Drop the “10p” rate

Right now there’s a media and political storm about dropping the so-called 10p[1] bottom rate of income tax.

There is merit in the central complaint: that it penalises people on low incomes (though not the lowest, who pay no income tax). There is little merit in the government’s response that many of those who lose will gain in other ways from the same budget, because those who gain are the same groups who have consistently gained from Brown’s budgets over the past ten years, and yet again there’s nothing for those who work hard for low pay but are childless. Indeed, the emphasis on ever more money for families may well be pushing us back to something like a 1970s “get pregnant to get housed” ethos.

But all that is of little relevance to the opportunistic humbug that’s filling the meeja. Politicians (on all sides) and others who are now screaming about it would be more credible if they’d taken it up a year ago when it was first announced. And the simplification is the Right Thing to do, insofar as simplification really happened. The obvious thing to do would have been to raise tax thresholds at the same time, though that does nothing about the poverty trap, where means-testing leaves people paying effective tax rates of over 100% on some of the very lowest incomes.

The point noone seems to have made is that the government must be able to change the burden of taxation over time, and that change cannot always be in one direction. The fuss about penalising some low-paid people is an argument that you can only ever adjust taxation in one direction. That leaves perpetual losers, and they won’t be happy.

Having said all that, in this instance I think the government should have done the obvious thing, and upped tax thresholds. And paid for it with less waste (like all those wars, and paying off the whole wunch of bankers) and/or a much-needed shift of taxation away from incomes and towards activities that pollute. A plague on all their houses!

For the record, most people are now taxed at 44%, while incomes over £43000/year are taxed at 54% on earned income[2]. Unearned income is taxed at much lower rates, and often not at all. And I’m not one of the losers from this budget: I think I’m marginally better off, though mostly for the wrong reasons.

[1] Actually a rate of up to 34%[2].

[2] That’s including the employment tax called “national insurance”, paid by both employers and employees.

Posted on April 21, 2008, in politics, rants, tax, uk. Bookmark the permalink. 1 Comment.

  1. Completely agree. The rate is less important than the principle that low paid childless people who choose to work are being penalised by this budget (whilst benefit claimants and those with children are compensated through our bloated benefit system). Increasing tax-free allowances would have compensated those who are losing disproportionately from the dropping of the 10p rate, and would benefit all income taxpayers to some degree.

    My business runs a number of payrolls for private clients and at one, a mail order book company, I have noted that some of the lower paid (typically young and/or part-time) employees are worse off by £8 to £12 per month in cash terms. That’s a lot if you’re on a low wage. Middle earners generally escape unscathed (but still pay a lot of tax overall).

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