Tax hikes? Take a hike

In preparation for his presumed appointment as Prime Minister, Andy Burnham has suggested that there is “room for movement on tax” within the Labour manifesto, hinting at future tax hikes. But if Burnham is serious about economic growth, he should reconsider. A new Policy Exchange report identifies four key problems with the current tax system: a tax-take which is already too high, absurdly high marginal tax rates, acutely damaging taxes, and overcomplexity.

The overall level of taxation is at its highest level in over 70 years, at 36 per cent of GDP compared to an OECD average of 34 per cent. This high largely reflects post-covid spending, but there has been no meaningful appetite within Government to reduce this to pre-covid levels — hardly helped by various policy U-turns. Clearly, there are cases where the government must spend in order to boost growth, or to redistribute. But a bloating welfare system, alongside the Winter Fuel Allowance U-turn, are not effective means by which to achieve these objectives.

There are many scenarios within the current tax system where the effective marginal tax rate (the percentage of tax paid on the next pound earned) rises to extraordinary heights. Economists care about marginal tax rates because they impact the incentive to work an extra hour, or to get a promotion.

Take someone earning between £100,000 and £125,140. Because of the withdrawal of the tax-free Personal Allowance, this creates an effective marginal tax rate of 62 per cent. If they are repaying a student loan, this rises to 71 per cent. That is to say that for a £100 pay rise, only £29 is retained.

There is a similar impact for those claiming Child Benefit earning between £60,000 and £80,000, and for those on low incomes as Universal Credit gets tapered away. This is incredibly damaging for work incentives.

Worse yet is the existence of “cliff-edges”. For example, at £100,000, childcare subsidies worth up to £7,500 per year are withdrawn. Similarly, Carer’s Allowance is withdrawn at an annual income of £10,608. This means that people can be made significantly worse off following a promotion or increase in hours worked. It may seem fair for those on higher incomes to lose various benefits. But our tax system currently creates situations where working people actively spend time and energy trying to keep their incomes below certain thresholds. No sensible tax system should encourage this.

Then there are certain taxes whose very existence is economically damaging. Stamp Duty Land Tax (SDLT) is one of the worst culprits. It reduces liquidity in the housing market, lowering labour mobility. It also discourages downsizing, meaning the housing stock is used inefficiently. There are rumours that Burnham could scrap SDLT, potentially replacing it with a Land Value Tax, which would be a big step in the right direction.

National Insurance is a form of income tax, although it is arguably less fair since it is levied only on income from work (rather than rents, dividends or interest). It therefore discourages employment. Burnham has suggested he will not raise NICs, but he should go further by lowering them. This would improve work incentives, encourage firms to employ more workers and potentially improve the NEET crisis.

Finally, the UK’s tax system is incredibly complex. Our tax code rose from 1,626 pages in 1976/77 to 23,522 pages in 2025/26. Compare this to France’s at 3,500 pages, or better yet Hong Kong’s at 350 pages.

 Complexity imposes costs on businesses who expend vast resources, an estimated yearly £4,500 for the average small firm, in order to navigate the endless complexities of our tax system, rather than focusing on providing goods and services.

 So, what is to be done? A new Policy Exchange report suggests an alternate approach. Funded by public spending cuts and an extension of the standard 20 per cent rate of VAT to zero-rated, reduced-rate and exempt items, Policy Exchange recommendations include: abolishing the “Manhattan Skyline” of marginal tax rates and abolishing Stamp Duty on property and shares, with the eventual goal of fully phasing out National Insurance for employers and employees alike. These reforms would go a long way in turning around the UK’s sluggish growth of recent years.

Unless we can get a grip on our spending, the burden of any significant future tax hikes would fall on working people

Unfortunately, it is likely that future spending needs (including those required for defence) will be met by calls for funding these through taxing the rich. It is entirely reasonable for those with the broadest shoulders to pay more in tax. However, bear in mind that the top 1 per cent of income taxpayers already provide 27 per cent of income tax receipts. As much as we may not want to admit it, this makes us extremely vulnerable to their behaviour.

Instead, we must face the facts — unless we can get a grip on our spending, the burden of any significant future tax hikes would fall on working people, further exacerbating our economic woes.