General Election 2017: The big questions on tax

Although it’s already been dubbed the Brexit election, tax is likely to be as important as ever in the 2017 poll. So here are my initial thoughts on the main tax issues up for debate in the coming weeks.

No pre-election Budget

Governments usually use the Budget before an election campaign starts to stoke the feel-good factor and set the tax agenda. This time, there won’t be one. The Budget in March was something of a political non-event, except for the rise in national insurance that was so quickly reversed. The Chancellor of the Exchequer, Philip Hammond, didn’t lay out a long term strategy on tax, and the Prime Minister, Theresa May, has given few hints about her tax philosophy. The next Budget is due in the Autumn, although an immediate post-election Budget, as happened in 2010 and 2015, can’t be ruled out.

This means that the Conservatives will make their promises on tax without first having put them in context with a Budget. They won’t be able to present their new ideas as being part of a continuing strategy that is already being implemented. Furthermore, work has been going on in the background that was supposed to inform policy going forward. Matthew Taylor’s review of the rights for people working in the gig economy should have helped inform changes to national insurance. And during his Budget speech, Mr Hammond hinted at long-term plans to rebalance the tax treatment of online and bricks & mortar businesses. None of this work is complete enough to provide policies ready to go into the manifesto. This matters because future tax reform will be made more difficult if it part of the mandate given to the winners of the election campaign.

Conservative pledges

The Tories made wideranging promises in their 2015 general election manifesto. Mr Hammond’s plan to increase the national insurance contributions of the self-employed, which he announced in this year’s Budget, came a cropper as a result. Even though his proposal did not infringe the letter of the 2015 manifesto, he had to ditch the rise within days.

Simply abandoning all the promises they made last time would open the Tories up to accusations that they are planning to raise taxes. I think they would be wise to maintain their pledges not to increase the main rates of income tax, national insurance or, especially, VAT. However, they should include a specific promise to increase Class 4 NICs so that Hammond can do what he proposed in the Budget. Where the Tories are planning to increase taxes, honesty would be the best policy and burnish Mrs May’s no-nonsense image (which has been dented by the announcement of an election when she said there won’t be one).

The Conservatives should drop the ruinously expensive commitment to increase the rate of the income tax personal allowance to £12,500 by 2020. I suspect this pledge resonates much less with the public than the one on income tax rates. Help for the just-about-managing would be better targeted by cuts in employees’ national insurance as this would not cut the taxes of wealthy pensions with lots of investment income.

Labour tax rises?

Labour has already promised to impose VAT on private school fees to fund free school meals for primary school children. They are likely to propose further tax rises to pay for other aspects of their programme.

I expect a mansion tax, just like Labour proposed in 2015. The mansion tax generally works well in focus groups as most voters imagine they’d never have to pay it. However, the scope of any wealth tax (which is essentially what a mansion tax is) needs to be wide if it is to raise significant amounts of money. Additionally, any mansion tax would bite hard in London, which is one of the few parts of the country where Labour might hope to do well.

Other options include restoring the 50% income tax rate for income over £150,000. This could be popular because people support increases in taxes they won’t have to pay. Again, the money raised is likely to be negligible. Another option is a windfall tax on the energy companies, or some other unpopular sector of the economy. New Labour did this back in 1997. The problem is that a windfall tax must, by definition, be a one-off. Hikes in corporation tax also seem relatively painless in electoral terms (although they shouldn’t be, as corporation tax is levied on people as much as any other tax, just at a further remove from their wallets). Shadow Chancellor John McDonnell has already declared that companies bidding for Government contracts would have to follow ‘best practice’ in tax compliance and multinationals will be forced to publish their tax returns. Neither measure would raise any new money. Mr McDonnell has also hinted at increases in capital gains tax and inheritance tax, which HMRC also don’t think would lead to significant tax receipts.

A final option for Labour is to go for a truly socialist manifesto, squeezing the rich till their pips squeak. Given the party is going to lose anyway, there seems little harm in its leader, Jeremy Corbyn, giving his leftwing instincts full reign. He could promise to increase the current 40% income tax rate (paid on all earnings over £45,000) to 50%. HMRC estimates that this would raise £12 billion and so deal with Labour’s fiscal credibility problem at a stroke. Of course, it would be poison with the electorate, as Labour found with a similar policy back in 1992, but this time it has nothing to lose.

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