Considering income alone is never enough when looking at living standards

James Plunkett is a Research and Policy Analyst at the Resolution Foundation

Stressed-middle-class-couple The Independent reports today that ‘middle England’ will be ‘hit hardest’ by upcoming changes to taxes and benefits. Research commissioned by the paper finds that families in the £40k-£50k bracket are set to suffer a four-way hit from:

• The reduction of the 40p tax threshold;

• A rise in NICs rates;

• A sharper taper on tax credits; and

• The means-testing of Child Benefit.

This kind of story is fairly familiar – here’s the Telegraph and the Mail making the same point – and in one broad respect, they’re right. Any fiscal strategy that’s reluctant to take additional measures that hit the top, and makes some effort to protect those at the bottom – like the one being pursued by the coalition – will end up relying heavily on raising revenue from the people in between. (Though in reality, within this group, it’s people in the ‘lower-middle’ rather than the ‘upper-middle’ that will feel these hits the hardest.)

But, as is often the case, today’s Indy story fails to really get to grips with the impact of these changes on living standards, because it doesn’t fairly compare households of different sizes. As anyone trying to raise children knows, a single person on an income of £40k can afford a lifestyle a world away from a family of four living on the same income.

In fact, in terms of living standards, a single person on £40k sits in the top third of the population, enjoying a standard of living above 71 per cent of people. By contrast, a couple with two children on £40k sit in the bottom half of that distribution, below 52 per cent of the population. Considering raw incomes alone is never enough – and is often misleading.

Position-of-households-earning-GBP40k-in-the-income-distribution
The challenge for the government is that this question of adjusting for household size isn’t just a problem for the way we analyse the impact of upcoming cuts, it’s a fundamental problem at the heart of the coalition’s tax-benefit strategy.

In simple terms, our tax system (as opposed to the system of tax-credits) is blind to the extra costs of children, and yet the government’s landmark policy to relieve Britain’s hard-pressed families – the raising of the personal allowance – is based solely on that system. The result is that relatively well-off couples without children do well, whilst many families in the bottom half of the distribution of living standards do badly.

Over the next few years, as more resources go into increasing the personal allowance, at the expense of child-related supports like tax-credits and Child Benefit, that is a trade-off that will grow in significance.

http://twitter.com/raidingtheparks/status/32860767531302912 RaidingTheParks

RT @leftfootfwd: Considering income alone is never enough when looking at living standards: http://bit.ly/huuO7L writes @JamesTPlunkett
http://twitter.com/meadwaj/status/32861783265902592 James Meadway

RT @leftfootfwd: Considering income alone is never enough when looking at living standards: http://bit.ly/huuO7L writes @JamesTPlunkett
http://twitter.com/brokenofbritain/status/32862658671677440 Broken OfBritain

RT @leftfootfwd: Considering income alone is never enough when looking at living standards: http://bit.ly/huuO7L writes @JamesTPlunkett
http://twitter.com/press_not_sorry/status/32862886044893184 Press Not Sorry

RT @leftfootfwd: Considering income alone is never enough when looking at living standards: http://bit.ly/huuO7L writes @JamesTPlunkett
http://twitter.com/spsot/status/32868252539420672 Spir.Sotiropoulou

RT @leftfootfwd: Considering income alone is never enough when looking at living standards http://bit.ly/gTfQZI
Mike Thomas

So you are telling us parents that having children is expensive?

Thanks, I did wonder where all that money was going.

The State should not be encouraging people to have children purely on a financial basis, there are many other important considerations.

Incidentally, can we please stop pretending that these ‘squeezed middle’ need your support. You milked them dry during the boom time and ignored any idea of assistance. I seem to remember Labour’s idea of ‘efficiency savings’ was to end the tax relief on childcare.

Which is a damn sight more than £80 a month per child.
Robert

Tell you what I’m disabled and I’m not getting £40,000 a year, by the time New labour had finished and the Tories took over, I will be a dam sight worse off then any bloody middle England swinging Tory voter, god Almighty what next the rich are struggling.
Ash

Mike

“can we please stop pretending that these ‘squeezed middle’ need your support. You milked them dry during the boom time and ignored any idea of assistance.”

Look – I know certain people *without* kids (and people with kids on higher incomes) didn’t do so well under Labour, but it’s just flatly untrue that middle-income people with kids were ‘milked dry’.

At one time or another during the Labour years we’ve experienced life as a one-earner family, a two-earner family, a two-child family, a three-child family, a low-income (£14k) family, a mid-income (£38k) family – i.e. we’ve experienced life as pretty much every shape of ‘average’ family you could dream up. At no time have we received less than £300 a month in Tax Credits (plus help towards childcare when needed). You’re not seriously going to tell me Labour have taken more than £300 a month off us in other ‘stealth’ taxes without us noticing?
Mike Thomas

Ash,

There were two very highly taxed groups of people under Labour as per their income

The 3rd and 4th deciles and the 5th and 6th deciles.

Once the 10p tax rate was removed, you could have added the 2nd decile until remediation measures had to be put into place. So much so, that the GINI co-efficient was worse under Brown and Blair than under Thatcher and Major.

Bitching and whining about the coalition measures now and stating the bleeding obvious isn’t going to focus attention when the coalition have done more to push basic income tax threshold up than the previous government did in 13 years.

It’s very rich to complain about stealth tax measure isn’t it, considering Brown shennigans?

What part of “There’s isn’t any money left” are you having a problem with?
Ash

Mike

Point by point then (as there are a few distinct points here):

“There were two very highly taxed groups of people under Labour as per their income

The 3rd and 4th deciles and the 5th and 6th deciles.”

OK. But what was the *net* effect of Labour’s tax-and-benefit policies on the incomes of families in that ‘squeezed middle’, once they’d both paid their taxes and received back any tax credits to which they were entitled? It’s just meaningless to look at tax in isolation; it’s the net contribution to the tax and benefit system that matters in terms of income.

“the GINI co-efficient was worse under Brown and Blair than under Thatcher and Major.”

I’m with you on this; Blair, Mandelson & co were dead wrong to think inequality doesn’t matter. But Labour’s mistake wasn’t failing to boost the incomes of low-to-middle income groups, it was allowing the incomes of high-income groups to keep racing ahead.

“the coalition have done more to push basic income tax threshold up than the previous government did in 13 years.”

OK, but 1 – this measure is regressive where tax credits were progressive (i.e. it leaves less money in your pocket the lower your income, rather than more) and 2 – the £700 boost in income for a low earner from raising the threshold to £10,000 is peanuts compared to the four-figure boosts the same people got when tax credits were introduced.

In fact to talk about ‘lifting low-paid families out of tax’ as if it’s some triumphant innovation is frankly laughable – the tax threshold for these people has effectively been far higher than £10,000 for over a decade now. (Taking tax credits into account, I don’t think I made a net contribution to the tax and benefits system until my income hit around £18,000).

“It’s very rich to complain about stealth tax measure isn’t it, considering Brown shennigans?”

Do you mean VAT? I’m not complaining about the tax itself so much as the fact that it’s being used to fund a cut in direct taxation, shifting the tax burden from middle earners (who’ll be paying less income tax) to lower earners, pensioners, the unemployed, students and the disabled (who won’t).

“What part of “There’s isn’t any money left” are you having a problem with?”

I’m not sure what you’re driving at here, given that I haven’t said anything advocating higher spending or lower taxes (and so relevant to the question of the deficit & debt). You’re the one advocating large tax cuts.
Mike Thomas

What is the efficiency of taxing people and then giving it to them back?

What an utter waste of money not to mention the lack of dignity in making a means-tested claim for your hard-earned money back. LESS the cost of administration of the scheme AND hoping they don’t come after you IF THEY screwed up the calculations.

Remember that, it is not government’s money, it is THEIR money.

Tax credits are absolutely not progressive at the marginal bands of their threshold, they introduced perversities like 95% marginal taxation on earnings just beyond the threshold. They were a poverty trap.

The fact there is no money left means precisely that, that means that EVERYONE has to pay more in taxes to REPAIR the damage Labour caused to the economy.
Ash

Mike

“What is the efficiency of taxing people and then giving it to them back?”

The efficiency lies in the fact that you can use one and the same mechanism to boost people’s net incomes whether or not they pay tax. Otherwise you need two separate mechanisms to do the same job – one tax-cut mechanism to boost the net incomes of taxpayers, and one benefits mechanism to boost the net incomes of non-taxpayers.

In fact it would be a lot more complicated than that, because obviously people on very low incomes paying very little tax would see very little benefit from any tax cut. Cut income tax by 5% for someone paying tax on £1,000 of their earnings and they’re £1 a week better off; cut it by 5% for someone paying tax on £10,000 of their earnings and they’re £10 a week better off. If you want to change that regressive pattern to a progressive one, you need to work out an appropriate withdrawal rate for low-income benefits. This is why the coalition is right to be looking into the feasibility of a tax-credit-style ‘universal credit’ system that simplifies all this.

“Tax credits are absolutely not progressive at the marginal bands of their threshold, they introduced perversities like 95% marginal taxation on earnings just beyond the threshold. They were a poverty trap.”

Absurd. If any tax credit recipient ever faced a 95p marginal tax rate (which I doubt), this can only be because they were a higher rate taxpayer facing 40p in the pound tax, plus NI, on top of the 39p rate of withdrawal for tax credits. No higher rate tax payer is caught in a ‘poverty trap’.

I actually remember opening my first paypacket under the Tories and realising that I was £20 a week worse off (after covering travel expenses) than I’d been on the dole. All my benefits had been stopped dead, and I was too rich (£12k a year) to get Family Credit. Now *that’s* a poverty trap. Tax Credits, on the other hand, have only ever been withdrawn gradually as our family income has risen. If that money seems to disappear more sharply if and when our income hits £45k, well, boo hoo – I think we’ll live.