Continuing protest over abolition of 10% tax band

by Business Case Studies on Tuesday 22nd April, 2008

Continuing protest over abolition of 10% tax band

When the budget was announced in March, accountants predicted that more than 1.8 million of the poorest workers would be forced to pay more than 60% tax on thousands of pounds of their income. This followed the proposals to scrap the 10% tax rate. They claimed this action would prove to be a disincentive to work for many. (The Times, March 13, 2008).

A spokesman for HMRC said: 'There is a small group of people affected by the loss of the 10%t rate, but two thirds of that group will receive extra benefits to compensate. You are always going to be better off in work than not in work. In part the increase in the figures is because of the introduction of tax credits in 2003.' (The Times, March 13, 2008)

David Cameron decided to support rebel Labour MPs in their bid to retain the 10% tax band. His decision has been criticised by the Conservative peer who chaired the Tory party's Tax Reform Commission, former cabinet minister Lord Forsyth of Drumlean, as it does not address one of the key issues. Lord Forsyth's report recommended abolition of the 10% tax band but in addition, raising the personal allowance to £7,185. That would mean two and a half million people taken out of paying tax at all. This recommendation came six months before Gordon Brown announced the measure in his final Budget. However, Mr Brown did not take on the Commission's proposal that personal allowances should be increased.

Angela Eagle, the Treasury Minister, appeared on the Radio 4 programme Any Questions on Friday 18th April and seemed to suggest that concessions were being prepared. However, senior sources at Number 11 Downing Street have since insisted that the policy will not change. Protest and debate continued while Gordon Brown was in the USA last week. He flew back to Britain on Saturday 19th April to face down the storm. (The Times, 19 April 2008)

The Prime Minister told GMTV that changes to tax credits combined with lowering the basic rate of tax from 22p to 20p were not being taken into account. He blamed the media for raising tensions and failing to report the issue properly while he was abroad. He believes that it is virtually impossible to say that people will lose out and that all the predictions made so far are out of date. He said: 'There are issues about how we get our message across to the public. we've cut the basic rate of tax from 22p to 20p, we've raised child benefit for seven million mothers and families in this country, we're raising the child tax credit, we're raising the pensioner's winter allowance, we're raising the pensioner's tax credit.' (The Times, 19 April 2008)

Gordon Brown faced new threats of resignations from his government over the weekend as the rebellion escalated. Yesterday five more ministerial aides broke cover to criticise his decision, with one declaring publicly that he is considering quitting and others known to be threatening to resign. (The Sunday Times, 20 April 2008)

See the Times 100 case study on Her Majesty's Revenue and Customs. In the UK, HMRC collects most taxes. This case study focuses upon the role of HMRC in collecting taxes and how these help the UK government to control the economy. The case also looks at the types of taxation used within the economy and the way in which HMRC communicates with businesses.

Sources:

The Times Online – Scrapping of 10p tax rate will hit millions, 13 March 2008

The Times Online – Gordon Brown flies home to a hard landing over 10p tax rate, 19 April 2008

The Times Online – Gordon Brown concerned as rebellion over 10p tax reform grows, 20 April 2008

The Times 100 Edition 12 Case Studies – HMRC, How HMRC collects tax revenue to support government policy

Potential Study Questions:

  • What are the phases of the business cycle?
  • Why do governments cut taxes in a recession?
  • Explain the effects of recession on personal income and businesses.

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