Know Your Issues: The 10p tax 

As the UK gears up for a general election, it becomes important to get familiar with the major debate issues. The UK is, of course, not gearing up for a general election, but it will, just as soon as everyone democratically agrees to stop liking the Opposition. In the meantime, Project Brainstorm sees it not only as its job, but also as its part-time hobby thing, to break down all the words into a series of easily digested sentences.

The 10p tax row has become a major problem for the current Labour government. Indeed, although Labour’s poor showing at recent local elections could be blamed on anything from increasing dislike of the Iraq war, to recent data security blunders, to a mishandled bail-out of a failing building society, to poor leadership, to fears about loss of civil liberties, to concerns over multiculturalism, to dismay over tough new immigration laws, to worries about laws permitting hybrid embryos, to the fact Ruth Kelly is still alive, to inactivity over the rising cost of food, to inactivity over the rising cost of fuel, to inactivity over the rising cost of housing, to resentment over the excessive intrusiveness of the state on people’s lives, the 10p tax issue has really driven a wedge between popular opinion and the current administration.

The 10p income tax on the first part of taxable earnings was introduced in 1999 by then-Chancellor Gordon Brown to help out the low earners. It was removed in his 2007 Budget, and replaced with a 2p drop in the basic rate. Obviously, this has created what are referred to as the 10p tax losers – people who previously earned low enough incomes to mainly be paying at the 10% rate are losers, and people who earned incomes so low they only paid the 10% rate are total losers.

The Conservative opposition has recently attacked the government over the move. It is worth noting that this was announced in April 2007, and that the recent row erupted in March 2008. This, of course, has nothing to do with political opportunism, and neither does it have anything to do with allowing more time for people to forget that the Tories had proposed abolishing the 10p rate in September 2006. Rather, it was the necessary amount of time required for the party to assess the effects of the reform, and specifically, to check that 10 was less than twenty.

Government ministers will often retort that the Tories have no credibility on such issues, as they have often opposed measures that have designed to tackle poverty, like the minimum wage. The Tories may not have been wrong to do so – the minimum wage does nothing to raise the incomes of the unemployed. Even more concerningly, it does nothing to raise the incomes of the very rich, and without that, there is no way the very rich could afford to pay the very poor the higher pay packet. The very rich would, as a result, find themselves destitute and dependent on policies like the minimum wage, paid for by the very poor who, themselves also earning minimum wage, probably can’t afford it.

Instead of everyone ending up poor, surely it would be better if some people were allowed to be very rich, and who better to do that than the very rich? Allowing others to do that would be counterproductive – economists have shown that with no government intervention, the very poor tend to spend their incomes on being very poor, and are likely to do the same if they were to suddenly become very rich.

The Tories, as the official Opposition, are in the fortunate position of being required to oppose everything – they opposed the removal of the 10p tax rate, and they opposed any suggestion that they may reintroduce it when in power. Thankfully, the entire crisis was resolved by a &pound 2.7 billion compensation package to be paid by the government to all those who had been hurt by the removal of the 10p tax – a portion of which is certainly owed to the government. So, where does this leave Gordon Brown and Alasdair Darling? The prime minister and the Chancellor seem safe for now, but the same probably can’t be said for Mr Darling.