Boris Johnson’s tax bombshell: is it a radical reform or a cynical bribe?
12th March 1985: Chancellor of the Exchequer, Nigel Lawson at his desk with red budget box. Ray Moreton/Keystone/Getty Images
It is striking that taxation, rather than Brexit, has immediately become the main bone of contention among the Tory leadership candidates. Boris Johnson’s proposal to raise the threshold for higher rate income tax from £50,000 to £80,000, while the threshold for reduced rate National Insurance contributions also would rise to £80,000, has been denounced by several of his rivals. This is likely to be the pattern of the contest: Johnson sets the agenda, while the others snipe at him in the hope that he will self-destruct.
Has the Boris tax bombshell blown up in his face? It is certainly easy to portray as a giveaway to the rich. The Left-leaning Resolution Foundation claims that only one in seven people earns enough to benefit, and the main beneficiaries would be wealthy pensioners. It is no coincidence that many of the 160,000 members of the Conservative Party, who will choose the next leader, fall into this category. Seen from that perspective, this plan looks more like a Boris bribe than anything else.
Yet Tories should hesitate before condemning the impulses behind the proposal. The Conservatives are nothing if not the party of low taxes. Many people, and not only Tories, look back with nostalgia to the days of Nigel Lawson’s tax-cutting budgets in the 1980s. Having inherited tax rates from Labour of up to 98 per cent on “unearned income”, the Thatcher government wasted no time in reforming the fiscal system to incentivise business and reward individual aspiration. Sir Geoffrey Howe stabilised inflation by controlling the money supply, while seeking to balance the budget by cutting spending.
Then, in 1983, Nigel Lawson became Chancellor. During his six-year tenure, Lord Lawson (at 87 still very much with us) reduced both the basic and the higher rates of income tax: from 30 per cent to 25 per cent and from 60 per cent to 40 per cent respectively. He also abolished four other higher rates and deregulated the City of London (“Big Bang”), while large parts of the public sector were privatised. The economic growth that was unleashed by these and other reforms transformed a budget deficit into a surplus, demonstrating that lower tax rates can sometimes pay for themselves, not least by removing the distortions caused by tax avoidance. It is true that “supply-side economics” can sometimes overheat the economy. Economists still argue about the causes of the “Lawson boom” of the late 1980s, but it was not an inevitable consequence of tax cuts.
What are the lessons of the 1980s for today? To be seen to be fair, Boris Johnson’s proposed cut in higher rate thresholds would have to be balanced by cuts in thresholds for the basic rate. The impact of the reform on Scotland, where income tax is devolved but National Insurance is not, would need to be more carefully considered. But the idea of restoring the Tories’ reputation as a party of radical economic reform — a reputation which has been forfeited since the Thatcher era — is not a bad one.
If the Johnsonian instinct to go for growth in the post-Brexit era is right, the opportunities created by leaving the EU also need to be seized. Michael Gove’s plan to replace VAT with a simpler US-style sales tax is certainly worth considering. VAT weighs heavily on the poor and the self-employed; it is also applied in ways that discourage growth.
It is no bad thing that the Conservatives are having a public debate about how they will deliver the prosperity they all promise. The next election will present the nation with a starker choice than any since 1979: between Jeremy Corbyn’s unreconstructed socialism and the winner of the Tory leadership contest. The next Prime Minister needs to abide by the principles of fiscal rectitude, while raising the living standards of the least fortunate and finding bold new ways of allowing those who create wealth to enjoy the fruits of their hard work. No one has expressed these principles better than W.E. Gladstone, the great Liberal Prime Minister and Chancellor: “Money should fructify in the pockets of the people.”
