Boris Johnson has given the game away. At this week’s Confederation of British Industry (CBI) conference, the Prime Minister admitted that Tory tax policy has been all about taking money from schools, hospitals and other public services and handing it to big corporations to increase their profits.
In pledging to delay a planned corporation tax cut to fund the NHS, Johnson may have stirred up enemies on the right — a Telegraph front page even accused him of “appeasing socialists” — but it has far more fundamentally exposed the mythology that has driven Tory tax policy in the past decade. The pretence that cutting taxes on big business leads to greater revenue for public services has been, it seems, abandoned.
Johnson addressed the CBI conference on the same day as Jeremy Corbyn and, in a sign the Tories feel under pressure from Labour over NHS cuts, attempted to pull a rabbit from a hat. Johnson told the hall of corporate executives:
“Because the NHS is the nation’s priority, because we believe emphatically in fiscal prudence, I hope you won’t mind if I also announce today that we are postponing further cuts in corporation tax. Before you storm the stage and protest, let me remind you that this saves £6 billion that we can put into the priorities of the British people, including the NHS.”
Johnson was pledging to delay a plan set by George Osborne back to cut corporation tax to 17% by 2020. Corporation tax, which is levied on business profits, was at 28% as recently as 2010. Thanks to Tory tax cuts it already stands at a historic low of 20%. In other words, business profits from some of the largest corporations in the world are charged at the same rate as the VAT on your shopping — and that’s before the loopholes that mean very few even pay that rate.
After a decade of grinding austerity, and with wages stagnating for the longest period since Victorian times, Johnson clearly feels the corporate tax-cutting agenda is potentially an electoral disaster. But this u-turn poses the Tories with a problem: it undermines a key pillar of the economic argument they’ve used to justify growing inequality and eroding public services.
Johnson and his fellow Tories have long claimed that cutting tax rates would increase tax income. Charge businesses a lower tax rate, the argument goes, and companies will boom so much and make such increased profits that they will pay more in the end. In fact, Johnson has said this explicitly, “every time corporation tax has been cut in this country it has produced more revenue.” (Something which, unsurprisingly, is not true.)
These ideas derive from a piece of Conservative economic wizardry called the Laffer curve. Johnson himself pushed the idea at the 2018 Tory conference:
“We should be constantly aiming not to increase but to cut taxes, mindful of the insight of the great 14th century Tunisian sage Ibn Khaldoun — picked up by Arthur Laffer — that you can often cut taxes to increase yields.”
Laffer’s simplistic formulation — he first devised it drawing on a napkin at a 1974 Washington dinner attended by, among others, Dick Cheney and Donald Rumsfeld — has long been an enthusiasm of the right. It assumes that fiscal policy operates on a curve where lowering the tax rate will increase the tax income.
The thesis ignores both its own practical implementation — consecutive Republican governments in the US cutting taxes and driving up the deficit — and the record of high taxation in America, where the highest revenues were recorded when the top marginal individual tax rates were near or above 90% around World War Two.
After decades of use as a propaganda tool for delivering billions in tax cuts to corporate elites, Johnson abandoned the Laffer curve at the CBI. Not cutting corporate tax rates to 17%, he clarified, would save £6 billion. In other words, cutting those tax rates would lose £6 billion worth of revenue — and jeopardise public services in the process. Not cutting the tax was “fiscal prudence.” So, at last, the Tories have admitted that cutting corporation tax is fiscal imprudence.
It was a sign of just how far Labour under Jeremy Corbyn has pushed Britain’s economic conversation. The Tories have been forced to run this election campaign on increasing funding to public services — particularly the NHS and the police — and are actually using the term “with taxpayers’ money” in their stump speeches. Whether the prose of government looks anything like the poetry of the campaign is another matter.
Boris Johnson has gone for a short term fix, but in doing so has inflicted long-term ideological damage to the Tories. The Laffer curve is not some sideshow, it is a centrepiece of the thinking behind Boris Johnson’s own economic team.
Take Chloe Westley, former spokesperson for the suspiciously-funded Taxpayers’ Alliance. Since July Westley has been Johnson’s special advisor. She has used Laffer to argue for corporation tax to be cut to 10%. Where does her special advice stand now?
But that isn’t even the most dramatic example. Boris Johnson’s own Chancellor, Sajid Javid, used Laffer’s logic explicitly during the Tory leadership contest. “Cutting tax rates could bring in billions of extra revenue,” he said in June of this year, “which would mean more nurses, more teachers, more police.”
So what are we to make of these contradictions? The most likely conclusion is that the corporation tax line was a stunt, designed to make the Tories appear to care about public services and not be in the pockets of big business. Certainly, it wouldn’t be surprising to see it go the way of another recent Johnson “freeze” on fracking and be almost immediately junked.
Johnson’s supporters, however, are concerned by such cynicism. The Tory-supporting Spectator argued that this “tax u-turn” could “backfire” with “the Prime Minister contradicting himself abruptly in the hope of a short-term gain.”
They are right to be worried. At the minimum, Johnson’s corporation tax gambit proves that the Tories no longer believe the economic arguments they have made for a decade. But at worst, it exposes something deeper — that they never believed those arguments in the first place.
If all the bluster about tax cuts increasing revenue was a charade from the beginning, then what have the Tories been doing? Deliberately giving handouts to the super-rich and big business while terminally undermining the funding stream available to key public services like the NHS. Surely even a media as pro-Tory as ours must ask them that question.