20AUG

Adam Smith Institute puts top tax rate at 54%

2 min read

17:53UTC

The Adam Smith Institute put the revenue-maximising top income tax rate at 54% on 7 August; the IPPR argued a day earlier that shared procurement could free £3.4bn of borrowing headroom.

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EconomicAssessed

Key takeaway

Two institutes published rival positions on financing defence, neither costed by the OBR.

The Adam Smith Institute published an argument on 7 August 2026 that raising income tax rates would reduce the revenue collected, putting the revenue-maximising top rate at 54%⁠¹. A day earlier the Institute for Public Policy Research (IPPR) argued that joint procurement and shared stockpiling with allies could create £3.4bn of borrowing headroom, set against a path to spending 3% of gross domestic product on defence by 2030 that it costs at about £13bn a year of extra spending in today's prices⁠². The IPPR accepts in the same paper that a permanent commitment at that level still requires higher revenue or lower spending elsewhere.

Neither number is an outturn. The 54% comes from a campaigning free-market institute's modelling of taxpayer behaviour, the £3.4bn from a campaigning centre-left institute's modelling of procurement savings, and neither has been costed by the Office for Budget Responsibility (OBR), the government's independent forecaster. This desk prints the pair without adjudicating between them, because adjudicating would mean adopting one side's model.

They belong in the same panel because they answer the same question from opposite ends. The defence path is a claim on the sovereign balance sheet with roughly £25bn a year of it unfunded on the OBR and Institute for Fiscal Studies assessments, and £3.5bn of the funding package published in June was one-off money that cannot repeat next year. One institute proposes to close that gap by spending less on the same capability, the other warns against closing it through the top rate of income tax. Neither institute has published a costing that the OBR or any comparable independent body has checked.

Deep Analysis

In plain English

Two policy research organisations, called think tanks, published different proposals for the same underlying problem: how the government pays for rising costs such as defence spending, without borrowing more than markets are comfortable lending. The Adam Smith Institute, which generally favours lower taxes, argued that raising income tax further would raise less money than expected. The Institute for Public Policy Research, which generally favours a larger state role, argued that buying defence equipment jointly with allies could free up some borrowing room without a tax rise, though not enough to cover the whole bill on its own numbers.

Deep Analysis

Root Causes

The Adam Smith Institute's 54% figure is a theoretical revenue-maximising rate, the estimated point on a Laffer-curve style calculation past which further rate rises are argued to lose more revenue through reduced work and avoidance than they gain from the higher rate.

It is the Institute's own modelled estimate, not an HMRC-observed effective rate.

What could happen next?

Meaning
Both proposals are positions from bodies with declared policy leanings, not independent forecasts, and neither claims to fully resolve the underlying funding gap on its own.

Source Landscape

This story draws on neutral-leaning sources

On the Institute for Public Policy Research's own figures, £3.4bn of borrowing headroom against a roughly £13bn-a-year defence cost path covers a little over a quarter of the annual bill.

The Institute's own summary states the remaining share still requires higher revenue or lower spending elsewhere; the procurement and stockpiling proposal does not close the full funding gap on its own figures.

Consensus view: These are two published POSITIONS, not two empirical findings. The right-leaning Adam Smith Institute argued on 7 August that higher income tax rates would reduce revenue, putting the revenue-maximising top rate at 54%.

Counter-view: The centre-left Institute for Public Policy Research argued on 6 August that joint defence procurement and stockpiling with allies could create £3.4bn of borrowing headroom against a defence path to 3% of GDP by 2030 costed at roughly £13bn a year, while itself stating that the remaining permanent cost still needs higher revenue or lower spending elsewhere.

Key tension: Whether Britain's fiscal constraint is best framed as a revenue-side limit, the Adam Smith Institute's position, or a spending-efficiency question, the Institute for Public Policy Research's position, and both institutes are advocacy bodies with declared policy positions, not neutral arbiters.

Sources:Adam Smith Institute·Institute for Public Policy Research

Mentions:Adam Smith Institute →Institute for Public Policy Research →Office for Budget Responsibility →Institute for Fiscal Studies →

First Reported In

Update #2 · Three household registers, three answers

Adam Smith Institute· 20 Aug 2026

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Causes and effects

Caused by

IFS puts £25bn a year of defence unfunded

The Adam Smith Institute and IPPR positions are competing arguments about how to close the roughly £25bn a year defence funding gap assessed in ID:5390.

Occurred 31 Dec 2025

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This Event

Adam Smith Institute puts top tax rate at 54%

Both organisations published positions rather than findings, and both are arguing about how to pay for the same defence commitment.

Different Perspectives

Institute for Fiscal Studies

The IFS puts about £25bn a year of the government's defence spending path still unfunded against plans announced so far, and separately relays the OBR's costing of the triple lock at £15.5bn a year by 2029-30, roughly triple its original £5.2bn projection. It presents both as fiscal arithmetic, not policy recommendation.

Resolution Foundation

The Resolution Foundation projects typical non-pensioner incomes rising 1.2% in 2026-27, and 4.7% for the poorer half of non-pensioner families, before frozen tax thresholds and rising council tax and housing costs erode those gains later in the decade. It reads the tax route out of Britain's debt position as one that falls unevenly on households rather than on the state.

Institute of Economic Affairs

The IEA argues total managed expenditure averaging 44.5% of GDP through the decade is unsustainable, and that holding spending growth to inflation until 2029-30 would improve the fiscal position by £40bn. This is a campaigning position from the free-market right, not a costed forecast like the OBR's.

Structural case for reading the fall as genuine improvement

The debt ratio fell, borrowing fell year-on-year in cash terms by £6.0bn over the financial year to date, and two gilt auctions cleared at bid-to-cover ratios of 3.39 and 3.58 times with no sign of buyers demanding a premium for risk. On that reading, the state of Britain's public finances has not deteriorated this fortnight.

Office for Students

OfS's November 2025 modelled scenario puts 45% of providers in deficit for 2025-26; its separate May 2026 annual report, counting what providers actually filed for the identical year, puts the figure at 36.6%. Neither publication reconciles the two for the reader.

Regulator of Social Housing

The RSH's Q1 survey of 195 landlords found cash interest cover falling to 59% and described recovery as "slower than previously forecast", while recording the same sector raising £4.3bn and lifting its twelve-month development forecast to £16.0bn, a three-year high.