“The tax and benefit changes”, they declare with moral pomposity on TV news, “make the poor worse off relative to the rich. This is fundamentally unfair.” No doubt we will see this again with the Autumn Statement coming up on 23 November.
This equation of “progressivity” with fairness is morally dubious. The implication being that anything that makes the poorest better off relative to the rich must be “a good thing”. Under this moral framework, one should celebrate a Budget which sees the incomes of the poorest 20 per cent fall by 4 per cent so long as all other groups are made worse off by 5 per cent.
The logical end point, of course, is that a truly “fair” outcome would be a dystopian world where incomes are totally equalised by the tax and benefit system. In fact, there is no possible tax on the rich too high. There will always be a socialist-leaning MP to denounce changes which do not compress incomes further.
But new evidence suggests that those who obsess about the effects of tax and benefit changes miss the point on their own terms. The reason is obvious: there is not a fixed group called “the poor” and another called “the rich”. Over our lifetimes there is mobility in incomes, people have children, move from full-time to part-time work and back again, and live in various housing tenures. Modelling typical lifetime paths, analysis by the same Institute for Fiscal Studies finds that policy changes which might look “regressive” actually can be far less so when you examine their effects across whole lifetimes.
Back in 2010, for example, the coalition government raised the main rate of VAT from 17.5 per cent to 20 per cent. And people right across the spectrum denounced this as “regressive”.
Thinking about the world at one point in time, they were right – the tax did hit those lowest down hardest. But that’s because people classified as poor at any given point tend to be those spending a lot relative to their incomes (either because they have lost a job, they have taken time out of the labour market, or maybe because they are students). Across a whole lifetime, once one accounts for income dynamics, however, VAT hikes tend to affect income groups almost proportionately – which is not surprising, given that people’s lifetime spending tends to track their lifetime income.
Likewise, it has become common in recent years for left-leaning think tanks to argue against further rises in the income tax personal allowance on the grounds that it is “regressive”. On a static basis, they are right: the poorest have incomes too low to benefit, while richer households often have two earners, so benefit twice. But given that, over a lifetime, people’s incomes grow and few households tend to be entrenched alone in very low income jobs, the effect of raising the personal allowance is pretty much neutral from this distributional perspective.
Perhaps the researchers’ most important observation (mentioned in passing), however, is this: when you look across lifetimes, inequality generally is much lower than if you look at the population at one point in time. In other words, much of what is held up as “worrying inequality” is actually a reflection of people being at different stages of their life-cycle.
The key take-away is that, if this obsession that each Budget should be “progressive” informs policy, it could lead to very perverse choices being made in terms of the effects on people’s lifetime earnings. Whether reducing inequality should be an aim at all is one moral debate. But even on their own terms, those hoping always to be “progressive” may not be quite as progressive as they think.