Britain’s foremost tax and spending thinktank has said that Boris Johnson’s promise to cut taxes for millions of higher earners would cost £9bn and benefit the richest 10% of households in Britain most.
The Institute for Fiscal Studies (IFS) said the proposal by the frontrunner in the Conservative leadership race was expensive and potentially incompatible with the Tories’ promise to end austerity and safely manage the public finances.
Johnson has said he would increase the higher-rate income tax threshold, at which earnings are taxed at 40%, from its current level of £50,000 to £80,000 should Tory members vote him in as leader.
Tom Waters, a research economist at the IFS, said: “It is not clear that spending such sums on tax cuts is compatible with both ending austerity in public spending and prudent management of the public finances.”
Drawing intense criticism from across the political spectrum, the proposal has been roundly attacked as a giveaway for the rich that would drive up inequality and harm the public finances. No-deal Brexit could damage Treasury revenues, while tax cuts would subtract from funding needed to boost public services.
The chancellor, Philip Hammond, has warned Tory leadership hopefuls against any reckless tax cuts and spending increases.
According to the IFS, about 4 million income tax payers with the highest incomes would benefit from Johnson’s tax promise, standing to gain almost £2,500 each on average. There are 32.75 million British workers, while the average salary is about £26,400 a year.
About three-quarters of the reduction in tax liabilities would go to those in the top 10% of the income distribution, while 97% of the gains would go to the top 30% highest earners.
Johnson has argued that more people are paying tax at the higher rate, while the study showed their numbers have increased by 170% since 1990. Johnson’s policy would slash the number of higher-rate taxpayers by a third to the lowest level since 1990.
Undermining a defence that the cut would encourage aspirational workers, serving as a reward for rising up the earnings pyramid, the IFS said that only a quarter of workers in Britain would benefit from the change at any point in their life or live in a household where someone had. It said just 8% of workers would gain from the change in the short term.
Wealthy pensioners would stand to benefit in particular. Johnson has said the cuts would be funded partly by raising the national insurance contributions of workers who benefit from the income tax cut. However, retirees do not pay national insurance.
The IFS said those over 65 would receive a tax cut about 60% larger than those under 65, entrenching generational inequality.
According to a separate report by the IFS, 60- to 74-year-olds on middle incomes already benefit from substantially higher pension payouts and wages.
Carl Emmerson, the thinktank’s deputy director, said the report, The Future of Income in Retirement, showed that a combination of generous occupational pension schemes and more people working into old age meant those in the 60-74 age bracket on middle incomes were 60% better off than those in a similar position in the mid-1990s.
The current crop of retirees was likely to be a bubble, with the prospect of less generous pension schemes for younger workers acting to depress retirement incomes in decades to come.
“Future generations may actually end up with lower private pensions,” he said. “But there is much capacity for employment rates of older individuals to rise further: for example employment rates of men aged 60 to 64, which have been increasing since the mid-1990s, are still well below the rates seen in the 1970s when life expectancy was much lower and health less good.”
