Thinktank Shows Johnson’s Tax Cut Plan Would Benefit the Rich

Thinktank Shows Johnson’s Tax Cut Plan Would Benefit the Rich

Boris Johnson, the 55-year-old Conservative member of Parliament, is one of two finalists, along with foreign minister Jeremy Hunt, vying for the prime ministership to replace outgoing Prime Minister Theresa May. The former foreign minister and former mayor of London is an ardent backer of Brexit and is amongst the most popular Conservative politicians. After Theresa May was forced to step aside after failing to deliver a Brexit deal, he is the presumed frontrunner to replace the Prime Minister and has commanded a huge lead throughout all the rounds of voting. Although the rest of the Conservative Party membership must now vote, the party lawmakers have also consistently backed the unabashed candidate. Johnson won 162 votes versus 77 by Hunt in the fifth and final round.

Johnson is a popular figure among the party members, making it hard for his competitor to urge them to not for Johnson and setting a potential conflict with the EU. However, his critics see him as a calculating self-aggrandizer, someone who would do or say just about anything to get ahead, and even his competitor, Hunt, called him a coward for not facing live debates over the plans for Brexit and the UK. He has also been a vocal critic of May’s Brexit deal and pledges to seek a better deal or leave the European Union without an agreement by 31 October, the latest deadline.

For his prime ministerial campaign, Boris Johnson has said that he hopes to raise the higher rate threshold (HRT) in income tax, at which earnings are taxed at 40 per cent, from GBP 50,000 to GBP 80,000 if he becomes the Prime Minister of the country. He has also pledged that the point at which earnings become liable for National Insurance contributions (NICs) would be raised, a policy also favoured by Mr Jeremy Hunt, his rival. After being criticised for his promise to cut income tax for higher earners and wealthy pensioners, Mr Johnson announced his proposal to raise the NIC threshold last week.

Britain’s foremost tax and spending thinktank, Institute for Fiscal Studies (IFS), said the proposal by the frontrunner in the Conservative leadership race was expensive, costing the exchequer GBP 9 billion and would mostly benefit the wealthiest 10 per cent of households in Britain. While the ruling party had promised to end austerity and safely manage the public finances, according to the calculations of the thinktank, the tax-cut plans would be potentially incompatible with the promise.

The Institute for Fiscal Studies reported that raising the higher rate threshold would have two effects on the tax liabilities of the population. First, rather than paying a higher tax rate (40 per cent), the beneficiaries with any taxable income between GBP 50,000 and GBP 80,000 would be subject to the basic rate of tax (20 per cent), decreasing the tax revenue of the government. Second, more National Insurance contributions would be paid by some people. This is because the higher rate threshold is aligned with the upper earnings limit (UEL), and above the upper earnings limit, earnings are subject to a 2 per cent rate of employee NICs, in contrast to a 12 per cent rate for earnings below the upper earnings limit, thus increasing the NICs rate applied to earnings between GBP 50,000 and GBP 80,000. The effective tax rate from income tax and employee NICs on earnings within that range falls from 42 per cent to 32 per cent as a result of raising the higher rate threshold (and with it the upper earnings limit) to GBP 80,000.

To give an idea of who this policy impacts, an individual with gross earnings of GBP 50,000 is 88 per cent of the way up the earnings distribution and, therefore, approximately 3.2 million people in work (including 0.4 million in self-employment) would gain from this policy, along with 0.4 million people who have significant unearned income but are not in work. With approximately three-quarters of the fall in tax liabilities favouring those in the top tenth of the income distribution, these gains mainly boost the earnings of those near the top of the income distribution. The top 30 per cent people in the income distribution would get 97 per cent of the proposed gains.

A clear age pattern of the individuals that would benefit as a result of this policy could be seen as average personal incomes vary substantially over a lifetime and between genders. With 20 per cent of men and 6 per cent of women between 35 and 54 seeing a tax cut as a result of the policy, these people are concentrated around the middle of working age and are considerably more likely to be men than women. The figures suggest that a significantly larger number would at some point in their lives gain from a higher threshold, and at least a quarter of the population would at some point in their lives live in a household which would gain.

As observed by Mr Boris Johnson, over the years, the numbers of taxpayers paying a higher tax rate have risen, with the number of higher rate taxpayers increasing by almost 170 per cent between 1990–91 and 2018–19. At the current higher rate threshold of GBP 50,000, which was increased in the financial year 2020, the Institute for Fiscal Studies reckons the number of higher rate taxpayers would be just under 4 million, as it has declined a bit in recent years as the real value of the higher rate threshold has increased. However, if the higher rate threshold were increased to GBP 80,000, the figure would reach its lowest level since the individual tax system was introduced in 1990–91 to 1.3 million, declining by about two-thirds, representing one of the biggest changes to the income tax system of the country in quite some time. While these calculations assume that the GBP 80,000 higher rate threshold is brought in this year, if the country was to reach a GBP 80,000 threshold in 2023–24, the number of higher rate taxpayers would fall to 1.6 million rather than 1.3 million.

Only income above GBP 8,632 per year is subject to NICs, according to the current rule followed by the government. The limit is the same for self-employed, employer and employee. Johnson has not specified whether he intends to raise just the employee and self-employed thresholds or the employer one too, nor how much he would like to increase this threshold by. The revenue of the government would decrease by GBP 3 billion per year, and 600,000 workers would be taken out of NICs altogether if the threshold is raised by GBP 1,000 for just the employee and self-employed. The cost goes up to GBP 4.5 billion per year if the employer one is changed as well.

Though the very lowest earning workers, who currently do not pay NICs, would be unaffected, these policies would have a larger proportional impact on the after-tax earnings of low earning workers. However, the picture is somewhat different when the effect of the policy on household incomes is examined, as the largest proportional gains go to those in the middle to upper part of the income distribution. This is because only workers benefit from this policy and the possibility that households towards the bottom of the income distribution are likely to be less, thus workers who move up the distribution are more likely to be impacted. Secondly, the policy has a smaller impact on incomes of households nearer the bottom, the benefits given by the government represent a larger share of their income, and not earnings. All unearned income (including pension income) is not subject to NICs, therefore raising the NICs threshold would have very little impact on pensioners, unlike the raising of the higher rate threshold.

The costings by the Institute for Fiscal Studies shows that the effect of immediately raising the higher rate threshold to GBP 80,000 would be decreased tax revenue of around GBP 9 billion a year. Raising NICs thresholds for everyone to GBP 12,500 would cost GBP 11 billion a year. This is when no change in contributions by the employers is assumed. According to the calculations, mainly richer households would be benefited by the proposed tax cuts and it would cost the exchequer as much as GBP 20 billion a year. However, the total distributional impact of the plan would depend upon whether the increase applies to employer NICs too, how much the NICs threshold is increased by, and the timeframe over which the policies are implemented.

The proposal has been criticised across the political spectrum a giveaway for the rich that would drive up inequality and harm the public finances, and now Tom Waters, a research economist at the thinktank, said that it might not be compatible with both ending austerity in public spending and prudent management of the public finances. Finance minister Philip Hammond has written to Johnson and Hunt, warning them against any reckless tax cuts and spending increases and urging them to respect his fiscal goals to keep the yearly budget deficit within 2 per cent of GDP. Johnson’s promises of higher spending for public services have been much more modest so far.