IFS verdict: Labour’s 10p tax idea “has no plausible economic justification”

by Stephen Tall on February 15, 2013

institute-for-fiscal-studies-logo-370x229Ed 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 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.