The Conservatives Have It Only Half Right

Tomorrow Iain Duncan Smith will outline plans to transform the welfare system. His report will suggest that more than half a million households could be moved off welfare and into work and this would eventually save the taxpayer £700m a year. IDS will predict that his plan will cost £2.bn a year but will eventually save £3.4bn after one to two years.

It's all well and good to radically change the benefit system but our income tax system needs the same treatment, at the same time. The aim of taxation is to finance government with as little harm as possible to the wealth-creating processes of the economy and in such a way that those paying the tax are those who can afford to do so.

I spent some time yesterday reading Madsen Pirie's 'Zero Based Policy' and so much made sense - particularly the section regarding income tax. It interests me because I am one of those people now on a low income and Labour have doubled my tax from 10p to 20p, therefore not only have I lost out on my private pension, I lose out on taxation.

Dr Pirie suggest that the starting level for income tax should be set above the minimum wage or above half the average income (average income being £25,000). At current earnings this would almost double from £6.035 to at least £12,000. Such a policy would take 7 million low-paid workers out of the income tax net altogether and would transform the lives of low earners by leaving them with more money to spend. Millions currently dependent on welfare support would be lifted out of it to become self-supporting. Not only should the threshold be raised to take low earners out of taxation, but the entire system should be simplified by having a single rate of taxation. The adoption of a single income tax band of 20% would have a dramatic effect on economic growth. Britain would once again become an attractive low-tax country in which talented high earners would wish to stay and to which high achievers from other countries would wish to come. These are groups which generate employment and economic growth and people whose spending power sustains many other jobs.

The Treasury would lose revenue of course, but there would be offsetting effects. In the first place the change would take many people out of welfare dependency. Not only would those in work keep more of their income, avoiding the need for welfare support, but many on welfare support would find the balance tipped in favour of work, motivating them to prefer work to welfare.

He suggests that the government should raise the higher threshold (now £40,835) in line with the personal allowance. This would cost an additional £6bn, taking the total cost of the reform to approximately £25bn. There is a good case for this as, according to Treasury figures, the number of higher-rate taxpayers in the UK has almost doubled since 1997 because the government failed to lift the threshold.

It helps too if a tax can be collected at relatively low cost compared with its yield and it is unlikely that anyone starting a new tax system would wish to achieve anything as cumbersome and complicated as that which presently exists in Britain.

The point of this dynamic model is that tax cuts do bring about behaviour changes. They raise the rewards of work and effort and make idleness less attractive by comparison. They make it more likely that business activity will expand.

Now Mr Iain Duncan Smith, as well as your welfare reforms what about income tax reform? Dr Pirie has already done the work for you so there's no reason this could not be adopted as Conservative policy. What is the point in taxing people with low incomes then spending millions on administering benefits which are glorified refunds?

Tweet