Today the Labour Party has announced that if elected it would introduce a 45% income tax rate on incomes over £80,000, and a 50% rate on incomes over £123,000. A new IFS Briefing Note analyses the impact of this proposal if it were introduced UK-wide immediately.
Key findings include:
1. Labour proposes to increase income tax for the 1.3 million people with taxable income exceeding £80,000 per year: the highest-income 2% of adults, or 4% of income taxpayers. Currently this small group receive more than 20% of all taxable income and pay more than 40% of all income tax.
2. The tax revenue that Labour’s proposal would raise is highly uncertain. If no one changed their behaviour in response, it would raise around £7 billion per year. But some of those affected would respond by reducing their taxable incomes, reducing the amount raised. The size of the response is highly uncertain and the revenue raised is highly sensitive to the size of the response. Labour expects the policy to raise in the region of £4.5 billion per year. Based on the available evidence this looks a little on the optimistic side, but it is entirely possible. However, it is also possible that the policy would raise nothing.
3. High-income individuals could respond to the policy in a number of ways. One straightforward response for many would be to increase their contributions to private pensions, which bring up-front income tax relief. They could also work less, make greater efforts to avoid or evade tax, emigrate, or not come to the UK in the first place.
4, Losses in cash terms would be highly concentrated on those with the highest incomes. If no one changed their behaviour then the 500,000 people with income between £80,000 and £100,000 would lose an average of £400 a year, while 50,000 people with income over £500,000 would all lose at least £22,900 a year.
5. Labour’s proposal would be the latest in a series of income tax increases for this group. Since April 2010 the introduction of the 50% rate (later reduced to 45%), the withdrawal of the personal allowance from those with incomes above £100,000, and a succession of restrictions to tax relief on pension contributions have all increased the income tax paid by those with the highest incomes.
6. The proposals would miss an opportunity to rationalise the income tax system for those on higher incomes. The planned overhaul of the taxation of those on higher incomes would have been an obvious chance to remove the absurd and arbitrary marginal income tax band between £100,000 and £123,000, which arises from the policy described as withdrawing the personal allowance. Instead Labour’s proposals would leave this in place, and would increase the marginal income tax rate from 60% to 67.5% within that band - or 66.6% to 73.2% once employer and employee National Insurance contributions, as well as income tax, are included.
Robert Joyce, an Associate Director at IFS and an author of the Briefing Note said:
"Labour is proposing to raise income taxes for the highest-income 2% of adults. Many would take action to reduce their taxable income in response: for example by increasing contributions to private pensions. Because the extent of those kinds of responses is very uncertain, the amount of extra revenue these higher tax rates would raise is also very uncertain. Labour’s policy could raise something like the £4.5 billion per year it expects, but it could also raise nothing. What is certain is that the proposal would miss an opportunity to sort out the complex mess that recent governments have made of the tax system for those with the highest incomes."
Notes to editors
1. Income tax on non-dividend and non-savings income is now devolved to the Scottish Parliament. Estimates of the revenue raised for the UK exchequer, based on the assumption that the policy applies across the whole of the UK, provide a very close approximation to the revenue that would accrue to the UK government even if the policy were not applied in Scotland. This is because the block grant paid to the Scottish Government would be adjusted based on the change in revenues in the rest of the UK. Hence the Scottish government's decision in this regard would affect its revenues, but not those of the UK exchequer.
2. Jon Ashworth MP, the Shadow Secretary of State for Health, stated on the BBC Today programme that Labour expects the policy to raise "something in the region of £4.5bn" from income tax changes. See http://www.bbc.co.uk/programmes/b08q30rc.