I’m not sure why I’m bothering: the whole blogosphere seems to be consumed by Nick Griffin being on Question Time.  Liberal Conspiracy has 6 posts in the last couple of days, including one where Sunny H shoves the whole of the Right in with the BNP (‘the right actually believe and perpetuate many of the lies that have fulled the BNP’s rise’) and takes some of the credit for killing multiculturalism.  Momentous.

Our own Dom thinks they should be let on QT to be hoist by their own petard.  The BNP a’re wrong: stop being scared of them.  So I won’t put too much thought into this one.  Or the next.

Whenever you ask anyone remotely left of centre How we will pay for the Deficit, they tend to find numerous clever ways to hit the richer-than-middle.  Of course.  The poorer-than-middle are, well, poor. Even Reform, no bunch of Lefties, are onto that: they call for the End of Entitlements.  Meaning, I suppose, no benefits for those above-poverty.  Their language is wonderfully florid:

Responsibility has drained away from the British welfare state, leaving a poisonous blend of entitlement and apathy. Middle and high earners, who could and should be independent of public welfare, instead use their political weight to extract “their fair share” from government, through universal benefits and near-free higher education.

Stirring stuff.  The huge proliferation of footnotes does not disguise some pretty superficial analysis: you know what I mean, “we spend £XXXX (huge scary number) and yet we have terrible YYYY (chose favourite society in decline figure). ” Causality, well that’s for wimps in universities.  And forget the fact that over on the Left they do the same, except they put ‘only’ in front of £XXXX.  Britain’s benefits are tiny as a replacement ratio, some other blog is writing right now.

But they reach ENORMOUS figures for savings.  £14bn immediately to be taken off the “middle class”.  Great, eh?  You know, those middle classes, all those Range Rovers, private schools, holidays in Dubai . . .

Trouble is, ‘middle’ is rather different from Britain’s usual wrongheaded understanding of Middle, best defined by the Telegraph’s utterly comic “coping class“, who seem to have about £90k each (yes, read the article).  In Reform’s case, we are – admirably – talking about the real middle:

a basic definition of middle class where every adult in the household has at least £15,000 in income and every child £5,000.

This true middle is much poorer than our standard image of “middle class”, as the TUC discussed at length (see their blog).  And Dillow has looked at it too.  Salaries of £50k – our normal understanding of where Middle Class might start – are actually top 10%.

So, these are the Median Class Britain, on perhaps £40k as a household with 2 adults and one kid, a bit above poverty – perhaps 50% above – but not miles above.  And what does Reform think can be done, easy as Pie? Well, remove some £14bn from these people.  Example: family of 2, 2 kids, £50k income, would have £3k less child benefit, so have a hit to their incomes of 6%.  That is about twice what has happenned in this last recession.

Then there’s Winter Fuel Allowance (£1bn), bus fares, TV licences, all big chunky items.

I can’t go through all the ideas.  Reform are, well, brave: except they are not in power and don’t have to worry about backlashes and politics and silly things like that.  But in comparison to most think tanks they have really put their balls on the line, or at least the balls of the ‘middle class’.

What bothers me is that they are getting away with a rhetorical trick. Written on the tin is “middle class welfare” and we all think of those Coping people the Telegraph moans about.  But they are not: they are people from just above poverty to just below comfortable.  This fiscal squeeze will be painful.  Reform have crudely added up some of the pain-numbers.  But their spin is attrocious – and, of course, they have utterly dodged the macroeconomic consequences (see last post).

Even the IEA is nervous:

“having had 12 years of dramatically expanding means-tested welfare provision and provision for those not working and relatively badly off, there is a danger that taking away universal benefits (or raising taxes on the middle class) will simply reduce further the net returns to working, to education and so on.”

And Megan over in the US has identified another problem with getting all your revenues from those wicked people, the Rich: those sorts of revenues, things like Capital Gains Tax, Stamp Duty, Yacht excise, Truffle fees and so forth are highly volatile. And that matters: volatility means some chump will spend it all when it’s good, and then  find us pitched into a crisis when it’s bad.

Note to Reform: thanks for doing so much fiscal maths.  But don’t try tricking anyone into thinking this is easy.

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13 thoughts on “Taxes. Who pays?

  1. Declaration of interest: I eat at Reform’s expense now and again.

    I think this is harsh, Giles. Sure, Reform’s arithmetic is pack of the envelope, and sure, there would be some behavioural changes, but it is hard to see them being out by an order of magnitude. Last time I looked, something like 85% of children were in households on means-tested benefits. Do we really believe that 85% of kids are in poor families? Or even near poor ones?

    Do we really believe that it is sensible that my 64 year old Professorial colleague should get to travel to work for free, while our cleaners have to pay to take the bus?

    Reform are advocating things that (by and large) left wing liberals should be in favour of, just like CFs advocacy of slashing subsidies for univ students who by and large are from affluent backgrounds and who will by and large go on to be affluent.

    Raising the student loan interest rate, or raising the level of fees would not be easy, but that doesn’t make it wrong. Ditto taking tax credits from people well above median earnings.

    There are macro considerations about when to do it, but these are sensible medium term policies.

    Off to watch QT now…

  2. I actually agree with some of these ideas. But I think that (a) their branding of the whole thing as “middle class benefits” would go against very many understanding the term – it is in many cases two earners on £8 per hour and (b) whether it is a benefit cut or a tax rise, it has a serious income effect. Sure, your professor colleages might be able to afford not to have these perks – I agree with that. But then their policy ought to be “no welfare for people on the 7-10th decile” which instead of raising £14bn will raise £5bn.

    And when you do the calculations using disposable income . . .

    There’s no getting around it – closing this deficit will mean hurting a lot of people who are at or below the median and rightly or wrongly think they are way below ‘middle class’ as it is currently understood – and reading the FT blurb on this, might not realise it.

    I may be overreacting. But when the Tories end up doing but 20% of this, it will be because it was as politically unrealistic as their earlier call to slash 10% of doctors’ pay at one fell stroke.

  3. I don’t think we will be able to repay the debt in a suitable time frame without some people below the 7th decile paying something, and I would rather take benefits from deciles 4-7 as well as 7-10 than raise VAT, myself. As a rule of thumb, we should question every benefit paid to people in the top half.

  4. You may well be right. No arguments there. We sat around in CF trying to work out how to do this – it’s impossible without something really difficult

  5. Interesting post, and comments! I think this issue of ‘what counts as middle’ is well demonstrated by this income distribution plot from the Institute of Fiscal Studies – only when folks realise quite how low the median earnings are will they understand that a heck of a lot of people are going to be a heck of a lot worse off if we rush to pay back the deficit without ensuring that these very people have stable jobs.

    Question – in calculating that

    it’s impossible without something really difficult

    , the word difficult presumably refers to making some of the real ‘middle’ pay for their share of deficit reduction. What happens if we decide to do away with expensive spending items such as Trident, the worst PFI contracts, ID cards etc – if we’d save £5bn from the 1-10th decile benefits cut, how much more can we save by cutting that which we can do without…? Just wondering if it’s a significant sum or not…

  6. For information: A radio discussion yesterday between someone from Reform and ???? identified that, for this paper, Reform defined middle class as anyone on £15,000 plus or a couple with two children on £40,000 plus.

    Would either of you offer a comment on the value of a citizen’s income?

    The main argument for universal entitlements seems to be around take-up and discrimination.

    Surely we should try to integrate the tax and benefit systems.

    Also, there is a sense that we belong to a society and that those of us who do well do so as a result of this membership. For those who are doing less well at a given time, their very membership provides factors that have assisted and are assisting the ‘commonwealth’ of that society and the some of the opportunities being seized by the ‘better off’.

  7. Dear Prateek,
    My comment was sent in close in time to yours, so I did not mean to exclude you from offering thoughts on a citizen’s income.
    B

  8. Thanks both for interesting points.

    Personally, I think the famous low-hanging fruit of ID cards Trident some middle class benefits and ‘efficiencies’ might add up to £20bn of a structural position that is £70bn out of whack – or about 4% of GDP. Some of these might hurt aggregate demand and make the problem harder. I think there is no two ways about it: consumption as a proportion of GDP is at 87%, it needs to fall to something like 81-2%, and that 5% means either:

    the consumption the government does FOR us falling (i.e. health education),
    some of the money the government sends from savers (wealthy) to spenders (poor) i.e. transfers
    more taxes from people so that instead of consuming the govt collects them and saves them in the form of repaying debt. e.g. VAT.

    Tim and I have had a discussion about whether higher VAT reduces consumption; it may make no difference to intertemporal choices to consume or save if it is deemed permanent (the subsitution effect) but it may have an effect through the income channel

    I think Reform have pulled the opposite trick that is usually played with the Middle. The usual trick is that the Telegraph etc describe as “middle” the people whe are in fact 85-99% of the income dist. Then when taxes on the rich rise, the Telegraph yells “assault on the middle” and fights it. The trick that Reform have played is the opposite: to propose a lot of things that will hurt the median and in fact some below, and then hope that this is not as damaging as it might be because we now think “middle class” means private schools, holidays, big disposable income: whereas the people hit by these measures are not really like that.

    Of course, I am speculating. i have no idea what they think we should think . . .

    Sorry Bill my views on cit income are ill-developed

  9. One of the problems of cit inc is that I have never seen a plausible scheme that resulted in tax rates lower than 60-80%. The difficulty with integrating the tax and benefits scheme is that taxes are individual and benefits are family based. The only plausible basis for integration is to move taxes over to a family base, but then (in particular) women returning to work after childcare would be taxed at their partner’s marginal rate from the first £, which is a big disincentive and would almost certainly reduce female labour force participation, with knock on effects for their long term incomes, particularly given the divorce rate, and the extent of under-pensioning of women.

    If anyone would care to multiply the £14k by the number of adults, plus £5 per child, and then subtract all of current benefits from it, and divide the result by the current income tax receipts we would get a sense of the extent to which taxes would have to rise. In fact they would have to rise by more than that, since benefits in a few cases would be higher – housing benefit claimants in central London, for example. Indeed, the fact that you would still need housing benefit means that integrating tax and benefits into a CI would not lead to the ending of means tested benefits.

    As I say, I don’t think that Reform are claiming this is easy. What they are doing is setting out a plausible way to proceed over time. As Peter Lilley used to say to Tories who urged him to cut £1bn from the welfare bill – which million poor people do you want me to make £1000 a year worse off? It is never easy, but something has to be done about the fiscal position sooner or later, and better that some of the burden is met by the (real) middle, rather than by the bottom.

    For my money the best thing that we could do for the middle is to allow more houses to be built, so that they gradually get cheaper over time. If house prices had increased with inflation since c. 1997 then a 100% mortgage on a typical 3-bed terraced house would cost about £75 a week today. At that point a lot more people would be a lot further from “economic danger” – they would be able to save more in good times, be asked to pay more tax when needed, be less likely to need benefits and so on and so forth. We cannot get there overnight, but we could aim to stabilise house prices at recent levels in nominal terms, which equates to a 2% fall in real terms, and a 4% fall relative to earnings. If we did that for a generation we would get somewhere.

  10. I like that idea, as you know – and the construction itself could provide real boosts to investment and growth – say an extra 200,000 houses a year, at 50k, that’s £10bn per year or almost 0.7% on growth, plus all the multiplier effects. And it meets a real need.

    i was reading Reform in a rush. If I find any quote to suggest that they think it’s easy, I’ll publish it, otherwise I am happy to withdraw the complaint till justified .

  11. If the low-hanging fruit will indeed only scratch the surface, then Tim’s point about house building comes into its own. Not only would house prices stabilise, it would (according to my rudimentary economics-for-dummies knowledge) create jobs and give many millions in poor housing conditions the chance to live better lives, which in turn would re-ignite demand, which would raise tax reciepts and go some way further to reduce the gap between consumption and GDP. Of course it’s up to both government and industry to ensure that the new demand is not for old, polluting products but rather for green and sustainable things, but that’s a different issue…

    I’m not sure why too little thought seems to be given to this sort of demand-driven solution to the debt conundrum, with more attention focussed on cutting benefits to those on really quite meagre incomes – which surely would make them even less likely to spend, completing the viscious circle…?

  12. Housing? There are a lot of planning consents already in existence and developers/builders were ready to start them 18 months ago and were already looking at working with RSL and doing shared equity schemes (as the investor market weakened). I really hoped that the spending injections could be directed into just such schemes. It was a unique opportunity for affordable homes to be high quality.
    I was working with one developer on a fantasitic scheme in Liverpool Dockland (towards the Dingle) designed by Christophe Egret – absolutely superb. And we were working closely with the Dingle community, the local RSA, the local employment project and with residents groups from the surrounding high value dockland properties. It would have done more to counter exclusion and foster community integration (as well as creating sustainable as well as construction jobs) than anything done in a decade of ‘initiatives’ in the area.
    A year and a month ago after the last conference season, when I raised this approach with Clegg, his office replied that such an initiative would take too long and it was better to have tax cuts.
    Comic really.
    B

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