IFS uncertain on revenue effects of tax rate increases

A new IFS briefing note concludes that policymakers should reconcile themselves to uncertainty about the revenue effects of changing the top rates of income tax. The briefing note contains new analysis of how high-income taxpayers respond to rate increases, based on three new working papers, which examine:

·         HMRC’s analysis of responses to the 50% income tax rate on incomes above £150,000 between 2010 and 2013;

·         individual, rather than aggregate-level, data to analyse responses to the 50% tax rate; and

·         how taxpayers respond to income tax thresholds where marginal rates change.

The new study concludes that:

·         it is uncertain whether or not a 50% rate would raise revenues and any estimate would depend on being able to distinguish between the short-term effects of forestalling and the longer-term responses to the change;

·         any additional revenue from Labour’s proposed increase in tax rates on incomes above £80,000 would have come predominantly from those with incomes between £80,000 and £200,000, rather than those with the very highest incomes; and

·         individuals with dividend incomes, such as owner-managers of incorporated businesses, are more responsive to changes in tax rates than those with employment income.

See http://bit.ly/2xfozPw.