THE AVERAGE UK HOUSEHOLD IS £270 WORSE OFF DUE TO LABOUR’S TAX & BENEFIT CHANGES SINCE 1997?
C4 News' Factcheck Blog of 12/04/10 examined Labour's 2010 Manifesto - specifically the following claim on taxation:
"The direct tax and benefit measures introduced since 1997 mean that in 2010-11, households will be £1,450 a year better off on average."
In attempt to sort "the fact from the spin", FactCheck found this claim potentially misleading and concluded the following:
"Here’s another number from respected tax and spend analysts the Institute for Fiscal Studies: -£270. Yep, that’s right – they found households are in fact £270 worse off, on average, as a result of all of Labour’s tax and benefit measures than they were in 1997... The IFS’s figure (on which there’s much more detail here) takes into account all the tax and benefit changes introduced since 1997. That includes direct taxes, as well as indirect taxes on services such as VAT, fuel duty or stamp duty, and business taxes such as capital gains tax and corporation tax... While Labour may have reduced direct taxation, it has shifted the burden on to other areas of the tax system. So by not taking the whole system into account, you come up with a potentially misleading picture."
Their verdict was:
“Well it has been a mammoth job for FactCheck to unpick the Labour manifesto for 2010. For starters, we’ve found that Labour has been quite selective when presenting their statistical information about direct taxes…"
OUR ANALYSIS: £1,450 BETTER OFF OR £270 WORSE OFF?
The IFS briefing cited is here. This indicates that:
“Tax and benefit changes implemented between May 1997 and April 2010 represent a net ‘takeaway’ from the public or a boost to the government’s finances of £7.1 billion, costing each household about £270, on average, in 2010/11, relative to the conventional ‘unchanged policy’ baseline the Treasury uses in Budgets and Pre-Budget Reports.”
The IFS’s figure of £270 appears to assume around 26.3 million UK households.
Is it fair to include business taxes?
The £7.1 billion takeaway estimated by the IFS includes - not only direct taxes, indirect taxes and benefits - business taxation (mainly corporation tax and business rates). In the FactCheck Blog, David Phillips of IFS argues that:
“the money paid in corporation tax is money that would otherwise have been paid in dividends (or invested and then earned as income by other people)…”
The inclusion of business taxation is critical – as without it the takeaway falls to around £2.5 billion, i.e. an average £95 per household. How helpful is it - as the IFS briefing has done - to conflate business taxation with tax and benefits on individuals/households? Is this common to other studies or something the IFS has chosen to adopt in this instance?
Although reductions in dividends or increases in business rates directly impact on business profitability, the extent to which business costs are subsequently passed on to consumers - or represent an additional burden to UK households - is debatable. For example, for many UK companies a significant proportion of shareholders are foreign investors based outside the UK: so how can a reduction in their dividend be considered an additional tax burden on UK households?
Is the “average” UK household paying more tax under Labour?
The FactCheck gives the impression that the answer to this is a definite yes and that on “average” we are paying £270 more and not £1,450 less under Labour since 1997. Yet the IFS briefing actually indicates that 60% of UK households – the poorest - have benefited and are better off under the changes introduced since 1997. Furthermore, for C4 FactCheck to focus solely on the tax burden is potentially selective and misleading as the IFS indicate that the main impact of tax and benefits changes since 1997 have been on the distribution of income.
Total UK household tax burden
Neither the FactCheck or the IFS briefing cited contains any information on the total average tax burden per UK household - necessary to place any of these figures in overall context. If we assume total UK tax receipts of around £397 billion (HMRC 09/10 data) and the IFS estimate of 26.3 million UK households, the average yearly tax burden on UK households is £15,097. Therefore, on this basis, the takeaway of £270 is equivalent to about 1.8% of the total average household tax burden. If business taxation is excluded, the £95 takeaway is equivalent to about 0.6% of average household tax burden.
THE VERDICT
The main impact of tax and benefit changes introduced by Labour since 1997 have been on the distribution of income. The IFS estimate that 60% of UK households – the poorest - are better off under changes introduced. In discussing the overall impact of tax and benefit changes since 1997, for the C4 FactCheck blog to focus solely on the tax burden – in terms of the average per household - without mentioning the principal impact on distribution is itself potentially misleading and selective. Especially as it’s perfectly clear from the IFS analysis that most UK households have gained from these changes, contrary to the impression given.
We estimate that the £270 takeaway under Labour is equivalent to around 1.8% of the yearly average household tax burden. This falls to 0.6% if business taxation is excluded from the calculation.
© The Auditor
C4 News' Factcheck Blog of 12/04/10 examined Labour's 2010 Manifesto - specifically the following claim on taxation:
"The direct tax and benefit measures introduced since 1997 mean that in 2010-11, households will be £1,450 a year better off on average."
In attempt to sort "the fact from the spin", FactCheck found this claim potentially misleading and concluded the following:
"Here’s another number from respected tax and spend analysts the Institute for Fiscal Studies: -£270. Yep, that’s right – they found households are in fact £270 worse off, on average, as a result of all of Labour’s tax and benefit measures than they were in 1997... The IFS’s figure (on which there’s much more detail here) takes into account all the tax and benefit changes introduced since 1997. That includes direct taxes, as well as indirect taxes on services such as VAT, fuel duty or stamp duty, and business taxes such as capital gains tax and corporation tax... While Labour may have reduced direct taxation, it has shifted the burden on to other areas of the tax system. So by not taking the whole system into account, you come up with a potentially misleading picture."
Their verdict was:
“Well it has been a mammoth job for FactCheck to unpick the Labour manifesto for 2010. For starters, we’ve found that Labour has been quite selective when presenting their statistical information about direct taxes…"
OUR ANALYSIS: £1,450 BETTER OFF OR £270 WORSE OFF?
The IFS briefing cited is here. This indicates that:
“Tax and benefit changes implemented between May 1997 and April 2010 represent a net ‘takeaway’ from the public or a boost to the government’s finances of £7.1 billion, costing each household about £270, on average, in 2010/11, relative to the conventional ‘unchanged policy’ baseline the Treasury uses in Budgets and Pre-Budget Reports.”
The IFS’s figure of £270 appears to assume around 26.3 million UK households.
Is it fair to include business taxes?
The £7.1 billion takeaway estimated by the IFS includes - not only direct taxes, indirect taxes and benefits - business taxation (mainly corporation tax and business rates). In the FactCheck Blog, David Phillips of IFS argues that:
“the money paid in corporation tax is money that would otherwise have been paid in dividends (or invested and then earned as income by other people)…”
The inclusion of business taxation is critical – as without it the takeaway falls to around £2.5 billion, i.e. an average £95 per household. How helpful is it - as the IFS briefing has done - to conflate business taxation with tax and benefits on individuals/households? Is this common to other studies or something the IFS has chosen to adopt in this instance?
Although reductions in dividends or increases in business rates directly impact on business profitability, the extent to which business costs are subsequently passed on to consumers - or represent an additional burden to UK households - is debatable. For example, for many UK companies a significant proportion of shareholders are foreign investors based outside the UK: so how can a reduction in their dividend be considered an additional tax burden on UK households?
Is the “average” UK household paying more tax under Labour?
The FactCheck gives the impression that the answer to this is a definite yes and that on “average” we are paying £270 more and not £1,450 less under Labour since 1997. Yet the IFS briefing actually indicates that 60% of UK households – the poorest - have benefited and are better off under the changes introduced since 1997. Furthermore, for C4 FactCheck to focus solely on the tax burden is potentially selective and misleading as the IFS indicate that the main impact of tax and benefits changes since 1997 have been on the distribution of income.
Total UK household tax burden
Neither the FactCheck or the IFS briefing cited contains any information on the total average tax burden per UK household - necessary to place any of these figures in overall context. If we assume total UK tax receipts of around £397 billion (HMRC 09/10 data) and the IFS estimate of 26.3 million UK households, the average yearly tax burden on UK households is £15,097. Therefore, on this basis, the takeaway of £270 is equivalent to about 1.8% of the total average household tax burden. If business taxation is excluded, the £95 takeaway is equivalent to about 0.6% of average household tax burden.
THE VERDICT
The main impact of tax and benefit changes introduced by Labour since 1997 have been on the distribution of income. The IFS estimate that 60% of UK households – the poorest - are better off under changes introduced. In discussing the overall impact of tax and benefit changes since 1997, for the C4 FactCheck blog to focus solely on the tax burden – in terms of the average per household - without mentioning the principal impact on distribution is itself potentially misleading and selective. Especially as it’s perfectly clear from the IFS analysis that most UK households have gained from these changes, contrary to the impression given.
We estimate that the £270 takeaway under Labour is equivalent to around 1.8% of the yearly average household tax burden. This falls to 0.6% if business taxation is excluded from the calculation.
© The Auditor
