The Fabian’s Tim Horton and IPPR’s Howard Reed have jointly authored a paper for Left Foot Forward designed to undermine the case for raising tax thresholds for low income earners. Clearly they are trying to undermine Clegg’s claim to support a fairer tax system, which by all accounts is playing very well on the doorsteps.
Horton and Reed make a number of charges that need rebutting:
- Three million of the poorest households gain nothing from the change
That is only because they simply just don’t pay tax. No tax cut will ever help that group, only an increase in welfare transfer payments can benefit them. That however would further increase dependency and disincentivise them from coming off welfare support.
- Households in the second richest decile gain, on average, four times the amount of those in the poorest decile.
Once again, this is because the lowest decile don’t pay much if any tax – we are really talking about part-time workers and those on welfare. Nevertheless everybody, including the lowest decile, will be better off whatever their income.
- Only around £1 billion of the £17 billion cost actually goes toward the stated aim of lifting low-income households out of tax, the policy would increase socially damaging inequalities between the bottom and middle.
Here we get to the real reason they object, it cuts taxes for the middle classes. According to their numbers, those on low incomes will only benefit by £5 a week and those on middle incomes will benefit by £20 a week. Low income households also qualify for welfare transfers from middle income earners, from free school meals to welfare credits. Is it really unfair against a background of progressively higher marginal tax rates on middle income earners? Middle earners pay disproportionately more tax after all.
Horton and Reed don’t really dispute that the lowest earners will be better off, they just don’t like the distribution of benefits from the policy. They do conclude with a bit of hyperbole: “It could actually harm the welfare of low-income households by increasing inequality and relative poverty.” Nobody is harmed by a “relative increase in inequality”. That is a left-wing myth. If your neighbour wins the lottery you are relatively poorer in comparison but not objectively, similarly those on lower incomes are not made poorer by those on middle incomes paying a little less tax. Nice try, but the moral case for taking those on the minimum wage out of tax is still stronger than the case for taxing them to pay them welfare.