How Labour will take tax rates back to the 1970s

Some taxpayers can expect to pay almost 70pc if Labour wins. Richard Evans looks at the parties’ record on taxes

Jeremy Corbyn has often been accused of wanting to take Britain back to the Seventies. New analysis for Telegraph Money shows that when it comes to income tax rates, his manifesto proposals would do just that. The top rate of income tax under Labour in the mid-Seventies was 83pc (or as much as 98pc on certain categories of “unearned income”). Under Mr Corbyn’s proposed changes, some taxpayers would face a rate of just under 70pc if Labour were to win power.

The Labour manifesto mentioned only the lowering of the threshold for 45pc tax and the reintroduction of a 50pc rate. But the interaction of those changes with an existing anomaly caused by the gradual withdrawal of the personal allowance on incomes of more than £100,000 would see some people paying an effective income tax rate of 67.5pc, according to the respected Institute for Fiscal Studies (IFS), with 2pc in National Insurance contributions on top.

Currently, those who earn between £100,000 and £123,000 lose 50p of the tax-free personal allowance for every £1 earned. This means that they pay an effective tax rate of 60pc on this band of income, plus 2pc NI. Labour’s plan to charge these taxpayers 45pc while they continue to lose the personal allowance progressively would increase the effective tax rate to 67.5pc, the IFS calculated.

The graph shows in detail how tax rates have changed over the past four decades as Britain’s political complexion has shifted between Left and Right.

How tax rates have climbed, fallen then climbed again

The figures show that Labour was by no means the originator of sky-high income tax rates in the Seventies, although it did take rates even higher than they had been under Edward Heath’s Conservative government. It inherited basic and higher rates from the Tories of 33pc and 75pc and raised them to 35pc and 83pc respectively.

Even Margaret Thatcher, famed as a tax cutter, allowed the e higher rate to remain well above 50pc for almost a decade: only in 1988 did her er government cut the rate from 60pc to 40pc. Her first rst chancellor, Geoffrey Howe, e, had cut the basic rate to 30pc as soon as the Tories took office in 1979 but there was no further reduction until the mid-Eighties, when it was cut in stages to 25pc. The Tories had cut it again to 23pc by 1997, their last year in power. Labour under Tony Blair left the higher rate untouched at 40pc throughout its 13-year term in office, although it cut the basic rate progre progressively to 20pc, where it remains. However, GordonG Brown, Mr Blair’s chancellor,ch did increase theth tax burden on higher earnersear by making them pay National Insurance on earningse in the higherrate bracket for the first time,time at 1pc, later increased

Mrs Thatcher cut the basic rate at once on coming into office

to 2pc under the coalition.

After Mr Brown became prime minister, his successor as chancellor, Alistair Darling, introduced a new 50pc top rate of tax on incomes of more than £150,000, although it did not take effect until the coalition government had arrived in Downing Street.

He also introduced the gradual withdrawal of the personal allowance on incomes of more than £100,000, which gives rise to the current 60pc effective rate and to Mr Corbyn’s planned 67.5pc band.

The coalition’s chancellor, George Osborne, cut the 50pc rate to 45pc in 2013.

Labour does target the rich

The historical evidence outlined above shows that things are not quite as clear cut as saying that Labour raises tax rates and the Tories cut them. What is clear, however, is that Labour raises tax rates for higher earners and the Conservatives cut them.

In none of its terms of office examined above did Labour cut

the higher rates of tax. Instead, it increased them in the Seventies, from 75pc to 83pc, or to 98pc if you include the unearned income surcharge.

In the Blair-Brown years it raised the top rate from 40pc to 50pc and added the 1pc National Insurance surcharge and the effective 60pc band.

Mr Corbyn plans another rise via the reintroduction of a 50pc band.

The Conservatives under Mrs Thatcher cut the top rate from 83pc (or 98pc with the surtax) to 40pc while the Toryled coalition cut it from 50pc to 45pc.

Labour has, by contrast, been prepared to cut the basic rate of tax: by 3 percentage points under Mr Blair. However, it raised the basic rate under Mr Wilson.

The Tories under Mrs Thatcher cut the basic rate by 6 percentage points. The coalition and the current administration have left it unchanged at 20pc.

How high tax rates affect behaviour (and the amount raised)

Mike Warburton, who was an accountant throughout the period, said: “Unsurprisingly, very few people chose to pay tax at the extortionate rates seen under Labour in the Seventies. Many of the brightest emigrated to the US in the so-called brain drain.” The Rolling Stones were among those to leave.

“Others simply didn’t bother to work hard or push for promotion and a pay rise on the basis that it didn’t make much difference to their takehome pay. Those with their own companies decided not to take dividends.

“Margaret Thatcher and Geoffrey Howe reduced the top rate on earnings to 60pc and then abolished the investment income surcharge. The basic rate was also reduced to 30pc. As a result, the yield from income tax shot up. The top rate then fell to 40pc in 1988, with the same result.”

The Rolling Stones took steps to avoid high taxes in the 1970s