It is hard to believe that it has been five years since Gordon Brown announced the abolition of the 10p rate band, and I am as surprised that it has taken until now for someone to suggest reintroducing it.
At Conservative Home, Robert Halfon MP argues;
Restoring a 10p rate of income tax, between £9,205 and £12,000, would cost around £6 billion a year according to the House of Commons Library. This is significantly cheaper than raising the personal allowance to £12,500 (which could cost as much as £14.4 billion). It also has the advantage that it would benefit all workers, and could be paid for without dragging more families into the 40p band of income tax.
Assuming that he is right in his arithmetic, introducing a new, lower tax rate would be totemic, a perpetual reminder to Labour activists and the public of the error of judgement made in abolishing it in the first place. It would be hailed by the media as a huge giveaway to the less well-off.
It also addresses something which bothers some Conservatives, in that by taking more people out of tax altogether, they have less incentive to support reductions in government spending – it appears much more attractive to support spending if it doesn’t cost you anything personally.
There are some obvious downsides. His proposal only gives £279.50 back to basic rate taxpayers, whereas raising the personal allowance to £12,500 would give them £659.00, a much more attractive option for the ‘squeezed middle’. And, without other adjustments, his tax cut would go to everyone, including the currently unpopular wealthy, who would benefit disproportionately – it would be worth £978.25 to a 45% taxpayer, something he seems to accepts, as he apparently doesn’t intend to reduce thresholds. It also leaves those on minimum wage still paying income tax.
There is also an argument, which I hear less of than I might expect from Conservatives, which runs thus;
“If we take less money in tax from working families, we need give less to them in benefits and credits, reducing the benefits budget plus the costs of administration, as well as reducing the number in receipt of benefits.”
One might consider withholding an amount of benefits/credits equal to the reduction in the tax bill, or use the money for other targeted benefits, such as child care, or just raise the living standards of the poorer, more vulnerable elements of our society, or whatever, but it would give governments of whatever stripe options to reform society in a manner suited to their philosophy. Everyone will have their own ideas.
Increasing the personal allowance to £12,500 does come with a cost, with added complexity required to restrict the benefits to the wealthiest, and would probably drag more people into the higher tax bands. It is simpler for most though, continues progress towards taking those on the minimum wage out of the tax system altogether (if it’s a minimum wage, why should it be taxed). It could also lead to a future equalisation, and thus simplification, of the thresholds for income tax and national insurance contributions and aligning these with the National Minimum Wage.
In summary, reintroducing the 10p rate band is an interesting idea, which will attract support from across the political spectrum, even as its proponents will argue about the necessity for consequential adjustments to ensure their personal definition of fairness. It is less generous than the Liberal Democrat proposals but, obviously, more easily affordable.
The debate should be an interesting one in the coming months…
* Mark Valladares is the Friday Editor of Liberal Democrat Voice.
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19 Comments
The 10p tax rate will no doubt be popular. More interesting to my mind would be the economics of a 30p (i.e. 30%) tax rate as well to help those who suddenly jump from a 20% to a 40% rate when they just go over into the 40% band.
I can’t see any major reason – in these days of computers – why we can’t have a multi-stepped tax band system.
Is bringing back the 10p rate band such a good idea? No.
It’s silly to compare a cheaper 10p change to a more expensive PA rise – if we can’t afford to raise the PA to 12.5k then just raise it to a lower target. Then comparing two policies that cost the same, we find that the only real difference is that those who would be taken out of tax by the PA rise are worse off (for most richer people there’s no difference).
I don’t often agree with the CPS but see http://www.cps.org.uk/blog/q/date/2013/01/11/is-it-time-to-re-introduce-the-10p-income-tax-band/ and especially Ryan’s second graph.
There’s also no real logic to having 4 tax bands (+ the PA). 2 + the PA ought – by changing rates and thresholds – to be enough for any distribution one wants.
Having said all that, we do already have a 12p tax band: the gap between when National Insurance kicks in at around £7,500, and the £10k the PA is going up to. Increasing the PA – contrary to your point – of course makes this gap bigger and equalisation harder.
The best tax cut by far here is therefore to increase the National Insurance thresholds, helping some of those on below £10k who’d be entirely unaffected by further PA increases or a 10p rate.
Better yet, abolish Employees NI contributions and raise Income tax and CGT to compensate. This would leave those with earned income above the NI threshold better off at the expense of those with unearned income above the income tax threshold. It would also get rid of the complication of two tax systems.
The idea that introducing a 10p rate will increase incentives to support spending restraint relies on a big failure of logic. Because the proposal is for a tax rate that is deliberately and iconically 10p in the pound, it will cost you 10p in the pound whether spending goes up or down.
Certainly NI should be phased out, starting with the employers contribution aka tax on jobs.
If its phasing out coincided with phasing in a Land Value Tax we would really be getting somewhere.
“It also addresses something which bothers some Conservatives, in that by taking more people out of tax altogether, they have less incentive to support reductions in government spending – it appears much more attractive to support spending if it doesn’t cost you anything personally.”
Not quite true, many people believe it is morally right that people should have a stake in the system that governs them. No representation without taxation, if you will.
I am sympathetic to that myself, but fundamentally i don’t like taking tax to give it back in tax credits ( a client state) which is why i support raising the threshold to the poverty level.*
* minimum wage x 37 hours for example.
@Paul R
There’s not really a jump. When you’re earning below the 40p threshold you get taxed at the 20p rate. When you go above the threshold everything you earn below the threshold [i]continues[/i] to be taxed at the 20p rate with only income above the threshold being taxed at the 40p rate.
We should be aiming to simplify the tax system. Fiddling with rates and banding is expensive, and the confusion reduces the ability of individuals to take control over their own lives.
Paul R.,
Multiple rates are certainly possible, and were part of the income tax regime in the 1980’s. In fairness though, in those days, self assessment didn’t exist.
Adam,
I agree with you, as Mr Halfon is comparing apples and oranges to his advantage. In the short term, I agree, raising the personal allowance does widen the gap, but once the target of £12,500 is reached, I would expect movement on NIC thresholds for the very reason you outline.
Peter,
Perfectly logical, but politically difficult until you equalise rate bands. It’s too easy to go big on the idea that tax rates are going up, and you could certainly fool enough of the people to make it unpopular.
Joe,
It won’t. That’s not to say that people don’t believe that it will.
Jedi,
Let’s be realistic here, most people give little thought to whether or not other people pay income tax. The philosophy of taxation, as opposed to “what does it mean to me”, is more esoteric than mainstream. Trust me, having spent twenty-six years in tax, I know what people talk about.
as i said, i support the liberal policy.
I’m not a fan of this. It complicates matters.
Like @jedibeeftrix, I support the raising of the tax-free boundary to be (min wage * 37hrs) * 52wks. And at the same time, the rate of benefit for a single person with no dependents to be less than this, for obvious reasons.
In fact, I support the abandonment of the personal allowance and its replacement with a Citizens’ Income, but that’s a different topic altogether.
Citizens’ income may be a different topic but if “by taking more people out of tax altogether, they have less incentive to support reductions in government spending” really does bother the Conservatives then maybe we should be pushing a policy that completely answers it.
some good ideas above, but if we forget the £10k threshold it will be at OUR at our peril. It is what we promised, we must establish the £10k threshold BEFORE we entertain any other ideas.
The 10p rate could be for £10k-12k of income, but the first threshold must be £10k..
We already have one of the most complex tax codes in the world, so adding to its complexity is a bad idea. Two years ago I wrote about how a flat tax might be progressive: http://livingonwords.blogspot.co.uk/2011/01/lunch-and-flat-tax.html – maybe it is time to think about it again?
I read that ther Coalition has introduced more taxes (e.g. on hot food) than it has abolished, and has increased taxation by 2 % or so overall so if that is true all this fine tuning doesn’t get us very far. It might be more meaningful to slash VAT and cut it out on energy and fuel? The poor would benefit from lowerprices then all round; the rich don’t care much anyway.
We also have a 60p band between £10,000 and around £110,000 due to the pointless and vindictive removal of personal allowance pound-for-pound at that point. Why?
@Dan Falchikov
I’m not a fan of the flat tax. The Economist looked into this a couple of years back and calculated that if you move to it from a progressive taxation system like ours and plan on keeping the same level of tax receipts, then top earners benefit most and middle/middle-to-low earners get hammered.
The only economic justification for introducing flat tax is in place of a previously-chaotic and under-collecting regime – which is why flat practitioners in some of the former Soviet republics have benefited from it.
Also agree with Peter Tyzack – the £10k personal allowance is our jewel in the crown, and easy for people to understand. Chip away with this with a 10p starting rate and you’ve immediately negated this massive and simple goal.
Who wants to explain this on peoples’ doorsteps? Not me.
It’s a stupid idea because it’s more needless complexity.
Just raise the personal allowance to the midpoint of whatever the 10p tax band would have been and achieve the same thing without more mindless complexity just so politicians can get a soundbite.