Ed Miliband’s big tax policy announcements


12:58 pm - February 14th 2013

by Sunny Hundal    


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I’ll fully admit it – I didn’t believe the Labour team when they told me there would be more meat on the bones on Thursday.

But there has been some, which is very welcome!

There are the key bits from Miliband’s speech today:

A One Nation Labour budget next month would lay the foundations for a recovery made by the many, not just a few at the top.
Let me tell you about one crucial choice we would make, which is different from this government.

We would tax houses worth over £2 million. And we would use the money to cut taxes for working people.

We would put right a mistake made by Gordon Brown and the last Labour government. We would use the money raised by a mansion tax to reintroduce a lower 10 pence starting rate of tax, with the size of the band depending on the amount raised.

This would benefit 25 million basic rate taxpayers. Moving Labour on from the past and putting Labour where it should always have been, on the side of working people.

This is a great start!

Update: Ed Balls writes in the Evening Standard on the 10p tax proposal:

Today Ed Miliband and I are saying that a 10p starting rate of tax should be brought back. It would put right a mistake made six years ago by the last Labour government. At a time when the economy is flatlining and the cost of living is rising it would boost the economy and put money back into people’s pockets. And it would make work pay by ensuring people keep more of their income if they increase their hours.

This Government seems to think that the way to kick-start our flatlining economy is to help the very richest while leaving everybody else squeezed as never before. But that outdated, trickle-down economics just isn’t going to work. Our economy will only prosper when we ease the pressures facing the vast majority and give everyone a chance to prosper. That is what Ed and I mean by a One Nation economy.

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Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


1. George Hallam

“This is a great start!”

?

This statement says more about your expectations than it does about Miliband’s proposals.

The proposals do nothing, repeat nothing, to address the problems that we face.

These are great intentions, but to me the more significant point is the disavowal of Brown and his mistakes.

A very good start.

This post I just made on another thread is probably better placed here. I’ve corrected some dodgy maths too!

So, he’s committed to reintroducing the 10p tax rate, funded by a Mansion Tax.

I’m not impressed.

Labour have now moved on to coalition territory with a policy that does basically the same thing as raising the tax threshold, but does it half as much.

Any arguments in favour of cutting tax from 20p to 10p go double for raising the tax threshold (= cutting tax from 20p to 0p). So by making the case for this sort of tax cut, they’re digging their own grave in terms of competing with the coalition parties on ‘helping the low paid’.

Conversely, the arguments *against* raising the tax threshold apply equally to cutting tax to 10p:

1. The distributional impact of both policies is regressive.

Supposing the proposal was to apply a 10p rate on income between £10,000 and £12,000, you get the following pattern:

– households in which no-one earns more than £10,000 gain nothing at all. By definition, then, this policy does nothing to help the poorest households (mainly pensioners, part-time workers, the disabled, and the unemployed).

– households in which two people each earn £12,000 or more gain £400.

– in between, there’s a sliding scale. A typical low-income household with one partner on £12,000 and one on £8,000 gains £200.

At the end of the day, what you end up with is a lot of money in the pockets of households on mid-high incomes, a little money in the pockets of households on low-mid incomes, and nothing at all in the pockets of households on the lowest incomes.

2. It’s just a very inefficient way of reducing the net tax burden on low-income households.

For every £1 these policies put in the pockets of a low-to-mid income households, £2 is put into the pockets of mid-to-high income households. Hence it costs far more than using the tax credits system to increase the net incomes of those low-to-mid income households by the same amount.

3. Because we’re running a deficit, any tax cut increases the pressure to cut spending elsewhere. A tax cut is no use to a low-income household if they just end up losing their tax credits.

OK, Labour say they’ll fund this tax cut through a Mansion Tax. But that Mansion Tax could have funded, say, the restoration of some lost tax credits or benefits to low-income households.

Crudely put: instead of giving £0 to household A on £10,000, £200 to household B on £12,000, and £400 each to households C, D, and E on £20,000, £40,000 and £60,000, we could have given £400 to household A, £200 to household B, £100 to household C, nothing to households D and E – and used the other half of the money to close the deficit or protect spending on services.

As I’ve said many times before, I’m all for reducing the net tax burden on low-income households. But these across-the-board tax cuts are a very expensive way of doing that, and have some unpleasant unintended consequences in distributional terms.

Having said all that – there clearly *is* a need to look at the living standards of middle-income as well as low-income households, and shifting the tax burden from working people’s incomes onto excessive wealth is in itself a good thing to do. But I’d like to think this policy would at least come as part of a package that would mitigate some of those unintended consequences – e.g. restoring tax credits lost by households who would otherwise fall behind, or finding some way to claw back tax cuts received by high-income households.

This is the sort of thing that worries me about current politicians in general. The 10p rate debacle is a great example.

Brown, backed by the two Eds, spent a whole year insisting that there would be no loser’s when the 10p rate was scrapped. It wasn’t a hard calculation to make, and it’s still boggling that the row rumbled on as it did. 90 seconds should have been enough. (I include the Conservatives in this of course).

So, two immediate questions arise:

1) Will the last-minute compensation package also be reversed?

2) How big will the band be? Naturally they can’t be specific at this stage, but they should at least know whether it will be similar to before, or rather more or rather less.

Without this it’s impossible to know whether this is a serious proposal, or just politicking. It would also tell whether the Shadow Chancellor has found his calculator.

“These are great intentions, but to me the more significant point is the disavowal of Brown and his mistakes”.

True, but one of his biggest mistakes was the Ed Balls, a mistake now also made by Ed M.

It’s worth being clear on this point:

What Brown did was to abolish the 10p rate while cutting the 22p rate to 20p. Net result: tax cuts for higher-income households, and tax rises for lower-income households. The problem with that was that it was regressive.

Miliband is proposing to reverse the tax rises on those lower-income households, but not the tax cuts on the higher-income households. Indeed, he is proposing to give those higher-income households *further* tax cuts, which are typically larger than the tax cuts received by lower-income households. And the problem with *that* is that it too is regressive.

So this is not as simple as ‘undoing a mistake’. There’s an important asymmetry here.

My ‘big picture’ worry here is this: if all three parties start trying to outdo each other over how much they can ‘cut taxes for low-income households’ (read: ‘cut income tax across the board’), it’s precisely low-income households who are ultimately going to lose out – both in absolute terms due to benefit cuts and rises in indirect taxation, and in relative terms as the incomes of average households pull away from them.

A mansion tax along the lines of the one envisaged by the Lib Dems is only going to raise around £1 billion, which means the 10p band is going to be pretty narrow. One of Mr Brown’s better tax changes was getting rid of the utterly useless 10p rate. A mistake to bring it back but I suppose it is all political symbolism to pretend that Labour are being radical. Needlessly further complicates the tax code for little benefit.

The 2007 tax changes were regressive if you only counted tax and NI changes. However, the overall budget was not regressive as the distribution effects can be seen here on the IFS presentation.

http://www.ifs.org.uk/budgets/budget2007/distribution.ppt

“Ed Balls writes in the Evening Standard on the 10p tax proposal: … It would put right a mistake made six years ago by the last Labour government.”

Ed was in the last government and in all likely-hood helped create the “mistake” of removing the 10p tax band. And it looks like he’s making more mistakes in his attempts at fixing it according to GO’s figures.

A mistake to bring it back but I suppose it is all political symbolism to pretend that Labour are being radical

It’s not a manifesto pledge – it’ll be quietly dropped in the years ahead. It’s real purpose is to try to limit Osborne’s room for manoeuvre in the budget.

@ Tim J

“It’s not a manifesto pledge – it’ll be quietly dropped in the years ahead. It’s real purpose is to try to limit Osborne’s room for manoeuvre in the budget.”

In which case, they may have shot themselves in the foot quite spectacularly – because I think there’s a real risk that Osborne will just take them up on it.

He’s going to be under pressure from the Lib Dems (and many Tories) to increase the Personal Allowance to £10,000 this time. At the minute, he’s probably wondering whether to do that or just go halfway, to £9,600 or so.

This is another way of going halfway. He could introduce a 10p band between £9,205 and £10,000 this year – then, as next year’s rabbit out of a hat, cut that 10p rate to 0p by finally raising the threshold. Hence beating Labour at their own game.

“: if all three parties start trying to outdo each other over how much they can ‘cut taxes for low-income households’ (read: ‘cut income tax across the board’),”

Simple really – the very poorest don’t vote and are concentrated in safe labour seats. The low income but in work people do vote. The low income but in work people who live in marginals are also likely to get some benefits (housing benefit and tax credits) but those benefits (rightly) will go to those with kids.

So those people who live in marginals, but are childless and in low paid work don’t benefit from a proposal to increase tax credits. They do from a rise in personal allowance or a 10p tax bracket. People in this group are also likely to be young and starting out in their career – hence helping them now directly when many may be saving for a deposit is a direct way of targeting the low paid but aspirational group – those who are also likely to be regular voters and who are also likely to be wealthier middle class voters when they are older (and who thus won’t qualify for tax credits once they get married and have kids).

13. George Hallam

Yesterday you wrote:
“Tomorrow morning Labour leader Ed Miliband will make a key speech on the economy. ..
“The speech is important because it lays out the key principles that will guide Labour’s political economy “for the next 30 years”. ”

It’s clear from the discussion that there is nothing of any substance here.

Back in 2010 People Before Profit said:

“We all need: Homes, Education, Health Care, Pensions and… Jobs.[ I should have added 'uncontaminated foood] The current crisis puts them all under threat. Emergency measures are required.

Those who got us into this mess won’t get us out of it. We have the resources to survive, if we use them. It’s our future, let’s get involved and take control. We need FIVE MILLION extra jobs to get the British people off benefits.

We can’t rely on the market– because the private sector is useless at creating jobs on its own. Between 1997 and 2007 six out of ten new jobs were dependent on state funding.

No cuts – any reduction in public spending will only increase unemployment and delay recovery.

Change the tax system– taxes must be simple, cheap to collect and based on ability to pay. Get rid of corporation tax and VAT. Increase income tax on £100,000 plus.

Help small businesses– by protecting them from unfair competition by giant multinationals, greedy landlords and ruthless banks. Small firms often give better value than their larger rivals. They also create more jobs than big firms.

Support British farmers– to produce decent food, using subsidies and science. Revitalise the countryside.

Reinvent manufacturing industry– Only manufacturing can provide the wealth and the jobs we need. Let’s revive it.

We’ve got to be green – but not in a half-hearted way – This is serious; just a bit greener won’t do. We need to be green in a total way. This includes re-thinking how we live and work.

Let’s put things together in a rational way– to create a new type of manufacturing industry that uses green, energy-efficient processes to produce green products. This means integrating cutting-edge science and technology into the industrial process.

Overseas – We must stand up to the US and the EU. Get our troops out of Afghanistan and back home to decent homes and jobs. Help other countries to protect their economies and reduce world imbalances.”

Now that was a real alternative.

14. Richard Carey

So Labour’s great announcement is they’re going to put the deck-chairs back in their original places on the Titanic. Full steam ahead!

15. margin4error

Aside from the obvious nit-picking – this is a very good start.

Labour at the last election had become the party of the impoverished. Not because of what it was doing for them, but because of the perception that they were not supporting those who struggle to pay their bills, can’t afford a holiday, but just about keep getting buy and raising their families.

These people – even if they are technically in poverty – never think of themselves as being in poverty. So talk about poverty sounds like you are doing stuff for other people – not them. And people quite rightly don’t like being ignored.

Meanwhile people earning less than £10k no doubt aspire to earn more than that – and so will see this as aspirational move that incentivises people to earn more and ensures they are properly rewarded for their efforts. (We hear this talk about the wealthy a lot, but it applies no less to the poor).

Also – and this is crucial – Labour have costed their promise. It may be a relatively small promise in the grand scheme of things. But over time as promises stack up – building up an understanding that it is affordable is crucial to credibility.

So – finally – well done Labour for starting the election campaign on the right footing.

How does this really differ from the Lib Dem approach of raising the tax threshold? Cutting the income tax rate from 20p to 10p for £1000 of income, which is what Labour plans, has the same effect for most people of cutting it from 20p to 0p for £500, which is the type of thing the Lib Dems support. (it cuts tax bills by £100).

Isn’t the Lib Dem approach actually marginally more progressive, in that the full benefit goes to people on slightly lower incomes (those who earn enough to be included in the £500 but not in the £1000 – yes only marginally more progressive I know).

Paying for the whole thing through a mansion tax rather than attacking benefit claimants is great, but that’s also a Lib Dem policy.

Also Sunny, wouldn’t it make sense to start talking about stuff that’s actually going to be in Labour’s manifesto? It’s great saying nice things in opposition but it’s pointless if that’s not what you actually plan to do in government. Wait, now I’m reminded of the Lib Dems again…

17. margin4error

Richard Carey

What a ludicrously lazy and weak-minded post.

Every journey starts with one step. Criticizing every little step as only a little step is flippant, pointless and demonstrates no wit or intelligence on your part.

@ hobson

“Isn’t the Lib Dem approach actually marginally more progressive, in that the full benefit goes to people on slightly lower incomes (those who earn enough to be included in the £500 but not in the £1000″

Yep. So, the Labour leader I voted for has now signed up to a policy that is, in one way, even more regressive than the Lib Dem policy I’ve been arguing against for the past three years.

OK, it helps that this policy is funded by a Mansion Tax rather than cuts to tax credits. Redistribution from the top to the middle-and-not-quite-top beats redistribution from the bottom to the middle-and-not-quite-top. But would it be too much to ask that we put the poor first, the ‘squeezed middle’ second, and don’t worry too much about the better off – instead of reversing that?

M4E

Criticizing every little step as only a little step is flippant, pointless and demonstrates no wit or intelligence on your part.

On the contrary, I think Richard’s analogy regarding replacing Titanic deckchairs was entirely apposite.

A medium term commitment to abolishing income tax and limiting government spending to 25% of GDP. Now that would have been something.

It’s not just me then:

http://www.ifs.org.uk/publications/6606

A couple of highlights:

“A far simpler and more sensible way of achieving these aims would be to spend the same amount of money on increasing the personal allowance… This would… be slightly more progressive… An even better alternative… would be to increase the point at which individuals start paying employee National Insurance Contributions… And if one wanted to focus the gains from the policy on low-income working families… increasing Working Tax Credits would be another sensible alternative to look at.”

“the proposal for a new 10p starting rate of income tax, has no plausible economic justification. It would complicate the income tax system and achieve nothing that could not be better achieved in other ways. It appears to repeat the same error perpetrated by Denis Healey in 1978 (undone by Geoffrey Howe in 1980), Norman Lamont in 1992 and Gordon Brown in 1999 (which he himself undid at considerable political cost in 2007). To have observed lower starting rates of tax being introduced and abolished by governments of both complexions over the last three decades and then to propose the same thing again suggests a remarkable failure to learn from history.”

For a visual representation of the regressive distributional impact of cutting the tax rate on a band of income just above the current personal allowance, see the graph on this page:

http://www.ifs.org.uk/publications/6045

Caveat: that graph reckons without adjusting the 40p threshold to restrict benefits to basic rate taxpayers, as Labour is proposing to do, so the gains to people in the top decile or two will be overstated. And of course, the specific cash figures don’t apply. But I can’t see any reason why the basic distributional pattern should differ depending on whether the tax rate on a band of income just above the current personal allowance is being reduced to 10p or to 0p.

The 10p tax pledge will be in the manifesto because the Coalition is simply not going to do it. It is a good policy, it is a strong policy and shows whose side Labour is on. Using £2bn from the mansion tax to cut taxes for ordinary workers is undoubtedly progressive and reaches out to those blue-collar workers who deserted us in 2010. Now what we need to do is talk about ‘the deficit’ and how we would cut it. Simply opposing ‘Tory cuts’ is not going to work, we need to start talking about how we would reduce spending and balance the budget. Ed Miliband should make Douglas Alexander the next Labour Party Chairman and Election Co-ordinator, so Tom Watson can take an advisory role as his deputy. Ed Balls should replace Douglas Alexander in the Shadow Foreign Office, because he is someone who is Eurorealist which is important in the run-up to 2015. That way, Ed could bring back his brother to become Shadow Chancellor by 2014 when Labour should promise to stick to the Coalition’s spending plans for at least two years after the next election after which we would have a zero-budget spending review. Now is the time for Labour to assert credibility over the economy.

23. Churm Rincewind

There’s already a tax based on property values. It’s called Council Tax. Is Ed Milliband merely saying he wants to introduce a further band?

Well, no, because Council Tax flows to local Councils, and Ed Milliband seems to be saying that he wants this extra money for national Government in order to “put right” Gordon Brown’s “mistake” in abolishing the 10p income tax band.

Yet the Coalition have effectively achieved this already by raising the personal allowance.

More spin than substance here, I fear.

I see no reason to disagree with GO. There is a valid argument that the Lib Dem policy of lowering the threshold is wrongheaded. By advocating a 10p rate we throw that argument down the drain.

Perhaps the mansion tax proceeds should fund a cut in VAT instead. (We need to attack the idea that income tax is the only form of tax. Time and again we hear the word “taxpayers” used as though it meant income taxpayers, and the related claim that the unemployed don’t pay tax.)

@ Renie Anjeh

“The 10p tax pledge will be in the manifesto because the Coalition is simply not going to do it.”

Wanna bet? Either they’ll do 10p or they’ll go ‘one better’ and do 0p (i.e. raise the Personal Allowance). Labour is not going to win a game of ‘top my tax cut’ against a coalition in which both parties are ideologically committed to doing whatever it takes to keep income tax low – raising VAT, cutting benefits and tax credits, scrapping services, etc.

“It is a good policy, it is a strong policy and shows whose side Labour is on.”

In those symbolic terms, it does what the coalition policy of raising the tax threshold does, only less so. And I’m deeply uncomfortable about buying into the idea that cutting income tax across the board is what you do if you’re on the side of low and middle income households. We used to recognise that for the self-serving right-wing crap it is. It’s high-income households who stand to gain the most from income tax cuts, and low-income households who stand to lose the most when tax revenues fall.

“Using £2bn from the mansion tax to cut taxes for ordinary workers is undoubtedly progressive”

Alice earns £10,000 a year, Bob £20,000, Charlotte £40,000 and Dave £200,000. I increase Dave’s taxes by £1200 a year and give £800 of that to Charlotte and £400 to Bob. Is that progressive? Sort of. In a way. Not in the way that it would be progressive to give £800 to *Alice* and £400 to Bob, though.

26. margin4error

Pagar

Fortunately we don’t live in a souless and uncaring enough society for any major party to put forward such stupid and uncivilised proposals.

We would use the money raised by a mansion tax to reintroduce a lower 10 pence starting rate of tax, with the size of the band depending on the amount raised.

This is the bit that spells out the unseriousness of the proposal by the way. Best estimates of what a mansion tax would raise are in the £2bn region. Reintroducing the 10p band that Gordon Brown abolished would cost £7bn. It doesn’t add up.

But it isn’t supposed to, particularly. It’s supposed to give rise to a soundbite of “we want to tax millionaires to give money to working people – that lot gave millionaires a tax cut.” It’s cheap rhetoric disguised as a policy.

Another ‘big picture’ point re using the tax system to address poverty:

A person’s position on the income distribution – how ‘rich’ or ‘poor’ he is – depends on the composition and income of his household. But we don’t tax households; we tax individuals. Hence the tax system is, in a whole range of cases, blind to the distinction between poorer people and richer people.

A single parent on 12k a year is towards the bottom of the income distribution. An MP’s wife earning 12k doing some part-time clerical work for her husband is towards the top. A couple with four dependent children, on 12k and 18k, are towards the bottom of the income distribution. A couple with no dependent children, also on 12k and 18k, are towards the top. But the tax system doesn’t know or care; cut taxes for the poorer people and their richer counterparts get the same tax cuts.

So if we want to keep taxing people as individuals (rather than introducing different tax codes for people with children etc.), but also want the overall net tax burden to be lower on poorer households than on richer households, we have to use something *other* than the tax system to fine tune households’ net contributions: benefits and tax credits being the obvious examples. Child benefit enables you to reduce the net tax burden on the couple with four dependent children without also reducing it on their counterparts without children. Tax credits let you reduce the net tax burden on the single parent on 12k without also reducing it on the MP’s wife. And so on.

29. margin4error

Tim J

I think you just lied.

Ed Miliband said “The size of the band would depend on the amount raised” – so your rather attempt to discredit it with irrelevant numbers you made up is, well, lets just say rather disingenuous.

Oh – but yes – it is to some extent the rhetorical turned into policy.

Because that’s democracy, and labeling it cheap makes it no less so.

The present government is cutting taxes for the rich because it’s rhetoric is that the rich create the wealth that the rest of benefit from trickling down to us.

Labour is suggesting that we create the wealth, and so maybe tax cuts for the not rich will be best for wealth creation. (Something I fundementally agree with, btw).

So that’s both sides of the debate turning rhetoric into policies.

Heaven forbid politicians act on what they say and believe huh?

30. margin4error

GO

A smart defence of complexity. Well said.

And I post that not caring one jot about poverty – as it tends to distract from bigger issues and it tends to be poorly accounted for. (if we scrapped the NHS and instead took £100billion and handed it out in equal share to every man woman and child – we would abolish poverty in an instant but would make the lives of the poor and normal working people of this country horrendously worse than at present.)

I think you just lied.

Ed Miliband said “The size of the band would depend on the amount raised” – so your rather attempt to discredit it with irrelevant numbers you made up is, well, lets just say rather disingenuous.

The £2bn projected revenue from the Mansion tax comes from, um, Ed Miliband (and the IFS for that matter, and pretty much every analysis of the Mansion Tax). That’s predicated on there being 70,000 houses worth more than £2m in the UK (which more be an over-estimate, other estimates put the number at 45,000).
http://www.bbc.co.uk/news/business-17397675

The £7bn cost of restoring Gordon Brown’s 10p tax band is an official Treasury estimate. http://www.theyworkforyou.com/wrans/?id=2013-01-14b.136279.h

These numbers are neither irrelevant nor made up. I think you just lied.

The present government is cutting taxes for the rich because it’s rhetoric is that the rich create the wealth that the rest of benefit from trickling down to us.

Labour is suggesting that we create the wealth, and so maybe tax cuts for the not rich will be best for wealth creation. (Something I fundementally agree with, btw).

So that’s both sides of the debate turning rhetoric into policies.

Heaven forbid politicians act on what they say and believe huh?

Balls. The biggest tax cut that this Government have introduced is the raising of the income tax threshold. People who were on the 10p rate when it was cut by Gordon Brown are now not paying any income tax at all.

It’s a crassly uneconomic tax that’s being suggested solely for the purposes of symbolism, and I’d be surprised if it ended up in the manifesto – in this guise at least.

32. margin4error

Tim

Any evidence that the £2bil comes from Ed M?

You’ve linked to an article with no comment from him, and a comment by a Tory. This suggests to me you were hoping I wouldn’t click through and realise you haven’t actually said anything useful in your latest post.

Meanwhile I assume you’ve checked the speech and realised he didn’t say the numbers you are bandying around as his, and have been able to find no mention of him saying them – otherwise you might have provided useful links or attempted to correct me.

Now go try again.

32 – Here’s Ed Balls saying it:

http://www.itv.com/news/update/2013-02-14/ed-balls-mansion-tax-would-raise-1-7-2-billion/

Good enough? Although Balls has £2bn as his high-end estimate, implying that the actual take could well be lower.

I have no idea why you’re being so obtuse about this though – the estimated revenue from a mansion tax is agreed as being about £2bn. Have a quickj Google – you can get the figure from the Guardian, the BBC, the FT, the Independent, the IFS, ITV, the Labour Party and on and on.


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