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
And furthermore…
This tax policy was actually passed at last year’s conference. I would expect the big debate this year to be around the DEBill.
Owen Meredith
Alix makes some very good points. I haven’t read the full paper yet, but I will, but from the blog, comments and rebuttals, it seems you have looked at lifting the tax threshold as a policy in isolation to suit your views.
I don’t believe anyone is usggesting that.
If, for example, you increase the basic rate of tax to around 24/25% at the same time, all top rate tax payers would be about £180 worse off, everyone under about £28k would be better off on a scaled, and those earnering over £28k would pay between £1 and £180 more as the graduate towards the top tax rate.
Soyou can lift the lowest eaners out of tax, without costing the Treasury a fortune!
I explain this here: http://owenmeredith.blogspot.com/2009/10/promote-growth-cut-costs-give-more-to.html
Rob
Some more footnotes and appendices in the report wouldn’t have gone amiss. At some point, details of a cut in individual income tax rates is transformed into an analysis of the impact on households, with little explanation of how this is done. I recognise that Landman Economics may have some intellectual property in their modelling, but it can’t be a hugely complex calculation, so it can’t hurt to explain how it was done, surely?
Tim Worstall
Rob: the reason why they analyse it on a household basis is simple.
The higher end of the houshold income distribution is dominated by two earner families. The lower end by one (and none).
So by analysing a change in “individual” taxation as a change in “household” taxation you manage to get in a nice cheap shot. For of course higher income households get more benefit….they’ve got two allowances to play with not one.
If you actually analysed a change in individual taxation on the basis of individual post tax incomes then much of what they’re complaining about here would go away.
Which is, of course, why they’ve done it this way.
Now they do have one line in there where they point out that the two allowance household gains more precisely because it is a two allowance household. But what makes the rest of their analysis meretricious is that they don’t explore the other implications of this……that the whole system of individual taxation is therefore regressive in exactly the same manner……that they most certainly would not support the idea of the household as the taxable unit….(nor would I but then I’m not complaining about the use of two allowances) and so on.
And as to the basic point of the rise in the allowance (and I would note that the ASI has been shouting about this for years, UKIP has been suggesting it for years and I personally (and there’s most definitely an overlap between the three) would argue that the personal allowance should be the full year full time minimum wage for entirely moral reasons.
Start from the beginninig:The Joseph Rowntree Trusts tells us that the people of this country think that £13,900 pre tax is required to be not living in poverty in the UK. That is £11,400 a year post tax.
Full time (37.5 hour week, 52 weeks a year) minimum wage brings in £11,300. Hell, this is close enough for government work.
If we say, for moral reasons, that those who work must not, by law, be paid less than the min wage, exactly the same moral reasoning insists that we should not be taxing said min wage to pay for outreach diversity advisors. Or SpAds. And if we are to say that no one working full time should be living in poverty then that again says, by the same moral reasoning, that we shouldn’t be taxing people earning under the amount needed to live not in poverty.
Increasing the personal allowance is a moral isse….we can clean up the economics of tax raising after we’ve dealt with that.
BTW, fun fact….as a result of fiscal drag recent governments (yes, Geo. Brown included) have been extending the income tax system ever further down the income scale. No one’s suggesting anything particularly radical here you know, only that the personal allowance should bear the same relationship to average wages as it did 20 or 30 years ago.
Christine Ottery
RT @leftfootfwd: Lib Dem tax policy "fails the fairness test": only 6% goes to poorest families http://cli.gs/BynM9