No taxation without explanation

The Shadow Chancellor lays out the principles that would guide Labour's long-term tax ambitions; All lower- and middle-income families would receive the full benefit of the tax cut
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The Independent Online
Today I will lay down the tax principles for a Labour government. And I will outline our long-term aim to introduce - when affordable - a new starting rate of income tax at 15p, and preferably 10p, in the pound. This would benefit all lower- and middle-income families and it would promote opportunity and hard work and cut the marginal rate of income tax for people with low earnings.

The Government has also laid out its long-term tax ambitions in recent months: the abolition of Capital Gains Tax and Inheritance Tax at a cost of at least pounds 4.5bn by the end of the century. Labour's approach to taxation will be guided by four principles which will be the basis of a new trust on tax between Labour and the British people.

First, a Labour government will be open and honest. We will not make promises that we will later break; we will not say one thing before the election and another after. That means no taxation without explanation. There will be no lies, no deceit and no irresponsible commitments.

Second, the tax system must encourage work, effort and opportunity - and not reward abuse or unjustified privilege. It is right, as Tony Blair said last week, that people at the top should have sufficient incentives to work and not be faced by penal rates of tax. But we must also deal with the disincentives to work caused by penal tax and benefit rates which prevent people at the bottom of the income scale going out to work.

Our third principle is that taxes must encourage long-term savings and investment. That is why we have said we are prepared to consider extending the principle of Tessas and PEPs by introducing a new Individual Savings Account to promote long-term saving. And fourth, we must have a fair tax system based on the progressive principle - that rates of tax must be based on ability to pay.

Now is not the time to make the detailed announcements of tax rates well in advance of an election. Our first principle of honesty about taxation means it would be irresponsible to make these sort of announcements before we know the state of the economy and the public finances.

But it is right that the electorate should know the difference between the Conservatives' long-term tax ambitions and our own. A new lower starting rate for income tax would, unlike the abolition of the Capital Gains Tax and Inheritance Tax, both be fair and strengthen the economy.

As I said at the TUC on Saturday, this measure, in combination with new employment opportunities, a minimum wage and reform of the benefit system, can break down the barriers to work embedded in the labour market and tax and benefit system. All lower- and middle-income families would receive the full benefit of the tax cut. And we must ensure that people on benefit do not find that extra income from the reduction in taxes is simply clawed back in lost benefits. That is why our proposal would be matched by an equivalent reduction in the rate at which benefit is withdrawn as income rises.

A lower starting rate of tax is both fairer and economically superior than using the same resources to increase personal allowances. Simply increasing allowances would disproportionately benefit higher-rate taxpayers. And increasing allowances, while taking some people out of tax altogether, does not address the poverty trap caused by very high marginal rates of tax.

But most importantly, increasing allowances is based on limited aspirations - the desire to compensate people for their poverty rather than bring it to an end. It assumes that the same people are and will stay poor, and the only priority is marginally increasing their income.

My approach is different. It is clear that people in work are changing jobs all the time and we must help them to move them up the wage ladder. I do not simply want to compensate the low-paid for their poverty. I want to see them move out of poverty into well-paid jobs, and that is why we want to see lower tax rates for those at the bottom of the income scale.

So our long-term aim is a tax cut with a purpose, a tax cut which benefits everyone both directly and, by putting people back to work, releases resources for stronger public services.

On the forthcoming Budget, Labour will set four tests for deciding our position on tax cuts. First, we will judge whether they are honest. Ever since 1979, the Conservatives have given tax cuts with one hand and taken more away in tax increases with the other. Second, we will judge whether they are sustainable. A strong economy is the only way to sustain both fair tax levels and strong public services, which is why Labour has put forward proposals to put people back to work and increase levels of investment in our economy. And there should be no cuts in public spending which undermine our frontline services.

Third, we will judge whether tax cuts encourage opportunity and employment. The abolition of Capital Gains Tax and Inheritance Tax will not meet these tests and we will oppose these measures. And, fourth, we will judge whether tax cuts are fair. A fair way of cutting taxes would be to reduce the hated VAT on fuel, and a cut in the starting rate would be a fair and economically beneficial way of reducing the tax burden.

The Chancellor should know that Britain cannot afford a tax system even more regressive than it is already. What Labour wants is a Budget for Britain that is not only fair but which invests for the future and puts people back to work.

The writer is the Labour MP for Dunfermline East.