Tax-cutting is as much about politics is it is about economics. Of course, the economics have to work too. But here is a statistic that should worry us. The IFS and Joseph Rowntree Foundation have shown that most of the growth in household incomes since 2001 was wiped out by the financial crisis. At kitchen tables up and down Britain, it is as if the last decade of growth simply did not happen.
It is hard for Conservatives to tackle this. Why? Partly, because we have allowed our political opponents to caricature tax-cuts as something “only for our rich friends in the City”, rather than as a means of creating and sharing wealth in society. Now more than ever, we have to show that tax-cutting is a moral creed, about lifting workers on low incomes out of poverty, and creating jobs for the unemployed.
Hence my campaign GreatGordonBrownRepealBill.com, to bring back the “starter” rate of income tax at 10p, which was scrapped by Gordon Brown in 2008. I believe that restoring the 10p rate would help Conservatives to counter the Labour war-cry that we are only interested in cutting taxes for millionaires. It would prove to the electorate, that David Cameron and George Osborne are on a mission to help the poor, by boosting the income of a worker on minimum wage by more than £250 a year.
As Tim Montgomerie puts it:
“[Conservatives] must declare very loudly and clearly that tax cuts for the working poor will be our priority as the economy picks up.”
Not everyone agrees. The campaign has been opposed from the Left, from the Right, and by the Liberal Democrats. Let me deal with each in turn.
THE LEFT: Labour’s response to low wages, over the last decade, was tax credits. The aim was noble - to help the poor - but the policy was flawed. In part, this is because tax credits became a subsidy to penny-pinching employers, enabling them to reduce wages for their staff knowing that they might get benefits instead. It has also left us with a hugely complex system of overlapping handouts, which taxes workers on low pay only to recycle their money back as welfare. For example, many families are eligible, but fail to claim what they are entitled to. Funds are lost in administration. Like Socialism, the idea is good in theory, but stumbles in practice.
Others take a gentler approach. The Living Wage foundation, along with Boris Johnson, have been nudging employers to pay £8.55 an hour in London, by suggesting that this could pay for itself in positive PR and productivity gains. Again this is a noble aim, but it will never help everyone. Perhaps larger corporates can afford it. But what about smaller and micro firms? At a time of economic uncertainty, it is a mistake to pile yet more burdens.
THE RIGHT: Some on the Right, especially in the thinktank world, oppose my Great Gordon Brown Repeal Bill on the grounds that it isn’t radical enough. They say that a new 10p rate of income tax could undermine the case for a flat tax - at some point in the future. The problem with this, as the IFS has set out, is that most conceptions of a flat tax are deeply regressive and are hard to defend as “fair”. A flat tax is almost certainly never going to happen, while this is true. For example, the IFS have shown that merging income tax and NICs to a flat level, would literally take from the poor to give to the rich. I agree wholeheartedly thoughtful commentators like Ryan Bourne from the CPS, that we must do more to generate support for broader tax cuts. But, surely the best way to do this, is to show that tax-cuts can be moral, and that they will help the millions, not just the millionaires. What better way to do this, than restoring the 10p rate of income tax?
THE LIB DEMS: Some Liberal Democrats have suggested that the best way of helping poorer families is to raise the personal allowance even further, to £12,500 a year. I agree that the Coalition should fulfill its £10,000 commitment, but believe that raising it further would be unwise. As Tim Montgomerie has argued, tax must not become something that is paid exclusively by people on middle and higher incomes. Everyone should make some contribution to the state, however small, to understand that public services are not free.
Then there is the thorny issue of the 40p band of income tax. Rises in the personal allowance have historically been paid for by dragging ever more workers into the 40p band of income tax. This is a brake on aspiration. It hits single-worker families the hardest. Already, for example, it has meant that we will end this Parliament with something like 5 million workers paying a marginal rate of 40p in the pound. This is not desirable either.
As an economic reform, restoring the 10p band is hugely cheaper than raising the personal allowance to £12,500; it keeps most workers with a stake in the tax system; and it avoids dragging more families into the 40p band. That is why I support it.
Famously, in his final act as Chancellor - Gordon Brown scrapped the 10p band in 2008. Overnight, this crushed working people with a tax-rise of £232 annually. Why should Conservatives not set ourselves the goal, of reversing the most unpopular decision of Britain’s most unpopular Chancellor?
So, in summary:
• Tax credits are flawed.
• Small firms can’t afford the Living Wage.
• A flat tax isn’t going to happen, and it would probably be unfair.
• We don’t want to drag any more families into the 40p band, and...
• We should be careful about not lifting too many people out of tax altogether.
How better then to help the working poor, than restoring the 10p band of income tax?
It would be popular. It would be symbolic of this Government’s economic mission. And it would help to tackle the desperate stagnation in family incomes, which we have suffered from in the last 10 years.