10p tax rate - fixed??

Tonight we will vote on the Government's plans to scrap the 10p starting rate of income tax. But the parliamentary excitement seems to have drained away now that the 'Labour rebels' have been persuaded to behave themselves after being promised concessions by the Government.

The truth is however that the proposed 'compensation' package is full of holes, as will become apparent when we get to see the details in the Autumn.

The first problem is that the Government really doesn't want to spend a lot of money compensating losers. As a result, there has been talk of giving 'average' compensation, which means if you are one of the ones worst hit then you will still be out of pocket.

Second is the question of where the money comes from to pay for the compensation? Suppose, for example, that the Winter Fuel Payment goes up to help the 60-64 year-olds who lose out and who don't get the 'pensioner' (Ie over 65) tax allowance. The Government probably can't just pay this to the losers in this group, so it will have to pay it to everyone. This is hundreds of millions of pounds over and above the cost of simply compensating the losers. Assuming the Government didn't just have the cash 'lying around' presumably ultimately some other tax will eventually have to go up to find this money - thereby creating more losers!

Third is the issue of 'take-up'. Whilst take-up of the Winter Fuel Payment is pretty good (though less so among men aged 60-64) take-up of some of the tax credits is pretty poor. So putting extra cash via a complex system of tax credits may not get to many of the poorest losers.

Four is the idea of using the minimum wage. To provide full compensation for all losers would involve employers having to increase wage rates for significant numbers of workers - and to make up their loss will they put up prices (creating losers among their customers) or perhaps hold down other wage increases (creating losers among other workers).

In short, this is a bad policy creating a wide diversity of losers. Trying to compensate over 5 million people in a wide diversity of circumstances is likely to be very expensive, very complex, and involve spending money on people who didn't lose in the first place. Far better simply to scrap the ill-judged policy.

But for now the rebels are happy - they don't have to vote against their Government three days before key local elections. Whether they will be happy when they see how this problem is going to be 'solved' is another matter....