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Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

1. Only the top five per cent of earners will be affected by Labour’s changes to income tax.

Labour say they only intend to jack up income tax for those earning over £80,000 (with new rates of 45 per cent up to £125,000 and 50 per cent beyond that). But scrapping the marriage tax allowance, while reducing dividend allowances and raising tax rates on dividend income, means they are raising income tax burdens much lower down the earnings scale.

Around 1.8 million families obtained the marriage tax allowance in 2018/19, with 1.5 million more eligible. Over ten per cent of the existing total £13.25 billion dividend tax liability for 2018/19 was borne by savers and basic rate taxpayers, let alone those earning between £50,000 and £80,000. Basic and higher rate payers with dividend income would suffer allowance cuts and see their tax rates rise from 7.5 per cent and 32.5 per cent to 20 per cent and 40 per cent, respectively, under Corbyn’s plans. Many people earning below £80,000, in other words, will see their income tax burden rise.

What’s more, Corbyn’s new tax bands will be for life, not just for Christmas. The threshold for the 45% rate would be fixed in cash terms rather than indexed – dragging more people into these higher rates as incomes rise. And, since the rich aren’t some fixed group, over a lifecycle many more people will be affected. Estimates suggest 3.4 per cent of people will enter the top one per cent of earners at some stage in life. Assuming (conservatively) a similar multiple for the top 5 per cent, around 15-20 per cent of income earners would experience higher marginal rates over their lifetime under Labour’s income tax plans.

2. Only the rich will be affected by the overall tax changes.

Richard Burgon intimated on Question Time that only the rich will be affected by Labour’s overall £83 billion revenue grab. We’ve seen that’s not true, but suppose it was: the average increase in revenue for people in the top five per cent of earners would need be £53,000 per year to raise that revenue. Currently, the top five per cent pay £94 billion in income taxes on a gross income of £283 billion. So “asking” for another £83 billion from them (no matter the source of tax) looks, shall we say, “difficult.”

Labour supporters went crazy when I pointed this out, claiming I’d ignored revenue from corporation tax hikes, expanding stamp duty, and more. But that’s the point: Labour’s income tax changes would raise only £5.4 billion of the £83 billion revenues they desire. Their other tax rises have economic burdens that hurt far beyond “the rich.”

The best evidence that we have on the economic incidence of Corporation Tax (which Labour would raise from 19 to 26 per cent) suggests that anywhere between 30 per cent and 70 per cent of the burden ultimately falls on workers. Existing evidence suggests a financial transactions tax will ultimately hit both pension funds and, again, workers. The idea it’s “the rich” or even “business” who pays, leaving ordinary folk unaffected, is just false.

3. Boris Johnson is “lying” about Labour Corporation Tax rates.

Johnson has claimed Labour would raise Corporation Tax to the highest level in Europe. C4’s “Fact Check” labelled this “wrong,” explaining that a 26 per cent rate would still be below those economic powerhouses of France, Belgium, Portugal, and Greece.

Labour do reckon they can raise more from Corporation Tax as a proportion of GDP than other developed countries. But, practically, Boris was correct about the headline rate, too – at least, for companies’ UK profits affected by Labour’s expropriation of shares for “Inclusive Ownership Funds.”

Such businesses would be mandated to give up ten per cent of any profits (determined for Corporation Tax purposes) to IOFs. That’s functionally equivalent to another ten percentage point hike in Corporation Tax rate from the point of view of shareholders, taking the UK’s effective rate to a massive 36 per cent – not just the highest in Europe, but the whole OECD.

You might quibble that this isn’t strictly a “tax,” but a shared ownership scheme. But the IOFs are mandated, not voluntary. And any dividends above £500 go directly and entirely to the government. If it looks like a tax, and quacks like a tax….

4. That Labour’s day-to-day tax and spend plans are moderate.

The 2010 election saw Labour argue that planned Conservative cuts of £6 billion in the Parliament’s first year would be huge and devastating. These days, Labour can announce £12 billion per year for WASPI women as a mere manifesto addendum.

This is indicative of where debate is at. Labour plan £150 billion extra in government spending before debt interest by 2023/24 (£83 billion current spending, £55 billion investment spending, and £12 billion WASPI). That’s a 16 per cent jump from today’s projections – equivalent to almost adding another NHS or growing government by up to eight percentage points, permanently, over one Parliament!

Spending at that level has never been sustained here; taxing at it is unprecedented. Some promises – free social care, prescriptions, TV licenses and fixing the retirement age at 66 – worsen the long-term debt headwinds associated with ageing. Then there’s the renationalisations (assumed not to impact the public finances), which history suggests will result in ongoing taxpayer subsidies if Labour intends to follow through in meaningfully reducing prices.

True, Scandinavian countries have sustained governments at Labour’s proposed size. But these social democratic states mainly transfer money, and don’t engage in Labour-style rampant interventionism. Nor do their governments pretend only businesses and the rich will pay.

In contrast, Labour’s tax plans have almost only downside revenue risk. Take hiking Capital Gains Tax rates. Given you only pay it when you sell an asset, many asset holders would likely defer gains and postpone income if a Labour government looked unstable, hoping for a Tory re-election reversing the policy. Elsewhere, heroic assumptions on the revenues from unitary taxation, the financial transaction tax, and more, has seen some legal experts conclude that revenues might be £20 billion lower than Labour plan for, even presuming they are right on the economics of other tax rises.

5. The main economic problem with Labour’s manifesto is that it’s just unaffordable.

Focusing on tax and spend, we downplay the likely massive negative cumulative impact of Labour’s policy on long-term growth.

From property rights incursions to more intrusive wage and price controls; mobilising resources through the Green New Deal to entrenching a quasi-Yugoslavian form of shared ownership, historical evidence suggests GDP will suffer a lot over time. Ignoring this because it’s difficult to measure makes laughable other partial analysis, such as the Resolution Foundation’s report claiming that Labour’s agenda would be better for child poverty.

Labour-supporting economists believe their investment plans are “good for growth.” But when the state competes for resources, the hurdle for improving economic health is whether government activity corrects market failures or is more productive than the private activity it crowds out. Given Labour’s aim for “green” and “social” transformation, and experience of major state investment programs worldwide, colour me doubtful. If you believe a massive new portfolio overseen by politicians such as John McDonnell will hugely improve public sector net worth, I have a £1 Millennium Dome to sell you.

20 comments for: Ryan Bourne: Five myths about the Labour manifesto

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