16 June 2022

Boris and the great glass tax elevator

By Damien Phillips

At the end of Charlie and the Chocolate Factory, Roald Dahl introduces us to the Great Glass Elevator. 

While a normal elevator ‘can only go up and down’ this elevator can ‘go sideways and slantways and longways and backways… and squareways and front ways and any other ways that you can think of’.

This marvellous device could obviously only work within the confines of a children’s story. Out in the real world, it couldn’t fly (literally or otherwise).

Unfortunately, Boris Johnson seems to have taken the inspiration for his tax policy from this fabulous, fictitious machine. 

Despite recent gestures towards lowering taxes, aimed at shoring up his support following last week’s leadership contest, his own instincts seem to ‘go sideways and slantways… and any other ways that you can think of’.

As a result, years of hard work by David Cameron and George Osborne to make the United Kingdom an attractive place for businesses to invest have been imperilled, and Labour have been gifted the opportunity to outflank the Tories on tax.

Worse, the credibility of future announcements from the Prime Minister is undermined by how frequently the Government has changed course, meaning it will probably be considerably harder for Johnson to dig himself out of this hole than it was to get himself into it.

The area where this problem is most immediately obvious is Corporation Tax, where the Government’s ‘magical elevator’ approach has resulted in a complex, counter-productive mess.

In the Budget of March 2021, Rishi Sunak announced what the Institute of Fiscal Studies called ‘the first rise in the main rate of corporation tax for half a century’ – from 19% to 25%.

After getting elected in 2010, the Conservatives put in years of work to bring the rate down and try and make Britain a more attractive place to invest. Following our departure from the EU, that was more important than ever. Yet all the good work was undone at a stroke.

Johnson once described himself pro-having his cake, and pro-eating it. We might say the same of the Treasury. For it looks as if they tried to get the extra revenue from the rate rise without any of the downsides normally associated with tax rises.

So instead of a straightforward increase, we got a complex series of exemptions and tapers. Profits of less than £50,000 per annum qualify for the ‘small profits rate’ of 19%. Those between £50,000 and £250,000 will be subject to an effective marginal rate of 26.5%. Only those higher than £250,000 will pay the new rate.

I will give the last word on this to the IFS: ‘Operating a small profits rate and a marginal relief system adds unnecessary complexity and creates unnecessary economic distortions’.

The so-called ‘super deduction’, whereby companies can expense investments in qualifying plant and machinery assets at 130% from April 2021 to March 2023, is another example of this too-clever-by-half politics.

A short-term incentive to invest in boosting productivity simply isn’t going to offset a long-term squeeze on profits. 

Johnson’s manifesto-busting hike in National Insurance is another example of the Government scrambling for money without heed for the consequences.

Perhaps if we called the NI rise what it is – a jobs tax – ministers might more easily grasp why increasing it, in the teeth of a cost-of-living crisis and in the shadow of a possible economic contraction, is so dangerous.

Yes, most obviously it is yet another squeeze on pay packets at a time when the cost of essentials is rising. But as NI contributions are made by employers too, it is also a strong disincentive against hiring.

And for all the talk of standing by small businesses, the UK’s ‘owner-directors’ arguably have it worst of all. Not only will they be hit by an extra tax on dividends designed to stop people bypassing the NI hike, but those who pay themselves as employees will have to pay higher employee and employer contributions too!

The Government finally realised this was disastrous, but rather than scrap the policy they opted to modify it with a halfway fudge that helps workers to receive a milder battering but still clobbers employers. In his Spring Statement, Sunak announced that the NI threshold would be increased in line with that for Income Tax.

As a result, you’ll be taxed less than the Government was initially planning if you’re employed… but there’ll likely be fewer jobs to go around as employing someone is still going to become more expensive.

One could go on. A windfall tax on North Sea oil and gas extraction was sternly opposed until it was suddenly government policy. As with Corporation Tax, a deduction scheme was tacked on to try to minimise any deterrent to investment. But is a populist raid on this sector wise at a moment when we’re desperately trying to reduce our exposure to Russian disruption of global markets?

Perhaps spurred by the revolt on his backbenches, Johnson seems to grasp that something needs to be done. In a recent speech, he denounced the overall burden of taxation (which he had created) as ‘now very high’ and that he would like to see it come down. But Tory activists and voters can be forgiven if, after all the above, they have trouble taking this new attitude seriously.

The contrast with previous Conservative governments is obvious. Both Cameron and Osborne in the 2010s, and Margaret Thatcher and Nigel Lawson in the 1980s, had a clear and coherent vision for the country and an economic theory to underpin their policies. 

Johnson and Sunak, by contrast, are not working in tandem, and neither seems particularly enamoured with the old commitment to low taxes which used to be such a definitive part of the Tory electoral offer. The result is a chaotic collection of bad policies, squandered opportunities, and lost growth. Maybe in the end it’s less Charlie and the Chocolate Factory and more a case of The Twits.

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Damien Phillips is a Fellow of The Cobden Centre, and a specialist in international affairs and political economy.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.