Labour's Valentine's policy gimmick (The Spectator)

Head of Economic Research Ryan Bourne talks about Labour’s policy u-turn on bringing back the 10p rate of income tax in The Spectator on Thursday 14th February 2013.

To view the article as its original posting, please visit The Spectator website

“At long last, Ed Miliband delivered us a Valentine’s Day present that everyone in the political world has been waiting for: a new policy! And a tax policy at that!

Not just content with maintaining support for a temporary VAT cut, reversing the Coalition’s tax credit restraint and reversing the 50p tax rate cut (all of which would worsen the deficit), the Labour leader has nailed his colours to a new mast. He wants to bring back the 10p rate of income tax, which his former boss Gordon Brown abolished, paid for by a mansion tax on homes worth £2 million.

Now, there are many observations which can made about this.

First, this is a huge u-turn for Miliband personally. Back in 2008, after the budget where the 10p rate was abolished, he said:

‘When you make a big set of changes in the tax system, some people do lose out. That is a matter of regret. Of course it is. But overall these changes make the tax system fairer.’

So it seems he has been put under pressure to adopt this policy by the effective campaigning of Tory MP Robert Halfon, who recently organised a Westminster Hall debate on this very issue and has pushed the introduction of the 10p rate on these pages.

Second, either Labour’s numbers don’t add up, or this would lead to an incredibly large mansion tax or an incredibly small 10p tax range. Our research into the Lib Dem mansion tax concept suggested it would raise £1 billion.  Yet we know the reintroduction of the 10p tax rate between £9,440 and £12,500 has been outlined by the Treasury to cost £7 billion in lost revenues. Therefore, calculations suggest either Labour’s policy would lead to a very very small 10p tax rate band, making it little more than a gimmick, or that their mansion tax is going to be very punitive.

Of course, there’s another possibility. Ed Balls’ article in tonight’s Evening Standard says that reintroducing the 10p band would benefit ‘basic rate taxpayers’. But of course, every income taxpayer earning over the personal allowance would benefit from the 10p introduction. Is the hidden detail here that this policy would be paid for in part by dragging even more people into the 40p band?

Third, this 10p policy is driven by the politics more than the economics. As I’ve argued on the CPS blog, the aim of cutting tax for the low paid and improving work incentives at very low incomes can be better achieved by continuing to raise the personal allowance by the same cost. Both Miliband and Halfon want this introduced for political reasons – Ed to give him a policy distinct from the Coalition and Rob to give the Conservatives a tax policy distinct from the Lib Dems. But in economic terms it’s David Laws who is right. Raising the personal allowance is better targeted. Just after the 10p rate was abolished, Robert Chote (of the Office for Budget Responsibility), in his previous role at the Institute for Fiscal Studies said:

‘The 10p band should never have been introduced in the first place. It complicated the income tax system and was poorly targeted on those it was claimed to help.’

Fourth, given the above, I have further concerns over reintroducing the 10p rate rather than raising the personal allowance. Don’t get me wrong, I want lower taxes. But this will make the tax system more complicated unnecessarily and will make it more difficult to achieve consensus for broad based tax cuts or merging income tax or National Insurance. The argument that keeping people contributing something has been lost – we have a personal allowance, and to my mind it is immoral that people earning the minimum wage or less pay any tax in the first place.

Finally, the mansion tax is still a bad idea. It would require revaluing properties, would hit the income poor, equity rich, and the UK already has the highest property tax take of any OECD countries. Oh, and wouldn’t it directly contradict the principle that the Coalition have just introduced through their Dilnot reforms?

All in all, it’s difficult not to conclude that this is a gimmick policy dreamt up on the back of a fag packet.”

To view the article as its original posting, please visit The Spectator website

Date Added: Thursday 14th February 2013