Labour’s Plan to Raise Tax on Top 5% in U.K. Is Called Into Question

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U.K. Labour leader Jeremy Corbyn’s plan to make the top 5% of earners pay more income tax could raise less than the party thinks, according to a leading think tank.

The Institute for Fiscal Studies said the precise amount the proposal would raise is highly uncertain because it depends on the extent to which people responded by reducing their taxable incomes.

The warning may revive concerns about whether Labour can generate as much money as it estimates to fund its spending plans. The party pledged almost 50 billion pounds ($65 billion) of tax and spending increases before the 2017 general election.

With parties set to unveil their manifestos for the Dec. 12 election this week, Labour has promised to raise income-tax rates for earnings over 80,000 pounds to 45% from 40% and introduce a 50% rate on earnings over 125,000 pounds.

An almost identical proposal announced in 2017 was projected by Labour to raise 6.4 billion pounds.

However, the IFS said a “reasonable central estimate” is about 3 billion pounds, though “it is also plausible that it could raise up to around 6 billion pounds or cost around 1 billion pounds.”

The policy would affect 1.6 million people, and 1.9 million by 2024, with those on incomes over 150,000 losing almost 5,400 pounds a year, it said.

Heavily Reliant

IFS economist Xiaowei Xu said Britain remains heavily reliant on the top 5%, with tax increases for high-earning individuals since 2010 meaning they now pay half of all income tax compared with 43% before the financial crisis.

“Perhaps contrary to popular belief, this group has seen the biggest tax rises over the last decade,” she said. “Countries that raise more tax than us tend to have much higher taxes on people on average incomes, and not just rely on the highest income individuals for tax revenues.”

Labour will on Wednesday pledge to “wage war on poverty” with a new report showing how hardship has increased in the last decade under the Conservative’s austerity policy. The opposition party has promised to introduce a 10-pound minimum wage, scrap the government’s controversial Universal Credit welfare program and expand free child care.

--With assistance from Jessica Shankleman.

To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, David Goodman, Jill Ward

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