The Labour Party and the Institute for Fiscal Studies clashed yesterday over the fairness of Gordon Brown's goal of a 15 or 10 per cent band of income tax and its effectiveness in improving work incentives.
The shadow Chancellor said yesterday lunchtime that a new lower starting rate of tax at 15p or preferably 10p was fair and, together with changes to the benefit system, "would substantially increase incentives to move off benefits and into work".
However, the IFS said that the most progressive way to cut income tax was to raise the tax-free allowances. Still fairer would be to cut taxes such as VAT, which would help the poorest people who do not earn enough to pay income tax. It added that "cuts in taxes do not have a significant effect on the work incentives faced by either the unemployed or the low paid already in work".
The IFS compared three options: raising the tax-free allowance by pounds 1,500 (while ensuring richer individuals did not gain more than poorer people); lowering the 20p lower band of income tax to 10p; and lowering the basic rate of 25p by almost 4p. Each would cost the Exchequer pounds 7bn - about double the amount Kenneth Clarke is expected to give away in next week's Budget.
An analysis of the distribution of gains from the three options showed that the poorest 50 per cent of households would gain more from bigger allowances than from a reduction in the lower rate. Both options were much fairer than the cut in the basic rate, which concentrated gains among the richest 50 per cent of households.
However, an adviser to Mr Brown said that the disparity of gains for the poorer half of the population between raising allowances and introducing a 10 per cent band was small. The IFS analysis showed clearly that a new 10p rate would be much more progressive than cutting the basic rate.
The IFS also took issue with Mr Brown over his claim that the new lower rate of income tax would help work incentives, if combined with reductions in the rates at which benefit is withdrawn when people on welfare get jobs or have low earnings. At present, for example, Family Credit is withdrawn at 70p in the pound and housing benefit at 65p in the pound.
However, a further IFS analysis showed that for low earners, it was benefit withdrawal rates rather than income tax rates that mattered.Reuse content