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Broaden the base: Why the 10p tax rate sucks

We are kidding ourselves if we think a 10p tax rate can create growth or encourage people to work harder. This is a political gimmick and it must be rejected

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The Commentator
On 14 February 2013 17:22

Don’t worry, this isn’t going to be another boring article on tax rates. If you’re looking for wonkish stuff, there's plenty of it around. Consider this both a philosophical and economically sound argument against Britain’s new political hot potato: the 10p tax rate.

The rate, lauded by left-leaning Tories and most of the Labour party as of yesterday, creates another tax band, meaning that people earning an as yet undetermined amount, will be placed into a new, lowest tax bracket in order to try and save them an as yet undisclosed amount of money. Sounds like a con? Probably because it is.

In the United States, politicians are often heard to use the phrase, “broaden the base”, an allusion to everyone paying their ‘fair share’. Of course, both ‘fair’ and ‘share’ are open to interpretation in this way, but we’re going to go ahead and work off the basis that if you live in Britain, earn in Britain and your financial setup is reliant on Britain – you should probably pay tax in Britain.

And how much should you pay? What is your fair share? What is our fair share? Do we really, in 21st century Britain, believe that one person’s efforts should be penalised to the extent that their wealth is taken in greater quantities and redistributed down the tax chain? Because you earn £62,000 a year and we earn £25,000 a year: is this cause for you to pay 40 percent and for us to be 20 percent?

Flipping that on its head, is it fair that our marginal tax rate should be 73 percent, and yours, as a higher earner, should be just 42 percent? No. In either instance, no. 

The complexity of Britain’s tax system has resulted in both of the most heinous pitfalls of public revenue collection. We have a system which firstly disincentivises people due to ‘progressive’ tax rates, and further penalises the middle classes through national insurance tax and through benefit withdrawal. Inevitably, instead of ‘strivers’ or ‘skivers’, Britain has created a middle class apathetic to their tax situation. This is apathy-inducing politics – the likes of which campaigners for a 10p tax rate are only too pleased to see occur.

A populace trapped by the tax system is one that can be manipulated politically. Go ahead, see for yourself. The articles that are in favour of a 10p tax rate only prefer the measure as a ‘politically prudent’ move. It’s about the votes, of course.

But really, the most damage being done here is not to the Conservatives or to Labour (depending on whom you believe), the damage is being done to the mindset of Britain, and in turn, public finances.

If we are truly small-c conservatives, then surely we must believe in and subscribe to the words of Art Laffer, Ronald Reagan’s advisor and the man who invented the Laffer Curve. In allowing lower earners to pay a new, lower tax rate, effectively what the state is dictating is, “You cannot look after yourselves. Someone else must look after you.” The same logic applies to lifting people out of income tax altogether. These people, it is argued, should share no burden of the state because they can barely look after themselves.

But in this, we are not talking about the impoverished or destitute, we’re talking about earners, still. They may not be on a ‘living wage’ after tax – but the responsibility to move beyond their current pay grade is their own. It’s no use saying, “Oh – you don’t earn enough? Don’t worry about striving – we’ll just take you out of tax.” That’s an effective pay rise for doing nothing.

Instead, if we really believe in creating a culture of aspiration, we must broaden the tax base, and flatten the tax system. No good can come of a middle earner paying a marginal rate of 73 percent to prop up someone who earns more. Just as it is no use in creating a new tax band to redistribute wealth and further complicate the tax system.

To show low and middle earners we mean business when it comes to reducing their tax burdens, we must provide them with the ability to rise above their current malaise, not entrap them within it. This can only, at this current point in time, be done in one or two ways.

Reducing VAT would, though uncosted, save the average consumer hundreds of pounds a year. Of course, at a time of immense national debt, this is perhaps not the best idea. Instead, in order to maintain revenues and create a fairer tax system, the government should be reducing the rates of income tax. The ‘additional’ or top rate will drop to 45 percent in April. The higher rate, arguably, should drop by two or three percent as well. The basic rate, again, can be cut by two points.

If you’re wondering how this is costed, and how public revenues can remain the same within this framework, we refer you once again to the Laffer Curve. At this point in time, low earners in Britain are around point A, while middle earners are at point B. The top rate lies somewhere right of B.

To bring all these people closer to the optimum level of taxation, to encourage the best possible revenue rates with the flattest and simplest tax system, we must begin by cutting income tax. 

 

Read more on: marginal tax rate, 10p tax rate, Laffer Curve, UK tax rate, strivers vs skivers, ed miliband, robert halfon mp, income tax, flat tax, and taxes
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