Are Lib Dem tax plans fairer?
Updated on 18 September 2006
Menzies Campbell says the Lib Dem tax package is redistributive, simple and green. Could he be right?
The Claim
"We've got a package which is much more redistributive than the 50p could ever have been."
Menzies Campbell, Sunday AM, BBC1, Sunday 17 September 2006
Background
Menzies Campbell faces his biggest challenge as Liberal Democrat leader this week as his party votes on whether to back his new tax proposals.
In the face of mounting opposition from party insiders he plans to ditch a commitment to a 50p top rate on income in favour of tax policies which he says are more redistributive, simple and green.
Some of the party faithful, including Evan Harris, say that maintaining the 50p top rate is fairer.
Analysis
The key elements in Campbell's redistributive tax package are: the abolition of the existing 10p starting rate of income tax, a rise in the starting threshold for the upper 40 per cent tax rate, and a cut in the basic rate of national income tax by two pence.
Abolishing the lowest level of tax will mean that those earning less that £7185 will pay no tax at all - releasing two million from paying income tax, according to Campbell.
Cutting the basic rate of income tax from by two pence to 20p in the pound will, he says, help low and middle income earners, while raising the starting threshold for the upper 40 per cent tax rate will relieve 1.3 million people from paying the higher rate.
On top of this Lib Dem plans to replace Council Tax with a Local Income Tax will benefit the bottom and middle incomes most.
Money bags
As for the rich, they will be hit harder under the new measures, which include higher levies on Capital Gains tax and restrictions on tax relief on pensions.
These measures will, the Lib Dems say "net approximately three times as much money from this group than the 50p rate" and, crucially, hit wealth as well as income.
According to their own calculations the changes in Capital Gains tax and pensions will allow a Liberal Democrat government to net over £10.5bn from the highest earners.
The Institute for Fiscal Studies disputes some of the Lib Dems new calculations, but estimates that the party's previous (slightly different) proposals to put a 50p tax on top incomes would net just £5.5bn a year
The grass is always greener...
On top of this the Lib Dems plan to introduce a number of environmental taxes - on gas-guzzling cars and air travel - which will push the total tax income from new measures to £20bn a year, while cutting the tax bill of the poorest by £18.7bn.
All these plans will, they say, redistribute wealth in the UK. Currently the bottom 20 per cent pay a higher percentage of their income to tax - 36.4 per cent according to the Liberal Democrats tax policy document - than the rich, who pay 35.6 per cent.
But Stewart Adam, senior research economist at the IFS, says that the Lib Dem's assertion that the bottom fifth of the population is currently paying more tax than the top fifth does not tell the whole story.
"That statement is technically correct but highly misleading," he says. "If you include tax credits and benefits the opposite is true, but it's better for them to push the scandal story that the rich are better off."
The Lib Dems not only leave out benefits and tax credits from their calculations but base their analysis on the claim that the poorest pay disproportionately more in terms of tax expenditure than the richest: an assertion that Adam says is not clear.
Robin Hood
Will the new tax plans redistribute wealth more evenly?
Campbell's new tax package will take more from the 'rich' - in a loosely defined sense - than the 50p top rate. But the plans are focused on those with high levels of wealth rather than income, leaving the richest earners in the same position as under the previous proposals.
"Those earning the highest 10 per cent will be fairly similarly affected under the new plans," says Adam. "Those earning £40,000 or with high levels of wealth and assets will be hit a lot harder."
So, the new plans raise more money from the rich overall than under the 50p top rate package, but do they give more back to the poor?
On average those earning the lowest 10th of income would gain slightly under the new proposals, following changes to income tax and local tax plans, but those at the very bottom - who pay no tax - would see very little change.
And new plans for 'green' taxes are likely to hit the poorest hard.
"As a share of income, low income people lose a larger proportion of their income in environmental taxes than those on higher income," says Adam.
Middle income earners would be best off under the new proposals, their salaries boosted by the income tax cuts and benefiting from the introduction of new local income tax.
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Verdict
The redistributive benefits of the Liberal Democrat's tax proposals are difficult to measure.
Campbell's new proposals would, on average, take more from the richest but the money would be redistributed towards those on middle incomes rather than the very poorest, who would be worse off, hit hardest by new 'green' taxes.
Sources
Menzies Campbell on Sunday AM, 17 September 2006
Liberal Democrats tax policy
Institute of Fiscal Studies
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