Boris Johnson’s tax “bonanza”: Would it work?9 Jun 2022
With the race for the No. 10 hot seat well and truly underway, the past few days have seen those contesting the role of Prime Minister outline their tax intentions should they become the country’s next political leader.
As one of the final five in the running to be Tory leader, former Mayor of London, Boris Johnson, has outlined something of a tax bonanza that would see the higher rate tax (40%) cut-off increase to £80,000 from the existing £50,000 - introducing a significant chunk of UK taxpayers to the standard rate of tax (20%).
In addition to Johnson’s broadening of the standard rate, he has also proposed cutting corporation tax and dedicating resources to a greener economy.
However, the fundamentals of Johnson’s tax plan have raised a few logical concerns among accountants and tax experts in Britain. To explore some of the questionable logic behind the leading PM candidate’s plan, we open the floor to Keir Wright-Whyte, Managing Director of our London accountants.
What’s the plan?
In simple terms, Johnson has proposed raising the higher income tax rate threshold from £50,000 to £80,000.
The first issue with that is cost.
According to the man himself, that change alone would cost £10bn per year. But, as with any economic policy, where one party gains another party must lose - so, how will they cover the cost?
Well, the big intentions are to combine a rise in National Insurance with Philip Hammond’s £26.6bn “fiscal headroom”, a surplus noted by the Chancellor when he said government borrowing had come in lower than expected, but some of this had been earmarked for no-deal Brexit planning.
Unfortunately for Johnson, historically, tax cuts have not been funded by headroom created by lower borrowing. Simply, they are funded by higher borrowing or lower spending, so the bookies’ favourite for No. 10 is wide of the mark on that point.
Lack of logic
One of the most significant issues with Johnson’s proposed changes is that they lack logic, both in economic or social terms, and as a result the proposal appears primarily as an appeal to electors in the Tory party Prime ministerial base.
We’re not picking political sides here, just looking at the situation from a broader perspective. From where we’re standing, Johnson’s proposal will make those in the £50,000 to £80,000 bracket among the lowest taxed in society.
Just look at the numbers for yourself.
That same band has already seen their taxes decrease thanks to a cut to National Insurance, and now Johnson wants to cut their income tax, too.
In fact, those in the £50,000 to £80,000 sweet spot would be paying roughly 20% tax on their income when all is said and done, while someone earning £30,000 would be paying more like 32%.
If you’re a student you can lump another 9% on top of that again.
It doesn’t make for pretty reading and there are two damning reasons why Johnson’s plans should be put to bed as a result.
Firstly, because a tax cut of that proportion with no underpinning logic would be a huge cost to the Treasury, and secondly, because it most likely won’t get through parliament, which further highlights that this is just Johnson signalling to his supporter base.
Assessing Johnson’s economic rationale
There are arguments to be made in favour of Johnson’s proposal, of course. But the success of these arguments depend on a few other variables which we’ll explain further down this section.
In terms of arguments for the tax cut, however, one such point of debate is Johnson’s intention to prevent fiscal drag - in other words, to try and reduce the amount of income tax paid despite an increase in salaries.
The reality could well be that if we were to fast forward 10 years, with inflation and a rise in salaries, it is highly likely that a much greater number of people will be dragged into the higher bracket of 40%, regardless of the fact that the cut-off for this bracket was recently raised to £50,000.
Here’s where the previously mentioned variable comes into play - would National Insurance align with income tax brackets?
Assuming it did, people would pay 12% National Insurance on more of their earnings, which would mean the overall net benefit for workers would be considerably lower.
However, 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.
Impact on productivity
You can see how, based on National Insurance, there’s a fine margin between being positive and sceptical about Johnson’s proposal.
The same scepticism could be applied to how a tax cut for the bracket in question would affect productivity.
It’s difficult to see how society’s output or innovation will pay for itself when the vast majority of this band are employees of companies and therefore their effort is not linked to the amount of tax they pay but rather the contract they have signed with their employer.
With a divide already created by a Brexit-majority England and a Remain-majority Scotland, now is not the time for a new leader to widen that gap - but that is potentially what Johnson’s proposal could do.
When devolved powers are considered, you can start to see how a tax cut like this one would throw the growing tax divide between the likes of Scotland and England into sharp focus.
What divide, you say?
Well, while 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, they would be impacted by changes to National Insurance Contributions.
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.
What are the alternatives?
Johnson could certainly target the higher-earning electorate with a new tax plan, but rather than going directly for them it would be best to put something in place for their university-attending children instead.
As mentioned earlier in the piece, students would be one of the most heavily-taxed demographics if Johnson’s plan was to go through. But maybe a more fruitful endeavour would be to figure out how young people, laden with tax and student loans, can afford to save for a pension and, if they wanted to, a house deposit.
With Johnson looking set to sweep his colleagues aside and claim the Prime Minister throne, it’s more than likely a matter of time until we learn the fate of the tax system and see how his proposed plan plays out in Parliament.