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Self’s assessment: Politicians’ tax promises

In our continuing series, Heather Self examines some of the tax issues that make the national headlines. This week, tax promises from politicians.

It was in 1992 that I was invited to be in the audience for a Channel 4 ‘Election special’ programme. Being a diligent tax adviser, I obtained copies of all three party manifestos, and duly posed my question to the Liberal Democrat MP David Alton: ‘It says in your manifesto that you are going to reform corporation tax. How do you intend to do that?’

It soon became clear that I had read his manifesto more carefully than he had. ‘We will simplify corporation tax’, he said. ‘Yes, but how?’ I responded, in my best Jeremy Paxman-like voice. Later, as the audience and politicians left the room, the Labour MP Jack Straw muttered to me ‘I’m glad you didn’t ask me a question’.

We should all ask politicians questions about their tax promises, particularly when they appear to have found a magic money tree. Both Boris Johnson and Jeremy Hunt have made extravagant promises, without any hint of how they might pay for them. Johnson’s main proposals are to increase the higher rate threshold for income tax from £50,000 to £80,000 and to raise the point at which NICs start to be paid.

If either candidate truly wants to help the poorest in society, they should take a look at tax credits

Raising the higher rate threshold would compensate for the fiscal drag which has occurred over the last few years, as the threshold has increased by less than inflation so more people have become liable to the 40% rate. However, this change would cost some £9bn a year and the benefits would disproportionately benefit the highest earners – someone on £50,000 is not a ‘middle income’ taxpayer, but close to the top 10% of the population. The cost would be less if NIC thresholds are increased to match, but this would not affect wealthy pensioners, at least some of whom will be among the narrow electorate for the Conservative party leadership. And someone on £80,000 – coincidentally around the level of an MP’s salary – would benefit by around £120 per week (again before any NIC changes).

Both Johnson and Hunt want to increase the point at which earnings attract NIC contributions, which in principle is a good way to help low earners. However, it is expensive, at a cost of around £3bn for each £1,000 by which the threshold is raised – or a cost of £11.5bn to raise it to the personal allowance level of £12,500. If either candidate truly wants to help the poorest in society, they should take a look at tax credits, and particularly some of the anomalies and complexities which face those transitioning onto universal credit. For example, the Low Incomes Tax Reform group calculated last year that those on universal credit face an effective tax rate of 63%, as their earnings increase over £409 per week and benefits are withdrawn.

Hunt wants to reduce corporation tax to 12.5%, which the IFS has calculated would cost around £13bn per year in the short run, although probably less in the long run. Although in theory lower tax rates attract more investment, the IFS states very clearly that ‘this is not a tax cut that would pay for itself’. Hunt approvingly cites the example of Ireland – which did indeed succeed in increasing investment with its low tax rate – but fails to mention studies by the LSE and PwC, among others, which calculate that Brexit will reduce foreign investment into the UK by around 20%.

Houses-of-Parliament-sculpture

Other measures suggested include the ‘reform of stamp duty’ by Johnson – to take properties under £500,000 out of SDLT altogether, and to remove the higher rate of 12% on properties over £1.5m which was introduced by George Osborne. Again, this seems to be mainly a measure designed to appeal to Tory voters, particularly those in the South East where the vast majority of the highest value properties are located. Meanwhile, Hunt suggests reducing the interest rate on student loans, which the IFS calculates would cost around £1bn in the long term – and mainly benefit the highest-earning 30% of graduates.

Thankfully, neither candidate appears keen to adopt Michael Gove’s suggestion of replacing VAT with a ‘fairer, simpler’ sales tax. He appears to be unaware (perhaps because he doesn’t like listening to experts) that some 160 countries in the world have VAT, vastly more than those who have a sales tax. Leaving aside the huge – and largely pointless – upheaval which would be caused by transitioning from one to the other, remember that VAT raises over £180bn a year or around 30% of total tax receipts, so any such significant change would put a large part of the tax take at risk. Moreover, repeated studies have shown that VAT, which is charged incrementally at each point in the value chain, is much less vulnerable to fraud than a sales tax levied only at the end point in the process.

It is worth remembering that the candidates’ tax promises are not yet part of their party’s manifesto, and indeed may not see the cold light of day once the Treasury has explained some of the realities of fiscal arithmetic – both Johnson and Hunt are promising tax reductions several times greater than has been seen in recent years, with no hint of how these are to be paid for. Perhaps we would all do well to remember George H.W. Bush’s famous pledge – ‘Watch my lips, no new taxes’ – and the tax rises that followed.

First published in Tax Journal on 4 July 2019.