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 overall.
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.
