Commentators have been trying to decipher an underlying strategy behind recent tax changes. I think that it is fairly clear. A Chancellor who is facing a deficit of over £100 billion finds it difficult to announce tax cuts without undermining his economic credibility. This obviously reduces his room for manoeuvre but the tax cuts that he has been able to give all have strings attached.
Almost all of the tax cuts are predicated on the Exchequer getting a return in some other form and quite quickly. Take for example the £7 billion package to help heavy energy users. Osborne is expecting that this package will not only reduce the number of businesses off shoring but will attract some re-shoring of businesses to the UK. Someone in the Treasury has calculated that the tax and National Insurance paid by workers in these business as well as the Corporation tax and business rates will go a long way towards reducing the net cost to the Treasury of this giveaway.
The cuts in corporation tax are designed to attract more companies to the UK and again are supposed to be almost self-financing. Indeed a recent study showed that 65% of the CT cuts would be almost immediately offset by other tax revenues increasing as a result.
The cut in bingo duty was accompanied by the announcement by one of the bingo operators that it was expanding and opening up three new bingo halls with a consequent boost to tax revenue.
But most dramatic was the change in the treatment of lump sum pensions by reducing the tax charge from 55% to the marginal rate which would normally be 20% for most pensioners, the Chancellor has earmarked almost an extra billion pounds per annum in tax revenues. This change combines the views of previous chancellors that simplification and lower tax rates will bring in more revenues.
Even the much vaunted increase in personal allowances is designed to have the offsetting effect of reducing the cost of benefits. Moreover those lower paid who have gained most are likely to spend this money on items which will attract duty and VAT. One could go through most of the measures which were announced and see that there is an implicit calculation that the benefits of the tax cuts will flow back to the Treasury in some other way.
The one area where the Chancellor did not act as suggested by many of his own MPs was increasing the 40% threshold. I suspect that there was little movement on the 40% threshold because most of any tax cut given to higher rate taxpayers would not flow back to the Treasury. Therefore it would be a more expensive tax cut than most which have been announced.
The message to any lobbyist is to ensure that a tax cut in their area can be demonstrated to assist the economy enough that its net cost to the Treasury is considerably less than the headline figure.
In times of public finance austerity tax cuts for nothing don’t work !
Jeremy Mindell is a Director at www.primondell.co.uk
