Matthew Sinclair: Fairness in fiscal policy

After the Emergency Budget the Institute for Fiscal Studies and the Treasury engaged in an extended debate over whether the policies proposed were progressive.  That was felt to be key to whether or not the fiscal adjustment was being carried out in a fair way, but I made this point, which Tim very kindly described as "killer":

Suppose you invented a policy, some kind of economic miracle, which doubled the incomes of the poorest ten per cent of families without the Government spending a pound.  That would reduce benefit spending.  It would also increase tax revenues from the poorest.  The same method that the IFS are using in their reports would show the effects of that policy as horribly regressive, cutting spending on the poor and shifting the fiscal scales against them.

I've yet to hear a decent response to that argument.  Just the fair point, as I acknowledged at the time, that the Government had asked for it by giving distributional analysis such prominence in the Emergency Budget report.  Of course, we don't have a miracle policy to hand, but that little thought experiment shows how distributional analysis often rewards policies that entrench dependency.

Today - as part of the 2020 Tax Commission project - we've released a new research note elaborating on that argument.  But we are also looking at the obvious next question: if a distributional analysis weighted a certain way isn't fairness, what is?  From the research note:

Many people would understand treating people “unfairly” to mean treating people in similar circumstances differently for no good reason. The Oxford English Dictionary definition of fair is “treating people equally without favouritism or discrimination”."

When you start to think about fairness that way, some very different problems to those suggested by the IFS start to appear.  There can be drastic differences in how even the most progressive taxes affect different households.  Families with a single earner are hit harder; people whose earnings are irregular instead of constant each year; and hard pressed families whose discretionary incomes are low relative to their gross earnings.

We've explored the issue with the help of some hypothetical examples including Helen Archer, Ian Beale and Susan Boyle.  You can read more here.