How do the rich respond to higher income tax rates

By Nuffield Foundation

The 2017 election saw Labour propose a 45% rate of tax on incomes above £80,000, and a 50% rate on incomes above around £125,000, to raise around £4.5 billion per year in revenues.

Nuffield-funded analysis by IFS researchers at the time concluded that Labour’s revenue estimate was probably little on the high side, but was not implausible. This reflected a high degree of uncertainty about the extent to which taxpayers would respond if their tax rate was increased, and the importance of such responses to the revenue effects of Labour’s proposals.

The IFS has today published a Briefing Note that presents new analysis of how high income taxpayers respond to changes in income tax rates. The Note is based on three new Working Papers, funded by the Nuffield Foundation, the Economic and Social Research Council and the European Research Council.

The first paper updates and critiques HMRC’s 2012 analysis of responses to and the revenue effects of the UK’s short-lived 50% income tax rate on incomes above £150,000 (which was in place between April 2010 and March 2013). The second uses individual (rather than aggregate-level) data to analyse responses to the 50% tax rate, and looks in more detail at the nature of the responses. It also proposes a new approach for estimating the long-term responses to a tax rate change, when temporary re-timing effects are significant, after finding that existing approaches perform poorly for the 50% tax rate. The third paper looks at how taxpayers respond to income tax thresholds where marginal rates change (such as the higher rate threshold where the rate increases to 40%, and £100,000, where the personal allowance is tapered away, creating a 60% marginal rate).

This is an extract from an IFS Observation. Visit the IFS website to read it in full >>

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