Squeezed middle includes top-rate taxpayers

The Guardian this morning reports that “Labour says ‘squeezed middle’ earns up to £50,000“. The counter-intuitive result (median income is around £26,000) is based on analysis by the independent Institute for Fiscal Studies (IFS).

In the Guardian, Patrick Wintour writes:

“Labour today moved to define its principal target group, the “squeezed middle”, by that saying such voters are people on an income of between £16,000 and £40,000-£50,000. The definition was given by Liam Byrne, charged with overseeing the party’s policy process by Ed Miliband…”

Analysis carried out for the Labour party by the IFS shows that couples with only one earner can pay the top rate of income tax and still fall just above or below the median when calculated on a household basis.

The study assumes that there is one earner on £44,000 who is contracted into the state pension. It shows that, after tax and benefits, couples with two children will fall in either the fifth or sixth income decile (i.e. just above or below median household income). Couples of this kind with one child will fall in the sixth or seventh decile while couples with no children fall in the wealthier eighth decile.

The findings support Labour leader Ed Miliband’s remarks on Friday – criticised by Nick Robinson as “deliberately vague” – that the “squeezed middle” constituted:

“those not on six-figure salaries, who are in the middle of the income distribution…”

The analysis shows that there are families in the middle of the income distribution who will be affected by the Tories’ policy of removing child benefit for top-rate taxpayers – undermining an argument made by The Times’ Danny Finkelstein who wrote last week:

“The median earner in Britain pulls in around £26,000 a year. In other words, half of earners are paid less than £26,000 and half more. Only 10 per cent of taxpayers have incomes above £44,000 a year and therefore pay tax at the higher rate…

“withdrawing child benefit from higher-rate taxpayers is not a squeeze on the middle.”

Labour’s definition is broader than that used by the Resolution Foundation think tank which produced a report last week looking at people between the second and fifth deciles (i.e. below the median) earning £12,000 to £30,000.

http://twitter.com/luratea/status/9220004499165184 Laura

RT @leftfootfwd: Squeezed middle includes top-rate taxpayers http://bit.ly/hin2Ua
Jack

standard case of people getting earnings and (household) incomes mixed up.
Alan W

Will – I think a slight change in terminology is called for here.

People earning £44K are not “top-rate taxpayers” anymore. They’re middle-rate taxpayers.

The phrase “top-rate taxpayers” should now only apply to those earning over £150K.

This may seem pedantic, but I think it’s an important shift to make, particularly if Labour intend to keep the 50% rate for the long term. Language can be a powerful tool in shaping public attitudes. The right understand this all to well; the left somewhat less so.
Mister Jabberwock

Will,

I must be missing something, or misunderstanding something at least.

You say that the couple with no children in the eighth decile has an income net of tax and benefits of £30,852 (from your analysis sheet) and the couple with two children have a net income of £33,148 yet are in the 5th or 6th decile.

Well, by definition someone on a lower household income must be in a lower or equal decile of household incomes. Not as you say here a higher decile.

It must mean that you are looking at two or more different populations when calculating the applicable decile.

Can you explain as it is pretty fundamental to understanding the post.
Jack

Mister Jabberwock – equivalisation.
see HBAI DWP publication (http://statistics.dwp.gov.uk/asd/index.php?page=hbai)
Ash

“couples with only one earner can pay the top rate of income tax and still fall just above or below the median when calculated on a household basis.”

At last someone has noticed! This is the line Labour should have been taking over the Child Benefit changes. By deliberately confusing individuals’ earnings and household incomes, the Tories tried to pass those changes off as only affecting the top 15% of the income distribution. They don’t; they hit families bang in the middle. (A single-income family on £44,000 has *less* money coming in, after tax, than a family with two median earners on £21,000 each. And a single person with no children on £44,000 a year is far higher up the income distribution than a family on that same income.)

There’s another very good reason to have a broad definition of the middle, which is this: everyone knows that Tory policies tend to favour the better-off, but many people on normal-ish (roughly, five-figure) incomes mistakenly think this means them. It doesn’t, of course; the only people who are genuinely better off in a low-tax, small-state society are people whose incomes are *so* high that it’s cheaper for them to pay privately for high-quality schooling, healthcare, pensions, security etc. than it is to pay a share of the taxes required to provide those services for everyone.

I *hope* it will gradually dawn on better-off-but-not-rich people – people paying the 40p tax rate but still reliant on state-funded pensions, state-funded schools, state-funded healthcare etc – that they are reliant on public spending like everyone else, and stand to *lose*, not gain, when that spending is cut in order to keep taxes low. If it does – if people on £50,000 wake up to the fact that their interests are closer to those of people on £25,000 than to those of people on £100,000 – maybe Labour can start building the necessary broad base of support.
Ash

Mr Jabberwock – the ‘Where do I fit in?’ tool on the IFS website is a good place to start if you want to see how different types of household are placed on the income distribution.
James Scott

Labour is in danger of allowing itself to get tied up in knots as it tries to define the concept of the “squeezed middle” in purely economic or income terms. Clearly, a single person in a shared house earning £25K with low expenses could be quite comfortable; however, for a family of four with both parents earning £30-40K with childcare responsibilities, pressurised jobs and perhaps elderly relatives to look after, life will be a real struggle even though they are earning decent sums of money. So I think it would be a mistake to define “squeezed middle” just in terms of income: the concept speaks not just to money but to the circumstances of the family unit and the real pressure of childcare, holding down a job, transport, juggling family and work life and caring for elderly relatives. Many families in this country will be familiar with these stresses and Labour tried to remedy the pressures in the last Parliament through local job clubs, Surestart and, for the future, Andy Burnham’s idea of a National Care Service. Labour should move the debate on to these issues rather than trying to define the concept of the “squeezed middle” in terms of people’s incomes.
Ash

Incidentally – it’s not really “*couples* with just one earner” paying the 40p tax rate who might be around the middle of the income distribution; it’s *families* with just one earner paying the 40p tax rate (i.e. including single-parent families).
Ash

James -

Fair point, but defining the middle in terms of how well off households are *once you take into account their composition*, rather than crudely in terms of individual earnings, is a huge step forward (for just the reasons you suggest). A family on £40,000 is, as you say, bound to be less well-off than a single person on £40,000 or even £25,000, and pointing that out is crucial to defending things like Child Benefit and Tax Credits.
Mister Jabberwock

Ash,Jack Thanks – But if expense normalisaiton type adjustments or contemporary comparison are being relied upon the post should explain that.

Anyone would recognise that families with children have expenses that those without don’t and you can adjust distributions for this – but this post doesn’t make any mention of that it just talks about household income net of tax and benefits. It says

“Analysis carried out for the Labour party by the IFS shows that couples with only one earner can …. still fall just above or below the median when calculated on a household basis.”

That statement is incorrect as they don’t (based upon the figures given); however if it said

“Analysis carried out for the Labour party by the IFS shows that couples with only one earner can …. still fall just above or below the median when calculated on a household basis if the income is adjusted for the costs of having children.”

Then it would be true and meaningful – if a bit less punchy!

Given how keen you rightly are for others not to mislead with statistics….