Sunday, May 28, 2017

The Institute for Fiscal Stuties on Labour's manifesto


It would be fair to say that the Institute for Fiscal Studies is no friend to either the Conservatives or Labour. They have been critical of both the Labour and Conservative manifestos.

Personally however I find their criticisms of Labour's preposterous spending plans both more convincing and more damning.

Labour candidates may claim that their manifesto plans are "fully costed" but the reality is that the Institute for Fiscal Studies has taken those plans to pieces.

Labour says it can raise £49bn a year through tax rises - £52bn minus £3bn of slack.

The IFS argues that at the very least £11bn of that £52bn is not going to materialise on the grounds that the party has overestimated what it will get from taxing the rich and hitting tax avoidance (see below).

They also warned that the remaining £41bn was "very generous" and that corporation tax rises wouldn't deliver the claimed savings beyond 2022.


Taxing the rich and companies hits everyone, not just the rich

The IFS warned that Labour's planned rises in corporation tax and stamp duty will hit more than just the rich. The party's decision to extend stamp duty to derivatives and bonds will include those saving in private pension funds among the "likely losers", said the institute.

And IFS deputy director Carl Emmerson said Labour's plan to hike corporation tax for larger businesses to 26% would again hit pension funds with shareholdings, and would ultimately be passed on to workers through lower wages or to consumers through higher prices.

"This isn’t to say we shouldn’t tax businesses," added Emmerson. "But we shouldn’t pretend that it is somehow victimless and hence fundamentally different from personal taxation. The impacts on households are just less transparent."


Tax rises aimed specifically at high earners are the least effective

Labour's flagship tax measure is to hit the highest earners with an income tax rise, supposedly to protect everyone else. Tax will be raised on everyone earning more than £80,000 a year.

Not so fast, says the IFS. While Labour is planning to raise £6.4bn a year from these measures, the think tank warned that just a low level of "responsiveness" - higher earners changing their behaviour, such as by moving abroad - would reduce this to £4.5bn a year. Medium responsiveness would cut it to £2.5bn, and high responsiveness would slash it all the way down to nothing.

The IFS say that the idea that Labour can fund their programme by only hitting the richest 5% and companies "will not happen" and that in practice they would have to raise taxation to the highest peacetime levels ever experienced in Britain to deliver their promises.


Labour's tax avoidance figures are unreliable...

Left wingers have a habit of ascribing heroic new funding streams to clamping down on tax avoidance. Labour's manifesto pledges to raise £8.8bn from hitting tax avoiders and evaders.

The IFS believe that "at least half of that is unlikely to materialise".

The party has double counted £2.5bn in extra revenue, and £1.6bn which Labour's offshore company levy is expected to raise won't materialise at all as people respond by ditching those ownership structures, said the IFS.

And what's left of the plans comes with "downside risk".


What the IFS could have added is that insofar as Labour's corporation tax rises do raise extra tax revenue they will leave companies with less money available for investment. That is likely to exacerbate the problem of low productivity growth which has been the worst problem holding the British economy back under governments of all colours for more than a decade.

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