IFS: Number of higher rate taxpayers could swell to 5m under the Conservatives

Guy Bentley
Follow Guy
IFS gives verdict on tax and benefit plans (Source: Getty)

The Institute for Fiscal Studies (IFS) has concluded that under the major parties' plans for taxation and benefits, in the next parliament households can expect their incomes, on average, to fall.

The independent think tank found there were major differences between the parties, with the Tories planning small net cuts to tax and much bigger cuts to benefits while Labour are planning to hike taxes with little change to benefit spending. The Lib Dems in keeping with their campaign theme are somewhere in the middle.

David Cameron's pledge to raise the higher rate threshold to £50,000 went down well at his party's conference last year. The phenomenon of fiscal drag where thresholds fail to keep up with inflation and drag more people into the tax band has been a major concern among Conservative supporters.

But the IFS found that even raising the threshold to £50,000, the number of higher rate taxpayers could swell by another 300,000 to over 5m.

None of the parties were covered in glory in the IFS analysis, with all coming under fire for a lack of detail:

All these parties seem to have a desire to raise tax revenue in vaguely-defined, opaque and apparently painless ways. In many cases the proposals would lead to unnecessary increases in complexity and inefficiency in the tax system.

Conservative plans to cut welfare by £12bn were said to be "largely unspecified" while Labour's plans for the benefits system were found to be "trivially small".

One of the key battlegrounds examined in the report was income tax. The Tories and Lib Dems are in agreement, wanting to raise the personal allowance to £12,500. According to the IFS, given 44 per cent of adults pay no income tax at all while couples could gain twice, the biggest winners would be in the middle and upper end of income spectrum.

On the Labour side, Ed Miliband's proposal to replace the married couples' transferable personal allowance in favour of reintroducing the 10 per cent starting rate of income tax would "replace one small complication in the system with another".

The IFS gave the policy a rough ride:

It is hard to think of any economic justification for a 10 per cent starting rate over a small range of income; virtually identical effects could be achieved by simply raising the personal allowance.

The policy would only benefit taxpayers to the tune of 50p a week. How much Labour's policy to hike the to rate of tax to 50 per cent remains uncertain. The IFS appeared content with the Office for Budget Responsibility's estimate of £100m. But looking at the income tax system as a whole, it suggested both Labour and the Conservatives fall radically short of effective tax reform:

None of the parties is suggesting sorting out real problems in the income tax system. They would extend the reach of the effective 60 per cent income tax rate which currently applies on incomes between £100,000 and £121,200.

They do not propose to do anything about the proliferation of thresholds that are by default frozen in nominal terms, and hence eroded by inflation over time.

Related articles