Boris Johnson’s tax cut proposals would cost the exchequer as much as £20bn a year while mainly benefiting richer households, according to calculations by the Institute for Fiscal Studies.
The think-tank warned that the Conservative leadership front runner’s “expensive pledges” to cut taxes for high earners and lift the national insurance contributions threshold were incompatible with the government’s promise to end austerity.
Mr Johnson announced his proposal to raise the NIC threshold last week after coming under heavy fire for his earlier promise to cut income tax for higher earners and rich pensioners.
The IFS costings show that the tax breaks for high earners would cost about £9bn a year in reduced tax revenues. Mr Johnson has not said how far he would lift the thresholds at which people pay NICs, but the IFS said it would cost £11bn a year to raise the NICs threshold for employees and self-employed workers to £12,500 — the level of income at which people also start paying income tax — even without changing thresholds for employers’ contributions.
The IFS report comes as MPs who support Mr Johnson are urging him to step up his campaign to replace Prime Minister Theresa May amid concerns he is starting to lose ground to rival Jeremy Hunt. One MP backing Mr Johnson said his policy to cut tax for the richest in society was an “own goal”.
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.”
Mr Johnson’s proposal to raise the higher-rate threshold for income tax from £50,000 to £80,000 would mean an average gain of nearly £2,500 a year for those in the top 10 per cent of the income distribution, the IFS said. The change would remove 2.5m people from the upper tax bracket, taking the number of high-rate taxpayers down to its lowest level in 30 years, it said.
Raising the point at which people start to pay NICs, a policy also favoured by Mr Hunt, would help redress the balance. The move would have a bigger proportional impact on the post-tax earnings of low-paid workers, and the IFS said it was “probably the best thing one can do through the tax system to help low-earning individuals”.
However, the think-tank said increasing tax credits would be far more effective, if the main aim was to help low earners in low-income households.
The very lowest paid would not benefit from the policy at all, because only earnings above £8,632 a year are subject to NICs at present. Moreover, the impact of the policy on household incomes would be different: households in the middle to upper part of the income scale would benefit most, because those in the poorest are less likely to be in work, and get a larger share of income from benefits.
Mr Johnson has not given details of the changes he would like to make to the various NIC thresholds. The IFS said raising the threshold by £1,000 would cost £3bn a year if it applied only to the contributions made by employees and the self-employed; this would rise to £4.5bn if it also affected the contributions made by employers.
Raising it to match the income tax personal allowance of £12,500 would cost at least £11bn, rising to £17bn if employers’ contributions were included, with 2.4m workers no longer paying any NICs.
Mr Johnson has been much more modest in promises of higher spending for public services. His most concrete pledge so far, which would guarantee all schools annual funding of £5,000 per pupil, would cost a mere £50m.