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.

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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.