As is often the case, one fails to really get to grips with the impact of changes on living standards if one doesn’t fairly compare households of different sizes.
James Plunkett is a Research and Policy Analyst at the Resolution Foundation
The Independent reports today that ‘middle England’ will be ‘hit hardest’ by upcoming changes to taxes and benefits. Research commissioned by the paper finds that families in the £40k-£50k bracket are set to suffer a four-way hit from:
• The reduction of the 40p tax threshold;
• A rise in NICs rates;
• A sharper taper on tax credits; and
• The means-testing of Child Benefit.
This kind of story is fairly familiar – here’s the Telegraph and the Mail making the same point – and in one broad respect, they’re right. Any fiscal strategy that’s reluctant to take additional measures that hit the top, and makes some effort to protect those at the bottom – like the one being pursued by the coalition – will end up relying heavily on raising revenue from the people in between. (Though in reality, within this group, it’s people in the ‘lower-middle’ rather than the ‘upper-middle’ that will feel these hits the hardest.)
But, as is often the case, today’s Indy story fails to really get to grips with the impact of these changes on living standards, because it doesn’t fairly compare households of different sizes. As anyone trying to raise children knows, a single person on an income of £40k can afford a lifestyle a world away from a family of four living on the same income.
In fact, in terms of living standards, a single person on £40k sits in the top third of the population, enjoying a standard of living above 71 per cent of people. By contrast, a couple with two children on £40k sit in the bottom half of that distribution, below 52 per cent of the population. Considering raw incomes alone is never enough – and is often misleading.
The challenge for the government is that this question of adjusting for household size isn’t just a problem for the way we analyse the impact of upcoming cuts, it’s a fundamental problem at the heart of the coalition’s tax-benefit strategy.
In simple terms, our tax system (as opposed to the system of tax-credits) is blind to the extra costs of children, and yet the government’s landmark policy to relieve Britain’s hard-pressed families – the raising of the personal allowance – is based solely on that system. The result is that relatively well-off couples without children do well, whilst many families in the bottom half of the distribution of living standards do badly.
Over the next few years, as more resources go into increasing the personal allowance, at the expense of child-related supports like tax-credits and Child Benefit, that is a trade-off that will grow in significance.
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12 Responses to “Considering income alone is never enough when looking at living standards”
Mike Thomas
What is the efficiency of taxing people and then giving it to them back?
What an utter waste of money not to mention the lack of dignity in making a means-tested claim for your hard-earned money back. LESS the cost of administration of the scheme AND hoping they don’t come after you IF THEY screwed up the calculations.
Remember that, it is not government’s money, it is THEIR money.
Tax credits are absolutely not progressive at the marginal bands of their threshold, they introduced perversities like 95% marginal taxation on earnings just beyond the threshold. They were a poverty trap.
The fact there is no money left means precisely that, that means that EVERYONE has to pay more in taxes to REPAIR the damage Labour caused to the economy.
Ash
Mike
“What is the efficiency of taxing people and then giving it to them back?”
The efficiency lies in the fact that you can use one and the same mechanism to boost people’s net incomes whether or not they pay tax. Otherwise you need two separate mechanisms to do the same job – one tax-cut mechanism to boost the net incomes of taxpayers, and one benefits mechanism to boost the net incomes of non-taxpayers.
In fact it would be a lot more complicated than that, because obviously people on very low incomes paying very little tax would see very little benefit from any tax cut. Cut income tax by 5% for someone paying tax on £1,000 of their earnings and they’re £1 a week better off; cut it by 5% for someone paying tax on £10,000 of their earnings and they’re £10 a week better off. If you want to change that regressive pattern to a progressive one, you need to work out an appropriate withdrawal rate for low-income benefits. This is why the coalition is right to be looking into the feasibility of a tax-credit-style ‘universal credit’ system that simplifies all this.
“Tax credits are absolutely not progressive at the marginal bands of their threshold, they introduced perversities like 95% marginal taxation on earnings just beyond the threshold. They were a poverty trap.”
Absurd. If any tax credit recipient ever faced a 95p marginal tax rate (which I doubt), this can only be because they were a higher rate taxpayer facing 40p in the pound tax, plus NI, on top of the 39p rate of withdrawal for tax credits. No higher rate tax payer is caught in a ‘poverty trap’.
I actually remember opening my first paypacket under the Tories and realising that I was £20 a week worse off (after covering travel expenses) than I’d been on the dole. All my benefits had been stopped dead, and I was too rich (£12k a year) to get Family Credit. Now *that’s* a poverty trap. Tax Credits, on the other hand, have only ever been withdrawn gradually as our family income has risen. If that money seems to disappear more sharply if and when our income hits £45k, well, boo hoo – I think we’ll live.