The IFS and “fairness” – a woeful contribution to the debate

The Institute for Fiscal Studies has done itself – and the wider public debate about the Comprehensive Spending Review – a considerable disservice over the last twenty four hours. In an effort to find new angles to “move the story on” regarding the government’s spending plans, the IFS’s insistence that George Osborne’s measures are regressive has taken centre stage. More’s the pity. Far from illuminating discussion about the coalition’s fiscal policy, the IFS has seemingly attempted to reduce moral – not merely economic – considerations to the status of a bar chart.

The Institute has walked straight into a trap – partly, though not wholly of its own making – of equating a progressive change to tax and benefits with “fairness”. The rationale appears to be that if any particular policy makes, say, the rich 5% worse off and the poor just 4% worse off, this is “fair”. Whereas a policy which makes the poor 5% worse off but the rich merely 4% worse off is “unfair”.

It is hard to know where to begin in exposing the inanity of this proposition.

Firstly, it’s worth noting that the relatively affluent in Britain pay a very high proportion of the overall tax take. In terms of income tax, the highest earning 1% contribute nearly a quarter of all receipts and the top 10% account for well over half. This is a quite staggering contribution by a relatively small proportion of the working population. But on the IFS approach, if we were to heap a still greater burden on these high earners this would make Britain a fairer place. Even if you believe the over-repeated cliché that “those with the broadest shoulders should bear the heaviest burden”, there is surely some point at which it is unfair to continue to place yet more weight on these shoulders.

Secondly, what is the endgame? On the “progressive” analysis, moves towards some sort of pre-1989 East German dystopia are all apparently steps in a fairer direction. Until we live in some hideous society in which every citizen has an identical income, there will always be room for “progressives” (i.e. socialists) to argue that those who are earning more should continue to pay more to the state. The (not very) implicit assumption is that we will not have perfected a fair society until everyone has exactly the same.

Thirdly, the IFS bar charts appear to take no account of dynamic effects. If, to take an extreme hypothetical example, a 10% reduction in welfare handouts to the relatively poor would have an incentivising effect of propelling these people into the workforce, this would surely be a sensible measure, actually alleviating poverty. Not on the IFS view of the world it isn’t. They are determined to measure the immediate “spot price” without properly considering incentive effects.

In a fast-moving, 24/7 media age, all think tanks are faced with the challenge of trying to communicate relatively complex ideas in relatively succinct and straight-forward terms. But if you fall in love with the immediate soundbite, rather than staying true to the complex idea, you risk diminishing your reputation and impact over the long run. The Institute for Fiscal Studies may have done just that.

And some further points:
1. It is bound to be the case that if the government is retrenching from a position of spending 54% of national income (with no tax cuts), the first-round effects of that will affect the poor most.
2. The position of the poor in the UK – it is agreed by all parts of the political and economic spectrum – is dire (especially in relation to workless households). If this problem cannot be solved by the state spending 54% of national income (or even 40%) then we are using the wrong model! Retreat from that model should hardly be seen as anti-poor.
3. The government has partly brought this on itself by its obsession with “fairness” – interpreted as redistribution

The effect of the CSR on the poorest decile is also unpredictable because people on benefits will be able to ‘game’ the system. For example, when Incapacity Benefit becomes means tested couples may decide to split up (or not to cohabit in the first place). Some of the sicker IB claimants may seek ‘promotion’ onto DLA. Similarly, some of the proposed cuts to Housing Benefit can be avoided through strategic changes in household circumstances.

Yes, incapacity benefit reform seems to be another attack (indeed the final nail in the coffin) for the contributory principle of National Insurance and another attack on family formation. Only two major decisions have been taken that affect the incentives for household formation both – to a significant degree – are anti-family formation.

I continue to like the ‘Growthland versus Egalitaria’ example in my book ‘The Power To Destroy: a study of the British tax system’, in which I explained how, at least on certain assumptions, the poor were likely to do better financially in a growing economy than in one which was highly redistributive.Mark and Philip and Richard, as well as myself, are all referring to the dynamic and behavioural effects of tax and state welfare system changes over time instead of contenting ourselves with a totally unrealistic static model.To some extent the government has dug a whole for itself by putting so much emphasis on the highly subjective and ambiguous criterion of ‘fairness’.

One point which makes me uncomfortable in this debate is the definition of “Income” in all these decile charts. I’m not an expert in any of this – is there a standard definition which you use? I assume it includes all state benefits, but does it also take into account the fact that those on low ‘incomes’ are also subsidised by social housing rents which are significantly lower than private? If not would this make a significant difference to the decile charts?

I agree with Philip Booth entirely (and the post). The IFS is believed to be ‘unbiased’ in the same way that the BBC is! What we need to put across is that (his point 3) ‘fairness’ cannot mean treating people unequally – i.e. discriminatory taxation of the richer is as unfair as discriminatory taxation (or anything else for that matter) of anyone, rich or poor. It is here that we need to emphasise the distinction between egalitarianism and equalitarianism.

“It is hard to know where to begin in exposing the inanity of this proposition.”Can you really be so daft? If after rent/mortgage/utilities and all other necessary expenditures the average household is left with say 5-10,000 pounds per annum of disposable income… and then you knock 1,000 pounds off that(or possibly even worse, depending on the individual circumstance), then that family is left significantly worse off… It is for this reason that flat taxes don’t work, because they are inherently REGRESSIVE despite being labeled as “fair” percentage-wise by proponents. You seem to think that because 4% and 5% are similar numbers that they are fair for all… they are NOT.

The problem with the idea of ‘fairness’ is that it is being used in different ways by different people. A common sense of fairness relates to ideas of proportionality, desert and reciprocity and this is how the government has tried to sell its welfare reforms. However, most of the media and organisations like the IFS define fairness in terms of equality, whereby more money to the poor always increases fairness regardless of the outcomes. The result, of course, is permanent poverty because there are all too few incentives for the poor to alter their behaviour.Fairness can be a very powerful argument, but it has to be defined and used differently from the simplistic manner seen yesterday.

J.R. McCulloch made a good point about tax 165 years ago: ‘The moment you abandon … the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice and folly you may not commit.’John Stuart Mill made a similar point: ‘The first rule is the general rule of taxation, namely equality: that is to say taxation in proportion to income.’ ‘Equality’ in this sense was also one of Adam Smith’s four maxims.Our tax and benefit system is so complex, with the government taking so much of the national income, that precise calculations of the effect of changes are impossible.

@Chris – flat taxes are fair in the only real meaning of the sense. If Peter has an orange and Paul has two oranges and I take half an orange from Paul I have treated Paul unfairly compared to how I have treated Peter. It makes no difference that equality has been achieved; the fact is I have engaged in discrimination thus I have been unfair. It is as simple as that (or rather it is complicated by the fact that Paul often ends up with two oranges while Peter is left with one!

@ John (the first)
No, it does not include all state benefits, nor redundancy payments. The ONS state that analysis was prepared in accordance with instructions from government departments and points out that the total of Tax Credits according to the Expenditure and Food Survey is only two-thirds of that paid out by HMRC. It includes a figure for housing subsidy but that is only 4% of the amount of housing benefit although for those living in “social housing” who receive housing benefit the housing subsidy should equal housing benefit if the rent is only 50% of market rent.
Also the bottom decile includes well-off students living in flats but not poor ones in halls of residence.

Income does not define who is poor and who is rich.If you finish paying off your house and go into semi-retirement, does that make you poorer? No.If you are a student who has literally zero income, are you the poorest person in the country? No.If you are a parent who would earn a marginal £50p an hour coming off benefits, are you the poorest in the country? No.Gandhi earned nothing and owned nothing but a loincloth. Was he poor?The only poverty that is genuinely meaningful is poverty of opportunity.

Spot on. The IFS has a very two dimensional view of things, which is further besmirched by their reductive notion of ‘fairness’, which itself doesn’t relate to the reality of life, fair or otherwise.As you point out, the best way to problematise the precepts on which their report is based is to take their assumptions to their logical conclusions – which is that everyone not on benefits should be taxed more and more until they themselves earn the same as those on benefits.The result of this of course would be that there would be no money to give out and therefore no one on benefits… So the logical end state of the IFS’s thinking on ‘fairness’ leads to ‘unfairness’ in extremis!

@whig BMW sell their cars at a fixed price, likewise the local baker his loaf and the plumber his services also. If I wish to buy a car, load, or have a tap fitted I am charged the same price for the goods and services as any other buyer. In other words I am treated fairly and equally. Imagine if BWM were to price their cars at a percentage of the purchase income. Likewise it’s unfair and discriminatory for the state to charge people different amounts of money in tax.

@WhigTake make your metaphor accurate, picture Peter has a barrel of 20 oranges while Paul has an orchard of trees which can produce 1,000 oranges.George the taxman comes in and says to both: you must pay 5% of your oranges as tax to the government. Paul hands over 50 while Peter hands over one. Wow Paul out-contributed Peter by 50-1!But here’s the catch. Those oranges are your currency. They buy necessities like clothes and food. Regardless of how many oranges either of us have, that loaf of bread still costs me one orange.Paul can STILL buy 950 but Peter can only buy 19. So when you want to talk about the ‘real world’, Peter already was up against it. Now he’s destitute.

@DavidNclNo! You hit the nail right on the head as to WHY the government must institute ‘progressive’ taxation! As you said, the price of goods does not change as a percentage of income, which means the poor already are between a rock and a hard place when they need to buy the necessities… Going back to the orange metaphor, if the loaf of bread costs me 1 orange out of my remaining stock of 19, I just forked over 5.26% of my income for one meal whereas Peter, my rival, forked over an infinitesimal .001% of his income for that SAME loaf! The tax system has to look out for the poor because the baker certainly isn’t going to!

@Chris – so he’s ‘destitute’ because the government has confiscated 1/20th of his property. Well, isn’t that the fault of the government? Should the government not be confiscating his or anyone else’s property (with the exception of public good’s provision) anyway? Besides, if you had the flat tax you so dislike he could never become destitute because you could easily set the level of the tax at a rate where he would pay no tax. Simply set the rate at a certain level that avoids him becoming destitute (via his property being confiscated anyway!) and there is no problem. Thanks for making the case for a flat tax there…

@Chris – the whole point you’re missing (I think you’ve done the metaphor to death now) is that it is the efficiency growth provided by the free market which has allowed the proportion of income spent on basic necessities of life like food to fall dramatically amongst the poorest, and not via redistribution but in spite of it. Where are the starving millions in our society? (Actually the problem if anything is too high a level of calorific intake). Redistribution merely hinders the process by which the economy grows and we are all better off – or doesn’t the lesson of highly redistributive societies like the USSR or North Korea mean anything to you?

“Fairness” like beauty is in the eye of the beholder. Some people care about it, like the batsman who “walks” when he felt the bouncer touch his glove on the way to slip, some don’t. Most just use the word as an excuse to demand more for themselves.
Economists ought to look at the concept of “marginal utility” which states that £1 paid in tax matters much less to a millionaire than a guy earning £6/hour, but the millionaire does notice £10,000 paid in tax. It is quite possible to set tax rates so that pain caused by the marginal tax rate at each level of income will be equalised (and this will be simultaneously attacked by the Daily Mail and the Grauniad).

@ Whig and Chris
William Pitt’s income tax only applied to those with an income in excess of the equivalent of £50,000 pa Above that level it was flat at 2d in the £
Only idiots start flat taxes at zero income (cost of collection exceeds amount collected on small incomes).

You haven’t read the IFS’s stuff, have you? THey don’t speak of fair or not fair – they explicitly say that is in the eye of the beholder – they talk of regressive/non-regressive, which are technical terms.

@Matthew – yes, what the IFS actually seem to have said is ‘the analysis is incomplete’ but if you look at the overall picture including tax increases the situation does seem to be generally ‘progressive’ (which I class as discriminatory, but still). The biggest problem actually seems to be more the way the Guardian and BBC and statist press portrayed what the IFS said than what the IFS did say (which is not much yet on the CSR). There is, however, a problem with the way the rest of the media uses the IFS as an ‘arbiter’ and spins their reports. However, the government/opposition should not be trying to claim they are being either ‘fair’ or ‘progressive’ either.

The two most overused and therefore meaningless words in politics in recent years are “change” and “fairness”.When will politicians and their advisers get the message that voters hear these words and reach for the sick bucket.

@ Matthew – yes, I did but the media – and most bloggers, to be blunt, have come to equate “fairness” with “progressive”.
In my personal opinion, with which you are entitled to disagree as it is an opinion but you are not entitled to dismiss without reasoned argument, fair should include ability to pay (depending upon income and needful costs, the latter reflecting size of family/household, special needs, local housing costs etc), how hard one has to work, what one needs to set aside to ensure a roof over one’s head in retirement, etc. A miner with 5 children working 50 hours a week is not the same as an advertising executive working 20 hours a week plus 5 expense-accounts lunches. CONT

CONT
On the other hand, if I am asked to work long and unsociable hours, I feel that it is “fair” that my NET pay after tax etc reflects this. The CEO of my main client keeps a sleeping bag in his office; there is no upper limit on the hours worked by the self-employed unless they drive lorries. Is it FAIR that we get the same pay as a clerk in the council offices?

The issue over fairness is precisely that it is not in the eye of the beholder. The key political issue is that the media and organisations such as the IFS have a conception developed by Gordon Brown when he was Chancellor which sees fairness in terms of the difference between rich and poor and whether the gap is diminishing. However, when you ask people what they mean by fairness they tend to see it in terms of reciprocity and desert. The problem is that the Coalition seem to be following Brown’s definition. If the meaning of fairness really was arbitrary it would not be used so assiduously.

Mark, this is simply wrong about what the IFS said. Carl Emmerson, acting head, said in opening remarks that “…the tax and benefit components of the fiscal consolidation are, overall, being implemented in a regressive way. But this is not to say that it is unfair: fairness will always be in the eye of the beholder.” http://tiny.cc/ymr8f.“Progressive” and “regressive” are technical terms in tax economics, relating the marginal rate of tax to the average rate, which have been used for decades. It’s confusing that the same words have political connotations, yes. Diddums. So either invent a new technical term or explain the difference between the two rather than dishonestly eliding it.

There is no civilised reply to Peter any more. “Idiot” is impermissible.
So is “Brown is a liar”
Should one earn more for working twice as hard for twice as long?

Another John, you may call me whatever you choose to, but it makes no difference to the manner in which fairness is used and perceived. If you are unaware of the academic literature on the issue then perhaps a period of silence whilst you discover it might be in order.

[...] The Institute of Economic Affairs on the logical result of being “progressive”, or communism, as it used to be [...]

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Peter,
Apologies for long delay, due less to my needing to look at academic literature than to my ISP putting your comment (and the preceding four and following two) into the spam folder so that I was not aware of your reply.
Your comment is 100% accurate.
However, when I look at the academic literature, most of it concerns the difference between different views of what is meant by “fairness” and how much is culture-dependent. There is even one paper that ascribes the Reagan victory over Mondale to individual views on the difference between equality and “equity” in their taxation policies and other that claims Chinese students need to be taught the “meaning of fairness”. CONT

You may think only papers on epistemology are worth describing as “academic papers” but some of us write academic papers on maths or financial economics and we outnumber the philosophers looking at the spending review. I usually duck epistemology as my younger sister is far better at it than I, but I think numerous writers who define “fairness” in terms of “equity” are indulging in a cyclical argument as “equity” is mostly used as jargon for fair.
But even if philosophers agree a definition for intellectual debate, how many children (let alone journalists) will use it?
NB I did wholly agree with your first comment on this thread but I think you are over-optimistic in hoping for change.

Another John, I certainly have no wish to define what is academic. My comments were based on the premise that most people have a rough and ready sense of fairness which does not equate to equity in the sense of redistribution but in terms of proportionality and reciprocity. This sense need not be logical or consistent. John Elster’s book ‘Local Justice’ is very good on this.Philosophers, I hope, seek to describe and comment on these uses rather than create them (whether it is this simple is, of course, a huge epistemological question worth ducking). Philosophers ought to agree on a definition precisely because it is used already by children.

Oh, and apologies for appearing optimistic: it is a sin I try to avoid.

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