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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David Osland: “Corbyn is actually Labour’s only chance”

The veteran Labour activist on the release of his new pamphlet, How to Select or Reselect Your MP, which lays out the current Labour party rules for reselecting an MP.

Veteran left-wing Labour activist David Osland, a member of the national committee of the Labour Representation Committee and a former news editor of left magazine Tribune, has written a pamphlet intended for Labour members, explaining how the process of selecting Labour MPs works.

Published by Spokesman Books next week (advance copies are available at Nottingham’s Five Leaves bookshop), the short guide, entitled “How to Select or Reselect Your MP”, is entertaining and well-written, and its introduction, which goes into reasoning for selecting a new MP and some strategy, as well as its historical appendix, make it interesting reading even for those who are not members of the Labour party. Although I am a constituency Labour party secretary (writing here in an expressly personal capacity), I am still learning the Party’s complex rulebook; I passed this new guide to a local rules-boffin member, who is an avowed Owen Smith supporter, to evaluate whether its description of procedures is accurate. “It’s actually quite a useful pamphlet,” he said, although he had a few minor quibbles.

Osland, who calls himself a “strong, but not uncritical” Corbyn supporter, carefully admonishes readers not to embark on a campaign of mass deselections, but to get involved and active in their local branches, and to think carefully about Labour’s election fortunes; safe seats might be better candidates for a reselection campaign than Labour marginals. After a weak performance by Owen Smith in last night’s Glasgow debate and a call for Jeremy Corbyn to toughen up against opponents by ex Norwich MP Ian Gibson, an old ally, this pamphlet – named after a 1981 work by ex-Tribune editor Chris Mullin, who would later go on to be a junior minister under Blai – seems incredibly timely.

I spoke to Osland on the telephone yesterday.

Why did you decide to put this pamphlet together now?

I think it’s certainly an idea that’s circulating in the Labour left, after the experience with Corbyn as leader, and the reaction of the right. It’s a debate that people have hinted at; people like Rhea Wolfson have said that we need to be having a conversation about it, and I’d like to kickstart that conversation here.

For me personally it’s been a lifelong fascination – I was politically formed in the early Eighties, when mandatory reselection was Bennite orthodoxy and I’ve never personally altered my belief in that. I accept that the situation has changed, so what the Labour left is calling for at the moment, so I see this as a sensible contribution to the debate.

I wonder why selection and reselection are such an important focus? One could ask, isn’t it better to meet with sitting MPs and see if one can persuade them?

I’m not calling for the “deselect this person, deselect that person” rhetoric that you sometimes see on Twitter; you shouldn’t deselect an MP purely because they disagree with Corbyn, in a fair-minded way, but it’s fair to ask what are guys who are found to be be beating their wives or crossing picket lines doing sitting as our MPs? Where Labour MPs publicly have threatened to leave the party, as some have been doing, perhaps they don’t value their Labour involvement.

So to you it’s very much not a broad tool, but a tool to be used a specific way, such as when an MP has engaged in misconduct?

I think you do have to take it case by case. It would be silly to deselect the lot, as some people argue.

In terms of bringing the party to the left, or reforming party democracy, what role do you think reselection plays?

It’s a basic matter of accountability, isn’t it? People are standing as Labour candidates – they should have the confidence and backing of their constituency parties.

Do you think what it means to be a Labour member has changed since Corbyn?

Of course the Labour party has changed in the past year, as anyone who was around in the Blair, Brown, Miliband era will tell you. It’s a completely transformed party.

Will there be a strong reaction to the release of this pamphlet from Corbyn’s opponents?

Because the main aim is to set out the rules as they stand, I don’t see how there can be – if you want to use the rules, this is how to go about it. I explicitly spelled out that it’s a level playing field – if your Corbyn supporting MP doesn’t meet the expectations of the constituency party, then she or he is just as subject to a challenge.

What do you think of the new spate of suspensions and exclusions of some people who have just joined the party, and of other people, including Ronnie Draper, the General Secretary of the Bakers’ Union, who have been around for many years?

It’s clear that the Labour party machinery is playing hardball in this election, right from the start, with the freeze date and in the way they set up the registered supporters scheme, with the £25 buy in – they’re doing everything they can to influence this election unfairly. Whether they will succeed is an open question – they will if they can get away with it.

I’ve been seeing comments on social media from people who seem quite disheartened on the Corbyn side, who feel that there’s a chance that Smith might win through a war of attrition.

Looks like a Corbyn win to me, but the gerrymandering is so extensive that a Smith win isn’t ruled out.

You’ve been in the party for quite a few years, do you think there are echoes of past events, like the push for Bennite candidates and the takeover from Foot by Kinnock?

I was around last time – it was dirty and nasty at times. Despite the narrative being put out by the Labour right that it was all about Militant bully boys and intimidation by the left, my experience as a young Bennite in Tower Hamlets Labour Party, a very old traditional right wing Labour party, the intimidation was going the other way. It was an ugly time – physical threats, people shaping up to each other at meetings. It was nasty. Its nasty in a different way now, in a social media way. Can you compare the two? Some foul things happened in that time – perhaps worse in terms of physical intimidation – but you didn’t have the social media.

There are people who say the Labour Party is poised for a split – here in Plymouth (where we don’t have a Labour MP), I’m seeing comments from both sides that emphasise that after this leadership election we need to unite to fight the Tories. What do you think will happen?

I really hope a split can be avoided, but we’re a long way down the road towards a split. The sheer extent of the bad blood – the fact that the right have been openly talking about it – a number of newspaper articles about them lining up backing from wealthy donors, operating separately as a parliamentary group, then they pretend that butter wouldn’t melt in their mouths, and that they’re not talking about a split. Of course they are. Can we stop the kamikazes from doing what they’re plotting to do? I don’t know, I hope so.

How would we stop them?

We can’t, can we? If they have the financial backing, if they lose this leadership contest, there’s no doubt that some will try. I’m old enough to remember the launch of the SDP, let’s not rule it out happening again.

We’ve talked mostly about the membership. But is Corbynism a strategy to win elections?

With the new electoral registration rules already introduced, the coming boundary changes, and the loss of Scotland thanks to decades of New Labour neglect, it will be uphill struggle for Labour to win in 2020 or whenever the next election is, under any leadership.

I still think Corbyn is Labour’s best chance. Any form of continuity leadership from the past would see the Midlands and north fall to Ukip in the same way Scotland fell to the SNP. Corbyn is actually Labour’s only chance.

Margaret Corvid is a writer, activist and professional dominatrix living in the south west.