Jeremy Corbyn has just announced a £25 billion a year tax cut for high earners.

Admittedly he didn’t announce it quite like that, but that is the effect of his newly announced maximum income policy.  By imposing an income cap, a Labour government will lose a large part of the huge amount of tax paid by higher earners.

The precise fall in tax revenues will depend on what level the income cap is set at.  All he has said is that it would be “somewhat higher” than his £138,000 salary (funny how, whatever a socialist’s income is, the “rich” always earn a bit more than they do).  But to give a few examples:

  • With a maximum salary of £150,000, the Treasury would lose £26 billion a year in income tax – that’s approximately the cost of all primary school education.

  • If the maximum salary is increased to £200,000, the reduction in annual tax revenues would still be £21 billion.

  • Even with a salary cap of £500,000, Corbyn’s Chancellor would still be collecting almost £10 billion less income tax each year.


That is a big hole in the Treasury’s income; total income tax revenues are only £169 billion, so the loss could be almost one pound in six of all income tax paid.

Capping salaries will also mean less collected in compulsory national insurance contributions, particularly employers’ contributions.  This could leave the National Insurance Fund with up to £9 billion less income per year, which the Treasury will have to make good, on top of the income tax loss.

The reduction in tax revenues will be a bit less if the cap does not apply to the self-employed, and of course in practice people will find their way around the limits and find new ways to be paid, so the effect will probably be smaller.  But that will only be as a result of the policy failing – if Corbyn achieves his desired objective of drastically reducing incomes at the top end, the Treasury will face a huge black hole in its tax receipts.

Even if lower salaries mean more profits for the employers, and therefore more corporation tax, that will only claw back a fraction of the tax lost, because corporation tax rates are much lower than the 45% income tax charged on high earners.

What this underlines is just how much tax is paid by the highest earners.  Despite all the stories about tax avoidance, the richest taxpayers, those with incomes over £150,000 and paying the top 45% rate of income tax, will pay over £47 billion of income tax this tax year – 28% of total income tax paid.  If their incomes are capped, they will still pay some tax, but substantially less.

That tax money is coming from just 333,000 of the highest-earning taxpayers, who are paying an average of over £140,000 of income tax each per year.  By micromanaging their incomes, Corbyn puts at risk not just the country’s economic health but also his own tax revenues.

 

Richard Teather is a Senior Lecturer in Taxation at Bournemouth University, and a chartered accountant.

7 thoughts on “The fiscal implications of Corbyn’s ‘maximum wage’”

  1. Posted 12/01/2017 at 11:17 | Permalink

    The entire point of capping grossly excessive executive is so that the money can be more fairly distributed to the people who do the actual work in the organisations they head up, and those people would therefore pay more tax (and send less of it to tax havens.) And, almost as important, it would mean tax revenue would cease to be as highly dependent on the super-rich as you correctly point out, therefore undoing some of enormous bias their interests receive from policymakers.

  2. Posted 12/01/2017 at 11:19 | Permalink

    The entire point of capping grossly excessive executive pay is so that the money can be more fairly distributed to the people who do the actual work in the organisations they head up, and those people would therefore pay more tax (and send less of it to tax havens.) But also, almost as important, it would mean tax revenue would cease to be as highly dependent on the super-rich as you correctly point out, therefore undoing some of enormous bias their interests receive from policymakers.

  3. Posted 12/01/2017 at 16:18 | Permalink

    “Jeremy Corbyn has promised Labour would introduce a maximum wage for executives at companies with government contracts”. This is from the guardian and his actual quote was “I would like there to be some kind of high earnings cap, quite honestly.” it is annoyingly vague and you may have written this piece prior to him going into a bit more detail.

    While i do appreciate your approach to showcase the levels of tax the wealthiest do pay you have oversimplified it a tad and exaggerated in others. Also if there was a 100% tax put in place revenues at £500,000 you would also assume that the higher earners would be rewarded for the loss of their earnings through stock options etc and therefore be taxed in other ways.

  4. Posted 13/01/2017 at 02:24 | Permalink

    Corbyn is a economically illiterate moron, trying to sell the public policies which would be laughed out of a typical student union for being clearly barking.

  5. Posted 14/01/2017 at 07:48 | Permalink

    “the people who do the actual work in the organisations they head up”

    Oh shut up you socialist idiot. You think running a business isn’t work? You think a company’s profits depend only on the nobility of labour? If running a business is so easy, why don’t YOU try it?

  6. Posted 16/01/2017 at 01:45 | Permalink

    This post is ‘fiscally’ unsound. There is no mention of Corbyn’s plans to increase the tax rate for top earner.

    Try again.

  7. Posted 16/01/2017 at 14:00 | Permalink

    Um … 45%, you are forgetting company NI contributions at 13.8% + Employee NI 2%

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