Sunak’s tax policy is trying to straddle two worlds and failing on both fronts
Chancellor Rishi Sunak seems to be in the midst of an identity crisis. After taking drastic measures to put the public finances on a sustainable footing in the wake of the pandemic, by raising the tax burden, he now wants to present himself as a tax cutting Tory. The problem is, he can’t be both.
This week, the Chancellor is said to be mulling a 1p cut to the basic rate of income tax in 2023 and 2024, taking the rate from 20 per cent to 18 per cent, and scrapping the additional rate altogether. Another eye-catching proposal under consideration is cutting Inheritance tax by increasing the threshold.
Politically, the move makes sense. The Chancellor is keen to substantiate his claims that he is a low-tax Tory, and to mollify an electorate that by 2024 may well be weary of tax hikes.
As Sunak himself has said, however, actions speak louder than words. The Chancellor has recently taken the tax burden to its highest level since the 1950s.
Only three months ago the Government unveiled the new health and social care levy. The levy is effectively an increase in National Insurance contributions to pay for the backlog in NHS operations and fund social care. After waving through a major revenue-raiser – the levy is expected to raise around £12bn – it seems strange to pursue such a large tax cut so shortly after, which could reduce revenue by a similar amount.
The new thrust towards lowering income tax is also at odds with the Chancellor’s emphasis on fiscal probity, and his warning that future tax cuts should be conditional on repairing the public finances.
Moving to large tax cuts would be an understandable position if it had come off the back of strong and sustained economic growth, or if the tax rises the Government announced recently brought in more revenue than expected. But we are still in the early stages of recovery from Covid-19, with lingering uncertainty around new strains such as Omicron. And major tax rises such as the social care levy have yet to even come into force.
With these measures the Chancellor wants to be seen as fiscally responsible and a bold, radical low-tax champion.
If anything, this approach takes the tax system in the wrong direction. First, the benefits of cutting the basic rate by 2p and scrapping the additional rate would disproportionately accrue to better-off households.
Someone earning the London Living Wage would see a boost of £178, or 0.83 per cent, to their income, whereas another person earning £200,000 would see tax savings of £3,254, representing 1.63 per cent of their income. Yes, everyone benefits from the change, but the benefits certainly aren’t targeted in any coherent way.
Reducing income tax right on the heels of an effective increase to National Insurance would also worsen the design of the tax system. It would continue to shift the tax burden away from income and onto earnings from work.
Workers are seeing the tax on their take-home pay go up as a result of the levy, whereas a cut in income tax would also benefit people who receive rental income or pensions.
Cutting inheritance tax would have a similar effect.
Inheritances are already more lightly taxed than income from work. Indeed, while inheritence tax receipts are forecast to have increased by almost 150 per cent between 1995 and 2022-23, the total value of estates is set to increase by 300 per cent over the same time period. And in any case, in a given year less than 5 per cent of estates are liable to inheritence tax; most people do not receive a large enough inheritance to attract the tax. Cutting this tax may win votes, but the benefits would largely flow to already well-off estates.
Of course, there are taxes which should be cut. But the combination currently being contemplated by the Chancellor would further widen the inter- and intragenerational gaps in the tax system, with taxes on young workers increasing as the burden is eased on wealthy pensioners.
Rather, the Government should be looking at ways to rebalance the tax burden, especially to shift the burden away from work and onto other forms of economic activity – particularly wealth, which is relatively undertaxed.
The Government’s current approach to tax policy seems haphazard, driven more by political contingencies than strategy. To deliver long-lasting and meaningful tax reform, the Government must show greater consistency in its fiscal objectives, and greater vision in its approach to reform.