Taxation (Living Wage)

Robert Halfon Excerpts

Tuesday 22nd January 2013 Westminster Hall

[Robert Halfon (Harlow) (Con)]

It is a pleasure to serve under your chairmanship, Mr Robertson.

Tax cutting is as much about politics as about economics. Of course, the economics have to work too, but here is a statistic that should worry us: the Institute for Fiscal Studies and the Joseph Rowntree Foundation have shown that almost all the growth in household income since 2001 was wiped out by the financial crisis. At kitchen tables up and down Britain, it feels as though the last decade of growth simply did not happen.

It is hard for any Government to tackle that situation. Why? Partly because we—I am talking about the Conservative-led coalition—have allowed our political opponents to caricature tax cuts as measures that are only for our rich friends in the City, rather than a means of creating and sharing the wealth in society. Now, more than ever, we have to show that tax cutting is a moral creed that is about lifting workers on low incomes out of poverty and creating jobs for the unemployed. Hence my campaign to restore the starter rate of income tax at 10p, which was scrapped in 2008 by the last Government.

I believe that restoring the 10p rate would help the coalition to counter the war cry of its political opponents that it is only interested in cutting taxes for millionaires. It would prove to the public that “lower taxes for lower earners” is not just a soundbite but that it can be a reality, first by raising the threshold to £10,000 and then by bringing back the 10p rate for the lower-paid.

The Treasury has confirmed to me in a written answer that the move would cost around £7 billion a year, if it benefited everyone. Interestingly, the Chancellor told the House last year that the same amount of money was lost when Labour brought in the 50p rate of tax, and that has been confirmed by the IFS. I am arguing that when the top rate of tax falls to 45p the extra revenue that the Government say will be raised ought to be put towards restoring the 10p rate of income tax.

Not everyone agrees with my view. The campaign for a 10p tax rate has been opposed from the left, from the right and by our colleagues, the Liberal Democrats. Let me deal with each one in turn.

When Labour was in power, its main response to low wages was tax credits. The aim was a noble one—to help the poor—but the policy was flawed. For example, Dr Jamie Gough from Sheffield university recently told The Guardian:

“Tax credits enable employers to pay below a living wage, and thus subsidise their profits.”

Tax credits have also left the Department for Work and Pensions with a hugely complex system of overlapping handouts that taxes workers on low pay only to recycle the money back as benefits. Reporting on tax credits, the ombudsman has said:

“Many are unaware of them and DWP staff often fail to invite claims.”

The idea is fine in theory, but many people lose out in practice.

Other people take a gentler approach. The Living Wage Foundation has been asking employers to voluntarily pay £8.55 an hour in London. Again, that is a worthy aim, and perhaps larger corporates can afford it, but what about smaller firms and micro-businesses that cannot? I am a supporter of the minimum wage, but recently the Low Pay Commission warned against forcing it higher, because

“Firms may be reluctant to create jobs by recruiting inexperienced or young staff, because they are put off by the increased wage bill.”

[John Stevenson (Carlisle) (Con)]

I am grateful to my hon. Friend for giving way and for securing this debate on an important subject. Does he agree that linking the personal allowance with the minimum wage would be an excellent way to take everyone who is on the minimum wage out of income tax?

[Robert Halfon]

My hon. Friend has an interesting idea, which I would like to explore further, but I believe that the focus of all the resources that the Treasury has, which of course are not much, should be on restoring the 10p rate, for the reasons that I will go on to describe. I have argued that we need a solution for everyone, not just for the lucky few. That is why I was pleased to see Kevin Maguire in The Daily Mirror today supporting the 10p campaign.

[Mr Andrew Smith (Oxford East) (Lab)]

I congratulate the hon. Gentleman on securing this debate on an important subject. I want to take him back to the point that he was making about tax credits supposedly allowing employers to pay lower wages. Presumably the basis for that argument is that tax credits raise the take-home pay for the worker at no cost to the employer. However, why does he not employ the same argument to the tax reduction that he is advocating, which again will raise the take-home pay of workers? In a properly competitive labour market, would that not allow employers to pay less?

[Robert Halfon]

That is where the philosophical difference between the right hon. Gentleman and me lies; I believe that we need to move away from a handout society, in which people’s taxes are recycled to hand out to various groups, to a hand-back society, in which people are handed back their own money through the tax system.

Some people on the right, especially in the think-tank world, oppose the 10p tax rate on the grounds that it is not radical enough. They say that it might undermine the case for a flat tax in some future Parliament. The problem with that—again, as the IFS has set out—is that a flat tax would be deeply regressive and it would be hard to defend as fair. While that remains true, a flat tax is unlikely to happen.

For example, the IFS has shown that merging income tax and national insurance contributions to a flat rate would literally take from the poor and give to the rich, unless the state was shrunk to a size that is politically impossible. Where I agree with people on the right, and with thoughtful commentators such as Ryan Bourne from the Centre for Policy Studies, is that the Government must do much more to generate support for broader tax cuts. My point, however, is that surely the best way to achieve that is to show that tax cuts are moral—to use a Blairite phrase, “for the many and not the few”—and that they will help millions of hard-working people, not just millionaires.

[Mr Jim Cunningham (Coventry South) (Lab)]

I do not have any difficulty with the hon. Gentleman’s proposal that there should be a 10p tax rate; in fact, it was a Labour Government who actually introduced that rate. Regarding a living wage, which the hon. Gentleman alluded to, I understand that there are no proposals—certainly, they would not be put forward by Labour—to legislate for a living wage. It is a voluntary thing, and it is down to employers, in fact, to decide whether to pay it.

The hon. Gentleman also referred to the minimum wage. I can certainly remember in my constituency many years ago that under the previous Conservative Government there was—what was it called? I think that it was called a “family supplement”, or something, for people on low wages. On one occasion, which really led Labour to legislate for a minimum wage—

[Mr Cunningham]

I will do in a minute. The fact was that in my constituency we had people on £1 an hour. As I say, I have no difficulties with the hon. Gentleman’s proposal, but whatever Government are in power, at the end of the day, the big threat is from the Exchequer. It is the Exchequer that will probably try to torpedo his proposal.

[Robert Halfon]

I thank the hon. Gentleman for his intervention. As I said before, I agree fundamentally with the minimum wage; it is a moral right that people are paid a certain wage, and I am glad that my party now supports that, but I have questions about the living wage. First, how do we set it? I believe that it puts enormous burdens on smaller businesses; the big multinationals will be able to deal with it. I do not want it to act as a disincentive to employment, and I believe that the burden of responsibility for the living wage should not be on businesses but on the Government: the Government should reduce taxation.

[Mr Cunningham]

rose—

[Robert Halfon]

I give way again to the hon. Gentleman.

[John Robertson (in the Chair)]

I hope that the intervention will be shorter this time.

[Mr Cunningham]

Frankly, if it is voluntary, then it is not forced on small employers. It is the big employers who can pay it.

[Robert Halfon]

Of course, if businesses want to pay their employees a living wage, that is all well and good; I would be delighted at that and would have no problem with it whatever.

My hope is that once the threshold reaches £10,000, we will consider bringing back the 10p rate for the lower-paid. Some Liberal Democrats disagree; they have suggested that the best way to help families is to raise the personal allowance even further, to something like £12,500 a year. I absolutely agree the coalition should fulfil its £10,000 commitment, but it would be unwise to raise the personal allowance even further. Everyone should feel that they have a stake in the state, and they should have some stake in the tax system even if they pay only a small amount, because they need to realise that public services are not free and that there is no magic money tree. My fear is that the Liberal Democrats want to pay for their policy, which will cost £14 billion if applied to everyone, by dragging even more workers into the 40p band. That is what has happened historically. The problem is that we will soon have families with not very high wages paying a marginal rate of 40p, and that will include police officers, shop owners, managers and senior nurses in the national health service.

[George Eustice (Camborne and Redruth) (Con)]

That point goes right to the heart of my hon. Friend’s argument. The aim of this policy should be to encourage people on low incomes to take higher-paid work, to work longer hours and to start the transition up the income scale. That is why he is right that we need to introduce a 10p tax rate in the interim; otherwise, people will go straight from their tax-free allowance to being taxed on any income above that. Does he agree that, in an era where there is downward pressure on many benefits, some of which affects the working poor, the 10p tax rate could be a good counterbalance, so that people keep their income in the first place?

[Robert Halfon]

My hon. Friend is exactly right. What he is saying is that we will create a hand-back society, where we give people back their own money, rather than just a handout society, which recycles benefits through the tax system.

Taxing the people I describe at the 40p rate is a brake on aspiration, and it has hit single-worker families the hardest. We started this Parliament with about 3 million workers paying the 40p rate, and the number will be closer to 5 million by 2015. We should not add further to that figure, as my hon. Friend says. Restoring the 10p band is more affordable than raising the personal allowance to £12,500. Most low-income workers would still have a stake in the tax system, and it would avoid dragging more families into the 40p band. That is why I support it over the Liberal Democrat proposals.

The fundamental point is, as the Government say, that we lost £7 billion when the high tax rate went up to 50p. If we get more revenue from having a 45p tax rate, the moral thing to do will be to put those extra billions towards funding the 10p tax rate.

Of all the things the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) did, the one that genuinely amazed me was that he scrapped the 10p band, given what the Labour party stood for. I accept that he introduced it in the first place, but when I watched him scrap it, I genuinely could not understand why he was doing it. Overnight, the change crushed working people with a £232 tax rise. Why should the Government not set themselves the goal of reversing that unpopular decision? There is a strong case for doing so. As I said, tax credits are flawed; small firms cannot afford the living wage; a flat tax is not going to happen and is unfair; we do not want to drag any more families into the 40p band; and everyone should have some stake in the tax system.

I suggest to my hon. Friend the Minister that the policy would be popular, that it would be a symbol of the Government’s economic mission and that it would help to tackle the desperate stagnation in incomes that Britain has suffered in the past 10 years.

--- Later in debate ---

[Catherine McKinnell]

My right hon. Friend raises an important point, and I will come to the Government’s approach to procurement in the private sector as the ripple of understanding of the benefits that the living wage can bring spreads to employers throughout the supply chain.

[Robert Halfon]

The hon. Lady mentioned some companies that have supported the living wage. That is all well and good, but they are big corporate companies that can afford to pay it. The issue for me is that smaller companies will find it much harder to afford to implement it. Surely the best way to help the lower paid is what the coalition is doing—cutting tax for low earners and taking 2 million lower income people out of tax all together. Is that not a much more effective way of helping the lower paid?

[Catherine McKinnell]

As I have said, the impact of the Government’s changes and the raising of the personal tax allowance have provided some help for those on the lowest wages, but the real impact has been detrimental. The figures from the Institute for Fiscal Studies show clearly that a family with one working earner will be worse off, on average, by £534 by 2016 because of all the tax and benefit changes that have been pushed through. I take on board the hon. Gentleman’s point, but the Government’s policies are hitting lower paid workers, not helping them.

[Robert Halfon]

I thank the hon. Lady for being so generous. She is right if she takes the benefits changes by themselves, but if she then looks at the lower tax for lower earners, the council tax freeze and other measures the Government have introduced, lower income workers will not be worse off in the way she describes.

--- Later in debate ---

[Mr Gauke]

There is a case for simplicity in focusing on the increase in the personal allowance. My hon. Friend the Member for Cleethorpes quoted the Forsyth Commission, which looked into this matter, and there is a question why we should ask people who are on quite low wages to be contributing income tax. I appreciate the arguments that everyone should make a contribution, and I do not in any way dismiss them, but when we are asking people earning such relatively low amounts to pay income tax, there are the significant questions of work incentives and simplification. The Government must bear those in mind when considering whether to reintroduce the 10p rate. There is a debate to be had on both sides. There are pros and cons both to personal allowance increases and to a new lower rate. In our coalition agreement, we rightly set out our determination to get to £10,000. Fiscal drag had brought more people into income tax than was right, and we have rightly made it our priority to address that.

[Robert Halfon]

Does the Minister accept that raising the tax threshold to £12,500—the minimum wage—would cost around £14 billion, whereas reintroducing the 10p tax would cost between £6 billion and £7 billion?

[Mr Gauke]

I should perhaps check the numbers, but I believe that my hon. Friend is in the right area. Those are, I think, the realistic costs. I am not here to make any further commitments beyond what we have said in the coalition agreement, but it is right that we have this debate. It is also right that we acknowledge that we are all trying to do the same thing, which is to reduce the tax burden on those hard-working, low-paid workers who have to pay more tax, partly as a consequence of a specific decision taken by the previous Chancellor in 2007 to double the 10p rate.