Whoever becomes the next PM, the rich are in for a treat

Johnson and Hunt's tax plans are a bonanza for big business and the rich, writes accounting expert Prof Prem Sikka.

The Conservative Party will soon anoint a new leader, who will become the Prime Minister. The name will change from Theresa May to Boris Johnson or Jeremy Hunt. But what else?

As government ministers Jeremy Hunt and Boris Johnson have presided over austerity, increase in inequalities and degradation of social infrastructure. At the 2017 general election, they opposed Labour’s plan to spend £49bn to reverse austerity. Now they have suddenly found around £100bn of public money to lubricate their ascent to power.

Even Chancellor Philip Hammond has warned Johnson and Hunt to “stop and think” before engaging in a “bidding war” of tax cuts and spending pledges. For the 2017 general the Labour Party published a fully costed manifesto. Yet Hunt/Johnson has failed to provide any costings, making their claims hard to verify.

People will have no opportunity to give a verdict on the Hunt/Johnson plans, as both have ruled out a general election. Instead, the Prime Minister is being appointed by 160,000 members of the Conservative Party, disproportionately concentrated in London and the south-east of England and unrepresentative of the UK population. Around 86% are middle class and 97% are white (in comparison, 54% of Britons are middle class and 87% are white). This group will decide the future of the whole country.

Failed policies

The central political strategy of Johnson/Hunt is to appease the membership of Conservative Party and its corporate donors as their support is vital to the climb to power. Hunt has promised to cut the headline rate of corporation tax to 12.5%. This will boost corporate coffers by around £13bn a year. The claim is that lower corporation tax rate will boost corporate investment, wages and economic growth. This policy has already failed.

The Conservatives have already cut the rate of corporation tax from 28% in 2010 to its present 19%. This has fuelled executive pay, dividends, and inequalities and stymied economic growth. In just three working days, the UK’s top bosses make more than a typical full-time worker earns in a year.

Compared to other industrialised countries, UK-based companies pay the highest proportion of corporate earnings in dividends. The outcomes are well described by the Bank of England’s Chief Economist who said that in 1970, major UK companies paid out about £10 of each £100 of profits in dividends, but by 2015 the amount was between £60 and £70, often accompanied by a squeeze on labour and investment.

The UK languishes near the bottom of the investment league. The UK invested around 16.9% of its gross domestic product (GDP) into long-term investment whereas the EU average is 20.1%.

The tax giveaways have not resulted in higher wages. At the end of 2018, the workers’ share of GDP in the form of salaries and wages was 49.4% compared to 65.1% in 1976. Due to low investment and erosion of the purchasing power of the mass of people economic growth has been slow and patchy. The most recent estimates are that the economy may have shrunk during the second quarter of 2019.

Tax cuts for Tory heartlands

Corporate investment is based upon the assumption that the great mass of people have adequate purchasing power to buy goods/services. Despite evidence of erosion of this power, Hunt and Johnson will only see wealth continue to travel upwards.

Johnson wants to increase the income tax higher rate threshold, i.e. when 40% marginal rate kicks-in, from £50,000 to £80,000. This may lead to adjustments to the threshold for the additional rate i.e. the marginal rate of 50%. The change could cost £9bn a year and the richest 10% would gain around £2,500 a year. The beneficiaries of this largesse reside in Tory heartlands.

Statistics published by HMRC show that 23.8% of the higher and additional rate income taxpayers reside in London, 20% in South East and 17.5% in East of England. The tax giveaway brings no benefit to 27.1 million (86.4%) basic rate income taxpayers or citizens below the income tax threshold.

The partisan pledge does nothing to reduce taxes for the poorest. In 2017-18, the poorest 10% of households paid 47.6% of their income in direct and indirect taxes, compared to 33.5% for the top 10% of households.

Johnson/Hunt could use the resources to rebuild the economy, but that hardly figures in their plans.

They could boost people’s purchasing power and reduce inequalities by simply sending a cheque to every household with income less than the national average. They could boost the amount of state pension. At 29% of the average earnings, the UK has almost the lowest state pension in the industrialised world. The average for industrialised nations is 63% of earnings. In the UK, the state pension is less than the statutory minimum wage, and barely enables many to survive.

On 23rd July, we will have a new PM. Whoever it is, they will preside over income and wealth percolating upwards as our society becomes even more unequal and unstable. Perhaps it’s no surprise given who’s backing them.

Prem Sikka is a Professor of Accounting at University of Sheffield, and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor for Left Foot Forward and tweets here.

5 Responses to “Whoever becomes the next PM, the rich are in for a treat”

  1. Tom Sacold

    Yep. Tories will cut taxes and services will suffer.

    Nothing new.

  2. Jason

    Jealousy aside, when the rich get richer, they spend more in the shops. They spend more in restaurants. They pay more in tax. There is more money available in the economy. When they get clobbered with tax,they move abroad and stop spending. That hits everyone. I run a small electrical business and earn less that £30k. I want the rich to get richer as this filters down and we all do better. In the 1970s wealth wise the country was much fairer, everyone was poor. Much poorer.

    Bring on tax cuts for the rich if this means more money being spent in the shops.

  3. Patrick Newman

    Jason, I feel very sorry for you. Obviously the rich do not populate your shop much as you are earning a pittance. You know what the say about trickle-down economics – kiss the arses of the rich and wait for the trickle down! Trickle down is the last refuge of the inequality deniers!

  4. Peter

    Jason. The rich don’t spend all the extra money in the shops. Look around your local high street.
    The rich don’t buy loads more because they can afford it because already haver enough of the things these shops sell. No more coffee, shoes, socks, fruit and veg, haircuts … Whereas the less well off do. The rich use their extra money to by assets which is why property prices and rents are so high and your customers can’t afford to buy more from you.
    The tax they pay isn’t removed from the economy, it is used by the the government to employ sufficient nurses, doctors, teachers etc and buy things like teaching resources from business. This money is then available to buy more electrical goods etc
    You say they pay more tax. If by this you mean that they have less insensitive to avoid tax, then this is an idea put forward by a second rate economist named Arthur Laffer who worked of Ronald Reagan. To make this sound more believable it is usually referred to as the Laffer curve because a curve makes it look as if there is some data behind the idea. There isn’t and there never has been. It just suits proponents of low taxes to make it sound like an unassailable truth. Trump recently presented Laffer with a medal!

    To summarise. Making poorer ppl richer will result in more spending in shops than making the wealth richer. Tax is good because it allows the government to spend money to benefit us all and stimulate more economic activity where its needed. The rich are either going to employ and accountant to help them avoid paying tax or they are not. Whilst our tax system allows them to then they will

  5. Jones

    Part of the issue is around how much people at the top are paid and the inequality it creates. Higher end tax rates have always reflected better social services. It might seem unfair that someone earning 300k pays what say 50 per cent above 70k…? So 230k is taxed at a 50 per cent rate (it has been in previous decades) meaning they take home 115k above the 70k. What the purpose of this was though was to create a MAXIMUM income rate. It basically cools the wheels of inequality, so someone who is earning say a ‘healthy’ 40k per annum could compete for goods, accommodation and services.

    Put in place a way that stops the rich hiding their money and you would find employees and employers alike would see no point in paying obscene wages or bonuses for the time people spend at their jobs or the work they do. Those people on extremely high wages tend to invest in property and rent it out which pushes the cost of homes up both in the buyer and rental market. Plus there are a lot fewer ultra rich people than there are poor to average earners – a point a previous commentator made. It is the majority that buy the bulk of goods and services. And extra 10k in the pockets of everyone on low pay would get spent back into the economy a lot quickier than the billions we give a ‘handful’ of the rich at the moment.

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