The pounds 34bn tax hikes Labour could impose

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The Independent Online
New research published today by investment bankers NatWest Markets presents a speculative but plausible list of tax increases adding up to nearly pounds 34bn which a Labour government could introduce within the lifetime of a parliament.

As Gordon Brown, the shadow chancellor, kicks off a long-awaited series of speeches about his tax and spending plans today, NatWest's City economists have begun to flesh out the detail of Labour's policies for themselves.

The list is headed by the windfall tax on which Mr Brown will focus in his speech. The amount the party plans to raise from this has crept up from about pounds 3bn originally to pounds 10bn now.

Despite a ferocious lobbying campaign against the tax, with opponents raising the spectre of a legal challenge, Labour is utterly determined to introduce it in order to fund its plans to get a quarter of a million of the long-term unemployed into work. The windfall tax is also that rare thing, a politically popular tax.

The authors of the NatWest paper, Geoffrey Dicks and John O'Sullivan, reckon the next most likely bets are raising the rate of corporation tax from 33 per cent to 35 per cent, and phasing out Miras, the tax relief on mortgage interest payments. Together these could raise more than pounds 4bn in a full year.

The UK has a relatively low corporate tax rate now, while strong profits mean the increase would raise a lot of revenue at this stage of the business cycle.

Labour could point out, the paper says, that the burden of putting the public finances on a sounder footing after the last election was borne entirely by individuals. A reversal of the [1991] cut in corporation tax would redress the balance, it says.

Abolishing Miras, the benefit of which has already been steadily reduced by successive Conservative chancellors, would end a subsidy to the housing market that economists have long criticised, at a time when booming prices mean the market would be able to bear it.

Getting rid of Miras would mean in effect increasing taxes on home-owners without breaking any pledges about not raising income taxes.

The list subsequently turns to more controversial measures, with the next three items amounting to income tax increases. Together, the three income tax measures could bring in more than pounds 6bn.

Ending the upper earnings limit on national insurance contributions would eliminate an untidy fall in the upward progression of marginal tax rates.

It would raise tax on middle and upper income earners, and could be packaged with Mr Brown's plans to introduce a 10 to 15 per cent income tax starting rate.

Phasing out the married couples' allowance, already restricted to 15 per cent by the Conservatives, and restricting relief on personal allowances to the basic rate of income tax, would also make the income tax system simpler and more progressive.

Tampering with income tax might appear to be too much of an electoral hot potato for these to be plausible candidates.

However, the paper recommends two possible corporate tax measures that appear to be closer to Labour's thinking.

One is the removal of tax relief on companies' interest payments, in order to end the tax system's encouragement of debt over equity finance.

The other is the withdrawal of the advance corporation tax credit. These could yield potentially huge revenues.

Finally, the authors consider the extension of VAT to private health and school fees and the introduction of motorway tolls as outside bets.