Boris Johnson’s tax cut: Would it work?

Boris Johnson’s tax cut: Would it work?

Boris Johnson’s tax cut: Would it work?

Boris Johnson has proposed to raise the 40p tax from £50,000 to £80,000 in his bid to become the next Tory leader – and the accountancy industry has certainly reacted.

Johnson outlined his plan in his weekly Telegraph column. Aside from raising the income tax threshold, he also proposed cutting corporation tax and boosting the green economy.

And his proposals have raised eyebrows among accountants.

What is he proposing? A ‘half baked’ appeal to electors

“There is absolutely no coherent logic underpinning this particular proposal,” says Richard Murphy, a chartered accountant and political economist, “either economically, or in tax terms or in social terms. It’s basically an appeal to the electors in the Tory party Prime ministerial base.”

Murphy, who does not affiliate with any political party, believes Johnson would be “creating a perverse situation” where the £50,000 to £80,000 bracket are among the lowest taxed in society.

“[This band’s] tax rate has gone down by having a National Insurance cut and now Johnson is also going to cut their income tax rate,” says Murphy. “In fact, they would only pay around 20% tax on their income, whereas those earning £30,000 a year are going to be paying 32+% on their marginal tax rate. If you’re a student, you’re going to be paying another 9% on top of that,” he says.

Nigel Green, CEO of the deVere Group, which caters to the kinds of wealthy clients who would often be in the beneficiary bracket, called Johnson’s plan “half baked”.

“I’m normally in favour of reducing taxation,” said Green in a statement, “more money back in people’s pockets is always a good thing for individuals, households, businesses and the wider economy.

“Mr Johnson’s tax cut for higher earners is ill-thought-through for two key reasons. First, there would be a significant net cost for the Treasury; and second, it is unlikely to get through parliament – it’s therefore just Boris virtue signalling to his base,” he said.

Critiquing Johnson’s rationale

Righting ‘fiscal drag’

Nimesh Shah, partner at tax advisory firm Blick Rothenberg, was more open to the Tory leader candidate’s rationale of ‘fiscal drag’. Shah suggests this has merit, arguing that in 10 years the point at which someone pays 40% income tax has increased by £6,125.

“If you were to factor in wage inflation during that 10 year period,” said Shah, “it is likely that more people have been dragged into 40% tax, despite the limit increasing to £50,000 more recently. This does not take into account the clawback of child benefit, which was introduced in 2013, which further reduced a family’s net take-home pay.”

For Shah, the real question lies around whether the National Insurance threshold would align.

“Assuming it did,” Shah said, “people would pay 12% National Insurance on more of their earnings, which would mean the overall net benefit for workers would be considerably lower. Ignoring any changes to the National Insurance threshold, the benefit of increasing the higher rate threshold to £80,000 would be £6,000 per annum (or around £115 per week).  

“If the National Insurance threshold were to align, that benefit would be reduced to £2,400 per annum (or around £46 per week). This would essentially mean that those that don’t pay National Insurance (pensioners and those who live-off their investment income) would be the main beneficiaries,” said Shah.

Productivity boost

Murphy is likewise highly doubtful the tax cut would have the desired benefits: “I don’t believe it will increase the output in society or the amount of effort in society, or the amount of innovation in society – I don’t think it will pay for itself.

“The vast majority of this band are employees and employee effort is not linked to the amount of tax they pay, it’s linked to their contract. Some of them will be self-employed and I’ve never ever met anyone who has been put off working because of tax,” says Murphy.

A fair tax cut throughout the country?

The proposal also throws up questions for devolved powers, and could widen tax divides between parts of the country.

Alexander Garden, chair of the Chartered Institute of Taxation (CIOT) in Scotland commented the proposals “are likely to throw into sharp focus the growing tax divide between Scotland and the rest of the UK.”

Garden said: “Taxpayers in Scotland who pay income tax at the rates and bands decided by the Scottish Parliament for earned income would not see any of the benefits of the proposal to increase the higher rate threshold from £50,000 to £80,000, but they would be impacted by changes to National Insurance Contributions (NICs).

“That is because decisions over NICs remain reserved to Westminster, while decisions over income tax on earned income are devolved to Holyrood. Under the Johnson tax plans, some Scottish taxpayers with earned income may end up paying significantly more than their counterparts elsewhere in the UK,” he said.

A growing and greener economy

Also included in Johnson’s pledge is a greener and boosted economy with business tax cuts.

“Growth, clean and green cannot be joined together in the same sentence,” says Murphy, a keen advocate for sustainable economics. “Does it make sense to stimulate marginal consumption, when the marginal consumption is most likely to be increased numbers of air trips or other high energy consumption patterns?” he says.

What should he do?

Instead, Murphy offers an alternative solution for Johnson to better appeal to the high earning electorate, by targeting their university-going children.

“He should be trying to figure out how younger people, who are heavily penalised by the tax system and student loans, can actually save for a pension and a house deposit,” he says.

On a more general front, Murphy suggests more should be done around Universal Credit, disability allowance payments, abolishing the bedroom tax and retaining corporation tax.

Blick Rothenberg’s Shah, on the other hand, said he believes the cut should target higher bands, by removing the clawback of the personal allowance.

“This creates an effective rate of tax of 60% between £100,000 – £125,000,” he said. “This has been a facet of the UK’s personal tax system for nearly 10 years, and creates significant frustration for taxpayers as well as many considering it be totally unfair.

“Another consideration is whether the starting point for the additional rate of tax (45%) should increase beyond £150,000. This threshold has not increased since the introduction of the 50% tax rate in April 2010.”

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