Good afternoon from New Economy Brief.

Tax has been at the centre of the election so far, both for what political parties are proposing, and what they aren’t. Many experts argue that the next government will have to raise taxes to avoid further austerity, collapsing public services, and ultimately losing power in 2029. But both major parties keep ruling out ways to bring in revenue. 

This week we explore what the parties are saying on tax, and run the rule over a variety of taxes the next government could use, some of them championed by smaller parties. 


How has tax changed since 2010?

Since the Conservatives (and Liberal Democrats) took office in 2010, the tax system has undergone many reforms. Over the last 14 years the bottom 40% and top 10% have lost out, while the middle 50% have seen their incomes increase due to tax and benefit changes. The amount the government receives in taxes has risen from just under 37% of GDP in 2010/11 to around 40% in 2023/24 (over £1tn). This is why we often hear that the ‘tax burden’ – tax as a fraction of national income – is at its highest in 70 years. Even so, UK citizens still pay less in taxes on average than those in other advanced economies

The political story on ‘fiscal drag’. Between 2010 and 2019, one of the government’s central tax objectives was taking people out of income tax by raising the level of the personal allowance, but this approach has since been reversed. As Chancellor, Rishi Sunak chose to freeze tax thresholds for six years instead, which pushed more earners into higher tax brackets as inflation increased their nominal income (known as ‘fiscal drag’). Jeremy Hunt has continued this. This has been a big source of the government’s rising tax take, as most tax receipts come from three sources: income tax, National Insurance contributions (NICs) and value-added tax (VAT). More recently the Conservatives’ approach has been to cut headline tax rates (mainly for NICs) while keeping the freeze on thresholds. Neither Labour nor the Conservatives have said they would end this fiscal drag, partly because doing so would be so expensive. The Liberal Democrats say they would end the drag and make raising the personal allowance a priority, but without saying exactly when, while Reform argue for raising the personal allowance to £20,000.

The GE2024 row over taxes so far. Tax is a highly contentious subject precisely because it has such clear winners and losers. This election is no different. The Conservatives have been promoting a widely disputed line that Labour will increase taxes by £2000 for every person, whilst saying that a Conservative government would reduce taxes – including by eventually abolishing NICs. (Labour have attacked this as an “unfunded” £46bn spending commitment). Reform also propose a £70bn programme of tax cuts, mainly funded by £50bn of public service cuts. It is hard to reconcile the desire for substantial tax cuts with the state of the public finances and public services (see our previous New Economy Brief for an explanation of the fiscal inheritance of the next government). The FT’s Martin Wolf agrees that “[a]n honest political process would start by admitting that there will have to be tax increases if the country is to deliver the public services it has promised.”

How do parties propose to raise revenue?

All parties are keen to avoid a ‘tax bombshell’-style attack and both major parties have definitively ruled out increasing the main revenue raisers of income tax, NICs and VAT (except on private school fees). Labour has also ruled out raising the main rate of corporation tax. Many, including the IFS’s Helen Miller, warn that ruling out increasing the biggest sources of revenue is a mistake which whoever wins the next election may come to regret. The question then becomes how to square the circle and bring in revenue when you have promised not to raise taxes on ‘working people’.

Equalising capital gains tax. Income received from work is taxed much more than income received from wealth, partly because Capital Gains Tax (CGT) is far lower than income tax. Economist Arun Advani has calculated that raising CGT to the same level as income tax could raise £16.7bn a year. This has support from think tanks on the centre-right and some Conservative politicians; the IFS’s Paul Johnson also recently voiced support for the idea. The Liberal Democrats have pledged to reform CGT to raise £5bn for the NHS, whilst Labour’s Rachel Reeves has reportedly been under pressure to consider it from Shadow Ministers. (Keir Starmer also refused to rule out raising CGT this week.)

Raising taxes on wealth. Wealth inequality has soared to record levels in recent years – economist Ben Tippet calculated that the richest six families in the UK could give every family in the country over £2000 just out of the increase in their wealth since the start of 2022 when the ‘cost of living crisis’ entered political debates. Taxing wealth with a high threshold would mean only a tiny proportion of the richest would pay more, but it could raise a vast amount for the Treasury. Applying a 2% wealth tax on assets over £10 million (paid for by just 0.04% of the population) could raise up to £24bn a year. Plaid Cymru support increasing wealth taxes, and the Green Party have a similar proposal to raise money for the NHS - expect more detail in their manifestos. 

Taxing share buybacks. Share buybacks – where a company buys its own stock to inflate its value on the stock exchange – have more than quadrupled in the UK since 2015, and dividends to the richest have soared. Taxing these is a good way to persuade firms to redirect profits away from shareholders and into productive investments. IPPR calculated that a modest 4% tax on share buybacks, the same rate proposed by the Liberal Democrats and adopted by US President Biden, could raise about £2bn a year, while a higher ‘emergency’ rate of 25% could raise much more (~£11bn a year). 

Levying excess profit and windfall taxes. The ‘Energy Profits Levy’ imposed an additional tax of 25% on profits of oil and gas giants following widespread opposition to the idea of them profiteering from a supply shock, largely driven by the Russian invasion of Ukraine. Labour have proposed extending this windfall tax. However, this isn’t the only sector to have enjoyed record unearned profits, and having already imposed this windfall tax would make it easier for the government (or a future Labour one) to tax excess profits taxes in other sectors too. IPPR’s George Dibb argues that this can discourage rent-seeking, suggesting that “the UK’s CMA should launch pre-emptive investigations into the potential for excess profits in the most concentrated sectors of the economy.” For example, Positive Money calculated that annual bank profits are four times higher than in 2020, and that a windfall tax on the four biggest UK banks could raise between £3.5bn and £14bn this year depending on its ambition.

10 tax reforms to raise £60bn for public services. A new briefing from Tax Justice UK and Patriotic Millionaires outlines more tax-raising options for the next government. Accompanying polling shows that the public and millionaires both want the wealthiest to pay more, and would be more likely to vote for a party that would raise taxes on the wealthiest to invest in public services. Other potential revenue-raisers from their paper are:

The elephant in the room: council tax

One last tax that hasn’t been discussed much so far is council tax. The current council tax system, based on 1991 property values, is famously regressive and in need of reform, but political parties have been loath to touch it because it creates so many losers (though the Fairer Share campaign points out it could also create winners, for example in the North). Would a party that won a large majority grasp the nettle?

Weekly Updates

Election Roundup

Lib Dems promise to rejoin Single Market. The Lib Dems’ manifesto, launched on Monday, promises to “fix the UK’s broken relationship with Europe by following our four-stage roadmap”, whose final stage is to rejoin the Single Market. 

Who bears the brunt? A new Women’s Budget Group briefing provides an intersectional analysis of the impact of social security cuts since 2010, finding that women in the lowest income decile, black women across all income groups, lone parents and disabled women have been disproportionately affected. 

Will GB Energy work? The Guardian explores some key questions around Labour’s GB Energy policy, including whether it will lower bills and if the model has worked in other countries. See our previous New Economy Brief for more analysis of GB Energy.

Pledge for the NHS. The Green Party has become the first political party to back We Own It’s Pledge for the NHS. The pledge consists of three parts: reinstate the Health Secretary’s legal duty to provide healthcare to all; give the NHS £40 billion more per year to catch up with equivalent European countries; and bring services outsourced to for-profit companies back into the NHS as their contracts end. 

Social security cuts. The Resolution Foundation has said that the Conservatives’ pledge to reduce welfare spending by £12 billion a year would be a “major undertaking” which would result in an 18% decrease in working-age health-related benefits by 2028-29.


Which faction could govern under Labour? IPPR’s Harry Quilter-Pinner has written a piece for the New Statesman about an ongoing debate between the ‘campaigners’ and the ‘technocrats’ within the Labour leadership about how to govern if it wins a majority on July 4th. While Grace Blakeley argues that stagnation and inequality are fuelling the rise of the far right, as seen in the European elections, and that the next UK government should take note.