IFS dismisses parties’ tax plans as ‘incoherent’

The UK’s leading economic thinktank has attacked the main parties’ tax plans for being vague, incoherent and likely to have unforeseen consequences which could hit aspiration and undermine the stability of the pensions system.

Property Nethervale Avenue, Netherlee, East Renfrewshire. The IFS has dismissed the main parties' tax plans as vague and incoherent. Picture: Robert Perry

In a hard-hitting report on the tax plans in the manifestos of the Conservative, Labour and the Lib Dems, the Institute for Fiscal Studies (IFS) has also called for the long-delayed council tax revaluation to take place in both Scotland and England, with current tax bands based on 1991 estimates.

The IFS claimed that “no party seems to have the courage to propose these rational and long overdue changes.”

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It noted that properties worth £2 million or more would be hit with an annual bill of £16,000 by the Lib Dems and Labour’s proposed Mansion Tax.

But the report suggested: “Fixing the council tax would be preferable to layering a separate tax on top of it.”

On plans for benefit cuts the IFS was dismissive of the claims in the manifestos.

It said the Tory plans to slash welfare by £12 billion were “unspecified” and the Lib Dems plans for half that amount “vague”.

But it held its harshest criticism for Labour, saying Ed Miliband’s proposals are “trivially small relative to the rhetoric being used.”

Looking at the Tory and Lib Dem plans to raise the income tax threshold to £12,500 it noted that the proposal is “of most value to those in the middle and upper-middle of the income distribution” because it benefited those not already exempt from paying tax and with two working adults in the household.

The IFS also suggested that the Tories and Labour propose a stealth tax by hitting exemption on pensions contributions.

It warned: “Both sets of proposals would also significantly complicate the system. They discourage people with incomes around £150,000 from increasing their earnings, with Labour’s proposals introducing a ‘cliff-edge’ into the system – people could become worse off as their income rises above £130,000.”

The thinktank also claimed that the move could undermine the stability in the pensions taxation system.

The report noted: “We need stability in the system for taxing pension savings. None of the proposals on the table would improve those parts of the pension tax system which need changing.

“They look like short-term, ad hoc changes which we will come to regret as what was historically a relatively rational income tax treatment of pension saving crumbles.”

The IFS also attacked Tory plans to exempt property from inheritance tax saying: “It is hard to see a good economic or social rationale for such a policy.

It noted “Owner-occupied housing is already tax-privileged and this policy would help lock older people into bigger and more expensive homes when both they, and those looking to buy, might be better off if they were to ‘downsize’.”

It also warned that Labour’s plans to give first time buyers a stamp duty holiday will lead just push up house prices further.

The IFS said: “Labour proposals to offer a stamp duty holiday for first-time buyers is likely, at least in part, to increase house prices, thereby shifting some of the benefit to current property owners.”

James Browne, a senior research economist at the IFS and one of the report’s authors, said: “We have seen little coherent reform to the tax system for many years and the parties’ manifestos promise little going forward.

“Damage has been done, and more is being proposed, to pension taxation, while proposals on the taxation of housing lack coherence. There is a limit to the extent that we can continue to pretend that tax revenues can rise while protecting the vast majority of people. Just because a tax rise hits ‘the rich’ or is labelled ‘anti-avoidance’ does not necessarily mean it is harmless.”