Boris Johnson's tax cuts plan would cost ‘billions’ and benefit wealthy most, says IFS

Posted On: 
27th September 2019

Boris Johnson’s planned tax cuts would cost billions of pounds and benefit Britain’s wealthiest the most, according to a major think tank.

Boris Johnson had pledged to raise the higher rate of income tax to those earning £80,000
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The Institute for Fiscal Studies (IFS) found that raising the higher-rate threshold in income tax from £50,000 to £80,000 would cost £8bn a year, in today's prices, even if the proposals were not fully in place until 2024.

They add that the 8% highest-income earners and 13% of income taxpayers would reap the rewards of the plan - to raise the threshold at which taxpayers pay 40% on their earnings - if it was rolled out next year.

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The now-PM's policy was unveiled during the Tory leadership contest alongside a bid to lift the threshold at which people start paying National Insurance contributions (NICs), in an effort to help low earners.

But ahead of its annual Green Budget, the IFS, working with the Nuffield Trust, claims that in total 75% of gains from the income tax plan would go to the highest-income 10% of households.

The move would take 2.5 million people out of paying the higher-rate, to fewer than 3% of adults - the lowest level since the individual income tax system began in 1990.

The IFS also found that while the PM’s plan to raise the point at which people start paying NICs is “the best way to help low earners” through the tax system, only 3% of gains would go to the poorest 20% of households.

It said that every £1,000 increase to employee and self-employed NICs thresholds would cost between £3bn to £4bn, while raising all thresholds to match the income tax personal allowance of £12,500 would cost £17bn.

A £3bn cut to employee and self-employed NICs raises incomes of this group by just 0.1% (£20 per year) on average, the think tank adds - a move that would "pale in comparison with the losses from benefit and tax credit cuts experienced by this group since 2010, which have reduced their average incomes by more than 10%."

Their report says: “A better-targeted way to help low earners would be to increase work allowances in universal credit.

“Spending £3bn on this could raise average incomes of the poorest 20% of households by 1.5% (£230 per year).

“Doing so would also tend to strengthen the incentive to be in paid work for some of the lowest paid.”

It also added that if ministers are to slash taxes for the high paid, they should boost the tax rate to 45% for those earning £80,000, which would “recoup most of the additional cost and return us to a simpler two-band (20% and 45%) income tax schedule”.

'MAJOR COMMITMENT'

Xiaowei Xu, a Research Economist at IFS and an author of the research said: "Given promised spending increases and growing demographic pressures, taxes are likely to have to rise over the next decade.

"Promising £10 billion to £20 billion of tax cuts is therefore a major commitment. If you are going to spend that much cutting taxes for those on high incomes or supporting low earners, you could find much better ways of doing so than the policies proposed by the prime minister.

"Cutting NICs to help low earners is a particularly blunt instrument – raising work allowances in universal credit would deliver far higher benefits to the lowest-paid for a fraction of the cost."

Shadow Chancellor John McDonnell MP, said of the research: "These proposals to raise NIC and income tax thresholds will rip out £10 to £20 billion a year from our already decimated public services, according to the IFS, and put those billions into the pockets of the rich."

"This Government cannot be trusted with our public services – only a Labour Government will end austerity and establish a fair tax system that serves the many, not the few."