Raising top tax rate could generate ‘uncertain’ consequences, IFS states

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An analysis carried out by the Institute for Fiscal Studies (IFS) has suggested that raising the higher income tax rate to 50% could create uncertain financial consequences for the Treasury.

The IFS analysed the effects of the Treasury’s ‘short-lived’ 50% tax rate for higher earners, which came into effect in April 2010 and ended in March 2013. The rate was then reduced to 45%.

A rise in the top tax rate could raise or cost the Treasury £1-2 billion per year in revenue, the think tank found.

It stated that the uncertainty could be caused by a number of factors, one of which is the so-called ‘forestalling factor’, which could see taxpayers bring forward income to avoid the tax rise.

Effects on revenue could also be influenced by the extent to which revenues generated by other taxes, such as VAT or capital gains tax, and future revenues could be affected by such a change in taxpayer behaviour.

Commenting on the ‘forestalling factor’, the IFS stated: ‘It seems clear from the data that many . . . individuals took advantage of this opportunity, artificially increasing their incomes in the year prior to the tax rate being increased, leading to a big reduction below their normal levels the following year.’