Clegg’s been having fun this week. First, he lets it be hinted to the Telegraph that he’d support the Tories in a hung Parliament – which of course is to position his party rightwards and to align his party with theirs.
This can only be part of an ingenious strategy to make the Lib Dem vote collapse in the Crewe and Nantwich byelection, and – cleverly thinking longer-term – to make rightish Lib Dem waverers drift over to the Tories and push leftish ones away to Labour. Smart.
And then, Clegg gave a speech on tax:
We already have a radical tax package, cutting the basic rate of income tax to just 16p, to make work really pay for everyone.
And scrapping the unfair council tax, which hurts the poorest the most. … Removing this unfair tax and replacing it with a fair local income tax will massively shift the tax burden away from the poor…
It’s absolutely vital that we make these tax changes if we want to make work pay.
Hmm. I happen to think there’s not a bad case for some sort of local income tax, although given that wealth inequalities are greater than income inequalities, this may not be the pro-poor no-brainer he imagines. But my point is that he contradicts himself. He wants to cut income tax to “make work pay” – but is it only nationally levied income tax that affects work incentives? Why would a local income tax not have exactly the same effect?
He also discusses tax credits. These are a real curate’s egg of a policy. They do achieve a lot of redistributive good – neither the Lib Dems nor the Tories dare to talk of scrapping them – but they’re far too complex both to claim and to administer. And as they’re means-tested, there’s also an issue of work incentives, which is Clegg’s point:
At the moment, for every pound you earn over and above six thousand, at least 31p is lost in tax and National Insurance. But for many, because of the loss of tax credits and means tested benefits like Council Tax benefit, much more is lost. 1.8 million people face an effective tax rate of more than 60%. For the worst affected, the tax rate can be 90p in every pound.
So the Lib Dems would do… er… he doesn’t quite say. In the middle of a passage on public spending and waste, he suggests in an offhand way that they’d “scale back tax credits”. For a little more detail, we need to look at the policy document the Lib Dems approved at their last conference: “Better targeting of tax credits to those on low incomes, by increasing the taper rate.”
Hmm. The taper rate, if there’s any doubt, is the rate at which tax credits are withdrawn as income rises. So what the Lib Dems would do to deal with the high effective marginal tax rates would, yes, make them affect fewer people. But those people taken out of the taper rates will be the better-off ones; the ones who remain will be those lower down the income scale. That’s all well and good if you’re focusing on giving money to them – but it does mean that and the marginal rates these poorer people face will be increased.
This is the trade-off of means-tested benefits: the more people you give them to, the less you can target them on the poor; but the more you concentrate on the poor, the higher the withdrawal rate has to be. And the chief bugbear of Clegg’s speech was not the level of credits received by the poor, but the effective marginal tax rates they pay – which this policy would worsen.