At his party conference speech last year, George Osborne said, “we can no longer justify paying means tested tax credits to families with incomes over £50,000.” Since then, the Conservative party has been consistent in claiming that “No families with a combined household income of £40,000 or less will be affected by our [tax credit] policy.”

George Osborne tried the trick again by claiming in his speech, “we will reduce payments to families earning over £40,000 next year and then align the thresholds for the child and family element.” But Table A2 in the Budget could not be clearer. By 2012-13, no family with one child over the age of one and income over £30,000 will get a penny in tax credits.

Earlier this year, a party election broadcast by the Labour party highlighted Conservative plans to “stop Child Tax Credit payments to hundreds of thousands of families on middle and modest incomes”. This followed a Labour briefing on February 3rd which claimed that:

“The independent Institute for Fiscal Studies has said that the Conservatives would need to take tax credits away from households with incomes of £31,000 to raise the money that the Conservatives have promised.”

A week later, then shadow work and pension secretary Theresa May, wrote an article on the Conservative party’s Blue Blog titled “Labour lies on child tax credits“:

Tax credits are designed to help families on low incomes, but we are now paying them to families earning over £50,000. We don’t think that is affordable anymore, so we have said that under a Conservative Government these families would stop receiving tax credits. No families with a combined household income of £40,000 or less will be affected by our policy.”

Who’s lying now, Theresa?

UPDATE 24/6:

It’s just worth being clear that this article – as per the note to the table above – refers only to those ineligible for baby, childcare, or disability tax credits.

The regressive increase of VAT from 17.5 per cent to 20 per cent raises £13.5 billion by 2014-15. But cuts to income tax, national insurance, corporation tax, and council tax cost £12.4 billion. Once all the changes are taken into consideration, tax changes contribute only £8.2 billion to the fiscal consolidation.

By contrast, the reduction in total managed expenditure comes in at £31.9 billion with £20.9 billion coming from departments and £11.0 billion coming from changes to benefits such as the freeze on child benefit. Indeed, effective cuts to child benefit, the child tax credit, and child trust funds – which together cost £2.5 billion – could have been avoided if the Chancellor had not announced cuts to corporation tax.

George Osborne’s VAT rise was “avoidable”. The reason it has taken place is it pay for the Lib-Con’s ideological tax cuts, which fly in the face of fiscal responsibility.

UPDATE 17.44:

For somewhat different reasons, Conservative Home have come to the same conclusion about VAT. Tim Montgomerie’s piece also includes this line from David Cameron in an interview with Sky on April 1st: “Our plans don’t involve an increase in VAT”.

Labour List have a separate transcript of David Cameron saying the same thing after the election in mid-May. Next Left call this Conservative move, “the legendary Geoffrey Howe dodge on VAT”.

The Government could raise an additional £2.5 billion a year by 2013 if the tax breaks enjoyed by aviation were tackled.  An analysis published last week by the Green Alliance and the Policy Studies Institute argues there would be economic, environmental and equity benefits if the Government got rid of these tax breaks.  According to Treasury estimates, if aviation fuel was taxed at the same rate as road fuel, the Exchequer would raise £6.5 billion a year. An additional £3.5 billion could be raised if the VAT exemption on air tickets and the purchase of aircraft equipment was abolished.

It would be difficult for the Government to take unilateral action to abolish many of these exemptions directly, particularly on tax-free fuel, because of international agreements. But it could use its proposed new Plane Tax as an indirect way of raising the money.  The Green Alliance argues that the money raised could be used to reduce income tax and support economic growth.  It says that £2.5 billion is the equivalent to the cost of reducing the employees’ National Insurance contributions by over 0.5%.

A fairer level of taxation would almost certainly lead to higher air fares.  This would, though, merely redress the balance of recent years where, because of the tax-breaks, demand for air travel has been artificially stimulated. Higher fares would reduce the growth in air travel.  That would go some way towards the UK having any chance of meeting its CO2 emissions target.  The soaraway growth in air travel threatened to drive a jumbo jet through these targets.  It will also ease the burden on other sectors of the economy which have been faced with cutting their emissions drastically in order to compensate for the rising emissions from the aviation sector.

But wouldn’t higher fares hit poorest people hardest?  The evidence suggests not.

The Policy Studies Institute found that:

•the extra tax increase for short-haul flights would be around £25 per passenger.

•For longer haul flights it would be greater as the tax with the distance flown.

•An economy fare from London to New York would be £50-£60 more expensive; business and first-class tickets would go up by £200 – £300.

And the equity benefits could be significant.  What worries the really poorest people in the UK when they wake up each morning is not whether they can afford a weekend in Paris or Rome, but the cost of clothes for their children, the rising price of bus fares and the prospect of increased heating bills.  Their quality of life doesn’t revolve around a flight to the Agean each year but effective sound insulation in their homes, somewhere safe for their children to play and easy access for their disabled parents to local facilities.  Taxation on aviation which helped pay for some of these things would be progressive.  The current tax-breaks are regressive. They are of most benefit to the people who fly the most:  the top 10% of income earners.

The abolition of aviation’s tax-breaks would also send an important signal about the Government’s willingness to move in the direction of green taxes.  While in opposition, the Conservatives talked about the need for ‘eco-taxes’: where the tax burden on polluters is increased but it is relaxed in other areas of the economy.  The Plane Tax gives the Government an early opportunity to move in this direction.

The new research from the Green Alliance and the Policy Studies institute can also provide useful ammunition for politicians on the left as they reassess their thinking on aviation.  Towards the end of the Brown Government it was becoming painfully clear that such a reassessment was long overdue.  Labour had become the party defending the privileged position of one of the most problematic industries on the planet.  The contenders for the Labour leadership should use this new research to help formulate a new policy on aviation that is both more equitable and sustainable and is much more relevant to the economic needs of the 21^st Century.

In an article yesterday for Left Foot Forward to accompany a new report, ‘Deficit reduction and the role of taxes‘, Tony Dolphin of IPPR writes:

“If the government wants to be progressive, it should give a greater role to higher taxes … Which taxes go up – whether now or at a later date, also matters. Increasing the standard rate of VAT is not the act of a progressive government…

“A better option – one that shares the burden of deficit reduction around a large proportion of the population but in a progressive way – would be to increase the basic and higher rates of income tax, something that has not been done in the UK since the mid-1970s. A 3p increase in the basic and higher rates of income tax would raise £15 billion – around one-fifth of the amount needed to eliminate the structural deficit”

Echoing these arguments, Matthew Whittaker of the Resolution Foundation writes, “the deficit reduction plan must exhaust every single potential progressive taxation measure before turning to spending”. He goes on to call for a wealth tax.

Meanwhile, in the Guardian yesterday, Labour leadership candidate David Miliband writes:

“If the Tories stick to their proposed formula of £4 of cuts for every £1 of tax rises this will see departmental spending slashed by a third outside of the NHS and international development. The balance should be 2:1.”

The Tories approach is also challenged by the Demos think tank who also call for a 2:1 rather than 4:1 ratio. They urge the Government to introduce £11 billion of tax rises above and beyond Labour’s plans which included the introduction of a 50p rate and increase National Insurance Contributions. Demos propose aligning all capital gains rates with income tax rates and charging CGT on primary residences when sold; raising the basic rate of income tax by 1p; moving from per-passenger air duty to per-plane air duty; and introducing a carbon tax. Even the Economist believes that the Conservative’s plans are too focused on spending cuts:

Unwelcome though it is, a contribution from higher taxes is required. Just how big it should be is a matter of dispute. The Tories have said they want to rely on taxes for a fifth of the consolidation. That may be too ambitious. If something like 2% of GDP were found by higher taxes, leaving spending to be cut by 5% of GDP, it would still be a tougher mix than all but two of the ten biggest OECD deficit-cutters managed.

The outlier in this debate remain the right-wing think tank, Reform, who this week called for over 90 per cent of the deficit reduction to come from spending cuts.

“The Labour party has to pick what it thinks is the right size of the public sector. Since 1997, public spending has gone up from 36% of national income to 48%. (Before the recession, it was at 42%.) But tax revenues have always been at around 38%, and during the recession fell to around 35%. The reason we’ve got a structural deficit is because Gordon Brown won the argument for investment in public services, but never took on the argument for increasing taxes to pay for it.”

The point is perhaps best made by this graph from the Institute for Fiscal Studies. Where the black and green lines end up is key to what the future of Britain will look like. The Lib-Cons with their series of tax cutting proposals want a smaller state, less redistribution, and a pared down welfare state. If Labour gets its act together, it can limit this scaling back.

This week’s Economist sets out the key strategic challenge facing the Labour party:

“For nothing will make or break the next leader of the opposition like his response to the government’s austerity programme. Oppose it all, and Labour will look incredible. Back it in grown-up fashion, and the coalition will have an easy ride. The tempting third way—supporting “good” cuts but not “bad” ones—will work only if Labour agrees on which bits of spending should go. Underlying this tactical dilemma is the more strategic question of what the left is for when there is no money to spend. Labour’s narrative was once devastatingly clear: the revenues from a buoyant economy should correct the historic underspend on public services. What is it now?”

The Social Market Foundation are on the right track today with a new report titled, “Axing and Taxing” covered in today’s FT. They recommend reducing the deficit with £39.0 billion of spending cuts and £25.3 billion of tax increases. This protects more public spending than under Labour’s plans to reduce the deficit with a 2:1 ratio of spending to tax. Indeed, if one removes from the SMF baseline the Lib-Con measures such as the £6.2 billion cuts to pay for scrapping the £6 billion employer NICs rise, their proposals would mean £32.8 billion in cuts and £31.3 billion of tax increases - close to the 1:1 ratio used by Ken Clarke and Norman Lamont in the early 1990s.

No doubt the SMF’s proposals to means-test child benefit and raise VAT will concern many on the left. But if not these we have to pick something else instead or say how taxes would go up further. In which spirit, instead of the VAT rise, which would be deeply regressive, I would instead pick a wealth tax. As the Political Climate blog points out, “recent data from the ONS show that the top 10% of households own more wealth than the rest put together”. Right-wing blogger Tim Worstall kindly points out the risks of capital flight. One way around this is to target the tax at land, which is hard to move. In an article for Prospect earlier this year, Philippe Legrain called it the “only efficient and fair way to bring Britain’s finances back into line”. After all, 0.3 per cent of Britain’s population owns 69 per cent of its land.

UPDATE 14.06

Alex Barker at FT Westminster picks out an intriguing graph from the SMF report to argue that a modest rise in VAT would actually be progressive if measure on an expenditure basis. It is certainly true that many in the bottom income decile are not the poorest in society since they are students, those on sabbatical, or self-employed people suffering from a bad year who are able to smooth their expenditure by borrowing or using savings. But there are arguably more people at the bottom of the income scale who bolster their expenditure by borrowing beyond their means. Expenditure rankings also say nothing about miserly Mr Scrooges at the top of the income scale. The SMF graph which caught Alex Barker’s eye is actually from an IFS report. They are careful to say only that the expenditure analysis gives a “different picture” rather than a better one.

And while we’re on the subject, this graph from the IFS shows that whichever way you cut it, removing exemptions to VAT – another SMF idea – would be regressive.

The graph below from the Institute for Fiscal Studies shows how Government revenue and spending has widened since the recession started. It shows clearly that before the crash, current spending excluding capital projects and revenues were virtually in balance. The deficit has been caused by increased spending – primarily due to automatic stabilisers such as unemployment benefits and the financial sector bail outs – but also by falling tax receipts.

In this public finance environment, it is extraordinary that the Coalition Agreement argues for several tax cuts including:

• an increase in the personal allowance for income tax – a Lib Dem priority which does nothing for the poorest families;

• a regressive move to cut to the planned increase in employer National Insurance – dubbed Labour’s “jobs tax“, ironic given the Government’s focus on cutting public sector jobs;

• reductions to the corporation tax rate which will do little to boost private sector output;

• a freeze to Council Tax in England for at least a year; and

• the introduction of a transferable tax allowances for married couples to “recognise marriage in the tax system” – a policy which will discriminates against single parents, widows, and married couples where both couples are in full-time work.

Recent research by Stan Greenberg shows that tw0-thirds of voters believe that “it is not the time to cut taxes” (p.44). Some spending cuts will, of course, be necessary (who really mourns the loss of ID cards?) while the overall level of spending will fall if the recovery is secured. But the Government’s planned attacks on the solidarity and redistributive impact of the welfare state is only one approach to deficit reduction. The alternative is to abandon these tax cuts and push ahead with many of the progressive tax raising proposals in the Compass report, ‘In place of cuts‘.

UPDATE 13.10:

Paul Krugman has an excellent blog outlining why the “fiscal austerity” of Cameron, Merkel and others is affecting the rest of the world:

We do have a framework for thinking about this issue: the Mundell-Fleming model. And according to that model (does anyone still learn this stuff?), fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a hole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)

Watch it:

First, as the Dr Patrick Nolan of the right-wing Reform think tank has written for Conservative Home:

“This claim that the UK largely stands alone among industrialised countries in not recognising marriage is quite simply wrong.

“There are a host of other countries that make no recognition of marriage in their tax systems at all, including New Zealand, Sweden, Finland, Greece and Hungary. Since the 1970s the clear direction of travel in tax systems has been to move away from family taxation. In relation to income taxes, for example, in 1970 it was possible to assess income taxes on a family basis in two thirds OECD countries, but in the 21th Century this has (quite rightly) fallen to around a third (and is continuing to fall).”

Second, comparing the £550 million cost of the Tory’s tax policy with the minimal costs of tax breaks for “Christmas parties and parking your bicycle at work” is simply absurd. Third, the Institute for Fiscal Studies published research before the election showing that “encouraging parents to marry [is] unlikely to lead to significant improvements in young children’s outcomes”. As Left Foot Forward documented before the election, the outcome gaps in cognitive development between children born to married and cohabiting parents are relatively small compared with the outcome gaps associated with a range of other factors.  The finding is consistent with a recent paper by Ruth Lister and Fran Bennett for Renewal, which concluded:

“As a number of commentators have pointed out, it is not possible to conclude from the statistics that marriage itself causes the positive outcomes associated with it and that therefore the stability of a society is a function of the support given to the institution of marriage. In particular, social scientists suggest that the stability associated with marriage can be attributed to the kind of people who choose to get married or to cohabit and to the values that they hold.”

Finally, Labour’s decision in 2007 to allow inheritance tax allowances to be transferable between married couples and civil partners remains contentious with many on the left but marriage was already recognised in the inheritance tax system. This is completely different from introducing a new (and expensive) tax break.

Mr Cameron did not explain why his policy discriminates against lone parents and widows, excludes 11.6 million married people where both husband and wife work, and does nothing for the roughly 600,000 married couples of working age who do not earn over the £6,555 tax threshold.

Unsurprisingly, a number of Tories are up in arms at the thought that the gain on second homes, shares, art, classic cars, fine wine and other similar assets may be taxed at rate equivalent to personal income tax rates. John Redwood, speaking for a substantial group of Conservative MPs, called the proposed plans “anathema to most Conservatives”. In contrast, Left Food Forward believes that given taxes must rise, raising capital gains tax is an economically sound, fair and progressive measure.

Currently, even if an individual pays the 50 per cent top rate of tax on their ‘earned’ income, they currently pay only 18 per cent on the profit over £10,100 they make on the sale of a second home, for example. Therefore a £100,000 profit would incur a tax bill of £16,182. Under the mooted proposals, they would pay closer to the 50 per cent on the profit above perhaps £2,000 – a substantial increase to perhaps £49,000. Multiply these profits by a factor of ten, and the beneficiaries of multi-million pound house price increases in Notting Hill begin to sweat.

But consider the desirability of the alternatives. Other than capital gains, governments can tax personal incomes, corporate incomes, or certain types of expenditure. Further increases in income taxes are not on the agenda for any political party for both political and pragmatic reasons (indeed the new government is due to raise the lower threshold to £10,000, effectively giving everyone a tax cut, however regressive). Increasing corporation tax is inadvisable at a time when Britain must retain and attract businesses. In fact the Tories plan to cut corporation tax, meaning shareholders will see more of their profits as dividends or reinvestment. And an increase in VAT hurts the poorest disproportionately, where an increase can materially reduce the purchasing power of those on the lowest incomes.

Capital gains is unearned profit that is primarily a matter for the rich. If an individual chooses to monetise the value of an inherited painting by an artist that just happens to be in vogue, taxing the gain at a meaningful rate neither penalises hard work nor acts as a disincentive to economic activity. It merely shares the benefits of fortunate birthright around. Second (or more) home-owners can be described as property speculators, who among other things drive up the cost of homes and reduce the availability of affordable housing across the country. Using debt they can generate enormous profits purely on the back of a rising property market – why on earth should this ‘income’ be taxed at a lower rate than plain old hard work and graft?

Assuming that value generated by genuine entrepreneurialism – as opposed to ill-advised merger & acquisition activity – is dealt with sensibly, that the thresholds are set to ensure that small, long-term investors are not materially affected by an increase (particularly if they are not top rate taxpayers), and that the thorny issue of indexation is carefully considered, then raising capital gains tax is the ‘least worst’ option of the alternatives.

As with Labour’s so-called ‘Jobs Tax’ or indeed the disaster that was supposed to accompany a hung parliament, be prepared for scare stories of a property market crash, “wealth creators” fleeing to Geneva and eventual economic meltdown. The fact is that in times like these, the burden must be shouldered by all. The Prime Minister and Chancellor know this. Let’s hope they can hold their nerve.

The Guardian reports today that:

“the Lib Dems accepted that spending cuts will start this year as part of an accelerated deficit reduction plan.”

In February, Philip Hammond told Channel 4 News:

“We have been very clear about this. In addition to cuts in child trust funds and child tax credits we will cut the government advertising budget.

“So for 2010, it is absolutely right to add savings from the reduction in the advertising budget to the savings in trust funds and tax credits”.

“We can save £1bn-£1.5bn from those three measures.”

Although the Liberal Democrats were previously opposed to cuts in 2010-11, their manifesto set out that they would make savings by “restricting tax credits” and “ending government payment in Child Trust Funds”. The Conservative party manifesto outlined that the party would “stop paying tax credits to better-off families with incomes over £50,000″ and “cut government contributions to Child trust funds for all but the poorest third of families and families with disabled children”.

During the election Labour contended that a Conservative government would, in fact, have to cut child tax credits for those earning over £31,000 in order to make up the numbers.

UPDATE 14.47:

The coalition negotiations agreement confirms that, “The parties agree that reductions can be made to the Child Trust Fund and tax credits for higher earners.”

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.