The squeezed middle?

Used under creative commons license. Image by ‘Images of Money’

Wednesday sees George Osborne deliver his latest budget speech. Some of it he announced on Andrew Marr’s Sunday morning show, other parts may well have been leaked by the time you get round to reading this (I’m writing this on Monday night).

In his appearance on the Marr show, aside from being fed his lines by the host who had earlier in the show demonstrated a clear and distinct partiality with regards to the Scottish referendum on independence from the rest of the UK, and aside from the fact that there was no serious or penetrating scrutiny given applied to the Conservative party policy, making the Marr Show little more than an extended party political broadcast for the Conservative party; aside from all that, I was struck by something Osborne said as part of his prepared speech.

Whilst speaking of personal taxation, Osborne spoke of the increase in the personal allowance that has taken place since the coalition came into power in 2010.

Before coming to that point though, I would like to note two things: One, the rapid increase of the personal allowance was a Liberal Democrat policy, not a Conservative one. It was a feature of the coalition agreement that the Lib Dems insisted upon. It was one of the few areas where the Lib Dems led and the Conservatives followed.

Secondly, I would add that it is probably the best thing the coalition government have done. I am in favour of lifting the lowest paid out of personal taxation. Ideally, the personal allowance should be at a level whereby no one is taxed whose net pay would not be enough to reasonably live off. The measuring of how much that is a complex matter and one that I shall not address in this blog post.

But the point that struck me was that Osborne was proud that it was reducing the amount of tax paid by the middle-to-high earners. Without getting too personal here, I will say that in my current job, on my current salary, a small part of my tax is paid at the 40% rate. This is an important point. The media will often talk about those who pay the 40p rate (i.e. 40p in the pound, but I prefer percentages for clarity) but they fail to mention that only the uppermost part of someone’s salary is paid at that rate. There is still a significant chunk that is paid at 20%.

As someone who is counted as a middle-to-high earner, am I pleased that the amount of tax I pay is being reduced? No.

Nomatter what your political persuasion, one should face up to the economic fact that we have both a large debt and a large deficit, both of which need reducing. The two essential ways of doing this are to increase revenues or to cut costs. The current government’s plan has, for the last few years, been to cut both revenues and costs, but to cut costs at a much faster rate, through their austerity plan.

Many more voices than just mine will testify to the great damage that the austerity programme has done, with people losing their livelihoods and even their lives as a result of it. In other countries, such as Greece, it has been taken to a more extreme level but has merely resulted in mass unemployment and has failed to live up to its promises.

So while some cuts are necessary (and here I would rather cut spending on Trident and other weapons of mass destruction rather than removing the safety net of social security which is relied upon by many in their hour of need) the more obvious and sensible measure is to increase revenue. Anyone who has studied economics at any level will be familiar with the idea of elasticity of demand. That is, the more you charge for product, the less demand will be. But how much demand falls off in proportion to how prices increase is measured by its ‘elasticity’. Luxury goods have a high elasticity, whereas necessities have low elasticity. Take train tickets for example. Many use trains to get to work. If the price gets bumped up by 5% we don’t get the choice to not go to work. We are forced to swallow it, increasing the revenues of the train companies.

When it comes to tax, part of modern right-wing ideology is that tax is highly elastic. They love to tell us that increasing taxes will deter rich people from coming to country (hey, that’s one way to curb immigration!) or force people to leave. In France, when they raised taxes, a few high profile people did choose to leave the country. But did it cause a reduction in revenue that crippled the country as the austerity measures did to Greece? No.

The truth is taxation is inelastic. This gives rise to the possibility that, as train companies have exploited commuters, governments could exploit all its citizens by unfair taxation. But what is fair? Surely it is in answering this question that differences between left and right become apparent, especially when we consider what our priorities are. Right-wingers such as George Osborne see fairness in prioritising that people keep as much of their gross pay packet as possible. Left-wingers such as me prioritise ensuring the dignity and the livelihoods of the poorest and most vulnerable in society.

For me, as stated once, but to reiterate the point, tax becomes unfair when the net income after tax is not enough to live on. If you have more than enough to live on, then you have enough to be taxed upon. Note that even if there was a flat rate of 40% (which is much higher than the actual effective rate of tax paid by those whose pay comes into the 40% band) then any individual would still keep more than half of their pay packet.

We also need to consider the seasonality of life. For some of my life I was in state education and not earning a salary, not paying taxes. At other times I have been unemployed and had to claim job seekers’ allowance in order to pay for my rent and food. At times like these, I was net taker from the state. At present, I am a net contributor. If I were to take a simplistic, conservative approach, and demand that I only pay tax for the services I use, then I would pay much less tax than I do now. But what about those who are currently in a season of being net takers? The young, the elderly, the unemployed, the disabled? It is to support them that we need a section of the population to pay more tax than the cost of the services the latter use. It is a recognition of this that makes me despise the term ‘the squeezed middle’. I am not squeezed enough.

To turn a phrase around a little bit, I would say: First, to each according to their need. To fund that, from each according to their ability. This is where I think our priorities should lie. The idea of tax for tax’s sake is as wrong as it is to try to separate the payment of taxes from the provision of centrally provided services.

So please George, let’s get priorities straight. For those who are out of the tax system, let’s ensure that there is a living wage paid to those in work, and a firm support net for those who aren’t. For those who are paid in excess of they need to live on, please tax us more. We can afford it.