Gordon Brown has today announced one of his election pledges: Labour has no plans to make our tax system fairer. Or has he put it: Labour will hold the basic income tax rate at 20 pence in the pound.
Lib Dems, too, are committed to keeping the basic rate of income tax at 20p. But, unlike Labour, the party would make a priority of lifting the personal tax allowance to £10,000, ensuring millions of low-earners and pensioners will stop paying taxes altogether.
As Danny Alexander emphasised in an article for Left Foot Forward last week, this would cut the income tax bill of the poorest 10% of families from £270 to £0. The next poorest 10% of families would see their income tax bill cut from £599 to £0.
Labour, though, opposes the Lib Dems’ tax reforms. This is the same Labour party which – as the Institute for Fiscal Studies reminded us just today – has seen inequality increase between 1997 and 2007-08.
The IFS study is well worth reading. It acknowledges, justly, that Labour has “largely halted the rapid rise in income inequality we saw under the Conservatives”. However, it also notes that:
On average, Labour’s reforms have slightly weakened the incentive for individuals to take paid work at all, and the incentive for workers to increase their earnings by a small amount. In particular, Labour’s reforms have weakened the incentive for couples with children to have two earners rather than one, and have increased the number of workers facing marginal effective tax rates of 70% or more.
This was exactly Danny’s point when addressing critics of the Lib Dems’ plans to raise the personal tax allowance – such as the Fabian Society and the FT’s Philip Stephens – who appear to prefer to see any additional public money ploughed into tax credits:
… crucially, tax credits increase the poverty trap. When you add up income tax, national insurance and tax credit withdrawal the poorest face a marginal tax rate of 70%. Add in lost council tax benefit, and housing benefit and marginal tax rates can easily reach 92%. For someone earning the minimum wage that would mean an extra hour’s work earns you about 50p – I wonder if the report’s authors would bother working for such a pittance.
If we take away the 20% income tax for those workers, as we will for all those earning less than £10,000, suddenly work becomes much more worthwhile again because you get to keep more of the money you earn. Dealing with poverty isn’t about handouts, it’s about helping people build their own routes to a better life.
Indeed. It’s why the Lib Dems are right to emphasise how progressive and fair are our plans to raise the personal tax allowance.
It’s perhaps not suprising that the Labour chancellor who wanted to abolish the 10p tax rate altogether – and so hit hardest the poorest in society – is just as unable now he’s the Labour prime minister to see how he can make the tax system fairer for all.
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3 Comments
The official Lib Dem policy may be fair in part, but in truth, it is not fair enough and lacks cross-party support.
There is an alternative way that makes real economic sense, by making the rich pay more and the poor pay less:
http://fairertaxcampaign.blogspot.com/2010/03/fairer-tax-campaign-ftc-about-us.html
Fairer Tax Campaign
Re “Labour has no plans to make our tax system fairer”:
We must also add that it is disappointing that the Lib Dems scrapped their policy of the 50% additional tax rate for incomes over £100,000 a year.
Raising the personal allowance to 10000 is probably a useful first step, provded there is somewhere for the money to come from. But in many ways it doesn’t go far enough.
It should be a definite objective that the effective marginal tax rate (taking into account benefits loss, NI, tax credit loss, and incime tax) should be progressive not regressive – ie a reduction in earnings should not result in an increased marginal tax rate. Raising personal allowance will make effective marginal tax rates less regressive for low earners than they are now, but will not completely eliminate regressiveness. Maybe we need a better sliding scale of rates too, instead of sharp step functions in marginal rate.
Another objective ought to be to get back to some of the good old liberal principals of the past: let’s tax things that damage the economy rather than things that improve it; let’s not tax the essentials of life, but instead the luxuries. Let’s achieve a reasonable balance between revenue raised by tax on employment (income tax and NI) and revenue raised by indirect taxes; let’s let people live their lives in freedom, not caged and harrassed by pointless laws and regulations and the hordes of petty bureaucrats that enforce them; let’s ensure that those entrusted with special authority are required to excercise it responsably; in the public services let’s let people who know how to do things do those things, and not be ruled over by quangos and unnecessary management layers who don’t know how to provide the services and cost a lot of money (if we got that one right, maybe we could raise the personal allowance to 20000 instead of 10000); and lets reaffirm our supports for the rights of man and throw away all the oppressive powers arrogated to themselves by government ministers and public servants.
If we did all that, we would have a fair tax system and a fair society. Looks like a bit of a long haul to me, and I see as many or more advocating it in other political parties as in the Lib Dems, which saddens me.