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.