Forcing Britain’s highest earners to foot a greater share of the nation’s taxbill is putting the Government’s long-term finances at risk, a leading economic think tank has warned.
The Institute for Fiscal Studies raised concerns about the state’s growing reliance on tax revenue from a small number of high earners.
“Lumping more taxes on the rich” is not a sustainable long-term strategy, the IFS suggested, as it warned that the ability and willingness of high earners to pay more tax could eventually run out. The think tank’s warning coincides with a heated debate in Westminster about the tax burden being placed on those with the largest incomes, with Conservative MPs warning against “soaking the rich” to fund services for the rest.
Official figures show that 300,000 people earning more than £150,000 a year now pay almost 30 per cent of all income tax — and 7.5 per cent of all tax revenue.
This places the stability of the public finances under threat because high earners whose taxes prop up the state could opt to emigrate, find ways of reducing their tax bills, or simply suffer declines in their fortunes, the IFS said. Government spending plans have become “very sensitive” to changes in the behaviour and status of a group that includes bankers and business executives and owners, as well as senior public employees including some NHS doctors.
If revenue from that small group falls, the Government would be forced to borrow even more money than it is now, the IFS said, suggesting that the Treasury should try to widen the tax base by targeting other sources.
“The Government might be concerned if the Exchequer becomes increasingly reliant on one particular revenue source, as it increases the risk that a shock to one revenue source would have serious implications for total revenues,” the IFS said in its annual Green Budget.
Politicians should resist the “knee-jerk” urge to tax the rich harder during downturns or risk them leaving the country, the economists said.
Rowena Crawford, a senior economist at the IFS, urged ministers to consider the stability of the tax base “rather than at the first sign of problems lumping more taxes on the rich people because of ‘the broadest shoulders and all that’ ”.
“The world is more mobile than it used to be,” she said.
“You become sensitive to the payment behaviour of those individuals. If you push them too far and they emigrate then you lose revenue.” The IFS did not call for a tax cut for high earners, but its findings offered encouragement to Conservative MPs who believe that David Cameron should ease the burden on the rich.
Steve Baker, the Conservative MP for Wycombe, said: “It is a cruel fairy tale to believe that 99 per cent of the public can live on the earnings of one per cent.
“A policy of soak the rich is not a sensible one; the system cannot sustain itself.”
Supporters of lower tax for high earners argue that lower rates would encourage people to earn more in the UK, ultimately pushing up overall tax revenues. Last week the Labour Party pledged to lift the top rate of tax from 45p to 50p if it wins the next general election, and challenged Conservative ministers to rule out any cut in the top rate of tax.
Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, said on Wednesday that the top rate would be brought down to 40p — its level before the financial crisis — “over my dead body”.
However, Boris Johnson, the Mayor of London, indicated that plans to cut taxes for the richest would appear in the Conservative manifesto, which is being written by his brother, Jo, the Orpington MP and head of the No. 10 Policy Unit.
“I don’t think we are going to go into an election with a campaign to keep our tax rates higher,” the Mayor said.
The IFS criticised Coalition moves to shrink the tax base further by lifting the personal allowance to £10,000, at a cost of £10 billion a year.
The Liberal Democrats plan to raise it higher, to £12,500, costing a further £12 billion a year.
The policy is an poorly targeted and expensive way of making the poorest better off and the money would be better spent by increasing the personal allowance on National Insurance contributions, or by allowing people on benefits to keep more of their own money when they start work, the think tank said.
Labour’s plans to reintroduce a 10p tax rate would be even less well targeted at the poorest and would make the tax system more complicated, it claimed.
“It is hard to find a coherent economic rationale for it,” the IFS said.
The IFS identifies two trends that have forced a shrinking band of people to bear a growing share of the State’s tax revenue.
The tax burden has shifted from business taxes and fuel duties onto personal taxation and property taxes. The share of taxes borne by capital gains tax, stamp duties and inheritance tax is expected to reach 5 per cent by 2018, the highest since records began in 1978.
At the same time, the Government has become reliant on the top one per cent for a greater share of the tax take, rising from 21.3 per cent in 2000 to 29.8 per cent this year.
In the same period, that one per cent’s share of the national wealth before tax has risen more slowly, from 11 per cent to 13.7 per cent.
Their true contribution is even higher because the wealthiest pay a “large fraction” of VAT and capital taxes.
The stamp duty from the London boroughs of Westminster and Kensington and Chelsea alone account for 14 per cent of all revenue.
The shrinking tax base may discourage politicians from curbing inequality, as it is in the taxman’s interest that the super-rich prosper.
“It could be better for you if the top one per cent has roaring income growth and everybody else ticks along, because you get more revenue out of it,” Ms Crawford said.
The Prime Minister has declined to rule out cutting the top rate but insists any tax cuts will be targeted at low and middle-income voters.