IFS - Labour plans to raise income tax for 1.6 million people – the highest-income 3% of adults
The Labour Party has announced plans to introduce a 45% income tax rate on annual incomes over £80,000 and a 50% rate on incomes over £125,000 from 2020–21. New analysis by IFS researchers, funded by the Nuffield Foundation, examines the likely effects of this policy.
Key findings include:
- Labour’s plans would raise income tax for 1.6 million people with taxable incomes over £80,000 a year. They are the highest-income 5% of income tax payers, or the highest-income 3% of all adults.
- Losses would be greater, in cash terms, for those with higher incomes. Someone with an annual taxable income of £100,000 would lose £1,000 a year, whereas someone with an income of £150,000 would lose £5,375 a year.
- The proposals would affect ever more people over time, since the £80,000 threshold would be frozen in cash terms. Approximately 1.9 million people will have incomes exceeding £80,000 in 2023–24: the top 6% of income tax payers or the top 4% of adults.
- The top 5% of income tax payers contribute half of all income tax revenues today, up from 43% just before the financial crisis. They receive a quarter of taxpayers’ income – similar to the share they had in 2007–08. The rise in the concentration of income tax at the top in recent years reflects a series of income tax increases for high-income individuals since 2010. These include the introduction of the additional rate (now at 45%), the withdrawal of the personal allowance, cuts in income tax relief for private pension contributions and real-terms reductions in the higher-rate threshold.
- The tax revenue that Labour’s proposals would raise is highly uncertain, and depends on the extent to which people reduce their taxable incomes in response to the rise in income tax. If no one changed their behaviour, the tax rises would raise around £10 billion per year on average between 2020–21 and 2023–24. Given existing evidence, a reasonable central estimate for the revenue raised is around £3 billion per year, but it is also plausible that it could raise up to around £6 billion or cost around £1 billion. All else equal people would respond less to the tax rise if avoidance opportunities are fewer, so it is possible that other measures introduced at the same time would affect the amount it would raise.
Xiaowei Xu, a Research Economist at IFS and an author of the report, 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.
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.”
Latest News from
NIESR: Boosting digital infrastructure will help close regional gaps05/12/2019 14:20:00
Significant investment in digital infrastructure to increase the coverage of ultrafast and full fibre internet for everyone in the UK may help to reduce regional disparities as the access is unevenly distributed across the country, according to an election briefing by the National Institute of Social and Economic Research.
NIESR: Productivity improvement needed to raise living standards05/12/2019 10:20:00
The next government must follow a robust, methodical and wide-ranging approach to kickstart a recovery in productivity growth in order to mend the “slow puncture” in UK economic growth, according to an election briefing by the National Institute of Social and Economic Research.
Researchers need to work harder to combat misinformation online, says Demos04/12/2019 14:20:00
A new report from Demos looking into how research and development is discussed and communicated about online shows the need for researchers to work harder to be a bigger part of the online conversation, in order to combat the rise of misinformation.
IEA: Evidence so far suggests minimum pricing in Scotland has been “an expensive flop”04/12/2019 13:15:00
Head of Lifestyle Economics at the Institute of Economic Affairs Christopher Snowdon commented on new evidence from the Office for National Statistics showing that the number of alcohol-related deaths fell in England by 145, fell in Wales by 13 and rose in Scotland by 16
Manifesto Promises: CSJ reports03/12/2019 11:35:00
Election manifestos provide an important reality check for organisations like the Centre for Social Justice. It is a clear indication, in black and white, as to whether government is listening to us and whether we are having an impact.
The King's Fund comments on new GP workforce figures and NHS vacancy data03/12/2019 10:35:00
Sally Warren, Director of Policy at The King’s Fund commented on new GP workforce figures and NHS vacancy data from NHS Digital
Policy Exchange - Time to plant – and harvest – more trees03/12/2019 09:35:00
All political parties agree that the UK needs more trees, but stimulating markets to support forestry and supporting sustainable wood use also needs to be part of land policy after Brexit, argues a new paper from Policy Exchange’s award-winning Energy and Environment unit.
NIESR: Tough lessons for new government on raising education standards28/11/2019 11:25:00
The incoming government must embark on a wholesale reform of the education from nursery schools through to adult education to help close gaps between the UK and other comparable economies, according to an election briefing by the National Institute of Social and Economic Research.
NIESR: Hiking minimum wage too fast may undermine policy’s success27/11/2019 11:20:00
Raising minimum wage levels too quickly risks undermining the strong consensus between employers, workers and political parties that has been built up during the past two decades, especially if the increases lead to falls in employment that are difficult to reverse, according to an election briefing by the National Institute of Economic and Social Research (NIESR).