Extract F states 'Following the pandemic, reducing the fiscal deficit shifted towards raising tax revenues rather than continuing strict austerity.'

Using the data in the extracts and your knowledge of economics, evaluate the view that there is a strong case for significant increases in the UK's top marginal rates of personal income tax.

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Extract D

Figure 1: UK Government expenditure and tax receipts, 2015–2025

Figure 2: Proposed personal income tax bands and marginal rates in the UK

Figure 3: Top marginal personal income tax rates in G7 nations, 2024

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Extract E: Fiscal sustainability and redistributive challenges

Following unprecedented public spending during recent global crises and subsequent domestic energy price support schemes, the UK's national debt has surpassed 100% of GDP, its highest level since the early 1960s. Although the budget deficit has contracted from its peak of over 14% of GDP during the pandemic to around 5% of GDP recently, structural pressures threaten long-term fiscal sustainability.

The cost of servicing this national debt has escalated dramatically due to monetary tightening and persistent inflation, with annual interest payments exceeding £110bn in recent years. Crucially, productivity growth has remained weak, dampening long-run tax revenue projections.

Economists debate the necessity of hard fiscal rules. Believers in deficit reduction argue that chronic borrowing risks crowding out private sector credit markets, increases the burden on future taxpayers, and risks sovereign credit downgrades. Conversely, critics suggest that tax rises during a period of low productivity growth risk locking the economy into stagnation. Under these conditions, targeting high-earning individuals is often proposed as a fairer way to consolidate public finances.

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Extract F: High-income taxation reform

To raise revenues and improve income distribution, a major reform has been proposed: lowering the threshold for the 45% Additional Rate from £150,000 to £125,140, while simultaneously raising the marginal rate for this top band to 48%. Proponents argue that high-income earners have a lower marginal propensity to consume (MPC), meaning that taxing them has a smaller contractionary effect on aggregate demand (AD) than broad-based tax hikes like VAT. This progressive shift ensures those with the greatest ability to pay contribute the most to rebuilding public services.

However, supply-side economists and business lobbies warn of adverse consequences. They argue that a top marginal rate of 48% could spark a 'brain drain' of highly skilled professionals—such as surgeons, senior engineers, and financial tech leaders—to lower-tax nations. There are also concerns that the reform might disincentivize work, leading high-earners to reduce their hours or retire early. To mitigate this, some economists propose matching tax hikes with increases in pension tax relief allowances to protect incentives to save.

Furthermore, critics point to the Laffer Curve, suggesting that raising the rate to 48% may lead to widespread tax avoidance or income shifting, resulting in a much lower fiscal yield than the Treasury's static projections. Despite these concerns, supporters note that at 48%, the UK's top rate remains lower than several major G7 competitors, including France, Japan, and Canada.