Labour sets income tax target at 10p in the pound

GORDON BROWN, the Shadow Chancellor, has made a dramatic move to outflank the Conservatives on tax by announcing Labour plans for a new low rate of income tax at 10p or 15p in the pound.

The initiative, agreed privately by the Shadow Cabinet last week, will upstage the Conservatives less than 10 days away from a Budget almost certain to contain big tax cuts.

In an interview with the Independent on Sunday, Mr Brown said: "I now take the view that whereas the Conservative Party and John Major have set out the objective of abolishing capital gains tax and inheritance tax, the real objective which will benefit the people of this country, in contrast, will be a lower starting rate of income tax.

"When affordable, our objective would be a starting rate of 15p or preferably 10p." This, he said, would "benefit everyone, particularly lower and middle income Britain - the decent hard-working majority of this country".

At present the lowest tax band is 20p in the pound. All income taxpayers are taxed at that rate on the first pounds 3,200 of taxable income, and 5.3 million people fall into that band alone. Lowering the 20p band in its entirety to 10p would cost around pounds 6bn, but Labour is likely to attempt a more gradual reduction. That would probably leave a narrower 20p band in existence.

Labour will present its proposals as fairer than anything envisaged by the Tories. Mr Brown said the new low rate would help the unemployed to return to work by alleviating the poverty trap, under which people taking up low-paid jobs can find themselves worse off because they lose benefits and at the same time start paying tax at 20 per cent.

He said: "We must remove where possible all the barriers that exist to getting people from welfare to work - these include disincentives which were built into the tax and benefit system."

Mr Brown will reveal details of his plans tomorrow in a speech at a charity lunch in aid of the British Dyslexia Association. On the same day, John Major will seek to reassert the Tories' claim to be the party of low taxation, at the annual Mansion House speech in the City.

One source said that Mr Major would argue that "the heart of the matter is that there must be a limit to the share of national income the Government spends and a limit to the take in tax. The less we take in tax the more we encourage enterprise."

Mr Brown is also committed to reducing VAT on fuel to five per cent at an estimated cost of pounds 450m, when resources allow.

The detail of how much taxes could be cut, and where the priorities would lie, would not be decided until the first Labour Budget. "Whatever we decide to do in any particular Budget will be announced then," Mr Brown said in the interview.

He is also coy about how Labour would respond to Kenneth Clarke's tax cuts, dismissing the question as "hypo- thetical". But the formulation he has adopted leaves open the possibility that Labour might abstain if the Chancellor proposes to cut the basic rate of tax, or even to raise the threshold at which the higher rate of 40p kicks in.

At the Unions '95 conference in London yesterday, Mr Brown highlighted the tax problems at the lower end of the income scale. He said: "In 1978/9, a married couple with one partner in work would only start paying tax at 32 per cent of average earnings, while today they start paying at 24 per cent.

"Allied with a benefit system which does not trap people out of work, we also need to create a tax system which does not impose high effective marginal tax rates on low-paid workers.

"Penal marginal rates for low-paid workers are not consistent with a progressive tax system or with my objective that the tax system should encourage employment opportunities and reward hard work and effort."

Interview, page 11