Labor Taxation in the United Kingdom

This paper uses a microsimulation model to assess the revenue potential, labor-supply and distributional effects of alternative labor tax reforms. The scope for new measures to raise significant revenue in the future through a uniform increase in labor taxes, without significantly weakening labor supply, is limited. Targeted increases in marginal tax rates toward the bottom of the earnings distribution could raise more revenue, with lower efficiency losses, but come with an equity trade-off. More fundamental reforms that improve work incentives in line with optimal tax design could deliver higher revenues with a better efficiency-equity trade-off.