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
“I suggest that LibDems arguing against a household analysis”
Eh? You’ll have to look to Tim Worstall for someone arguing against a household-based analysis, and last time I checked he was not a Lib Dem. If you’re talking about me, I was simply pointing out a basic truth. I said:
“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.”
Nothing factually incorrect in there. The graph is a great illustration of how tautologous your overall point is. You’re standing there shouting that households who pay more tax stand to benefit more from a tax break, and expecting it to mean something. It doesn’t, it’s just a fact. You want to give low earners extra help, you up their benefits. This is a tax reform. Your argument is tautologous because you persist in confusing the tax system with the benefits system.
“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.”
Erm. You haven’t analysed it very well, then. And by “analyse” I mean “read the relevant policy papers”. The original proposal (2006/07) was to introduce green taxes on pollution, reform CGT and shutting down particular tax breaks for the wealthy, reform notably getting rid of the double relief on pension payments enjoyed by higher rate taxpayers. The aim at that time was to lower the basic rate, which I did not consider progressive enough (and I said so on CiF). Fortunately, the party saw the merit of my proposal (!) and ditched the basic rate cut in favour of raising the personal allowance.
The proposed savings mentioned above nonetheless remained, and remain, in place to pay for it. If you do not understand this, I suspect it arises from a simple ignorance of how the Lib Dems construct policy. Once a policy is passed by conference, it is party policy until it is replaced by another, or superceded by events. Members of parties with a more fast and loose grasp of internal democracy tend to not get this. In this instance, the CGT reform was superceded by Brown’s shocking axing of the Lawson system in order to curry favour with the wealthy. Both the green taxes and the restrictions on pension relief remain party policy and for my money the latter is one of the most important strands of reform.
In addition to that, the Mansion Tax was in fact initially floated as a way of paying for raising the personal allowance (so, in fact, forget the policy papers, you’ve not even read the news reports! Sheesh.) Now, the mansion tax is clunky, like I said. But it’s a tax on accumulated chunks of wealth, and if it’s used to pay for tax breaks on economically productive activity, especially when the greatest proportionate beneficiaries are the lower earners – well, I’m all for it, on every level. I don’t understand why you’re not.
So, why have you omitted pension relief reform and the Mansion Tax from your analysis? Is it because they would fall on the rich and inconveniently disprove your partisan point? If you are in earnest, I’m sure you will want to issue an immediate correction to your “research”.
Guido Fawkes
Fabians in “tax cut doesn’t help non-taxpayers” shock discovery.
Sunder Katwala
Alix,
Not sure if you had read the paper after your earlier post. Section 3.14 (p13-14) does discuss the distributional impact of the whole LibDem package: this would retain the regressive gradient across the bottom nine deciles, while the top decile would lose income. It is of course possible to raise those resources from the top decile using the other proposed policies, and it is a separate decision as to choose what to do with that.
Alix
Again, I don’t understand your use of the term “regressive”, Sunder. People paying more tax in the first place will, obviously, stand to benefit more from a tax cut. So they look “better off” on your graph. You cannot give higher tax cuts to people who do not pay tax. (You can give them more benefits – but that is a different thing. This is an income tax break.) For this proposal to be “regressive” it would have to *actively favour* higher earners over lower earners. It does not. It taxes higher earners (over £40k) in order to pay for tax breaks for lower earners. Your bottom nine deciles are – I am assuming – made up of people who earn 40K (being the higher rate threshold) or under in various permutations. All of them get some help as a result of this proposal. The lowest earners in taxable bands get proportionately the most help of all (and I notice no-one has taken my proportionality point on board, which is a shame as I think this is where the true ideological difference lies).
Alix
“We have analysed the current LibDem policy proposal which they will take into the General Election. This is what they are proposing.”
I remain interested in why you did not mention the mansion tax, pension relief reform or green taxes in the course of making this point (even if only to dismiss them as insignificant). You had every opportunity to do so. Why not? Again, did it interfere with the overall message of “regressive tax” you wished to convey?