Monday, October 15, 2007

Different kinds of inequality

Paul Linford writes to offer 10 suggestions to Gordon Brown on how to regain the political initiative. The advice is kind of sketchy (point 9 is 'Bring Back Alan Milburn'), and not all that coherent (point 1 is 'do a u-turn on holding a referendum on the EU treaty', point 2 is 'stop adopting policies proposed by the Tories'), but I am particularly interested in points 4 and 5:

Paul calls for Brown to "Launch an all-out assault on inequality," arguing that, "The chickens of three decades of selfish capitalism are beginning to come home to roost for our society. Mr Brown needs to acknowledge that and start to formulate policies that will heal the growing divide between haves and have nots in terms of both income and assets."

I agree with just about all of this, though found it a surprising sentiment from someone who has been writing about the value of abolishing inheritance tax.

Point 5 is about tackling 'fiscal drag'. Paul writes that "Rising average wages have trapped millions of middle-income earners in the marginal tax bracket between 20pc and 40pc." He wants the 40% rate raised and a new higher rate on people earning, say, over £250,000 to make up the loss in income. See also here for more on this theme.

The government took a long time to pick up on the shift in public opinion about inheritance tax. I think this might be a sign of something similar and potentially just as damaging.

By 'reducing inequality', Paul and others don't (I think) particularly mean the gap between the poor and the rich, or even the poor and middle income earners (the idea that the consequences of inequality are just beginning to be felt, for example, doesn't fit). Instead, the inequality in question is that between middle income earners and the very rich. Kate's comment that it is unfair that someone on £37,000 is paying the same rate of tax as someone on £250,000 echoes the argument over inheritance tax that 'the rich just avoid it anyway, it is people who work hard and just want to pass on a bit that suffer'. The language used is similar, middle income earners being 'trapped' by having to pay tax at 40% on part of their income.

In fact, anyone earning £36,000/year is at the upper end of middle income earners. The average wage is about £21-24,000 (depending on different ways of measuring it) and even in London £36,000 is a significantly above average salary. If there are to be tax cuts, I think they should be targeted at people earning less than the average salary, because I believe in reducing inequality and because a tax cut will do more good for someone on £18,000 than someone on £36,000 (as, indeed, would spending on public services like housing or childcare). Also, there aren't in fact very many people who earn more than £250,000, and they are quite hard to get money out of, so raising taxes for them wouldn't in fact pay for much of a tax cut for the quite rich (which is not to say that we shouldn't raise taxes on the very wealthy).

But the sense which many above average earners have - that others are benefiting more than them and that they deserve a tax cut - is politically very significant, given that they mostly live in London and the South East, often in marginal constituencies. Indeed, they are often journalists or friends of journalists, so their concerns are guaranteed plenty of coverage and the kind of sympathetic hearing which, for example, people in receipt of incapacity benefit will never get.

One of the big challenges facing Labour is to decide how to respond to this. Getting into an auction with the Conservatives about who will offer bigger tax cuts would be a dispiriting response, but equally, the temptation to respond by telling people to stop whinging and realise that they are in fact much better off than they feel is not one which should be indulged.

Equally, there is an opportunity here if middle income earners don't automatically identify their interests with those of the very wealthy. Maybe one way to proceed is to point out who benefits most from tax cuts to the upper rate of income tax (it isn't those who are only paying a couple of thousand pounds at the higher rate), and to offer an alternative which boosts the disposable income of both middle income earners and those living on low incomes.

The other task is to boost turnout amongst poorer voters. There are a lot more people earning £20,000 or less than those earning £35,000 or more, but they are less likely to go and vote, so the so called 'centre ground' usually ignores them except to lecture them on their need to work harder, acquire new skills and be available for new jobs (whether or not they find them rewarding). If politicians responded to the concerns of middle income earners about their living standards in this way, there would be howls of fury.


At 6:30 pm , Anonymous jdc said...

For me a large part of the problem is that money doesn't seem to be worth very much at the moment. Earning £36k does put you at the top of the middle income bracket - yet I'm close to that and couldn't afford a 1-bed flat in much of Southern England.

This cannot be a normal situation. Heaven help me if I did anything like have children or take foreign holidays. I count on needing an income of at least £45k before I can even consider the former.

At 5:05 pm , Anonymous angus said...

Brown's last budget sensibly raised the threshold for top rate income tax to £43,000 from 2009.

Like you, I can't see much of a case for raising it further than that, unless(and that will be the day) the top tax rate was to be increased above 40%, in which case increasing the threshold to 50K or so would make sense.


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