How long can the Lib Dems claim their tax policy helps the poorest?

Next time you see Nick Clegg or Tim Farron emoting about the Lib Dems’ concern for the poorest, remember: the priority for them is income tax cuts, write Tim Horton & Howard Reed.

By Tim Horton and Howard Reed

In her comment piece in today’s Times, Rachel Sylvester seems to have swallowed a bucket-load of Lib Dem spin. The article is behind the Times paywall (£), but the gist is as follows: behind the scenes, the saintly Nick Clegg and his brave band of Lib Dems are fighting the evil Tories to force them to focus on the poorest in society by raising income tax thresholds.

Let’s leave to one side the question of how long the Conservatives will let the Lib Dems keep painting them as a ‘nasty party’ to be tamed by their coalition partners (John Redwood recently described this as “one of the things I do not like”). What is more interesting to see is how long the Lib Dems can get away with claiming that they and their tax policy are motivated by a special concern for the poorest.

The Times repeats the Lib Dem mantra that raising the personal allowance is “taking the low-paid out of tax”. But it isn’t. The low-paid are currently getting hammered by VAT and a range of other taxes. VAT hits the poorest so much harder than income tax because, while income tax is progressive (the tax burden rises with your income), VAT is regressive.

(This is mainly because poorer households have higher consumption relative to their income than richer households do, so the VAT paid as a result of this consumption is a larger proportion of household income for poorer households than for richer households.)

By cutting income tax at the same time as raising VAT, the Government are shifting the burden of taxation in a way that makes our tax system less progressive.

To illustrate, the graph below shows the distributional impact (by household income quintile) of the government’s recent increase in the income tax personal allowance (costing £3.7bn) combined with £3.7bn-worth of VAT increase (which represents about a third of the total VAT increase to 20%). In other words, this shows the impact of a £3.7bn tax shift from income tax to VAT.

Distributional-impact-of-shifting-the-burden-of-taxation-from-income-tax-to-VAT
On average, households in the poorest 30% of the population lose from this tax shift. As the graph shows, households in the poorest fifth are big losers, while households in the 3rd and 4th quintiles are significant gainers.

(Those in the richest fifth lose slightly because the government has also adjusted the point at which you start paying the higher rate of tax in order to limit gains to richer households from the income tax cut, and these small gains are outweighed by the VAT rise.)

So the effect of this tax shift is significant redistribution from the low paid to the higher paid. The reality is that most low-paid households would have been far better off if, rather than cutting income tax, the Conservative-led coalition had spent the available resources lessening the VAT rise.

One of Margaret Thatcher’s legacies from the 1980s was a much more unequal Britain; as Professor John Hills has shown, one of the main causes of this was a large shift in the burden of tax away from income tax and towards VAT. The Liberal Democrats are now driving forward this Thatcherite agenda once more.

Sylvester expresses surprise in her Times piece to find that George Osborne “is a big fan of raising the [income tax] threshold”. But she shouldn’t be surprised; it has long been a Tory fantasy, promoted by Maurice Saatchi and Norman Tebbit (though rejected by more moderate Tories like David Willetts).

One reason why this tax shift is so regressive is that raising income tax thresholds isn’t a very good way of helping low-income households (for more on this, see our report from March 2010).

Only 6% of the cost of increasing the personal allowance is spent on the Lib Dems’ stated aim of lifting low-income households out of income tax; the remaining 94% is a whacking great tax cut for the rest of us. And, of course, an income tax cut does nothing for some 3 million households in the poorest quarter of the population who do not have income high enough to pay tax – including many pensioners and parents juggling childcare with part-time work.

If the Lib Dems and Tories were really motivated to stop those on low incomes having to contribute to the exchequer, they could do this for far more low-income families by putting the same resources into extending and increasing tax credits, than they could by raising income tax thresholds.

The introduction of tax credits by Labour dramatically increased the number of low-income families paying no net tax (and brought about huge reductions in effective tax rates for millions of families – on a scale that dwarfs the effects of increasing the personal allowance).

Finally, what about the effect on public services? No-one minds a middle-class tax cut when we can afford it, but we are currently in the midst of the deepest welfare and public service cuts in living memory. And the coalition’s tax cuts are making these spending cuts far deeper than they need to be. Yet there has been no public debate about whether or not the resources should instead be used to stop cuts to frontline policing, retain Building Schools for the Future, or provide better equipment for our troops in Afghanistan.

No wonder the Lib Dems are trying to stick to the bogus claim that these tax cuts reflect some special concern for the poorest. Over the next year, we are going to see schoolchildren taken out of schools as their families are forced to move due to Housing Benefit cuts; disabled people trapped in care homes and unable to see their families because of DLA cuts; and single parents forced to leave their jobs because of cuts to financial support with childcare.

Next time you see Nick Clegg or Tim Farron emoting about the Lib Dems’ concern for the poorest, remember: all of these personal and social tragedies are less of a priority for them than income tax cuts.

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52 Responses to “How long can the Lib Dems claim their tax policy helps the poorest?”

  1. Peter Raymond

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  2. menburke

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  3. joedgoldberg

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  4. Mike Le-Surf

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  5. Emma Donaldson

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  6. etonstifles

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  7. Jimmy

    Another brilliant piece from Tim Horton. Just when I thought my opinion of the Clegg-dems couldn’t get any lower….

  8. Will Straw

    Following Rachel Sylvester's Times op ed, @timjhorton & Howard Reed skewer idea that Lib Dems' tax policy is "fair" http://bit.ly/gfeLQT

  9. Chris Gudgin

    @hansguntersson RT @wdjstraw: …@timjhorton & Howard Reed skewer idea that Lib Dems' tax policy is "fair" http://t.co/orC7H5J

  10. Lewis Baston

    As the authors note, raising the threshold has a perfectly respectable Tory pedigree. Reggie Maudling as Chancellor did it in 1963. He saw it then as a more egalitarian and expansionary alternative to lowering the headline rate of income tax, which is what a lot of people on the backbenches and in the Treasury wanted him to do. Reggie took more people out of paying income tax than Clegg can dream of, and he didn’t do a regressive switch into purchase taxes either.

  11. Michael Carr

    How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/g7OxsF – excellent analysis by Left Foot Forward.

  12. TreeOfMan

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  13. Éoin Clarke

    This is a godo article but in actual fact you can take the argument a little further.

    Say for a moment the LD £10k threshold pledge had never existed. What would have happened?

    Well if the Personal Tax Allowance [PTA} is simply pegged a) at its present level b) plus inflation.. all the way to 2016.. where would PTA end up? Well if we say that they government pegged it to the inflation rate, and simply that… ie did not raise it in real temrs by a penny.. but simply matched RPI, then I venture to say that by 2016… current PTA +RPI of 6% [which if we take into account rising oil prcies VAt 20% and other inflationary costs to food is not out of the qeustion, and an eventual interest rate rise] we have the following calculations

    2010-2011 7102
    2011-2012 7528.12
    2012-2013 7979.68
    2013-2014 8457.74
    2014-2015 8965.2044
    2015-2016 9502.9

    Thus, one can see that the £10k promise is a hollow one.. PTA has been rising for years, and would have done so anyway..

    As this article rightly points out, the government will get it all back, and more, in VAT

  14. Andy

    Sorry but you are wrong. Taking people out of tax is progressive. End of! Get over it

  15. Kevin leonard

    other words, this shows the impact of a £3.7bn tax shift from income tax to VAT…….What it shows most of all is that these changes have nothing to do with reducing the deficit as they have gained absolutely nothing from this move other than to punish the poor and reward the rich. Dirty lying fraudulent tax avoiding millionaires feathering their own nests for the future as usual…..

  16. Éoin Clarke

    Andy,

    If inflation continue at that rate, you are not taking them out of tax any more than they were in 2010…

    Its a bit like saying that wages grow year on year when you are lucky if the barely match inflation. ..

  17. Sunder Katwala

    Supporting the argument of the post it is interesting that James Forsyth of The Spectator, a commentator who is broadly sympathetic to the coalition and indeed to this policy, has written about how the Tories would like to promote the true impact of the tax threshold policy as a Middle England tax cut for the middle-classes, but are constrained from doing so because of the LibDem desire to promote the taking the poor out of tax claim.

    http://www.spectator.co.uk/print/politics/all/6258828/the-coalition-needs-a-clear-message-for-middle-england.thtml

    “Take the plan to raise the income tax threshold to £10,000. The coalition talks about this Liberal Democrat idea as something that helps the low paid by lifting them out of tax altogether. This is true, of course, but it is less than half the story. The total cost of this change will be just over £17 billion, and £16 billion of that will go to those who earn over £10,000 a year: you still benefit from this change if you earn £40,000 a year as your amount of tax-free income is increased. But the Liberal Democrats do not like to stress this point because they want to portray the reform as a policy designed to help the poor.

    In this year’s Budget Osborne began the process of raising the threshold to £10,000, but he combined it with a freeze in the allowance for higher rate tax-payers. Even with this change, the policy benefits anyone who earns less than £44,000 a year. But coalition ministers are still reluctant to go on television to talk about how they have cut taxes for the middle classes”.

  18. Duncan Stott

    The first problem with your analysis is that some of the apparently poorest households by income in your graph aren’t really what would be considered poor. It contains wealthy pensioners, students, the self-employed going through a brief income dip…

    Household expenditure is a better measure of who is poorest. To quote the IFS: “one would get a more reliable picture of who those are with the lowest standards of living by examining those recorded at the bottom of the spending distribution than one would if one looked among those recorded at the bottom of the income distribution.”

    The ONS has also found that one in five of the lowest-income fifth of households spends more than twice their current income, and concluded that “the peculiarities of [these] households can be associated with a temporary condition of low income, rather than with a permanency of poverty,” adding that “expenditure could be regarded as a better proxy for the standard of living of households with few resources”. http://bit.ly/dTWr04

    One more ONS quote: “referring to income distribution to identify the incidence of indirect taxes on households with low income can be misleading”. Sadly that’s exactly what this article has done.

    Next, please don’t pretend that it’s only the Tories who fantasise about raising personal allowance. Here’s that other voice of the hard right, BevaniteEllie (Gellard), cheerleading for the very same policy: http://bit.ly/ewrBRY

    Thirdly, you’ve plucked VAT and personal allowances out simply to suit your agenda. Why not also show capital gains tax increases? You have to look at the whole tax package to get an accurate picture of the effect of the government’s policies on fairness. For instance, the IFS green paper widely previewed yesterday, and acknowledged on this site http://bit.ly/eIUsXu, after studying the whole package of tax and benefit changes to come into force in April concluded that the most well off will be hit hardest. The writers have done more cherry picking in this article than a seasonal migrant worker does in a whole summer.

  19. Duncan Stott

    I just left a lengthy comment on this load of cherry-picked, misleading guff from @leftfootfwd http://bit.ly/fyf1BE Awaiting moderation 🙁

  20. simpkins83

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  21. Cheadle Labour

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/g7OxsF This is starting to wear very thin

  22. Ian Blades

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/g7OxsF

  23. False Economy

    RT @leftfootfwd How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  24. Sarah Mingay

    RT @FalseEcon: RT @leftfootfwd How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & …

  25. Brian Barefield

    RT @FalseEcon: RT @leftfootfwd How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & …

  26. Staffordshire UNISON

    RT @FalseEcon: RT @leftfootfwd How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & …

  27. Mr. Sensible

    Silly gimmic.

  28. cdrfuzz

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/g7OxsF

  29. Juan Voet

    RT @FalseEcon: RT @leftfootfwd How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & …

  30. SJ

    So just how many Scandinavian nations with Socialist/Social Democrat governments have VAT rates below the UK rate? VAT is not charged on food or children’s cloths, and is charged at 5% on heating fuel, As someone classified as ‘poor’, I would have thought the poor pay a larger proportion of their income on zero rated goods than the rich.

    Yes you are right inequality increased under Thatcher, however after 13 years of Labour government, this country has left with higher levels of inequality than it did after 18 years of Conservative governments. There were 700,000 more people in extreme poverty when Labour left office than when Labour took office, and incredibly more than at any point since records began. These figures remember all came before the credit crunch, deficit and recession, a time of unheralded government wealth. The rich, under Labour, have done very well; of the extra income enjoyed by British households over the Labour years, 40% has accrued to the richest 10%. The average real incomes of the poorest tenth declined by 2% in the 10 Labour years to 2007-08.

  31. Robin Howell

    RT @CdrFuzz: RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/g7OxsF

  32. Arron Neve

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/g7OxsF

  33. Bern O'Donoghue

    RT @FalseEcon: RT @leftfootfwd How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & …

  34. Nick Beddow

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  35. Tony Glover

    I’m starting to agree with Denis Healey – this coalition won’t last another year. The cracks are starting to open.

  36. Burnley Labour Party

    "By cutting income tax at the same time as raising VAT, the Government are shifting the burden of taxation in a… http://fb.me/uvAIE9d8

  37. Rich

    Is it right I’m continued to be amused whenever inflation is brought up, what with one of Labours favourite tactics being to not increase things even by inflation?

  38. Mike Ranscombe

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  39. Stephen Lintott

    How long can the Lib Dems claim their tax policy helps the poorest? | Left Foot Forward: http://bit.ly/fa9zjw

  40. Broken OfBritain

    RT @Slintottuk: How long can the Lib Dems claim their tax policy helps the poorest? | Left Foot Forward: http://bit.ly/fa9zjw

  41. Tim Horton

    Why Clegg's claims about "taking the low paid out of tax" ring very hollow in the face of the VAT rise and benefit cuts http://ow.ly/3OIma

  42. Mr. Sensible

    We can but hope, Tony.

  43. Molly

    RT @FalseEcon: RT @leftfootfwd How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & …

  44. Ash

    Andy

    “Sorry but you are wrong. Taking people out of tax is progressive. End of! Get over it”

    Sorry, but how is it progressive? A raise in the income tax threshold is of *least* benefit to households in which everyone is so poor they already pay no tax (e.g. pensioners, part-time workers), and of *most* benefit to households in which everyone’s earnings are higher than the new threshold (e.g. households where two people work full-time). It’s precisely as progressive as raising the threshold for the 40p rate would be.

    I suppose you could argue the effects of the policy are ‘progressive’ for all but the poorest *if* this tax cut was being funded by raising taxes on the better-off. But it’s not – the cost of raising the threshold to £10,000 is being wholly met by the rise in VAT. What’s going on is redistribution from the bottom to the middle – extra tax is being collected from pensioners and part-time, minimum wage workers and handed to basic rate taxpayers.

  45. Steve Trow

    RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed

  46. Neil

    If the only changes to the tax system being made were the two you base your ‘analysis’ on you might have a point.

    But they’re not.

    You have ignored a list of other tax changes that are hitting high income people hardest including the 50% rate on incomes over £150K, the rise in Capital Gains Tax, the doubling of the NI rate on high incomes and the restrictions on higher rate pension contribution relief.

    Between them these measures mean that those in the top 10% of earners are paying a huge amount more in tax. (And rightly so)

    You also ignore the other very important reason for increasing the basic allowance which is that it increases the incentive to work which is a good thing for the government and for individuals.

  47. Mark Morris

    I think the only sensible comment here is from Neil.

    And remind me what was the top rate of income tax for most of the years betwen 1997 and the end of the Blair/Brown Government

    (answer 40 per cent)

  48. Simon

    “(This is mainly because poorer households have higher consumption relative to their income than richer households do, so the VAT paid as a result of this consumption is a larger proportion of household income for poorer households than for richer households.)”

    This is simplistic statement and fails to recognise that the following items have zero VAT:

    food
    children’s clothes and shoes
    books and newspapers
    public transport

    and 5% applies to:
    heat and lighting, children’s car seats, sanitary towels

    The patterns of expenditure amongst households varies enormously, but what is clear is that there are many low income households (especially those which only use public transport) which spend very little of their household expenditure on goods and services covered by VAT.

  49. Irish election: What's on offer from the main parties | Left Foot Forward

    […] attack the more vulnerable in society whilst giving the wealthier a free pass. For more on the regressiveness of VAT, see the Horton/Reed analysis on Left Foot Forward from earlier this […]

  50. Sunder Katwala

    Proof Mike Hancock on #newsnight – and Osborne promise tomorrow – is nonsense, once VAT compared to income tax cut http://bit.ly/fTHY2W

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