Sam Gyimah is MP for East Surrey, and is a former Universities Minister.
For nine years austerity and its consequences has dominated our debate and become the new normal. I am proud of what my party has done in rescuing the country’s finances.
But 1.5 per cent growth is not good enough. Economic growth creates better jobs, improves people’s standards of living, enables us to adequately fund public services, and gives people a reason to buy in to capitalism. If we are to solve the challenges that we face — social care funding, a well-funded NHS and an education system that gives everyone a great start in life, we need growth to do it.
I have not seen any candidate in the leadership contest put forward a plan that is going to address this – I want whomever triumphs as the next leader of our Party and Prime Minister to consider my tax plan as a way to turbocharge our economy.
Governments have got into the habit of raising taxes and introducing new ones. I want to change our debate around tax from introducing new taxes to cutting the worst ones.
That’s why we need to abolish Britain’s first worst taxes – the those that do the most damage for the money they raise, and whose abolition will get us the most bang for our buck:
1. Make the Annual Investment Allowance unlimited.
2. Index the tax thresholds to inflation – permanently.
3. Replace business rates with a commercial land tax.
4. Eliminate the personal allowance withdrawal for higher earners.
5. Move towards abolishing stamp duty for homes under £1 million.
Make the Annual Investment Allowance unlimited
We were right to bring Corporation Tax down from 28 per cent to 19 per cent. It’s made investing in Britain more attractive – the fact that McDonald’s, Starbucks and Snapchat have moved their European headquarters to London is evidence of that.
But we need to look beyond the headline rate. When businesses invest in new equipment, machines, and industrial buildings, they’re forced to deduct the investment at an arbitrary rate over a number of years, and because of inflation they cannot claim back the true amount. That’s not the case for ordinary day-to-day expenses like pens and paper. That’s a problem because if you’ve ever run a business, as I have, you know that cash is king. I want to fix this and ensure a level-playing field in the tax system between manufacturers and financial services.
That’s why we need to make the Annual Investment Allowance unlimited. This will level the playing field and fix corporation tax so that it is a tax on profits only, not investment. This follows similar moves in the United States, and academic research suggests it has boosted business investment by 17.5 percent where it has been done. This would be a tremendous boost to business across the country, especially manufacturers.
Index the tax thresholds to inflation – permanently
In 1988, when the 40p tax rate was introduced, around 5 per cent of taxpayers paid it. Today, closer to 15 per cent of taxpayers do. A similar effect takes place in the other tax bands. The reason is that every year, inflation pushes more and more people into higher rates of tax, without them being any better off.
This discourages work and hits workers with a stealth tax. And it means that, every year, we are effectively raising taxes on people without a proper debate in Parliament. If we permanently index the tax thresholds to inflation, we can eliminate this stealth tax on work and stop the endless creeping down of these higher rates of tax.
Replace business rates with a commercial land tax
Because Business Rates are levied on a property’s value and not just the land beneath it, they act as a punishing disincentive to investment.
The worst affected businesses are manufacturers. Tata Steel’s rates bill rose by £400,000 a year when it rebuilt the blast furnace at Port Talbot. No wonder British Steel is struggling. Despite what the likes of Jeremy Corbyn and Nigel Farage say, the answer isn’t nationalisation of these industries. It’s modernising the tax system so they don’t get punished when they invest.
The next Leader must replace business rates with a tax on commercial land, paid by the landlords and levied only on the land value itself, so that no business is worse off if they invest and landlords do not have an incentive to keep commercial properties vacant.
Eliminate the personal allowance withdrawal for higher earners
Withdrawing the personal allowance for people earning over £100,000 creates a massive tax cliff-edge. It means that people earning between £100,000 and £125,000 face a 60 per cent marginal income tax rate, meaning they take home just 40p for every pound they earn (and just 38p after National Insurance).
That is madness. Back in 1988, Nigel Lawson was right to cut the upper rate of tax from 60p to 40p. We need to do it again.
Move towards abolishing stamp duty for homes under £1 million
Stamp duty has been described by the Institute for Fiscal Studies one of the UK’s worst-designed taxes. It discourages elderly people from downsizing and freeing up their homes for younger families, and stops people from moving homes for better jobs. Just this week the Resolution Foundation highlighted the economic damage caused by high housing costs trapping people in areas with weak work opportunities. A study of a similar tax in Australia found that it lowered GDP by 72p for every pound it raised.
We need to start the process of scrapping Stamp Duty altogether on homes under £1 million. This would eliminate stamp duty for 98 per cent of housing transactions, but forgo only 68 per cent of the tax receipts, at a cost of £6 billion. Alongside wider reforms to cut the cost of housing, this tax could be made cost neutral.
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It’s not good enough to propose big, attention-grabbing tax cuts that would cost tens of billions without doing much to boost growth. We have limited resources, but there’s still a lot we can do if we’re smart about it.
There have been big debates among Conservatives about getting left behind voters and young people to buy into capitalism. But so much of that debate has conceded the Left’s critique of capitalism. Capitalism has its flaws, but it is the only thing that can give people the opportunities and standards of living that they want and deserve.
For the Conservatives to win over the voters we’ve lost to other parties, we need to rediscover our core values of work, enterprise and aspiration. We need to focus on using tax cuts to unlock growth, to create better jobs and more opportunities in life for young people and people who have been left behind. We can’t just offer voters more of the same: we need to make Britain boom again.