The Tory right is, yet again, showing its ignorance of the income distribution and tax system. The Speccie’s leader says:
Mr Cameron has been criticised for telling Mr Marr that he would remove tax credits for households which earn more than £50,000 a year. This…would hit 130,000 families immediately and unsettle many more. It is a proposal that would undoubtedly hurt Middle Britain.
Considered in isolation, this would indeed be an objectionable and vindictive proposal.
Considered in isolation, this would indeed be an objectionable and vindictive proposal.
The first flaw here is an albeit mild version of the middle England/Britain error - the notion that the well-off are just ordinary folk. In truth, a two parent household with two children and earnings of £50,000 a year is better off than almost two-thirds of the population. It has disposable income, before tax credits, of over £650 a week, whereas median incomes are £601 a week for two-children households (table 2.3 pf this pdf).
The second flaw is that the sums involved are small. Such a household gets £10.50 a week in child tax credits - the working tax credit is exhausted after weekly earnings hit £340 (table 1.6d of this big pdf). But this is only around 1.6% of after-tax income. The loss of such a sum might sting a little - but it is surely over-sensitive to call such a move “vindictive.”
This is not to say it’s wrong to oppose Cameron’s proposal. There is a reasonable objection to it - namely, that stopping families on £50,000 getting tax credits requires a rise in effective marginal tax rates.
If you imposed an abrupt cut-off at £50,000, you would impose a marginal tax rate of over 100% at around that income level. If you withdrew tax credits more smoothly, you’d impose even higher withdrawal rates upon families earning less than £50k - and these already face deduction rates of over 75% if they earn less than £720 a week.
To fulfil his promise, then, Cameron must either hurt people on incomes less than £50,000 - which acquits the Speccie of my charge of committing the middle England error - or impose even greater disincentives to work, or even further complicate the tax credit system, or some mix of all three.
However, the Speccie ignores this difficulty in favour of blather. Which is, I fear, yet more evidence that that the Tory right is entirely ignorant of issues of income distribution and the tax credit system.
The second flaw is that the sums involved are small. Such a household gets £10.50 a week in child tax credits - the working tax credit is exhausted after weekly earnings hit £340 (table 1.6d of this big pdf). But this is only around 1.6% of after-tax income. The loss of such a sum might sting a little - but it is surely over-sensitive to call such a move “vindictive.”
This is not to say it’s wrong to oppose Cameron’s proposal. There is a reasonable objection to it - namely, that stopping families on £50,000 getting tax credits requires a rise in effective marginal tax rates.
If you imposed an abrupt cut-off at £50,000, you would impose a marginal tax rate of over 100% at around that income level. If you withdrew tax credits more smoothly, you’d impose even higher withdrawal rates upon families earning less than £50k - and these already face deduction rates of over 75% if they earn less than £720 a week.
To fulfil his promise, then, Cameron must either hurt people on incomes less than £50,000 - which acquits the Speccie of my charge of committing the middle England error - or impose even greater disincentives to work, or even further complicate the tax credit system, or some mix of all three.
However, the Speccie ignores this difficulty in favour of blather. Which is, I fear, yet more evidence that that the Tory right is entirely ignorant of issues of income distribution and the tax credit system.
In any such debate, what is being discussed is if A if is fairer than B. With each side saying their proposal is fairer. Each side has a very different idea of what "fair" is, meaning that the debate is confused and each side cannot understand the other. What an electorate needs to hear are what each party's idea of fairness is, rather than trying to figure it out from the debates that stand as proxies for this argument.
Posted by: marksany | August 02, 2009 at 12:25 PM
This is not to say it’s wrong to oppose Cameron’s proposal. There is a reasonable objection to it - namely, that stopping families on £50,000 getting tax credits requires a rise in effective marginal tax rates...great lens, very interesting article...will credit this..
http://scoremorecredit.com/forum - get your credit questions answered.
Posted by: Scoremore | September 24, 2010 at 02:21 PM