Tory tax and welfare plans will benefit richer households more than poorest, says leading think-tank

Labour and Liberal Democrat benefit changes would mean substantial redistribution in long term, says Institute for Fiscal Studies

Andrew Woodcock
Political Editor
Thursday 28 November 2019 15:47
Paul Johnson: IFS manifesto analysis

Conservative manifesto tax and welfare plans would benefit richer households more than the poorest, while both Labour and Liberal Democrat proposals would involve “substantial” redistribution over the long term, a leading economic thinktank has said.

But under current plans, neither opposition party would restore claimants’ real-term incomes to the levels seen before the Conservative austerity programme began in 2010, said the Institute for Fiscal Studies.

Meanwhile, the IFS warned that Labour’s tax plans would impact on households well beyond the top 5 per cent of earners who Jeremy Corbyn is targeting for income tax hikes.

Some lower-income taxpayers could lose out from the loss of the marriage tax allowance and be on the receiving end of changes to taxation on dividends and capital gains, while almost everyone would feel an impact from lower wages or higher prices if companies pass on Labour’s planned increase in corporation tax, the thinktank said.

And its expert researchers said that Labour’s promise to end in-work poverty within five years was not achievable.

The Conservative manifesto leaves tax and benefit rates virtually unchanged, other than an increase to £9,500 next year in the threshold for national insurance contributions (NICs), worth less than £100 a year to individuals earning more than this amount, said the IFS.

Just 8 per cent of the benefit from cutting NICs goes to the bottom 20 per cent of households and none at all to the poorest, with the effect that, while Tory tax and welfare plans for the next parliament will have little overall impact, better-off households will fare slightly better than the most disadvantaged.

By contrast, Labour and Liberal Democrat proposals for tax and benefit reform would boost the net incomes of the poorest 20 per cent by almost 8 per cent and the next-poorest group by around 4 per cent, the IFS found.

Both plan to abolish the two-child limit for benefits, as well as the “bedroom tax” and benefit cap.

The 50 per cent of households with the highest incomes under Lib Dem plans and 20 per cent under Labour would see their net incomes reduce as a result of changes to taxes and benefits, with the richest 20 per cent losing about 3 per cent under Mr Corbyn’s plans.

IFS director Paul Johnson said: “Putting it in the context of what has happened over the last decade, these are fairly modest changes – clearly welcome for those in the bottom third, but nothing like undoing the changes we have seen since 2010.”

(Institute for Fiscal Studies)

Deputy director Robert Joyce said that while the proposed changes would not have a transformative effect on inequality in the next five years, if they were maintained they would have a “very big impact on the distribution of incomes in the long term”.

The IFS’s Stuart Adam said it was “clearly not true” that Labour’s planned tax measures would affect only the 5 per cent highest earners.

Single-earner couples could lose £250 a year from the loss of marriage tax allowance, while some people outside the top 5 per cent were certain to lose out from changes to the treatment of dividend taxes and capital gains.

But the biggest impact is likely to come from Labour’s increase to 26 per cent of the main rate of corporation tax.

“At least part of this is likely to be passed on to workers in lower wages and customers in higher prices,” said Mr Adam. “Even if that doesn’t happen, the company simply makes lower profits for shareholders, which includes pretty much everybody with a private pension and not all of those people would be in the top 5 per cent.

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