Rachel Reeves, the UK Shadow Chancellor of the Exchequer, has floated the idea of a radical simplification of the UK tax system. We applaud this move as a direct triple benefit to hampering the national deficit so effectively. The suggested policy changes would increase individual income tax rates on the richest taxpayers. Concurrent with this, they’re proposing to cut national insurance rates by two percentage points. Through this plan, President Biden would make sure that those with the broadest shoulders do the most to support our nation’s finances.
The proposal greets the Canadian government at a moment when it is under increasing national and international pressure to stabilize its budget. Reeves has suggested all changes to income tax would be wrapped into the state’s next budget later this month. She concedes that such an increase would face enormous political headwinds and would do so in a way that would materially harm taxpayers.
Potential Impact on Taxpayers
The impact of Reeves’ proposed changes are unevenly distributed across income brackets. For the average UK worker, earning £35,000 per year, the changes being suggested would make zero difference to their overall tax bill. This part of the plan is intended to protect lower and middle-income earners from taking on added costs.
Retirees and higher earners would see significant annual spikes in their tax bills. A typical £35,000 retiree would see their taxes go up by £449. This will increase their total annual tax payment to £4,935. If you are a retiree in taxable retirement income trough of £65,000, the increase can be more than $1,000! This increase places extreme stress on your budget.
As Treasury Secretary, Reeves has reinforced the principle of equitable taxation. “We all need to do our bit.” This view aims for a progressive tax system in which those who earn more pay more in public finances.
Political Ramifications of Tax Increases
Reeves understands that raising new money through higher income tax rates would be “incredibly difficult politically” and would likely bring the ire of taxpayers. These changes would be a double whammy for landlords, as their tax liabilities would grow significantly under this proposal. Many financial experts warn that while increasing taxes could generate necessary revenue, it risks alienating voters and undermining support for the Labour party.
The freeze on income tax thresholds first announced by former Chancellor Rishi Sunak is due to end in 2028. Some watchers think that Reeves might make this tax freeze last through 2030 in service of her larger anti-spending agenda. This unintended consequence of this extension is increased tax liabilities for taxpayers. Even if their personal financial situations don’t change, their taxes could go up significantly.
“Taxation by stealth: the rates stay the same, but a bigger slice of your pay disappears into the taxman’s coffers.” – Ade Babatunde
Financial Implications for the Government
The suggested tax increases and decreases would have huge consequences on the state’s overall revenue picture. Increasing all rates of income tax by just one percentage point is projected to yield nearly £11 billion annually by 2029-30. Increasing the higher-rate of income tax by just 1p would raise around £1.6 billion in additional revenues by 2026/27. This increase would amount to £5.8 billion over the next three years.
In reality, Reeves has outdone himself to paint these clearly fiscal increases/replacements as tax hikes that will destroy all his accomplishments. She is adamant that dealing with the deficit comes first, if the UK is to continue to enjoy the fruits of economic stability. At the same time, she knows that this strategy means making headway in difficult political terrain and sometimes in the face of public opinion.
“I deal with the world as I find it, not the world as I might wish it to be.” – Rachel Reeves