Tory Members of Parliament failed to oust
last week, but they sure put a fright into the Prime Minister with a close no-confidence vote. A good sign is that Mr. Johnson says he now wants to focus on the economy, and tax cuts are back on the agenda.
Tax policy has been one of Mr. Johnson’s biggest blunders. His signature error has been a 2.5 percentage point increase in the payroll tax to fund the National Health Service, which took effect in April as household energy bills rose 54%. Last month Mr. Johnson adopted a Labour Party proposal for a windfall-profits tax on energy companies.
had already announced an increase in the corporate-profits tax rate to 25% from 19% over several years. Mr. Sunak has also imposed a five-year freeze on the thresholds for personal income-tax brackets, baking in a hefty tax increase as inflation pushes nominal earnings into higher brackets.
All of these will increase government revenue by 2% of GDP. That’s as much as former Labour Prime Minister
raised taxes over his entire 10-year term, according to the Institute for Fiscal Studies, a think tank. Britain’s tax burden as measured by revenue as a proportion of GDP is on track to be the highest in 50 years by mid-decade. Mr. Johnson on Thursday allowed this is too high but is waiting to tell voters what if anything he’ll do about it.
All of this is wrecking Mr. Johnson’s political fortunes. Tories worry they’ve lost their reputation as tax cutters, a central part of their sales pitch to voters. And all these taxes are damaging the economy. The government is struggling to spur business investment that would rev productivity and raise real wages. Consumer confidence is flagging as taxes eat into budgets ravaged by inflation.
If tax reform is finally back on the agenda, the question is how to do it. The Tory preference has been for targeted, short-term tax relief that doesn’t change incentives to work or invest. That includes handouts for energy bills, a one-off rebate on local property taxes, and a temporary “super deduction” that lets companies deduct 130% of a capital investment from taxes but only for two years.
Britain needs a tax reform that is pro-growth and reaches most voters. Canceling the corporate-rate increase would be a good start, along with a permanent new expensing provision for business investment. The so-called business rate—a tax on premises that punishes investments to improve facilities—also cries out for an overhaul.
On the personal side, Mr. Sunak can reverse the inflation tax by indexing brackets. The payroll-tax increase deserves to get the chop. And there’s scope for deeper reforms. Pension savings above the tax-free lifetime allowance of £1,073,100 can now incur a punitive tax rate of up to 55%, especially if a retiree still has a large balance at age 75. This encourages older workers to retire earlier and draw down pensions rather than work longer and continue to save and invest—which may also be contributing to Britain’s labor shortage.
The Tory economic policy fiasco is worth marking beyond Britain because other conservatives around the world have made similar mistakes. Some Republicans in the U.S. have fallen for tax credits and other gimmicks that poll well but do nothing for growth and that voters soon forget. Remember when
child tax credit expansion was supposed to be an economic and political winner?
Mr. Johnson’s targeted tax handouts have done nothing to offset his larger permanent tax increases that have been a spectacular loser for Britain’s economy and the Tories. Parties of the right that ignore the supply side of the economy end up as losers.
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Appeared in the June 13, 2022, print edition.