...a blog by Richard Flowers

Thursday, August 26, 2010

Day 3524: No, Captain Clegg is RIGHT; the Institute for Fiscal Studies HAVE gone nuts!


Featured on Liberal Democrat Voice

I really, really wanted to write about how we SHOULDN'T be attacking the IFS, because that is just such OLD politics.

But then I tried READING their report.

I am dismayed… no, I'm ANGRY that something this… ILLITERATE is being passed off as a serious piece of research. Worse, that it is FRIGHTENING people.

Their accusation that the Budget is REGRESSIVE hinges on a KEY assertion:
"…the top half of the income distribution gains on average as a result of increases to the income tax personal allowance and the employer NI threshold."
But this sentence is JUST FLAT WRONG.

The less important part is that the EMPLOYER's national insurance threshold DOES NOT affect the employee's earnings – the CLUE is there in the NAME.

There IS a COMPLICATED relationship between the level of Employer's NI (the 12.8% rising to 13.8% extra that it costs your employer to employ you on top of your salary before tax) and the number of extra people that businesses are willing and able to take on (which is why the Conservatories tediously insist on calling it a "jobs tax"), and that does feed in to overall earnings as more or fewer people are IN employment. But that's a second or third order variable, not a direct effect of tax policy… in other words, that's not important right now!

The more important part is that people paying higher rate tax DO NOT BENEFIT from the rise in personal allowance. The threshold for paying the higher rate of tax was LOWERED so as to CANCEL OUT the gain from the higher personal allowance.

In fact, the HIGHEST earners actually do WORSE out this scheme, because Labour's Mr Alistair Dalek introduced a wheeze whereby if you earn above a hundred thousand pounds, your personal allowance gets TAKEN AWAY – so top earners have an extra slice to pay at the higher rate and NO reduction in their basic rate because they have no personal allowance left even after the increase.

Okay, maybe I'm wrong, maybe I've missed something, and I realise that the tax system is excessively complex – I bang on about it often enough – but it seems to me that this is a pretty FUNDAMENTAL thing to get wrong.

Either, the IFS have failed to include the reduction in the upper rate threshold in their computations, or they have completely failed to understand where their figures have come from.

In either case, how is it possible to have ANY faith in the other conclusions that they draw?

Now, I do think it's fair to say that the Coalition's response to this has been a fair way from BRILLIANT.

I mean, on the one fluffy foot there IS a good case to be made that if the IFS want to create a model for how changes to Housing Benefit (which mainly affect the less well off) affect incomes, then they really OUGHT to be doing the same for changes to Capital Gains Tax (which mainly affect the better off) as well.

Because OBVIOUSLY the budget is going to look regressive if you study the things which impact on lowest income groups and IGNORE then things which affect high income groups.

But then on the other fluffy foot we get Government ministers saying: "and you have to take into account the cuts in Corporation Tax".

No, they really, really don't and we look STUPID for saying it.

Of course we HOPE that cutting company tax will mean that companies employ more people thus taking more people out of the lowest income groups. But they might just trouser the difference. Or spend it on buying new equipment from Germany. Or in paying off that tricky bank loan. Or any number of other things.

It's a gamble to restart the economy, not a personal tax measure, and let's not pretend otherwise.

And I can understand, really I can, why Captain Clegg is "slamming" the report for being "partial". Our WHOLE POINT in joining the Coalition was to get Liberal Democrat FAIRNESS added to the Conservatory budget. AND WE DID.

So this is personal.

But I think – I hope – we all agree that the Liberal Democrats would be EXPECTED to say that.

What we really needed was a senior CONSERVATORY, and I mean Master Gideon, really, to come out and say: "we WANT to be progressive and we are DISMAYED that the IFS figures show otherwise and I will be having my team work over the budget again to be sure, but can I just point out…"

Look, it is not impossible that the IFS's central thesis is RIGHT, and we should be DEEPLY CONCERNED about that possibility

The cost of fixing Hard Labour's recession and overspending should NOT fall more heavily on the poorest than on the richest.

We need to be constantly vigilant to see that that does not happen, and if the facts say it is happening, we must put it right. And we need to be SEEN to be doing that.

Which is why the Office for Budget Responsibility needs to be more INDEPENDENT, why we need the Government books to be AUDITED, and why we should WELCOME scrutiny from independent organisations like the IFS.

But how can the IFS report have ANY credibility if they include such a glaring total misunderstanding of how the personal allowance change works? Simply, they can't.

So, I really, really wanted to say we shouldn't just "stick to our guns"; we should ACCEPT that we DON'T KNOW the answers for certain; we should say we'll TAKE ON BOARD the IFS critique and we'll LEARN from it and TRY TO DO BETTER.

But I'm really at a loss to understand how this report HELPS, other than in reinforcing Hard Labour's hysterical, self-serving lies and making good Liberal Democrats doubt the good faith of their own Government.



Stephen Wigmore said...

As much as I don't like the IFS report I think you've got it wrong here.

"the top half of the income distribution"

refers to the upper 5 deciles of the household income distribution.

According to that distribution higher rate tax is only paid by about 10% of the population, i.e. the richest decile.

The ridiculous thing about this report is that the upper half of the income distribution does not refer to people who are particularly wealthy for the most part, which is I why I can't get particularly upset that there not getting as stuffed by the changes as the IFS would seem to want them to be.

Millennium Dome said...

I have in fact been trying to work out how the IFS can be right, and I think you may have put your finger on it.

But I think it is FAIR to protest that the language used is at best SLIPSHOD and at worst WILLFULLY MISLEADING.

There are two things to say here: there's the important distinction which you identify, between "SOME PEOPLE in the top half of the income distribution" and "the top half of the income distribution".

There is also a distinction between INDIVIDUALS and HOUSEHOLDS and which I'll come to in a moment.

And by not making these distinctions CLEAR the key sentence is, at the very least, open to interpretation.

Anyone earning between £7,475 and £42,875 (adjusted for inflation) will gain a full £200 per year as a result of the increase in personal allowance (people earning between £6,475 and £7,475 will get a proportion of that – as what tax they pay is eliminated – as will people earning between £42,875 and £43,875 – as the new higher rate tax they pay takes back the gain from the higher personal allowance).

Median income in the UK in 2009 was £489 per week, which is £25,428 per year, which – by coincidence or not – is almost halfway between £7,475 and £42,875.

So it's FAIR to say that there are people in the top half of the income distribution WILL gain.

But using the phrase "the top half" does NOT make clear that the UPPER part of the top half DOES NOT benefit; and it conceals that benefits from the tax change also fall into the BOTTOM half of the income distribution.

Millennium Dome said...

However, where I think the real confusion arises is in the use of HOUSEHOLD income rather than PERSONAL income.

Because the TAX system treats people as INDIVIDUALS, not households, so a couple or a family ALL get the personal allowance raise.

Now, I'm sure the IFS are not proposing that we return to joint taxation of partners, but in that case what is their justification of translating what is LITERALLY a "personal" allowance into a "household" allowance?

(The Government, I have to admit, can't be completely free from blame here, because in the case of BENEFITS some benefits are withdrawn if another person in the "household" is earning more than the Government deem fit.)

But anyway, having given it some thought, I realise that a household with two or maybe even three members working even on around median income PERSONALLY would be in the upper end of the HOUSEHOLD income distribution scale and yet would gain substantially - £400 or £600 per year – where a single worker earning an equivalent sum (£50 or even £75 thousand) would gain nothing.

Median HOUSEHOLD income seems to be about £30,000 (2008 figures) .

That in itself is SUGGESTIVE: by not being much higher than median income, it suggests that the lower HOUSEHOLD incomes are made up of households with only ONE earner, while households with more than one earner rise into the "top half" of the income distribution.

(And I think, actually, that a LOT of "households" with daddy and daddy/mummy and mummy/mummy and daddy both going out to work and earning £25,000 each would be rather SURPRISED to learn that according to the IFS that meant that THEY were in the "top half" of the income distribution.)

But obviously this throws off all my workings because without a model of the mix of single high earners to couples (and more) on multiple moderate incomes that make up the upper deciles of the HOUSEHOLD income scale, then I can't guess how the increase in personal tax allowance translates to households gains.

Equally, though, I do think that the IFS rather needed to "show their workings" here – to STATE that the top half of the income scale gain BECAUSE there are large numbers of families where two bread-winners bring home £25k.

So, long story short (too late!) I completely agree with what you say, but I don't think it invalidates my assertion that the IFS article rests on an assertion that is far from as cut and dried as they appear to claim.

All the best