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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Jeremy Corbyn faces a dilemma as Brexit solidifies: which half of his voters should he disappoint?

He comes from a tradition on the left that sees the EU as a capitalist club.

Imagine a man who voted to leave the European Economic Community in 1975. A man who spoke out against the Maastricht Treaty in 1993, saying that it “takes away from national parliaments the power to set economic policy and hands it over to an unelected set of bankers”. A man who voted against the Lisbon Treaty in 2008.

You don’t have to imagine very hard, because that man is Jeremy Corbyn. When campaigning for the Labour leadership in 2015, he told a GMB hustings, “I would ­advocate a No vote if we are going to get an imposition of free-market policies across Europe.”

When Labour’s Brexiteers gathered to launch their campaign in 2016, several seemed hurt that Corbyn and his shadow chancellor, John McDonnell, were not there with them. “It is surprising, when we voted against the advice of the chief whip on a number of European issues over the last decades, that Jeremy and John, who have always been in that lobby with us, that they would want to lead a campaign that isn’t even asking for a renegotiated position,” said the MP Graham Stringer.

I mention this because since the election campaign started in April, I keep having an odd experience – people insisting that Corbyn is not a Eurosceptic, and that he will use Labour’s new-found strength to argue for a softer Brexit. Others claim that Labour’s current position on freedom of movement (ending it) is the obvious, common-sense – even progressive – choice.

This matters. Look, if the evidence above doesn’t convince you that the Labour leader is intensely relaxed about exiting the European Union, I don’t know what else would. Yet it’s clear that some Labour activists strongly identify personally with Corbyn: they find it hard to believe that he holds different opinions from them.

The second factor is the remaking of Brexit as a culture war, where to say that someone is a Eurosceptic is seen as a kind of slur. Perhaps without realising it, some on the left do associate Euroscepticism with Little Englanderism or even flat-out racism, and see it as a moral failing rather than a political position.

But I’m not impugning Jeremy Corbyn’s character or morals by saying that he is an instinctive Brexiteer. He comes from a tradition on the left that sees the EU as a capitalist club. You can disagree with that premise but it’s a respectable line of reasoning.

Also, the Euroscepticism of Corbyn and his allies will undoubtedly give them an advantage in the months ahead; they are not consumed by fatalism, and the members of McDonnell’s shadow Treasury team feel that the removal of European state aid restrictions can help revive ailing bits of the British economy. They have a vision of what an ideal “Labour Brexit” would be – and it’s not just sobbing and begging Emmanuel Macron and Angela Merkel to take us back.

We do, however, need a reality check. Now that the necessary humble pie has been eaten, Labour’s unexpected revival at the ballot box means we can begin to treat Corbyn as a normal politician – with the emphasis on the second word. He’s not the Messiah, but he’s not a joke either. He is a charismatic campaigner who is willing to compromise on second-tier issues to achieve his main objectives.

From the general election, we can see just how good a campaigner Corbyn is: he can fire up a crowd, give disciplined answers to interviewers and chat amiably on a sofa. That throws into sharp relief just how limp his performances were last year.

He might have little else in common with Theresa May, but they both looked at the EU referendum and thought: yeah, I’m going to sit this one out. He called on activists to accept the EU “warts and all”; and said he was “seven, or seven and a half” out of ten in favour of staying in it.

For both leaders, this was a pragmatic decision. May did not want to be overtly disloyal to David Cameron, but neither did she wish to risk her career if the result went the other way.

Anyone in Labour would have been equally sane to look north of the border and back to 2014, and remember just how much credibility the party immolated by sharing stages with the Conservatives and allowing itself to be seen as the establishment. By limiting his involvement in the Remain campaign and whipping his MPs to trigger Article 50, Corbyn ended up with a fudge that gave Labour some cover in heavily pro-Brexit regions of the country.

That’s the politics, but what about the principle? I can’t shake the feeling that if Corbyn campaigned as hard for Remain in 2016 as he did for Labour in 2017, we would still be members of the European Union. And that matters to me, as much as left-wing policies or a change in the rhetoric around migrants and welfare claimants, because I think leaving the EU is going to make us poorer and meaner.

That’s why I worry that many of my friends, and the activists I talk to, are about to be disappointed, after waiting and waiting for Labour to start making the case for a softer Brexit and for the single market being more important than border controls. As Michael Chessum, a long-standing Momentum organiser, wrote on the New Statesman website, “Recognising the fact that immigration enriches society is all very well, but that narrative is inevitably undermined if you then choose to abolish the best policy for allowing immigration to happen.”

Labour’s success on 8 June was driven by its ambiguous stance on Brexit. To Leavers, it could wink at ending freedom of movement when they worried about immigration; to Remainers, it offered a critique of the immigrant-bashing rhetoric of recent times. But can that coalition hold as the true shape of Brexit solidifies? Over the next few months, Jeremy Corbyn’s biggest decision will be this: which half of my voters should I disappoint?

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 22 June 2017 issue of the New Statesman, The zombie PM

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