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Friday, February 15, 2013

Two Eds blunder over new 10p tax rate

Anybody who had even minor suspicions about Labour's economic competence would have had their fears confirmed yesterday after Ed Miliband stood up in a major speech, said that the abolition of the 10p tax rate by his government in 2007 was a mistake, and proposed that it be reintroduced, to be funded by a new mansion tax.

It is a shame that they did not do this when they were in Government. Instead they supported the move to abolish the 10p tax rate. It was the biggest tax mistake they ever made and it has taken them until now to realise their error.

The best way to cut taxes for those on low incomes is take them out of tax altogether. That is why Liberal Democrats in Government are raising the Personal Allowance. From April, over a million people in Wales will get a further Income Tax cut so they will be £600 a year better off than under Labour. Already we have ensured that the 100,000 lowest paid workers in Wales will not pay a single penny of income tax.

Labour had 13 years in Government to make property taxes fairer by introducing the Liberal Democrat policy of a Mansion Tax, but they chose not to. With the Liberal Democrats in Government the wealthy are paying more in each year of this Parliament compared to any under Labour.

But do not take my word for it. Look instead at the independent Institute for Fiscal Studies. They make two key points. Firstly, they show that reintroducing Labour’s 10p rate in full would reduce tax revenues by around £7 billion a year and benefit basic rate taxpayers by up to £271 a year. They say that it is unlikely that anything close to this amount could be raised through a mansion tax alone. That leaves a black hole in Labour's plans already.

Secondly, they say: A far simpler and more sensible way of achieving these aims would be to spend the same amount of money on increasing the personal allowance – a policy on which the current government has already spent £9 billion a year. This would have virtually the same impact on individuals’ tax payments (see figure below), be slightly more progressive, take some people out of income tax altogether and avoid the complexity involved in introducing a new income tax rate.

In seeking to differentiate themselves from the coalition government on tax and in trying to counter the beneficial impact of our tax policies on the low paid, Labour have steered themselves into an economic cul-de-sac and reopened the doubts as to whether they can be trusted to run the economy again.
How much better or worse off would people be if instead of the increase in PA since the Coalition came to power, they had re-introduced the 10% tax rate? It might be that the tax cut has already happened! Of course, the more tax cuts the merrier.

Raising the PA is equally more subtle and more effective and until this April, for the most of the change, people don't realise what they have, which make the 10% tax rate sound even more enticing.
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