It was fun for David Cameron while it lasted but the Conservative party’s uneasy moratorium on talking about tax cuts is about to come to an abrupt end. The Tory Tax Reform Commission, launched by his predecessor Michael Howard, will shortly deliver its findings — and the prospect is causing panic in the party’s Victoria Street headquarters.
Far from being the modest simplification of the tax code that the Cameroons had hoped for, I have learnt from senior sources that the current draft report includes a blueprint worth up to £19.5 billion a year in net tax cuts to be implemented over the course of a first Tory term, as well as a number of additional uncosted tax reductions. I can also reveal that shadow chancellor George Osborne is fighting a rearguard action to convince the Commission’s excellent chairman, Lord Forsyth of Drumlean, to dilute his plans; while not binding on Cameron, they will be taken seriously by the media and opposition.
The implicit threat from Tory HQ is that the report will be buried if it is too radical; in a crucial meeting with his commissioners on Thursday, Forsyth will have to decide how much, if anything, he is prepared to concede. The report is to be sent to the printers next week and launched at KPMG on 19 October.
The draft report amounts to the most radical detailed tax proposals to have been produced by any official Conservative party-commissioned group for at least a decade. The existing 150-page draft will probably expand to between 180 and 200 pages through the addition of extra calculations. Its 40 proposals include cutting the basic rate of income tax from 22 per cent to 20 per cent, slashing corporation tax from 30 per cent to 25 per cent (and eventually to 20 per cent) and scrapping the 10 per cent starting rate of income tax. The draft even calls for a cut in the top rate of tax as a longer-term aspiration. In a blow to Cameron, and contrary to media reports, the Commission won’t propose any countervailing new green taxes, nor does it address council tax reform. The threshold at which the top rate of tax kicks in would also remain unchanged.
The poor would pay significantly less tax, with the starting 10 per cent rate of income tax scrapped and hence no income tax payable on the first £7,185 of earnings. There would also be a revolutionary reform of inheritance and capital gains tax; the two levies would be merged. Primary homes would become totally exempt from inheritance tax while the rest of a deceased’s estate would be eligible only for a reformed capital gains tax. This would impose either a 20 per cent or a 40 per cent tax on gains on assets handed down; the rate would be reduced by a tenth every year so that no tax at all would be payable on assets held for a decade.
There would also be help for families with transferable personal allowances, for couples with a child under the age of five, making it less costly for one of the parents to stay at home. Currently parents earning £50,000–£60,000 are still eligible for family tax credits; the Commission wants to ensure that these taper off at a significantly lower rate. It also wants to scrap tax credits for film production and for research and development.
Stamp duty on share transactions would be abolished; however, the Commission will not propose to undo Chancellor Gordon Brown’s destructive raid on pension funds. Contrary to speculation, the plan doesn’t endorse a flat tax: it contains a chapter discussing the proposal and reviewing its implementation in Eastern Europe but ends up rejecting it on practical grounds. But the Commission’s draft report agrees that Britain has become less competitive and argues that there is a negative relationship between economic growth and high taxes. It includes an exclusive survey of British businesses, as well as a number of case studies from countries that have successfully cut tax.
In conversations with Forsyth, Osborne has made it clear that he is especially opposed to the Commission’s proposed reduction in the basic rate of tax. Osborne is concerned that it would be portrayed as helping the rich and the middle classes. Even more controversially, Osborne wants the Commission to consider a £1 billion employee national insurance contributions hike by extending the income range on which they are payable by £5,000. We shall see what Osborne makes of his last big opportunity to convince Forsyth to back down.
Until June, the Commission was considering presenting two competing ‘core proposals’, which were ‘revenue neutral’ with tax cuts matched exactly by closing loopholes. But three months ago the commissioners decided to go much further and endorse actual overall tax cuts. An outside chance remains that they will revert to their first plan under pressure; the Cameroons would like the Commission’s proposals to be seen as an à la carte menu from which to pick and choose — and have already started briefing one newspaper that this is how they should be interpreted — rather than as the unified, coherent plan proposed by Forsyth.
However, the leadership now accepts that even if they succeed in adulterating the Commission’s final report, it will nevertheless be far more radical than originally expected. Cameron and Osborne have pre-emptively started releasing some of the report’s recommendations as their own — including the commitment to a £5,000 transferable child allowance and the proposal to abolish stamp duty on shares.
Osborne and Cameron will have to tread carefully as the radicalism of the Forsyth Commission chimes perfectly with increased unease over tax among Tory backbenchers. Many who had reluctantly begun to accept the Cameroonian view that tax cuts are political suicide are now changing their minds again. Backbenchers have told me that a TaxPayers’ Alliance/ICM poll, splashed on the front page of the Sunday Times last month, created a stir by demonstrating a growing public appetite for tax cuts when sold the right way; they also report that their constituents are increasingly angry about the gross waste of taxpayers’ money that has become the hallmark of Brown’s public sector.
I have also learnt that 17 of the 54 new Tory MPs elected in 2005 have joined the Thatcherite No Turning Back group, chaired by John Redwood; their names will be released at the Tory party conference, further strengthening the new mood. The new members include Michael Gove, one of Cameron’s closest confidants. All 50 members of the group — including several members of the shadow Cabinet — have put their names to a powerful new pamphlet making the moral as well as economic case for tax cuts.
All of this confirms that for the first time since he became leader, Cameron has lost control of a crucial policy debate, with many senior figures no longer scared to question the bizarre official line that tax cuts would jeopardise economic stability. While this is no bad thing, Cameron will have to move fast to regain the initiative in other areas if he is to avoid the rest of his project unravelling.
Allister Heath is associate editor of The Spectator and deputy editor of the Business.