Raising taxes without reform could damage growth warns Institute for Fiscal Studies

A prominent think tank warns the Chancellor Rachel Reeves, “simply raising tax rates without reform would do more economic damage than is necessary”.

The Institute for Fiscal Studies (IFS) has published a report on options for tax increases ahead of the Autumn Budget.

The report urges the Chancellor to reform the property taxation system and warns against “tinkering and half-baked fixes”.

Taxing rental income would be damaging

Rumoured media reports claim the Chancellor could extend national insurance to rental income and replace stamp duty with a property tax on homes worth more than £500,000.

The IFS warns that taxing rental income would be damaging and that proper reform is needed.

The report says: “If Ms Reeves is considering increasing taxes on returns to capital, such as rental income, dividend income, interest income, self-employment profits or capital gains, simply raising tax rates without reform would do more economic damage than is necessary. Proper reform would reduce the disincentive effects that these taxes currently have on investment and, therefore the unnecessary drag that they have on growth.”

The report suggests it would be better for the Treasury to raise any additional revenue through a reformed property taxation system.

It says that stamp duty is damaging for both the housing and the rental market, as it discourages people from moving and slows the functioning of the rental market, which in turn acts as a drag on economic growth.

The think tank says a well-designed tax system would have no place for stamp duty at all and instead calls for a reformed council tax system.

The report says: “Council tax should be turned into a tax proportional to up-to-date property values, set at a rate that would replace the revenue from SDLT on housing as well as existing council tax revenue.

“The revenue from both business rates and SDLT on commercial property would then (ideally) come instead from a tax on the value of non-residential land (i.e. excluding the value of the buildings themselves, unlike business rates), feasibility of accurate valuation permitting, so as not to discourage the development and use of property for business purposes.”

The last thing we need in November is directionless tinkering and half-baked fixes

Isaac Delestre, a senior research economist at IFS and an author of the chapter, said: “Revenue-raising seems likely to be a major goal of the coming Budget. But if Rachel Reeves limits her ambition to collecting more revenue, she will have fallen short. Almost any package of tax rises is likely to weigh on growth, but by tackling some of the inefficiency and unfairness in our existing tax system, the Chancellor could limit the economic damage.

“The last thing we need in November is directionless tinkering and half-baked fixes. There is an opportunity here. The Chancellor should use this Budget to take real steps down the road towards a more rational tax system that is better geared to promoting the prosperity and well-being of taxpayers.”

Kate Davies, executive director of The Intermediary Mortgage Lenders Association (IMLA) has issued a stark warning to Chancellor Rachel Reeves against using the housing market as a convenient target for tax rises in November’s Budget, saying that such measures would fail to raise meaningful revenue and could instead choke off economic growth.

She said: “The Chancellor should resist the temptation to reach for politically easy but economically damaging options. Most of the property-related measures being discussed would deliver minimal revenue, take years to implement and undermine confidence in the housing market.

“Tinkering with the housing market will not deliver what the government needs. If ministers want growth, they should look at broader, bolder measures that can genuinely raise revenue and support investment. Small, piecemeal tax changes will just add uncertainty, hurt confidence and slow activity at exactly the wrong time.”