Just in case Labour forms the next government (it’s wise to be prepared for all eventualities!), here’s a rundown of their stated plans on tax, and what they might actually do in power.
It’s only fair to start with what’s in the manifesto. The short answer is ‘not a lot’.
The permanent tax measures include: £5.2 billion a year by 2028-29 from closing non-dom tax loopholes and ‘investment in reducing tax avoidance’; £1.5 billion from applying VAT and business rates to private schools; and £0.6 billion from closing the ‘carried interest’ loophole (where profits from private equity deals are treated as capital gains rather than income). That is a total of about £7.3 billion. In addition, Labour expects to raise £1.2 billion annually from a ‘time-limited’ extension to the windfall tax on oil and gas companies.
At face value, this is small beer (the total tax take is over £1,000 billion and national income is about £2,800 billion), and most of the money has been earmarked for specific priorities in the NHS and education (so not obviously wasted).
Nonetheless, there are already reports that the prospect of these extra taxes is encouraging wealthy foreigners to step up plans to leave the UK and deterring further investment in the North Sea. And of course, this comes on top of a tax burden that is already at a record high.
Few seriously expect Labour to stop here. Indeed, any new government would struggle to keep taxes down given the increasing demands on public services and the tightness of the current fiscal plans. But balancing the books may be even harder for Labour given the extra pressure for more spending from the party’s core supporters and, perhaps, their greater willingness to see taxes rise to pay for it – especially taxes that they think will be paid by other people.
The manifesto does include the commitment that ‘Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT’.
But this leaves plenty of scope for raising more tax in other ways, notably by increasing taxes on capital or savings, as well as extending the scope of existing taxes and fiddling with allowances and thresholds (note the commitments only refer to ‘rates’).
The emphasis on ‘working people’ does not tie Labour’s hands that much either. For example, Keir Starmer has defined ‘working people’ as those ‘who earn their living, rely on our [public] services and don’t really have the ability to write a cheque when they get into trouble’. A range of surveys (such as this one from the ONS) suggest that about 30% of adults could not pay a large unexpected bill. But that would still leave about 70% who might be ‘fair game’ for more tax rises under Labour (on this test).
Labour appears to have less room for manoeuvre on business taxes. Here the manifesto says ‘Labour will cap corporation tax at the current level of 25 per cent, the lowest in the G7, for the entire parliament, and we will act if tax changes in other countries pose a risk to UK competitiveness. We will retain a permanent full expensing system for capital investment and the annual investment allowance for small business.’
But it is still worth watching business rates. These will be reformed so ‘we can raise the same revenue but in a fairer way. This new system will level the playing field between high street and online giants, better incentivise investment, tackle empty properties and support entrepreneurship’. Among other things, that leaves the door open for higher taxes on online businesses, which will inevitably be passed on to consumers in higher prices.
So, what is Labour likely to do? A credible article in the Guardian a few weeks ago provided a good steer. This suggested a headline figure of £10 billion in additional tax rises for the first Budget, likely to be in the Autumn.
Of this, £8 billion might come from raising Capital Gains Tax (CGT) to the same level as income tax on sales of corporate equities and second homes. This would be relatively uncontroversial: the £8 billion figure happens to match a proposal from Dan Neidle and could be spun as a return to the Lawson days. There is also growing international support for ‘enhancing the taxation of capital gains’ as a means to redistribute the economic benefits from AI (as in this discussion paper from the IMF), which again could provide useful cover.
The other £2 billion might come from closing some specific loopholes in Inheritance Tax, such as the exemptions for agricultural land. Again, this is not outrageous.
Nonetheless, these options would still have economic costs – for example, increasing CGT on shares would deter savings and investment and raise the cost of capital. These also only appear to be the options for the first Budget, begging the question of what would be the next targets?
For what it is worth, the Conservatives came up with a long list (partly from trawling through comments from Labour-supporting economists). This speculative but not implausible list included: increasing tax on pensions (ending the 25% tax-free lump sum and making tax relief on pension contributions less generous), increasing Council Tax (by increasing the number of tax bands cutting discounts, and large upward revaluations), increasing the rate and level of Stamp Duty, new levies on energy bills, and increasing Employers’ National Insurance (perhaps by extending them to employer pension contributions).
Another possibility might be extending VAT to private healthcare. It’s a fair question: if Labour believes it is right to add VAT to school fees, why not private healthcare as well?
The prospect of a rolling programme of tax rises suggests that any honeymoon period for an incoming Labour government could be very brief.
I would be sceptical here of surveys, such as this one from abrdn Financial Fairness Trust, which claim that people are willing to pay more tax for better public services.
For a start, this is one of those ‘motherhood and apple pie’ issues, where few people are likely to want to say otherwise. The results may also be skewed by presenting more tax as the only way to find the money for better public services. I suspect that if people were offered a wider range of options – in particular, adding ‘savings on the welfare bill’ – then the results may look very different.
Finally, more sophisticated polling suggests that the amounts of additional tax that people are actually willing to pay are relatively small.
In short, the Conservatives may have failed in their attempt to put ‘clear blue water’ between the two main parties on tax, but most people can expect to pay even more under Labour. Let’s see what the polls say in few months’ time.
Plain-speaking Economics 
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