Ed Miliband’s announcement yesterday that Labour will re-introduce a 10p starting rate of income tax paid for through the introduction of Vince Cable’s mansion tax has received a tepid response from the Institute for Fiscal Studies. The IFS put out a note yesterday headed simply, Better options exist to help low earners than 10p tax rate:
A 10p tax rate would reduce taxes for those on low incomes and strengthen their work incentives. A far simpler and more sensible way of achieving these aims would be to spend the same amount of money on increasing the personal allowance – a policy on which the current government has already spent £9 billion a year. This would have virtually the same impact on individuals’ tax payments, be slightly more progressive, take some people out of income tax altogether and avoid the complexity involved in introducing a new income tax rate. …
… the proposal for a new 10p starting rate of income tax, has no plausible economic justification. It would complicate the income tax system and achieve nothing that could not be better achieved in other ways. It appears to repeat the same error perpetrated by Denis Healey in 1978 (undone by Geoffrey Howe in 1980), Norman Lamont in 1992 and Gordon Brown in 1999 (which he himself undid at considerable political cost in 2007). To have observed lower starting rates of tax being introduced and abolished by governments of both complexions over the last three decades and then to propose the same thing again suggests a remarkable failure to learn from history.
For the record, I think this is a little harsh. That Labour has recognised you can help the low-paid by cutting the tax taken from them is a significant step for the party. It suggests they might genuinely be moving away from Gordon Brown’s well-meaning but ridiculously complex ways of helping the poorest by taxing them with one hand then giving (some of) it back through benefits and tax credits with the other hand.
It also shows how the Lib Dems have genuinely shifted the terms of this debate. Miliband’s plan was originally proposed by Tory MP Robert Halfon. That both Labour and the Conservatives are now battling on the Lib Dem terrain of how best to lift the low-paid out of tax is a genuine victory for progressive liberals. More importantly, it makes it far more likely that, whatever happens in 2015, the Lib Dem policy will continue in one shape or form.
Two other points from the IFS analysis are worth highlighting…
Vince’s Mansion Tax vindicated:
The ‘mansion tax’ has a sensible logic underpinning it: if residential property is to be taxed, it makes sense to levy such a tax in proportion to property value and base it on current valuations. By contrast, Council Tax, the existing tax on residential property in England and Scotland, has neither of these features as it is based on 1991 property values and is set far from proportional to those values, with higher-value properties significantly under-taxed
(Though it should be noted that the IFS’s first preference is a full Council Tax overhaul, with properties re-valued from the original 1991 estimates, and the charge levied made proportional to their current value.)
Focus next on National Insurance Contributions (NICs) – NOT the income tax threshold
Currently the Lib Dems are moving towards committing to raising the personal income tax threshold to c.£12.5k, ensuring no-one paid less than the minimum wage is subject to income tax. It’s a worthy aim, but an expensive one which will not benefit the poorest paid who are still subject to direct personal taxation through NICs. As I suggested yesterday:
I’d prefer we looked at unifying income tax and national insurance to take the lowest paid out of personal taxation altogether and use the revenue from the mansion tax to smooth out the transition which might otherwise hit pensioners and low-income individuals who don’t work.
The IFS backs up this suggestion as the most progressive option currently available to policy-makers:
An even better alternative, which would help those who already pay no income tax because their incomes are below the personal allowance but do pay employee National Insurance Contributions (from April, there will be 1 million such people earning between £7,748 and £9,440), would be to increase the point at which individuals start paying employee National Insurance Contributions. This would also bring the income tax and National Insurance systems more in line and would take some people out of direct tax altogether. And if one wanted to focus the gains from the policy on low-income working families rather than basic-rate taxpayers generally, increasing Working Tax Credits would be another sensible alternative to look at.
* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.
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12 Comments
I’d prefer we spent more effort on changing the media zeitgeist, to ensure people understood why people work certain hours or not at all, and to stop the victimisation of them which is now occurring. The reintroduction by Labour of the 10p rate is but a short step towards reinstating a proper sliding scale of income tax. If we are to retain NI, then we must ensure everyone knows WHY it is like it is, and separate from Income and general taxation. If we no longer hypothecate it for pensions and particular benefits, then we should as Stephen is suggesting, integrate it with income tax. What a load of cobblers the IFS is speaking, by the way – of course we should be reintroducing multi-rate tax. As for the further raising of the threshold, £10k is already too high; it does not enable a proper level of public spending.
There’s no plausible economic justification for re-defining the definition of tax progressivity to fit whatever propaganda the IFS put out, yet they do it frequently (see tuition fees and VAT).
“An even better alternative, which would help those who already pay no income tax because their incomes are below the personal allowance but do pay employee National Insurance Contributions, would be to increase the point at which individuals start paying employee National Insurance Contributions.”
Yes please.
I agree, but we would then have to ensure that pensions were no longer contributory, or a lot of people on low incomes would get to the end of their working life with no contributions.
The other problem with National Insurance, which isn’t often commented on, is that if you work short contracts with gaps in between, you pay both NI and Income Tax through PAYE. If your income doesn’t reach the threshold, you get your tax back, but you don’t get your NI back, which means in practice it is levied on people who earn well below the threshold. In addition, if you don’t pay enough in a given year for it to count as a contribution year, you end up having paid what is allegedly a contribution to something while not being counted as having contributed – again hitting the low earners hardest. So a reform would be good if the contributions problem could be sorted out.
I would combine Income tax and national Insurance (NI has pretty much lost its meaning anyway), have a bottom threshold at a decent level, ideally tied Minimum Wage level, and then rework the bands to have a more steadily progressive system overall.
This would help low paid workers and be more progressive, simple and transparent overall.
Agree on NICs, and also think it’s probably time we started pushing the debate on tax reform forward a bit, now that we seem to have got everyone to the same corner of the playground. As far as I know one of the underlying principles is still to shift the balance across from income tax to wealth taxes, and the kinds of terms and ideas we’re currently dealing with (increased PA, mansion tax etc) are really quite clumsy manifestations of that. Welcome, but a start rather than a destination.
It might also be nice to make some noise about simplification (especially now, when everyone with a tax return still has the end of January rush fresh in the mind), though that would be properly marching towards a can of worms.
Oh bollocks, any chance you could unlink my face from my other email, please? That’s my old LDV mugshot, it’s certainly never been on my Gravatar or WordPress accounts.
There’s a potential problem with making pensions non-linked to NICs though. Using myself as an example, I currently live abroad and am hence non-resident for tax purposes. However, I pay voluntary NICs because I would like to have a pension one day. Since I’m only planning to stay away a year or two it shouldn’t make much difference in my case, but if pensions were non-contributory, what would be to stop me working abroad most of my working life, never paying the UK any tax, and then showing up back in the country aged 65 and demanding my pension?
In the light of the current reforms couldn’t a similar system be instituted for people in your situation, just no longer called ‘NI’?
@ Laura Gordon “I agree, but we would then have to ensure that pensions were no longer contributory, or a lot of people on low incomes would get to the end of their working life with no contributions.”
That’s not true. There are two separate thresholds related to NICs. One is the point at which you build up contributions; the other, higher one is the point at which you have to start actually paying NI. So we can raise the latter without affecting anyone’s ability to build-up eligibility.
Taxation advice and compliance is an important part of my core business. I have long advocated the unification of IT and NIC (i.e. NIC scrapped) for all the reasons already given by other correspondents. The time has long gone when the NI stamp was used directly to fund the NHS and State pension.
For many years the NIC tax has indeed been meaningless and complicated, especially when interacting with IT. It is often difficult to advise clients. A typical question when a taxpayer is faced with voluntary NICs is: “What will the consequences be regarding my State pension ?” Well, it may be 30 or more years before he starts to receive it and the current rules are in any case very complicated. So who can honestly give an honest answer ?
A possible solution might be for HMRC to maintain a life-time record of each taxpayer’s income tax paid (they already have this information for each recent year so the cost of doing this would be minimal). The state pension would then be based on that lifetime record. The politicians would determine the precise linkeage. Of course
transitional arrangements would have to be made. Issues such as years of low or nil contributions, periods of parenthood, unemployment would still have to be addressed but the information would be so much more transparent.
NIC proposals for pensioners = Lib Dem electoral suicide for no real benefit? My reason for saying this: very little money will be raised nationally by adding NIC to pensioner salary bills, because relatively few pensioners can get jobs. Part-time jobs are easier to get, But pensioners with part-time jobs are mainly attractive to employers because lack of NIC means they are currently cheap to employ. Adding NIC to their salary bill will likely result in their jobs disappearing.