Director of IFS says Labour tax plans 'add up', but pose 'some risk'

Labour has historically struggled to convince the public that their manifesto number add up, in an issue older then Ed Miliband’s issues. This Labour leadership has had more trouble than most, after presenting impossible or economically illiterate early plans during the leadership election in 2015. Further trouble came when Diane Abbott fumbled the numbers in a rather monumental interview flop on LBC.

The party’s spending plans have, however, been given a boost as Paul Johnson- director of the Institute of Fiscal Studies- told the Today programme that Labour’s spending plans set out for this election do add up.

Johnson said:

Would they raise more from corporation tax than they are promising to pay on education? The answer is yes. The reason for that is they are suggesting a very, very big increase in corporation tax, raising somewhere in the region of £15bn to £20bn a year by the time they have put it fully in place.

It would make it one of the biggest tax increases in the last 30 years or so. You could introduce an increase of that level; it would return the main rate of corporation tax to where it was six or seven years ago.

He did, however, temper this somewhat by insisting that they add up in the short run:

Well, I haven’t looked in detail at all the things they’ve promised, but even if you add in the increased public sector pay numbers, yes it would all be covered, I think, in the short run.

As you might expect, the long term implications of major tax rises are more complex than the short term implications. Hikes in corporation tax can have a detrimental effect on long term economic growth and investment, and can therefore make any hike now less effective as time goes on. Johnson said:

Two important things about corporation tax – first, it’s not a victimless tax. This would increase taxes by about 1% of national income, so it would leave us all in the long run about 1% worse-off.

And of course, it is people in the end who pay it and it would reduce incentives for companies to invest in the UK ....

The risk is that whilst this would raise knocking on for £20bn in the short run, it’s probably going to raise rather less than that in the long run as companies invest less and take other opportunities to reduce the amount of tax they pay. So the long run behavioural effect of this tax would result in revenues being less than the immediate headline increase.

Labour might contest this. A corporation tax rate of 26%, as Labour proposes, is not excessively high compared to other major economies. In fact, the rate reached 28% under the last Labour government. However, other economies have simpler corporation tax systems than the UK’s, which often sees companies effectively pay more than the headline rate. This, of course, is also at a time where the UK’s international competitiveness and attractiveness to foreign investors is taking a prolonged hit because of Brexit. Johnson said:

Even if you take it back up to 26%, as the Labour party are suggesting, it would not be particularly high by international standards.

But there have been other increases - not to the main rate of corporation tax, but to other elements of corporation tax - over the last few years and whilst we have a low headline rate, we have a very broad base. So the effective rate of corporation tax in the UK would start to look relatively higher by international standards. In a world where we are particularly worried about investment into the UK, and a Brexit situation, to significantly increase the rate of corporation you would have to say is taking some risk with the productivity and investment in the economy over the next decades