Plans to increase taxes for top earners were “very unlikely” to produce the predicted boost to Treasury coffers and could reduce revenues, a think tank has warned.
The Institute for Fiscal Studies (IFS) said a 45 per cent tax rate for those on incomes above £150,000 would not raise the £1.6 billion anticipated by Chancellor Alistair Darling in his Pre-Budget Report last November.
In a briefing note before tomorrow’s Budget, the IFS said the move would probably raise only about £550 million and could cause revenues to fall if measures to stop tax avoidance were not put into place.
The IFS said the rate increase – due to be introduced in April 2011 – could force some higher earners to leave the country or retire early.
It said that those who stayed in the system would look for ways to reduce their taxable income by working less, contributing to a tax-free pension or converting it into other types of earnings which are taxed at lower rates. Even if the Treasury is correct in judging the response to the rate increase, the IFS said the loss of VAT and other indirect tax incomes would shave revenues.
It said Government plans to withdraw the income tax personal allowance from those on wages of £100,000 and above in two stages from April 2010 was more likely to raise the predicted £1.6 billion.
The move creates two bands – between £100,000 and £106,475 and £140,000 and £146,475 – in which the marginal tax rate is 60 per cent.
But James Brown, senior research economist at the IFS, said: “Alistair Darling’s income tax increases for the rich will significantly complicate the tax system, and may well raise little revenue. A simpler and smaller increase in tax rates across a broader range of high-income taxpayers would raise the money the Treasury is looking for more efficiently, especially if combined with measures to make income tax harder to avoid.”
The IFS report said it was “extremely unlikely” the Treasury would raise £3.2 billion from the new tax rate and personal allowance reforms.
It said the Government would be more likely to raise £3 billion by creating a 60 per cent tax band for all those earning more than £100,000 a year.
It said it “may well be impossible” to raise extra revenues from the one per cent of the population on incomes above £150,000 by just increasing the tax rate above that level. But the IFS said the Government could raise the £3.2 billion by increasing the higher rate of income tax on earnings above £43,875 from 40 per cent to 43 per cent.