A tax on aspiration?

The complex new student support system will result in eye-watering effective tax rates for many low-

Governments, like individuals, often like to believe their varying instincts and aspirations all fit comfortably together even when they don't. They prefer to try to keep these tensions under wraps and sometimes don't even like to admit them in private to themselves. And the coalition is a case in point.

One of its favourite claims is that, despite the fact that all sorts of welfare support is being removed from families on middle incomes, when it comes to the very poorest they are doing more than their predecessors. The pupil premium usually gets a mention here, followed by the expansion in student support for the most disadvantaged.

Another cherished claim is that punitive marginal tax rates for those struggling on modest incomes seeking to earn their way up will be reduced - a point  made with great passion by David Cameron in his 2009 Conservative party conference speech when he railed against an example of a 96 per cent tax rate hitting a single mother. At this point, the coalition tends to highlight the Olympian ambition of the Universal Credit and its effort to integrate benefits and tax credits and create a single, smoother means-test in our welfare system. 

A final claim is that it is right and proper to localise decision making about how to allocate scarce financial support – for instance through the decentralisation of council tax benefit.

Many would want to challenge each of these claims; but let’s leave that to one-side. What should be beyond dispute – though this is rarely recognised – is that these three agendas don’t make for comfortable bed fellows; indeed, they don’t really belong in the same room at all. Try and defend them individually if you so wish, but don’t pretend they add up to a coherent strategy.

The recent Child Benefit saga gave daylight to some of these tensions, demonstrating in vivid terms how poorly designed middle-class welfare retrenchment can generate nasty means-testing problems that then have to be mitigated.  As of next January the removal of Child Benefit from households with someone on over £50k will mean a new 50p or higher effective tax rate for these families if they have one child, and 60p for those with two kids. If the Budget hadn’t had so many other highlights the dragging of the 50p tax rate from the super-rich down the income scale would surely have received more notice.  

Now a new report by professor John Hills, perhaps the UK’s foremost authority on the welfare state (together with his LSE colleague Ben Richards), provides us with another dramatic case study of how different policy objectives combine to form a nasty cocktail. The perhaps unintended and unforeseen effect of a shift to greater private contribution in welfare (this time in the form of higher tuition fees), combined with efforts to protect the position of the very poorest (increased bursaries and grants aimed particularly at families with earnings under £17k), and a nod towards localism (universities run their own support system) is to create a new aspiration trap – truly eye-watering effective tax rates hitting families in low-to-middle income Britain sending a child to university this autumn.

This stems from the way in which the complex patchwork of student support gets withdrawn as household earnings rise. Some of the resulting ‘cliff edges’ soar high above those that triggered the Child Benefit row. 

To understand how this will actually play out in practice Professor Hills considers two families each with a child about to go to the University of Oxford. One family has earnings of £17k and the other £44k – so a difference in gross earnings of £27k.  After we take account of the impact of the overall tax and benefit system the difference between these families falls to £13,250. But once we factor in the additional impact of all the different elements of the new student support system the gap collapses to a grand total of £200 (yes, you read that right).

To restate: an initial difference in gross earnings of £27k between (broadly speaking) a low-income and middle-income family is completely wiped out. The withdrawal of student support, together with the tax and benefit system, creates an effective 99 per cent tax rate on earnings between £17k and £44k. There is no point being better off. And that’s before we consider some truly scary effective tax rates at particular points in the earnings distribution (see chart). I think it is fair to say that the coalition hasn’t fully got its head around the politics of this.

And don’t think this is just some quirky Oxford phenomenon, though the issue is most dramatic there (which, to be fair, is because the support on offer at Oxford for those with the very lowest incomes is most generous). Hills surveyed the support at our largest 52 universities representing 60% of all HE students and finds that it is common for small differences in parental earnings to lead to several thousand pounds less support. 

Now, we can ask questions about aspects of this. There will be some parents who couldn’t care less about the financial position of their 18 year old, so they won't view a drop in support as any sort of hit on the family budget. And the report significantly understates the extent to which the withdrawal of some financial support, like cash bursaries and maintenance grants, may feel more like an effective 'tax rise' on the family than others, such as the removal of fee discounts (which may seem like a problem for the student tomorrow rather than the family today). Despite this the overall argument is strong.

The usually understated Hills concludes that despite the towering rhetoric about the what the universal credit will achieve, some parts of government are moving in “precisely the opposite direction”,  giving rise to new poverty traps. “It looks as if we will see a lot more of this in the future.  Already councils have each been told to work out their own way of making savings on Council Tax Benefit, which could result in them withdrawing benefit faster, adding to the poverty trap – but with rates and rules varying across local authority boundaries.  With budgets under pressure, it’s an obvious reaction to withdraw services from those with higher incomes, while keeping means-tested support for the poor. But what may seem a reasonable response to fiscal constraints while trying to protect the poorest in one sphere may overlap chaotically with other attempts to do the same thing”.

If this new twist to the student finance reforms sparks to life, as its impact on household budgets becomes clearer, it will send a shiver down the spine of leading members of the coalition. At the time they took the decision to bring in the new funding system they knew, of course, they were in for some choppy politics and that those on middle and high incomes would take a hit. But I very much doubt they grasped that it would lead to what many of them would consider to be totalitarian tax rates being imposed on families in the so-called striving classes whose kids are aiming high.

Students walk under the Bridge of Sighs along New College Lane on March 22, 2012 in Oxford. Photograph: Getty Images.

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

Photo: Getty
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Will the House of Lords block Brexit?

Process, and a desire to say "I told you so" will be the real battle lines. 

It’s the people versus the peers, at least as far as some overly-excited Brexiteers are concerned. The bill to trigger Article 50 starts its passage through the House of Lords today, and with it, a row about the unelected chamber and how it ought to behave as far as Brexit is concerned.

This week will, largely, be sound and fury. More peers have signed up to speak than since Tony Blair got rid of the bulk of hereditary peers, triggering a 200-peer long queue of parliamentarians there to rage against the dying of the light, before, inevitably, the Commons prevailed over the Lords.

And to be frank, the same is ultimately going to happen with Article 50. From former SDPers, now either Labour peers or Liberal Democrat peers, who risked their careers over Europe, to the last of the impeccably pro-European Conservatives, to committed Labour and Liberal politicians, there are a number of pro-Europeans who will want to make their voices heard before bowing to the inevitable. Others, too, will want to have their “I told you so” on record should it all go belly-up.

The real battle starts next week, when the bill enters committee stage, and it is then that peers will hope to extract concessions from the government, either through defeat in the Lords or the threat of defeat in the Lords. Opposition peers will aim to secure concessions on the process of the talks, rather than to frustrate the exit.

But there are some areas where the government may be forced to give way. The Lords will seek to codify the government’s promise of a vote on the deal and to enshrine greater parliamentary scrutiny of the process, which is hard to argue against, and the government may concede that quarterly statements to the House on the process of Brexit are a price worth paying, and will, in any case, be a concession they end up making further down the line anyway.

But the big prize is the rights of EU citizens already resident here.  The Lords has the advantage of having the overwhelming majority of the public – and the promises of every senior Leaver during the referendum campaign – behind them on that issue. When the unelected chamber faces down the elected, they like to have the weight of public opinion behind them so this is a well-chosen battleground.

But as Alex Barker explains in today’s FT, the rights of citizens aren’t as easy to guarantee as they look. Do pensions count? What about the children of EU citizens? What about access to social security and health? Rights that are easy to protect in the UK are more fraught in Spain, for instance. What about a British expat, working in, say, Italy, married to an Italian, who divorces, but wishes to remain in Italy afterwards? There is general agreement on all sides that the rights of Brits living in the rest of the EU and citizens of the EU27 living here need to be respected and guaranteed. But that even areas of broad agreement are the subject of fraught negotiation shows why those “I told you sos”  may come in handy sooner than we think.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.