The last Labour government hiked the top tax rate to 50pc, and it was a policy disaster
Article By Melissa Lawford for the Telegraph 04.10.21
Rishi Sunak has failed to rule out further tax rises
Boris Johnson and Rishi Sunak have refused to rule out further tax rises in the life of this Parliament, prompting fears they are prepared to break their manifesto pledge again in a bid to plug the hole in the national finances caused by the pandemic.
Conservative backbenchers, as well as influential MPs including Jacob Rees-Mogg, have warned that raising taxes becomes counterproductive both in economic terms and with the electorate. Even without rises, the number of higher and top-rate taxpayers is already forecast to rocket as marginal rate threshold remain frozen.
The relationship between tax rates and tax revenue is symbiotic. Increasing rates will increase revenue, but this calculation has a limit. Once the rate gets too high, it becomes prohibitive and begins to discourage work and investment. Economic growth starts to decline, and therefore, in turn, so does revenue.
This relationship is known as the Laffer Curve, named after the economist Arthur Laffer, one-time economic adviser to Donald Trump. Crucially, the curve is a full semi-circle. Mr Laffer argued that excessive tax rates would not just slow revenue to a plateau, but actively cause revenue to plummet.
The number of higher-rate taxpayers has rocketed since 1990
The key principle of the curve is that people will adjust their behaviour according to tax rates. For every tax, there is a threshold above which tax hikes will damage the incentive to work, invest or produce to such an extent that the Government’s income will fall, despite receiving more tax from those who are caught.
Tax hikes will kill the Covid bounce back
Any tax hikes now will hit the British economy at a particularly vulnerable time.
Tom Clougherty, of the Centre for Policy Studies, a think tank, said: “The Treasury is not worrying enough about the bounce back, I wonder if they are taking it for granted.”
Chancellor Rishi Sunak has already announced hikes in corporation tax and National Insurance.
“Corporation tax hikes will completely trash our competitiveness overnight. It is almost guaranteed to make our economy smaller than it was,” said Mr Clougherty.
“The biggest danger is that we miss the opportunity to maximise the bounce back growth. There will be a huge release of pent-up energy and a sensible government would try to ride that wave.
“With all of the general uncertainty, the mood music will very much get worse, and it will chill investment.”
Tax hikes will hit different sectors disproportionately. “Women with children are a group that is particularly sensitive to income tax rises. Because of childcare costs, they already have very slim margins on their earnings. If income taxes rises, fewer of them will be likely to keep working,” said Mr Clougherty.
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Credit: REUTERS/Toby Melville