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Drag on Incomes from Fiscal Drag equivalent to a 5% tax rise

Geoff Riley

8th October 2023

Another outing for the concept of fiscal drag, with the Resolution Foundation quantifying the effects of freezing income tax thresholds, noting that as a result, by 2028 the Treasury can expect to collect £40bn from income tax alone, when without these changes it would only have been £30bn. The Resolution Foundation is claiming that this is the biggest rise in income tax for fifty years equivalent to raising the basic rate of income tax by 5%.

It's one of the largest increases in 'stealth taxes' in the recent past, to the extent that it's even calling the use of the term itself into question.

Please read their article

This House of Commons Research Paper looks in more detail at fiscal drag

In simple terms, fiscal drag refers to a situation where inflation or rising incomes push taxpayers into higher tax brackets, resulting in them paying more in taxes. Let me break it down further. Essentially, governments use tax brackets to determine how much tax a person or business should pay. For example, someone earning $20,000 a year might be in a lower tax bracket than someone earning $100,000. But if there is high inflation, the person earning $20,000 might eventually earn enough to be in a higher tax bracket, even though their purchasing power has not actually increased.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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