Lib Dem tax policy “fails the fairness test”: IFS says so too

Our guest writers are Tim Horton of the Fabian Society and Howard Reed of Landman Economics

Last month, Left Foot Forward posted a blog highlighting research by the two of us, which argued that the Liberal Democrats’ manifesto pledge to spend £17 billion increasing the income tax personal allowance to £10,000 “fails the fairness test”. Among other reasons, we argued that:

• It would do nothing to help the very poorest, who don’t have incomes large enough to pay income tax;

• Only around £1 billion of the £17 billion cost of the policy actually goes toward the stated aim of lifting low-income households of the tax;

• Households in the second-richest decile would gain on average four times the amount that those in the poorest decile gain; and

• The policy would increase socially damaging inequalities between the bottom and middle of the income distribution.

The well-respected Institute for Fiscal Studies published its assessment of the parties’ spending plans on Tuesday. Their distributional analysis reaches similar conclusions to ours. As the IFS puts it, “these figures are a reminder that income tax cuts are not well targeted to help the poorest in society… in isolation, this giveaway could not be described as progressive.”

As we pointed out in our earlier publication, the Liberal Democrat manifesto also contains a number of revenue-raising measures that are progressive and welcome – for example, the ‘mansion tax’ on domestic property values above £2 million, and measures to tackle tax avoidance measures. Many have criticised using some of these measures to fund a permanent tax cut on the grounds that the revenue is either unidentified (in the case of the anti-avoidance measures) or potentially variable (in the case of the green taxes or restricting pensions tax relief, where revenue is dependent on behaviour not changing). And it should be said that other parties are also seeking to raise revenue from sources like high-value property and tackling tax avoidance. Nevertheless, these measures are in theory highly progressive.

But this in no way changes the fact that there are much better ways of spending £17 billion than delivering a tax cut that fails completely in its stated aim of “offering real help – and hope – to millions of low income families”.

The IFS notes:

“Broadly speaking, the Liberal Democrat package would redistribute from the well-off to middle-income families – augmenting the progressive pattern of Labour’s pre-announced measures but doing little for the poorest households. This latter feature might appear odd given the Liberal Democrats’ often-expressed anger at the relatively high rate of tax paid on the gross income of the poorest households.”

Our own report had described the irony of the Lib Dems justifying their tax cut by using the fact that the poorest in society pay a higher share of their gross income in tax than everyone else. Not only does this tax cut do nothing for the poorest, but because on average it gives more proportionally to richer households than to poorer ones, it would increase the differential between what the poorest pay and what everyone else pays.

So we renew our call on the Lib Dems to replace this proposal with a fairer alternative – or, at least to stop selling it in terms of ‘fairness’. We note that some Lib Dem election leaflets during this campaign have inaccurately described this proposal as being worth “£100 to pensioners”. But, of course, it is only worth £100 to pensioners who pay income tax – roughly, the richest 40 per cent of pensioners. This policy would give some support to the richest 40 per cent of pensioners and nothing to the poorest 60 per cent.

That’s not fairness.

You can download “Think Again, Nick! Why spending £17 billion to raise tax thresholds would not help the poorest” here.

http://twitter.com/houseoftwits/status/13064225833 House Of Twits

RT @leftfootfwd Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/bencooper86/status/13064304667 Ben Cooper

RT @thedancingflea: Crystallises what is great about LFF! RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/mikejulietbravo/status/13064618547 MJB

RT @HouseofTwits: RT @leftfootfwd Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/sarahportsmth/status/13064683002 sarah, portsmouth

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/cornishview/status/13064924885 Jan Sroczynski

RT @houseoftwits: RT @leftfootfwd Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/pity_kitty/status/13065115557 Kathryn Hyde

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/aidanskinner/status/13065903286 aidanskinner

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/joehmusic/status/13066070467 Joe Hesketh

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps (interesting point)
http://twitter.com/andrewlomas/status/13064084612 Andrew Lomas

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/lucyfunf/status/13064134438 Lucy Chapman

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/andy_s_64/status/13064149568 Andy Sutherland

RT @leftfootfwd Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps < been saying it for days …. #Ge2010
http://twitter.com/thedancingflea/status/13064178982 Claire Spencer

Crystallises what is great about LFF! RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/georgeowers/status/13064209287 George Bernard Owers

RT @thedancingflea: Crystallises what is great about LFF! RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/scarifier/status/13066839945 scari fier

RT @HouseofTwits: RT @leftfootfwd Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://www.twitter.com/niaccurshi Lee Griffin

Keep on representing only half the story, it showers you in glory.
http://twitter.com/samknight/status/13064491900 Sam Knight

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/vee6/status/13064578519 Peter Mallett

RT @HouseofTwits: RT @leftfootfwd Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/alistrathern/status/13067653714 Alistair Strathern

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/softmutt/status/13065088814 Vanessa Morriss

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps <<NOT surprised
http://www.twitter.com/niaccurshi Lee Griffin

Why this continues to irk me, by the way, is the continued shifting of the goalposts.

This policy by the Lib Dems is about a fairer tax system. Not a fairer redistribution of wealth, not a fairer benefit system. It is about saying that if you earn roughly less than relative poverty then you shouldn’t have to go through to rigmarole of paying tax only to get it back. Ironically of course Lib Dems aren’t yet proposing a cut to tax credits so not only will these people not pay tax, but they’ll also still get benefits. Nick Clegg and Vince Cable have repeatedly said this isn’t about those not paying tax. Yet here you are trying to cherry pick what kind of fairness is being talked about. Lib Dems have never talked about this in any other terms than fairness in the taking of taxes, why exactly do the IFS and LFF feel the need to drag it in to an area that isn’t relevant to the policy intention?

But of course it is to a degree slightly relevant for those not on an income, because it’s also about breaking down the situation with marginal tax, a subject you choose not to cover despite moving the goalposts in to an area that the policy isn’t really about. Convenient.

You still choose to use graphs that are only detailing half of the effects of the Lib Dem policy, you are willfully misleading people on the subject.

And all of this would be slightly less annoying if you weren’t such terrible hypocrites. Take Lib Dem policy to remove child trust fund’s and put the money towards pupil premiums. That is a whole policy which takes money away from well off families that are more likely to use the free lump sum from government funds and targets it at the poor…yet you champion…ironically…the pumping of money into a system that is entirely disproportionate to need.

But I’m not going to sit here and call the CTF regressive as you have idiotically done about this LD policy in the past. You see I can recognise that a lump sum paid to a person that happens to be poor when they’re 18 means more, even if it hasn’t been topped up as much and is a slightly lesser value than one maintained by a middle-income family, will represent a greater value than to that middle-income child/now adult.

Like I’ve said on Twitter, you don’t say giving a burger to a starving man is unfair just because you give a couple that are over-nourished one each as well…especially when that couple have had to pay for all three burgers. Clearly I have to clarify because LFF is about constantly being petulant and pick arseholes over things that the starving guy represents someone earning £10k.

I think I’ll leave you with this comment from LibCon that details why your campaign against this policy is redundant and ridiculous. http://j.mp/aV6G1B
http://www.twitter.com/niaccurshi Lee Griffin

And just to clarify. Someone earning £10k will take 7% more of their income home while still retaining any benefits they get. A couple earning a middle wage each of £24k will take home, collectively, only 2% more. How exactly you can claim the middle benefits “more” is beyond me…unless of course you take an absolute value to mean more than a relative one, which would be stupid.
Will Straw

Lee,

I’m sorry you felt the need to make this personal. If Lib Dems are on the cusp of power I hope your elected representatives cope a bit better with legitimate criticism of policy.

The central point is that the Lib Dems claim this is a “fair” policy and, since there is no satisfactory definition of the word, we have to make a judgment about what the word means. In the context of the tax system, I interpret it to mean progressive (ie who gets what on the income distribution). There are no shifting goalposts here and this was the basis of Tim and Howard’s original paper. The IFS, as the quotes above show, could not be clearer about whether or not this helps the poorest.

In terms of judging a policy in isolation, your claim is absurd. If the Lib Dems announced that every taxpayer would get a laptop, people earning £7k to £10k would get a disc-drive and people earning under £10k would get nothing, no-one would claim that it was fair, yet this effectively has the same effect as the LD policy. It’s great that the overall package redistributes income from top to middle but that doesn’t mean we shouldn’t analyse each component. The legitimate debate about 10p tax was precisely that – a debate about a specific policy taken in isolation.

As to your burger argument, let’s say I’ve raised the £6 to buy three cheeseburgers and there are only three people in society and I help all three. That sounds fair but would it have been “fairer” to buy the “starving man” a burger for three days running and give the others nothing? The problem is that the Lib Dem policy only gives one burger to a “starving man” for every 16 it gives to “over-nourished” people in your analogy. That isn’t fair in anyone’s book.

I respect your commitment to the Lib Dems, Lee, and to this policy. But please don’t question the motives of Left Foot Forward or our contributers. The Lib Dems have been given a very fair press on this site on Trident, green policies, and over the treatment of Nick Clegg, among many other areas. It is also unfair to our Lib Dem contributers to call us “partisan” (as you did on Twitter).

Best wishes,

Will
http://twitter.com/brianlabour/status/13069520821 Brian Tomlinson

As i suggested to Cable at the Teddington hustings RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: http://bit.ly/anrnps
http://twitter.com/paulkclews/status/13067449668 Paul Clews

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/looloowriter/status/13071160772 Louise Pennington

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://www.leftfootforward.org/2010/04/questions-for-the-leaders-economic-policy/ Questions for the leaders: economic policy | Left Foot Forward

[...] In light of the IFS saying of your policy, “income tax cuts are not well targeted to help the poorest in [...]
http://twitter.com/mark_want/status/13075958425 mark grip

Lib Dem tax policy “fails the fairness test”: IFS says so too …: New research by the IFS outlines that income ta… http://bit.ly/d2ghOK
http://fabulousblueporcupine.wordpress.com Alix

“In isolation, this giveaway could not be described as progressive; but to judge the distributional impact of the Liberal Democrats’ package as a whole we must also consider who would lose from the tax rises they would introduce to pay for this tax cut.”

Will, this is from the IFS report, bottom of page 35. I know it would be very convenient for you if the second half of that sentence were not there, but it is. You cannot assess one half of a tax-neutral package in isolation, we have always argued that, and the IFS are not suggesting that you should. I’m sorry, but this is getting silly.
http://twitter.com/randomvariable/status/13086149350 Naadir Jeewa

Research shows that LibDems' 10k income tax allowance fails the fairness test: http://bit.ly/b5Tp5d #leadersdebate
http://twitter.com/tankovic/status/13092850883 Damir Tankovic

Lib Dem tax policy “fails the fairness test”: IFS says so too … http://bit.ly/9EhHKx
http://twitter.com/aidanskinner/status/13133262191 aidanskinner

@mapkyca lower and medium incomes don't pay much tax: http://bit.ly/cBwaQP
http://twitter.com/ladyedinburgh/status/13162084834 Sarah Brown

RT @randomvariable: Research shows that LibDems' 10k income tax allowance fails the fairness test: http://bit.ly/b5Tp5d #leadersdebate
http://twitter.com/felix_cohen/status/13183089422 Felix Cohen

@dominiccampbell This? http://bit.ly/aZIgwe possibly reasonable, but I think the solutions aren't tax but social in the bottom 10%.
http://twitter.com/vachedemer/status/13190494693 Marq Hugh

RT @leftfootfwd: Lib Dem tax policy “fails the fairness test”: IFS says so too http://bit.ly/anrnps
http://twitter.com/gimpyblog/status/13302783885 gimpy

@bengoldacre ref for that last tweet http://bit.ly/b5Tp5d
Philip Giddings

The LibDem 10k personal allowance would benefit me and other working people on extreme povery pay who currently get NO minimum wage, no benefits and no tax credits. I’m ‘self-employed’ averaging £3-4 an hour. No, that wasn’t a typo, I said £3-4 an hour.

Labour has frozen personal allowances for years at around 5K, which has hit the poorest hardest. I’m forced work 60+ hours a week to pay mortgage and bills and live below benefit levels, in squalor and isolation. Why should I pay taxes for someone with a family, a decent home and a decent job that pays 50k a year to get child tax credits?
http://www.leftfootforward.org/2010/05/vote-2010-an-election-reflection/ Vote 2010: An election reflection | Left Foot Forward

[...] their approach to Trident and climate change. But much of their policy – particularly on tax, banking reform, and immigration – requires further [...]
http://www.leftfootforward.org/2010/05/clegg%e2%80%99s-10k-tax-allowance-is-no-tory-concession-its-a-tory-dream/ Clegg’s 10k tax allowance is no Tory concession; it’s a Tory dream | Left Foot Forward

[...] (even though our main points were subsequently validated by the Institute for Fiscal Studies’ own analysis). Their central complaint, however, was that we hadn’t taken into account the fact that the [...]
http://twitter.com/electionbear/status/14173690142 Matt Wallace

@PompeyGoat Infer bias all you want, but those economists and the IFS -> http://bit.ly/bxISGu both say its not redistributive to the poor.
http://dnmufc.wordpress.com/2010/05/12/clegg%e2%80%99s-10k-tax-allowance-is-no-tory-concession-it%e2%80%99s-a-tory-dream/ Clegg’s £10k tax allowance is no Tory concession; it’s a Tory dream « Dnmufc's Blog

[...] (even though our main points were subsequently validated by the Institute for Fiscal Studies’ own analysis).Their central complaint, however, was that we hadn’t taken into account the fact that the [...]
http://twitter.com/andy_s_64/status/25098849045 Andy Sutherland

And for all those LimpDems still in Cleggstasy about his "lifting millions out of tax" – that's regressive too http://bit.ly/dvdCQW