Coffee House

Restoring the 10p tax rate would be fair and simple

22 January 2013

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.’

Claim your gift

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. 

Give the perfect gift this Christmas. Buy a subscription for a friend for just £75 and you’ll receive a free gift too. Buy now.

Show comments
  • Aidy Lewis

    All tax is theft.

  • ryan

    the should not cut money down to 15p its bad thing to do beacuse on wages use to be on emplyment before i hate it so bad

  • Radford_NG

    Set tax threshold at Minimum wage per hour, times 40 hours plus x %.[And abolish Nat. Ins.]Let the worker take home his full pay packet and dump the Brownite tax credits.All this money will be spent locally,supporting jobs and creating tax revenue

  • HJ777

    Daft idea. The 10p rate was always a Brown gimmick and simply adds complexity.

    If you want to help the low paid, the best option is simply to raise personal allowances by half the width of your proposed 10p rate band. The net cost would be pretty much the same (a fraction more) but with more benefit for those whose earnings are such that they would fall in the middle of your proposed 10p band. Brown, of course, wasn’t interested in what would help the low paid most, he was simply interested in looking as if he was.

    And the government already is raising personal allowances.

  • Youbian

    Flat tax for all. Evidence based. Helps overall tax take.

  • Olaf

    I’d like to know how much money can be saved by simplifying the tax system. It’s something I’ve never seen set out clearly. Similarly I’ve never seen the costs of means testing anything.

    • Louise McCudden

      I think Taxpayers Alliance did a report on it, can’t remember how much it said now…

  • 2trueblue

    Brown put it in, and then Brown took it out. !3yrs., a huge majority, the BBC on their side, why did they not step up to the plate and do better for the UK?
    They made our lives more complicated on every level and unnecessarily. The rich became richer and the poor got poorer, child poverty grew, that is part of their legacy and frankly they do not deserve to be allowed to forget it.

    Raising the tax threshold is the simplest way and with that we must concentrate on getting rid of all the complexities in our system. This should not be confined to our tax system.

    One of the biggest problems is when someone comes off benefits and goes into employment they find themselves poorer initially and gets into more debt. This is an area that needs sorting out. The problem can get worse if they then become unemployed again. It is so complex and dispiriting they can then just give up.

  • Ryan Bourne

    The main point which my original blog made, which Rob has not addressed here, is that his aims could also be achieved (with better results for the very low paid) by raising the personal allowance to the same cost.

    Thus, the key debating point in weighing up these two policies against each other is whether it is better to take very low income earners out of income tax altogether, or make them still contribute something. I happen to think it is immoral anyone earning this little pays any income tax (especially given they are then likely to get it back in benefits). What’s more the evidence from the US suggests that taking people out of tax at best makes them more fiscally conservative, and at worst has little effect on their outlook of the state:

  • AdemAljo

    ‘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…’

    This is the exact reason why we shouldn’t even be thinking about it. The 10p rate was introduced by Brown in 1999 in order to win some early, mid-term support. However, as with all Labour policies, it is just an example of how Labour are far too greedy and politically shallow to actually remove low earners from taxation altogether, which is especially poignant now, considering how the party least associated with helping the poor is actually achieving this exact aim at a rate of knots.

    Any policy which puts unnecessary pressure on top-down upheaval of our tax system should be thrown out. If it is indeed more expensive to up the allowance to £12,500, then we should be asking ourselves, ‘why is it so’?

    The reality of it is, two people in one household earning £12,500 each, would, in the best-case scenario, be taking home £25,000, which is approx. the average take home pay in Britain. The beautiful thing about those figures is that that kind of take-home pay can easily be achieved in the poorest parts of the country.

    Simplification, not exasperation. We’ve had 13 years of ‘nibbling at the edges’ of problems and I think I can safely say we’re absolutely sick of it (and them).

  • Russell

    Any move to reduce Income tax, especially for people on very low wages must be supported. It would encourage people to take up employment, especially as cuts to benefits/allowances takes place.
    More of peoples earnings left in their pockets to spend or save as they wish and at least a move in the right direction to weaning people off the state and on to their own endeavours.
    Big plus point would be to complete the humiliation of Brown & Labour

    • AnotherDaveB

      To reduce taxation, you must first reduce government spending. Despite all the rhetoric about ‘hard decisions’ that is not happening. Government spending has increased since the 2010 election.

      • Fergus Pickering

        But why is that, oh wise one. and what can be dome about ot? Not much, I should say. My wife suggests putting up interest rates and turfing lots of people out onto the street who have unmanageable mortgages. Is that good? Her arguments are far too cogent for me, but I can’t help feeling uneasy about putting people out of there homes even if they have behaved foolishly. The Americans did it and they are forging ahead but it’s not the European way, is it?

        • AnotherDaveB

          I don’t see the relationship between “putting up interest rates”, and reducing government spending. Perhaps you’d like to explain it to me.

        • Chris Morriss

          Yep, putting up interest rates et al will do it. whether the government have got the guts to try is is a different matter.

  • HooksLaw

    A preposterous proposal since we are already cutting thresholds. Spending time collecting from a narrow 10p band is pointless. Putting the standard rate at 15p and the upper rates at 30p would make more radical sense. It would fit in with leaving a very top rate at 45p
    All the govt then has to do is live within its means

  • Chris lancashire

    I would oppose reintroducing a 10p rate purely on the grounds of reintroducing additional complexity in the tax system. What can be better than increasing the Personal Allowance – as the Coalition has so far done to its credit – and removing low earners from tax altogether? And to say that Tolleys would remain at 1801 pages is to accept what the idiot from Dunfermline did in his disastrous tenure by increasing it from the 900 pages he inherited.

    • telemachus

      Gordon took a big personal hit on this and we need to decrease complexity in tax
      One of the better Coalition policies is the drive to get the first £10000 out of tax

  • jazz6o6

    Flat rate tax, flat rate tax, flat rate tax.

Can't find your Web ID? Click here