Nick Palmer says the sacred cow of income tax may be unwell

One of the curious features of being a Labour MP in the last three elections was that we would often wake up and find out from the newspapers that we were irrevocably committed to something that we had not discussed, but which Tony or Gordon had decided was vital to our chances.

A hardy perennial was the recurrent commitment not to increase the standard rate of income tax. This was part of the New Labour deal: we were not unilateralists; we weren’t going to nationalise the commanding heights; and we wouldn’t put up your income tax.

This probably did help initially in refurbishing our image, but it has become a sacred cow. In these troubled times, we should re-examine the cow to find out how it’s getting on and if, in electoral terms, it is actually still alive.

Why? Because we need an effective counter to the drastic reshaping of the state which the coalition government is unveiling. David Cameron has given the game away by commenting that it’s “not just about money”, but about changing the way society operates, with far more involvement of the voluntary and charitable sectors.

This sounds quite good to many people at first sight: replacing stodgy bureaucrats with nice ladies from Age Concern. But there are reasons why it has not happened already.

First, the presence of voluntary and charitable organisations is patchy and disproportionately concentrated in prosperous areas.  If Cameron merely meant that work can be farmed out where there is an excellent third sector provider, that would merely restate much current practice. But what if there is no such provider operating in, say, Mansfield? If we are to be increasingly dependent on the availability of such providers, the coalition is collectively signing us up for a postcode lottery, for which they do not have the faintest shred of a mandate.

Second, in the real world the distinction is not between mindless bureaucrats and selfless volunteers but between the highly trained and the less trained. The obvious example is home care, for which most councils now have a mixture of in-house and commissioned agency staff.  The latter are notably variable in quality: generally paid less than council staff (which is why the agency can get the contract), they will often be less experienced and more likely to switch to other jobs when they become available.  A rapid turnover of junior agency staff paid not much more than minimum wage leads to a lack of continuity of care.

So we ought to be putting down early markers to oppose the wholesale export of public services to private providers – not because we are clinging to public provision for ideological reasons, but because the vulnerable people who depend on it will be hurt most by its loss.

The coalition’s reply to that is predictable: “We need to cut public spending – what would you do instead?” Merely saying that we think the need for cuts has been exaggerated will not win the argument.

However, an iron rule that the deficit must mainly be tackled by cuts in public spending does not actually exist. The coalition has just made it up and has deemed the correct ratio to be 90% cuts, 10% tax rises. That is why it is time for Labour to look at our income tax policy again.

The standard rate of income tax was cut twice by 1p under Labour.  These were the political equivalents of one-night stands, except that one-night stands, however morally debatable, are at least supposed to give you a whole night of enjoyment.

The pleasure resulting from the 1p tax cuts lasted about 10 seconds: the moments at the end of the Budget speeches where they were produced as rabbits out of Gordon Brown’s hat. Few MPs have ever met constituents who gave us credit for them, and most people have forgotten that they ever happened. As for our solemn pledge never to increase the standard rate, how many voters are impressed? Those who are even aware of the pledge merely assume that we will tax them in some other way.

The sums involved are very significant.  The state currently gets £140 billion a year from income tax: a rise from 20p to 21p with similar rises at the higher rates should generate around £7 billion. Restoring the rate to 22p would offer a credible alternative to the most savage cuts as we seek to combat them.

Would you rather have decent elderly care, schools maintained at least at current standards, restraint in university fees, and (barely) adequate provision for the disabled? Or would you rather have 2 pence? It’s a question that the new Labour leadership should be prepared to ask.

Nick Palmer was MP for Broxtowe 1997-2010. He intends to seek to stand again in the next election.

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3 Responses to “Nick Palmer says the sacred cow of income tax may be unwell”

  1. Aidan Skinner says:

    Never mind adjusting the slides on Income Tax and National Insurance, what the Labour party should be doing is reforming and simplifying the entire personal tax regime.

    For instance, implementing a negative income tax to replace capital gains tax (which should be treated as income if held for less than N years outside an ISA), national insurance, inheritance tax would be fairer, easier to understand, more transparent and could be used to get rid of some benefits such as income support entirely and roll up others such as the various tax credits to save on administration.

  2. james says:

    It’s not just about income tax.

    We have a problem with a race to the bottom in terms of corporation tax. Transnational firms based in the UK outsource jobs to lower-wage economies (reducing the number of people paying income tax) and have clever means of avoiding taxes (both at home and abroad). This is unsustainable, not least because the business models of these firms externalise social and environmental costs.

    Labour needs to promote the growth in co-operative and employee-owned firms in the private sector – less likely to outsource jobs, more able to internalise those “negative externalities”, and greater “adaptive resilience” to change because of the partnership approach.

  3. APJG says:


    Your theory is fine if one accepts your premis that all cuts will impact on front-line servcies. However, the last 13 years have seen a disproportionate increase in bureaucracy for often a decrease in service standards.

    We have in the public sector at least 750,000 to 1 million paper pushers and enablers and managers to service providers who were recruited over the lifetime of the last Labour government who need to be redeployed in the private sector and do not have the relevant skill sets – retraining will be costly and time-consuming and will unfortunately have a severe short term social impact.

    However, as James says, the UK is an international competitor and must compete on as near a level playing field as possible. This means reducing corporation tax and employment taxes and increasing efficiency and the educational standards of our young people.

    We can only reduce business taxes if we reduce our public sector costs.

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