that money at the top, except the air taxes.

    But they also think the structural deficit will be in the region of £80 billion, and they propose to close all of that through spending reductions – “purely spending cuts” according to the party leader last week, in explicitly stating they would have the toughest spending line in this respect. (I have seen some suggestions this is not quite party policy, but am not clear about that, and it has not been publicly nuanced or corrected).

    And the other major parties are equally or more opaque about their deficit reduction plans. So the point to all parties is that questions about tax, spending, deficit and debt levels need to be taken together. (This is a point about tax “connection” the Fabians have been making since the 2000 tax commission, but it is more pressing now).

    The opportunity cost of the tax threshold plan is a similar amount of public spending cuts, which go beyond areas the party has already earmarked. It would be difficult for those attracted by the policy to make a final judgement without knowing what they are trading off.

    It is important and good that the LibDems have identified some fair and popular ways to increase revenue. Having done that, and used the revenues, Clegg is saying that they do not think it is possible to deal with deficit reduction through a mixture of both tax increases and spending cuts, since they have made and used all the tax increases they think feasible.

    ***

    I am sure that everyone agrees that the LibDem proposal does mean £1400 for double-income households with two earners over £10k; £700 for single-earner households over £10k; less for those earning under £10k and nothing for those in part-time work earning up to £6800.

    Taking into account how this is funded, this increases income inequality across the bottom 90%, with 70% going to the top half and 30% of the bottom half of the household distribution.

    There are numerous fairness claims or defences of this – ‘the rich pay more tax and taxes should be flatter, not more progressive’; it is right to ‘reward hard work’ and not prioritise those not in work – but the claim that it is progressive in terms of its impact on the income distribution is not true. (There were objections to a household analysis on Saturday: it is just bizarre to claim this is not the normal approach).

    If the goal is “cut taxes to particularly help the bottom, while doing something for everybody”, then progressive alternatives would include the universal tax credit proposed by the Fabian Society in ‘The Solidarity Society’, which would be a flat payment across everybody which would be worth proportionately more at the bottom, or the tax credit system, which would have a pro-poor bias because it is based on household income, and because of its progressive distributional impact.

  5. Alix

    Sunder. I like the first half of your comment. By all means, try to make the case that the money would be better spent elsewhere. Obviously, we will disagree, but at least that will be an honest argument.

    However. Do not try to cling to this wreck of an “analysis” and expect your reputation to remain intact. Reading the second half of your comment, I am starting to think you are deliberately obfuscating. Do you, or do you not, accept that the report appears to state that the graph shown above only models the raise in the personal allowance, and not the rises in tax on the wealthy which would pay for it?

    Here is the relevant passage:

    “So let us for the moment assume that the revenue to pay for the proposed
    increase in the personal allowance comes solely from those in the top decile.
    What would the distributional impact of this combined package then look like?

    For the first nine deciles (from poorest up to second richest), the impact would be the same as that shown in the graphs above; the difference would be for the richest decile, which would now have a significant net loss of household income (since they are funding the whole package).”

    In the light of this, do you have to alter your claim that “Taking into account how this is funded, this increases income inequality across the bottom 90%, with 70% going to the top half and 30% of the bottom half of the household distribution.”?

    If not, and you have actually used the text and not the graph as the basis for your observation (which obviously, I would question the significance of anyway, because it does not take into account the relative value of a tax cut in relation to income), do you have any comments on the defensibility of presenting only half the proposal in the graph?

    “the claim that it is progressive in terms of its impact on the income distribution is not true.”

    Back to this again. You STILL have not taken on board my two core points.

    1. By calling this proposal regressive you are simply not using the correct definition of “regressive”. For the third time, a regressuve tax is one which falls more heavily on a lower income than a higher income. This proposal alters the tax system so that the tax burden falls less heavily on a lower income and more heavily on a higher income. Nothing else is tampered with. Tax credits remain, as you pointed out yourself. This proposal makes the tax system more progressive.

    2. You still have not taken on board the simple fact that people who pay very little tax cannot benefit as much from a tax cut as people who pay more. You are being (wilfully?) mislead by the above graph into ignoring the fact that many people in the bottom deciles are not paying enough tax to benefit from the tax cut. That’s why they can’t get as much back as people who are paying more tax.

    The average household income is about £30k? So say that falls into the middle of your deciles. It’ll be made up in a huge number of ways. It might be one person earning £30k. It might be two people earning £15k, or one earning £23k and the other earning £7k. All these households will benefit from a tax cut differently, because tax is assessed on individual income. That’s just how tax works. To put its results into household form doesn’t “prove” anything about the “regressive” nature of the tax cut. It just shows in graphic form that it’s a tax cut. Tax isn’t assessed by household, it’s assessed on individuals. There’s nothing *wrong* with displaying income by household. But it won’t tell you anything you didn’t already know about tax cuts. They work best for people who pay tax.

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