The left-leaning thinktank, the Resolution Foundation, has stated that working people would have been better off if Rachel Reeves, the Shadow Chancellor of the Exchequer, had opted to raise income tax rates instead of freezing income tax thresholds. The analysis, released on October 17, 2023, argues that maintaining the current thresholds is less progressive than implementing a modest increase of 1p in income tax rates.
According to the Resolution Foundation, freezing income tax thresholds effectively increases the tax burden on lower and middle-income earners over time. This occurs as inflation drives wages higher, pushing more people into higher tax brackets without any increase in their real income. The thinktank’s research highlights that this approach disproportionately affects those on modest incomes, contrasting with the potential benefits of a small tax rate increase.
The report suggests that a 1p rise in the basic rate of income tax would generate approximately £5 billion annually. This revenue could be used to fund vital public services and support those most in need. In comparison, freezing the thresholds could result in a more significant long-term financial strain on working families.
While the Labour Party has campaigned on maintaining these tax thresholds, the Resolution Foundation’s findings indicate that this policy could lead to a reduction in disposable income for many workers. The thinktank emphasizes that a more progressive tax system would alleviate some of the pressures faced by families as they navigate rising living costs.
This debate comes at a time when the UK is experiencing heightened economic challenges, including inflation and cost-of-living increases. The Resolution Foundation’s research aims to inform policymakers about the potential implications of tax decisions on ordinary citizens.
In summary, the Resolution Foundation contends that a strategy focused on raising income tax rates, even slightly, would provide a fairer financial landscape for the working population compared to the current freeze on tax thresholds. As discussions around fiscal policy continue, the implications for millions of taxpayers remain a critical concern.
