Monday 12 April 2010

Sorry Nick, Labour has made the tax system fairer

Nobody could seriously argue with the Institute of Fiscal Studies on the distributional impact of Labour 1997-2010, in showing that Labour's changes to the tax and benefits system have been strongly progressive.

So how does Nick Clegg stand the IFS analysis on its head to claim the opposite this morning? He claims to have "damning evidence that after 13 years they have failed to deliver fair taxes. Despite everything they said in 1997, life has got harder for people at the bottom and easier for people at the top".

It would appear that he does so by excluding tax credits from his tax analysis, which enables him to turn the IFS' comprehensive analysis upside down.

But I was surprised that The Guardian reported the Clegg claim at face value, without noting either the Institute of Fiscal Studies analysis or the tax credits point. (As did The Telegraph, perhaps less gob-smackingly). The Guardian did report the IFS findings a fortnight ago.

But this also raises the issue of why Labour has not done more to argue for and communicate the distributional impact of tax credits.

[UPDATE: The IFS have published a specific commentary on the LibDem analysis: Do the poorest really pay the most in tax?].


Of course, tax credits are widely disparaged as both complex and pointless, particuarly by senior journalists and national politicians, whose incomes are mostly above those of the families which benefit from them. So how often do you see it claimed that they 'take with one hand and give away with the other'?

This is simply wrong. Don't take that from me; take it instead from the evidence-based Tory frontbencher David Wilett.

As Willetts wrote shortly after the 2005 election, in offering a persuasive rebuttal of Maurice Saatchi's argument that tax fairness was best pursued by raising income tax thresholds.

Some people believe this is still worth doing because it would get people off Gordon Brown’s tax credits. It is assumed that people on modest earnings are paying as much in income tax as they are receiving in tax credits. If this were true, I would leap at the opportunity to tackle this problem. I have no brief for Mr Brown’s tax credits. They are complicated. Reports out this week show the distress caused to millions of families by their shambolic introduction. I would like to see them reformed.

But the amount of money that a low-income family is receiving in tax credits is much greater than the amount they are paying in income tax.

If you are earning £10,000 a year you might be paying £900 a year in income tax but receiving, depending on your family circumstances, several thousand pounds in tax credits. No affordable increase in the personal tax allowance will offset most low-income families’ tax credit entitlements.

As Hopi Sen tweeted this weekend:

I entered details for Tax credits for 2 parent 2 kid family with 1 earner on £24k (c median) Labour Child Tax credit £2880. Tory Credit £150.


I was just trying to point out how tiny in scale tory tax allowance is. If held CTC below inflation for one year, it would eat it up any benefit.

The Left Foot Forward critique of the LibDem threshold plan, co-written by Fabian research director Tim Horton with Howard Reed, showed that the impact of raising the tax threshold was regressive. That has continued to generate an engaged and hard-fought blogosphere debate.

While other LibDems proposals raise revenue at the top, it remains valid to argue that the £17 billion threshold plan would increase inequality between the bottom and the middle, and would increase relative poverty. (That will not concern libertarians like Guido Fawkes who think relative poverty is meaningless, but it might well matter to social liberals, who do not).

After the election campaign, I hope LibDem advocates of a higher income tax threshold will revisit the question of different methods by which the party could propose to cut taxes at the bottom, which might better meet their party's fairness goals.

We have published the extract of the Fabian Solidarity Society book which compares the distributional impact of tax cuts, threshold rises replacing the tax threshold with a flat-rate rebate and a universal tax credit. I hope that analysis will help to inform progressive debate in different parties beyond this election campaign.

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