Labour tax plans would hit 1.6m higher earners but revenue from the hike 'highly uncertain', warns IFS

Posted On: 
20th November 2019

Labour's new tax plan would impact around 1.6m higher earners, but the likely returns from the policy are"highly uncertain", a major think tank has warned.

The IFS warned Jeremy Corbyn's tax hike could bring in around £3bn
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Analysis from the Institute for Fiscal Studies (IFS) found the planned hike could even cost the Treasury up to £1bn-a-year due to the "risk" of high earners seeking to reduce their pre-tax income.

Jeremy Corbyn has already announced his plans to introduce a 45% income tax rate on those earning over £80,000 and a 50% rate on those with salaries of £125,000 and above.

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According to the IFS, the plans would increase the tax bills of 1.6m individuals and would likely raise up to £3bn a year.

But they warned the UK was already "extraordinarily dependent" on higher earners as a source of tax income, and said the policy could "plausibly" be derailed if individuals move to reduce their tax burden in response to the plans.

The report's author, IFS Research Economist Xiaowei Xu, said: “Labour are proposing a substantial tax rise on the highest-income 3% of adults. This could raise some money – about £3 billion a year as a central estimate – and could have some effect on reducing income inequality. But it comes with risks, as those with the highest incomes are likely to respond to the tax rise by reducing their pre-tax incomes. 

"The likely extent of these responses is highly uncertain, though the more Labour reduces the scope to shift income into more lightly taxed forms (like capital gains), the more revenue its income tax proposal would be likely to raise."

He added: "It is worth noting that we are already extraordinarily dependent on this small group of individuals for tax payments – they account for half of income tax revenues today. Perhaps contrary to popular belief, this group has seen the biggest tax rises over the last decade. 

"Countries that raise more tax than us tend to have much higher taxes on people on average incomes, and not just rely on the highest income individuals for tax revenues.”

Responding to the analysis, Conservative Treasury Minister Simon Clarke, said: "Jeremy Corbyn is planning a reckless spending spree that everyone will end up paying for.

"Labour's sums don't add up. They say only the top earners will pay but the revenue won't come close to covering their £1.2 trillion spending pledges they've made so far. Proof that Corbyn's Labour will result in higher taxes for workers, businesses and families.

He added: "Only a majority Conservative Government will get Brexit done and manage the economy responsibly, providing the certainty that families and businesses need to plan for the future. No one can afford the cost of Corbyn."

"Scourge of poverty"

The analysis comes after Labour released a new report accusing the government of "entrenching" poverty in the past ten years.

They accuse the government of costing the average worker £6,300 due to wage stagnation, while claiming in-work poverty has increased by 1.5m since the start of the decade.

Shadow Chancellor John McDonnell said: "Poverty in Britain is now the most visible and widespread it has been in decades.

"This new report shows the Tories have failed to tackle ten modern scourges of poverty, each becoming more entrenched on their watch.

"The next Labour government will wage war on poverty in all its forms, eliminating in-work poverty, ending austerity and raising living standards across the country."

The party have already pledged to roll back austerity by introducing a £10-an-hour minimum wage for all workers over the age of 16, as well as ending the freeze on working-age benefits

 

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