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Why do the poor pay so much tax?
10 years of Labour have left the poor paying more in tax than the rich. Why?
One of the most obvious things one can say about the present government is that they have increased public spending. From low (by 20th century standards) levels in 1997, public spending has increased substantially under Gordon Brown's Chancellorship. It was always obvious that taxes would have to rise in order to pay for this, and that was part of the implicit bargain New Labour made with the electorate. But has this actually led to a fairer society?
Chris Dillow has pointed out some evidence that it has not: look closely at the table on page 7 of this PDF and you will see that the poorest quintile of the population are paying 36.4% of their income in tax, whilst the richest pay only 35.5%. Let me reiterate: the poorest in Britain pay a higher proportion of their income in tax than the richest, according to the government's own statistics.
This is an outrageous situation for a supposedly progressive government to have created. And it's not as if Gordon Brown's latest Budget did anything to reverse the trend; the abolition of the 10p starting rate of income tax will hit the poorest most of all. Increasing focus on environmental taxation also hits the poor, which is why the Lib Dems advocated a substantial increase in the personal allowance as part of the 'Green Tax Switch' proposal. Green taxes raise more revenue for the government, and a responsible government should make sure that the poorest in society are properly protected from these taxes by equivalent cuts in taxes that they pay.
Of course, Gordon Brown would respond that the poor are helped by tax credits. But the tax credit scheme itself is descending into farce, the latest fiasco being the revelation that the total overpayments made by the scheme since its inception has reached £9bn. At heart, tax credits are actually a good idea, but their implementation bears all of the hallmarks of New Labour's greatest mistakes: an intrinsically good idea has been badly implemented due to over-complication and a reliance on the ability to process lots of complicated and variable information. Overpayments happen when a person claims tax credits when their income is low, then does not cancel their claim when their income rises. For the poor, whose income is very volatile, even from month to month, it is almost impossible to put in an accurate claim for tax credits. They are left with a choice between claiming and hoping that they get to keep what they receive, or not claiming at all; some 2 million potential tax credit claimants opt for the latter.
It has been common for commentators to give Gordon Brown a relatively easy ride over the last 10 years. The economy hasn't collapsed under his stewardship and there has long been a sense that we wouldn't see the best of Gordon Brown until Tony Blair has made way for him at Number 10. But the evidence is mounting that Brown has done very little to help those most in need in society and that, for all of the money spent, we have not seen the improvement in public services that we might expect. It is time for the Liberal Democrats to become much more robust in attacking Gordon Brown's mistakes, and exposing the genuinely outrageous aspects of the tax system we have today. The Conservatives seem to be embracing almost every aspect of the Blair-Brown project; it's up to us to provide the alternative.
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Sadly, rumour has it that FPC have changed their mind on the issue of personal allowances.
If so, that's quite disappointing. In my opinion, the personal allowance needs to rise quite significantly (although it's easier to propose that than it is to propose how to pay for it!).
"At heart, tax credits are actually a good idea,"
I trust you mean that Tax Credits are well-intentioned, rather than that they are a good idea. They are a shockingly bad idea: a vastly over-complicated bureaucratic nightmare of an idea.
Apart from the huge sums of money which have been distributed at random, never to be recovered, what is the actual cost of running the whole Tax Credits shambles?
A far better solution, as you rightly indicate, would be to raise the personal allowance threshold considerably. This would achieve a comparable effect in terms of helping those worst off, but would give far better value for money and would be far less prone to costly error.
Fair point! I think the general aim of tax credits - give the worst off more financial independence - is a good one. If government is going to dish out huge sums of money, I'd rather it gave it to poor people to spend for themselves than spend it on ID cards, pointless wars or agricultural subsidies (to pick some easy examples). But, as you point out, tax credits in anything like their present form are doomed to over-complexity. Gordon Brown's biggest weakness is the belief that he can manage this complexity effectively.
For me, a key argument in favour of a hike in the personal allowance is that it allows people to keep more of the money they earn, to spend as they see fit, rather than taking it off them then giving it back if they jump through the necessary hoops.
I don’t mean to quibble, but public spending was not low in 1997 by C20th standards. In fact, it was only slightly low (around 38%) by the standards of the last thirty years, during which public spending was usually around 40%.
In fact, until Labour last got in and (shock, horror) drove up public spending, the state took only around a third of GDP. In 1960 the proportion was 32.2%. Between the wars it was around a quarter and before WWI the state took less than a tenth of GDP.
So by 20th century standards public spending was very big in 1997, and is astronomical now.
A high level of public spending is in fact self-defeating; indeed, in the long run it is highly costly. The public sector squeezes out the growth-creating private sector and so stifles economic growth.
As I have noted before , it has been estimated that the last bout of Labour profligacy – the legacy of the Wilson government – has cost the UK $1tr a year.
No, that is not a typo. “If government spending, as a proportion of national income, had been held at the level experienced in 1960, econometric evidence suggests that output in the UK would, today, be nearly twice as high as current levels. Total public expenditure would then be higher, albeit as a lower proportion of a much bigger national output.” – David. B. Smith.
As I said in my previous post , our parents have mortgaged our future, and we are short-changing our children.
As regards the comments:
Anonymous & Rob:
Sod the FPC. Conference is where the decisions are taken and we should push for further tax cuts at the lower end through a massive hike in the personal allowance.
I've argued before (including in one post where I praised Norman Tebbit !) that the personal allowance should rise to at least the equivalent of the minimum wage. This was endorsed - sadly only as a long-term ambition - in the taxation policy paper that we voted into policy in Brighton. We must make sure that this is now implemented.
Agentmancuso & Rob:
Actually, in theory tax credits are more than just well intentioned. A negative income tax (NIT) could have a significant impact both on poverty and on incentives to work, if only it wasn't undermined by a vast bureaucracy. Why not just run a PAYE system whereby companies pay low income earners an NIT automatically. The chances are that overall they will still have to pay a net amount to HMRC so they'll still have to submit payroll accounts as they always have.
The real problem is that withdrawal rates push up the effective marginal tax rate, and companies may use it to damp down their own salary offers. But I don't believe that this cannot be overcome.
I very much like that idea as a basic theory, but the devil is most certainly in the details. I'm no economist, but if the problems could be solved then this certainly seems to be a simpler solution than the multi-pronged approach that currently prevails.
Its even worse for the bottom 10% (around 50% of income taken in taxation) we need to slash income tax for the poorest altogether and introduce a land value tax or local income tax to replace the council tax that hits the poorest worse. This is not an arguement for higher or lower taxation, it is about whether we allow people who are poor to be punished by the government for being so.
people at the bottom of the scale are the ones that work the hardest to get what they want out of life. yet they still get constantly knocked back by high goverment charges and high economical living costs. that is why there is so many people in dept and cant afford the repayments.they payed nearly £450 on tax and n.i each month. they only get to see 2 3rd's of the money that they earn.
this makes it a very difficalt to raise up two young chrildren with nothing to live on, but we manage as we got to for there future. yet you see the rich people that get everything handed to then and the people that come to this country get everything handed to then on a plate.
the council will only help people when they are homeless and have nothing, unless you a imagrent.and what a joke that is. you have nothing and your expected to beg like a little puppy to some twat for him to say tough you got to help yourself unless the courts say otherwise and then you realy feel down graded just so that you can have a roof over your head. then they charge you through the roof for rent, cancil tax, water, elecric, gas, food, not forgetting that you are already in dept up to your eyeballs and have nothing, they then charge you for not paying as you cant afford to pay .this puts you in more dept.
there are alot of young familys realy stuggleing to live and no-one wants to help. this puts alot of strain on them and can cause break ups and resulting into alot of single perant familys which then ends up in more dept owed.
its just a contious loop.
on the other scale.THE RICH but yet poor.... got money got a house off of the goverment and got new cars on the drive, got the latist tv, trainers, disigner clothes, ask for a new place as they dont like were they are as its mite have turned into a but of a rough estate in 10 years get a lovly new house in a nice area.yet a family with 2 kids that has been on that list for years living in a tiny flat just enougth room to sit down on the floor and share bedrooms. toilets with other people in that bulding block. nice.
OLD peolpe. live from the goverment all there lives, got a big house or even a average size house. lots of money stashed in banks and under there beds, on there own in a 3-4 bed houses untill they die. then the house is free for the next person.
why not keep a check on the size and the amont of people living in the houses and then move then to a smaller place so that the other peolpe with more occupants to a household can get sorted out.
THE RICH.... they dont care at all. they got it and you have'nt tough. if they want a 100% pay rise they get it. they get done by the police for drink and driving the get off it.
every other person get screwed over.
they get caught for soclistiting. they get off.
they get caught for large amounts of drugs the get off.
we get prision,we get fined, we lose everything. they get a slap on the rist and got to your room for 5 min and think what you have done. all because they have the money to.....
the waste
the goverment needs to look at the amount it is waste's on silly things like a new statue's and there meetings that cost us tax payers 1 million + each time this happens. putting up other officals in hotels and there expenditures that cost £750,000 for there presants to be in this country. GREAT. there rich why cant they pay for them selfs.
gordon brown has not got a clue about being poor. the same as the rest of the goverment officals. they all came from a top private school. were perants can afford to pay £2500+ per half term for there child.the poorest cant even afford to feed there chrildren at school and have to have goverment school dinners of wich costs 39p per child. yummmm nice dinner ......
help the true english people and not let others take the ride and spoil it for all that was once a strong britton back in the days of margrett thatcher and winston chirchill. they kept the english culture alive. now we are not english nor is this britton but a multi cultural place that is open for abuse and distruction whist the people of this wonderfull country stuggle.
were going back to the old fashion days the rich are richer and the poor are poorer. if your in between then hey good luck as you will find it hard if you become poor. unlike a poor persom becoming rich.
this goverment sucks...........