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.

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There's nothing Luddite about banning zero-hours contracts

The TUC general secretary responds to the Taylor Review. 

Unions have been criticised over the past week for our lukewarm response to the Taylor Review. According to the report’s author we were wrong to expect “quick fixes”, when “gradual change” is the order of the day. “Why aren’t you celebrating the new ‘flexibility’ the gig economy has unleashed?” others have complained.

Our response to these arguments is clear. Unions are not Luddites, and we recognise that the world of work is changing. But to understand these changes, we need to recognise that we’ve seen shifts in the balance of power in the workplace that go well beyond the replacement of a paper schedule with an app.

Years of attacks on trade unions have reduced workers’ bargaining power. This is key to understanding today’s world of work. Economic theory says that the near full employment rates should enable workers to ask for higher pay – but we’re still in the middle of the longest pay squeeze for 150 years.

And while fears of mass unemployment didn’t materialise after the economic crisis, we saw working people increasingly forced to accept jobs with less security, be it zero-hours contracts, agency work, or low-paid self-employment.

The key test for us is not whether new laws respond to new technology. It’s whether they harness it to make the world of work better, and give working people the confidence they need to negotiate better rights.

Don’t get me wrong. Matthew Taylor’s review is not without merit. We support his call for the abolishment of the Swedish Derogation – a loophole that has allowed employers to get away with paying agency workers less, even when they are doing the same job as their permanent colleagues.

Guaranteeing all workers the right to sick pay would make a real difference, as would asking employers to pay a higher rate for non-contracted hours. Payment for when shifts are cancelled at the last minute, as is now increasingly the case in the United States, was a key ask in our submission to the review.

But where the report falls short is not taking power seriously. 

The proposed new "dependent contractor status" carries real risks of downgrading people’s ability to receive a fair day’s pay for a fair day’s work. Here new technology isn’t creating new risks – it’s exacerbating old ones that we have fought to eradicate.

It’s no surprise that we are nervous about the return of "piece rates" or payment for tasks completed, rather than hours worked. Our experience of these has been in sectors like contract cleaning and hotels, where they’re used to set unreasonable targets, and drive down pay. Forgive us for being sceptical about Uber’s record of following the letter of the law.

Taylor’s proposals on zero-hours contracts also miss the point. Those on zero hours contracts – working in low paid sectors like hospitality, caring, and retail - are dependent on their boss for the hours they need to pay their bills. A "right to request" guaranteed hours from an exploitative boss is no right at all for many workers. Those in insecure jobs are in constant fear of having their hours cut if they speak up at work. Will the "right to request" really change this?

Tilting the balance of power back towards workers is what the trade union movement exists for. But it’s also vital to delivering the better productivity and growth Britain so sorely needs.

There is plenty of evidence from across the UK and the wider world that workplaces with good terms and conditions, pay and worker voice are more productive. That’s why the OECD (hardly a left-wing mouth piece) has called for a new debate about how collective bargaining can deliver more equality, more inclusion and better jobs all round.

We know as a union movement that we have to up our game. And part of that thinking must include how trade unions can take advantage of new technologies to organise workers.

We are ready for this challenge. Our role isn’t to stop changes in technology. It’s to make sure technology is used to make working people’s lives better, and to make sure any gains are fairly shared.

Frances O'Grady is the General Secretary of the TUC.