The Big Question: Who wins – and who loses – with the abolition of the 10p rate of income tax?
Why are we asking this now?
Because it has suddenly become politically-charged. The Treasury Select Committee has criticised the Government for abolishing the 10p tax rate, a move pre-announced in Gordon Brown's Budget last year.
The committee says that those on lower incomes who will be affected disproportionately by the change represent an "unreasonable target for raising additional tax revenues ... While tax simplification is a laudable aim, it seems strange that the abolition of the 10p starting rate of income tax disadvantages mainly low-income households". If the 10p rate was such good idea in 1999, when Mr Brown introduced it, why is it a bad idea now?
Who is unhappy?
Discontent seems widespread, because of that most potent of complaints – fairness. The problem is that the cut in the basic rate of tax from 22p to 20p, which won Mr Brown favourable headlines a year ago, and an increase in the threshold for paying the higher rate of 40p in the pound, tends to benefit the affluent most, while dropping the 10p rate tends to hit the less well-off. It looks like a Robin-Hood-in-reverse approach. Even the Tory leader, David Cameron, has waded in, saying: "This is Alistair Darling's mess and it's up to him to sort it out. But our view is that this is not the right time to be hitting some of the poorest families."
More worryingly for ministers, Labour MPs are in revolt, especially after an apparent promise to rebels that the Treasury would reconsider matters was abandoned by government whips. The concern for Labour is that it will lose a Commons vote on an important part of the finance Bill – a grave embarrassment that has prompted a vote of confidence for governments in the past.
On the other hand, it is all a bit odd because the change was announced more than a year ago, in Gordon Brown's last Budget as Chancellor, and did not cause much of a fuss then.
But I thought nobody would be worse off?
Mr Brown claimed that, but such an absolute assertion may come to haunt him. Purely on that one tax change, there will be winners and losers, as there will with the Budget as whole (as, indeed, there are with every Budget).
So who loses?
About five million taxpayers. In its report, the committee claimed that households without children or anyone over the age of 65, and who earn less than £18,500 a year, would be the "main losers". The independent Institute for Fiscal Studies (IFS) estimates the losers will include 2.2 million single working people with no children, 1.2 million double-income couples with no children, 700,000 double-income couples with children, 500,000 non-workers, 400,000 single-income couples without children and 300,000 women aged 60 to 64. Changes in tax credits mean that some families with children and some pensioners – but not all – will be protected. However, that is provided they successfully apply for credits and benefits, a procedure that some find too challenging. The council tax benefit take-up rate was just 65 per cent in 2006, while that for working tax credits was about 80 per cent.
Is anyone else losing out?
Yes. A narrow slice of the population earning between £38,840 and £40,040 will be adversely affected by the alteration in the National Insurance rate, rising from one per cent to 11 per cent on this tranche of income – although this is relative. They will probably still benefit if the other changes are taken into account, but by less than other taxpayers. Non-doms will be stung by the £30,000-a-year fee they will have to pay to live in the UK. The losers under the changes to capital gains tax have been well-documented; anyone with a valuable (£1-plus) capital gain on a business they have owned for a long time has seen their potential tax liability rise by 80 per cent, though many have taken evasive action. Those who enjoy a smoke, a drink or drive a big car will also suffer.
Plenty. Generally, the richer you are and the more children you have, the better – though often by as little as £1 a week. Teetotal, non-smoking non-driving households will do best of all. Politically, taking the last two Budgets as a whole, it looks good for "middle England" – key, swing voters on between roughly £20,000 and £40,000 per year are gaining.
What about children in poverty?
Winners too. The Government's Budget changes, especially those in Mr Darling's first Budget this year, will indeed lift many children out of poverty. The IFS agrees that another 250,000 will benefit. According to the IFS, a relatively obscure measure – a change in the disregard of child benefit payments in claims for housing benefit and council tax benefit – will do most to help the Government towards its aim of halving child poverty (at 1998 levels) by 2010 and ending it by 2020. Then again, the IFS also says the Government will miss its 2010 target by 450,000 children.
What does the Government argue?
Apart from Mr Brown's adamantine claim (see above), ministers are relying on selective quotation from expert sources. The Cabinet Office minister Ed Miliband cites the IFS and says: "When you look at the overall effect of the last Budget, there are 16 million households who gain and the biggest gains go to the poorest 30 per cent of people in our society." Unfortunately for Mr Miliband, the IFS also says that only "on average" do lower income families gain, pointing out that the wealthy benefit too.
What is at stake?
The cost of reinstating the 10p rate would be £7bn to £8bn – money that has gone towards eradicating child poverty. The Government wants its opponents to say how they would fund that.
What's the bigger picture?
Confusing. Changes in disposable incomes are also influenced by wage increases, inflation, mortgage rates, increases in council tax and so on. Isolating the impact of a single Budget measure can be difficult, though it has to be said that, on most of these counts, households are facing a more intense squeeze over the next year or two as economic growth falters and the credit crunch persists. In the longer term, through policies that, for example, widen access to education and training and thereby raise productivity, tax rises can (arguably) make the nation as a whole better off.
So, even if tax hikes hurt some sections of the population today, it can be debated that one day they will create a more prosperous society through, say, a better educated workforce. Reducing child poverty, the main point of the 2007 and 2008 Budgets, can be expected to foster that.
Are the poor worse off without this tax band?
*Its removal has hit the poor as a means to raise greater tax revenues – not something a Labour government should be doing.
*Those benefiting from the changes will be the favoured swing voters from "Middle England".
*David Cameron, the Conservative leader, said it was "not the right time to be hitting some of the poorest families".
*Reinstating it could cost as much as £8bn, so anyone wanting to reinstate it will have to raise taxes elsewhere or cut spending.
*Its removal has been used to tackle child poverty, which will enrich the country over the long term.
*Looking at the Budget overall, ministers argue that the biggest gains went to the poorest 30 per cent of the population.
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