Boris’ Tax Cut – It’s Eyecatching But The Wrong One

Boris Johnson is suggesting that he should mark his ascension to the throne by having a large and lovely tax cut. Yes, good idea, why not? However, he’s rather aiming his fiscal power at the wrong part of the income distribution. We do indeed want lower marginal tax rates because of that Laffer Curve stuff. And yes, it is a bit steep that the middle classes hand over 50% and more – when including NI – of their marginal income to the diversity advisers.

But, you know, resources are limited, there’s a better way to use this financing room:

Boris Johnson has promised to cut taxes for around 3 million higher earners by raising the 40p threshold from £50,000 to £80,000 if he becomes prime minister, in a move condemned by senior Labour figures. The Tory leadership hopeful used the Telegraph to make the case for the cut, saying, “We should be raising thresholds of income tax – so that we help the huge numbers that have been captured in the higher rate by fiscal drag.” The move would cost around £9.6bn a year, which would be paid for partly from savings in Brexit no-deal preparations, he said.

Fiscal drag is a real thing and yes, we do need revolutions every few decades to return to that previous state of play. But even so that higher rate isn’t the correct target.

It’s the personal allowance that should be raised. For who is it that faces the largest marginal rates in the system? That would be those on the margins of the tax and benefits systems. Whose income is just rising so that their incomes enter the tax system itself, while also beginning their exit from the benefits one. Such marginal rates are currently sometimes over 100%, millions are on over 60%. This is a certain disincentive to getting off arse and going to work. Even Universal Credit is only hoping to reduce this taper to 60% or so.

A better way therefore of spending such fiscal room is to raise that personal allowance. An old rule of thumb which may or may not be valid now is that a £1,000 rise in the personal allowance “costs” the Treasury £3 billion. So, for this cash Boris could raise that allowance £3,000 and a bit. To, say, £16,000. This would aid everyone and would significantly address the biggest problem of the current system. The excessively high marginal rates for the poor.

Oh, and it would make the Living Wage people shut up as the post tax minimum wage would now be that post tax living one.

Myself I’d argue that this is also where we should keep funnelling any available fiscal headroom. Until the personal allowance is the same as the median wage, about £22,000 a year. After all, why not have a properly progressive income tax system? One where only those better off than average pay income tax at all?

There’s even a political gloss to this. No one ever would be able to reduce that personal allowance in nominal terms – and it would take a few decades for fiscal drag to lower it again.

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Reader

So, Boris has a plan to win the leadership competition by pleasing the membership; then lose the next election having annoyed everyone else. But he might have just scuppered his chances of reaching the final two, since his Westminster colleagues do care about the next election.

Q46
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Q46

‘For who is it that faces the largest marginal rates in the system? That would be those on the margins of the tax and benefits systems. ’

For who is it that most likely votes Tory? Not those on the margins but those higher earners.

Politicians run (or ruin) the economy for political motives, not economic ones. I thought you knew this.

Reader
Guest
Reader

“For who is it that most likely votes Tory? Not those on the margins but those higher earners.”
Well, it’s the marginal voters that need to be wooed. Not the ones that just recently got a £5000 boost to their higher rate tax threshold and would vote Conservative anyway in case Corbyn takes it back.

Chester Draws
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Chester Draws

For who is it that most likely votes Tory? Not those on the margins but those higher earners.

That is increasingly no longer the case.

The rich vote Left, on the whole. The very poor vote Left, on the whole.

In most of the Western world, it is working people with moderate incomes who make the vast bulk of the vote for the Right.

Leo Savantt
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Leo Savantt

Being probably the only person on the planet who favours a flat rate income tax and no personal allowance whatsoever (treat all equally and we’ll all be more equal is the argument), I find it hard to get excited about Mr. Johnson’s proposal. That aside it doesn’t seem like a vote winner, and that especially with the rise of The Brexit Party, is surely what the Tories need, to win votes.

MrVeryAngry
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MrVeryAngry

10% rate would do nicely. Tithes work for me.

tamimisledus
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tamimisledus

No, you aren’t.
I also favour a flat rate of income tax.

But then I advocate a flat rate of income tax of zero.

PJHH
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PJHH

“This would aid everyone…”

Except those who are earning below the current TFA, who would be screaming that they won’t see any benefit from the rise…

tamimisledus
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tamimisledus

…. including those not earning anything at all ….

PJHH
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PJHH

Arguably, anyone sponging off the state as a life/career choice is, indeed, ‘earning’ below the current TFA.

But point taken – especially those not earning anything at all.

Andrew Carey
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Andrew Carey

Confession time: I’m an entryist member of the Conservative Party. I’m majorly interested in politics, and for just over £2/month I get to be one of 150k people deciding who gets to be PM once every 10 years or so ( roughly ). Bang for my politically interested buck, this is better value than being one of 30 million or so people voting every 5 years or so in national general elections, which carry a cost of a few quid anyway in time expended and the cost of the show to the nation in giving you a choice. So let’s… Read more »

Matt
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Matt

“Oh, and it would make the Living Wage people shut up”

Nothing will do that.

tamimisledus
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tamimisledus

Why not have a system in which nobody has to pay income tax?
That would make a much better system all round.

tamimisledus
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tamimisledus

Have you read the whole of Boris’ proposals for taxation?