The Lib Dem idea to reduce income tax to 16p will not benefit people on lower incomes as much as those on higher ones. Here's why with a bit of fag packet maths:
The current 20p tax bracket is applied to earnings from £6,000 to £41,000 (for most workers assuming they get the full personal allowance of £6k). A worker earning £11k will pay 20p tax on £5k, i.e. £1000 per year; a worker earning £41k will pay 20p tax on £35k, i.e. £7,000 per year.
Reducing this band by 4p puts money into the pockets of people paying income tax. Someone earning £11k will have an extra £200 to spend each year (a pay rise of 1.8%) and someone earning £41k will have £1400 pounds more to spend (a pay rise of 3.4%).
People not paying tax, e.g. someone on benefits or a state pension gets nothing (no pay rise at all). Earners over £41k don't get more than the £1400, but a household with two people earning £41k each gets an extra £2800 p.a.
Does this redistribute wealth to those most in need? Of course not.
The Lib Dems have claimed that reducing VAT has made no difference to the credit crunch. They are right in that respect - it is like splashing water at a forest fire. The credit crunch is a worldwide problem founded on the very basics of our economic system, i.e. capitalist greed and a debt based monetary system.
Was the 2.5% reduction any better at redistributing wealth? Yes, it is better but still not great. It will increase the purchasing power of people on benefits and state pensions. It will increase the purchasing power of people on lower incomes - but again it is not perfect. If you buy £5k of vatable goods each year, your purchasing power increases by £125; if you buy £20k of vatable good, your purchasing power increases by £500.
What is needed is a better focussed tax, taxing pollution rather than simple spending. This should be coupled with tax increases for higher earners and a citizens' income for all.
I don't want to see people on £41k getting a 3.4% pay rise while people on low incomes get nothing. Inflation is negative for people with large mortgages / high incomes and around 5% for those on lower incomes / without mortgages. Tax needs to be paid by those who can afford it, not those who can't.