Frontline Economics: The 10p rate is pure politics – let’s raise people out of income tax altogether

 
Ryan Bourne
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MILTON Friedman once said, “I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” I agree, particularly for taxes on income. There is a strong moral case for easing the burden, especially now the cost of living is rising above nominal wages.

Yet Ed Miliband’s suggestion to reintroduce the 10p income tax rate is not the sort of tax cut our economy needs. First, let’s look at the specifics. He’d finance the 10p rate with the proceeds of a mansion tax targeted on properties worth £2m or more, and would restrict the new tax band to “basic rate taxpayers”. As one newspaper put it, this means taking large amounts of money from a small number of people and giving a tiny amount of money to a large number of people. Our research last year estimated that a mansion tax would raise around £1bn. Others have suggested £1.7bn. This could fund a very small 10p band of about £1,000 over the personal allowance, meaning a tax cut of £100 per basic rate taxpayer per year (£2 per week).

This is not the full story, however. Interaction with benefit withdrawal means the actual effect on people’s net after tax income would be just 67p per week. Labour has also hinted that the mansion tax implementation would require a full property revaluation of council tax bands. Further still, restricting the 10p tax rate cut to basic rate taxpayers would mean dragging more people into the 40p tax band.

What about the general principle of reintroducing the 10p rate? The idea has also been pushed by Tory MP Robert Halfon, who wanted it to operate over a much larger range than Miliband (£9,440 to £12,000). Yet economically, continuing to raise the personal allowance by the same cost has a much better targeted benefit to poor income workers, and would avoid complicating the tax system further. The rough £6bn cost of Halfon’s variant on Miliband’s proposal, for example, could be used to raise the personal allowance to £10,620. This would see someone on £11,000 pay just £76 in income tax (20 per cent of £11,000-£10,620) compared to £156 under his 10p proposal (10 per cent of £11,000-£9,440).

Why then is the 10p rate pursued? The cynical answer is the politics. Some Tories like Halfon want a tax cutting policy unique from raising the personal allowance, which many credit the Lib Dems for pursuing. Similarly, Miliband wants a tax policy unique from the coalition’s.

But when I’ve pushed people on both sides for a more principled justification, they usually say: “it’s good to keep people contributing to the system but to cut their burden”. This is a bizarre argument, not least because that principle has already been surrendered by the existence of a personal allowance at all. And given Conservative party chairman Grant Shapps has now hinted the Tories will instead raise the personal allowance further, it gives the party a powerful message: Labour wants to tax low income workers. The Conservatives want to take them out of tax altogether.

Ryan Bourne is head of economic research at the Centre for Policy Studies. You can follow him on Twitter @RyanCPS