Slippery Taxes and Regressive Outcomes

 

In his resignation letter Iain Duncan Smith reminded the nation that Conservative Party policy may not always be designed to benefit the entire nation. For the Conservative Party to be successful in the business of politics it merely has to implement a set of policies that appeal to the Conservative Party’s core support groups.

The rest of the nation should take heed of this pithy revelation by a senior cabinet minister. The tendency for this government to let the rich off the hook when it comes to taxation might well be related to the fact that Conservative Party donors and the core constituency of Conservative voters tend to come from the highest income and wealth cohorts in society.

Government policy rarely succeeds in restricting tax loopholes, though the government frequently makes a token gesture in this direction. If the government is, in fact, in favour of inequality, then one might suppose it is not actually trying very hard to make the tax system more progressive. The chancellor has come up with a ruse to underplay the distributional impact of his economic strategy.

Analysis shows that the impact of the Chancellor’s welfare and tax changes in the most recent budget, even after the withdrawal of the controversial changes to PIP payments for the disabled, strongly favours upper income groups, and hits hardest the lowest income groups. The chancellor says this is ‘tough love’, his way of helping people who need it most. By making poverty nastier you give people a bigger incentive to get out of it, or so the story goes.

The tax system is only as progressive as its implementation allows. There are many ways in which those with high incomes and wealth can avoid and evade tax, because of this the effective rate of income tax is not as progressive even as the letter of the law suggests. For example, if, in practice, many who would pay the highest rate of income tax can shift flows away from income tax and into corporation tax they end up paying a lower marginal rate of tax than those on lower incomes.

This tendency to protect the most well off in society rather than the least well off is presented as an ideology which expounds the benefit of incentives to the entire economy. This ideology (best summarised as a firm belief in the ‘trickle down effect’) gained a strong foothold in Britain in the last century. However, in the twenty-first century Reaganomics, Thatcherite economics and New Labour economics is seen by many as quaintly old-fashioned; a discredited ideology. Nonetheless, those who are best served by it continue to promote it.

In his statement to the Treasury Committee this month the chancellor revealed that the government has ended its practice of publishing income and wealth distribution data alongside its budget statement. Instead the treasury now releases data on the absolute amount of government payments, and the absolute amount of total tax paid by different socio-economic cohorts in society. This is, clearly, a very different thing from the distribution of income and wealth.

The Committee expressed some outrage that the chancellor has chosen to withdraw the publication of distribution data. It makes it much harder to hold the government to account on the distributional consequences of public policy. It would appear that this is precisely the chancellor’s intention.

The chancellor is determined to avoid making his performance on absolute and relative poverty a key issue in the coming years. Osborne and Cameron have been keen to argue that the best way to help those who are least well off is to force them out of their ‘surplus bedrooms’ and get them into menial, low paid, insecure jobs. ‘More people working’ is a constant mantra, but the poor terms and conditions of employment in this stalling economic recovery are underplayed.

The nation is well aware that food banks are opening, rough sleeping is on the increase, and homes, whether to buy or rent, are increasingly unaffordable to those on average or even on significantly above average incomes. Conditions of squalor, overcrowding, mental illness and malnutrition are all on the increase.

The Chancellor argues that his policy is one of ‘tough love’, that it is his way of helping the least well off to withdraw benefits and boot them out into the workplace, yet he seeks to sideline the data that would reveal the effects that his policy actually has on ordinary people across the nation. It might cause concern that it is not in fact the poor that are helped in this way, but rather the Conservative Party’s core constituency. ‘Tough love’ might turn out to be nothing more than a convenient pretext.

 

 

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