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Tory leadership: Do rivals' tax pledges add up? Tory leadership: Do rivals' tax pledges add up?
(5 days later)
Promises to cut taxes have become the dominant theme so far of the race to succeed Boris Johnson as Conservative party leader. But how are the plans costed and do they make economic sense? There have been heated exchanges about tax between the candidates for the Conservative leadership.
Under current government plans, the total tax burden is set to reach its highest level since the 1940s, according to official forecasts. Former chancellor Rishi Sunak accused his rivals of pursuing "something-for-nothing economics", which he said "isn't Conservative".
The Tory leadership candidates are promising to reduce it but haven't specified whether they would pay for any shortfall in government finances with extra borrowing or cuts to public spending, instead emphasising that they would spur growth and thus increase government revenues. Foreign Secretary Liz Truss pointed out that, under current plans, the tax burden will be raised "to the highest level in 70 years".
Lord Lawson - a former Conservative chancellor - has warned: "There is a danger that this leadership election is going to descend into a Dutch auction of tax cuts which are not necessarily affordable." Most of the candidates are pledging specific tax cuts but haven't gone into detail about whether they would pay for any shortfall in government finances with extra borrowing or cuts to public spending, instead emphasising that they would grow the economy and thus increase government revenues.
So what taxes would they cut and what's the estimated cost?
Who could be the next prime minister?Who could be the next prime minister?
When will we know who the new PM is?When will we know who the new PM is?
National Insurance Liz Truss
National Insurance (NI) is a tax on earnings and self-employed profits - paid by all workers, until they reach the state pension age. What has she pledged and how much would it cost?
Since April, they have been paying more in NI - an extra 1.25p in the pound. The rise - announced by former Chancellor Rishi Sunak - was to fund health and social care. scrap April's National Insurance rise: £13bn a year
Will National Insurance changes save me money? cancel planned corporation tax rise (due to go from 19% to 25% in April 2023): £17bn a year
To try to ease the impact of the changes amid cost of living pressures, Mr Sunak raised the threshold - at which people start paying NI - to £12,570. But some of his leadership rivals say this isn't enough. suspend green levies on energy bills (in the Friday debate she claimed it would knock "around £150" off energy bills): £8.5bn a year
Who wants to change it? Total estimated cost: £38.5bn a year
Foreign Secretary Liz Truss and Tom Tugendhat - chairman of the foreign affairs committee - want to scrap April's NI rise. Analysis
Economic analysis National Insurance (NI) is a tax on earnings and self-employed profits - paid by all workers, until they reach the state pension age. It is also paid by employers.
Reversing the NI rise would cost about £13bn a year, according to Stuart Adam at the Institute for Fiscal Studies (IFS), the economic think tank. Since April, they have been paying more in NI - an extra 1.25p in the pound. The rise - announced by Mr Sunak when he was chancellor - was initially to help the NHS clear its backlog and then to help fund social care.
Carl Emmerson, deputy director the IFS, said cuts to personal taxes such as NI "certainly won't be paying for themselves". He said while such tax cuts would put "more money in people's pockets", they risked contributing to inflation. To try to ease the impact of the changes, Mr Sunak then raised the threshold at which employees people start paying NI from £9,880 to £12,570 a year.
Income tax National Insurance: Will tax changes save me money?
The basic rate of income tax is currently 20p in the pound and is paid on earnings between £12,571 to £50,270. Reversing the NI rise would cost about £13bn a year, according to the Institute for Fiscal Studies (IFS), the economic think tank.
This rises to 40p in the pound for earnings above £50,270 and 45p in the pound for earnings over £150,000. Carl Emmerson, the IFS deputy director, said cuts to personal taxes such as NI "certainly won't be paying for themselves". He said while such tax cuts would put "more money in people's pockets", they risked contributing to inflation.
Former Chancellor Rishi Sunak announced a reduction in the basic rate to 19p but not until 2024-25. Corporation tax is a tax on the profits of businesses.
Is this the biggest personal tax cut for 25 years? The tax rate is currently 19% but it is due to increase to 25% in April 2023.
Who wants to change it? IFS economist Stuart Adam calculates that cancelling this rise would cost £17bn a year. But the IFS says the annual cost doesn't allow for whether the corporation tax cut could lead to increased investment in the UK, which could make the final bill "substantially lower - though not enough for the tax cut to pay for itself".
Current Chancellor Nadhim Zahawi - who has now been knocked out of the leadership contest - wanted to bring the cut forward, making it 19p in 2023 and 18p in 2024. Green levies
Trade Minister Penny Mordaunt says she would increase income tax thresholds for basic and middle income earners in line with inflation. The government makes energy companies add environmental and social obligations onto energy bills to pay for things like schemes to help fund renewable energy schemes and provide grants for insulation.
These thresholds - the point at which people start paying the tax or paying it at a higher rate - are currently frozen for four years from April 2022. This means when people get a pay rise they can be dragged into paying a higher rate, raising more revenue for the government. They make up about 15% of an average energy bill.
In 2020-21, those levies raised £12.2bn, of which about 70% (£8.5bn) went on environmental programmes.
Ms Truss has not specified whether she would scrap those projects or fund them another way.
There is also little detail of how she would fund all this, although it has been reported that she wants to pay off the government's Covid debt more slowly.
Trade minister Penny Mordaunt has been MP for Portsmouth North since 2010.Trade minister Penny Mordaunt has been MP for Portsmouth North since 2010.
Economic analysis Penny Mordaunt
According to IFS's Stuart Adam, bringing the income tax cut forward to 2023-24 would cost a "one-off" £6bn. It's thought reducing it further would cost another £6bn. What has she pledged and how much would it cost?
According to OBR estimates, the income tax threshold freeze is forecast to raise £2.9bn in 2022/23, rising to £18bn by 2025/26. Scrapping this could mean billions of pounds less in tax revenue for the government. increase income tax thresholds for basic and middle income earners in line with inflation: an estimated £2.9bn in 2022/23, rising to £18bn by 2025/26
Corporation tax cut VAT on fuel from 20% to 10%: at least £5bn
This is a direct tax on the annual profits of businesses - essentially, a form of income tax for companies. suspend green levies on energy bills: £8.5bn a year
The tax rate is currently 19% but from next April - under a decision by former Chancellor Rishi Sunak - it is due to increase to 25% in April 2023. Total estimated cost: £16.4bn in the first year, rising in the following years
Who wants to change it? Analysis
Ms Truss has pledged not to increase corporation tax. She says her tax reductions would be funded by paying off the UK's Covid debt over a longer period of time. The basic rate of income tax is currently 20p in the pound and is paid on earnings between £12,571 and £50,270 (except in Scotland where there are different arrangements).
Mr Zahawi said he would scrap next year's rise. Jeremy Hunt - the former foreign secretary who has also been knocked out of the contest - said he would reduce the tax to 15% in October. This rises to 40p in the pound for earnings above £50,270 and 45p in the pound for earnings over £150,000.
Economic analysis Rishi Sunak announced a reduction in the basic rate to 19p but not until 2024.
IFS economist Stuart Adam calculates that: The thresholds - the point at which people start paying the tax or paying it at a higher rate - are currently frozen for four years from April 2022. This means when people get a pay rise they can be dragged into paying a higher rate, raising more revenue for the government.
cancelling the rise from 19% to 25% would cost £17bn a year According to OBR estimates, the income tax threshold freeze is forecast to raise £2.9bn in 2022/23, rising to £18bn by 2025/26. Scrapping this could mean billions of pounds less in tax revenue for the government.
reducing the rate to 15% would cost another £14bn a year Of course, by the time the new prime minister is in place, we will already be half way through the tax year, so the impact would fall more in 2023-24.
The IFS says though that this potential £31bn annual cost doesn't allow for whether the corporation tax cut could lead to increased investment in the UK, which could make the final bill "substantially lower - though not enough for the tax cut to pay for itself". The government charges two types of tax on petrol and diesel: fuel duty is 52.95p a litre and there is VAT on top of that at 20%.
Fuel duty The OBR expects fuel duties to have raised about £26.2bn in 2022-23, but we do not have that broken down into VAT and fuel duty.
This is a tax - along with VAT - included in the price of petrol, diesel and other types of fuel. Ms Mordaunt wants to cut the VAT from 20% to 10%. We've made a rough estimate, using price and consumption data, that VAT on petrol and diesel raised about £10bn in 2021, so we can say that halving the VAT would cost the exchequer at least £5bn.
The price of fuel has increased dramatically in the UK - following the war in Ukraine - adding to the cost of living pressures. Ms Mordaunt said on the BBC's Sunday Morning programme that she would be prepared to borrow more money to fund her plans.
Why is petrol so expensive in the UK? Asked if she would be prepared to borrow to fund day-to-day spending (as opposed to investment) she said, "Yes we will, we will have to do that for some time."
UK fuel duty is currently 52.95 pence per litre for petrol and diesel. In the 2022 Spring Statement, the government announced a temporary cut to fuel duty of five pence per litre. Kemi Badenoch
Who wants to change it? What has she pledged and how much would it cost?
Mr Tugendhat has pledged to cut fuel duty by 10 pence per litre. suspend green levies on energy bills: £8.5bn a year
Ms Mordaunt has said she would cut VAT on fuel in half, from 20% to 10%. Total estimated cost: £8.5bn a year
Economic analysis Analysis
Fuel duty brings in a lot of money for the government - an estimated £26.2bn in revenue in 2022-23, according to the Office for Budget Responsibility (OBR). Ms Badenoch said she was committed to reducing corporate and personal taxes as well but that she would not enter into a tax bidding war with other candidates over the issue.
The government said that April's five pence per litre cut would cost £2.4bn - so any further reductions would be in the billions. But she did talk about some of the things that government would spend less on under her leadership such as:
Caroline Mullen and Greg Marsden, transport researchers from Leeds University, argue that cutting fuel duty would only benefit the wealthiest in society. public sector staff such as "staff wellbeing mentors"
"In 2019, the highest income group in the UK drove an average of 4,893 miles per year, more than three times that of the lowest income group. reducing "superfluous support staff and peripheral activities" in schools
"If it is the least well off that the fuel duty cut is aimed at protecting, then the tax system or benefit adjustments would surely be more targeted and effective," they said. not letting the police "waste time and resources worrying about hurt feelings online"
VAT on energy bills Rishi Sunak
VAT is payable on goods and services. The standard rate is 20% but VAT on domestic energy bills is currently 5%. What has he pledged?
When the UK was a member of the EU, this could not be reduced further. During the 2016 EU referendum campaign, Boris Johnson and Michael Gove said that "when we Vote Leave, we will be able to scrap this unfair and damaging tax". But this has not happened. Rishi Sunak only resigned as chancellor on 5 July, so announcing wholesale changes to his own policies would be seen as politically problematic.
Who's proposing what? He launched his leadership bid, saying: "Once we have gripped inflation, I will get the tax burden down. It is a question of 'when', not 'if'."
Suella Braverman - who has also been knocked out of the contest - had called for VAT on energy bills to be cut further.
Economic analysis
Getting rid of the 5% tax would cost the government about £1.7bn a year, according to HMRC estimates.
What about the other candidates?
Rishi Sunak has launched his leadership bid, saying: "Once we have gripped inflation, I will get the tax burden down. It is a question of 'when', not 'if'."
He hasn't come out with detailed tax cuts yet but says he wants "radical reforms" to the way businesses are taxed.He hasn't come out with detailed tax cuts yet but says he wants "radical reforms" to the way businesses are taxed.
Kemi Badenoch says "I'm committed to reduce corporate and personal taxes" but hasn't given any more details.