Monday, 25 February 2013

Tweedledum and Tweedledee

Both the Welsh Lib Dems and the Conservatives in Wales have announced proposals of sorts for how they would vary income tax in Wales, if it gets devolved, and in the unlikely event that either party ever leads a government in Wales. At first sight, the proposals are very different; the Lib Dems want to cut tax at the bottom end, whilst the Tories want to cut it at the top end.

The Tories seem to be making some very sweeping assumptions in their proposal, which blatantly conflates "the entrepreneurial" with those paying 40% tax. Whilst there may be entrepreneurs paying tax at 40%, I'd bet that there an awful lot of businessmen and women in Wales who aren't. And I'm absolutely certain that a lot of those paying 40% in Wales aren't entrepreneurs either; they're more likely to be in senior jobs in the public sector.

And there's another unjustified assumption in what the Tories are saying as well, which is that reducing tax on the entrepreneurial spurs them to greater effort and success. What's the evidence for that, I wonder? Whilst I'm sure that there are some who are 'only in it for the money', there are many other reasons for establishing and running companies; and many of those doing so find that they are working long hours for low rewards for many years – or even for ever.

If they really wanted to encourage entrepreneurs, they'd be looking at those who risk everything in the early years (or rather, perhaps, those who decide not to), rather than those who've already made it. And they certainly wouldn't be looking to reward those who've simply climbed their way up the greasy pole in local or central government.

The Lib Dems' proposal suffers from a rather different flaw. Certainly, reducing the tax take from the lowest paid sounds a bit better than reducing tax simply for the higher paid. However, unless accompanied by an increase in taxes for the higher paid (which the Lib Dems seem not to be proposing), then the main beneficiaries will actually be the higher paid.

What both parties are really doing, of course, is pitching their policies at particular groups of voters. Given that the Tories have already and correctly identified that there are only around 117,000 higher-rate taxpayers in Wales it seems a curiously small section of the population to be targeting, particularly since a significant proportion of them probably already vote Tory anyway. For the rest, it will merely confirm the impression that the Tories are a party for the better–off. The Lib Dems are effectively proposing to benefit much the same people, just marketing it a bit better.


Anonymous said...

" However, unless accompanied by an increase in taxes for the higher paid (which the Lib Dems seem not to be proposing), then the main beneficiaries will actually be the higher paid."

Care to expand on that? I'm a little lost. Not saying you're wrong. But surely, the WLD proposals help those on minimum wage etc the most?

John Dixon said...


It may depend on how we define 'most' benefit - as a proportion of income or of tax paid, you're right; but as a total sum, the higher paid benefit most. For the sake of simplicity of explanation, I'll use round figures rather than actual ones.

Say we reduce tax from 20p in the pound to 10p in the pound on all earnings from £15,000 to £25,000. Anyone earning under £15,000 gains no benefit at all. Someone earning £20,000 would benefit by £5,000 * 10p = £500. But someone on £25,000 or more a year (including those earning huge salaries) gains the full £10,000 worth of reduction, £1,000 a year.

I don't doubt that it's a better way of reducing taxes than cutting the top rate of tax than the Tories are proposing, but it has the consequence of reducing the amount of tax paid by the higher paid as well, unless accompanied by either increases in the tax rate at higher levels or changes to the boundaries.

Another way of looking at it is this: Such a reduction in tax rates would reduce the flow of revenue into the government's coffers. But the vast majority of that reduction in revenue is because less tax is being paid by people earning £25,000 a year and over; not because of the reduction from those earning between £15,000 and £25,000.