Fabians fail the fairness test

Not having decent internet access over the weekend at Lib Dem conference, I’ve been itching to get my paws on the latest Left Foot Forward report on the Lib Dem proposal to raise the income tax threshold to £10,000. “Think Again, Nick!” (pdf) purports to show that, far from being the most redistributive policy on offer in this general election, it is in fact deeply regressive and a hallmark of the Lib Dems’ rightward shift.

I’ve been reading the headlines on both Left Foot Forward and Next Left over the weekend, thinking, “They’re not going to take the personal allowance proposal in isolation are they? Surely, this analysis must purport to show how, contrary to all the evidence I’ve seen, equalising capital gains, equalising tax relief on pensions, closing various other loopholes and introducing a mansions tax will actually have a minimal impact on the incomes of the wealthiest on society? That’s got to be some pretty bloody impressive research. I’ll believe it when I see it but surely someone as fair-minded as Sunder Katwala wouldn’t get involved in a partisan hatchet job? He’s got a reputation to consider.”

How wrong I was because taking the personal allowance policy in isolation, it transpires, is exactly what Tim Horton and Howard Reed have done. They even preface their report by emphasising how much they approve of the Lib Dems’ tax raising proposals. And if you were in any doubt that this is anything other than a bit of Labour propaganda rather than serious research, they rather give the game away by putting an embarrassing photo of Nick Clegg on the front cover. When you reduce political criticism to the level of Nick Brown even before you begin, you really do have a credibility gap to contend with.

The actual research doesn’t actually say that much. It consists of little more than a bunch of quotes which show that (gasp!) some rightwing people support the policy and a graph showing the impact on each income decile which, frankly, I could have approximated on the back on an envelope and five minutes. How they manage to expand this out over 32 pages is a marvel to behold, but then they do say that muck spreads.

The fact that raising the tax threshold helps people on higher incomes more than people on low incomes is not, believe it or not, a startling revelation. We know. The party has never tried selling this policy in isolation; we’d be mad to attempt to because people would rightly ask where we propose trying to find £17bn. The two are meant to balance each other; that’s why we are calling for a tax shift and not either a rise or reduction in taxes overall1.

But there are three other reasons why the policy is not only defensible but progressive:

1. An increase in the tax threshold will reduce inflationary pressure on wages at the bottom end of the scale and reduce the deadweight cost of employment. Anything that discourages the outsourcing of employment to other countries is a good thing, particularly at a time when the economy is so fragile, is crucial. Horton and Reed can up with all the graphs they like, but the difference in income between someone working and not working at all is significant.

2. The fact that people on middle incomes do well out of this tax shift is an entirely good thing because we need middle-class buy in – again, especially during this fragile period. Campaigning for a massive shift in income between rich and poor which leaves those on median income out in the cold might be a nice example of hairshirt politics but it is unlikely to inspire the public.

Horton and Reed like to talk about deciles as keeping the argument abstract is helpful to them. Let’s try to move this a step or two into the real world though, shall we? According to the government’s latest equalities report (pdf), the weekly income at the 30th percentile (P30) is £292 while the income of the 70th percentile (P70) is £523, less than twice as much. There is actually a bigger gap between P70 and P90 than between P30 and P70. Individuals can shift between these abstract staging posts significantly during their working lives, and even within a few months. I’m a case in point, having gone from an income which put me in the top 70 percent to something approximating median income simply by shifting to a four day week to protect my job last summer.

So, am I concerned that our tax policies help people above average incomes? Not a bit of it, especially at a time when the average UK house price is, still, £160,000 (it wasn’t that long ago when a mortgage worth more than four times your income was considered the height of irresponsibility).

The third reason for this policy being progressive is that it represents a significant shift away from taxing income and onto taxing wealth. Shocked by the fact that there is a 4x income difference between P10 and P90? You should be, but you should be even more shocked that when it comes to wealth the difference is 100x. Any system which allows people at the bottom end of the scale a greater share of their own money whilst taxing the wealth at the top end of the scale will help to tackle that. It is, frankly, a greater priority.

None of this is to deny that the Lib Dems could go further. Personally, I would like to see a much bigger shift away from income taxes and onto wealth taxes. I’d be prepared to contemplate a flat tax and even the abolition of income tax altogether (although I have grave doubts about this being practical), which would almost certainly – in isolation – lead to a shift from low incomes to high. But crucially, I’d never want to see that happening without a corresponding increase in taxes on things like land. You could try to smear me as some kind of rabid, rightwing, Ayn Rand-inspired libertarian but frankly I don’t fancy your chances.

The Fabians’ own proposals in The Solidarity Society are very interesting and deserve a closer look. I have a lot of affection for the key commitment in the 1992 Lib Dem manifesto for a citizens’ income and would love the party to revisit it. But does anyone, least of all Sunder Katwala, Tim Horton or Howard Reed, believe that Gordon Brown is the man to implement a programme that even vaguely resembles universal welfarism? If the Fabians and Left Foot Forward are serious about promoting progressive aims they should be aiming their fire at a Labour government that has squandered thirteen years of power. It would have been nice, at least, for them to have the courtesy to at least try to justfy Gordon Brown’s decision to cut income tax by 2p and abolish the 10p rate as he did in 2007. To not tackle this is not merely partisan but moral and intellectual cowardice.

Perhaps the most damning aspect of this report is that the simplest way to abide by the authors’ wishes would be to do nothing and not raise personal allowance. Indeed, when it comes to alternative proposals, the best they can come up with is three half-hearted bullet points. For a 32 page report that really just repeats the same basic message again and again, that is a particularly bad show.

In conclusion then, the Lib Dems’ proposed tax package would significantly reduce income inequality, go some way to addressing wealth inequality, would cut the deadweight cost of Labour and would benefit the middle classes as well during an extremely challenging economic period when solidarity between the poor and people on middle-incomes will be crucial. The other major parties, and in particular Labour, have nothing on offer that comes close. I don’t think the smears will get the Fabians and other tribal Labour activists very far but if they want to make this election about the need for fairer tax policies, bring it on.

  1. In fact, just to be clear, with the banking levy, the Lib Dems are going into the election calling for an overall increase in taxes. The general line being put out at conference was that Nick Clegg ‘misspoke’ in his Spectator interview by ruling out Lib Dem support for any further tax rises in future to tackle the deficit, although sadly Clegg himself neither confirmed nor denied this when I pressed him on this in the Q&A. []
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10 comments on “Fabians fail the fairness test
  1. james says:

    A point I can’t resist making is that there’s a greater likelihood of Fabian proposals being enacted in full, rather than those of the Liberals.

    I think everyone accepts the 10p tax was a mistake – and we know the reason it happened. From 1997-2007, Labour’s leadership accepted the economic status quo and so did not challenge the burdon of taxation. With the economic crisis, this has obviously changed greatly – public opinion has certainly changed as regards the taxation of high earners.

    I apologise for comments made through Facebook, I’d not spotted the footnote regarding Clegg’s comments on taxation which were misconstrued.

  2. rob tennant says:

    I cannot believe that they took the raising of the threshold in isolation. Why are Left Foot Forward being so partisan? I expect this kind of nonsense from Sunder Katwala but I thought Will Straw was more fair-minded.

  3. Alix says:

    “How wrong I was because taking the personal allowance policy in isolation, it transpires, is exactly what Tim Horton and Howard Reed have done.”

    Aha, actually they do consider the rises we propose to pay for it. It’s buried away at 3.1.4 and Sunder was kind (or brass-necked) enough to point it out to me. It says:

    “As discussed earlier, the lion’s share of the revenue raised from the Lib Dem’s proposed tax increases would seem to come from the very wealthy and those with very high incomes. So let us for the moment assume that the revenue to pay for the proposed increase in the personal allowance comes solely from those in the top decile.

    What would the distributional impact of this combined package then look like? For the first nine deciles (from poorest up to second richest), the impact would be the same as that shown in the graphs above; the difference would be for the richest decile, which would now have a significant net loss of household income (since they are funding the whole package).”

    Which would seem to, oh, you know, negate their entire point? They then go on to say this finding isn’t really *real* for reasons I honestly cannot unpick as they seem to have been shat out by a weasal.

  4. James Graham says:

    James,

    If no single party has a majority in the Commons on 7 May, the Lib Dems’ policies will count for a lot more than anything the Fabians publish.

    Alix,

    I saw that but it doesn’t form their analysis. Actually, a decile by decile look at the overall impact of our tax policies would be very interesting. Horton and Reed have just done the easy, back-of-an-envelope bit.

    Sunder does appear to have his hairshirt on here. Ironically, his approach is quite similar to David Camerons. In November, Cameron declared that he was less concerned about the gap between the richest and poorest and more concerned about the gap between the poorest and the middle. Sunder, despite criticising this at the time, now seems to be agreeing with him.

    You’ve got to wonder why he has such a bee in his bonnet about what the above-average-but-not-richest earn.

  5. Alix says:

    “Ironically, his approach is quite similar to David Camerons.”

    ByrneTofferings has just pointed that out to Will Straw. Awaiting reply.

    Here’s an irregular verb. Sunder has just briefly touched on a Fabian policy of making a universal flat payment to all (i.e. both earners and non-earners), which will (he says) be proportionately worth more to those at the bottom. Nice, that’s the beginning of a CBI, right? So proportionality can be taken into account when you’re making a pay-out to all, but not when you’re offering a tax cut to earners it seems.

    “My across-the-board pay-out is worth proportionately more to those at the bottom.
    Your across-the-board tax cut is regressive.”

  6. Sunder Katwala says:

    Saying that the gap between the middle and the bottom matters is not the same as saying it is the only gap that matters, or it is the priority gap which matters most (which was what both Blair 2001; Cameron 2009 said in different ways). And we have criticised that point. cf Fabian Life Chances Commisison report 2006; work on health inequalities; attitudes work for the Joseph Rowntree Foundation.

    So, yes, the gap between the middle and the top matters too, and we have stressed how hard it is to build a broad pro-equality coalition if one rules that out of bounds. That’s why we were positive about LibDem 50p rate proposals for many years, and the Mansions Tax.

    But I would be equally concerned about a politics which doesn’t address sufficiently the gap between the middle and the bottom, which is one of the central things one looks to a broad pro-equality coalition to achieve.

    The LibDems have many strengths: I will of course concede a lot of the critique on civil liberties and political reform. We were always positive about the party keeping inequality at the top open, such as on higher top rate, and frequently pushed Labour people to respond to that. (Angela Eagle got into trouble at one Fabian/CentreForum event when a Treasury Minister for agreeing about that). We can welcome the Mansion Tax and be critical of the LibDems on the Child Trust Fund.

    I would argue that, on distributional questions, there can be a tendency to present in egalitarian left and Guardianista language proposals which do most for middle and upper income groups. The LibDem policy on Tuition fees was an example of this in 2005, in my view, though it was also electorally successful.

    By all means disagree with the argument about the politics of fairness, but it is not an illegitimate challenge or argument.

  7. James Graham says:

    Sunder,

    But it is an illegitimate challenge when you are only focusing on one half of the policy. And it certainly does deserve robust rebuttal when it is clear that you are lashing out to divert attention away from your own party’s failure to address the issue.

  8. James Graham says:

    What irritates me most of all is not that this is partisan, knockabout stuff which is fair enough, but that it is being presented as objective in depth research when it is anything but.

  9. Peter Kunzmann says:

    My comments left on the ‘Left Foot Forward’ website…

    “I am sorry to say that the Left Foot Forward analysis is inadequate (it totally ignores key aspects of Lib Dem tax and beneift policy) and the graphs you use are EXTREMELY misleading.

    However, before I go on with my critique, I do acknowledge that your article makes SOME good points about Lib Dem tax policy – namely it is not as redistributive or as many of us on the Lib Dem left would like. I, for example, would like to see a far more redistributive package that helped people right at the very bottom – perhaps through a Citizen’s Income policy for example.

    However, although I belive Lib Dem tax policy could be better (MUCH better) – I will attempt to explain why you are wrong to condemn it in full.

    Concerning the graphs – you only analyse the effect of the raising of the threshold and the changes to the 40p rate. You do not include graphs which show the effect of the tax changes at the top (changes to Capital Gains Tax, Pension Relief and Mansion Tax). If you did, it would show clearly lower and middle deciles benefiting, at the expense of the very top. This would give the casual reader a very different impression of what Lib Dem tax policy implies.

    Now, I recognise you do mention this in the text – though you still choose not to put a large emphasis on it. It remains the case that lower income earners DO benefit at the expense of high income earners. This is redistributive and progressive.

    However, more worryingly, you miss some of Lib Dem tax/benefit policies entirely – both from your graphs and your text. Many of these address your concerns that Lib Dem policy is biased towards the middle.
    Key aspects of this are:
    - The Local Income Tax: Which I believe benefits the lower deciles at the expense of the middle and the top.
    - The removal/reduction of tax credits from middle income earners. (Lets leave aside the debate over long vs short tapers for the moment and just focus on the pure, immediate distributive consequences)
    - The introduction of higher rate child benefit. (Party policy, which will hopefully still be in the manifesto)

    As you said in your text it is stupid to look at income figures before all tax/benefit policies have been applied – yet that is exactly what your own analysis does.

    Taking these factors into consideration would show very different (and far more progressive) distributive consequences. It would show the poor benefiting more, the middle benefiting less and the rich really getting even more of a hit!

    I hope that you can accept these points… then go back any redo your pamphlet showing the the effect of Lib Dem tax/benefit policy as a whole.

    Leaving your article as it is can only mislead voters and lead to a seepage of votes away from what are actually the most progressive tax/benefit policies of any of the 3 major parties.

    We can all say the policies could be better but don’t condemn everything wholesale on a partial and misleading analysis.

    Peter Kunzmann,
    Social Liberal Forum”

  10. Duncan says:

    I remember hearing someone argue that it was unfair and regressive because people who earned £11,000pa benefited more from the policy than those who earned £7,000pa. The willful stupidity was genuinely astonishing.

9 Pings/Trackbacks for "Fabians fail the fairness test"
  1. [...] over on the SLF website, I’ve written a response to the Left Foot Forward/Fabian “research” which purports to prove that the Lib Dem tax policy is regressive – by its own admission it [...]

  2. [...] Democrats. 5 Comments UPDATE.  Praise be to James Graham and the Social Liberal Forum, who have produced a far more effective and wide-ranging defence of the £10k tax threshold policy than my poor effort below, or than I could have managed with 2 [...]

  3. [...] A longer version of this post can be found here. [...]

  4. [...] Fabians fail the fairness test (James Graham | Social Liberal Forum) … the Lib Dems’ proposed tax package would significantly reduce income inequality, go some way to addressing wealth inequality, would cut the deadweight cost of Labour and would benefit the middle classes as well during an extremely challenging economic period when solidarity between the poor and people on middle-incomes will be crucial. The other major parties, and in particular Labour, have nothing on offer that comes close. I don’t think the smears will get the Fabians and other tribal Labour activists very far but if they want to make this election about the need for fairer tax policies, bring it fucking on. [...]

  5. [...] All credit to Clegg for considering the distributional impact of the component parts of his policy package. I’m not sure why so many Lib Dem activists think this is illegitimate (such as James Graham at Social Liberal Forum). [...]

  6. [...] Fabians fail the fairness test by James Graham on the Social Liberal Forum. “James Graham demolishes the Fabian [...]

  7. [...] ran a piece attacking the party’s tax policies for not being progressive. That results in many responses around the place defending the party’s policy and today Left Foot Forward runs a [...]

  8. [...] Graham’s comments over at the Social Liberal Forum were typical: “The fact that raising the tax threshold helps people on higher incomes more than [...]

  9. [...] in government.  During the run up to the election, along with most Liberal Democrats, I enthusiastically supported the Liberal Democrat policy to raise personal allowance.  There is much to admire about this policy, but it was always part of a wider, redistributive [...]

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