Here's a lovely coincidence. On the same day that the Labour Left was unable to put up a challenge to Gordon Brown, National Statistics showed why Old Left policies are unworkable.
Table 16 of this pdf gives the gory details. It shows that the poorest 10% paid a higher proportion of their incomes in tax than the richest 10% - 44.1% versus 35%. This is because indirect taxes (including green taxes) bear more heavily upon them.
The tax system, then, is not progressive. Direct taxes slightly reduce inequality, but indirect taxes undo this; see table 2 of the same pdf.
These figures raise a challenge for the traditional Left: how can we combine big government with income redistribution?
One possibility would be to reduce indirect taxes and raise income taxes. But this wasn't part of John McDonnell's campaign (pdf). And it would tend to reduce work incentives.
The second possibility is to raise taxes on the rich. However, even a 50% rise in the amount of tax they pay would raise only around 2% of GDP. Even if this is feasible, it's hardly enough to finance traditional Leftist goals of increased health spending and redistribution to the poor.
My view here, as you know, is for the Left to ditch big government. Redistribution requires cuts in state spending. Is it too much to hope that yesterday's debacle will be the cluebat that beats the message into the Labour left, that it's time for new thinking?
"Redistribution requires cuts in state spending": very likely. Apart from the self-interest of those who suck at the public teat, that presumably means that people of all political persuasions should be able to agree to cut state spending. How much agreement might there be on what to cut?
Posted by: dearieme | May 18, 2007 at 12:46 PM
Would a basic income help?
Posted by: sanbikinoraion | May 18, 2007 at 12:55 PM
"Redistribution requires cuts in state spending"
Brilliant. It jumbles up two unrelated topics, but brilliant nonetheless. How many decades do you think it will take you to persuade "The Left" to adopt this as a mantra?
Posted by: Mark Wadsworth | May 18, 2007 at 01:07 PM
I never understand this argument when you make it, as it seems weird to focus on the taxes, and not the spending that those taxes pay for.
If you do that, then the combined impact of the tax and benefit system is to raise income for the poorest 10% from £3,182 to £11,876, which is more than a three-fold increase. It raises the income share of the bottom 20% from 3% to 7%, and the next 20% from 7% to 12%.
Posted by: Matthew | May 18, 2007 at 02:38 PM
For the poorest 10% the income increases from £4,250 before tax and benefits to £5,268 after. The Government's claims of redistribution look rather thin when of the £5,167 given in cash benefits 80% of it is taken back in direct and indirect taxes.
This suggests a need to look at the way redistribution takes place if there is a real desire to decrease inequality.
Posted by: Edd | May 18, 2007 at 02:59 PM
Matthew - there's no doubt that benefits raise equality. But that's a separate fact from the question: how can we gather taxes to finance those benefits? All I'm saying is that the tax system, in itself, isn't egalitarian - a fact which the left, I'd have thought, would lament.
Posted by: chris | May 18, 2007 at 03:10 PM
But Chris, you're saying it means old labour policies are 'unworkable', by posing the question:
These figures raise a challenge for the traditional Left: how can we combine big government with income redistribution?
But of course the impact of the tax and benefit system is going to look bad if you only focus on taxes. Your question has a simple answer - with redistributive spending - and that is what happens.
The tax system clearly could be improved, but I'd say you're always going to have tobacco and alcohol taxes, and probably some kind of sales tax on other goods (which countries don't have them?). Thus for people who spend more than they earn, it's going to be a high proportion of their income. If the direct tax system mitigates this, and they receive more in cash benefits than they pay on excise duties and VAT then it doesn't seem to me too much of a crisis.
Posted by: Matthew | May 18, 2007 at 03:58 PM
You're assuming fiscal sanity. Focus groups reliably inform me we should cut taxes across the board, and ramp up redistributive spending, an option you ignore.
Posted by: cerebus | May 18, 2007 at 04:26 PM
[Matthew - there's no doubt that benefits raise equality. But that's a separate fact from the question: how can we gather taxes to finance those benefits? ]
But this is surely a non-problem? We are paying those benefits right now, so we're financing them out of the tax system as it is currently designed. Matthew is surely right here; if we rolled up all the cash benefits together and called them a tax credit then we could put the entire progressivity of the tax-and-benefit system into the tax system and this would have answered your question.
Posted by: dsquared | May 18, 2007 at 05:25 PM
Actually yes - looking at that table, if I abolished housing benefit and replaced it with "housing tax credit" I could wipe out the direct taxation of the lowest quintile entirely.
Posted by: dsquared | May 18, 2007 at 05:29 PM
so, is it just a matter of accounting convention, and you could reclassify parts of the current system (replacing benefits with tax credits), to make the tax system look more redistributive, but essentially leave things unchanged - or is there something more substantive going on? I'm confused.
Posted by: Luis Enrique | May 20, 2007 at 10:06 AM
What Matthew said. But if really do want to increase the progressivity of the tax system, I'm surprised you didn't mention council tax. Income taxes for the poor are very low and indirect taxes difficult to tweak, but turning council tax into a proper property tax by levying it at a flat % of (regularly revalued / indexed) property value and increasing council tax benefit (or even abolishing the tax for social rented homes) would make a very big difference to overall progressivity.
Posted by: Jim | May 20, 2007 at 11:02 AM
Jim, if you happen to read this again - are comments on your blog buggered? I can never leave one, I just get an error (I would have emailed you, but couldn't see an address either).
Posted by: Luis Enrique | May 20, 2007 at 01:17 PM
Oh god, so they are. That might explain why I haven't had one in months. Thanks Luis!
(Er, you can probably delete these comments, Chris.)
Posted by: Jim | May 20, 2007 at 05:15 PM
Abolishing council tax for social rented homes doesn't seem like a top-notch plan: the poorest of all are people renting from private landlords because they're on social housing wait-lists...
Posted by: john b | May 21, 2007 at 01:00 PM
'One possibility would be to reduce indirect taxes and raise income taxes. But this wasn't part of John McDonnell's campaign (pdf). And it would tend to reduce work incentives.'
Why would they be reduced?
Posted by: james C | June 23, 2007 at 10:03 AM