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General Election 2019: IFS Manifesto Analysis - Taxes

28th November 2019

Taxes

Again, there is little to say about Conservative proposals. They have very few beyond a small cut in National Insurance Contributions and an ill-advised promise not to raise rates of income tax, NICs or VAT. As with their lack of proposals on spending, if you think things are pretty much OK as they are, then you will like the Conservatives proposals for tax and spend. If you want big increases in taxation and spending then Labour and Liberal Democrats have plenty to offer.

While much has been made of Labour's proposals to increase income tax for those on high incomes this is set to raise only a small fraction of their overall proposed increase in tax. Much the biggest proposals are for increases to corporation tax which, were they to bring in as much revenue as Labour suggest, would take corporate tax revenues to their highest ever in the UK and to among the highest in the developed world. They would also raise effective rates of corporate tax to levels that are high by international standards.

There has to be serious doubt as to whether elements of their corporate tax proposals would raise the sums suggested. The same is true of the proposed Financial Transactions Tax. Proposals to change the taxation of dividends and capital gains are very welcome, and would raise revenue, but again how much revenue is highly uncertain, though it is less clear in this case that Labour are being optimistic - the revenue effects of these changes are just very hard to estimate.

All other countries which tax and spend on the scale that Labour proposes have tax systems which levy more tax on the average worker than we do. Liberal Democrat proposals to put a penny on the main rates of income tax would be simple, progressive and would raise a secure level of revenue. While the Conservatives continue to pretend that tax rises will never be needed to secure decent public services, Labour pretends that huge increases in spending can be financed by just big companies and the rich. In this respect neither Labour nor the Conservatives is being honest with the electorate.

One specific non tax policy from Labour looks a bit like a tax - that's its inclusive ownership fund under which 10% of large UK companies’ shares would, over ten years, be put into a fund which would receive 10% of dividends or of after tax UK profits. At least three quarters of these payments would go to employees, the rest to government. For firms where all the payments would go to employees this would be like an enforced employee share ownership scheme. In the first instance shareholders (i.e. savers, those with pensions etc) might face a 10% reduction in the value of their investments, but it seems likely that in the longer run companies would adjust by reducing other aspects of workers’ remuneration to compensate. For firms where profits are big enough that the government takes the final tranche this policy would be similar in its effect to raising the corporation tax rate from Labour’s proposed 26% to just over 33%. As well as possibly reducing other aspects of pay this policy could have other unintended consequences – incentivising firms to stay below the large company threshold, to operate as UK branches of foreign companies and to rely more on debt rather than share capital.

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