Is it time to re-introduce the 10p income tax band?

All things considered, is it time to bring back the 10p income tax band, scrapped by Gordon Brown?

Copyright for this photo is granted by kind permission of its author, Andy Carr
Ryan Bourne
On 11 January 2013 15:54

Conservative MP and tax campaigner Robert Halfon has recently advocated the re-introduction of the starting 10p tax band for low earners. In an article for Conservative Home, he said:

“What is the best way to show that tax-cutting is the best way to redistribute wealth from the rich to the poor, to help eliminate the poverty trap and create incentives to work?... The answer is by showing that there is a moral mission for lower taxes — and the best, boldest, and most symbolic way would be to restore the starting ten pence band of income-tax, which Gordon Brown scrapped in 2008.”

This short note considers whether the re-introduction of the 10p rate is desirable in broad terms, and examines the relative effectiveness of the 10p rate in fulfilling Mr Halfon’s aims compared to an increase in the personal allowance of equal ‘cost’.

The economic effects of the rate

Halfon is proposing that a new 10p rate be created between the personal allowance (£9,440) and £12,000. The income tax structure would then have five main rates: 0 percent (the personal allowance), 10 percent, 20 percent, 40 percent, and 45 percent. 

As Mr Halfon outlines in his article, the main effect of this would be to halve the income tax bill of all those earning between £9,440 and £12,000 – meaning someone earning £12,000 would, for example, see their income tax bill fall from £512 to £256. Full-time workers on the national minimum wage would see their income tax bill cut by around 37 percent. And of course, the marginal tax rate faced by workers earning less than £12,000 but more than £9,440 would now be 10 percent rather than 20 percent, giving many part-time workers a stronger incentive to work more. All other taxpayers earning above £12,000 would see a tax cut of £256.

So, in terms of the aims of improving work incentives and slashing the income tax burden for those on low incomes, Mr Halfon’s tax cut would seem to do the business.

The House of Commons Library suggests that implementation of this policy would cost around £6 billion in lost revenue, however. And this comes with what economists describe as an opportunity cost. If we have £6 billion for a tax cut to help the low paid, is the 10p rate the best way to improve work incentives?

If it is fair and right that low earners should pay less tax, then many would argue that it would be even more fair for poor people, particularly earning the minimum wage or below, to be taken out of tax altogether. This could be achieved by raising the personal allowance. Raising the personal allowance would also have a stronger effect on work incentives, because the marginal income tax rate faced by low earners would be 0 percent rather than 10 percent.

Mr Halfon of course rightly points out that raising the personal allowance to £12,000 would be much more costly than his proposal to reintroduce the 10p rate. But for the same cost as his proposal we could raise the personal allowance to £10,620.

All those earning between £9,440 and £10,620 would then pay no tax whatsoever, and would face a 0 percent marginal tax rate. Those earning between £10,620 and £11,800 would be better off than under Mr Halfon’s proposal, whilst facing a 20 percent marginal tax rate. And those earning more than £11,800 would now only get a tax cut of £236 rather than £256.

To summarise, raising the personal allowance to £10,620:

- would lead to lower marginal tax rates than Mr Halfon’s proposal for those with gross incomes below £10,620, but higher for those between £10,620 and £12,000

- would give a lower tax bill to all those earning £11,800 or less than Mr Halfon’s proposal, but a £20 higher tax bill for all those earning more than £11,800. 

The political side

The re-introduction of the 10p tax rate has not been advocated on the usual conservative/liberal ground of economic liberty or efficiency alone, however. Like Gordon Brown back when the rate was first introduced in 1999, some conservatives advocate it on the grounds of fairness or social justice. It has been described as a ‘blue-collar’ policy, ‘moral’, and ‘symbolic’.

This somewhat suggests that the policy is being advocated as much on political rather than economic terms. It was ever thus. Back in 1999, Treasury officials complained that Brown was determined to introduce the lower rate in order to get Labour in on the Tories’ popular ‘tax cut agenda’. They complained that despite the arguments Brown made in favour of the new rate, the economic aims could be achieved more easily through other policy means.

One of the reasons that the editor of Conservative Home, Tim Montgomerie, has advocated the policy is to deliver a distinct Conservative achievement, given most of the popular press and public credit the Liberal Democrats with the increase in the personal allowance (a proposal which was originally advocated by Maurice Saatchi and Peter Warburton as far back as in 2001).

In truth, much of the debate about the 10p rate has therefore always been political. Indeed, despite the inevitable political assault from the Conservatives when Brown abolished the tax in 2007, many Conservatives had previously intimated that the 10p rate was a ‘gimmick’.

Yet lowering the tax burden on low paid workers, particularly those facing squeezed incomes, is a noble aim. The policy therefore deserves fair hearing.

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