Why the 10% starting rate had to go
alexanderbaker Sun Apr 20, 2008 at 09:53:28 AM GMT 
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People need to look at the tax system in the round before criticising individual aspects of it. What those who decry the removal of the 10% starting rate conveniently forget is that - due to the tax credit system - it is the wealthy, not the poor, who will lose most from it.
The question of the optimal taxation policy has vexed economists for many a decade. However, one thing is quite clear from the academic literature: varying marginal rates of taxation with income is a rather blunt instrument when it comes to addressing the issue of supporting those on low incomes.
In fact, a far better system is to ensure people face the same marginal rate of taxation. The reason being is that in a system where lump sum transfers already occur (in the UK this is through the tax credit system), then the group who gains most from lower marginal tax rates are those who do not even need lump sum benefits - the realtively wealthy.
Where lump sum transfers compensate those on lower incomes for increases in the starting band, they do not actually stand to lose out. For those who do not receive tax credits, they - other things being equal - pay double the rate of taxation on that part of their income than they otherwise would have.
A lot of the current arguments around the 10p starting rate are based on a confused understanding of how the tax system works.
Gordon Brown, and everyone in the Labour party, should be promoting to the electorate the progressive changes to the tax system which have occurred over the last decade.
Particularly because the Conservatives would undo all of them.
The Conservatives' line of giving back the 10p starting rate (which they can't afford) and dismantling the tax credit system (which they can) is actually a far more pernicious reality in which the worst off stand to lose the most.
Tax changes over the last decade have targeted resources where they are most needed; redistributing from those who can afford to pay, and providing for those who can't. The 10p tax change is no different when set in the wider tax policy context.
The sad truth of those who argue vehemently against the lastest tax change is that they have not properly thought through the implications for those on whose behalf they claim to be fighting.
And not least because it makes a less sympathetic Conservative government far more of a reality.
In fact, a far better system is to ensure people face the same marginal rate of taxation. The reason being is that in a system where lump sum transfers already occur (in the UK this is through the tax credit system), then the group who gains most from lower marginal tax rates are those who do not even need lump sum benefits - the realtively wealthy.
Where lump sum transfers compensate those on lower incomes for increases in the starting band, they do not actually stand to lose out. For those who do not receive tax credits, they - other things being equal - pay double the rate of taxation on that part of their income than they otherwise would have.
A lot of the current arguments around the 10p starting rate are based on a confused understanding of how the tax system works.
Gordon Brown, and everyone in the Labour party, should be promoting to the electorate the progressive changes to the tax system which have occurred over the last decade.
Particularly because the Conservatives would undo all of them.
The Conservatives' line of giving back the 10p starting rate (which they can't afford) and dismantling the tax credit system (which they can) is actually a far more pernicious reality in which the worst off stand to lose the most.
Tax changes over the last decade have targeted resources where they are most needed; redistributing from those who can afford to pay, and providing for those who can't. The 10p tax change is no different when set in the wider tax policy context.
The sad truth of those who argue vehemently against the lastest tax change is that they have not properly thought through the implications for those on whose behalf they claim to be fighting.
And not least because it makes a less sympathetic Conservative government far more of a reality.
Why the 10% starting rate had to go | 10 comments (10 topical)
Why the 10% starting rate had to go | 10 comments (10 topical)
