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FactCheck: are Clegg's tax plans really more redistributive than last time?

By Channel 4 News

Updated on 17 September 2008

Have the Liberal Democrats hatched the most redistributive tax plans they've ever proposed? FactCheck investigates.

The claim

"This is the most redistributive tax plan we've ever proposed - more than twice as redistributive, in fact, than the proposal for a top 50p income tax rate we campaigned on in the 2005 general election."
Nick Clegg, writing in The Independent, 12 September 2008

The background

Not so long ago, the Lib Dems were firmly seen as a tax and spend party, and at the last election, called for a 50p top rate of tax for those earning more than £100,000 a year.

But under Nick Clegg's leadership - and the turbulent times of the post-credit crunch economy - the party has come out in favour of tax cuts.

On Monday it voted at the annual Lib Dem conference to adopt a proposal paper, Make it Happen, which paves the way to "delivering big tax cuts for those who are struggling".

The idea of tax-cutting is hard for many Lib Dems to stomach, with speakers at the conference debate expressing concern it would open the door for future Tory public spending slashing.

The proposals are made trickier to sell by a complicated a mixture of several different tax and spending packages.

The newest - and least defined and most controversial - plan involves £20bn cuts in public spending on things such as the ID card scheme and child trust funds, most of which would be redistributed to spending in other areas such as education and social care.

Any left over would go on tax cuts, but the specifics of both the tax and spending cuts aren't yet set in stone.

This tax switcheroo, set out in a paper called Reducing the Burden, adds up to around £20bn and was approved at conference last year.

The party also has existing plans to replace council tax with a local income tax: another £20bn change.

The other cornerstone of Lib Dem tax policy involves cutting 4p from the basic rate of income tax, paid for by a mixture of green taxes, scrapping of higher rate pension relief and taxing capital gains at the same rate as income.

This tax switcheroo, set out in a paper called Reducing the Burden, adds up to around £20bn and was approved at conference last year.

Clegg, keen to reassert the party's Robin Hood reputation, singled out this final package and claimed at the weekend that the party's tax plans were the most redistributive to date.

In addition to making the claim in The Independent, he told Andrew Marr on Sunday morning that the £12bn the party planned to raise from the combination of pension relief and capital gains tax changes made the plans twice as redistributive and as the party's totemic former plan to increase income tax on those earning over £100,000 a year.

Only a year ago, then leader Menzies Campbell was claiming the plans would leave 90 per cent of households better off - something FactCheck found wanting. Has Clegg got things right this time round?

The analysis

The 2005 election pledge to increase income tax on those earning more than £100,000 was worth £5.6bn.

Whether it would have raised this amount it another matter; the Institute for Fiscal Studies points out that the Lib Dems had not taken into account revenue that may be lost if top earners took moves to reduce their tax liability in the face of the tax increase.

Still, in theory, this does make the proposed £12bn worth of tax raises from the two elements of the package which Clegg singled out on the Andrew Marr show - taxing capital gains at the same rate as income, and the abolition of tax relief on higher rate pension contributions - worth twice as much as the 50p pledge alone.

But who would the new changes benefit, and who would they leave worse off?

Abolishing pension relief for higher-rate taxpayers would affect those in the higher earnings bracket, but it's a far wider bracket than the £100,000 plus earners targeted by the 50p tax rate.

It's not clear whether this scheme would work, either. There's a question mark over the contributions employers make to defined benefit schemes.

It's not clear whether this scheme would work, either. There's a question mark over the contributions employers make to defined benefit schemes (such as final-salary pension schemes), common in the public sector and still found in many private sector companies.

Employers fund the scheme as a whole, rather than making individual, defined payments for each employee. So it's not clear how the tax break would, or could, be removed only from those higher rate employees.

Taxing capital gains, rather than income, tends to tax wealth, or accumulated assets, rather than paycheques. "The people who make capital gains are generally well off, but it's harder to say how redistributive this would be," says Stuart Adam, a senior research economist at the IFS.

The Lib Dems also plan to raise some revenue through increased green taxes, which are intended to redistribute the tax burden to those who carry out the most polluting activities.

This doesn't necessarily mean that the poorest will benefit; a family on a low income driving a high-emitting car may feel the pinch from the Lib Dems tax plans far more than a millionaire with the same vehicle.

The verdict

On paper, at least, the plans should raise twice as much money than the 50p tax plan alone, but whether these are the most redistributive, let alone twice as redistributive, is harder to say and depends to an extent how redistribution is defined.

The 50p package was targeted at the richest few, while the new package takes a less banker-bashing view of redistribution - some aspects of the new package are aimed at walloping all higher rate tax payers, rather than just the top slice.

Overall, there are still a lot of grey areas in the Lib Dems plans, such as a possible hole left by the government's decision this year to increase car tax, meaning the party has to look to bigger increases to avoid a shortfall. And of course, on a wider note there's still the big question mark over the exact nature of the proposed spending cuts, which have yet to be spelled out.

FactCheck rating: 2

How ratings work
Every time a FactCheck article is published we'll give it a rating from zero to five.

The lower end of the scale indicates that the claim in question largerly checks out, while the upper end of the scale suggests misrepresentation, exaggeration, a massaging of statistics and/or language.

In the unlikely event that we award a 5 out of 5, our factcheckers have concluded that the claim under examination has absolutely no basis in fact.

The sources

Reducing the Burden
Make it Happen
Institute for Fiscal Studies
Nick Clegg on Andrew Marr
19 Sep 2007: FactCheck - Lib Dem tax plans

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