UPDATE.  Praise be to James Graham and the Social Liberal Forum, who have produced a far more effective and wide-ranging defence of the £10k tax threshold policy than my poor effort below, or than I could have managed with 2 hours of furious blogreading IFS quoting graphmaking marriage-ruining hell.    If you are pushed for time, go straight there, rather than this effort.

As I suspected, the Fabian’s effort looks at just one leg, not the whole tax policy.   As James writes:

taking the personal allowance policy in isolation, it transpires, is exactly what Tim Horton and Howard Reed have done. They even preface their report by emphasising how much they approve of the Lib Dems’ tax raising proposals. And if you were in any doubt that this is anything other than a bit of Labour propaganda rather than serious research, they rather give the game away by putting an embarrassing photo of Nick Clegg on the front cover.

This goes straight into my “blog post of the year” category. Bet you didn’t know I even had one.

————–

Hat-tip Guido, who also does a robust job of defending the LibDem policy of raising the tax threshold to £10,000.

I like and respect Tim Horton, and so don’t want to dismiss too easily the Fabian piece of research that seems to rely heavily on the fact that this does not help those who, um, don’t have an income.

Sure: if every policy were to be condemned if it failed to enrich that bottom decile more than the rest, then the only policy that could be recommended would be a lifting up of benefits.   The Fabians, quite simply, would prefer £17billion that Vince et al have found in forms like the mansion tax and pension tax relief ‘spent’ in other ways.

I don’t think that this attack will prove very effective.  If it is fairly explained, most people would see the Lib Dem Tax Switch not as an alternative way of ‘spending’ the money, but as a way of redistributing the tax take; taking certain (unfair) tax reliefs on e.g. pensions for the very rich, and using the money gained to tax less those for whom the decision to work must in some cases be quite marginal.  Two caveats to their general ‘how unfair’ message:

  • The level of regression amongst working households must be less than that shown in their graph 9. And that is how a lot of people will see it.  A person on £15k and another on £20k will get about the same amount, meaning a greater % for the former.  That seems quite fair to most of us.
  • Skimming, I could not see a similarly distributional analysis of the way the money is raised – the removal of tax breaks, the mansion tax, and so 0n – that fund this proposal.  The Lib Dems are only proposing this change as part of a complete funded package – if one leg is not done, neither is the other.  Taking just one side seems a bit disingenuous, to say the least.

There has to be a huge debate about tax policy in the next two years.  I am beginning to get a bit frustrated with the only criterion being a straightforward income decile graph, and a quick eyeballing of whether the poorest 2-3 deciles get the most. What LeftFootForward call the Fairness Test is not the only test to be applied, as the dismal quality of some Robin Hood Tax arguments has illustrated.

That will not be good enough for me, or the voters, I think.

UPDATE: Another reason I take against relying just on a distributional analysis in tax arguments, is that it fails to realise the dynamism of people between those deciles.  In some (unpublished) research in 2008, I found that people often moved between the bottom and the next deciles, and so on, because of changing circumstances.  But the dominant narrative – particularly for people attacking Labour and accusing it of fostering dependency – imagined the same millions in poverty year after year.  That is not the case.

People wanting to move permanently out of poverty may consider not only the decile they are in, but the one they aspire to get into.  Disadvantaging work over benefits damages that aspiration.  Another reason that lightening the tax burden lower down the income scale has more to say for it than I think this Fabian analysis suggests.

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10 thoughts on “Libdem tax policy attacked from the Left

  1. those on low incomes would be much better off if, rather than being ‘lifted out of
    tax’, the same £17 billion was spent on measures such as tax credits, benefits or key
    welfare services (Section 3.2.4).

    This tells you all you need to know and how Labour have failed. They’d rather use political and bureaucratic time-consuming measures instead of freeing people to have more money in their pockets as an incentive to aspire. They also don’t understand that tax credits (however much they are needed) disincentivise the payment of fair wages – I remember the personnel wallah at a call centre exhorting people to take up their tax credits (he was a Labour man) – I thought `of course you do, you’re companies based in Jersey – it saves your company money`.

  2. Taking just one side seems a bit disingenuous, to say the least.

    But you realise that’s how Labour’s election promises would operate, if they reached government! They’d do the tax rises but not any spending promises.

    Treating everyone else like they’ll only keep one half of their promises just betrays the way they expect their favourites to behave as well.

  3. “They also don’t understand that tax credits (however much they are needed) disincentivise the payment of fair wages”

    Interesting point – is there a danger that employers will hold down wages in response to the raising of tax thresholds, so that they get the benefit rather than employees?

    I didn’t find the Fabian analysis all that convincing, and generally agree with your criticisms, but here’s a slightly different question from the one they posed:

    How does raising tax thresholds compare with other alternatives as a way of increasing economic growth? E.g. supposing instead the money went into cutting corporation tax, or increasing unemployment benefits, or infrastructure projects, or whatever other policies would give most return for each £ spent on them.

    Lastly:

    “People wanting to move permanently out of poverty may consider not only the decile they are in, but the one they aspire to get into. Disadvantaging work over benefits damages that aspiration.”

    This is a remarkably ineffective way of tackling this problem (though I take the point that this is not the main aim).

    If you want to strengthen work incentives, you could cap withdrawal rates at 55%, introduce free childcare, extend the Future Jobs Fund to guarantee everyone an offer of a job after a year, and still have change left over from £17bn!

    1. I am not against many of the more micro-things that Labour have introduced over the last 13 years, and which often resemble those you mention in the last paragrph – in particular tax credits, despite the botched executions. But they reek of micro-meddling, whereas the 10k threshold, as a piece of electoral rhetoric, is powerful and simple. Work incentives are also carrot AND stick – thinking Purnell/Freud review – and this is a nice carrot.

      I am sceptical about the language of guarantees. Trying to guarantee reality – who will offer the job? Is this a way of hardcoding an expanding state workforce?

      I think the idea is meant to sit above the Keynesian stimulus side – it is meant to be structural not cyclical, and about fairness rather than targetted intervention in the depressed economy. After all, who knows, by 2012 or whenever it finally came in, we might finally be growing again ….

      On employers holding down wages: that would take concerted monopolistc behaviour. When demand for labour rises again, I would hope this is less possible. As it is, they are holding down wage growth, and this is eagerly accepted owing to the alternatives on offer right now. Some might be pocketed by employers, but all things being equal it ought to make the hiring of more people more attractive.

      1. “I am sceptical about the language of guarantees. Trying to guarantee reality – who will offer the job? Is this a way of hardcoding an expanding state workforce?”

        I first saw the idea on Duncan’s economic blog, but basically, yes, the state becomes employer of last resort (or, rather, the state provides the funding for other orgs to become employers). It is actually Purnell’s idea:

        http://www.openleft.co.uk/2009/12/04/jobs-guarantee/

        I like that in this case, you are arguing the side of the bold and simple populist policy, whereas I prefer more technocratic, wonkish solutions 🙂

      2. Yeah, how did that happen? I spend 1 hour in a lib dem conference hall and come out ranting like a lib dem pamphleteer …

  4. Just a thought or five, I’m still buzzing from the Lib Dem spring conference 🙂

    those on low incomes would be much better off if, rather than being ‘lifted out of
    tax’, the same £17 billion was spent on measures such as tax credits, benefits or key
    welfare services (Section 3.2.4).

    John, couldn’t agree more with your analysis of this position – I am so tired of hearing this argument. People, regardless of which decile they sit it, don’t need more charity – more bureaucratic top-down patronising welfare payment – they need to be handed back the means to fulfil their aims, to live the lives they value by making the most of what they earn. But then the last 30 years have depended on a fundamentally flawed piece of thinking when it comes to this issue – that it’s fine to allow unfettered accumulation of wealth and assets to those fortunate enough to spin the wheel and land in a high-paying job, so long as those lower down have their plight alleviated by a drip-feed of complicated apologetically-redistributive welfarist handouts.

    [/rant]

    the point about disincentives to work is a salient one – under the NuLabour workfare programme, coupled with punitive wages and conditions experienced by those able to find work, the transition from maternity/training/joblessness to full/part-time work is hardly worthwhile – raising the threshold strikes me as an imaginative, liberal and above all economically sound way around this and many other imbalances in public policy. As for donpaskini’s question about alternative ways of using the £17bn or so, I may not be an economist but I feel I’ve read enough lately to comment that whilst putting hundreds of pounds back into the pocket of those most likely to spend it in the productive economy would boost economic activity and the capabilities of those concerned, the cutting of corporation tax would surely allow greater profit margins before wages were raised…?

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