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banner Friday, 10 March, 2000, 10:38 GMT
Tackling tax inequalities

Chancellor Gordon Brown has been a closet redistributionist since he came to office.

Under Labour, the poorest 20% of households have gained substantially from measures such as the increase in child benefit and the introduction of the working families tax credit.

At the higher end of the income scale, the abolition of mortgage tax relief and the married couples allowance, and the increase in the rate at which National Insurance contributions have to be paid, have slightly reduced the income of the top 10%.

The rich are likely to have been hit even harder by the changes Mr Brown introduced to pensions, dividends and company taxes - which increase taxes by around 4bn but cannot be attributed to individual households.

Reversing the trend?

However, Mr Brown would have to go much further to make the tax system truly progressive, where the rich pay a substantially larger proportion of their income in tax than the poor.

In fact, the latest government figures suggest that the poorest 20% of households actually pay more of their income in tax than the richest 20% of households.

This is largely because of the reliance on indirect taxes like value added tax (VAT) and duty on cigarettes, petrol, and alcohol, which fall disproportionately on the poor.

It is also due to the ability of the rich to shield much of their income from tax through the use of Peps, ISAs, and pensions.

Limits on boldness

Mr Brown has been careful to place his redistributionist instincts within limits.

He wants to maintain his reputation as a prudent chancellor and reassure the middle classes.

He has targeted help on particular groups of the needy, especially children - where he has a target of ending child poverty in 20 years.

Many Labour party activists and poverty campaigners would like Mr Brown to be more explicit about his aims, and swifter with his remedies.

Ruth Lister, professor of social policy at Loughborough University and former director of the Child Poverty Action Group, says Gordon Brown is a "closet redistributionist" who should come out of the closet and "take the responsibility to make the case for redistribution, or else the policy won't stick."

She says the government has shown a "real commitment" to alleviating child poverty, "but has to go further to tackle inequalities head on."

Among the key measures she would like to see is a review of the overall benefit levels, which she says are too low to live on.

Targeting the poor

That is unlikely to happen.

Mr Brown's redistributionist strategy seems to be to target relatively narrow groups of the poor.

As well as children, he has given more money to poor pensioners and the severely disabled.

But his main ambition is to "make work pay" and he has dramatically increased benefits to those who are in work but on low pay.

The new Working Families Tax Credit (WFTC), which replaces family credit, is paid through the tax system by employers, and has more generous tapers - making many more people eligible.

Mr Brown has also added a generous child care subsidy to the WFTC.

He is considering a more radical change - creating an integrated child credit (ICC) that would combine child tax allowances, and the element in the WFTC and income support allocated to children - in total around 40 per week per child.

That change would pave the way for the WFTC to be extended to other low-paid households, giving a guaranteed minimum income for everyone in work.

A hand-up, not a hand-out

The introduction of an ICC would make the transition from welfare to work easier, as the element relating to children would not change at all.

Mr Brown believes that, with better education, the government can get people out of poverty more quickly by ensuring that they can get jobs.

He is prepared to offer sticks as well as carrots to move people from welfare to work.

He has already announced that there will be tough new rules for those under the age of 30 who are included in the New Deal programme.

If they do not accept the offer of either a job or training, they can lose their benefit for up to 6 months.

The chancellor still has more than 500m set aside in the windfall tax to pay for further New Deal measures.

So he could extend the New Deal to all the unemployed - there are relatively few unemployed people between 30 and 55.

Raising national insurance

Mr Brown is interested in making one part of the tax system more progressive - the National Insurance system.

Increasing the upper earnings limit on national insurance to the higher tax rate could raise 600m and end the anomaly that people who earn between 29,000 and 32,000 a year pay a lower tax rate than those earning under 29,000.

The chancellor could also increase the rates of National Insurance for the self-employed, who make up one in eight of the population.

He is already cracking down on individuals who set themselves up as companies to avoid paying more NIC and tax.

But he may want to return some of the money in the form of tax cuts to avoid being accused of hitting the middle classes.

Benefits in kind

Another way Mr Brown could help the poor is to give more money to public services.

Although Mr Brown is currently running a huge tax surplus, putting more money into health and education could require an increase in taxation.

For this to be politically acceptable, some suggest hypothecation - where taxes are allocated to specific areas of expenditure.

National Insurance payments are already supposed to operate in this way, paying for pensions, sickness and unemployment benefits.

But it has never quite worked that way.

The chancellor has often made contributions to top up the National Insurance Fund, and, less regularly, taken back any surplus.

Nevertheless, some argue that the National Health Service could be better funded if it received a specific portion of say, income tax.

Earmarked taxes

The Treasury has traditionally been against hypothecation mainly because of fears that revenues might fall if the economy went into recession.

However, in the pre-Budget report the Treasury accepted the case for hypothecation in two areas.

It said additional, above inflation, revenues raised from petrol taxes would go to improve public transport and additional revenue from taxing cigarettes would go to the health service.

Extending hypothecation would be controversial, but could be a way of making redistribution politically acceptable.

In the long run, it could prove an attractive option.

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See also:

10 Mar 00 | Budget2000
The chancellor's 'war chest'
17 Mar 00 | Business
'Children stuck in poverty trap'
11 Feb 00 | Business
TUC calls for more spending
21 Sep 99 | UK Politics
War on poverty
21 Sep 99 | UK Politics
The poverty debate
10 Nov 99 | The Economy
More tax cuts likely
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