måndag 7 april 2008

10p tax rate abolition row

The Chancellor's decision to abolish the 10p tax band has provoked a rearguard action from MPs who have noticed that the changes will leave people on low earnings paying more. Their criticism, while justified, is missing the point.

Income tax is a bad way to raise public revenue.

Apart from being expensive and vulnerable to avoidance and evasion, it involves collecting information about individuals and their families and is an invasion of a fundamental right to privacy. Built into the system are perverse incentives, since it is effectively a fine on employing people to do work, because it forms part of the cost of employment. It was never intended to be the principal source of government revenue and thresholds were once high enough to ensure that only those with high incomes were liable for the tax. But because those thresholds were not increased to take account of inflation, even the poorest eventually became liable for income tax, which thus forms part of the so-called poverty trap.

But income tax is obviously not going to be abolished overnight, even if the goverment accepted that it needs to be replaced. As a basic principle, however, thresholds should be set so that no-one receiving the statutory minimum wage on a 40-hour week should pay either tax or national insurance. At a stroke, this would get rid of a major component of the poverty trap, and so make it easier to get unemployed people back to work. For earnings above that threshold, it is inevitable that tax rates will have to be substantially higher than they are at the moment, and possibly more than 30%. It would also be advantageous if the higher rate was set so that not more than 10 or 15% of people paid it, which again might mean it needed to be higher.

None of the above suggestions are of course any more than tinkering with a bad system but they would at least reduce some of its worst effects whilst a better alternative was worked out and put in place.

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