Friday, 18 December 2015

SRIT: A Blunt But Undeniably Progressive Tax

The SNP spin machine has been in full effect over the last few days. They need to be. How can they defend their decision not to use the Scottish Rate of Income Tax (SRIT) to protect us from the spending cuts imposed by Westminster's austerity policies?

The Spin is pretty simple: because the SRIT has to be applied to all tax bands equally (true) it would unfairly hit the poorest hardest (untrue).

Here's Swinney (our Finance Minister) to the Scottish Parliament
"By its nature, exercising that power would have a disproportionate effect on the amount of tax paid by the taxpayers on the lowest incomes."
... and being interviewed by the BBC
"It would have in fact been about double the effect on the taxable income of individuals at the lower income thresholds rather than people at higher income thresholds"
This is from the Scottish Parliament Information Committee (SPICe). Coming from the politically independent government body that is meant to inform MSP's I find this truly shocking - if you don't know why, read on

Here's SNP MSP Joan McAlpine on Twitter

I could find plenty of other examples but anybody with ears knows that variations on this theme are being hammered into the Scottish consciousness: the SNP aren't using SRIT powers because they would hurt the poorest most.

This (rather than governing) is what the SNP do best. It's a kind of mass Neural Linguistic Programming; they select a few simple statements and relentlessly repeat them until they are received as wisdom by their trusting supporters. All political parties do this to some degree of course, but the lack of scrutiny applied to the SNP and their sheer brass-neck sets them apart. The intelligentsia may expose their soundbites as being deeply misleading or (as in this case) simply wrong, but that doesn't matter. Their supporters are well trained to ignore dissenting voices.

We could assemble a greatest hits list: the ones that intentionally mislead by ignoring our higher public spending ("we generate higher GDP per capita", "we send more tax per head") or the ones that are - by any reasonable analysis - downright wrong ("oil is just a bonus", "we'd have been £8bn better off", "our oil forecasts were in line with the market at the time"). To the second list we can now add "using SRIT would hurt the poorest most"

So why is this assertion so misleading?

As I explained in my last blog (Swinney: Confused or Aiming to Confuse), the suggestion that a flat increase to all tax rates (which is all that SRIT currently allows) hurts the poorest most plays on a simple intuitive misperception: people think the poorest pay 20% tax and the richest 40%, so 1/20 is twice as bad as 1/40. Their are a couple of problems with this, the biggest being that we only pay tax above a threshold (the Personal Allowance) which means that a higher proportion of higher earners' income is taxed1.

In my last blog I explained (using rounded figures) how an additional 1% SRIT would mean - because the first £10k of income (the Personal Allowance) is not taxed - someone earning £20k would pay £100 more tax but someone on £40k would pay £300 more tax .

The wider point here is that this additional tax money raised could be used to alleviate the impacts of "Westminster's austerity policies". The additional money raised could be recycled into public spending in a way that defends our essential public services and protects the poorest in society. A simple person might think that the SNP - having campaigned as the "anti-austerity" party - would lose all credibility if they failed to take this opportunity to put their words into action.

But back to the narrow "proportionality" argument. I've had time to refine the analysis a little so that it includes employees' National Insurance Contributions. This means we can see the impact on take-home pay (which is surely the key measure here);

It's a detailed table but the key row is the one showing "impact on take-home pay" (the first column is for somebody working full time on the National Minimum wage).  Taking the first four columns, all figures are full annual impact:
  • Earning £14k: pay £34 more tax, a 0.3% reduction in take-home pay
  • Earning £20k: pay £94 more tax, a 0.6% reduction in take-home pay
  • Earning £40k: pay £294 more tax, a 1.0% reduction in take-home pay
  • Earning £60k: pay £494 more tax, a 1.2% reduction in take-home pay
It is undeniable that the poor are affected, but to suggest (as Swinney has) that SRIT would have a "disproportionate effect on the amount of tax paid by the taxpayers on the lowest income" or "double the effect on the taxable income of individuals at the lower income thresholds rather than people at higher income thresholds" is at best intentionally misleading and at worst (as I would argue) it is frankly wrong. The last row in the table above is how the SNP attempt to justify the statement: you be the judge.

Now regular readers of Chokkablog will know I do like a graph and this data screams out to be graphically presented. Just two graphs should do it.

To help us understand how effective tax rates vary by income level (factoring in the impact of the Personal Allowance) and how an additional 1% SRIT would impact that;

Note how the red line (the additional 1% SRIT line) diverges from the blue line (current tax policies) - the effect is magnified for higher earners.

As an aside: the first curved section of the line is of course tending towards 20% (the maximum tax you would pay if there were no higher bands). Similarly the second tends towards 40% (the proportion of income taxed at less than that rate declines as you head further right). The change in profile between £100k and £120k is simply because the personal allowance is phased out for higher rate tax payers over this range - effectively accelerating us towards the 40%. The final additional rate kicks in above £150k, sending us on a line which is asymptotic to 45%. If you earn £1m you pay 43.6% tax (somebody asked).

Finally, let's look at the measure that I would argue is the best single measure of the proportionate impact of SRIT: what impact a 1% increase has on the take home pay of people on different salary levels:

Now: you can argue that the incremental pound matters more to a lower earner and that existing SRIT powers don't allow us to avoid impacting all tax payers. They are valid points. But when Swinney brazenly asserts that using SRIT powers would "have a disproportionate effect on the amount of tax paid by the taxpayers on the lowest incomes" or would have "about double the effect on the taxable income of individuals at the lower income thresholds rather than people at higher income thresholds" he is engaging in a conscious deceit.

I'm not alone here (for example this We Need to Talk About Tax piece by Graeme Cowie covers similar ground), The good news for the SNP is of course that hardly anybody reads blogs like this - they won't be losing any sleep.

For what it's worth: here's my attempt at a shareable single graphic summary:

Or if we'd rather keep it in his "amount of tax paid" terms;

1. The other problem is that taking percentages of percentages is nearly always a misleading thing to do.  It's been (correctly) pointed out in the comments that "the percentage increase in tax bill" logic allows the statement to be justified - the lower income tax bills goes up by 5%, declining to 2.8% at £150k. This is true and I covered it in the previous blog - but as I highlight, the impact on take-home pay (or total effective tax rate) is greater the higher the income bands because a higher proportion of their income is taxed. I'm comfortable this is what matters, is the only reasonable way to interpret the figures


FF said...

Strictly speaking SPICe are correct: an increase in SRIT would result in "a larger percentage increase in income tax liabilities for lower earners", ie relative to the amount of tax they pay now. As a percentage of their income, as you correctly point out, the tax increase would be lower. Arguably the second point is the more useful one which leads me onto...

The logic of the SPICe graphic would be to reduce income tax for "a larger percentage decrease in income tax liabilities for lower earners". But that wouldn't make sense, would it? So they de-emphasise the possibility by making the font smaller.

Kevin Hague said...

True - their tax bill goes up by the higher percentage (the 5% bottom row for the first columns in my table) but their take-home pay goes down by a lower percentage. I'm comfortable the latter is what matters.

Anonymous said...

This analysis overlooks the basic costs of living and the amount of disposable income that each income band has after paying for food, heating, transport, etc. Your argument that a 1% increase in SRIT has a smaller % impact on the take home income of a low earner is obviously correct in stark numerical terms, but reality is different when you look at the impact of £94 on the disposable income of someone on £20K relative to the impact of £294 on the disposable income of someone earning £40k.
ONS statistics estimate that UK households spent an average of £517 a week in 2013. On that basis, our worker earning £20K a year is already in debt and now has to pay an extra £94!

Anonymous said...

I wonder how much extra it would raise towards Scotland's relative deficit?

Colin Webster said...

This is undoubtedly the key point, but it was mostly ignored in the analysis above. Surely it's a glaring point? Kevin, you accuse Swinney of duplicitous behaviour, but you've opened yourself up to accusations of the same

Anonymous said...

Anonymous, your point is a valid one, but while you rightly distinguish between the relative disposable income after basics of someone on £20k and someone on £40k, it lessens the force of your argument to then quote an average (across ALL income brackets) household weekly spend of £517 as the basis for your conclusion. As the statistics you quote show, lowest income households spend an average of between a third and a half that amount

Kevin Hague said...

Please see the next blog - I think I've created what you ask for here

Nessimmersion said...

Two points:
Please add the reduction in available income due to employers NI, include the Employers NI in the total for tax paid.
Please describe why Scotland is unique, evidence from around the world that increasing tax decreases revenue raised ( Laffer curves are known in reality even though many theorists prefer to ignore their existence).
Please describe why, for example, a north sea oil worker on 70 K ish, already paying a substantial proportion of their income should pay even more tax, as well as not getting family allowance etc, why should he spend all that time offshore, away from family when the government think they are entitled to even more of his money.

Kevin Hague said...

Blimey, draw you neck in eh?

I'm highlighting the inaccuracy of Swinney's statement.

As an employer I'm more than aware of the impact of employers NI but I'm showing the take-home pay impact and therefore that's not relevant to this analysis.

I happen to believe on progressive taxation (although I'd be amongst those most heavily hit by it) but I'm not inclined to respond to your demand to explain why the principle has merit.

Merry Christmas

Malcolm Henry said...

Personal Allowance is going to be £10,800 in 2016/17 (a £40/year tax cut) and £11,000 in 2017/18 (a further £40/year tax cut). Hard to see why the SNP is refusing to mitigate the hated Tories' tax cuts by a modest rise in SRIT.