So Edward Samuel Miliband, the leader of the Labour Party, has finally promised to abolish the spare room tax, or should that be the spare room subsidy? I’m not entirely clear. Every Labour party politician assiduously refers to this as the spare room tax and every member of the Conservative party assiduously refers to the spare room subsidy. Their various supporters in the press follow suit, so which is it? In essence, this is about the use of language to bias a debate.
- If it is a tax being imposed on poor people, then that is more evidence that the people imposing it are heartless Tories.
- If it is a subsidy being withdrawn, then that is further evidence that people who oppose the policy just want to spend money and would explode the deficit if they got power.
This kind of labelling is an old (and quite transparent) trick, and one that I have already used twice in this post alone (although you may have to know what my own political bias is in order to spot one of them).
Technically speaking, I have more sympathy with the Conservative description of the policy as what is happening is that a subsidy is reduced if the family living in subsidised accommodation is judged to have more than sufficient living space. I suspect some quick witted Conservatives will start saying “there he goes again making promises he can’t keep: You can’t abolish a tax that doesn’t exist.”
Although withdrawal of a subsidy can have effects similar to the imposition of a tax. Indeed, a subsidy is simply a negative tax rate, and so there is a point that if a subsidy is reduced, that is mathematically the same as increasing a tax. This often leads some people to cast a reduction in tax rates, or a refusal to tax a good they think should be taxed as subsidising the good in question.
The problem with using this logic to cast the failure to impose taxes you like as a subsidy and the failure to give out a subsidy you like as a tax is that it is highly vulnerable to reductio ad absurdum. A friend and I were once discussing an article which referred to the withdrawal of a tax on mortgages (which happened about 20 years ago) as a subsidy for private home owners. At the time we were sitting in Oxford’s economics department which is one of those buildings where all the external walls are made of floor to ceiling windows, so I had to point out that the abolition of the Window tax in 1851 meant we were in the most subsidised building in Oxford. Indeed, under that view, the Shard of Glass in London is receiving an eye wateringly large subsidy (adjusting the taxes that were charged for inflation).
To go one step further into the absurd, before breakfast, I could claim that books have been heavily subsidised by the government’s failure to tax them at £1,000 per book. After breakfast, I can claim that books have been heavily taxed by the government’s failure to subsidise each book by £1,000. The only thing that has actually changed while I was having breakfast is my reference price, not the policy.
So there must be some reference where we can refer to the good as either being taxed or subsidised. One extremely convenient one would simply be to look at whether the government is paying out money (in which case we should probably refer to a subsidy) or whether the government is taking in money (in which case we should probably refer to a tax). The key advantage of this way of labelling things is simplicity, to know whether a policy is a subsidy or a tax, you just need to look at what happens to the government’s budget. Under this convention, the Conservatives are correct and the housing benefit changes constitute a reduction in subsidy rather than an increase in tax.
However there is another way of looking at this which allows us to be more sympathetic to Labour. We could say that a policy is a tax if it raises the price above the market price that would prevail if there were no market imperfections, and that it is a subsidy if it lowers the price below the one that would prevail if there were no market imperfections. One attractive property of this way of labelling policies is that we can refer to the refusal to tax petrol in a manner that takes the price of the carbon externality into account as a subsidy. In this labelling scheme, any policy that involves any kind of subsidy or tax is per se inefficient. Since the price of housing in the UK is kept artificially high by imperfections in the housing market, this would allow us to cast the benefit changes as a tax and say that Mr. Miliband is correct to talk about abolishing the bedroom tax.
If this labelling scheme appeals to you, then I just have one question for you and Mr. Miliband: So you are going to be taxing those who are ineligible for housing benefit how much?
I thought so. It is probably best if we just stick with the definitions of tax and subsidy that refer to the effect on government spending and income.
None of this makes any comment on whether reducing housing benefit in this way is the correct policy, it is just about whether we should call it a tax or a cut in subsidy. Now might be a good time to start openly discussing the merits of this particular subsidy and whether it should be reduced or not; and if it should be reduced, is this the right way to go about it?