Labour must focus on the lowest paid as well as the highest paid on tax reform

The fierce debate around Ed Balls’ pledge to reintroduce the 50p tax rate is set to rage all the way up to the 2015 general election. Few policy announcements could match it for symbolic resonance among the party faithful, or- as recent polling indicates- the wider public. The tax rise sends out a clear message about Labour’s priority in government: ensuring those with the deepest pockets contribute most to restoring the public finances.

This was the same message promoted by Alistair Darling in 2009 when the 50p rate was first introduced. The then-Chancellor argued: “it is fair that those who have gained the most should contribute more” and explained how the tax hike was intended to “help pay for additional support” for the victims of the global financial crisis.

However, back then as it is now, increasing the top rate of tax is really only half a message; the prologue to a greater and more meaningful story. Labour’s mission now is to pen a compelling narrative about personal taxation that touches the lives of the 99%. Yes, restoring the 50p rate says to the public that Labour is the party of fairness, of redistribution, and of social justice, but it doesn’t tell them how the tax system will be reformed to help them.

A good first step would be for the party to spell out how it will reform taxation for the lowest earners. Labour has a torrid history in this area. Few can forget Gordon Brown’s disastrous abolition of the 10p tax rate in 2007, a decision that inflicted considerable damage to the then Prime Minister’s standing and drove untold thousands of Labour supporters out of the party. Since 2010, Labour has been consistently wrong-footed on the issue, unable to muster up a decent counter to the Coalition’s bold and progressive plan of ratcheting up the personal tax-free allowance.

Ed Miliband’s last announcement on the topic was a pledge to restore the 10p tax rate, which would benefit basic rate taxpayers to the tune of £271 a year according to the Institute for Fiscal Studies. However, as the think-tank goes on to report, the benefits conferred by the 10p rate are better achieved by raising the personal allowance- something which is also more progressive as it takes the lowest paid workers out of income tax altogether.

A stronger Labour strategy on low pay would start by matching the Coalition’s commitment to raise the personal allowance to £10,500. A bolder next step would be to exempt minimum wage workers from payroll taxes altogether- starting with National Insurance Contributions (NIC). Whichever way you dress it up, NIC is a tax on labour that raises the marginal rate of tax for all employees. Right now, NIC slaps a tax charge of 12% on all earnings above £7,748 a year. You could be on as little as £200 a week and still see the taxman carry off £25 of your earnings a month.

Labour could end NIC for minimum wage workers along with income tax, at a stroke delivering the living wage that Labour supporters so covet. This would have the added benefit of incurring no costs on businesses- and therefore no cost to employment.

Yes, there will be questions to be asked about how such a tax cut will be funded, but this is the part of the story that links back up with higher marginal rates for top earners and, more intriguingly, wealth taxes- on property, on land, and inheritances.

Labour is the party of the redistribution. Coupling higher taxes for the wealthy directly with lower taxes- or indeed, no taxes- for the low paid is a clean and simple way of relaying that message. It is one the party, and the country, should get behind.   

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