Potential PMs jostle for tax supremacy

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As the race for the Tory party leadership gets serious candidates have turned to tax to boost their leadership credentials, engaging in a tax arms race.

AccountingWEB editor Tom Herbert outlines the pin-stickers guide to the tax policies of our potential prime ministers, and how they plan to fund them.

BJBoris Johnson

Blue-rinse bonanza: The be-mopped bookies’ favourite has stated that he’ll raise the higher income tax rate threshold from £50,000 to £80,000.

The change would cost around £10bn a year, according to Johnson, who plans to fund the bill through a national insurance rise and Philip’s Hammond’s £26.6bn ‘fiscal headroom’. During the last budget, the Chancellor stated that government borrowing had come in lower than expected, but some of this had been earmarked for no-deal Brexit planning.

However, IFS chief economist Paul Johnson (no relation) disputes the funding claim. On Twitter, the economist stated that: “Claims tax cuts are ‘funded’ by headroom against borrowing target are absurd. They are funded by higher borrowing or by lower spending. That’s it.”

Wealthy pensioners, who don't pay national insurance, stand to benefit the most from the plans: up to £6,000 each according to analysis from the Institute for Fiscal Studies (IFS). Boris Johnson has also hinted that he wants to cut stamp duty on homes, stating it is “absurdly high”.

huntJeremy Hunt

Race to the bottom: The foreign secretary has attempted to outline his pro-business credentials by announcing plans to cut corporation tax from 19% to 12.5%.

This would continue a trend that has seen the UK reduce its main rate of corporation tax from 28% in 2010 and match Ireland as having one of the lowest corporation tax rates in the world.

Hunt argues that cuts could boost revenue if more businesses relocate in Britain, and companies use the additional funds to invest, employ more staff or increase workers’ wages. However, despite the UK’s falling corporation tax rate business investment still lags behind other developed economies and fell in every quarter of 2018.

Corporation tax cuts can also be expensive: Hunt’s proposal could cost Britain as much as £13bn, according to the Resolution Foundation.

GoveMichael Gove

Simple sales tax: Away from his recreational activities, the environment secretary has been making headlines for his proposal to scrap VAT and replace it with a “lower, simpler, sales tax”. While eagle-eye AccountingWEB readers may have spotted a way out of Making Tax Digital for VAT, the wider implications of Gove’s plans have also come gone under the microscope.

While no specific details have emerged about Gove’s sales tax, in broad terms the difference between VAT and a sales tax is the fact that a sales tax only applies when an item is finally sold to a consumer. Under VAT, businesses have to pay the tax when they sell goods to one another and then claim the tax back on purchases.

While Gove claims a system of sales tax results in less administration and greater productivity, experts have pointed out that businesses may claim to be selling products to other businesses (rather than consumers) in order to evade the new tax.

The IFS claims evasion fears have led to every country in the Organisation of Economic Co-operation and Development (OECD), apart from the United States, move away from a sales tax and towards VAT.

raabDominic Raab

Cutting crew: The former Brexit secretary plans to cut the basic rate of income tax from 20% to 15% and raise the point that people start to pay national insurance so it is the same as income tax (ie £12,501 a year).

Under Raab's plans, the basic rate of tax would fall by a penny a year until it reaches 15p. This would prove expensive: the IFS states that it costs about £5bn for every 1p cut in the rate of income tax, and Raab’s national insurance plans could eventually cost £10bn.

Like Boris Johnson, Raab intends to fund his giveaways via the government's £26.6bn "fiscal headroom". Therefore, he will need to find other means of funding his tax cuts to keep them sustainable in the long term.

javidSajid Javid

Low-tax kinda guy: The home secretary wants to wipe out the 45% additional-rate tax band on incomes above £150,000.  This move, Javid argued in an interview with the Telegraph, would improve the “dynamism” of the economy and generate billions of extra revenue for public services.

However, his opponents argue that implementing a policy that would benefit the top 2% of taxpayers would hand Jeremy Corbyn the keys to Downing Street.

Javid has also signalled an openness to cut the basic rate, calling himself a “low-tax person”.

HancockMatt Hancock

Gambling on the small business vote: The health secretary has vowed to ‘level the playing field’ for small businesses by scrapping business rates for small retailers and hitting Amazon and other big firms with a new digital services tax.

The former Bank of England economist has also announced plans to raise the national living wage to £10.21 by 2022 and to implement a tax on gambling firms’ profits.

According to Hancock, his policies will be funded by Philip Hammond’s £10bn Brexit buffer.

stewartRory Stewart

Policies gone walkabout: While the international development secretary has gained notoriety for his Twitter walkabouts, unusual career path and opiate consumption, Stewart has also garnered the approval of tax mavens for stating that he would draw on principles set out in the Mirrlees Review.

While he is yet to spell out any specific measures, writing in the Financial Times last week Stewart stated that he would mandate the Treasury to present a plan for the simplification and modernisation of the UK tax system by 2022-23.

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have a story that might interest us or wish to comment on the site's coverage get in touch via the site's private message function or Twitter DM (@AWebTom)

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14th Jun 2019 10:09

Love the idea of funding their cuts with the "Brexit Buffer", as though Brexit is now solved and won't actually cost anything further.

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14th Jun 2019 10:40

They can promise what they want, but they won't be able to get any radical tax changes through Parliament!!

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By NeilW
14th Jun 2019 10:59

"However, IFS chief economist Paul Johnson (no relation) disputes the funding claim. "

Quite why people listen to this person I don't know, when basic GCSE maths shows he doesn't know what he is talking about.

My spending is your income. Your spending is my income. All less tax.

That money bounces around the economy like a stone skipping across a pond until it all disappears in tax.

Once you do the geometric progression you find that for any given amount of government spending, you will get back exactly the same amount in tax for any positive tax rate. To the penny.

The only thing that stops that is people deciding to save, not spend. Hence what they call a 'deficit', which just ends up as a deposit at the Bank of England, which HM Treasury owns anyway.

Therefore a reduction in tax rates might move the distribution about a bit, but the total amount stays the same for any given level of net private saving. All that changes is the number of transactions in the sequence to get there.

It all goes around in a circle. And they don't use Sterling anywhere else.

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to NeilW
14th Jun 2019 15:48

But money is created out of thin air effectively by all borrowing including of course government borrowing (and it is destroyed by loan repayments and taxes reduce government borrowing and give fiat money its value in the 1st place), so there is no such zero sum game in practice if you factor in the entire supply of money.

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to NeilW
17th Jun 2019 14:42

You need basic GCSE Economics, I think.

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14th Jun 2019 10:59

One thing they could do is phase the loss of the personal allowance between £100K earnings and £150K instead of the current £125K. Between £100K and £125K the effective tax rate is 60% and with payments on account they double the cash outlay the first year anyone hits this mark. This makes the payment 120% of the earnings and is grossly unfair. This acts as a barrier to growth in tax receipts. Clients with cash balances in their limited companies would convert these into dividends if the payment wasn't so penal. By phasing the withdrawal of the personal allowance over a larger range, this barrier would be removed. I have no doubt that the overall tax take would increase.

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to raybackler
14th Jun 2019 11:20

I know when I think of the people most unfairly treated by the tax system it's those earning £125,000 a year who I can't help but pity.

You could solve the marginal rate issue you identify by dropping the point at which the clawback starts to £50,000 and having it happen at £1 for every £4 until income hits £100,000.

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to raybackler
17th Jun 2019 10:28

@Ray, to extend your idea, if you just taxed 50% over £100k, and kept the PA, it would be "jobs a good 'un" all round.

Much simpler, but of extra revenue from top earners which in turn just slightly deflates prices for very large houses.

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By RogerMT
14th Jun 2019 11:32

Boris with his tax cuts for those who don't need it is simply appealing to his current electorate, assuming he gets in the top two. Tory party membership mostly being over 60, white, and comfortably off. Just you watch when he goes for a GE, this selfish pledge will be brushed under the carpet. I wouldn't trust Boris to tell me the time. If he becomes PM, God (other deities are available) help us all.
Rory Stewart is the only one not apparently intent on seeing how fast they can drive off the Brexit cliff edge. The stupidity and short-termism continues. Whoever wins, it's yet another Tory PM with no mandate, and there should be a GE asap.

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14th Jun 2019 12:01

Huh!

They are politicians, "On the Stump"; and will make wild promises.

Anyone, let alone professionals who actually believe them, urgently needs to see a good analyst!

The core is simple: obscene Government profligacy, from central, through regional, to county and local.

Tax Strategies, have been used for over 100 years as political expediency, to plaster over a crack. There has never ever been any serious economic analysis on a Cause and Effects Basis. Which is precisely why tax codes have become so unwieldy and arcane. All new administrations tinker around the edges to meet some party political edge.

Anyone remember the Yacht Sinker Heath the serial liar?

VAT: "One simple tax at one small rate!" as a replacement for Purchase Tax. Which was abject nonsense, since PT only applied to new items and mainly expensive artifacts.

Whereas VAT now applies to nearly EVERYTHING, even a person's labour!

Methink politician him speak with forked tongue!

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