Tuesday, 22 June 2010

The proof: VAT hike + income tax cut = regressive

There is an excellent Left Foot Forward post from Tim Horton and Howard Reed, which shows the impact of George Osborne's changes to the income tax threshold and of his increase in VAT.

They write:

Incredibly, some of the briefing around the budget today suggested that the coalition saw the income tax cut as some kind of compensation for the VAT rise. But, as the graph shows, that isn’t the case at all.

Their graph provides the evidence to clinch Next Left's earlier point that cutting income tax and raising VAT isn't progressive.

But we should raise a small cheer for the tax threshold changes now excluding higher-rate payers. This is a change from the LibDem manifesto pledge, and has been advocated by the Social Liberal Forum, offering the party one partial response to challenges about the policy's claim to tax fairness.

The tax threshold changes now accrue mainly to the middle of the income distribution. It does exemplify the point that those who see increasing tax thresholds as the route to tax fairness then end up having to make changes to mitigate the inequality impact.

The Social Liberal Forum also produced a useful checklist from a progressive LibDem perspective of the tests a genuinely progressive budget ought to have met; it is difficult to see that George Osborne passed. Author James Graham has since marked the budget scorecard at two out of seven.

Another significant contribution to the policy challenge to the coalition government's austerity budget from inside the centre party came in a punchy piece from Richard Grayson, who is vice-chair of the party's federal policy committee, arguing that the budget should lead "Liberal Democrats may soon realise that a centre-left party is being led from the centre-right".

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