Daily Archives: 11 August 2006

Would flat taxes help the poor?

That an article has appeared in the Daily Mail today claiming that flat taxes would help the poor should come as no surprise. That it is based on a piece of original research by the Joseph Rowntree Foundation however ought to raise at least the odd eyebrow.

In fact, man-bites-dog spin from the JRF notwithstanding, the flat tax is only half the story. What the JRF are also proposing is the creation of a negative income tax system to replace the extremely complicated existing system of tax credits. That sounds more like the bunch of Quakers we know.

Personally, of course, I would go further: most countries worldwide that have flat income tax rates also have significantly higher property taxes. By introducing these (LVT to be specific) at the same time you could significantly reduce the base income tax rate while capturing more wealth from the better off in a more economically efficient manner. But I’m repeating myself.

Social justice – Lib Dem style?

I really ought to go to bed, but I thought I’d leave you with this little snippet.

According to the Lib Dem Treasury team notes about the tax commission’s new proposals, a retired couple on a £15,000 income living in a Band G house will be £1,578 better off under their proposals (assuming average environmental taxes of £332 per household).

This however is highly misleading, on two counts. For starters, it assumes that the couple OWN their house (i.e. own an asset of between £160,000 and £320,000). If they don’t, have no other assets and are paying minimal rent (I assumed £70 p/w when using this calculator, which is approved by Help the Aged), they would be entitled to full council tax benefit. In which case, they would be around £450 worse off (again, assuming an increase in environmental taxes of £332 per household on average).

Poorer pensioners in smaller houses and on less income would still be worse off by around the same amount (benefits would render their council tax to zero and they save next to nothing with the income tax cuts). Meanwhile, a pensioner couple in a Band H house on an income of around £20,000 would be another £500 better off.

In short, poor pensioners do badly or gain next to nothing, while pensioners on middle incomes do well. And that is before you consider the fact that these wealthier pensioners will be sitting on hundreds of thousands of pounds worth of assets which under these proposals will be exempt from tax altogether.

Could someone explain to me how this is justifiable? And why aren’t poor pensioners included in the illustrative figures sent out to journalists?

For the record, here are the relevant statistics:

  • Average Council Tax Band G: £2,023
  • Average Council Tax Band H: £2,428
  • Change in NI/IT contributions for £15k pensioner couple under Lib Dem proposals: -£82
  • Cost of Local Income Tax for £15k pensioner couple: £33
  • Change in NI/IT contributions for £20k pensioner couple under Lib Dem proposals: +£706.75
  • Cost of Local Income Tax for £20k pensioner couple: £579

UPDATE: As I explain in the comments, I’ve just spotted a flaw in the “entitledto” website that means it occasionally comes up with some funny numbers, and clearly it was last night. However, it doesn’t undermine by basic argument: that these tax proposals favour the wealthy over and above the genuine poor. A Band D couple with £10,000 for instance gains nothing and is still assumed to pay the £332 in extra environmental taxes. I was only actually wrong to assume that a couple of £15,000 would be entitled to full CTB; everything else still holds.