Labour's tax rise and why it's wrong in very many ways

This week Labour promised a new dawn - an increase in Scottish income tax.  Kezia Dugdale, who is a fine woman trying her hardest in a difficult situation (imagine trying to fashion ice sculptures from melting slush), announced that we'd all get hit with an extra 1% income tax to fund councils but that people who earn less than £20,000 would get a few quid back - one hundred green and crispy pound notes, if you will, or a horrible clanking of brass if you're too young to remember real money.  Sounds like a decent plan where everybody is paying in a bit more to help out but there's a wee bit of help for those who might struggle.  A good idea - except, except, except ...

There are a few problems - 

Taxable benefits
From everyone's favourite Government department, HMRC, comes a list of

The most common benefits that you pay Income Tax on are:

• the State Pension

• Jobseeker’s Allowance

• Carer’s Allowance

• Employment and Support Allowance (contribution based)

• Incapacity Benefit (from the 29th week you get it)

• Bereavement Allowance

• pensions paid by the Industrial Death Benefit scheme

• Widowed Parent’s Allowance

The taxation personal allowance from April 5th will be £11,000 so if you were a carer working part-time and earning £11,000 from that job all of your tax allowance would be taken up.  George Osborne currently takes 20% out of your £62.10 a week carers allowance (£12.42 in tax per week or £645.84 a year) but Labour's plan would increase your tax to £13.04 per week or £678.08.  Then Labour would give you £100 back but that would be taxable at 21% so you'd get £79 of it so you'd be £46.76 a year better off - a bit less than 90p a week.  If your earnings are higher than this you'll get to a point where you're losing cash under Labour's scheme a lot sooner than you think (see below).

Essentially, get any of these benefits while you're a taxpayer and Labour will be coming for a slice of them.  Something further, though - some in-work benefits will be reduced when additional income is declared so some people might be left with just a tax rise.

It's taxable

As pointed out above, the £100 is taxable so it's only worth £79 if the tax rate is 21%.  That means that the break-even point under Labour's plan would be when your pay is £18,900 - any more than that and you're losing money.  Look -

Your pay is £18,000, allowance £11,000, taxable £7,000.  At 20% the tax is £1,400 so pay after tax (ignoring all other deductions) is £16,600.  Increase the tax to 21% and add Kez's £100, taxable is £7,100 and tax is £1491 so pay after tax (ignoring all other deductions) is £16,609 - up £9 over the year.

Your pay is £19,000, allowance £11,000, taxable £8,000.  At 20% the tax is £1,600 so pay after tax (ignoring all other deductions) is £17,400.  Increase the tax to 21% and add Kez's £100, taxable is £8,100 and tax is £1,701 so pay after tax (ignoring all other deductions) is £17,399 - you've lost £1.

Your pay is £18,900, allowance £11,000, taxable £7,900.  At 20% the tax is £1,580 so pay after tax (ignoring all other deductions) is £17,320.  Increase the tax to 21% and add Kez's £100, taxable is £8,000 and tax is £1,680 so pay after tax (ignoring all other deductions) is £17,320 - exactly the same as if they hadn't messed around.

Get paid any less than £18,900 you're gaining a few pennies a week, get paid any more and you're losing out.  Let's be charitable and say that Kez's team just never realised that a payment from a Scottish administration would be taxed.  Someone at Labour's magic £20k threshold would be about £11 down at £19,999 but if they earn an extra quid then they're £90 down because they're now being charged 21% tax but getting no government cash.

The tax rise is unfair

Not all income is taxed on the Scottish rate.  Income from dividends and savings is exempt (in spite of the pretence that the UK and Scotland will have equal dibs on taxation there are parts of the system which will remain entirely in George Osborne's sweaty palm - See page 7 of this) so any lottery winner living off the fruits of investments and interest payments won't be affected by the increase; anyone who inherited wealth and has never had to work a day in their life will get away scot-free, and any company director who takes all or part of their remuneration as a dividend escapes it, too.  Shuggie McDufflecoat pushing a street cleaning barrow eight hours a day gets hit for the whole whack, though, and Senga McDufflecoat operating a supermarket checkout in unsociable hours gets stung as well.

That's not all - even among those on PAYE it's not fair.  Take a look at the Scottish tax rates and the threshold for next year (as they stand at the moment) and you'll see that there's a progression in what you pay - under £11,000 there's no income tax to pay, between £11,000 and £43,000 you pay 20%, up to £161,000 you pay 40% and over that you pay 45%.

So if you earn the £20,000 that just excludes you from Labour's £100 giveaway (some nurses earn about this amount) the figures go like this: £11,000 tax-free so £9,000 to be taxed.  At 20% tax that's £1,800, at 21% it's £1,890.  Tax going up from £1,800 to £1,890 is a 5% rise.

A teacher on £30k -

£30,000 - £11,000 = £19,000 taxable. At 20% the tax is £3,800, at 21% it's £3,990 - a rise of £190 or 5% in tax payable

MSP on £59,089 -

First £11,000 tax-free.  Next £32,000 @ 20% = £6,400 and @21% = £6,720. Next £16,089 @ 40% = £6,435.60 and @ 41% = £6,596.49.  Total tax for an MSP on current system adds up to£12,835.60 and under Labour's proposal £13,316.49 - a rise of £480.89 which is 3.74653307987% - call it a 3.75% rise in tax payable.

Company director on £200,000 -

First £43,000 is the same as an MSP on each tax rate; the next £118,000 @ 40% is £47,200 and @ 41% is £48,380; and the final £39,000 @ 45% is £17,550 and at 46% it's £17,940.  Total tax under the current system is £71,150 and under Labour's new system £73,040 - a rise of £1,890 or 2.66%

So low earners would pay 5% more in tax than they do now, an MSP would only have a 3.75% increase in the tax they pay and the company director 2.66%.  It has a progression but progressive it's not.

The planned bureaucracy is chaotic

The £100 is a tax rebate that can't be a tax rebate. Scottish Parliament doesn't have power to direct HMRC to pay a rebate (or to adjust thresholds or vary rates by different amounts) so Labour proposed using councils to pay the £100 - which makes it a government bung rather than a tax rebate which makes it taxable income which reduces its value to £79 (see above).

Here's a thing, though, councils don't have access to HMRC records so they have no idea who is earning less than £20,000 but also paying tax. Payslips you say? No way of proving that that's the entire income; there are lots of other ways of turning a coin and quite a few people don't have payslips which would prove how much they earn on a regular basis in any case. P60? That's last year's earnings and doesn't show anything about this year's earnings - unless people are expected to wait a year for their £100.

The payment of the £100 is not automatic, either, you would have to toddle down to your local council and claim it or, as one wag put it, "Roll up roll up and win the chance to apply to your local council to get your own money back..." - nice and easy for a parent working full time; or perhaps not ...

Not that we know exactly how the system supposed to work because Labour failed to tell us.

The numbers don't add up

There aren't sources given for the numbers used by Labour to create this Jenga tower of a policy but they give a number or two here and there and they just don't add up.

The original claim was that a 1% rise would raise £500 million and that £50 million would be needed to pay the £100 payments (that would be half a million payments a year) but in the hours after the policy was announced it was expanded by £25 million to encompass pensioners (that'll be 750,000 payments a year in total now), so that's the tax take down to £425 million on Labour's figures.

The Office for Budget Responsibility figures, though, say that Labour's overestimated the tax that would come in from a 1% hike so there's another £10 million out of the pot - down to £415 million. If you want to understand how the OBR got to its projection I'd recommend reading the original forecasting methodology booklet. We can't say whether this is enough to satisfy Labour's spending commitments for this tax rise because the spending was never actually laid out but we can say that losing £35 million in a couple of hours is a bit careless when you're asking people to trust you with more of their money.

Then there's the cost of administering the £100 that people have got to claim back through their council. It wasn't clear at first what the proposed costs were but it became clear when Kezia got into a Twitter spat with an SNP candidate - 

 
Quite why she was bothering with such a biffing back and forth with a first-time candidate instead of getting on with her job of annoying the Scottish Government and leading Labour I've no idea but the £1 million admin cost is simply not credible. Those Discretionary Housing Payments (DHP) are payments towards housing costs. It's the mechanism by which the Scottish Government mitigates the cuts in Housing Benefit known as the bedroom tax, among other things.

Total DHP in Scotland is less than £40m (limited by Department of Work and Pensions rules) and covers housing costs in areas where councils will already have substantial information on claimants (you have to be claiming Housing Benefit which you claim through your council or the housing element of Universal Credit to get a DHP) and can process them in a fairly straightforward manner, fitting them into existing claims in most instances. Councils have no data or method of collecting data for the £100 and there will be many more claimants (if people can find the time) but Kezia reckons that it will be much cheaper to administer the more complicated scheme. It may be that there is magic in the air but the truth is more likely to be that it's not possible.


Labour isn't serious
On the day that Stage 1 of the Budget was in Parliament Labour MSPs were outside at a demo trying to make headlines instead of being inside in the committees scrutinising the budget. Kevin Stewart MSP raised it during the Budget debate :  

Does James Kelly not acknowledge that this morning the cabinet secretary was at the Local Government and Regeneration Committee and then the Finance Committee for those committees’ budget scrutiny? Only one Labour member turned up at the Local Government and Regeneration Committee, and that member asked only one question. Is Labour really so bothered about all this? - See more at: http://www.scottish.parliament.uk/parliamentarybusiness/report.aspx?r=10351&i=95248&c=1908111#ScotParlOR

Does James Kelly not acknowledge that this morning the cabinet secretary was at the Local Government and Regeneration Committee and then the Finance Committee for those committees’ budget scrutiny? Only one Labour member turned up at the Local Government and Regeneration Committee, and that member asked only one question. Is Labour really so bothered about all this?

Does James Kelly not acknowledge that this morning the cabinet secretary was at the Local Government and Regeneration Committee and then the Finance Committee for those committees’ budget scrutiny? Only one Labour member turned up at the Local Government and Regeneration Committee, and that member asked only one question. Is Labour really so bothered about all this? - See more at: http://www.scottish.parliament.uk/parliamentarybusiness/report.aspx?r=10351&i=95248&c=1908111#ScotParlOR

Does James Kelly not acknowledge that this morning the cabinet secretary was at the Local Government and Regeneration Committee and then the Finance Committee for those committees’ budget scrutiny? Only one Labour member turned up at the Local Government and Regeneration Committee, and that member asked only one question. Is Labour really so bothered about all this? - See more at: http://www.scottish.parliament.uk/parliamentarybusiness/report.aspx?r=10351&i=95248&c=1908111#ScotParlOR

Labour's Deputy Leader only mentioned the policy when he was asked about it and spent much more of his speech praising the SNP Scottish Government (no, I don't think he's preparing a leadership challenge), perhaps displaying a bit more of the strategic thinking that Labour will have to do.

If there was serious intent behind this policy it would have been laid out well in advance with plenty detail but it wasn't. No Labour speaker yesterday mentioned amending the Budget Bill - this may be because they are infamously useless at it, most famously Iain Gray having an amendment for additional apprenticeships accepted by the Government and then whipping Labour MSPs to vote against it.

The £100 payment is supposed to be 

an annual payment of £100 for every household paying tax and earning under £20,000

so a couple both earning would have to have a joint income of less than £20,000 to qualify for the bung (they'd get the tax rise in any case).

There's nothing to indicate what the rules are for houses in multiple occupation where a fairly hefty chunk of young professionals (certainly in Edinburgh) live while they are saving to try to get on in life so you could have three or four people earning less than £20,000 each getting hit with a tax rise while they're trying to make ends meet.


It's serious
This is a serious issue - I'm in favour of raising income tax but this scheme would hurt a lot of people without delivering the resources Scotland needs. I'd quite happily see tax raised on higher rate taxpayers and additional rate taxpayers but I can't see any justification for upping the basic rate for the low paid. If we had proper control we could, of course, create other rates, adjust the thresholds, change the allowances and so on - but we don't have control. You can blame whoever you want for that lack.

The scale of working poverty in Scotland is stark - 360,000 households with at least one person working are living in poverty. That's 10.7% of all working households in Scotland - the workless households and the households where people are economically inactive for other reasons aren't included in this figure. That's the challenge we have to face in a rich nation blessed with advantages. I can see no justification for increasing their income tax, their council tax or any other tax they have to pay until they have the chance of a lifestyle that is at least decent.

Labour has the chance to bring forward an amendment to the budget and to put this proposal in its manifesto. Neither would be good for Scotland and neither would be good for Labour.