by Stephen Tall on April 7, 2010
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.