Tuesday, April 29, 2008

The 10 tax fiasco

There may be those who are not themselves on low incomes and who imagine that last week's U-Turn has solved the problems created in Cumbria and elsewhere by the abolition of the 10p starting tax rate. Sadly, it has not.

The concessions promised by Alistair Darling may have averted a government defeat yesterday, but they have barely begun to work out how the promise to compensate those who lose out can be kept of how the money required can be paid for.

For a start, until the implementation of the promised concessions, full details of which will not be released until the "Pre Budget Report" in the autumn, the five million people who were adversely affected by this tax change will still be paying more. In a constituency like Copeland that probably means that nearly 10,000 people are currently losing out by anything up to £464 per family.

Affluent and middle class people who lose some money but are promised it back in a few months can afford to borrow against that promise or reduce their savings, but for people in the income bracket affected by the 10p tax change, this is much more difficult. What makes matters worse is that Alistair Darling could not give an absolute guarantee that everyone affected would get the full amount back. So at the moment, and for the next few months, this change is causing real difficulties.

And then there is the huge amount of government and civil service time which is being spent on undoing the damage in Gordon Brown's last budget - and the vast amount of time and effort which will be reguired to make the backdated payments necessary when they finally work out what they are going to do.

None of the major changes in Brown's last budget have survived unscathed - they backed down on the Non-Doms tax regime, they have announced compensation for the 10p tax change, and they climbed down on Capital Gains Tax changes.


It is welcome that enough Labour MPs have finally recognised, a year after the decision was announced, that a tax increase specifically targeted against those on low incomes is a bad idea to force the government to change this "Reverse Robin Hood" policy. Unfortunately none of the ideas being mooted - changing payments for pensioners or those with families, changing the minimum wage or working tax credits - will help everyone affected. Not all those who lose out are pensioners or have children, only five percent are on the minimum wage and the take-up of working tax credit is only 22%. At the moment what we have is a complete shambles, and the most vulnerable hard-working families are paying the price.

A regional analysis of the best that could be achieved to compensate families in the North West using the tactics currently under consideration is as follows.

Before any concessions, approximately 565,607 families in the North West will lose out, even after tax credit changes.

Furthermore, only a limited amount can be compensated using the measures Alistair Darling has indicated:

• The maximum reduction in the number of losers is 32,016 from any changes to the Winter Fuel Allowance for women aged 60 – 64.

• The maximum reduction in the number of losers is 18,356 from an increase in the minimum wage.

• The maximum reduction in the number of losers is 128,062 from changes to the eligibility requirements (cut the age limit to 16 and the required number of hours to 16) for the Working Tax Credit.

• The maximum reduction in the number of losers is 32,016 from an increase in the Working Tax Credit

Total: This means that based on what the Government have said so far about their strategy for compensating the losers, a best estimate of the maximum total reduction in the number of losers as a result of the package is 210,450 out of 565,607.

Similar problems apply in the rest of the country.

There are only two things the government could do which would undo the damage. The simplest would have been to actually reverse the decision - but that would apparently have been too much of a humiliation for them.

The other approach, as George Osborne and others have suggested, would be to increase tax thresholds so that more of those on low incomes are taken out of the PAYE system entirely. The government have not explained how they will fund the concessions they have promised, but that would be the most effective use of whatever money they can find.

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