Thumbs down for Labour's planned tax increases

The respected and independent Institute for Fiscal Studies passed its judgment on the Labour Party manifesto. The tax rises are huge and not as innocuous as the impression given, notably in Labour’s greybook, with higher prices, lower wages and reduced investment expected to follow. Whatever the basic maths based on ready-reckoners, the behavioural changes could be huge – and not for the better.

But is this even possible? Head of the think tank, Paul Johnson, described the claim: 'It's impossible to understate just how extraordinary this manifesto is in terms of the sheer scale of money being spent and raised through the tax system. Take it from me, these are vast numbers, enormous, colossal. They suggest that all of that will come from companies and people earning over £80,000 a year. That is simply not credible.'

The IFS concluded on taxes:

Labour’s proposed income tax rise for those with incomes above £80,000 would affect only the highest-income 3% of adults. But this accounts for less than a tenth of the additional revenue Labour says it would raise.

About three-quarters of the revenue comes from increasing taxes on companies and their shareholders. It would be a mistake to think of this as falling entirely on ‘the rich’.

To the extent that corporation tax falls on company shareholders, that includes everyone with a defined contribution pension. And in practice much of the burden will be passed on to companies’ employees through lower wages, and customers through higher prices – and that means all of us.

Labour proposes to raise the main rate of corporation tax to 26% and reintroduce a small profits rate at 21%. In terms of headline tax rate, that would move the UK from one of the lowest headline rates in the OECD to above average. Alongside other corporation tax increases proposed, this would move the UK from raising an average share of national income in corporation tax to the highest in the G7 – if the reform raises the revenue Labour hopes.

In the short run, the increase in the rate of corporation tax might bring in the £20 billion Labour says. In the long run it would bring in less, as a less competitive rate would reduce investment, and therefore productivity and wages, in the UK.

Labour’s proposed reforms to the taxation of capital gains and dividends could represent moves in the right direction; its proposal for a financial transactions tax much less so.