Tuesday, February 07, 2012

Whoops - Birmingham Lib Dems call for tax increase on low paid

This afternoon, Cllr Ray Hassall and Cllr Neil Eustace will lay a motion before Birmingham City Council - in more than one way. It should be a simple task to write a back-slapping motion that congratulates their party on something or other, but their motion, as originally submitted, has quite a different meaning to that which we may assume they intended.
This Council notes that:

  • 20% of Birmingham residents who are employed earn £10,500 or less.
  • the average household income in the city is £1,800 less than the national average.
  • the difference between the national average & city average increased by over £700 between 2006 and 2011.
  • the £1,000 the increase in the tax threshold to £7.475 in 2011/2 and a further increase to £8,105 in the 2012/13 tax year.
  • the Governments commitment to increase the tax threshold to £10,000 by 2015.
This Council also notes that reducing tax thresholds for hard working Birmingham residents will result in them paying £700 per year less income tax and taking low earners out of paying tax all together. Council therefore welcomes the reduction tax thresholds which will provide additional income for hard pressed families and result in the stimulation of the local economy.
(Emphasis added, all other text exactly as presented)

Whoops.

Good job these two don't do anything important, eh? Ray was only cabinet member for culture until deposed by Martin Mullaney (I'm sure Ray will be delighted to lend Martin a hand in his campaign this year). And Neil is just chair of the public protection committee.

Or perhaps Neil and Ray actually support increasing taxes.

Now, while INCREASING tax thresholds is superficially attractive, the policy isn't perfect. As the Institute for Fiscal Studies puts it "income taxes are not well targetted to help the poorest in society."

It doesn't help the poorest. If your income is below the tax threshold - like that of many pensioners - you won't see any gain. This change won't help all of those employed residents who earn less than £10,500.

Around a quarter of adults nationally live in households where they don't earn enough to pay tax and the poorest 10% will benefit by a whopping 72 pence a week - rather less than they have lost through the VAT tax hike that the Lib Dems campaigned against before 2010, which is costing families at least £389 a year extra (on top of inflation and fuel costs that the Liberal Democrats have failed to control).

Everybody else benefits rather more, as this graph from the IPPR demonstrates. Indeed, the top 10% band of household incomes benefits more than the bottom 20%. A full-time worker on the minimum wage will see about £500 extra a year, but those working less than 24 hours a week won't see any gain at all. (I'd like to see Ray and Neil - financial wizards that they are - justify the claim that it will lead to a £700 tax cut. Perhaps they should ask Tory Cllr John Alden to explain tax to them.)

And then there's the cost. The IPPR project this to cost £13 billion - which is either £13 billion in taxes to find or £13 billion in cuts to make. For all that effort, only 7% of that cost will be spent in taking those low earners out of tax, but 66% is used to help households in the top half of the income spread. Is that really an efficient use of resources? Will the households who see themselves dragged into the 40% tax band and facing the loss of child benefit thank the Liberal Democrats?

As the IPPR points out, if you want to boost the income of low income households, the tax credit model is far more effective, but this government - of which Eustace and Hassall are clearly enthusiastic supporters - is attacking that piece of genuinely redistributive taxation. Childcare tax credits are being cut back - something that will directly affect the ability of some working parents to find work.

This plan is unquestionably well-intentioned, but the reality is founded in simplistic and superficial spin rather than real substantial gains to poorer, working families. For some, it will actually impose a disincentive to work or to seek promotion. Laudable in its aims, this is simply the wrong policy to pursue - a publicity success, but a practical failure.

In fact, the motion as put forward by Cllrs Hassall and Eustace may actually be Freudian in its accuracy - the outcome could be a hike in VAT to 22% to cover the cost , according to a tax specialist from PriceWaterhouseCoopers.

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