Poverty, marginal tax rates and the big state

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Are Conservatives serious when they bang on about the high marginal tax rate of people at the bottom end of the income scale and its symbolism as a failure of the “big state”, as David Cameron referred to on Thursday and William Hague repeated on Any Questions?

I ask this because this “tax rate” – which I don’t dispute – is mainly due to our complex benefits and tax credits system. Simply put, there are two ways to reduce this marginal rate: increase the tail off by cutting means testing or at least extending the income levels at which people still receive benefits, or reducing benefits altogether. The latter option would of course lead to more people living in poverty.

The former option however would increase the size of the state, which we are to understand is a total no-no. This is one of those areas, in short, where you have a very simple choice: reduce poverty or reduce the size of the state. You simply can’t have it both ways and in this respect the Tory conference this week has begged more questions than it has answered.

That isn’t true of all areas of public policy – there are plenty of areas where the small state option is the more pro-social one. But it does highlight how the poverty in aspiring for a “smaller state” as an end in itself. It seems to me that the Tories are obsessed with these second order indices and lukewarm when it comes to the fundamentals.

One thought on “Poverty, marginal tax rates and the big state

  1. “The former option however would increase the size of the state, which we are to understand is a total no-no.”

    Not necessarily — if you slimmed down the amount of means-testing, as you suggest, and “extend[ed] the income levels at which people still receive benefits”, one could argue that you would achieve a decrease in State *bureaucracy* whilst increasing State redistribution.

    I sincerely doubt this is what the Tories meant, though. The talk of marginal deduction rates has always been very cynical, because though they have increased under New Labour, as Peston pointed out in “Brown’s Britain”, the levels of income that suffer them are at a higher level than prior to 1997: in other words, more of those who suffer from MDRs are better off to do so.

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