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CPS responds to Labour’s manifesto “economic illiteracy”

Article by: Daniel Mahoney and Tim Knox | Published: 16 May 2017

Daniel Mahoney and Tim Knox of the Centre for Policy Studies have published a briefing note in response to Labour’s three centre-piece revenue raisers; increasing income taxes on those earning more than £80,000, hiking corporation tax to 26% and introducing a financial transactions tax.

A summary of their response can be found below.

1. INCREASING INCOME TAX ON THOSE EARNING £80,000+
Labour has claimed that increasing income tax rates for those earning above £80,000 could raise up to £6.4 billion a year. Labour is proposing to increase the rate from 40p to 45p for those earning between £80,000 and £123,000, and increase the rate to 50p for those earning more than £123,000.

CPS response:
Tim Knox, Director of the Centre for Policy Studies, says: “High earners are the geese that lay the golden eggs: the top 1% of taxpayers already pay about 30% of all income tax. Forcing them to pay more might be politically tempting but is economically crazy. Many of “the geese” will either fly off to more attractive countries or just stop laying the golden eggs”.

About 5 million Britons live abroad and, on average, more than 300,000 a year already leave the UK. As many as one in ten highly skilled British citizens now lives overseas. Mr Corbyn’s plans would simply encourage more of them to leave, meaning that they will pay less tax, employ fewer people and spend less money in UK shops and services .”

Daniel Mahoney, Head of Economic Research at the Centre for Policy Studies, says:
“Labour’s plans to increase income taxes on those earning above £80,000 is unlikely to raise a significant amount of revenue. “For example, according to the Budget 2013, increasing the rate to 50p for those earning more than £150,000 would only yield the Treasury around £100m a year. Hiking income taxes on very high earning individuals can only raise minimal amounts of revenue or lead to a dangerous erosion of the tax base. It is widely understood that these taxpayers are the most mobile.

“Lowering the 45p rate to £80,000 and increasing the income tax rate to 50p for those earning more than £123,000 could raise a modest amount of revenue but this is still likely to be small in macroeconomic terms. Labour has pledged around £50bn of spending commitments. Its pledge on income tax could only cover a tiny fraction of this, while damaging the UK’s attractiveness for investment”.  

2. INCREASING THE RATE OF CORPORATION TAX
The Labour Party has announced that it plans to increase the rate of corporation tax from 19% to 26% by 2020/21. This compares to the Government’s plans, which would see the corporation tax rate fall to 17% by 2020/21. Labour has claimed that this would raise £19.4bn a year by 2020/21 – despite the fact that cutting the corporation tax rate from 28% in 2010-11 to 19% has, in fact, been associated with an increase in onshore corporation tax receipts of 44% since 2011-12.

CPS response: Tim Knox, Director of the Centre for Policy Studies, says:
“Expecting an increase in the rate of Corporation Tax to bring in more revenue is economically illiterate. The fact is that cutting the tax rate has coincided with a substantial increase in receipts for HM Treasury. To increase the rates so dramatically at precisely the time when the UK should be striving to establish its international competitiveness and when many other countries are cutting their headline rates – particularly the US – would be suicidal for the UK economy.”

Daniel Mahoney, Head of Economic Research at the Centre for Policy Studies, says:
“Labour plans to increase the rate of corporation tax to 26% in the hope of raising £19 billion a year. This is completely unrealistic. When accounting for the impact on economic activity, 45 – 60% of this estimate will be wiped away in the long term. And, of course, there is also no guarantee that hiking corporation tax rates will yield substantial revenues in the long run.

In fact, the Government’s cut in corporation tax rate has been associated with a 44% increase in onshore revenues since 2011-12. Corporation tax revenues, as a whole, have exceeded the OBR’s expectations by well over £10bn in 2016-17, highlighting the benefits of creating the conditions for strong economic growth. Moreover, historically cuts in the headline rate of corporation tax have not led to falling revenues.

On the other hand, Labour’s plans to increase corporation tax by a third will be highly detrimental to the competitiveness of the UK. As part of a series of other anti-business measures this could have an adverse impact on economic activity, which could potentially lead to a drop in corporation tax revenues in the longer term.”

3. FINANCIAL TRANSACTIONS TAX
Labour’s planned tax on financial transactions would bring in £5.6 billion a year, according to its manifesto.

CPS response:
Tim Knox, Director of the CPS, said: “There are only two world class financial centres: London and New York. By intentionally imposing a tax on financial activity would mean that many large financial institutions would either leave the UK or move transactions to less aggressive jurisdictions. This is something which the UK cannot afford.”

Daniel Mahoney, Head of Economic Research at the CPS, said: “The Financial Transactions Tax proposed by Labour would pose a threat to the UK’s financial services sector. The UK’s financial sector is vital to the UK economy, being the largest of any major economy in proportionate terms and contributing over £70bn to Government coffers every year. There are also major questions as to whether a financial transaction tax will create any net revenue at all. The European Commission, for example, has said that the FTT across Europe would damage the economy by 0.5%, which is twice the projected yield from the tax.”