Oxfam: solutions, but not (quite) the right ones

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I’ve just been reading about Oxfam’s latest campaign, which seems to hit the nail on the head in terms of where the new frontier of domestic poverty relief is.

They’ve come up with “FREDs” to describe the people being hit by the credit crunch – people who are Forgotten, Ripped off, Excluded and Debt-ridden (see?)

What’s also great to see is that, after defining their problem very well, they’re advancing some very practical, nuts-and-bolts ideas about the tax and welfare systems to alleviate poverty amongst FREDs.

Still, I wouldn’t be an aspirant blogger unless I had it in me to nit-pick a set of well thought out, excellently researched proposals from an exceedingly worthy cause.

I’ve got to sound a word of warning about one of their proposals – that of raising the threshold on income tax.

This sounds like a great idea – taking poor people out of tax, or at least, giving them more breathing space before their incomes are eaten into by the revenue. However, it’s actually highly regressive: because raising the threshold on the lowest band of income tax affects everyone paying tax, the vast bulk of the benefit accrues to the wealthy majority.

A large chunk of government revenue would be surrendered, with only a small portion going to saving a section of the genuinely needy a few quid per week; the rest goes to the middle classes.

This is an extremely inefficient distribution of the benefits of a tax cut, even leaving aside what would actually happen to that revenue were the government to spend it instead (i.e. on services benefiting working class communities, or schemes to aid the unemployed in reskilling or getting back into work).

I’m not against giving the worse off a break on taxation – I wouldn’t be in the Labour Party if I was, would I? – but there’s better ways to do it. Oxfam have also called for more tax credits: leaving the lower threshold on income tax where it is, but raising higher levels as they call for, will produce extra revenue which can be pumped directly into the hands of FREDs without any of the middle classes getting their hands on the lucre.

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6 Responses to “Oxfam: solutions, but not (quite) the right ones”

  1. Kimmitt Says:

    Can that problem not be circumvented by simply adjusting tax rates elsewhere?

  2. voteredgogreen Says:

    …like what? What tax rates could you adjust?

  3. Kimmitt Says:

    Raise the higher rate v. slightly so the tax cut for higher rate payers is offset?

    I suppose it would be difficult to that to basic rate payers too but you could always create additional tax brackets to avoid penalising medium to low earners.

  4. voteredgogreen Says:

    The answer is tax credits – just tax people, and redistribute directly. Far simpler than faffing around with the tax system. Also, you have to remember that a large number of worse-off people don’t pay any tax at all, because their earnings are below the threshold: direct tax credits to them (paid for out of general taxation) are going to have an effect, where a raised threshold won’t. And if the name of the game is helping the worse off, surely the worse off you are, the more you need help?

  5. duncanseconomicblog Says:

    I’m not so sure, tax credits can be a nightmare with people undr and over claiming.

    Surely nudging up the personal allowance whilst rasing the basic and higher is easier?

    I agree that the worst off don’t pay direct tax – so yes benefit rises are also required.

  6. afanoffred Says:

    I agree with duncan – there’s massive confusion over tax credits, and although yours is probably the best idea in theory, voteredgogreen, it doesn’t seem to have worked, does it? More simple, effective and foolproof would surely be to adjust the rates of taxation? With continuing high rates of inequality (and, according to some measures, increased inequality) since 1997, perhaps those on the left ought to be a little more concerned about the fairly low level of taxation borne by the very wealthy and middle classes (contrast the current level with either pre-Thatcher levels of taxation or with other European social democracies), and the relatively high taxation on the lower middle classes and working class?

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