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. Alix

    The definition of regressive taxation is taxation that falls disproportionately on lower earners. Raising the personal allowance reduces the current level of disproportionality. It makes the taxation system less regressive.

    What definition of regressive are you using?

  2. Sunder Katwala

    I asked co-author Howard Reed if he had any response to the point about marginal tax rates, and whether the LibDem threshold proposal does anything about this. He says:

    “The assessment criteria for tax credits are completely separate from the assessment for income tax – the current tax credit system is assessed on gross incomes so the cut in income tax does not take anyone out of the tax credit eligibility (as their GROSS income is unchanged, it’s their net income which changes. It does of course take people below £10,000 gross income out of the income tax system but the PAYE side of this is mostly done automatically anyway – there is very little admin hassle from the point of view of the employees who are being taxed”.

    While there is probably a separate case for simplifying the tax credit system and making it easier to claim, the simplification arguments that some people are making are complete red herrings”.

  3. Robbie Erbmann

    RT @nextleft: A very detailed discussion on @LeftFootFwd re the paper on regressive effects of LibDem tax plans http://bit.ly/bCo4V4

  4. Fabians Attack Low Tax for the Low Paid - Guy Fawkes' blog

    […] The Fabian’s Tim Horton and IPPR’s Howard Reed have jointly authored a paper for Left Foot Forward designed to undermine the case for raising tax thresholds on low income earners.  Clearly they are […]

  5. Sunder Katwala

    I suggest that LibDems arguing against a household analysis ask Steve Webb and/or the Institute of Fiscal Studies whether is the main and long established basis for analysing poverty, inequality and distributional impact of tax changes across society, and report back to us on what they say.

    Owen Meredith,

    We have analysed the current LibDem policy proposal which they will take into the General Election. This is what they are proposing. There is no suggestion at all that the party will increase the basic rate to offset the gains higher up the income range than those earning £10k.

    Were they to do so, they would have a less expensive policy, and it would be focused on taking those earning less than 10k out of tax.

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