From the TUC

Middle Income Britain: time for a new agenda

31 May 2009, by Guest in Economics, Labour market, Politics, Society & Welfare

The TUC Touchstone pamphlet, Life in the Middle, received wide media coverage on its launch last week. There were half page analyses in the Financial Times and The Guardian and news reports in The Daily Telegraph, The Daily Express and The Daily Mail and a very detailed analysis on the BBC website.  The Daily Express and Daily Mail also dedicated full page columns by their lead political columnists to the pamphlet, The Daily Mirror’s Kevin Maguire covered it and The Observer also had a column on Life in the Middle describing the pamphlet as “rich and fascinating” . 

The pamphlet’s author, Stewart Lansley, and myself did interviews for the Today programme on Radio 4 and for Radio 5 and the pamphlet was covered on BBC2’s Working Lunch.  In addition, this blog received a record-breaking number of visitors on Thursday and Friday while the pamphlet was also mentioned on a wide number of other blogs including comment pieces on Liberal Conspiracy and Comment is Free.

The plan now is to move rapidly to doing more work on the type of policy agenda that can help remedy the problems faced by “Mibs”  (that’s Middle Income Britons to the uninitiated).  Fairer tax and fairer wages are clearly central but my hunch is that the analysis provided by Life in the Middle is strong enough and important enough to generate a far wider range of policy initiatives. Of course, further developments will all be reported in full here on the Touchstone blog.

2 Responses to Middle Income Britain: time for a new agenda

  1. Adrian Wrigley
    Jun 5th 2009, 9:32 pm

    This pamphlet illustrates just how poorly those in the union movement understand the basic operation of the political economy. By basing their analysis on a deeply flawed model of the economic system, grossly erroneous conclusions and policy recommendations are drawn.

    It’s hard to know where to start in putting right such a broken analysis! I hope the blog owner will kindly accept this analysis in two separate comments. (thanks).

    Perhaps the biggest conceptual flaw is their focus on money incomes. Most wealthy people get a major part of their income as non-money (imputed) incomes. This includes the hidden flow of income to owner-occupiers. It also includes the income flow of directly owned capital assets. And it includes the income from the erosion of debt values through monetary inflation. There is also the income from gifts af all sorts (especially intergenerational gifts such as low/no interest loans from parents, loan guarantees, business investments and the “safety net” of coming from a wealthy background).

    The pamphlet also seems confused about incomes and wealth. They are concerned with dispersion of living standards which relate more closely to wealth than money income. Yet the groups of the “wealthy”, “high earners” and “the rich” are used almost interchangeably.

    Another way of looking at the issue is by asking the question “who is appropriating the economic rents in the economy?”. The answer is that the wealthy appropriate the vast majority of the economic rents – usually without being recorded in any accounts and without being liable to tax. These economic rents are generated by government and community activity and by nature. They are not “earned” in any meaningful way by the wealthy but simply arrogated by them. In effect, the government is a giant “subsidy machine” for the wealthy invisibly feeding them economic value. The result is a constant and powerful “trickle up” current in the economic system. Attempts to nullify this automatic flow to the wealthy by taxing high earners has no basis in logic or economic theory. Why would taxing wealthy people and spending it on services whose value flows back to the wealthy do anything other than worsen the situation? The feedback loop actually returns more to the wealthy than is collected in tax, so the more tax you collect from high earners, the greater the economic rent arrogation is by the wealthy. We can see this is true from the track record of high and low spending governments in recent decades. High (income) tax Labour governments widen wealth disparities particularly rapidly.

    These issues were well understood by the Classical Economists such as Adam Smith, David Ricardo, Henry George. Another explanation (very accessible) is here

    In terms of conclusions, the prescription is exactly wrong. It mentions Council Tax, ability to pay and the effect on “the poor”. Council Tax is incident almost entirely on the house owners. Council Tax Benefit and Housing Benefit are incident on house owners too. Except in the short term, tenants pass on these taxes and benefits straight to the landlords by the adjustment of rents. So Council Tax rarely hits the poor (even although it may be collected from them) – none of the poor people I know own their own homes. The Benefits mentioned are simply gifts for wealthy home owners and landlords – propping up land rents/house prices and comprising a significant contributor to the wealth gap.

    The idea of tax “related to ability to pay” is so deeply ingrained in popular thought, but completely without foundation or application in practice. A much better principle is “Pay for what you take, not what you make”. “Ability to pay” is a key “reason” that non-monetary incomes are generally outside the tax system – and that is how the wealthy intend it to stay.

    On capital taxation, much of what is collected is little more than a reflection of the inflationary monetary system. In the decade from 1997, UK inflation (M4) has been 11.6% annually. So any asset which has appreciated by less than this has actually returned a loss to its owner against inflation (assuming no income to complicate matters). And yet people are expected to pay tax on this as if it had given an economic gain. Most notably, this applies to “capital gains” on housing. House prices have tracked (monetary) inflation surprising well in the past century. There is no justification for charging tax on capital assets (more properly land) which simply track true inflation. If the asset is yielding a return beyond the normal return on the economic capital (ie the building), failure to tax it would (and does) result in an iniquitous arrogation of unearned income to the wealthy and drive increases in wealth concentration.

    Overall, I think the authors of the pamphlet are genuine and honest in their approach. But their naivety on key economic matters is astounding! It’s as if they are being “played like a musical instrument” of the wealthy. By advancing the agenda of the wealthy against that of the workers, the TUC continues to entrench the present iniquities and diverge from its worthy goals.

  2. Robert Day
    Jun 6th 2009, 10:48 pm

    I can see where Adrian’s coming from: but his analysis is based on economics – and very much economic theory – rather than looking at how the analysis in the leaflet (which I have just skimmed before posting) stacks up against reality.

    All I can say is that from where I sit – a graduate who, after thirty years in the public service, the last twenty of them in an area regarded as ‘knowledge-based’ and part of the ‘new economy’ of economic regulation, is still earning less than the national average wage – the picture painted by the pamphlet looks broadly correct. The solutions put forward, though, seem fairly long-term, and even if a future (albeit fairly hypothetical) Government were to take its policy lead from the pamphlet’s findings, I wouldn’t be holding my breath for my personal financial position to improve based on that policy.

    Neither would I be holding my breath if the same Government followed Adrian’s prescription, unless the tax I pay were to be slashed to unrealistically low leves because of my not paying for services I don’t use (I have no dependent children, for example).

    (Anyway, the concept of taxation is, to some extent, that you pay for services that you either will most likely use in the future, or for services that others use that increase the common good, even if indirectly. So for example, the argument that someone who does not use railways shouldn’t have to support tax subsidies to the railways is false because of the amount of passengers and goods the railways move that does not end up on the roads, thus reducing congestion and indirectly benefitting those who do not use them.)