Tory hopefuls aren’t grasping these taxing issues

Tax is the top talking point in the Tory leadership race. Apart from the current frontrunner, Rishi Sunak, all the other contenders are pledging immediate, deep cuts to the headline rates of both personal and corporate taxation.

Such tax-cutting would lead to the Treasury losing tens of billions of pounds in revenue. Unless spending on public services is to be strangled, these promises will have to be paid for by bigger borrowing at a time when our public sector net debt is at historic highs,. There is a genuine risk here. If our fiscal deficit spirals, investment in our country could dwindle.

Ah, but tax cuts will stimulate economic growth, comes the counterargument, eventually paying down the public debt. But their effect on growth will be marginal at best. The truth is that growth is projected to be absent or anaemic for the foreseeable future.

Credible candidates for the top job should therefore be honest about how they will fund their policies through spending reductions or tax rises elsewhere. After all, this is a political party with countless ministers who resigned just last week to get rid of a PM who they thought was not being honest enough.

This is not to rule out tax cuts. Targeted and funded tax cuts could be especially helpful to redistribute resources to those on modest incomes.

Shifting overall taxation from work to wealth should be a priority. This will make the tax system more progressive since taxes on wealth affect people higher up the income scale. But also because income from work is typically derived from effort, whereas income from assets — especially housing — is in large part a product of luck.

Unfreezing, maybe eventually raising, the value of the personal allowance alongside the primary threshold for National Insurance contributions would now be the tax cuts that would support the lowest earners the best.

To fund cuts to taxes on work, the next Chancellor could apply the new Health and Social Care Levy to pension and rental income. Those working beyond the state pension age should no longer be exempt from all National Insurance contributions. Capital gains tax rates could also be raised to narrow the gap with income tax rates, taking inspiration from the famous tax-cutting Chancellor Nigel Lawson, who actually equalised the rates in 1988.

Ryan Shorthouse is director of the think-tank Bright Blue