Tax cute in tough times - who really gains?

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1. Tax cuts in tough times – who really gains? Gavin Kelly – Resolution Foundation Matthew Whittaker – Resolution Foundation Tim Montgomerie – The Times Polly…
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  • 1. Tax cuts in tough times – who really gains? Gavin Kelly – Resolution Foundation Matthew Whittaker – Resolution Foundation Tim Montgomerie – The Times Polly Toynbee – The Guardian Stephen Tall – Lib Dem Voice Gary Gibbon – Channel 4 #taxcuts
  • 2. Tax cuts in tough times – who really gains? Gavin Kelly & Matthew Whittaker November 2014
  • 3. Pre-election promises Been here before: • Promises of tax cuts often precede post-election tax rises But also an especially challenging context: • Fall in living standards  politics  tax cuts • Big deficit and fiscal constraint  economics  tax rises
  • 4. Assessing the current debate Some differences, some similarities All parties are pointing to some tax cuts  Different scale  Different sources of funding (with distributional implications)  Shared rhetoric of supporting households on low to middle incomes/ low paid  Shared ‘candour deficit’ about tax rises/implications of fiscal tightening
  • 5. Assessing the current debate Some shared blind spots Focused on tax cuts for low earners?  What about NI (‘forgotten’ tax payers) Focused on disposable income of low to middle income families?  What about Universal Credit Silence on both.....
  • 6. Presenting the alternatives Some important caveats Our starting point? • Even if tightening overall: still case for tax reform • Context means distributional choices matter even more • All proposals must be fully funded Caveats • Raising living standards clearly depend on wider factors • Narrow focus today on personal tax/in-work benefits • If fiscal position deteriorates further then all bets off...
  • 7. Recent – and proposed future – focus on income tax cuts does nothing for 5m lowest paid Each increase in the personal allowance has increased the number of employees who no longer benefit from further movements Notes: Includes removal of marriage tax allowance. Source: RF analysis using IPPR tax benefit model
  • 8. Recent – and proposed future – focus on income tax cuts does nothing for 5m lowest paid By April 2015, gap between employee NI threshold and personal allowance will stand at around £2,500 Notes: Includes removal of marriage tax allowance. Source: RF analysis using IPPR tax benefit model
  • 9. Recent – and proposed future – focus on income tax cuts does nothing for 5m lowest paid By April 2015, gap between employee NI threshold and personal allowance will stand at around £2,500, meaning 1.2m ‘forgotten taxpayers’ will pay NI but not income tax Notes: Includes removal of marriage tax allowance. Source: RF analysis using IPPR tax benefit model
  • 10. Lib Dem approach provides biggest proportional gain in deciles 6-8 in 2020-21 Based on increasing personal allowance to £12.5k in April 2020 and removing marriage tax allowance Notes: Includes removal of marriage tax allowance. Source: RF analysis using IPPR tax benefit model
  • 11. Conservative approach provides biggest proportional gain in deciles 7-9 in 2020-21 Based on increasing personal allowance to £12.5k in April 2020 and raising higher rate threshold to £50k Source: RF analysis using IPPR tax benefit model
  • 12. UKIP approach provides biggest proportional gain in deciles 7-9 in 2020-21 Based on increasing personal allowance to £13.5k in April 2020 (it might be FAR higher) and introducing a 35p tax band that stretches from £47k to £61k by 2020 Notes: We model £13.5k PA in 2020, but UKIP’s proposal could be interpreted as equating to a level closer to £16k by then. 35p band is promised between existing higher rate threshold and £55k, we assume it rises with inflation over the course of the parliament. Source: RF analysis using IPPR tax benefit model
  • 13. Labour approach provides biggest proportional gain in deciles 6-8 in 2020-21 10p band on the first £300 of income above the personal allowance in 2016 (rising with inflation for rest of parliament). Labour say: paid for by removing marriage tax allowance Notes: Includes removal of marriage tax allowance. Source: RF analysis using IPPR tax benefit model
  • 14. Proposals vary hugely in size (and in regressivity) – but all skewed upwards Modelled proposals vary from a cost of £900m to (at least) £13bn, but households in the top half of the income distribution consistently do best Source: RF analysis using IPPR tax benefit model
  • 15. Clear majority of gains go to households in the top half of the distribution Notes: Distribution of gains per £1 spent on the different proposals as modelled in 2020-21. Source: RF analysis using IPPR tax benefit model Based on the distribution of costs across household income deciles
  • 16. Bottom half of households account for no more than a quarter of the cost in all cases Notes: Distribution of gains per £1 spent on the different proposals as modelled in 2020-21. Source: RF analysis using IPPR tax benefit model Of every £1 spent, the bottom 50% account for 25p under the Lib Dems 24p under Labour 19p under UKIP 18p under the Conservatives
  • 17. Top fifth of households account for between one-third and one-half Notes: Distribution of gains per £1 spent on the different proposals as modelled in 2020-21. Source: RF analysis using IPPR tax benefit model Of every £1 spent, the top 20% account for 31p under the Lib Dems 34p under Labour 43p under UKIP 46p under the Conservatives
  • 18. Focusing support on work allowances under UC is more targeted Based on a 20% increase in ‘lower’ work allowances and corresponding cash increases in ‘higher’ work allowances Source: RF analysis using IPPR tax benefit model
  • 19. Combined – and funded – package provides more progressive outcome Based on a 20% increase in work allowances and realignment of NI threshold and PA Paid for via 3- year freeze in PA; 2-year freeze in basic rate limit; extension of NI to workers over the state pension age Source: RF analysis using IPPR tax benefit model
  • 20. Produces an outcome that pays for itself and focuses on the bottom half Notes: Distribution of gains per £1 spent on the different proposals as modelled in 2020-21. Deciles 8-10 do not appear in the RF distribution because these households are net contributors. Source: RF analysis using IPPR tax benefit model
  • 21. Produces an outcome that pays for itself and focuses on the bottom half Notes: Distribution of gains per £1 spent on the different proposals as modelled in 2020-21. Deciles 8-10 do not appear in the RF distribution because these households are net contributors. Source: RF analysis using IPPR tax benefit model 82 per cent of the gains from the RF package flow to households in the bottom half of the distribution
  • 22. Very different set of outcomes from the party approaches • Unlike party promises, benefits enjoyed by low to middle income households, working-age, families with children and those earning less than £10.5k
  • 23. Very different set of outcomes from the party approaches • Unlike party promises, benefits enjoyed by low to middle income households, working-age, families with children and those earning less than £10.5k • Other benefits include: – Reduced effective tax rates for some lower earners – Major simplification of tax system – Pre-requisite for integration of NI with income tax
  • 24. Other packages could be pursued – but the principle of prioritising UC remains • Parties’ focus on income tax cuts are hard to justify during fiscally tough times • They all miss the purported target. No rationale for benefiting those above £10.5k while ignoring those on £8k • UC work allowances provide more targeted support • As part of a majoritarian package that prioritises work allowances, raising the NI threshold is clearly better than raising the personal allowance and simplifies tax system
  • 25. Tax cuts in tough times – who really gains? Gavin Kelly – Resolution Foundation Matthew Whittaker – Resolution Foundation Tim Montgomerie – The Times Polly Toynbee – The Guardian Stephen Tall – Lib Dem Voice Gary Gibbon – Channel 4 #taxcuts
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