Thursday, April 03, 2008

Fairer taxes

When Gordon Brown delivered his last budget just over a year ago, he couldn't have expected that its long term legacy would have been to unite the Tories and Lib Dems, along with an increasing number of members of his own party, in opposition to tax rises for low paid workers without children.

The situation facing people who are living on low incomes, but who don't have kids, didn't feature as a major issue in the 2005 election, or the one before. No powerful lobby group speaks for them, and they aren't considered part of 'Middle England' (though thousands of them live in marginal constituencies around the UK - there are a lot more people earning less than £18,000 in Gillingham than earning £60,000+).

The changes in income tax, cutting the basic rate by 2% while abolishing the 10% starting rate, means that anyone earning between roughly £18,500 and £35,000 is better off, while workers earning enough to pay income tax but less than £18,500 are worse off, up to a maximum of £223 per year per person. In terms of the political Conventional Wisdom of the time, this was redistribution from those who don't vote to those who do, planned just in time for an election in 2008. As we know, it hasn't turned out that way.

Over in America, David Frum has written a book which in part aims to explain the decline in popularity of the Republican Party. Frum notes that “after almost three decades of tax-cutting, most Americans no longer pay very much income tax … By contrast, the top 1 percent of taxpayers pay well over one-third of all U.S. income taxes.” As a result, the appeal of tax cuts as opposed to greater public spending on, for example, healthcare has been radically diminished. On CentreRight, the reviewer of Frum's book concluded that "Tax cuts targeted at low earners is an idea that has resurfaced on many conservative blogs recently, but it is one that if implemented would make all future tax cuts much more difficult."

There are a number of lessons from all of this. One is that any attempts at tax simplification are always fraught with the danger that the people who lose out will be more vocal than those who gain. A second is that policies which take from less well off people to give to the middle classes aren't the vote-winners which some have argued. And a third is that when the Conservatives complain about tax rises for low paid people, the longer term aim is to cut them for the rich.

But above all, there is a golden opportunity here for Labour to rescue the situation. Put simply, it is now a matter of political consensus that people on low incomes pay more than their fair share of tax, and people who have a lot of money pay less than their fair share. So the fair and popular thing to do is to cut taxes for those on low incomes, and pay for it by raising them on the rich. And if, in future years, this helps to undermine support for the Conservative case for more and bigger tax cuts a la George Bush, then so much the better.

12 Comments:

At 10:27 am , Anonymous Alix said...

"A second is that policies which take from less well off people to give to the middle classes aren't the vote-winners which some have argued."

I don't wish to be peevish when you is clearly being dispassionate and sensible etc, but could we also mention the fact that it's wrong?

My optimism that any such rescue of the situation might take place has dwindled since I read this in the Grauniad:

"Senior ministers have said they are going to look at the change's impact especially on pensioners aged 60 to 65..."

http://www.guardian.co.uk/politics/2008/apr/04/taxandspending.gordonbrown

This is going to be another hopelessly over-complicated Labureaucracy solution, isn't it.

 
At 12:39 pm , Blogger Tim Worstall said...

The simple way to do this is to raise the personal allowance significantly.
Say, to £12 k or so. As a number of "right wing" people like the Adam Smith Inst have been known to suggest.

 
At 2:22 pm , Blogger ejh said...

Well, that's the way to do half of it.

 
At 2:49 pm , Blogger Miller 2.0 said...

Very well argued.

But, I think I'd prioritise a cut in VAT - a sure election winner, extremely useful to the poor, and an economic stimulant in tough times.

 
At 2:50 pm , Blogger Miller 2.0 said...

Also, Tim Worstall makes a good point above.

Perhaps also extend Tax Credits to the young and single (Please??)

 
At 6:20 pm , Anonymous tim f said...

Wouldn't raising the personal allowance to 12 grand mean everyone was taxed less on the first 12 grand, ie a millionaire kept the whole of the first 12 grand too? So moving towards a flat tax system and away from progressive taxation?

Not sure (as a young and single person!) that I think we should extend tax credits to the young and single either. Young and single people generally have more disposable income than young families with children. Yes, some young single people earn low wages but that's the same problem as anyone else earning low wages and has the same range of solutions. And yes, young single people have specific problems like getting on the housing ladder, but better to target spending on building homes rather than giving them cash while house prices spiral.

 
At 1:32 am , Anonymous alix said...

"So moving towards a flat tax system and away from progressive taxation?"

Yes, the millionaire would also get the 12k tax free. But "progressive taxation" is simply a taxation system which allows poorer people to benefit proportionately more than richer people. Which raising the personal allowance would clearly do, as the tax on 12k is proportionately more important to the 18k earner than the millionaire.

If one were to give tax credits to the young and single as well, wouldn't it just be easier to not tax the poor so much in the first place?

 
At 5:44 pm , Anonymous Anonymous said...

"I'd prioritise a cut in VAT - a sure election winner, extremely useful to the poor, and an economic stimulant in tough times."

I think VAT rates are an EU matter.

 
At 10:31 pm , Anonymous tim f said...

But there is some flexibility - isn't it technically illegal to have differential rates of VAT on different goods, yet that's exactly what we do with books & children's clothes (ie no VAT on these goods). Personally I'd like to see us double VAT on luxury yachts, Ferraris and caviar, but that probably won't surprise many people.

I may be wrong about this, but someone will surely say so if I am!

 
At 9:53 pm , Anonymous angus said...

"isn't it technically illegal to have differential rates of VAT on different goods, yet that's exactly what we do with books & children's clothes (ie no VAT on these goods)."

No. The EU allows certain specific items to be either zero rated or charged at a reduced rate of at least 5%.

The standard rate of VAT has to be a minimum of 15% though. Below the UK rate of 17.5%, but not greatly.

Differential rates, such as for luxury goods, are not allowed.

 
At 10:28 pm , Anonymous tim f said...

Thanks for the clarification.

 
At 8:40 am , Blogger ejh said...

The EU allows certain specific items to be either zero rated or charged at a reduced rate of at least 5%.

4% surely?

(I say so not from any knowledge of EU law, but from being a bookseller in Spain, where "IVA" is added to books at a rate of 4%....)

 

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