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””
Matthew
Is there not an easy solution to this, which is to raise the personal allowance to £10k, but then increase the basic rate of income tax sufficiently to ensure higher rate taxpayers don’t gain? I can’t remember what the figures are but if we’re talking something like £3,500 extra on the allowance at whatever the basis rate is – 20%? – so every higher rate taxpayer is gaining £700, the basic rate needs to rise by something like 2% to offset this. This will also mean all basic rate taxpayers gaining.
I sometimes wonder whether a much higher personal allowance will lead to a lot more tax avoidance, but I have no evidence for that.
Sunder Katwala
John B
Thanks for your comments and critique. I don’t think they address the central point of the paper – which was to assess the impact of the tax threshold change, and which shows that the threshold change is regressive. But they do they raise some interesting points about other parts of the tax and benefits system, outside of the LibDem proposal.
(1) The critique of the LibDem proposal does not depend on any alternative use of the £17 billion it costs.
If £17 billion is available to be used, then there are a limitless number of ways to deploy it, some of which might reduce relative poverty and inequality. The question for LibDems is really “what would you do with £17 billion”. If the best answer is “raise the tax threshold” then that is one major policy – perhaps the costliest any party will have – which isn’t going to reduce inequality or relative poverty. The suggestions of either public spending on pro-poor services, or spending on tax credits, are not exhaustive.
(2) You make some criticisms of tax credits. But what is Liberal Democrat policy on tax credits? I am not an expert, and appreciate any corrections on detail, but here is my understanding.
I think they are proposing that awards should be made for fixed periods of six months, to bring more stability to the system. This sounds to me a good idea, albeit a relatively minor reform, which is sensibly motivated. It could incur some additional costs (where people receieve more for longer), though it could mean some people having to wait longer for support when there was a significant adverse shift in their earnings (though in those cases it would be cheaper). But I don’t think it addresses your points about tax credits.
I am not aware of other substantive proposals to change the distribution of tax credits from the party. I assume this is because Vince Cable, Steve Webb and others are very much aware that, while there are real issues in administration and complexity, these are massively outweighed by their enormous positive redistributionist effects.
Without more significant changes to the benefits and tax credits system, the LibDem raised threshold will have relatively limited effect on issues like marginal tax and benefit withdrawal rates. (I will ask the authors about this: LFF might want to carry something about the detail of that as the discussion continues).
Some others propose tax threshold changes in order to scrap the tax credit system. I stress is not LibDem policy, but is often advocated by right-wing commentatators. One would have to model the distributional impact of that change too. I don’t have the detail. It seems obvious from the distributional impact of tax credits that it would be massively regressive: it would dwarf the impact of the 10p tax rate abolition. It would also be politically very difficult.
David Willetts made this point in 2005, in explaining his opposition to Maurice Saatchi’s proposals. At the time, he states that the £10,000 threshold would have cost £30 billion, because the threshold was then just under £5000. (It would now cost £12 billion less, because the nominal threshold is now much closer to £10k).
http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article536372.ece
Sunder Katwala
@johnb78 I have replied to yr critique (http://bit.ly/bCo4V4 ) on LibDem tax threshold & tax credits in the @leftfootfwd thread
Alix
Couple of quick points & I’ll read the PDF later, but I think I know what it’ll say. These are what Ben Goldacre calls zombie arguments. No matter how many times you knock them down, they always get up again.
“• the measure would do nothing to help the very poorest, who don’t have income large enough to pay tax;”
This is a dumb argument. It’s like saying “This is an apple and it doesn’t solve the banana shortage, therefore it’s a rubbish apple.” There are dozens of Lib Dem policies that “don’t help the very poorest who don’t earn enough to pay tax”, just like there are dozens of Labour policies that don’t – because they are about other things. This policy is about a fairer tax system. It does what it says on the tin. It will make the tax system fairer and flatter, and in the process it will offer the greatest proportional help to people who pay tax but are nonetheless on low pay.
For people who don’t earn enough to pay tax, we have a little thing called a welfare state. And, coincidentally, the welfare state as constructed by Labour currently includes so-called “tax credits” paid over to households earning up to about £70k in some cases. As I’m sure you know another Lib Dem policy is to taper those tax credits. High-minded claims about Labour’s opponents failing to concentrate funds on the poorest are not well-founded.
“• 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;”
I’ve not checked your figures, but I imagine this and the next objection on your list are both “objections” because of the same errors of interpretation. One, you have reinterpreted the “stated aim” to suit your purposes. The stated aim is to make the tax system fairer. This has the *effect* of lifting low-earners out of poverty. Two, you are implicitly assuming that absolute gain is more important than proportionate gain. This can pretty easily be knocked on the head. £300 per year will make far more of a difference to someone earning £12k than someone earning £30k. And *everybody* earning £12k will feel that difference. Ignoring this simple truth suggests a disturbing lack of interest in people’s actual circumstances.
“• households in the second richest decile would gain on average four times the amount than those in the poorest decile; and”
Again, not read the report, but I take it this is just a restatement of point 1, that the lowest earners (up to £6k) won’t earn enough to benefit from the tax cut, and those earning between 6K and 10K will “only” benefit to the tune of 20% on that range. And they’re all in your poorest decile, so they’re dragging the average gain down. If this is what you’ve done, your statement is misleading to the point of sophistry. You were on far more respectable ground with just stating the figures. You have deliberately sought to give the impression with this statement that the policy is biased in favour of higher earners. Unimpressive.
“• the policy would increase socially damaging inequalities between the bottom and middle.”
Again, pending my reading of the report, this sounds like an assertion-masquerading-as-finding, and is essentially a rehash of points 1, 2 and 3.
There *is* a debate to be had about the only point in which actual figures are quoted, i.e. point 2. This debate is largely about principle. The two questions are “Does absolute gain matter as much as proportionate gain?” and also “Should the tax system be fairer and flatter as a matter of principle?”. To which my answers are of course no and yes respectively, and accordingly, I don’t mind that the tax cut goes to everyone. It’s just a fairer tax system. I like fair tax systems. Your respective answers are yes and don’t care, so far as I can see. I note you haven’t mentioned at all the fact that this whole tax cut is being paid for by debarring access to tax breaks currently enjoyed by higher earners.
So I think my overall responses is twofold.
1. This is a liberal policy. Wherever possible I want people on low income lifted out of tax. I do not want them taxed and then given handouts. That is antithetical to me as a liberal. It also has nothing to do with the tax system. The tax system is the mechanism whereby government takes a due from people. The Liberal Democrat policy aims to alter in a revenue neutral way where that due falls. No-one should allow themselves to be bamboozled by Labour into thinking that benefits are part of the tax system. The fact that Labour has called some of its benefits “tax credits” does not make it so. They are not tax credits in any true sense of the term.
2. Show me the money. What have you got to offer instead? You, meaning this website and the Labour party generally. Have you got a way of taking low-earners out of tax and not extending the same tax reduction to higher earners? Something like Matthew’s scheme (above) would work. You come up with that, iron out the complexities of collection to a convincing extent, find a way of arguing that it is fair and flat, push it through the Labour party using whatever mechanisms are available to you and then we can talk.
Until then, I’m afraid the Lib Dems are offering to lift all earners >£10k out of tax altogether and make an enormous (and decreasing) proportionate difference to those earning over it.
Alix
Sorry, when I said “This has the *effect* of lifting low-earners out of poverty” I of course meant out of the tax system.