Feb. 14 (Bloomberg) -- A Labour government would tax U.K. homes valued at over 2 million pounds ($3.1 million) to pay for a new 10 percent income-tax band for low earners, the opposition party’s leader, Ed Miliband, announced today.
The move adopts a key policy of the Liberal Democrats, the junior party in the current Conservative-led coalition and a possible partner for a future Labour government, while reversing one of the last Labour administration’s most unpopular policies.
Gordon Brown abolished the 10 percent tax band in his final budget before becoming Labour prime minister in 2007 to fund a 2 percentage-point cut in the basic rate of income tax to 20 percent. The change left more than 5 million people worse off and led to widespread criticism from within the Labour Party. Brown announced in 2008 he would compensate those affected by raising the threshold at which people begin paying income tax.
“We would put right a mistake made by Gordon Brown and the last Labour government,” Miliband said in a speech today in Bedford, north of London. “We would use the money raised by a mansion tax to reintroduce a lower 10-pence starting rate of tax, with the size of the band depending on the amount raised. This would benefit 25 million basic-rate taxpayers.”
Deputy Prime Minister Nick Clegg, the leader of the Liberal Democrats, said this month he had been unable to convince his Conservative coalition partners to adopt his proposal to introduce a 1 percent levy on the value of homes above 2 million pounds. Clegg said the current system of local-property taxes sees the rich paying relatively less of their value than the rest of the country.
Business Secretary Vince Cable, the second-most senior Liberal Democrat in the Cabinet, welcomed Miliband’s announcement on the high-value homes levy.
“The mansion tax is not just about fairness, it is also about giving the right signals to the economy,” Cable said in response to a question at an event in London. “It is a good thing to do not just from the point of view of the distribution of wealth but also because it penalizes investment in extremely unproductive activities.”
Miliband’s announcement is “an appeal to the Lib Dems, who’ll be important if the next parliament is also a hung one” and no party wins a majority, meaning a coalition is needed, Steve Fielding, a professor of politics at Nottingham University, said in a telephone interview. “He’s saying Labour is a low-tax party for the people who’re suffering, and will be a necessary-tax party for people who can afford it.”
Conservative Prime Minister David Cameron yesterday criticized the decision to abolish the 10 percent tax rate, fueling speculation that his coalition may reintroduce it to help people on low incomes struggling with the rising cost of living.
“My prediction is that they won’t have thought it through or costed it properly, and we will discover over the course of the day all sorts of problems and issues with a policy that looks like it has been cobbled together overnight,” the premier told Sky News television today, when asked about Miliband’s announcement.
“It’s a risk that raising this possibility again actually could be slightly self-defeating,” Lucian Cook, a director of residential research at real-estate broker Savills Plc in London, said in a telephone interview. “Any impact it could have in creating uncertainty in the market could actually in the short term reduce” tax receipts.
Knight Frank LLP’s index of luxury-home prices in central London rose 8.1 percent in the 12 months through January. That compares with the 1.1 percent increase across the country as a whole measured by the Halifax mortgage unit of Lloyds Banking Group Plc.
Prime London prices continued to climb even though Chancellor of the Exchequer George Osborne introduced a 7 percent tax rate on purchases of the most expensive residential properties last year.
“We’ve already had quite a hard attack on properties over 2 million pounds,” Richard Barber, a partner at prime real-estate broker W.A. Ellis LLP, said by telephone. “I do think it would be detrimental.”
Cable said he didn’t want to comment on Labour’s plan for a 10 percent tax band. The Tory-Liberal Democrat coalition has been raising the point at which people start paying income tax, with the aim of increasing it to 10,000 pounds a year by 2015.
Even so, it also cut the top 50 percent rate of tax on earnings over 150,000 pounds to 45 percent, arguing that the higher rate generated almost no revenue. Labour says that move shows the Tories are the party of the rich.
Osborne is due to announce his annual budget on March 20. Miliband’s Labour Party has led the Conservatives in the polls for much of the past year. The latest YouGov Plc survey put Labour on 42 percent support compared with 32 percent for the Tories and 9 percent for the Liberal Democrats. YouGov questioned 1,946 adults Feb. 12-13. No margin of error was specified.
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