Sorry Ed, Gordon was right to axe the 10p tax
“Red Ed” is going yellow. His proposal to cut taxes on labour and raise them on property is exactly the kind of switch a future Labour government should make if it wants to create a fairer and more economically efficient tax system. Both the mansion tax idea and the 10p tax plan are straight out of the Lib Dem playbook. While the Lib Dems want to raise the personal tax allowance, Miliband wants to bring back to 10p tax band that Gordon Brown infamously abolished in 2007.
These policies are almost indistinguishable – for both the economic gurus at the Institute for Fiscal Studies or punters in the Dog and Duck. For anyone earning more than £10,000, a £500 rise in the personal allowance would benefit them the same as a £1,000 10p tax band. The cost to the Treasury would be all but identical too. Miliband is therefore at one with the Lib Dems on how to reform the tax system.
So the broad objectives of this shift are right: tax hard work less and house price luck more. But the specific plan to resurrect the 10p tax band is a bad idea. Almost everyone in Westminster, it seems, agrees with Ed Miliband that abolishing 10p tax was a “mistake made by Gordon Brown”. But conventional wisdom is wrong.
Gordon Brown introduced the 10p tax band in 1999 to improve work incentives for lower-paid people. But it was never a terribly good idea from either an equity or efficiency perspective. Most beneficiaries were relatively well-paid, despite the rhetoric, and the change added a whole new layer of complexity to the tax system. So in the 9 years between the band’s introduction and its ignominious demise, Brown designed the tax credits system to boost the work incentives of low-paid people, making work pay while minimising cost to the taxpayer. His 2007 budget then completed the circle. Having introduced a better solution he abolished the 10p tax rate, while at the same time simplifying the tax system, raising the Working Tax Credit and lowering the basic rate of income tax to 20p.
The result of this upheaval was a system that offered better work incentives at a lower cost and with greater simplicity. It was a reform that then IFS chief Robert Chote welcomed as a “genuinely simplifying budget” that “should be a cause for congratulation rather than criticism”. If Brown erred, it was in thinking that the politics would go down as well as the economics. He was trapped by the largely mythical benefits of the 10p tax band as a cost-effective way to help the working poor.
Sadly, that’s a myth that politicians of all stripes still appear to believe in. Most of the £11.2bn it would cost to reintroduce Brown’s 10p tax band would not go to the low-paid. Indeed, once the Universal Credit system arrives, recipients will see any tax break cut their UC entitlement by 65p in every pound. A more potent use of any money raised from the mansion tax would be to cut effective tax rates for the low-paid by boosting the Working Tax Credit, currently frozen by the government.
The thrust of Miliband’s plan is right. But the political obsession with 10p tax is not. Axing that tax band in 2007 was the right move. Rather than going yellow, Red Ed should go Brown.
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