22OCT

Adam Smith Institute puts top tax rate at 54%

2 min read

16:23UTC

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.

← Back to Debt passes £3trn, its ratio below forecast Jump to analysis ↓

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

Read original →

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

Read story →

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

Pension Protection Fund

Acting chief actuary Aaron Pang put the rise to 135.0% funded down to liabilities falling 2.1% against a 1.0% fall in assets, reflecting higher gilt yields. On Lowdown's reading, the yields that lift the Treasury's interest bill leave 4,838 company schemes with a £280.7bn surplus that does not reduce state borrowing.

Torsten Bell

The Labour figure wrote on 14 October that the IMF's October figures show the fastest fiscal consolidation in the G7. The IMF forecasts the UK deficit falling from 3.8% of GDP in 2026 to 1.4% in 2031, a squeeze still to be delivered through taxes and spending.

Tax Justice UK

The left-leaning campaign group says ten tax reforms would raise over £60bn a year for public services, and on 22 October asked why higher taxes on extreme wealth remain politically difficult. It offers the tax-led exit to the IEA's cuts; the £60bn is its own claim, not an official costing.

Institute of Economic Affairs

The free-market think tank's Alternative Budget of 19 October would suspend the state pension triple lock for three years, freeze welfare in cash terms and move tax onto a wider VAT. It claims the day-to-day budget returns to surplus in 2027-28, its own projection rather than an official costing.

Resolution Foundation

The living-standards think tank said welfare spending ran about £2.5bn above expectations in September, City AM reported on 21 October, and its economist Greg Thwaites urged targeted energy support. Its figure lands as a Chancellor who calls welfare cuts a moral duty finalises the 28 October Budget.

Institute for Fiscal Studies

Director Helen Miller said a steady-as-she-goes Budget is not an option, with the IFS putting 2029-30 headroom at about £20bn, The Independent reported on 12 October. The IFS puts the cost of avoiding cuts and funding higher defence at around £35bn of tax rises or benefit cuts, more than any headroom estimate in circulation.

Written with AI from Lowdown's published reporting. Not individually reviewed by an editor. Editorial standards.