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.