Taxation: perception and reality

The public debate about tax and its importance in funding public services is often confused. Today’s report from the Equality Trust (authors of the Spirit Level) seeks to determine people’s understanding of tax, but also discover what people believe people should be taxed, and how this compares to the UK’s current tax system.

Public polling conducted in partnership with Ipsos MORI reveals that:

• Public perception of how the UK’s tax system affects households in different income groups contrasts sharply with the reality
• The public believe the UK’s tax system is more progressive than it is, with nearly seven in ten people (68%) believing that households in the highest 10% income group pay more of their income in tax than those in the lowest 10%. In reality, the top 10% pay a smaller proportion of their income in tax than the bottom 10%
• Public support for a more progressive1 tax system is high. Over eight in ten (82%) believe that households in the highest 10% income group should pay a greater proportion of their income in tax than those in the bottom 10%. An even greater majority (96%) would like the tax system to be more progressive than it currently is.

 

In reality the actual proportion of gross household income that households at each decile pay in all taxes shows that:

• The current tax distribution in the UK is regressive.
• A household in the bottom 10% pays 43% of its income in tax, while the average household and a household in the top 10% both pay 35% – 8 percentage points less than the bottom 10%.
• The higher percentage paid by the poor (bottom 10%) is attributable to a number of taxes. While income tax and national insurance are broadly progressive, the bottom 10% of households pay roughly 23% of their gross household income in indirect taxes on consumption and more than four times as much of their income in council tax as the top 10%.

The authors therefore argue that these findings show that the current tax system is not fit for purpose. And they make the following recommendations:

• Parties seeking to form the government from 2015 should commit to the principle that any changes in tax policy are progressive
• Council tax should be transformed into a progressive property tax by re-evaluating properties and creating new bands with higher rates for high value properties
• Government should look to reduce VAT when it has a budget surplus
• The upper limit of National Insurance should be raised to ensure that the tax is progressive across all deciles.

 

Hard to disagree with most of that!

 

 

Posted with Blogsy

Low wages and living costs squeeze households, but tax allowance cuts are not the answer

The latest labour market statistics show that inflation is still rising around twice as fast as average weekly earnings and so household budgets remain tightly squeezed. Even if wages start to pick up the real pay gap that has opened up looks set to take years to close.

According to the ONS wages have hit minus 2.2% on average since the first quarter of 2010, the last quarter before the Tory-Lib Dem coalition came to power. In comparison, wage growth averaged 2.9% in the 1970s and 1980s, 1.5% in the 1990s, and 1.2% in the 2000s. This follows a report by the Institute for Fiscal Studies (IFS) which said that while the fall in household incomes had now probably come to a halt, living standards were still “dramatically” down on what they were before the global financial crisis hit in 2008.

Another report shows how the wage squeeze is impacting on saving. One in three Scots has saved nothing at all in the last three months.  Those who do have savings are less likely to dip into them than anywhere else in the UK but when they do, they are likely to raid the household piggy bank for a far larger sum than in most other areas.

For many on low pay even generous wage rises would leave their households in need of additional support via tax credits and benefits to keep them anywhere close to above the poverty line. New TUC research shows just how important this support is for working families with children. The study features a range of fictional households to show how taxes and in-work benefit entitlements change as pay goes up.

Measures that increase earnings (higher wages and/or tax cuts) provide a greater overall income boost for adults without kids than they do for low earning families with children. Wages are of course still important, but not enough to meet the needs of low income working families. This shows that reducing tax allowances is an expensive way to help those on low earnings. It doesn't replace the ongoing tax credit cuts.

This research shows that with more than half of benefit cuts hitting working people, any real programme to enable those on low pay to share in the recovery needs to recognise the role of in-work credits along with stronger pay growth, and focus on reversing tax credit cuts rather than on delivering further poorly targeted personal allowance giveaways.

At the other end of the pay scale a new High Pay Centre analysis shows the hidden cost of big pay differentials within organisations. Workplaces with big pay gaps between the highest and lowest wage earners suffer more industrial disputes, more sickness and higher staff turnover than employers with more equitable pay differentials.  On average:

• Bosses earning 10 times more than the lowest-paid staff in their organisation experience industrial action at least once a year. Those with lower pay differentials do not.
• Workplaces where top earners get 8 times the pay of junior staff report at least one case a year of work-related illness. Workplaces with pay differentials of 5 or less do not report any.
• Organisations with average pay ratios of 7:1 experience higher staff turnover.

High Pay Centre director Deborah Hargreaves said: “High executive pay is not only frequently unmerited but has a huge hidden impact on the rest of the organisation and society as a whole. Whether it’s through staff turnover, sickness, low morale or industrial action, big pay gaps undermine employees’ loyalty to the company and their managers. Employers suffer lost productivity, have to pay more sick pay and legal and recruitment costs as staff left feeling the financial and emotional strain are driven even further into the ground.”

Low wages and living costs are still squeezing household spending and savings despite the limited economic recovery. But tax allowance cuts are not the answer for low income families. Meanwhile, high and unequal pay is not only unfair, but damages organisations as well.

Sources of additional tax revenue

Given the pressures on public spending, governments at UK and Scottish levels should want to identify some additional tax revenues. A recent IPPR report  makes a number of suggestions as to areas they might want to consider.

They give three reasons for considering additional revenues:

• More measures to cut the fiscal deficit will be required between 2015 and 2020, and if the 80:20 ratio of spending cuts to tax increases that has applied in the current parliament is going to be maintained then there will have to be some discretionary tax increases.
  
• All political parties want to reduce some taxes. For example, both the Conservatives and the Liberal Democrats are likely to pledge to increase the personal tax allowance from £10,000 to £12,500 – which means other tax increases will be required to offset this cut.
  
• There are long-term demographic pressures on public spending. If we want to retain current levels of provision of health and social care for older people, revenues will have to increase to pay for them. The alternative is a significant rundown in the quality of public services in the UK in coming decades.

In Scotland, all three reasons apply irrespective of the outcome of this year’s independence referendum.

There are no easy solutions to be found in other countries. Their comparison of tax systems across OECD countries shows that the UK is a fairly average country when it comes to taxation. There are many other economically successful countries – in particular in Scandinavia – that have a significantly higher ratio of tax to GDP, but there are also countries with a lower ratio. Even in Scotland, there is little political appetite for Scandinavian levels of taxation as the White Paper shows.

The report does give some pointers as to where to start, particularly with the aim of increasing revenues in a progressive way and without causing economic damage. The report assesses the potential of three broad classes of new tax revenue:

• less unpopular taxes, such as the frequently mentioned 'mansion tax'
• mainstream taxes, such as changes to VAT or national insurance
• entirely new taxes, such as taxes on wealth, land or financial transactions.

Thoughts on this issue are not restricted to the political left. Tory commentator Danny Finkelstein, recently made the case for a new ‘NHS tax’ in article in The Times. An attempt to link taxes with the most popular public service.

One solution unlikely to be favored by Finkelstein is taxing high incomes and wealth. Last Wednesday was dubbed ‘Fat-Cat Wednesday’ by the High Pay Centre because Britain’s top bosses have already made more money in 2014 than the average UK worker earns in an entire year. FTSE 100 Chief Executives are paid an average £4.3 million, equivalent to hourly pay of well over £1,000. Executive pay has increased by 74% over the past decade, while wages for ordinary workers have remained flat.

I am tempted to say that there is more than one way of skinning a cat – but that would be tasteless!

 

Listen to Parents

Save the Children have collated the views of parents into a great report on childcare in Scotland. There is a remarkable consensus amongst parents about what the problems are and what they need. The high cost of childcare causes real problems for families across Scotland.

Parents in work either struggle to make ends meet because of the cost of childcare or use a complex mix of support from friends and family and childcare to keep costs down. Others give up work or don’t take up opportunities to work because the cost of care makes it unworkable. Even finding out what’s available for what age group is complex and time consuming. There is a catch 22 where you can’t confirm childcare arrangements until you know when you will be working or studying nor can you confirm when you could work or study until you have childcare sorted.

What we need is to look at the system as a whole. There is still a split between childcare and early years education with one paid for directly by parents and the other via taxation. Childminders and private nurseries while regulated by local authorities are not under their control. There is no strategic planning about how many are needed in each area, in fact no one knows:
• the level of demand/need for childcare in Scotland.
• how many more parents would be working if childcare was available/affordable
• how many hours of childcare parents want/need to balance the needs of their child and the need to earn money
• what mix parents would really like between childminder/nursery provision and providing that care themselves.

UNISON is a long-term supporter of publically delivered service free at the point of use. Delivering childcare in the sameway as post five-education will make the system, simpler, cheaper for families and of a higher and more consistent standard. As an IPPR report shows that the provision of childcare free at the point of use pays for itself in increased tax income from extra hours worked by women entering the workforce. The extra hours promised in the Children’s Bill are welcome but the whole system needs to change if we are to really move forward. The findings of this report suggest that parents would welcome this change.

Just pay your taxes

It seems that Mike Russell is exploring ways of encouraging philanthropists to take on a role is Scottish schools. The cabinet secretary was speaking this week at a conference organised by the David Hume institute. Lindsay Paterson presented his report: Outstanding Students and Philanthropic Contributions in Scottish School Education” at the event. Here Professor Paterson lays out ways in which “the imagination of the philanthropic entrepreneur can be brought to bear on providing opportunities for outstanding students to flourish”.

It’s great that people want to give money to support Scottish education but there are also risks. Lindsay Paterson is right to say that we have to retain democratic accountability in policy making. The Herald also rightly raises concerns about whether such a scheme will widen the existing gap between top and bottom. Too many children fail to achieve their potential.

What happens to pupils with outstanding talents isn’t really the issue in Scottish education. The outstanding students in Scotland already match the outcomes of the highest achievers in international comparisons. Last week at another conference on inequality in education I learned that in maths the highest achieving children match those in Hong Kong but at the other end of the scale we rank alongside Turkey. The issues are why the outcomes are so poor for those from deprived backgrounds and how to raise their attainment. As Mike Russell said “promotion of greater social justice and greater equity in educational outcomes for all our children and young people” should be the priority for government initiatives. Fresh ideas and energy are always welcome but schools need adequate secure funding, (not tied to the whims of big money donors) and education professionals, trained to high standards in order to achieve these goals.

Another way forward would be if those who have lots of money who want to support our schools just pay their taxes at a decent rate. That’s how we maintain democratic control over spending. They wouldn’t get a flashy building or fund with their name on it but they would be able to help a lot more children reach their potential.

More Business Rates Cuts

The Scottish Government has annouced it plans to allow councils to adjust business rates relief. Business rates and reliefs are set for all Scotland by the Scottish Government and funds distributed to councils under a set formula. The new plan will allow authorities some scope to vary the relief they offer local businesses. The Government claims this is both a boost for business and significant empowerment of local authorities. This plan highlights the Scottish Government’s commitment to reducing business taxes. We are more concerned with having enough money to pay for public services.

Another question is: is this really as Derek MacKay claims
“allowing them to respond to the needs of their communities”?

All that is actually being offered is a choice over where and how much councils can reduce business rates. Nowhere are councils being allowed to increase their income. Earlier this year UNISON showed how council’s were increasing charges to residents in the face of budget cuts. Businesses benefit from local government services and should pay towards the costs of delivery like the rest of us.

Instead of a national system where councils can choose where to make reductions it would be better to allow local authorities to set their own business rates. This would give them a valuable leaver for both economic development and funding to pay for services and infrastructure. Local control would be a much simpler and cheaper system to operate rather than a complex set of local reliefs. That really would be allowing them to respond to the needs of their communities.

The case for taxation

The supporters of austerity economics constantly talk about hard choices and the need to create a low tax economy. This is intended to drive us to a US style small state with only safety net public services.

The Reid Foundation has helpfully modelled an alternative approach to tax that emphasises growing the tax base, not simply increasing tax rates. Ed Miliband has discussed a similar approach under the heading of 'predistribution'. There has been a predictable right-wing reaction to this from the usual suspects in Scotland.

Robin McAlpine has set out a useful rebuttal of their criticism in today's Scotsman. He argues "And yet the reality is that we have a chronic low-pay economy which destabilises the tax base and leaves the public paying billions of pounds to subsidise in-work poverty. Only one in five Scots earns between £25,000 and £35,000. Three out of five earn less; half less than £21,000. The Reid Foundation has modelled what would happen to Scotland’s finances if we had a labour market comparable to other economies at our state of development. If we moved even relatively modest numbers of people out of low pay into medium pay and reduced unemployment we could increase the tax take by over 30 per cent without raising tax rates at all."

This argument supports UNISON campaigns such as the Scottish Living Wage and our own briefing on wages, inflation and the economy.

The classic Neo-Liberal response on tax is to present it as a form of theft. This is then used as some sort of moral justification for tax dodging. There is a very good rebuttal briefing of this written by Richard Murphy. The essence of his argument is that tax and property rights go hand in hand. There is no alternative, unless you want to live in Somalia at the barrel of a gun. So if property rights are legitimate, so is tax.

It's only two sides of A4 and is well worth a read.

Bumper Book of Government Waste

The tax cutting campaign group the Tax Payers Alliance have produced yet another one of their attacks on public spending. In their imaginatively title Big Book of Government Waste, they stick to their effective tactic of finding spending they don’t like at calling it waste. This year they have managed to reach a total of £120billion.


It’s a great laugh, mocking arts projects, awards ceremonies and councillor's lunches meanwhile, the Big Bumper Book of Private Sector Waste is still unpublished: The costs of failed privatisation, massive bonuses paid to chief execs for failure, billions wasted on PFI, private failures like Southern Cross and G4S and its Olympic security fiasco. As ever public sector workers terms and conditions are their first point of attack. Almost half of their waste total: £53billion comes from “overpaying on public sector pay and pensions”. This is not mistakenly overpaying. What they mean is that wages are too high in the public sector. So key to reducing “waste” in their eyes is reducing workers wages.


They claim that public sector workers are paid 8.2% more than private sector workers; this requires some deeper analysis though. The figures do not include bonuses or other perks which are far more prevalent in the private sector. Across the UK, particularly in England many of the lower skilled and paid jobs that were once in the public sector have been outsourced to the private sector. Outsourcing the lower paid jobs raises the average wage measure without anyone receiving any wage rise at all. This has also increased the number of low paid jobs in the private sector so decreasing the average wage point there.


Despite what the tax dodgers’ alliance claim the public sector is not where the fat cats are working. If you compare the pay of graduates, for example, in the public and private sectors then they earn less: 5.7% to be exact.


A trawl thorough their pages outlining figures from newspaper paper reports on council tea biscuit and train ticket bills can raise a smile but it’s not a serious analysis of public spending. It’s a shame that so many media outlets treat them as if they are producing high quality independent research. They are a right-wing body dedicated, not to value for money for tax payers, but to reducing the size of the public sector. They are currently campaigning to get rid of National Insurance, which no doubt suits their wealthy backers but may be a bit more tricky for the rest of us. “Behind the Mask” published by the Northern Ireland Public Service Alliance shows exactly who they are. Backers include: Tony Gallacher owner of Gallacher UK who has given £3million to the Conservatives since 2001; Christopher Kelly owner of Keltruck : Sir Anthony Bamford, of JCB who has also donated £1million to the Conservatives. and Stuart Wheeler who having previously donated £5million to the Conservatives has now endorsed UKIP. Remember who they are what they are trying to do the next time you here them on the radio.