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Tory leadership contest: Do tax plans add up? Tory leadership contest: Do tax plans add up?
(14 days later)
In the race to succeed Theresa May as prime minister, Conservative leadership contenders are setting out how they want to run the UK. In the race to succeed Theresa May as leader of the Conservative party and prime minister, Boris Johnson and Jeremy Hunt are setting out how they want to run the UK.
But what are some of the candidates saying about tax and spending, and do their sums add up? They have both announced taxation and spending plans. So, what are the details and do their sums add up?
Boris JohnsonBoris Johnson
The plan: To raise the higher income tax rate from £50,000 to £80,000. The plan: Raise the higher income tax rate from £50,000 to £80,000.
What it means: At the moment, individuals have to pay 40% income tax on any earnings above £50,000. So, a person earning £55,000 a year, pays 40% on £5,000.What it means: At the moment, individuals have to pay 40% income tax on any earnings above £50,000. So, a person earning £55,000 a year, pays 40% on £5,000.
Under Mr Johnson's plan, the point at which the 40% higher rate kicks in would be raised to £80,000. This would not affect Scottish workers because the Scottish government sets its own income tax rates and bands.Under Mr Johnson's plan, the point at which the 40% higher rate kicks in would be raised to £80,000. This would not affect Scottish workers because the Scottish government sets its own income tax rates and bands.
Mr Johnson also wants to raise national insurance - to absorb some of the cost. Mr Johnson also wants to raise the point at which people start paying National Insurance, absorbing some of the cost by also raising the ceiling for NI.
National insurance is a separate tax. It's only paid for by workers and companies and it is meant to fund state benefits, such as the NHS. National Insurance is a separate tax. It's paid for by workers and companies and it is meant to fund state benefits, such as the NHS.
Under this new tax regime, someone earning £60,000 a year could benefit by £1,000 a year; while someone on £80,000 or more would gain a maximum of £3,000 (because some of the benefits would be lost due to national insurance increases). Under this new tax regime, someone earning £60,000 a year could benefit by £1,000 a year, while someone on £80,000 or more would gain a maximum of £3,000 (because some of the benefits would be lost due to national insurance increases).
But it's wealthy pensioners who stand to benefit the most, up to £6,000 each according to analysis from the Institute for Fiscal Studies (IFS). That's because pensioners don't pay national insurance to begin with. But it's wealthy pensioners who stand to benefit the most - up to £6,000 each, according to analysis from the Institute for Fiscal Studies (IFS). That's because pensioners don't pay national insurance to begin with.
So if someone already receives a generous work pension, not only will they be subject to less income tax (up to the new threshold), they also won't be affected by the national insurance rise.So if someone already receives a generous work pension, not only will they be subject to less income tax (up to the new threshold), they also won't be affected by the national insurance rise.
Changing the tax system in this way would cost around £10bn a year, according to Mr Johnson. He says the bill could be funded from the £26.6bn of "fiscal headroom". The cost: Changing the tax system in this way would cost around £10bn a year, according to Mr Johnson. He says the bill could be funded from the £26.6bn of "fiscal headroom".
This "headroom" refers to government borrowing, which came in lower than originally expected and had been ear-marked by the chancellor for no-deal Brexit planning This "headroom" refers to government borrowing, which came in lower than originally expected and had been ear-marked by the chancellor for no-deal Brexit planning.
However, if Mr Johnson chooses to fund his tax changes with this lower borrowing, it would not amount to a permanent solution. That's because the money can only be spent once. However, if Mr Johnson chooses to fund his tax changes with this £26.6bn, it would not amount to a permanent solution. That's because the money can only be spent once.
So, to pay for the policy in the long-term, Mr Johnson will need to raise taxes elsewhere, announce spending cuts or continue to fund it from government borrowing. So, to pay for the policy in the long term, Mr Johnson will need to raise taxes elsewhere, announce spending cuts or continue to fund it from government borrowing.
Michael Gove The plan: Raise public sector pay and increase school funding
The plan: Scrap VAT and replace it with a sales tax. What it means: A leading supporter of Mr Johnson, Health Secretary Matt Hancock, told the Times that the days of public sector pay freezes under Theresa May and David Cameron would be over if Mr Johnson was elected.
What it means: VAT, or Value Added Tax, is the tax customers pay on most goods and services. The standard rate is currently 20%. Public sector pay was frozen for two years in 2010, except for those earning less than £21,000 a year, and rises were capped at 1% in 2013. The government announced an end to the pay cap in 2017, and some public sector workers have negotiated increases above 1% since then.
Under Mr Gove's plans, VAT would be replaced "with a lower, simpler, sales tax". The candidate himself has declined to specify by how much he would increase pay, saying only that remuneration should be "decent".
The difference between VAT and a sales tax is essentially administrative. With a sales tax, the 20% would only apply when an item is finally sold to a consumer. He has also pledged to fund increased investment in special needs education, as part of a £4.6bn boost to overall school funding.
With VAT, businesses still have to pay it when they sell goods to one another, and then claim the money back. In theory, under this new system, businesses would have less administration, which could help them become more productive. The cost: We don't know by how much Mr Johnson wants to increase public sector pay, but the IFS says that each 1% increase in pay for the public sector workforce costs the government about £1.8bn a year.
The problem, however, is that businesses could be given an incentive to claim they were selling products to other businesses (rather than consumers) in order to evade the new sales tax.
The IFS says this fear over evasion has driven every country in the Organisation of Economic Co-operation and Development (OECD) - apart from the United States - to move away from a sales tax and towards VAT.
In the UK, VAT raises £140bn a year - so reforming such a big revenue-raiser could be risky if it doesn't go smoothly.
Jeremy HuntJeremy Hunt
The plan: To cut corporation tax to 12.5% The plan: Cut corporation tax to 12.5%
What it means: From April 2020, instead of paying 17% tax on their profits, companies would pay 12.5%.What it means: From April 2020, instead of paying 17% tax on their profits, companies would pay 12.5%.
The foreign secretary is in favour of cutting the rate of corporation tax, which is the tax that companies pay on their profits, to 12.5%, which is the same rate as they have in the Republic of Ireland. The foreign secretary is in favour of cutting the rate of corporation tax - the tax that companies pay on their profits - to 12.5%, which is the same rate as in the Republic of Ireland.
The government is already planning a series of cuts to corporation tax, which was cut from 20% to 19% on 1 April 2017, and is scheduled to fall to 17% next year.The government is already planning a series of cuts to corporation tax, which was cut from 20% to 19% on 1 April 2017, and is scheduled to fall to 17% next year.
The suggestion to cut it by another 4.5 percentage points came in a report by another Conservative MP at the end of May. The report was welcomed by five of the leadership candidates. Mr Hunt has specifically referred to the corporation tax cut in interviews. The idea of cutting it by another 4.5 percentage points came in a report by another Conservative MP at the end of May.
The government estimates the policy would cost about £14bn a year. That cost would be reduced if future tax takes were to be boosted by companies being attracted to move to the UK to take advantage of the lower tax rate, or if companies use the money saved to pay higher wages or invest it in improving their productivity. The cost: The government estimates the policy would cost about £14bn a year. That cost would be reduced if future tax takes were to be boosted by companies being attracted to move to the UK to take advantage of the lower tax rate, or if companies use the money saved to pay higher wages or invest it in improving their productivity.
How much that would reduce the cost is very hard to predict.How much that would reduce the cost is very hard to predict.
The plan: Take 90% of businesses out of business rates
What it means: Business rates are a local tax paid on the use of buildings for non-domestic purposes.
The cost: We haven't seen any formal costings of this policy, but in the 2018 Budget, Philip Hammond decided to give a one-third discount on business rates to high street retail businesses with a rateable value below £51,000 in 2019-20 and 2020-21. The Treasury said that would benefit 90% of high street retail businesses.
The Office for Budget Responsibility said the discount would cost £490m this year and £450m next year.
It means we can estimate that a 100% cut for those businesses would cost an extra £900m next year and about £1.35bn a year after that.
Business rates are currently collected by local authorities, which retain half of the money. Central government is reimbursing them for the one-third cut and would presumably also reimburse them for the 100% cut.
The plan: Increase annual investment allowance to £5m
What it means: If you are running a business and you buy equipment such as computers or machinery, you can deduct the amount you spend on it from your profits to reduce the amount of tax you have to pay.
There is a limit to the amount you can deduct, which is called the annual investment allowance. At the start of this year it was raised from £200,000 to £1m for two years.
The cost: We do not have a costing for this measure either, but to get an idea of the amounts of money involved, the OBR said the temporary increase to £1m would cost £600m this year.
The plan: Money for fishing, farming and defence
What it means: Jeremy Hunt would increase spending on defence from its current level of 2% of Gross Domestic Product (GDP - the sum of everything the UK produces each year) to 2.5% of GDP by 2023-4.
He has also said he would have a "relief programme" for the fishing and farming sectors to help them deal with the effects of a possible no-deal Brexit.
The cost: The boost to defence spending would cost £15bn a year by 2023-4. The relief for fishing and farming would cost £6bn. Mr Hunt says his overall plans would "kick-start the economy and create extra growth", which would mean the government had extra money to spend.
But the disruption involved in leaving the EU with no deal is widely expected to reduce growth - at least initially - which would mean that increased taxes or borrowing or reduced spending in other areas would be required to fund the extra spending.
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