LETTER: Why Labour's tax plans are a fair deal

From Mr Andrew Smith, MP

Sir: The Institute for Fiscal Studies argues that Labour's long-term ambition to cut the starting rate of income tax to 10p in the pound is not the most progressive way to cut income tax ("Brown's 10p tax scheme attacked", 21 November). But the institute's analysis does not support its conclusions.

Its figures, in fact, confirm that cutting the starting rate of tax is fairer than cutting the basic rate of tax. But they also show that a lower starting rate is fairer than simply raising allowances, unless higher allowances are combined with "other adjustments to ensure richer individuals do not gain more than poorer individuals". Even then, the distributional differences between a lower starting rate and higher allowances, with the IFS adjustment, are barely perceptible - and much more progressive than a cut in the basic rate.

But Labour's proposals are even fairer because they logically combine a cut in the starting rate of tax with an equivalent cut in benefit tapers. Cutting tapers alone would simply pull many more people into means-tested benefits and do nothing to help the many low-paid people not on benefit who still see a higher proportion of their earnings taken in tax than 16 years ago.

The IFS ends its analysis by arguing that cutting the starting rate of tax does not help the unemployed and low-paid workers because very few such people are 20p taxpayers. But surely the IFS is now describing the very problem Labour wants to address - the fact that so many families are trapped out of work by the tax and benefits systems.

It is coping with this problem that Labour's welfare-to-work strategy is designed to tackle. In today's dynamic labour market, people not only enter work on low-wage, and often part-time, employment, but they are also changing jobs all the time and we must help them move up the wage ladder. That is why we want to see, along with other reforms, a lower starting rate of tax to help people off welfare and up the wage ladder.

The IFS tax-benefit modelling can only describe how the world is today, not how it could be if the reforms to employment, social security and tax policy that Labour proposes are enacted.

Yours sincerely,

Andrew Smith

MP for Oxford East (Lab)

House of Commons

London, SW1

22 November

The writer is Shadow Chief Secretary to the Treasury.