Two big things should have been clear from last week’s Budget. First, that we do need extra taxes, however painful, to fund public services and inject much needed investment to shift Britain out of stagnation. Second, that there are important choices to be made about where the increases are imposed, and therefore who contributes more. Labour governments have tended to ask those with the broadest shoulders to bear more of the burden. Yet our politics often makes it hard to apply this principle systematically.

There have been many calls to shift the burden more from income onto wealth, correcting an imbalance whereby the gains that the best-off make from their assets are taxed much more modestly than income from work. The Budget made some modest steps in this direction. Most importantly, increases in capital gains tax, from a minimum of 10% to 18%, started to reverse recent reductions in these rates, though still falling well short of a proposal by the Institute for Fiscal Studies to align them with taxation on income. Other measures started to limit the ways that allow the wealthiest to protect themselves against taxation, notably by subjecting unused pension pots to inheritance tax and increasing capital gains tax on “carried interest” (which treats some fees as capital rather than income, resulting in private equity fund managers paying less tax). These welcome changes also fell far short of the reforms needed to rebalance the weight of taxation from earned income to assets.

Yet most of the extra taxation in the Budget came from a tax tied to earnings: employers’ National Insurance. Taxes based on people’s incomes, whether paid directly or by their employers, provide about half of all tax revenue, and any substantial tax rise is bound to tap this source.

The big question for income tax rises is do they follow the “broadest shoulders” principle? To do so, it is better to maintain relatively generous allowances (which allow everyone the same tax-free element of income, worth proportionately more to the lowest paid), and when more taxation is required to increase the tax rate, as long as it doesn’t rise to a level that undermines work incentives. 

Income tax cuts initiated in the 1980s focused on the rate of income tax, with the basic rate falling from 30% before 1986 to 20% from 2008. This benefited relatively better-off basic rate taxpayers most. 

Tax cuts during the 2010s looked very different: while the rates remained unchanged, the threshold at which people begin paying tax nearly doubled, and the threshold for paying National Insurance contributions also increased. This meant more earnings were protected from tax, especially as earnings rose slowly over this period.  As a result, each taxpayer had about £1,800 a year more on average in their pockets than if thresholds had risen in line with earnings. This amount represented about 6.5% of the pay of someone on average earnings, but 13% for someone on half average earnings. 

The trouble is that this more “progressive” strategy for reducing taxation is harder to mirror when an increase is needed. The broadest shoulders principle would favour an increase in tax rates over a lowering of thresholds. But headline-rate increases are far more visible to voters. As a result, politicians hate having to increase the rates, so for decades each successive reduction income tax rates has seemed irreversible. 

This taboo on income tax rate rises doesn’t strictly apply to National Insurance. Chancellors Gordon Brown and George Osborne each raised the rate by a point, and Rishi Sunak by 1.25 points through the short-lived Health and Social Care Levy). But income tax has the advantage of covering a wider range of income types than NI, which only applies to earnings from work and is escaped entirely by the almost one in four adults above pension age. Moreover, the two main parties at the last election felt obliged to promise not even to raise the NI rate, for employees, despite it having recently been cut by an unaffordable four percentage points. As has been well-publicised, another way the tax burden has increased is “fiscal drag”, which involves freezing earnings thresholds while prices and earnings rise. This hits lower-earning taxpayers proportionately more than those near the top of the basic rate band.

Just as strikingly, the big hike in employers NI announced in the budget imposed a relatively modest increase in the rate (by 1.2 percentage points), but sharply reduced the earnings threshold below which no such tax is payable, from £9,100 to £5,000 a year.  This latter measure increased by £630 the cost of hiring any worker earning above £9,100, again affecting lower-income workers proportionately more – for example if pay increases are restricted to compensate.

To illustrate the combined effects of direct taxation on different groups in the 21st century so far, the graph below shows how much the state has taken over time in total, from individuals and their employers, as a percentage of their earnings, for people on half-average, average and twice-average earnings.