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Authors: Stuart Adam
The Liberal Democrats propose to increase the income tax personal allowance to £10,000 while keeping the level of income at which people start to pay the higher rate of tax unchanged. They say this giveaway would cost £16.8 billion in 2011-12. They also propose a set of significant tax-raising measures:
In total, the Liberal Democrats estimate that these tax increases would raise £19.2 billion in 2011-12, £2.4 billion more than the cost of their income tax cut. We will be releasing a full analysis of this package - and all of the main parties' tax and benefit proposals - in the coming days. But what can we say by way of an initial assessment of whether the sums add up?
Increasing the personal allowance to £10,000 does indeed look like it would cost around £16.8 billion (or at most a billion or so more), assuming that people do not change their behaviour in response to the tax cut. In practice it would encourage more families to have someone in paid work (and paying taxes), thereby reducing the cost.
Whether the tax raising proposals would raise what the Liberal Democrats expect is much more uncertain. They could raise more or less.
For the reforms to aviation taxation, the Liberal Democrats suggest that they would set the rate as high as is necessary to achieve the £3.3 billion extra revenue they want. That is perfectly feasible.
On the taxation of 'mansions', banks, pensions and capital gains, the data that are publicly available do not allow us to give a definitive costing. To arrive at their figures, the Liberal Democrats have had to make numerous assumptions. Some of these assumptions are questionable, and there are some mistakes, but while in some cases that implies raising less revenue than the Liberal Democrats estimate, in other cases it implies raising more. Their estimates for the mansion tax, the bank tax and the restriction of pensions tax relief do not seem unduly optimistic, while the reforms to capital gains tax would probably raise substantially more than the £1.9 billion they suggest. But there is a great deal of uncertainty around all these costings, given the paucity of relevant data available.
The estimate that £4.6 billion would be raised from their anti-avoidance and anti-evasion measures looks highly speculative. The Liberal Democrats have not attempted to estimate directly the impact of most of the measures they specify; they simply assume particular proportions of the total 'tax gap' attributable to evasion and avoidance that they think they could fill. Whether their approach would really raise so much more than the Government's continuing strenuous efforts must be open to question. For example:
Beyond these concerns, the fractions of evasion and avoidance that the Liberal Democrats claim their measures would eliminate are assumed arbitrarily (though in fairness we have no way to estimate them more accurately). They may be too high or too low. The Liberal Democrats acknowledge this uncertainty and describe their £4.6 billion figure as a 'target', but they are relying on the revenue to fund their income tax cut.
So what is the overall picture?
We can be pretty confident that the Liberal Democrats' headline giveaway would cost roughly what they claim. Whether the revenue raising measures would yield what they expect is much more uncertain - and we cannot even say with confidence whether they are more likely to raise too much revenue or too little. On the one hand, their estimates of the revenue to be raised from tackling avoidance and evasion seem optimistic; on the other hand, the estimates of the revenue to be raised from the rest of the package if anything look pessimistic. The only way to find out for sure would be to suck it and see.
View all Observations in the series
Does offering higher teacher salaries improve pupil attainment?
In new work published today, IFS researchers analyse the impact of offering higher teacher salaries on pupil attainment. We examine salary scales and pupil attainment in primary schools in and around London. For these schools, and for the salary differences of just under 5% that we observe, we do not find evidence that higher salary scales for teachers have much impact on pupil attainment. This suggests that if individual schools offered salary differentials on this scale across-the-board, they would not necessarily attract more effective teachers.
The next five years look better but tough fiscal choices remain for Scotland
The latest public finance forecasts published by the Office for Budget Responsibility (OBR) in December presented a better outlook for the UK than had been suggested by their March forecast. This is good news for the UK and Scotland in the short-term but much of the improved short-term outlook comes at the expense of reduced scope for economic recovery after 2018–19. Also the one area of greater weakness in the OBR’s latest forecast – revenues from oil and gas production – has substantially more adverse consequences for Scotland’s fiscal position than for the UK as a whole. In short, the new forecasts do little to diminish the tough choices that will face Scotland (and, to a lesser extent, the UK) if it is to achieve long-run fiscal sustainability.
50p tax – strolling across the summit of the Laffer curve?
Ed Balls and Ed Milliband have cited recent HMRC statistics which show those paying the 50% income tax rate are estimated to have paid some £10 billion more in tax over the three years 2010-11 to 2012-13 than was projected to be the case back in 2012 when HMRC analysed how much the tax was raising. Is that an indication that the 50p rate was more successful in raising revenue than HMRC concluded in their analysis?