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Restoring the 10p tax rate would be fair and simple

22 January 2013

11:30 AM

22 January 2013

11:30 AM

MPs will today debate taxes and the living wage – in particular, my campaign to restore the 10p rate of income tax.

For Conservatives, a ‘starter’ rate of 10p would help us to counter the Labour war-cry that the Coalition is only interested cutting taxes for millionaires. It would prove to the electorate, that this Government is on a moral mission to help the poor, by boosting the cash income of a worker on minimum wage by more than £250 a year.

As Tim Montgomerie puts it:

‘We must declare very loudly and clearly that tax cuts for the working poor will be our priority as the economy picks up.’

As an economic reform, it would be hugely cheaper than raising the personal allowance to £12,500 and it would be symbolic of the Coalition’s mission to repair our economy. CoffeeHouse readers will remember how – famously, in his final act as Chancellor – Gordon Brown scrapped the 10p band in 2008. Overnight, this crushed working people with a tax-rise of £232 annually. Why should Conservatives not set ourselves the challenge, of reversing one of the most unpopular policies of Britain’s most unpopular Chancellor? The Treasury say that restoring a 10p band of income tax, on earnings between £9,440 and £12,230, would cost around £7 billion a year. Elsewhere I have suggested how it could be paid for.

But, interestingly, some thinktanks and commentators on the Right are not supportive of the idea. Probably the most eloquent expression of their case was put recently by Ryan Bourne from the Centre for Policy Studies, who (in a very thoughtful and fair article) set out his worries. In a nutshell, he argues.

  1. ‘The 10p rate would add further complexity to the tax system…’
  2. ‘The main problem… is not so much any administrative complexity, but willingness for Chancellors in Budgets to… take from one group to give to another…’
  3. ‘The addition of another marginal rate makes it less likely that a consensus will be achieved for broad-based tax cuts… In particular, it would undermine attempts to move towards a simpler, flatter tax system…’
  4. ‘The real problem with marginal tax rates for many low income groups is not due to income tax but to tax credit withdrawal.’

To be fair to him, Ryan’s is a balanced article. He also says:

‘There are clear arguments in favour of the 10p tax policy in its own right, from both economic efficiency and moral perspectives.’

But given that he makes four detailed objections, I want to rebut these in turn:

  1. Will it be too complex? If we restored the 10p rate of income tax tomorrow, would this add unnecessary complexity to the tax system? I don’t believe so. You could still fit the different marginal rates of income tax on a single sheet of paper, for example. Tolley’s Income Tax guide would still be 1,801 pages long, but the vast bulk of this length would still be because of the thicket of opt-outs, deductions, loopholes, and special cases. Restoring a new 10p band would not add meaningful complexity, so I don’t accept this argument.
  2. Will it increase the temptation to redistribute wealth? Ryan is correct, that an explicit goal of our @CutTaxTo10p campaign is to raise the cash incomes of workers, so that the minimum wage feels more like a Living Wage. But given the enormous complexity of the benefits system, Ryan’s argument is misplaced. If the Treasury wants to funnel cash to a specific group of people, it already has the means to do so in a much more targeted way: through the benefits system. That is what it does, and it is partly why Britain currently has the working tax credit, the child tax credit, income support, housing benefit, Council tax benefit, employment and support allowance, statutory sick pay and maternity leave, rent rebates, disability benefits, and the carers allowance, as well as age-related cash payments such as the minimum income guarantee, the Winter Fuel Allowance, the basic state pension, and so on, all as levers for what Ryan calls ‘willingness for Chancellors… take from one group and give to another’. Tinkering with redistribution already happens and a 10p rate of income tax wouldn’t really change that.
  3. Will a new 10p rate of income tax undermine the case for lower, flatter taxes? This is the meatiest of Ryan’s objections, and it is perhaps the most commonly cited by those on the Right. The problem with it, as the IFS has set out, is that most conceptions of a flat tax are deeply regressive and are hard to defend as ‘fair’. For example, the IFS have shown that merging income tax and NICs to a flat level, would literally take from the poor to give to the rich. I agree wholeheartedly with Ryan that we must do more to generate support for broader tax cuts. But, surely the best way to do this is to show that tax-cuts can be moral, and can help the many not the few? What better way to do this, than restoring the 10p rate of income tax?
  4. Should we fix the benefits system first, before cutting taxes, because this is more of a poverty trap? I agree with Ryan that benefits withdrawal is a massive problem: it is probably the biggest single contributor to welfare dependency. But, also, we can walk and chew bubble gum at the same time. IDS is delivering the Universal Credit, so that it will always pay to work. Why should this stop us from – at the same time – pressing ahead with lower taxes for lower earners? Why should this be limited to raising the personal allowance to £10,000? These policies can be complementary.

I have always believed that politics is the art of the possible. The Left in particular have taught us that you must achieve change through evolution – not revolution. So, how can we help Brits on the lowest incomes, to earn enough for a decent standard of living? The IFS and the Joseph Rowntree Foundation say that almost all the growth in household incomes since 2001 has been wiped out by the financial crisis. At kitchen tables up and down Britain, it feels as if the last decade of growth simply did not happen. The case for restoring the 10p rate of income tax is more urgent than ever.

Robert Halfon is MP for Harlow. 

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