‘Taxman to raise same proportion of national income as before crisis, but from different places’, says IFS

The IFS’S latest study of tax in the UK showed that there was a fall in the share of the adult population who pay income tax (from 65.7% to 56.2%) between 2007-08 and 2015-16 – a period when the government consistently raised the tax-free personal allowance.

During the same period, there was an increase in the proportion of income tax paid by the top 1 per cent of earners (from 24.4 per cent to 27.5 per cent) caused by a lowering of the higher-rate threshold, a higher top rate of tax and less generous pension tax relief.

However, beneath this apparent stability in the overall tax take, the think tank found that there have been significant shifts in the composition of the UK’s tax revenues.

A new IFS Briefing Note, published today, sets out ‘The changing composition of UK tax revenues’ in the decade up to 2020.

Under current forecasts, the IFS said, tax receipts in 2020–21 are due to come in at 37.2 per cent of national income. Compared with 2007–08, the taxman looks set to raise more from VAT but less from other indirect taxes, about the same from personal income taxes but with more of that coming from the highest earners, less from the main property taxes and substantially less from corporation tax.

The Treasury is set to become more reliant on a range of small taxes, including five entirely new taxes that, combined, are forecast to raise an additional £7.3 billion in 2020–21, the IFS claims.

It found tax revenues have been boosted by an increase in the rate of VAT to 20 per cent in 2012. Revenues from other indirect taxes have fallen, largely because fuel duty has been consistently frozen at 2011 levels. The IFS said the choice to deviate from increasing fuel duty in line with inflation costs £4.4 billion a year in 2015–16 terms.

The think tank said it expects, that should freezes persist over the next five years, fuel duty revenues will grow even more slowly than the OBR forecast and be substantially lower in the longer term.

Between 2007–08 and 2015–16, the IFS also found that there has been a fall in the share of the adult population who pay income tax (from 65.7 per cent to 56.2 per cent) and, for the remaining tax payers, an increase in the proportion of income tax paid by the top 1 per cent of earners (from 24.4 per cent to 27.5 per cent).

This increased reliance on a small number of income tax payers follows a longer-run trend that was driven largely by above-average increases in top incomes. Since 2008, this increased reliance has been largely driven by the policy choices to increase the personal allowance, cut the higher-rate threshold, introduce the additional rate and cut pension tax relief.

Corporation tax receipts since 2008 have been substantially hit by weak profitability in the banking sector.

There have also been many reforms in this area. Overall, corporation tax policies between 2010 and Budget 2016 (including those that are due to come in before the end of the parliament) have resulted in a revenue cost of £10.8 billion a year in 2015–16 terms.

Moves to broaden the base and crack down on avoidance and new taxes on banks have not been sufficient to outweigh the cost of cutting the corporation tax rate from 28 per cent to 17 per cent. The overall trajectory of corporation tax receipts will continue to depend on the strength of growth in corporate profits and the extent to which lower rates boost activity. A permanent decline in onshore corporation tax revenues would mark a break with the previous trend which, despite continuous predictions to the contrary, was for onshore corporation tax receipts to be quite steady over time once cyclical effects were excluded.

Two new taxes on banks – the bank levy and bank surcharge – were introduced in response to the lower revenue stream coming from banks and, in part, to the view that banks should contribute to the public finance cost of the crisis. The IFS said the measures have buoyed receipts, but they were not underpinned by a clear strategy. Notably, the bank levy was ratcheted up almost constantly in an attempt to squeeze more revenue out of banks before an abrupt about-face in response to concerns that it may be having undesirable effects, including increasing the likelihood that HSBC left the UK. More thought should be given to whether, and if so how, the banking sector should be taxed differently from other sectors.

The IFS said: “More broadly, the new taxes, which also include a diverted profits tax, an apprenticeship levy and a sugar levy, have tended to be introduced hastily and without consideration of the full set of effects.

“There is always uncertainty around forecast tax receipts. The risks to revenue streams are currently larger than usual: there is still uncertainty about the strength of the recovery, it is difficult to forecast the receipts from new taxes and there is policy risk in the sense that the government may choose to deviate from the assumptions embedded in forecasts. A long-term strategy for the tax system would help to alleviate some of these risks.”

In a new briefing note, two IFS researchers, Helen Miller and Thomas Pope, said: “Whether these changes have been part of a clear and coherent overarching strategy is, to put it kindly, unclear.”