Tuesday, January 29, 2013

Published elsewhere: Is bringing back the 10p rate band such a good idea?

This is a slightly longer version of an article posted on Liberal Democrat Voice this afternoon...

It is hard to believe that it has been five years since Gordon Brown announced the abolition of the 10p rate band in an failed attempt to be too clever by half (as my mother would describe it), and I am as surprised that it has taken until now for someone to suggest reintroducing it.

I have quite a lot of respect for the Conservative MP for Harlow, Robert Halfon, whose initiative this is. He does seem to have the ability to spot ideas that are popular and not necessarily obviously ideological - fuel duty, for example - and this is potentially one of them.

At Conservative Home, he 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.
He is, I suspect, right in his arithmetic - I haven't checked, although I suspect that others are actively doing so. Introducing a new, lower tax rate would be totemic, a perpetual reminder to Labour activists and the public of the catastrophic error of judgement made when abolishing it in the first place. And given, the remarkably low level of knowledge displayed by the media with regard to tax, it would probably be hailed as a huge giveaway to the less well-off.

It also addresses something which bothers some amongst Conservative ranks, in that raising the personal allowance takes more people out of tax altogether, giving them less incentive to support reductions in government spending - it is, to their mind, much more attractive to support spending if it doesn't cost you anything personally. And whilst, adding an additional tax rate does add complexity to the system, that isn't to a huge degree.

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 £659.00 to the same people, a much more attractive option for the 'squeezed middle'. And, of course, 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 appears intent upon, as he doesn't apparently intend to reduce thresholds. It also leaves those on minimum wage still paying income tax. 

So yes, it would cost less than increasing the personal allowance to £12,500, but it should be noted that giving away less money should obviously cost less, and he is somewhat comparing oranges with apples given the differing thresholds he applies in his argument.

There is also an argument, which I hear less of than I might expect from Conservatives, which runs thus;

"If we take less money from the paypackets of the poorest 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."

You might argue about whether you might withhold 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. Personally, I'd favour measures designed to lift children out of poverty, but everyone will have their own ideas.

Increasing the personal allowance to £12,500 does come with a cost, plus the added complexity required to restrict the benefits to the wealthiest which in turn would probably drag more people into 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, one might ask why should it be taxed). It could also be seen as part of a potential equalisation, and thus simplification, of tax rates, national insurance contributions and 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 twenty-seven months before the next General Election...

No comments: