Even Tories know Osborne’s tax changes won’t help lower paid


10:20 am - March 23rd 2011

by Sunder Katwala    


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Osborne will use the increase tax threshold to claim that he has lowered personal tax bills, and is trying to take the poor out of tax.

That the claim is misleading was obvious as soon as this key budget pledge was pre-spun on 1st March – as the claim relies on ignoring the VAT rise.

A powerful and informed argument against the tax threshold change was made by George Osborne’s Cabinet colleague David Willetts, who offered a punchy critique of why the policy wouldn’t help the poor, but would increase inequality for The Times back in 2005.

Here’s what Willetts wrote then.

Many people assume that there is an easy way of cutting taxes and helping the poorest people — we should raise the income tax allowance. At the moment people start paying income tax at about £5,000 a year. What if we increased that to £10,000 a year — wouldn’t that transform the situation of the poorest people?

It is true that poor people pay a shockingly high amount of tax. The richest 20 per cent of households lose 35 per cent of their incomes in tax. The poorest 20 per cent of households lose 37.9 per cent of their incomes in tax. In fact the poorest 20 per cent pay a higher proportion of their incomes in tax than any other slice of the population. No one seriously planned for this bizarre outcome.

But the tax that poor people pay isn’t income tax. The poorest 20 per cent of households sacrifice 28.5 per cent of their income in indirect tax, of which the biggest single item is VAT. All direct taxes take 9.5 per cent and of this the biggest item is council tax, which takes 4.6 per cent. Income tax, taking 3.5 per cent of their income, is responsible for less than one tenth of the taxes paid by the poorest fifth of households.

The inclusion of 40p taxpayers as gaining from the threshold change is an interesting reversal of this government’s policy to date.

Doing this makes the tax threshold change even more regressive. (And the policy already became more regressive when the Coalition ditched LibDem plans to pay for it from progressive tax measures).

However, removing 40p taxpayers from gaining from this policy (by bringing the 40p starting point down by a similar amount) would create a car crash with the goverment’s decision to take higher rate taxpayers from child benefit.

That would add further to the 750,000 people brought into the 40p rate of tax, with important knock-on effects as the government cutting child benefit from any household with a higher rate taxpayer from 2013.

Osborne claimed in announcing the policy that the change would not hit those households until somebody was earning over £44,000, but he has not said if he will keep this promise. His current policy will hit people earning several thousand pounds less than that.


A longer version is at Next Left

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About the author
Sunder Katwala is a regular contributor to Liberal Conspiracy. He is the director of British Future, a think-tank addressing identity and integration, migration and opportunity. He was formerly secretary-general of the Fabian Society.
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Reader comments


Bit like Brown then and his removal of the 10p tax band often called a fiasco, but come on Brown knew what he was doing.

I just filled up my disability motability car now with hand controls of course, with derve at £1.48 a litre, something Brown did little or nothing to help people.

labour Tory, Tory labour it’s getting harder to notice the difference.

The trouble is that Willets is obfuscating the realities of the inequality of low income earners by including them in with those not earning at all.

But then we know you have consistently decided to ignore the difference in “taking the poor out of tax” and “taxing those without an income less”, and the intended effect of minimising marginal tax rates.

Minimum wage in the UK should be inceased to £10ph. When one considers average rents and the fact that the government says a single adult on benefits requires approx £65pw to subsist (food, bills, travel,etc) than £10ph is a fair and reasonable minimum wage….do the sums yr self!

At present millions of UK workers are paid minimum wage and still need to claim benefits (housing benefits, tax credits, etc). Hence the state are topping up the meagre wages employers pay…..in effect the state is subsidising employers profits. So the employers are the REAL benefit spongers!

This leads to the conclusion that wage differentials in the UK are seriously flawed. How would companies afford an increase of minimum wage to £10ph? Simple – reduce the salaries of those higher up the scale who mistakenly imagine they deserve so much more than those on minimum wage. How this would work….a simple explaination – if a company presently shares out £1million per month in wages – than after the increase of minimum wage to £10ph it should still only share out £1million…but obviously readdress it’s pay structure!

Legislating for a living wage would save the state billions in benefits that currently top up the paltry money employers pay…..it would incentivise people into work, narrow the ever widening inequality gap in the UK, and enable the state to invest more in education, health, invading middle east oil rich countries (sarcasm), etc.

Of course this won’t happen – people’s greed wouldn’t allow it…those higher up the pay scale wouldn’t accept wage reductions – no matter how fair it was / no matter that it would create a healthier society. Ho hum!

I do not begrudge people who have built up a firm or company who then take out a good wage. I do not think £10 a hour is going to happen this side of my life time, £7.50 is about right.

But the problem with telling people what they can or cannot earn is of course we have cheaper areas of cheaper labour like Poland.

@3 Believe it or not you’ll find a few libertarian types that frequent these boards who are in favour of abolishment of the minimum wage, with the government supplementing their wages a la working tax credits. The theory being that more can then be hired at low low rates and thus provide stimulus for the economy.

Personally I’m more inclined to believe that if money were spread more evenly among the populace then the number of people spending money and contributing to growth will significantly increase.

“The inclusion of 40p taxpayers as gaining from the threshold change is an interesting reversal of this government’s policy to date.”

Yes – we’re seeing the further Torification of a policy that was pretty Tory to begin with, and became very Tory when the Coalition decided to fund it by raising VAT.

Cut to direct taxes benefitting mainly mid-to-high earners = Tory
Cut to direct taxes benefitting mainly mid-to-high earners and funded by a rise in VAT = very Tory
Cut to direct taxes benefitting even the top 5% of earners and funded by a rise in VAT = yet more Tory.

@2 Lee

“The trouble is that Willets is obfuscating the realities of the inequality of low income earners by including them in with those not earning at all.”

First of all – plenty of the people in that bottom 20% *are* earning. They’re just not earning enough to pay (much) income tax, and therefore to benefit (much) from a rise in the tax threshold. A typical part-time worker working 16 hours a week for £7.50 an hour, say, wouldn’t be earning enough to pay income tax even with the threshold at £6,500.

Secondly – I don’t understand why we’re supposed to think non-earners (pensioners, the disabled, the unemployed) can safely be ignored while we try to tackle inequality among people who are earning. Doesn’t it matter that if you make earners better off, non-earners end up relatively worse off and so inequality as it’s usually understood – i.e. between the poor and the rich, not just between the *working* poor and the rich – gets worse?

(If remedial measures were going to be taken to ensure the non-earning poor didn’t fall behind, that would be one thing; but the net incomes of those people are being driven *down* by the VAT rise and benefit cuts. In terms of increasing inequality, this is a ‘perfect storm’.)

something Brown did little or nothing to help people.

The global price of oil isn’t under the control of our govt.

@ Sunny

True, but constantly increasing the amount of tax on petrol (one of many stealth taxes under the Brown regime) is….

Stealth tax…hmmm…. a bit like increasing VAT then cutting 1p off fuel prices and pretending you’re doing something to help the motorist.

The truth behind George Osborne’s Deficit Reduction Plans (the rate at which we drive down the amount the country borrows)
A c loser examination of the ‘RED BOOK’ , the truth is that, if we look at his forecasts last year and compare them with next year, he fails to hit his targets by a country mile.
• Last June he said borrowing for this year would be 116 billion pounds but this has gone up to 122 billion.
• And in 2012 he forecasted borrowing of 89 billion but he’s now saying it will be 101 billion.
• This is massively important, while the country is still borrowing our debt figure is not going down but up and up.
• Remember the government said to judge them over the course of the parliament and their ability to reduce the deficit.
• Well by the end of the parliament (2015) the Con-Dem’s forecasts our national debt would have dropped to 1.3 Trillion Pounds but infarct the Red Book has revised this figure up to 1.35 or even . 6 Trillion Pounds .
• So the government is now forecasting another 300 billion pounds, on the national balance sheet by 2015
• Why does this all matter? Well we are paying 44 billion in interest rates today and from next month we will be paying 50 billion pounds a year, this dead money, which could be spent better and elsewhere.

Unfortunately for us this means further and deeper cuts to living standards, jobs, public services and a slowdown in growth will continue into 2012/13 and possibly beyond.

11. Dick the Prick

To be fair hardly any of them vote Tory so why should he care? Ain’t any votes in it.

@Sickchip

“Minimum wage in the UK should be inceased to £10ph.”

This will cause an increase in unemployment. I know you mean well.

Trooper @ 12

Does it, though? The average wage in this Country is 29 odd grand a year, yet those people are not on the dole. Any thoughts why that is? What jobs become unviale with a rise in the minimum wage? Do people’s hair stop growing when the cost of getting it cut goes up? Surely higher wages will mean a net increase in jobs? Surely peole like Audi rely on highly paid people to buy their cars, for example?

14. Praguetory

Let’s do some ballpark on this. Let’s say somebody on just over £8,000 a year was paying £400 in income tax (20% of £2,000) and this tax is wiped out as a result of the coalition changes. Let’s make the implausible assumption that this person spends every last penny of their income on items attracting standard rate VAT. Even then, the extra VAT they pay as a result of VAT moving from 17.5% to 20% is just 2.5% of £8,000 or £200. In other words, anybody working full time on the minimum wage will definitely benefit from coalition tax changes to VAT and PAYE. And let’s not forget that Labour would have put up VAT. And whilst we are at it, let’s not forget that the Coalition abolished income tax for low earners and Labour doubled it.

@Jim,

I think you’re dangerously close to suggesting printing everyone a million quid, so we’ll all be rich. Price fixing doesn’t work. If you fix the price of something too high, you get a glut, because you can’t sell it. If you fix it too low, you get a shortage, because no one will bother to supply it. If somebody earns £10 per hour, its because it’s worth employing them for that money (plus all the extras an employer has to pay). If they’re not worth that money, they will be unemployable.

This is not my own work, you understand, but based on my understanding of the market principles, very much better elaborated by the economists I think are right, such as:

http://mises.org/econsense/ch36.asp

There will be many round here who will readily pour scorn on this opinion, but it is a rational opinion, and not based on taking pleasure in other people’s poverty. Indeed unemployment is the cause of great poverty.

16. Planeshift

I’ve never seen a link to misses on a blog before.

Praguetory:

“Let’s say somebody on just over £8,000 a year was paying £400 in income tax (20% of £2,000) and this tax is wiped out as a result of the coalition changes. Let’s make the implausible assumption that this person spends every last penny of their income on items attracting standard rate VAT. Even then, the extra VAT they pay as a result of VAT moving from 17.5% to 20% is just 2.5% of £8,000 or £200. In other words, anybody working full time on the minimum wage will definitely benefit from coalition tax changes to VAT and PAYE.”

OK – now let’s put two and two together. *Somebody* is filling that £200 hole in the government’s coffers, since the overall tax burden is not being reduced. Who? Well, obviously it’s got to be someone who *does* pay more in VAT but *doesn’t* benefit from this tax cut – someone like our £8,000-a-year earner’s retired mum, or part-time colleague, or unemployed neighbour. The tax burden is being shifted away from some low, but mostly mid-to-high earners, and towards those too poor to pay income tax.

TT @ 15

Look, let us start at the beginning. Your average car mechanic or plumber can charge almost anything and we pay it. Not because we think it ‘good value’ but because that is the determined by ‘market conditions’. There is nothing intrinsic about these jobs and the price they attract, we just get there by a number of mechanisms. There is nothing that says ‘plumbing’ is ‘worth’ twenty or thirty quid an hour. If ‘market conditions’ pushed the price of labour up to ten quid an hour, there is nothing, in principle, to stop the price of ‘shelf stacking’ to become ten quid an hour. Tesco are not going out of business just because the price of stacking shelves has moved to ten quid an hour, are they? They are not leaving there shelves empty because it is too dear to put stuff on them, are they? Nor are people stop going to the hairdressers or buying coffee, or buying a newspaper or a million different other things either, just because the price increases ‘too much’ or if that was true then we would have dispensed with water pipes thirty years ago when huge numbers of plumbers became self employed.

Don’t get wrong, moving from a minimum wage of under six quid to ten would cause a violent correction, but there is no reason to suggest that it could not be done in a couple of jumps. I believe that Seven Fifty an hour is pretty much achievable without too much interruption.

@18 Jim,

“There is nothing intrinsic about these jobs and the price they attract, we just get there by a number of mechanisms.”

Agreed, I think. The mechanism is supply and demand, upon which there are a host of interractions, such as regulation, immigration of skilled workers etc.

“If ‘market conditions’ pushed the price of labour up to ten quid an hour, there is nothing, in principle, to stop the price of ‘shelf stacking’ to become ten quid an hour.”

Agreed, but I don’t know why there’s a need to bracket market conditions with inverted commas.

For the rest of what you say, I think you’re not fully taking account of the knock-on effects of the ‘correction’, which would nullify the supposed benefit of increasing the minimum wage. A minimum wage is a form of price fixing. The market will adjust to accomodate such impositions. but you must expect those adjustments to include price increases and unemployment.

You can reflect upon the effects of price fixing on any particular commodity. If beer was fixed at 20p a pint, the breweries would stop making it, unless they could quickly force through similar fixes on their costs. If it was £10 a pint, people would buy less, smuggle more, make their own, breweries would go bust. All these would be ‘corrections’ imposed by the price fix. The labour market performs in the same way as any market. There may be moral considerations, but these do not negate the mechanisms at work.

TT @ 19

Yes, but nobody is talking about a wide imbalance like your beer analogy of between 20p and ten quid. We are looking at a relatively small jump for some of the lowest paid with regard to the National average wages.

Of course in many industries, the price of unskilled, service jobs is around ten quid an hour right now anyway. It is just that the employee simply does not see most of that money. It is siphoned off in the form of parasitic scum, AKA ‘employment agencies’. These vermin have been allowed via various Right Wing regimes, (including New Labour) to work their vicious claws into the free market and effectively muscle their way into de facto ‘closed shops’ and thus skew the demand side of the labour market.

Isn’t funny that the supply side of such market interventions, in the form of unions have been destroyed, yet no-one, and especially ‘New Labour’ have lifted a single finger to tackle a clear ‘distortion’ of the market here? Employment agencies have insinuated themselves between Capital and labour and sucked the lifeblood out of labour. For all the talk of ‘free markets’ and the like, the most obvious barrier to a free labour market is allowed to go completely unchecked and have escaped ‘reform’. I wonder why that is? Could it be that the owners of Capital are okay with such distortions?

The Right Wing can be excused, grinding the poor into the dirt is what they do, but New Labour has no such excuse. When I use the term Tory scum, then I mean most of New Labour as well.

Do not let anyone tell you that unskilled labour is not worth ten quid an hour, because they are only half right, the cost of unskilled labour has far exceeded that and the employment agencies have been completely responsible in artificially suppressing it via a completely distorted supply demand dynamic.

PS, if you REALLY want to help the working poor and you really want ‘work to pay’, instead of tweaking tax and benefits, put every owner of an employment agency against a wall and place a bullet into his forehead.

@Jim,

I guess we’ve all got our priorities ‘come the revolution’!

It’s an interesting point you make. Minimum wage rates are protectionist, and as such I see them as mistaken. I accept that there are stacks of protectionist measures in place, so it may seem harsh to oppose one that is ostensibly aimed at helping the low-paid, when the rest go untouched. That said, there has to be a reason employers use these agencies, and don’t directly employ the workers and thereby keeping the agencies’ cut themselves. Other than the firing squad, what changes could be made?

“For all the talk of ‘free markets’ and the like, the most obvious barrier to a free labour market is allowed to go completely unchecked and have escaped ‘reform’.”

There certainly is a lot of talk about ‘free markets’ and much of it is nothing of the kind, but I do believe that truly free markets are to the benefit of all, including the poor, in the same way that repealing the corn laws benefited the poor, by taking away the protectionism that kept the price of bread unnecessarily high.

TT @ 22

That said, there has to be a reason employers use these agencies

There is a fucking great reason, it distorts the labour market in their favour. Pretty well too. If all these hotels (for example) were forced to compete for labour, the price of labour would undoubtedly rise to a more acceptable level. Given that agencies normally charge around the ten quid mark for unskilled labour, it is not too far off the mark that is a reasonable figure for the price of labour.

By eliminating the compeditive element from the labour supply, they are able to squeeze a few quid out of the poor.

what changes could be made

Well we need to give people who are employed by agencies the same rights as those employed by real compainies too. Let us level the playing ground. However, this is never going to happen because, notr only do the Right despise the poor, but the Left have a pretty despicable record on the poor too, so the only real option is a mass cull. This goes against everything I stand for in political terms, but, it is worth a shot.*

but I do believe that truly free markets are to the benefit of all, including the poor

Just as long as the owners of Capital have the final say on how free the market is. When the poor get above their station, the ‘free’ market reserves the right to put up interest rates, cut jobs, redraw laws or anything else it needs to do to keep the poor down.

*Of course I am only half joking, but I do despise employment agencies nearly as much as I despise New Labour supporters.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

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  2. Chunkylimey

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  3. bryan

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  4. Nick H.

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  5. Kelvin John Edge

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  6. A reaction to the Osborne’s growth budget « Though Cowards Flinch

    […] Sunder Katwala today spotted that in 2005 David Willetts, now Minister of State for Universities and Science, said the tax stream that is the most unjust for the poorest of society is not income tax, rather: The poorest 20 per cent of households sacrifice 28.5 per cent of their income in indirect tax, of which the biggest single item is VAT. […]

  7. rachellh

    Even Tories know Osbornes tax changes wont help lower paid | Liberal Conspiracy: http://bit.ly/gcwzyY via @addthis

  8. Alan Hurt

    Even Tories know Osborne’s tax changes won’t help lower paid | Liberal Conspiracy http://t.co/CwKmoYm via @libcon

  9. Neil Wigglesworth

    RT @curmudgeon_1: Even Tories know Osborne’s tax changes won’t help lower paid | Liberal Conspiracy http://t.co/CwKmoYm via @libcon

  10. Paul Kenny

    RT @curmudgeon_1: Even Tories know Osborne’s tax changes won’t help lower paid | Liberal Conspiracy http://t.co/CwKmoYm via @libcon

  11. Annette Carter

    Even fellow Tories know Osborne's tax changes won't help lower …: That would add further to the 750000 people … http://bit.ly/gDcunJ

  12. Daniel Pitt

    Even fellow Tories know tax changes won't help poorest http://bit.ly/gf8qqw #ConDemNation #Budget2011





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