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””
Tim Horton
Tim – the reason we analyse the figures at the household level is because that is the level at which you assess welfare. For example, the Duke of Westminster’s wife would not be in poverty if she had zero income. (I thought Tories like you understood the importance of families?)
So we have not done it at the household level in order to ‘get’ these figures, but because that is the level at which welfare is meaningfully assessed. You might not like the results, but there you go. (As far as I know, no party is planning to change the basis on which the government assesses welfare and poverty.)
Specifically, the analysis has been done over ‘equivalised’ household incomes, that is, adjusted to take the composition of households into account – such as number of children, pensioners etc.
The distributional gradient therefore also reflects the pattern of characteristics like this across the population (the same technique used by organisations like the Tresury and the Institute for Fiscal Studies).
Billy Blofeld
You guys at LFF will appreciate this 😉
The Guardian reading spider…
Alix
And I still say your entire argument is tautologous. Your graph shows that households (whether double or single earner) who pay more tax stand to gain more from a tax break (up until £40k per earner). Well, yes. You want to up welfare as a separate exercise, up it. This is a tax policy which aims to flatten out the tax system.
Owen, I like your scheme for its simplicity, but in an ideal world I would not tamper with the base rate because it’s a bit of a blunt instrument. Part of the point of this tax reform in particular and Lib Dem tax reform in general is that economically productive work should be penalised less and wealth more. That is why I like the idea of interventions like removing the double relief on pensions enjoyed by higher rate taxpayers. By paying in those sums to their pensions, they are explicitly acknowledging that they earn enough in proportion to their circumstances to not need to keep it all in circulation; they are hoarding it instead. A high-earner, on the other hand, who happens to have 17 children and two sick parents (to take it to reductio ad absurdam) may well use all their income and hoard none of it. Even the rather clunky Mansion Tax is a more precise way of targetting accumulated wealth than moving the base rate around.
Mr. Sensible
Will, I’m not sure I understand.
Sunder Katwala
A very detailed discussion on @LeftFootFwd re the paper on regressive effects of LibDem tax plans http://bit.ly/bCo4V4