The tax battleground for the upcoming election is on course to be fought over a ‘tax pledge gap’ of almost £60bn, the biggest difference between the main parties’ plans in a generation, according to a major new report published today (Wednesday) by the Resolution Foundation.
The shifting shape of UK tax examines how the shape of the UK’s tax system has evolved in recent decades and how it might change in light of the main parties’ tax pledges.
The report notes that while the parties have yet to publish their manifestos, Labour are expected to call for very significant tax rises, following plans for £50bn higher taxes in their 2017 manifesto, while the Conservatives are emphasising tax cuts. The Liberal Democrats are also likely to pledge to increase rates of income tax by 1p.
The Conservatives’ limited fiscal space for big tax cuts (£7bn in 2023) may mean that they drop plans for £10bn of income tax cuts for high earners, and instead focus on bringing the National Insurance threshold into line with the Personal Allowance. This would give most workers a tax cut of up to £480, at a cost of £11bn.
The scale of the differences between Labour and the Conservatives could mean a ‘tax pledge gap’ of up to £60bn – the biggest since at least the 1992 election.
The Foundation says that a robust debate about the merits of these very different approaches to tax should be central to this election. However, it warns that many popular claims about UK tax are misleading, and need to be set straight.
For example, it says that while tax receipts as a share of GDP are on course to reach a 40-year high in the next parliament, the average amount of total tax people pay relative to their income has been falling over the past four decades. Income taxes specifically are also low by international standards. In fact, the average effective tax rate on typical earnings has fallen from 30 per cent in 1975, to 25 per cent in 1990 and 18 per cent today. Were taxes on earnings still at their 1990 level, the average worker today would be paying an extra £1,800 a year on tax.
The report says that whoever wins the election is going to face pressure to raise taxes to fund existing public services in an ageing society. The cost of maintaining existing education, health and social security provision is set to rise by £36bn a year by the end of the decade. Added to this, the transition from fossil fuel to electric cars – a policy endorsed by all main parties – could reduce revenues from duties by up to £35bn a year.
The Foundation says that that these big revenue pressures mean it is vital that the parties get the detail right on their tax plans.
For the Conservatives, the report warns that low-income families risk being short-changed by the rumoured National Insurance cuts. That’s because working families on Universal Credit (UC) will immediately lose around two-thirds of any tax cut through lower benefit awards. To ensure that poorer workers gain as much as richer ones, the Foundation says that the Conservatives should pledge to ensure that UC’s work allowances go up in line with any tax cuts.
For Labour, the report notes that planned income tax increases for richer households should be introduced early in the parliament, and be matched by action on capital gains taxation, in order to prevent widespread avoidance reducing revenues and undermining trust in the tax system.
Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said:
“The parties are going into the election with a ‘tax pledge gap’ of up to £60bn – the biggest difference between the two main parties in a generation. This should set the scene for a robust – and hopefully honest – debate on the role of tax.
“But despite these differences, whoever wins the next election will likely need to raise taxes to support the extra spending an ageing society needs. Raising taxes is always challenging, but it is worth bearing in mind that, for many, tax rates have in fact been falling steadily for decades.
“Given these challenges, it is vital that the parties design their tax policies carefully. The Conservatives must avoid short-changing low-incomes families by ensuring that any cash gains from tax cuts aren’t clawed back from workers on Universal Credit. Labour must avoid creating new opportunities for tax avoidance by ensuring their plans for higher taxes on the top are introduced swiftly.”