Lib Dem tax policy: Our response to your responses

The authors of the 'Think Again, Nick!' report on the wisdom of increasing the personal allowance respond to comments across the blogosphere.

Our guest writers are Tim Horton and Howard Reed, authors of ‘Think Again, Nick! Why spending £17 billion to raise tax thresholds would not help the poorest

As the authors of the report that kicked off the debate last weekend about the wisdom of increasing the personal allowance, we wanted to take up Will’s offer to reply to some of the comments that have been posted in response – both on Left Foot Forward and on other sites, best summarised at Next Left or Liberal Democrat Voice.

First, we wanted to say thanks to everyone who has offered comments on our analysis.

Before we reply to some of the substantive points, a quick word about our motivation. It is a shame that some have interpreted our report and subsequent commenting as somehow disrespectful to the Lib Dems. In fact, it should be taken as quite the opposite – a mark of respect. In days gone by, people would dismiss Lib Dem policies on the grounds that they would never be implemented or that the sums didn’t add up. (Indeed, most criticism to date of this Lib Dem tax cut from other parties has been based on deliverability and credibility – namely, that it is a fantasy to think that the measures proposed to raise the revenue for this tax cut would actually deliver the £17 billion claimed.) By contrast, we have taken the proposal at face value and asked: assuming the necessary revenue were available, would it be the right thing to do? Some people might not have liked our conclusions, but if we’re genuinely into three-party politics, then we should also be up for critiquing all three parties’ policies.

Now some responses to points that have been made.

There were basically three sets of responses to the report. A first set challenged the legitimacy of assessing an individual policy. A second set queried our claim that the proposal was unfair or regressive. (Some respondents mixed both: Alix Mortimer shifted rather tortuously from arguing that the allowance increase was progressive in its own right, to arguing that it was of course regressive if we didn’t also take the compensating tax rises into account. Interesting…) We offer some thoughts on each of these two complaints below.

A third set of responses (in our view, the most coherent) challenged the political significance of our findings and the value-orientation of our argument. We do not address these here, since these are matters of opinion, and everyone is entitled to their own view. We would just say this. It is perfectly coherent for people on the right to argue that inequality doesn’t matter, or that the negatives of coercive taxation outweigh the benefits. But bear in mind how far away this is from the philosophy being espoused by many progressive Liberal Democrats around the country. It is to this group that our challenge was really addressed.

1) Is it legitimate to consider the wisdom of individual policies?

One complaint was that we only sought to evaluate the impact of the personal allowance increase in isolation. This is not true – our report does try to consider the effect of the package as a whole (Section 3.1.4), and finds that taking the corresponding tax-raising measures into account does not affect our key concerns arising from an examination of the tax cut in isolation (specifically, that it is a way of using £17 billion that ignores the poorest and also that it increases socially damaging inequalities between the bottom and middle of society).

A more commonly heard complaint, however, was from those criticising the fact that we sought to isolate the impact of the personal allowance increase at all. The standard complaint here was that it is not legitimate to look at individual policies and that you can only look at policies in terms of the impact of the whole package (usually followed by denunciations that the work was therefore ‘biased’, ‘partisan’, ‘misleading’, and so on).

This is a ludicrous claim. Where individual policies are discretionary decisions, like this tax cut, then of course you can consider the wisdom of pursuing them. There is nothing about the tax rises that the Lib Dems are proposing that then compels them to increase the personal allowance to £10,000 – it is a discretionary decision.

Yes, one should also consider the impact of the combined effects of different policies – as we did. (And at no point in our report did we claim that the impact of the personal allowance increase was the impact of the entire package.)

But that does not make it illegitimate to consider individual policies on their own merits. (Imagine this argument in other contexts. It would be like saying just because the personal tax and benefit reforms Labour has pursued have, taken together, been highly progressive, that this meant you couldn’t criticise individual decisions like their 2007 cut in inheritance tax. What nonsense.)

In particular, to pretend that a collection of policies is a take-it-or-leave-it package, rules out the possibility of ever improving that package. We made it quite clear in our report that we support the Lib Dems’ proposals to ask those on very high incomes to pay more in tax, by restricting higher-rate pensions relief, closing avoidance loopholes, and so on. But we also think there are much fairer ways to use this revenue than this increase in the personal allowance, which is why we are calling on the Lib Dems to replace it with other possible alternatives.

Indeed, the Liberal Democrats themselves have in the past done just this with this particular tax policy. Between July 2007 and April 2009, the equivalent Lib Dem policy was to use the revenue-raising package of tackling tax avoidance / green taxes / etc. to fund a 4p cut in the basic rate of income tax. Then, on 20 April 2009, it was announced that this revenue would now be used to fund an increase in the personal allowance to £10,000 instead. In the words of the Guardian at the time:

“Until today the Liberal Democrats were committed to rebalancing the tax system by cutting the basic rate of income tax by 4p in the pound. Instead, in what Clegg said was a response to an ‘evolving situation’, the party wants to use the money that would have funded the 4p cut to increase the tax allowance by £3,525 instead. Clegg said that this policy was ‘even fairer’, that it would take 4 million people out of income tax altogether, and that it would be worth £705 a year to anybody earning up to £100,000, the point at which the benefit starts to taper out.”

All credit to Clegg for considering the distributional impact of the component parts of his policy package. I’m not sure why so many Lib Dem activists think this is illegitimate (such as James Graham at Social Liberal Forum).

What we are proposing is that such a process of consideration should happen again. We think, to quote Nick Clegg, the package could be made “even fairer”.

Finally, Peter Kunzmann goes a step further and argues that you can only assess fairness in terms of all of the other policies a party is planning to enact. Clearly we don’t agree with this. Among other things, it would close down the space in politics to discuss the justifiability of individual policy decisions. Peter is right that if one were claiming to produce an assessment of an entire party platform then it would be necessary to consider all these policies. But that wasn’t our objective, Peter. It was to analyse this tax measure and try to illustrate that it isn’t as great as many people think. It’s no good denouncing our work as misleading because it doesn’t conform to your separate objective.

(It would be an interesting exercise to analyse the impact of an entire party platform, though difficult this time round as no-one’s really put the details of their deficit-reduction plans on the table other than talking about the relative contribution of tax rises and spending cuts. What would taking all other Lib Dem policies into account look like? It’s a good question. We know the Libs have some good proposals in various policy areas. Would they do enough to eliminate the regressivity of this £17 billion tax cut across most of the population? We really don’t know. But, Peter, we’ll tell you this; whether or not the picture overall looked good or bad, our point to you would still be the same: it could be so much better if this ludicrous £17 billion tax cut were replaced by something fairer.)

As a footnote, it should also be said that – while credit is due to the Lib Dems for being ahead of the curve with proposals to tackle inequality at the top – other parties are also looking at similar policies on closing loopholes and pensions tax relief. (We’re told even the Tories are thinking about some of this stuff!) So we would also encourage other parties to think about the distributional impact of possible ways of using those resources, and not assume – as some respondents here seem to – that, simply because the revenue has been raised from the very wealthy, any subsequent use of the resources is impervious to criticism.

2) What does ‘regressive’ mean and is this policy regressive?

We call a tax change ‘regressive’ when it gives more on average to households higher up the income distribution as a proportion of their net household income than it does to households lower down the income distribution.

As Graph 2 in our report illustrates, this tax cut would be regressive because the gain households get from it as a percentage of their net household income tends to increase as you move up the household income distribution (though falls away again in the top decile). For example, households in the middle of the income distribution would see an increase of about 3% in their net household income from this tax cut, whereas households in the poorest fifth would see an increase of only around 1.6% (that is why it would increase inequality between the bottom and the middle).

(When you take into account the tax rises on the super-rich that you mention, those in the richest 10% are losers, certainly; but this regressive gradient would still remain across the bottom 90% of the population.)

The distributional gradient across the population reflects a variety of factors. One is that there are a lot of working-age households on only modest earned income or no income at all. Another is the fact that two-earner households (which tend to be richer) get more than single-earner or no-earner households from the tax cut. Another is that pensioners don’t gain as much from the reforms as those of working-age.

Note that analysis is done at the household level, because that is the level at which welfare is meaningfully assessed. (Think about it this way: the Duke of Westminster’s wife would not be in poverty if she had zero income. As far as I know, no party is planning to change the household basis on which the government assesses welfare and poverty.)

Specifically, the analysis has been done over ‘equivalised’ household incomes, that is, incomes adjusted to take the composition of households into account – such as number of children, pensioners etc. (So a household with a single individual earning £30,000 has a higher ‘equivalised income’ than a household with a single individual earning £30,000 with two children.) The distributional gradient therefore also reflects the pattern of characteristics like this across the population.

(Some people have asked about the analytical technique. The analysis is based on microsimulation modelling of the tax and benefit system over a representative dataset of UK households, ordered by their equivalised net disposable household income. It is a similar technique to that the Treasury and the Institute for Fiscal Studies use for modelling.)

While there was a lot of discussion about this analysis, we haven’t seen any comments that substantively challenge our figures.

Instead, the major criticism seems to have been that what we are saying is ‘obvious’ and so shouldn’t be take as a sign of a bad policy. For example:

• on the measure not benefitting the poorest, we have ‘rob tennant‘: “[your point that it] ‘does nothing to help those who don’t pay tax’ – durrrr, it’s supposed to help those who do pay tax”; or

• on the regressive nature of the policy, we have ‘Alix’: “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.”

We have to apologise to those who think our analysis is too obvious to be worth saying (though its puzzling that many of the same individuals have been furiously posting other comments trying to argue the figures are wrong – they can’t both be wrong and obvious).

But, unlike Rob and Alix, we do think they mean something. We think they mean that the Lib Dems have the wrong priorities. We suppose we were saying them less for their analytical insight than to highlight how extraordinary it is that a party affecting to claim the mantle of ‘fairness’ is proposing to spend £17 billion (six times the cost of its ‘pupil premium’ for disadvantaged kids) on a regressive measure that also excludes the very poorest from help at all. That is appalling.

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