Published:

84 comments

Labour has long faced the challenge that voters tend to believe the party can’t be trusted with the public finances. Blair and Brown briefly overcame the reputational hurdle, only for the effects of going into a financial crisis with a deficit already in place to bring the problem roaring back. In 2015, Ed Miliband memorably refused to accept that Labour overspent when in power, which didn’t do him any favours. In recent years, the difficulty has been exacerbated by Jeremy Corbyn and John McDonnell’s history of hard left enthusiasm for high tax, high spend, high debt economics – something the Prime Minister spoke to when she reminded viewers on Friday night that there is no “magic money tree”.

The Labour manifesto attempted to overcome that by simply circumventing it. We are told time and again that it is “fully costed”, a term normally used in a way that implies we should therefore believe it is somehow cost-free. In reality, of course, their costings simply mean that they intend to fund their promises through heavy use of both tax and debt – the IFS judges that if they succeeded in raising what they claim, it would take the tax burden to the highest level in 70 years.

The impact on those paying income tax could be severe. Officially, Labour is claiming that “only the top five per cent” will pay any more. They justify this on the basis of their manifesto proposals to almost half the threshold for the 45 per cent tax rate, from £150,000 to £80,000, and to reintroduce the failed 50 per cent tax rate on earnings over £123,000. These proposals alone would represent a drastic increase in tax rates for those affected – including an effective rate of 67.5 per cent for some taxpayers, not including National Insurance.

Not only is this economically harmful and driven by the politics of envy – what’s worse is that it won’t work. The IFS’s analysis is that it would raise some money, but that in practice it won’t raise what they claim. The problem, not for the first time, is that Labour’s economic analysis is fundamentally flawed – they fail to recognise that raising taxes has knock-on effects, changing people’s behaviour and stunting growth, and therefore that revenues increase more slowly as rates rise.

This issue applies not only to their income tax plans, but to their other proposed tax raids, such as that on Corporation Tax. The cumulative effect, according to Paul Johnson, the Institute’s director, would be a shortfall of somewhere between £20 billion and £30 billion. If, god forbid, John McDonnell was in the Treasury, where would he find the money to make up that shortfall? Given that Income Tax and NICs already contribute almost half of all tax revenue, it seems likely the fiscal Eye of Sauron would fall there.

In short, Labour’s fiscal plan wouldn’t just involve soaking those over £80,000 – unwise a move as that would be – but it would fail, and the costs would land on the rest of the workforce, too. Perhaps if they had a track record of good and responsible fiscal management, Labour could shrug off this concern, but as it is voters would be wise to be concerned.

84 comments for: The true impact of Labour on taxpayers would be far greater than they pretend

Leave a Reply

You must be logged in to post a comment.