So the Lib Dems have caved on Trident, immigration, the euro and voting reform. Quite a list. True, you can’t have power without compromise, but too much compromise starts to look a lot like powerlessness. At least they’ve won a concession from the Tories on income tax: according to the BBC, in their summary of the coalition’s policies, there will be a ‘substantial rise in income tax allowances for lowest paid from April 2011’.
Hang on a minute, though. Can it be that the public broadcaster has fallen for the new government’s spin? Because, as it happens, raising the personal income tax allowance won’t benefit the very lowest paid:they already don’t earn enough to meet the current threshold. And since the change will apply to everyone who earns under £100,000 (as of April this year, people who earn six figures or more no longer get the personal allowance, though I wonder if that will be quietly reversed), only a fraction of the tax relief will go to the not-quite-lowest paid who earn a bit, but not much, more than the current threshold of £6475. Before the election, Tim Horton of the Fabian Society and Howard Reed of Landman Economics put the case against the Lib Dem policy of raising the threshold to £10,000 in a paper for the (Labour-supporting, but still) blog Left Foot Forward (‘evidence-based political blogging’). Here are some of their conclusions:
the measure would do nothing to help the very poorest, who don’t have income large enough to pay tax. Three million households in the poorest quarter of the population – some of those who most need help – would see no gain from the policy
Of the £17 billion total cost, only around £1 billion (6% of the total) actually goes on the stated aim of lifting low-income households out of tax. The remaining £16 billion (94% of the total) goes towards cutting taxes for middle- and higher-income households
households in the middle of the income distribution see larger proportionate gains in their household income than those at the bottom, increasing socially damaging inequalities between the bottom and middle (including relative poverty)
And that’s all not only before you take into account the effect of cutting public services, but also assuming that the threshold at which people start paying higher-rate tax doesn’t get automatically pushed up too, as it seems it will under Cleggeron and the Liberal Conocrats’ plans. Here’s a graph from Horton and Reed’s paper showing how the benefits of the original Lib Dem policy would have been distributed, alongside the impact of the new Torified version (click to enlarge):
According to Left Foot Forward, the Tory leadership rejected the idea in 2005 for being too unfair. I wonder how many Lib Dem voters were hoping to install a deputy prime minister with a fiscal policy somewhere to the right of Michael Howard.