A remarkable failure to learn from history

Thumb_richard-edgar
Labour leader Ed Miliband and shadow chancellor Ed Balls unveiled their new plans in Bedfordshire
Labour leader Ed Miliband and shadow chancellor Ed Balls Photo: Stefan Rousseau/PA Wire

The leader of the Labour Party and the shadow chancellor have unveiled two big economic ideas today: reintroducing a ten pence starter tax rate and a mansion tax.

Neither of them is particularly new and neither of them is particularly effective.

My colleague, Alex Forrest, has the details of the announcement and excellent analysis of the politics behind the story here but reaction from economists to the speech by Ed Miliband and Ed Balls has been underwhelming.

The respected Institute for Fiscal Studies has weighed in with some analysis of what would happen in practice.

First it tackles the mansion tax. This is a reaction to a flaw in current council tax levels which are based on 1991 property values and which unfairly tax low-value properties more than high-value ones.

Labour's plans leave council tax untouched and simply overlay a mansion tax on top.

Labour is proposing a mansion tax on homes worth over £2m
Labour is proposing a mansion tax on homes worth over £2m Credit: ITV News

The IFS argues it would be better to reform council tax itself by using up-to-date valuations and making a proportional charge fair across the range of property values.

The burden would fall more heavily on more expensive homes.

See also:

The 10p tax rate was scrapped by Gordon Brown
The 10p tax rate was scrapped by Gordon Brown Credit: Tim Ireland/PA Wire

Moving to the 10p in the pound tax rate, the IFS agrees it would help basic rate tax payers but argues that it is too complex and there are better ideas: either raising the threshold before a worker starts paying any tax at all or - better yet, they say - raising the threshold at which we start paying National Insurance Contributions.

There are a million people who earn between £7,748 and £9,440 and who (from April) won't pay any tax but who will pay NI contributions. Changing those thresholds would lift them out of taxation altogether - an incentive to work.

The IFS did agree with Labour about the costings of the two measures - something the Prime Minister had doubted this morning when he heard the details - but a Labour spokesman said he was untroubled by the criticisms of how Ed Miliband proposed to spend the money.

I shall leave the last (damning) word to the IFS authors themselves:

A 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 in1980), 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.