Thursday, 18 March 2010

Rumble in the LibDem jungle

Tim Horton has a Comment is Free commentary today, summarising his case against the Liberal Democrat policy of raising the income tax threshold to £10,000 as set out in his and Howard Reed's Left Foot Forward paper at the weekend.

There were lengthy discussions of the challenge on Left Foot Forward itself and on Liberal Conspiracy here and here.

There has been a spirited defence of the party's policy from Liberal Democrat bloggers. LibDemVoice has a round-up. Indeed, the challenge has united bloggers from different wings of the party, with James Graham of the Social Liberal Forum and Alix Mortimer, on the libertarian wing of the party, both challenging the critique as unfair.

The main points from LibDem bloggers have been that it is unfair to take the tax threshold policy in isolation, when the revenue is raised progressively as part of a revenue neutral package, and that an income tax threshold change can't be expected to help those who pay little or nothing in income tax.

Guido Fawkes weighed in on the LibDem side of the argument, arguing that the idea of relative inequality is a "left-wing myth".

I think that three central concerns about the policy remain valid.

(1) I think it is common ground that the tax threshold change itself does more for better-off than poorer households. As James Graham wrote: "The fact that raising the tax threshold helps people on higher incomes more than people on low incomes is not, believe it or not, a startling revelation. We know. The party has never tried selling this policy in isolation".

The debate is between those who think that is justified because of the progressive way that the money is raised in a revenue-neutral package, against the challenge that there would be considerably more progressive ways to use that revenue for fairness goals.

(2) It seems clear that implementing the overall LibDem manifesto package would decrease income inequality between the top and the middle, but increase the gap between the bottom and the middle.

While the money is raised at the top, there do not seem to be any significant measures in the overall manifesto package to prevent the position of those who don't get much or any of the £700-£1400 tax breaks from getting worse. Hence the concern that the package would deepen relative poverty. I am not sure anybody has challenged this point, other than from a position that inequality or relative poverty don't matter (which would be very much a fringe position among LibDems).

The defence that an income tax threshold change can't be expected to help non-income tax payers does surely not adequately address a challenge as to whether to choose to put almost all of the resources available into an income tax threshold change.

The reason the poor pay a higher proportion of their incomes in taxation is primarily about indirect taxes, not income tax. An alternative proposal like the Solidarity Society report's universal tax credit could address this, in a way that an income tax threshold change can not.

(3) What is the opportunity cost in public spending given the current fiscal position?

Nick Clegg told the Spectator that the LibDems intend to have the toughest approach on spending cuts to close the deficit, contrasting his approach with the willingness of other parties to consider spending rises. (Note that his rationale was the claim that the party's tax breaks focus on lower earners).


“We’re saying “purely spending cuts”, and for a number of reasons. If you want the economy to grow, you must stimulate demand. Any economist will tell you that the best way to do this is by giving tax breaks to the people who tend to spend more of their money. That is to say people lower down the income scale”.


Clegg's interview seems to make clear that, while the current policy package is revenue neutral, the opportunity cost of the tax threshold policy will be £17 billion of unidentified spending cuts. The LibDem leader suggests that the tax rises which fund the threshold change and the pupil premium exhaust the possibilities of tax rises altogether. None of the parties have been at all clear about the content of their deficit reduction plan, but these spending and taxation decisions need to be considered together. The choices made will have important distributional consequences too.

The debate over the weekend has shown that the LibDem party is pretty much united around the tax threshold plan, though some acknowledge the virtues of a universal credits or basic income approach too.

But the emerging debate over spending cuts, tax rises and deficit reduction is just beginning. The idea of the LibDems being toughest on cuts will be contested within the party. The Social Liberal Forum is challenging the leader's suggestion that the party should rule out further tax increases to close the deficit.

14 comments:

Simon said...

The political reality of the LD proposal also needs to be taken into account.

Basically it's a vote winner where the sort of redistribution measures floated here and on LFF are not.

Also has anyone looked at the stimulus effects of putting £17b into a tax cut for low-middle income earners?

Tom said...

That something is a vote-winner is not necessarily a good reason to do it. For a long time it looked like cutting inheritance tax would be a big vote-winner.

This applies all the more when a policy's vote-winning ability seems largely to rely on lying about its being a progressive measure to help the poorest.

Simon said...

That something is a vote-winner is not necessarily a good reason to do it

Maybe so but deal with the political reality for a minute and I maintain that the chances of getting widespread support for the LD proposals are far greater than a call to increase benefits by £17b.

I also don't think enough credit has been given in terms of the benefits this would have for people on the minimum wage. A couple both working full time on £5.80 an hour would be £1400 a year better off. That is a huge difference. Life changing in fact for people struggling to get along.

As much as I love this blog I do think on this occasion, arguments about which decile benefits and attempts to measure the "progressiveness" of a policy just misses the point.

Far better to have a policy that re-distributes to some extent and has a chance of being implemented than a policy that is super-fabulous re-distributive and has 0 chance of making it.

Sunder Katwala said...

Simon

I hear your point. The LibDem proposal may be more intuitively electorally appealing than spending a much smaller amount on current tax credits for greater impact.

But tax credits (despite lots of moaning about their complexity) do not have "0 chance of making it": rather, the opposition parties are trimming at the edges, because their impact on household incomes makes offering to scrap them would be unpopular and very difficult politically.


I think it would be perfectly possible to use a universal tax credit mechanism, or the conversion of the allowance into a rebate (the point of which is to provide a vehicle for progressive tax cuts, eg if needed in a stimulus), in a way which was popular - eg there must be ways to describe "£400 or £500 tax credit/rebate for everyone", is for the most part likely to be largely popular in a similar way to "£700 off for earners over £10k", by raising the allowance, while having different detailed distributional impacts.

That doesn't address objections to a 'should we be spending £17 billion on a tax cut' question, but those who want to spend £17 billion on a tax cut could find that was a fairer and still popular way to do it.

Saying 'spend all £17 billion on unemployed out of work benefits' would be vulnerable to this criticism. But I don't see anyone arguing that. The argument is against the prioritisation/lack of balance of the LibDem package which means we have a 'fair taxes' proposal increasing relative poverty and inequality at the bottom, while reducing it at the top.

donpaskini said...

"The political reality of the LD proposal also needs to be taken into account.

Basically it's a vote winner where the sort of redistribution measures floated here and on LFF are not."

What's the evidence for this?

e.g. the Lib Dem opinion poll rating hasn't increased since they adopted this policy, and there has been no polling comparing this policy to alternative ways of spending £17bn.

Simon said...

@ donpaskini

LD's went up 4% in the YouGov daily tracker after the weekend coverage of their conference including (but not limited to) coverage of their tax proposal.

However, you seem to imply that just by announcing the proposed cut (sometime last year I think) it would somehow go directly into the consciousness of voters who aren't political obsessives and so make a difference to the LD ratings

The truth is that for the LD's it will take a general election campaign and Clegg / Cable / Hune hammering the issue home in debate after debate after debate for it to register with people who don't pay much attention to the ups and downs of everyday politics, let alone the tax proposals of the 3rd party.

More than that though, do you really need polling to tell you that a £700 tax cut would be popular?

As for a comparison with alternative ways of spending £17bn, it's just my opinion but simplicity works and this policy is easily understood whereas tax credits / rebates are not.

donpaskini said...

"LD's went up 4% in the YouGov daily tracker after the weekend coverage of their conference including (but not limited to) coverage of their tax proposal."

...and then they went straight back down again. Hardly the sign of a policy which has actually influenced people's voting intentions.

"The truth is that for the LD's it will take a general election campaign and Clegg / Cable / Hune hammering the issue home in debate after debate after debate for it to register with people who don't pay much attention to the ups and downs of everyday politics, let alone the tax proposals of the 3rd party."

That's an entirely reasonable argument, but it proves the point I'm making - we don't actually know whether or not this is going to be a vote winner.

"More than that though, do you really need polling to tell you that a £700 tax cut would be popular?"

Your claim was that it was a "vote winner" - there are plenty of policies which are popular on their own but which have no impact on how people vote.

I think it is probably less of a vote winner than opposition to the Iraq war and top-up fees in 2005, or even the penny on income tax for education in 1997/2001.

The most effective vote winning policies are ones which are popular on their own, but which also tell a bigger story about the party's values and are consistent with their other policies - opposing the Iraq war and top-up fees were both popular policies, but also clearly signalled to disillusioned Labour voters that the Lib Dems shared their values as a centre-left party of peace and public services. Hence the 6% or so swing from Labour to Lib Dems last time.

In contrast, the messaging from the Lib Dems is totally all over the place at the moment. Over the past week I've heard the following arguments - they want to lift the poor out of tax, actually the main beneficiaries of this policy won't be the poor because they don't pay tax, but will instead be the middle class, anyway, on a point of principle we need to simplify the tax system, and we need to cut public services by £80 billion per year, or maybe we don't. It is not a very consistent approach.

I remain to be convinced that the tax cut will actually change people's voting intentions, and would be fascinated to see any evidence to support the claim. I guess we'll find out on May 6th, though!

Simon said...

actually the main beneficiaries of this policy won't be the poor because they don't pay tax, but will instead be the middle class

That's a contentious claim. The cut amounts to an increase in take home pay of 7% (ish) for those on £10,000pa. The more you earn, the lower in % terms the cut is worth and so proportionally it give greater help to those on full time / minimum wage type incomes.

If your point is that in terms of numbers it benefits the middle classes then sure it does but I maintain you need that group to buy into it for it to gain traction.

As for the popularity / vote winning potential, without specific polling I guess there's no way of knowing, but I'd be pretty sure that if you and I stood on the High Street of any marginal constituency this weekend and asked people to pick between the LD proposal and the Labour / Tory headline proposals (whatever they are), the LD one would win comfortably.

In contrast, the messaging from the Lib Dems is totally all over the place at the moment.

Contentious again but assuming it's true has this confusion filtered into the consciousness of ordinary voters? Not a chance.

International Commentarian Solidarity said...

The Orange Book wing of the party is preventing the liberal democrats from acting pragmatically, and all too often adopting neo-liberal dogma in the face of evidence to do otherwise.

donpaskini said...

"I'd be pretty sure that if you and I stood on the High Street of any marginal constituency this weekend and asked people to pick between the LD proposal and the Labour / Tory headline proposals (whatever they are), the LD one would win comfortably."

But even if this is true, it doesn't mean it is a vote winner.

In 2005, Michael Howard's policies of being tough on immigration were extremely popular, but didn't help the Tories win votes.

"But assuming it's true has this confusion filtered into the consciousness of ordinary voters? Not a chance."

It's a symptom of the problem that most voters don't know what the Liberal Democrats stand for.

Sunder Katwala said...

Don

Thanks for these interesting comments I think you were a bit warmer

Perhaps one major lesson of these debates is that there seems to have been a significant under-supply on the blogosphere
(i) detailed tax policy and distributional arguments.
(i) in-depth debate about the detailed LibDem policy platform.

Don't you think?

Sunder Katwala said...

Was trying to say "I think you were a bit warmer about the goal of the policy itself in the LC thread"

donpaskini said...

I think the goal of the policy is quite good, but that there are probably better ways to spend £17 billion. I can see the appeal of aligning the starting rate of income tax with the minimum income which people need for an adequate standard of living as a medium term goal.

But here I am just arguing the politics of it, rather than the merits of the policy.

Simon said...

@ Don

From UK Polling Report

Meanwhile the Lib Dems seem to be consolidating their conference boost rather well, remaining at 20% compared to the 17% and 18% sort of range YouGov had been showing previously.