Wednesday, 23 April 2008

Government backs down on 10p rate

The Government has effectively backed down in the face of a revolt by backbench Labour MPs over the 10p tax rate. The rate will not be restored, but there will be a set of compensatory payments:

Retreat

How all this is going to work is not quite clear. Apparently, retired people between 60 and 64 will be assisted by changes in the winter fuel payment, although quite how that will operate is unclear. Will I, as a higher rate taxpayer over 60, get an even bigger payment? It seems a blunt instrument to me.

Similarly, manipulating the minimum wage is also a blunt instrument and could have unintended consequences, e.g., setting the rate too high could have an adverse effect on jobs.

It would also appear that the working families tax credit would be extended to childless couples and presumably to single people (the distinction between these two categories is unclear given the large numbers of people who cohabit). Presumably this would not be at the same rate as for families.

The $64,000 dollar question is where is the money going to come from these compensatory payments before the end of the financial year? Through public expenditure cuts or tax increases elsewhere? We got into this mess in the first place by treating cuts in the standard rate as a political virility symbol.

1 comment:

Justin Greaves said...

The whole thing does seem a mess. My personal preference would be for an increase in personal tax allowances but unfortunately that isn't one of the options. The government has clearly (up to now) been concentrating on child and pensioner poverty and not poverty in a broader sense. Furthermore, child poverty seems to have been reduced by moving people from slightly below the poverty line (60% of median earnings) to slightly above it. The data seems also to suggest that severe poverty (eg: less than 40% of median earnings) has actually increased under Labour. Whilst some form of tax credit system is probably necessary it has become excessively complex and has the twin problem of lack of take up and drawing more and more people into the net of state assistance. It is like sticking plasters over the problem of poverty in Britain without dealing with the root causes (although, of course, solutions are never going to be easy).