Ed Miliband has promised to undo one of Gordon Brown's greatest mistakes by announcing that Labour intends to reintroduce a 10p tax band funded by a new mansion tax on properties valued at more than £2m.
Brown abolished the 10p rate in 2007, prompting a revolt of Labour MPs and the low-paid. On Thursday Miliband described it as a mistake and the shadow chancellor, Ed Balls, said the abolition meant "people understandably thought Labour was no longer on the side of the hard-working people we have always sought to help".
The move, announced in a speech in Bedford, was denounced by the Conservatives as "a stunning admission of economic incompetence".
The IFS thinktank said Labour had not chosen the best way to help the low-paid, while Policy Exchange, a centre-right thinktank, claimed the 10p rate on the first £1,000 of taxable income would be worth just £100 a year for basic-rate taxpayers and, once tax credit withdrawals were included, would leave the low-paid with only 65 pence a week more.
Miliband's twin policy is designed to show how growth can be achieved by strengthening the squeezed middle. It also does something to reassure those complaining at the lack of clear policies.
His surprise move wrongfooted those Tories who had been campaigning hard inside their own party to reintroduce the 10p band, and also grabs a longstanding Liberal Democrat signature policy, the mansion tax.
Miliband said his plans would lay the foundations for a recovery for the many rather than the few at the top, but stressed the policies would have to be reviewed immediately before the election in light of state of economy.
Setting out the scale of the living standards crisis, he said: "People in Britain are putting in the hours, doing the shifts, as never before, but something has changed in the last few years. There's less chance of promotion, less chance of a pay rise, and prices just go up and up and up. Petrol for the car. Tickets for the train. Childcare for the kids. Deposits for a first home. The squeezed middle has never been so squeezed."
Balls refused to say whether his version of the mansion tax would require revaluing properties, saying there were many ways to levy the tax. He said he was happy to work with Danny Alexander, the Treasury chief secretary, on how details of a mansion tax would work.
Alexander rejected the 10p band as a way of helping the low-paid, saying: "Increasing the personal allowance, extending the 0p rate of income tax, as it were, to £10,000 is a far more direct, far more progressive way of getting more money into the pockets of working people on low and middle incomes than anything Labour ever did when they were in government and anything that Ed Miliband is proposing today."
The Lib Dem business secretary, Vince Cable, who has been a leading proponent for the mansion tax, welcomed Miliband's "very sensible" announcement. "We have a lot of rich foreigners buying property in the south of England driving up prices so that local families can't get property," he said.
The Lib Dems' mansion tax would have involved a tax based on 1% of a property's value above £2m. As a result, a property worth £3m would face a charge of £10,000 a year. The party has said 70,000 properties would be affected and the total yield from the tax would be £1.7bn a year, now likely to be £2bn, implying revenue of £30,000 per mansion for the Treasury. David Cameron has repeatedly rebuffed Lib Dem efforts to introduce the tax.
The IFS rejected reintroducing the 10p rate, saying "a far simpler and more sensible way of achieving these aims would be to spend the same amount of money on increasing the personal allowance – a policy on which the current government has already spent £9bn a year. This would have virtually the same impact on individuals' tax payments, be slightly more progressive, take some people out of income tax altogether and avoid the complexity involved in introducing a new income tax rate."
A No 10 political spokesman said: "This is a stunning admission of economic incompetence from Ed Miliband and Ed Balls – that their decision in government to scrap the 10p tax rate hurt millions of working families. People will never trust Labour again.
"The low-income working people who lost out the most from Labour's 10p tax hike now pay no tax at all thanks to this government's record increases in the tax-free personal allowance. Losers under Labour have become winners thanks to our tax changes."
The Treasury pointed out that in 2008 the people most hit by the 10p tax abolition paid almost £350 in tax, and now thanks to the rise in personal allowances introduced by the coalition paid no income tax at all.
It said the government had increased taxes on the rich, including a new stamp duty land tax rate for properties worth more than £2m, an annual charge on those properties and an extension to the capital gains tax regime. The last budget, it added, raised five times more money from the richest than the 50p tax.
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image: © EdMiliband