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.
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?”
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. ..
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”.
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.
Duncan Stott
I just left a lengthy comment on this load of cherry-picked, misleading guff from @leftfootfwd http://bit.ly/fyf1BE Awaiting moderation 🙁
simpkins83
RT @leftfootfwd: How long can the Lib Dems claim their tax policy helps the poorest? http://bit.ly/fyf1BE by @TimJHorton & Howard Reed