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IEA - Incoherent Labour tax plans beset with problems

Mark Littlewood, Director General at the Institute of Economic Affairs, commented on Labour’s tax plans

“The Shadow Chancellor’s tax plans are beset with problems. Poorly targeted and wilfully ignoring historical evidence, they are lacking economic credibility and rationale.

“Increasing income tax for the top 5 per cent of earners would be a disincentive to investment and enterprise and undermine economic growth. Indeed, punitively high levels of income tax have historically led to less revenue coming in to the Treasury as avoidance increases. When the top rate was cut from 50 per cent to 45 per cent in 2013 the tax take promptly increased by around £8 billion. What’s more, there was never much evidence that the 50 per cent rate brought in more than a few £100 million in additional revenue, which wouldn’t do much to pay for Labour’s planned spending splurge.

“The UK already has a very progressive income tax system. Nearly 27 per cent of income tax receipts come from the top 1 per cent of earners – much higher than their 12 per cent share of income – while more than half is paid by the top 10 per cent of earners, compared to a 39 per cent share of income.

“Labour politicians talk about targeting the mega-rich, but even on that dangerous metric these plans do not stack up. Around 1.6 million people had incomes of £70,000 or more in 2015, of whom roughly half had incomes of between £70,000 and £100,000. These people are not the mega-rich. This 1.6 million includes 260,000 pensioners, and around half live in London or the South East, where living costs, especially housing, are higher. They also include many families with children where there is only one high earner.

“As ever, the devil will be in the detail. There is no commitment on employer NICs – a tax on jobs and wages and where any increases could have a crippling effect on small businesses. Additionally Labour have only committed to freezing standard rate VAT – this doesn’t preclude policies such as an abandonment of zero-rating or a tax on luxury goods.

“Yet again, no party is proposing to take the necessary action to simplify and cut taxes.”

Notes to editors

For media enquiries please contact Stephanie Lis, Director of Communications: slis@iea.org.uk or 07766 221 268.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.

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