Rachel Reeves, the chancellor, is being pressed by some of her colleagues to break Labour’s manifesto pledge, but with a tax rise only on the highest earners.
The Independent understands that changes to the top rate of income tax have been discussed by ministers, as the Treasury seeks to bridge a gap between revenue and spending of between £30bn and £40bn a year.
Some of our sources have suggested that a rise in the top rate of income tax, or a lowering of the threshold, would be regarded by voters as an “understandable” breach of the manifesto promise not to raise any of the main taxes.
We are not convinced that they are right. The Independent has argued that the government needs to be honest with people and to admit that taxes must rise. We believe that there is some scope for restraining the growth of public spending in some areas. The disability benefits budget is an obvious example, but the botched attempt to cut payments, including for existing claimants, was seen off, with some justification, by a backbench Labour revolt.
Overall, however, if we want decent public services, we have to pay for them, and British tax levels are not particularly high by comparison with other European countries – especially for middle earners.
It was a political mistake of Ms Reeves’s to have cut her planning so fine in last year’s Budget that she has had to come back for more tax rises 12 months later, and it was folly to have claimed to have “fixed the foundations”. But acknowledging that error does not change the need to find more revenue.
The problem, of course, is that Labour promised at the election not to raise income tax, VAT, national insurance or corporation tax – the four taxes that between them raise the bulk of the government’s revenue. That leaves the chancellor scrabbling around for other taxes, or “stealth” forms of those taxes, such as freezing income tax thresholds in cash terms. It is always going to be hard to raise significant sums that way.
Last year, Ms Reeves resolved the dilemma by putting up employers’ national insurance contributions, arguing that it did not count as a rise in national insurance because it did not fall directly on “working people”. Increasing the tax take from the top rate of income tax would involve an even more blatant piece of sophistry, in effect defining anyone earning more than a certain amount as “not a working person”.
Regardless of such wordplay, however, a tax rise for top-rate taxpayers would be a bad policy. If the top rate were increased from 45p in the pound to 50p, it would raise a nugatory amount. This issue was debated and the debate closed during the coalition government, when George Osborne cut the rate from 50p to 45p.
If the threshold were reduced from £125,000 a year to £100,000, it would add to the distortion of the tax system by which earnings between £100,000 and £125,000 are hit by a higher effective rate caused by the gradual withdrawal of the personal allowance. Furthermore, those reaching £100,000 a year also lose the child care subsidy. A further tax rise on this group would disincentivise wealth creation and provide more work only for tax lawyers.
If the chancellor is going to break the manifesto pledge, she should do it openly, do it in a way that raises significant sums, and do so in a way that is fair. She should raise the basic rate of income tax, which will take money from the broadest base of taxpayers according to their ability to pay. It would apply to all forms of income, including rent, dividends and interest: everyone who can afford to would pay, with those on higher incomes paying more.
The time for sophistry and stealth taxes is over. It is time to come clean with people about the state of the public finances and to ask everyone to do their bit to fix the problem.
