tisdag 13 maj 2008

U-turn on 10p tax rate

There is no shame in making a U-turn if one is going in the wrong direction. The government is to be congratulated on amending its proposals for abolishing the 10p tax rate by raising thresholds. The cost of this, said to be £2.7 billion, is about 0.6% of annual government expenditure of £589 billion. This must be well within the margin of error for budgets. In that taxation of wages is ultimately paid by employers and forms part of labour costs, the longer term effect of this change will be to cut unemployment and the total amount of benefit that has to be paid out. It will also result eventually, though again not in the short term, in a cut in government expenditure insofar as it cuts the cost of employing people in the public sector.

Tax thresholds should be linked to the minimum wage. Minimum wage legislation should not be necessary; the fact that it is needed indicates that something else is wrong that ought to be dealt with properly instead of being merely tinkered with. However, since we have it, a good principle to follow would be that people earning less than 40 hours' pay at the statutory minimum wage should not be liable for income tax.

More fundamentally, the current row shows yet again that the tax system is broken beyond repair. The money needed to run the country should not be raised by soaking the poor, under a system laughably described as being "progressive" and based on "ability to pay". Fresh, and lateral, thinking is needed to devise a replacement. The whole ramshackle structure needs to be demolished and rebuilt from the ground up.

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