Fudget

The current debate over the 10p tax rate confuses two distinct policies introduced in Gordon Brown's last Budget.

This morning I posted over on Labourhome about the 10p tax issue. Whilst the title of the post might have been a little inflamatory, I stand by my general points.

I'm constantly surprised, however, by how well-meaning Labour supporters seem to oppose any measures which don't appear to be "Labour", even if the effect of those measures is consistent with the principles of the party.

Lump sum transfers (i.e. tax credits) are far better than marginal tax rates at targeting resources towards those on low incomes. Why? Because lower marginal tax rates are a benefit enjoyed by all, whereas tax credits target resources where they are most needed.

If I as a policy maker want to help those on low incomes, then why should I give EVERYBODY a tax cut - even those who can afford to pay. Isn't it better to help those most in need, rather than indiscriminantly handing out tax rebates to prince and pauper alike?

Apparently not, if you read a lot of the comment that has been generated in recent days about the matter.

Sadly, the current argument about the 10p tax rate is caused by the combination of two distinct policies in Gordon Brown's last budget - the removal of the 10p tax rate and the lowering of the basic rate to 20%.

People believe that the one paid for the other. This isn't necessarily strictly true. But the combination of the two policies confuses the issue in peoples' minds.

The government would have an easier job explaining the benefits of the tax credit system over the starting rate had they not abolished the starting rate at the same time as lowering the basic rate.