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The amendment relates to the 10p rate of tax that the Government currently levy on the first part of people's incomes. We believe that the rate should be reduced to zero, effectively extending substantially the tax free allowance that people enjoy. Some 2.7 million people now have a marginal rate of tax of 10 per cent. as a result of the Chancellor's expansion of the band by £300 above indexation. Along with the early introduction of the 10p rate, that has been a substantial cost to him. However, instead of introducing other tax cuts, we believe that he should simply have extended the tax free allowance, taking 2.7 million people out of paying tax altogether.
The key debate is whether the Chancellor is going down the right route in seeking to introduce and then expand the 10p starting rate of tax or whether he would have been better advised, as Liberal Democrats have consistently argued over many years, to expand tax-free allowances to take many people out of paying tax. Instead, he has introduced another complication into the tax system.
The first question to ask relates to the distributional impact of the Chancellor's policy. Would we better help people on the lowest incomes by taking the Chancellor's course of the tax complication of a 10p rate or by taking the Liberal Democrats' choice of extending tax-free allowances? Research undertaken by the Institute for Fiscal Studies shows that spending an equivalent amount of money on either widening the 10p band or cutting it to zero has different distributional impacts that do not affect people in the same way.
Broadly speaking, the poorest 10 per cent. would gain twice as much by the Government cutting the 10p rate to zero than they would by the Government spending the same money on increasing the 10p band. The poorest 50 per cent. would gain more by cutting the 10p rate to zero. That led the Institute for Fiscal Studies to comment in its "Green Budget 2000" that widening the 10p band in the way that the Chancellor has chosen to do is "less redistributive". By contrast, on our suggestion of cutting the 10p band to zero, it said:
The Paymaster General (Dawn Primarolo): Will the hon. Gentleman explain exactly how his proposal to introduce a zero rate tax relief band on top of the personal allowance would make the tax system less complex and easier to understand?
Mr. Taylor: If the Paymaster General had been listening, she would have understood that I said that, in effect, we would increase the allowance. The nature of this debate and our ability to table amendments to the Finance Bill gives us an opportunity to discuss these issues.
Mr. Taylor: If that is the best that the minds in the Treasury can come up with, I have worries about their ability to brief Ministers. I have said twice--I shall say it again--that our proposal is to increase the tax-free allowance. I shall make absolutely clear the mechanism through which we would do that. We would spend money to turn the 10p rate into a tax-free allowance at equivalent income levels.
In case the Minister is wondering, our approach would be so beneficial in redistributive terms because it would give the maximum benefit at low income, including to part-time earners. That is exactly what the Institute for Fiscal Studies says. The Chancellor has to explain why he has chosen to take such a complex approach in preference to the simplification that we want. The Minister is right: operating two systems--a tax-free allowance and a 10p rate--is complex. If we were proposing, as she suggests, to have two different systems, we would be maintaining the complexity. However, we are not arguing that, because we want simplification. The Institute for Fiscal Studies argues, as does the broad range of those involved in the sector, that there should be a simple system that gives maximum benefit to people on the lowest incomes. Our proposal would take 2.5 million people out of the tax system.
The Chancellor has also introduced other complexities into the tax system since he took office. The number of direct tax rates was 24; it is now 47. There were no tax credits; now there are eight, with five more proposed. The tax system is hugely complex. It benefits accountants enormously, because it allows them to earn much more, but it does not benefit those in greatest need. The money would be put to more effective use if it were given to people on the lowest incomes.
Mr. Jim Cousins (Newcastle upon Tyne, Central): Does the hon. Gentleman not see advantages in terms of tax simplification in aligning the system of personal allowances with the trigger rates for the payment of national insurance? The Government have moved towards that. If we bring the tax and national insurance systems together, we will achieve a massive measure of tax simplification.
Mr. Taylor: The hon. Gentleman and I would probably agree to a large extent on long-term reform, for which the Liberal Democrats have been arguing much longer than others. There are difficulties in that policy, however, because we need to ensure that people are not unfairly penalised, which is why change has to be introduced gradually. I do not disagree with the principle of the hon. Gentleman's argument. Indeed, personal national insurance--employees national insurance--is an anomaly within the tax system. It does not build up an individual insurance fund. We have argued that the basic state pension should be available in full to all and not tied to a contribution record that unfairly penalises people, most of whom have stayed at home to look after children and have a reduced pension as a result. The operation of national insurance gives rise to many issues, but I will be called to order if I discuss them now.
The question mark that hangs over the Chancellor's strategy is how he envisages the tax system developing. It is not obvious from the internal logic of introducing the 10p rate and the decision to broaden the band at what point the Chancellor believes the process should be halted. Do the Government believe that the basic rate should gradually become the 10p rate? On what basis have they decided on the £300 increase? In addition, we are increasingly seeing difficult interactions between tax and savings. The tax system has been made more complex.
People who are trying to tackle poverty have argued for our option. They want to take people out of tax altogether in preference to the 10p band. People who deal with tax, such as accountants and those employed by other professional bodies, have also argued that the Government are unnecessarily complicating the system and that it would be better to take some people out of the tax system. There is only one reason for the Government's decision: the Chancellor is delivering a political message designed to trump the Conservatives. They argued for a 20p rate, so he came up with the 10p rate. That is the only logic behind their decision. The Government have a huge majority, which they expect to keep in the general election. I had hoped that they would have the courage to go for a sensible tax policy to take people out of paying tax instead of introducing a tax complication that is purely designed to wrong-foot the Conservative party.
The Government might argue that there is a difference of opinion about strategy, but at least Labour agrees--unlike the Conservatives--that the aim is to have a progressive tax system so that people on the lowest incomes contribute least until their incomes increase, when they are expected to contribute a little more.
The introduction of the 10p rate cuts at the basic rate of income tax but huge increases in indirect taxation have made the tax system more regressive. Under the Conservatives, the rich paid less of their income in tax than the poor, but that has got worse under Labour. People in the poorest fifth of households typically pay 41.4 per cent. of their income in tax in one form or another compared with just 36.5 per cent. for the richest fifth. We know that because it is part of the information provided by the Government in table B on page 39 of the Red Book. The proportion of income paid in tax has risen for the bottom 80 per cent. of households since 1997-98 and fallen for the richest 20 per cent. Most people are paying more; the rich are paying less; and the very poor are paying substantially more as a percentage of their income than the very rich. The process that we advocate of taking people out of tax would help to turn that around.
It is not just a question of tax; we are also concerned about inequality in our society. The measure of inequality of income after tax--the Gini coefficient--has recorded another increase in the past year and now stands at 40 per cent. That is the highest level for any year for which the Office for National Statistics has data. Almost every measure shows inequality at its highest, or close to its highest, level. Such information is available in April's Economic Trends.
We have a Labour Government who are apparently committed to increasing equality in society, but who are actually increasing inequality. They are theoretically supporting progressive taxation, but have increased the regressive nature of tax in the United Kingdom. They have increased tax for the poorest and cut it for the richest. In the process, they have been unable to deliver the improvements in health, education and pensions that people thought they were going to receive back in 1997 when Labour came to office.
Our proposal shows that the Chancellor had a choice about what to do with the money available to him, which he decided to spend on tax cuts. We have used figures in the Red Book to demonstrate that he could have taken 2.5 million people out of paying tax, increased equality and created a more progressive, simpler tax system which would please even the accountants. We believe that the Labour Government should have delivered on that; it is something on which the Liberal Democrats aim to deliver.