All in this together?

I don’t propose to blog in detail today on George Osborne’s budget and its likely effects. There’ll be plenty of analysis and discussion going on elsewhere over the next few days.

But while all the discussion is going on, here’s a chart to keep in mind, from p.67 of the Red Book (PDF), showing the percentage impact on net income for different levels of income:

You’ll notice two things. First, those at the very bottom are hit harder than almost anyone else. Only the top two deciles – who can well afford it – suffer a bigger impact.

Second, even the Treasury is acknowledging that the VAT rise is deeply regressive. VAT makes up the bulk of the “indirect tax” impact shown in the chart, and the impact of such rises is -1.5% for those at the bottom of the income range and less than 1% for those at the top. And for those in the bottom deciles, 1.5% or 1.25% is a significant amount of money.

Talk of “lifting 880,000 people out of income tax” by raising personal allowances sounds good, and may mollify the consciences of some Lib Dem supporters, but in reality the benefits of this are far outweighed by the impact of the VAT rise.

In short, the Budget is as many predicted: a re-run of this celebrated Labour election poster from the 1930s:

The only differences are that the guy at the top is arguably being asked to step down two rungs – and the guy at the bottom to step down one and a half.

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9 thoughts on “All in this together?”

  1. The Vat thing is an interesting one. The IFS notes [1] that if one looks at the effects of Vat in terms of consumption deciles rather than income deciles, then it comes out as somewhat progressive as against slightly regressive. They argue that, because people save out of current income to insure against a future loss of income, it could potentially be more proper to consider the distributional impact of a consumption tax in terms of the consumption distribution. Otherwise, the out-of-work company director (for example) ends up in too low a bracket, and other similarly curious outcomes.

    I don’t entirely know what to make of the argument, and they clearly don’t either: it’s put forward very tentatively. Nevertheless, they have a point: it is not immediately obvious that it is better to consider the distributional impact on purchasing power rather than on purchasing per se.

    [1] http://www.ifs.org.uk/budgets/gb2010/10chap7.pdf (p. 146)

  2. They argue that, because people save out of current income to insure against a future loss of income

    Wow, that’s news to me, I’m supposed to be saving out of my current income? Where’s this extra money coming from to go into this thing you call “savings” then?

    Have to confess, I don’t understand this income tax threshold. Does it mean that everyone on less than seven grand a year won’t pay any tax but everyone over pays the same tax as before? *confused* Or does it mean that people on a low income which I think I count as (about ten grand before tax) all pay slightly less tax than before until you get to seven grand or so when you pay no tax?

    Also confused about housing benefit. Are we all going to get less, or is it that there’s a cap on it (so I suppose that means anyone on a low income will be moving out of the posh parts of places like London and the like… ooh, isn’t that an interesting coincidental side-effect, getting rid of the “chavs” from the “nice areas”…..)?

  3. Seems to me it’s a simple matter of mathematics. If things there are anything like things here, then the bulk of federal/national spending is directed at lower incomes, therefore any meaningful reduction (or even growth reduction) of spending will “hit” lower incomes harder. Likewise, when a taxation regime is already steeply progressive, as both Britain’s and America’s are, the only way to raise any meaningful amount of revenue is to tax those people who are taxed at a very low or zero rate. The demand that, in an already steeply progressive system, any spending cut or tax hike only make the system more progressive (and, during the good times, it’s not as though this demand is reversed–you’ll just bring out the same “social justice” reasoning for why a spending hike or tax cut must *also* make the system more progressive) just doesn’t work out in the arithmetic, as there simply aren’t enough at the top making enough money for your social welfare state to come entirely out of their pockets, even under ceteris paribus assumptions (i.e. ignoring the fact that the more the state punishes being wealthy with steeper taxation, the less inclined people will be to become wealthy).

  4. Josh: ah, but is the UK taxation system as “steeply progressive” as you suggest? I don’t have the exact figures to hand, but my understanding is that – once all taxes (direct and indirect, local and national) are taken into account – the bottom twenty-percentile in the UK pay a higher proportion of their income in tax than the top twenty-percentile.

    So never mind “steeply progressive”: “not regressive” would be an advance on the current position.

    1. To be honest, I don’t know. We don’t have a VAT here, so it’s relatively easy to compute where the lion’s share of federal revenue comes from. And at least your income tax is steeply progressive, with the top rate being 50% (and you wonder why your wealthiest people move to the USA).

  5. Ruth: I don’t think the IFS’ assumption is totally invalid. I’m not willing to personalise the issue, because a question like that is highly dependent on situational factors, but I don’t think it will wash to provide your own situation, whatever that may be, as a counter-example, just as it would not wash for me to provide my own situation as a corroborative. Most people, and you must accept that you are not ‘most people’, are in a position to save at least some money if they put their minds to it.

    On the tax point, it is fairly simple. Everyone who earns between £6,475 and £7,475 used to pay tax and no longer will. Everyone who earns more than that will pay £200 less in tax, and if I recall correctly, Osborne said that he would be clawing that £200 back from higher-rate taxpayers somehow.

    1. Phil: I think it’s pretty safe to say that most people in the bottom one or two deciles (certainly those with dependents) are going to struggle to save significant amounts of money – let alone enough to represent a realistic cushion against future losses of income. After all, many people in that position are dependent on benefits to make ends meet: and if they were able to save then that would prove “we’re” paying “them” too much in benefit, wouldn’t it? Catch-22.

      As for personal allowances: yes, I gather that the higher-rate threshold is going to be lowered in order to ensure that higher-rate taxpayers don’t benefit from the change.

  6. Most people, and you must accept that you are not ‘most people’

    Yes, you’re right, I’m not “most people”, in fact, I’m a whole lot better off than a lot of people I know because I do at least have a job (not sure for how much longer, it’s a bit of a public sector non-job, y’know?)… and what John said – if people could save, it would be proof they were getting too much money from the government wouldn’t it? :/

    Thanks for the tax explanation. I just hope that now people aren’t told “well, you’re getting more back in tax, so you won’t need your tax credits then will you”. I know it’s being stopped for people on a high salary but I’m worried that it won’t stop there and eventually they’ll seek to get rid of it all together. But I’m a bit paranoid about that.

  7. John and Ruth: Of course I recognise that not everyone in the bottom deciles is able to save. At the risk of repeating myself, it is highly situation dependent, and children are precisely one of the factors I had in mind. It would be utterly fatuous of me to think anything else, and while I may on occasion be fatuous, I don’t think I am utterly so.

    But the IFS, and by extension I, wasn’t talking exclusively about the bottom quintile. The reason is simple: the bottom quintile are not, by definition, most people. We (yes, I’m squarely in the bottom quintile, have been for four years) are only twenty percent, and the worst-off twenty percent at that. Even if most people one knows are worse off, one does not know most people.

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