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Tax system can be fairer and greener, says new think-tank model

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18 April 2009

As we approach the crucial 2009 Budget, the Institute for Public Policy Research (ippr) is outlining a tax and benefits reform package that would increase taxes on the wealthy, introduce a carbon tax, and benefit all but the wealthiest families. The independent think tank says the package would also enable the government to meet its commitment to halve child poverty by 2010.

The effects of the illustrative package have been calculated using ippr’s new model of the UK tax and benefits system, which is based on data from national income and expenditure surveys.

Key elements of the package include:

A new carbon tax on domestic fuels and electricity, levied at £25 per tonne of carbon dioxide
An increase of £1,000 in the personal allowance
Increases to Jobseekers Allowance, Child Benefit and Child Tax Credits
A new 50 per cent income tax rate for those earning more than £250,000 a year
Removing the ceiling on National Insurance contributions for high earners .

ippr says that although the introduction of a carbon tax by itself would be regressive, with poorer households paying a higher proportion of their income, the wider package illustrates how it would be possible to more than compensate the average low-income household.

ippr also says that low-income households living in poorly insulated homes would need extra help, and so is recommending an expansion of fuel poverty programmes and more effective regulation to require private landlords to improve energy efficiency in their properties.

Overall, the package starts to switch the tax burden from income to carbon, and would raise £1.2 billion in additional revenue. This extra money could be spent on an expanded energy efficiency programme targeted at low-income households.

The package would raise the incomes of poorer households by an average of between £7 and £11 a week. The wealthiest two per cent of households would see their weekly incomes fall by between £62 and £309 a week on average.

Lisa Harker, ippr Co-Director, said:

“We need to make Britain both fairer and greener, and the tax system should play its part. The very wealthy have done far better than the rest of us in recent years, and the growth of the financial bubble was both socially and environmentally unsustainable.

“At present the poorest pay a larger proportion of their incomes in tax than the richest, and this needs to change. At the same time, we have no consistent carbon tax to encourage us to reduce energy use in our homes.

“In this 2009 Budget the Government has a chance to take bold decisions, and move us decisively towards a fairer and greener economy. Our modelling shows that we can have a fairer tax rate for the rich and use the tax system to reduce carbon emissions, without penalising low and middle income households.”

The package would also enable the government to meet its commitment to halve child poverty by 2010. ippr has calculated that by increasing Jobseekers Allowance, Child Benefit and Child Tax Credit, government could lift a further 600,000 children out of poverty by 2010.

Combined with previously announced measures, this would enable the government to meet its target to reduce child poverty by a half compared to 1998 and put it firmly on course to end child poverty by 2020. Increasing benefits for the poorest families will also provide an extra boost to the economy, as they are more likely to spend any extra cash, rather than save or pay off debt.

Notes to editors:

The final report on ippr’s Red and Green Taxes project will be published summer 2009

Time for another ‘People's Budget’ which uses ippr’s Red and Green taxes model which to proposes new tax measures to be taken in the April 2009 budget will be published here on Monday 20 April 2009.

The ippr tax-benefit model uses spending data from the Expenditure and Food Survey and income data from the Family Resources Survey. Both are large scale, government datasets containing detailed data about patterns of income and expenditure in a range of different household types across the UK.

The model can be used to examine the aggregate cost and distributional impacts of a range of different kinds of tax and benefit measures, including income tax rates and allowances, tax credits, means-tested and universal benefits, and expenditure taxes.

The first use of the model was to investigate a package of measures aimed at making the tax system fairer and introducing a carbon tax. The details of the package are:

Reform 1: Carbon tax on domestic fuel at £25/tonne of carbon dioxide
A £25/tCO2 tax rate was chosen on the basis that this is the figure the Government currently uses as the Shadow Price of Carbon in project appraisal. The modeled results include the response of households to the tax, assuming a short run elasticity of demand of 0.2.

Reform 2: £1,000 increase in the personal allowance
The income level at which individuals under the age of 65 start to pay tax increases from £6,475 to £7,475. This change would take 800,000 people out of income tax altogether.

Reform 3: Raise Jobseekers Allowance, Child Benefit and Child Tax Credit
Jobseekers Allowance would rise to £75 a week for people aged 25 and over; and to £65 a week for people under 25. At April 2009, JSA was £64.30 for people aged 25 and over, and £50.95 for people under 25. The rise would apply to both income-based and contributory JSA, as well as Income Support.

Child Benefit for second and subsequent children would rise to £20 a week. Child Benefit for the first child is currently £20 a week, and £13.20 for additional children.

The child element of the Child Tax Credit would increase by 18 per cent, from a maximum of £2,235 to £2,640 a year. The maximum child element is paid to households with an annual income of up to £16,040.

Reform 4: A new 50 per cent income tax rate on earnings over £250,000
The top rate of income tax would rise from 40 per cent to 50 per cent for earnings above £250,000 per year. This change would affect about 50,000 people.

Reform 5: Remove the upper ceiling on employee National Insurance contributions
This would mean that employee NICs are levied at 11 per cent on earnings above the current upper earnings limit (£770 per week in 2008-09).

Emissions from electricity generation are covered by the European Union Emission Trading Scheme, although the price of carbon in the scheme is current fairly low (around £10/tonne carbon dioxide). A carbon tax would go further by applying to gas and other domestic fuels, which are not currently covered by the trading scheme.

The analysis includes a correction to the costings and distributional effects of the JSA increase to allow for the fact that JSA claimant count is likely to have increased by about 1 million by late 2009, relative to its 2006 level.

The impact of the package in terms of percentage changes in average incomes and changes in average weekly income by income decile are shown below:

Income decile	% change in average household income	Change in average weekly household income
1 (poorest)	5.3	£7.17
2	5.3	£11.28
3	2.3	£5.93
4	2.0	£5.98
5	1.6	£5.58
6	1.3	£5.47
7	1.1	£5.31
8	0.7	£3.91
9	0.1	£0.93
10 (richest)	-.36	-£50