It's time to be honest about who gains from tax cuts

Raising the personal allowance won’t give anything to the lowest-earning five million workers.

The news that George Osborne is likely to match the flagship Liberal Democrat commitment to raise the personal tax allowance to £12.5k in the next parliament is further proof of what became apparent during the conference season: the government’s economic message is jerking awkwardly between painting a bleak account of the years of austerity still to come and sunny promises of major tax cuts just around the corner.

It also clarifies that raising the personal tax allowance (PTA) will remain the tax cut of choice for both sides of the coalition. Which means that it is worth going back over some of the claims made in support of it – not least as some of them are a bit wide of the mark. This is not to say there is no case to be made for having a higher PTA: a tax-free stretch of income has always been an important part of our tax system and raising it clearly has beneficial effects (for instance, it simplifies, improves work incentives for some, and encourages dual-earning). It’s just that sometimes the key arguments made in support of it are often unbalanced or misleading, or both.

It is regularly, for instance, billed as a tax cut targeted at the lowest earners. And, to state the obvious, someone on say £12k – who would benefit - is clearly on a low wage. Yet it’s important to realise that the proposed hike in the PTA from £10k to £12.5k won’t give anything to the lowest-earning 5 million workers in the UK, all of whom will earn less than the £10k threshold come 2015.

More specifically, it’s said that the specific rationale for a further hike in the PTA is to help those on the minimum wage which has fallen sharply in real terms over recent years. Trouble is, more than 60% of those paid the minimum wage – predominantly women - work part-time. Again, they don’t gain. So rooting the whole argument for going to £12.5k in terms of those toiling on the minimum wage is a bit of a stretch.

Another, related, claim is that the point of a larger personal allowance is that it ‘lifts people out of tax’. And self-evidently this is right – in relation to income tax (several million people will have been lifted out of income tax by 2015 due to coalition policy choices). But that’s only part of the story. The coalition has not raised the threshold for National Insurance in the same way (it’s been uprated with inflation for the last 3 three years). It seems to be acceptable that someone on £8k should pay NICs but unacceptable that someone on £12k pays income tax. It’s hard to think of a sensible rationale for this. If tax cuts are the order of the day then raising the NICs threshold would be a far better priority.

At other moments it is argued that the whole point of the tax cut is to help low-income households or families. Again, this is shaky ground. The bulk of the gains from increasing the PTA flow to the top half of the household income distribution. This observation sometimes raises eyebrows but there is no great mystery about it – it simply reflects the fact that there are large numbers in the bottom half of the distribution who don’t work, and there are large numbers who do work but pay no or little income tax. Meanwhile, in the top half of the income distribution there is a much greater preponderance of dual-earning households who gain twice-over from tax cuts.

Indeed, to understand how households, particularly families with children, will benefit from a higher PTA in the next Parliament we need to consider how it will interact with Universal Credit (due to start in 2017). At the moment a tax cut would benefit someone by the same amount regardless of whether or not they are eligible for tax credits. It doesn’t affect their claim. Under Universal Credit this changes. The gains from the tax cut will in large part be offset by a reduction in entitlement to Universal Credit. And this is no small point: millions of families with dependent age children will be on UC. Tax cuts are going to lose much of their potency for a large swath of low to middle income families, it’s just no one has told them. It would be possible to amend Universal Credit to deal with this problem but so far no party has said they will – it costs money.

So raising the tax allowance is not a policy for the very lowest earners. Nor is it a policy for a far smaller number of very highest earners (people on more than roughly £120k, about 0.5 million, get any gains taxed away). But it is a tax cut for the overwhelming majority in between. Some of these will be on low (but not the very lowest) earnings, some in the middle and some near the top: it spreads the gains around which, depending on your point of view, could be a good thing or a bad thing. To put it another way, only a small part of the cost involved in the proposed increase in the PTA – around 10% - comes from lifting those on between £10k and £12.5k out of income tax: it’s expensive mostly because it also gives a tax cut to everyone earning from £12.5k to roughly £120k.

It’s also important to emphasise that how big the gains will really be, and how much it costs the exchequer, will depend crucially on the detail. A policy to raise the personal tax allowance ‘during the next Parliament’ – meaning by 2020 - to the level of the salary of a full-time minimum wage worker in 2015 (c. £12.5k), is a very different thing to committing to move straight to a £12.5k allowance in 2015. And it’s also very different to committing to raise the allowance by 2020 to whatever a minimum wage salary will be at that time.

Finally, it’s worth noting that, as with many policy commitments, there are likely to be unintended consequences. This is because the government has decided to make earning more than the tax allowance an eligibility criteria for some crucial policies – such as to access more generous childcare support, or auto-enrolment into employer pension schemes. This linkage is a truly asinine bit of policy-making. Raise the threshold while sticking to this approach and ever more low-paid part-timers will miss out on vital forms of economic security.

So, yes, let’s debate tax cuts. Given the squeeze on incomes there will inevitably be pressure on all parties to help ease the pressure on households through the tax system. But let’s discuss this in the knowledge of the fiscal hole that still needs to be filled (which will most likely mean tax rises too). And, crucially, let’s be candid about who really gains from these proposals.

Gavin Kelly is chief executive of The Resolution Foundation

George Osborne arrives at Number 10 Downing Street with his special adviser Rupert Harrison on 7 October 2013. Photograph: Getty Images.

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

Photo: Getty
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No, the battle in Momentum isn't about young against old

Jon Lansman and his allies' narrative doesn't add up, argues Rida Vaquas.

If you examined the recent coverage around Momentum, you’d be forgiven for thinking that it was headed towards an acrimonious split, judging by the vitriol, paranoia and lurid accusations that have appeared online in the last couple days. You’d also be forgiven for thinking that this divide was between a Trotskyist old guard who can’t countenance new ways of working, and hip youngsters who are filled with idealism and better at memes. You might then be incredibly bemused as to how the Trotskyists Momentum was keen to deny existed over the summer have suddenly come to the brink of launching a ‘takeover bid’.

However these accounts, whatever intentions or frustrations that they are driven by, largely misrepresent the dispute within Momentum and what transpired at the now infamous National Committee meeting last Saturday.

In the first instance, ‘young people’ are by no means universally on the side of e-democracy as embodied by the MxV online platform, nor did all young people at the National Committee vote for Jon Lansman’s proposal which would make this platform the essential method of deciding Momentum policy.

Being on National Committee as the representative from Red Labour, I spoke in favour of a conference with delegates from local groups, believing this is the best way to ensure local groups are at the forefront of what we do as an organisation.

I was nineteen years old then. Unfortunately speaking and voting in favour of a delegates based conference has morphed me into a Trotskyist sectarian from the 1970s, aging me by over thirty years.

Moreover I was by no means the only young person in favour of this, Josie Runswick (LGBT+ representative) and the Scottish delegates Martyn Cook and Lauren Gilmour are all under thirty and all voted for a delegates based national conference. I say this to highlight that the caricature of an intergenerational war between the old and the new is precisely that: a caricature bearing little relation to a much more nuanced reality.

Furthermore, I believe that many people who voted for a delegates-based conference would be rather astounded to find themselves described as Trotskyists. I do not deny that there are Trotskyists on National Committee, nor do I deny that Trotskyists supported a delegates-based conference – that is an open position of theirs. What I do object is a characterisation of the 32 delegates who voted for a delegates-based conference as Trotskyists, or at best, gullible fools who’ve been taken in.  Many regional delegates were mandated by the people to whom they are accountable to support a national conference based on this democratic model, following broad and free political discussion within their regions. As thrilling as it might be to fantasise about a sinister plot driven by the shadow emperors of the hard Left against all that it is sensible and moderate in Momentum, the truth is rather more mundane. Jon Lansman and his supporters failed to convince people in local groups of the merits of his e-democracy proposal, and as a result lost the vote.

I do not think that Momentum is doomed to fail on account of the particular details of our internal structures, providing that there is democracy, accountability and grassroots participation embedded into it. I do not think Momentum is doomed to fail the moment Jon Lansman, however much respect I have for him, loses a vote. I do not even think Momentum is doomed to fail if Trotskyists are involved, or even win sometimes, if they make their case openly and convince others of their ideas in the structures available.

The existential threat that Momentum faces is none of these things, it is the propagation of a toxic and polarised political culture based on cliques and personal loyalties as opposed to genuine political discussion on how we can transform labour movement and transform society. It is a political culture in which those opposed to you in the organisation are treated as alien invaders hell-bent on destroying it, even when we’ve worked together to build it up, and we worked together before the Corbyn moment even happened. It is a political culture where members drag others through the mud, using the rhetoric of the Right that’s been used to attack all of us, on social and national media and lend their tacit support to witch hunts that saw thousands of Labour members and supporters barred from voting in the summer. It is ultimately a political culture in which our trust in each other and capacity to work together on is irreparably eroded.

We have a tremendous task facing us: to fight for a socialist alternative in a global context where far right populism is rapidly accruing victories; to fight for the Labour Party to win governmental power; to fight for a world in which working class people have the power to collectively change their lives and change the societies we live in. In short: there is an urgent need to get our act together. This will not be accomplished by sniping about ‘saboteurs’ but by debating the kind of politics we want clearly and openly, and then coming together to campaign from a grassroots level upwards.

Rida Vaquas is Red Labour Representative on Momentum National Committee.