Rejoice! Labour has a policy. Even better it’s a Lib Dem policy.

by Stephen Tall on February 14, 2013

Yesterday at PMQs Ed Miliband channelled Ronald Reagan. Today he’s channelling Vince Cable:

Here’s what Ed has just announced:

Let me tell you about one crucial choice we would make, which is different from this government. We would tax houses worth over £2 million. And we would use the money to cut taxes for working people. We would put right a mistake made by Gordon Brown and the last Labour government. We would use the money raised by a mansion tax to reintroduce a lower 10 pence starting rate of tax, with the size of the band depending on the amount raised. This would benefit 25 million basic rate taxpayers. Moving Labour on from the past and putting Labour where it should always have been, on the side of working people.

No more details as yet — we’ve another two years to wait for them apparently: “We’ve rightly said that we will only set out our tax and spending commitments at the next general election.” Fair enough, except it makes it a bit tricky to answer the two critical questions: 1) will the tax cut cost more than the mansion tax raises; and 2) will it help the poorest paid most?

While we’re waiting for Labour to help us work that out, it’s worth looking at the Centre for Policy Studies’ analysis of the impact of this proposal (first put forward by Tory MP Robert Halfon last month) compared with the Lib Dems’ stated preference to lift the income tax threshold to exempt all earning less than the minimum wage. Here’s the graph that shows the effects most clearly:

cps 10p tax option

In summary: the Lib Dem proposal costs more, but would help the low-paid more. The Labour/Halfon proposal is cheaper, but helps the low-paid less.

Personally I’m not sure either are the right priority just now. 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.

PS: our own in-house tax expert, Mark Valladares, looked at this issue last month: Is bringing back the 10p rate band such a good idea?

* Stephen Tall is Co-Editor of Liberal Democrat Voice, a Research Associate for the liberal think-tank CentreForum, and also writes at his own site, The Collected Stephen Tall.