The crucial thing is that many of these people also pay capital gains tax (CGT), which is one of Ms Reeves’s top targets in her maiden Budget on Oct 30. The tax, which is levied on the profit of an asset when it is sold, is paid by just 350,000 people every year, but generates £15bn in revenues mainly from people at the top of the income distribution.
HMRC data shows that in 2022-23, people with gains under £50,000 and taxable income below £37,700 contributed 5pc of the total gains and represented 38pc of those liable to pay CGT.
By contrast, 44pc of gains for individuals came from just 11pc of CGT-liable individuals with taxable incomes above £150,000. “Higher and additional rate taxpayers tend to realise greater gains than those with lower taxable incomes,” HMRC says in its latest analysis.
Lord Johnson of Lainston, former investment minister, says Labour is in danger of turning off the very voters it was able to woo in the last election.
“There’s an assumption that higher rate taxpayers are ‘rich people’, but actually the rate that it kicks in would hit a secondary school teacher for example who probably doesn’t consider themselves to be rich or certainly who Labour is targeting,” he says.
“But these people are going to fall ever deeper into the net of the desire for the Government to try and tax as much as possible.”
He warns that hitting capital gains will only backfire. “If you derogate the principle of return from risk, then you are going to get less people taking it, and you’re going to get less investment, fewer inventions and less growth.
“So it’s completely mad to distort a tax system that’s worked well purely for dogmatic reasons, because it doesn’t actually end up raising more tax.”
All this suggests that Reeves may not be able to pump a meaningful amount of money into public services without breaking her manifesto pledge to not tax “working people”.
Dan Neidle, a tax lawyer, noted on a recent IFS podcast that the feat would be unprecedented. “Every single developed country in the world that spends more on public services than the UK, raises that money through higher taxes on average earners than the UK, without exception.”
Tory advisers, meanwhile, are enjoying life on the outside. “We’ve all been laughing at how we imagine all our replacements are telling Treasury officials that the Resolution Foundation and IFS say this tax policy raises billions,” says one. “Only for them to come back and say: ‘Well, no. It doesn’t. Sorry. But by the way, have you considered a rise in employers’ National Insurance or VAT?’”