Resolution Foundation's Tax cute in tough times - who really gains? event with slides by Matthew Whittaker

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