The Institute for Fiscal Studies wants to reward criminal behaviour?

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Here's another classic from the Institute for Fiscal Studies:

To discourage investors from hiding their wealth in foreign tax havens, the authors recommend exempting interest income from personal tax, and allowing shareholders to deduct an imputed normal return on the basis of their shares before imposing tax on dividends and capital gains.

Based on 2005/06 data this would mean £15.6 billion of interest income would fall out of tax, plus a significant part of all dividends (see below).

I estimate using reasonable rates based on that data that the tax yield on interest might be about £4.3 billion. £2.2 billion of that would be paid by about 3.34 million higher rate tax payers, which basically means that almost every higher rate tax payer has interest income at an average of about £650 tax each. £2.1 billion is paid by over 16 million lower rate tax payers at an average of about £125 tax each. Taxpayers earning £1 million of overall income would benefit by an average of at least £16,000 each though.

And let's not forget dividends. Total UK declared dividend income in 2005/06 was £37.1 billion. Total tax on this would have been about £12.4 billion of which £9.5 billion was paid by higher rate taxpayers at an average of about £5,800 each. £2.9 billion was paid by standard rate tax payers at £450 each in my estimate. Ignore the fact that this level of income is wholly illogical: it represents a rate of return way above any known distribution yield on the UK's holding of quoted shares, a fact which can only be explained by the distortions in income paid through private companies that are converting labour income into capital income (the incentive for which would massively increase under the scheme the IFS propose). Just assume, as the IFS do, that the part of the dividend yield equivalent to gilt yields is tax free from now on. Give or take a bit dividend yield is about double gilt yield based on FTSE data. In that case that's another £18.5 billion that falls out of tax, cutting tax revenues by £6.2 billion, of which £4.75 billion would go the wealthiest 10% in the country. And the problem of income shifting would be considerably increased.

So what is happening as a result of this IFS recommendation? A total loss to the government of over £10 billion and exacerbated opportunity for abuse whilst the tax system gets more regressive, the effective tax rate on capital declines, offshore abuse (which by no means only relates to interest is encouraged) and no doubt VAT will go up again to make up the difference.

But worse, all this is because the IFS is not willing to address the fact that a criminal activity should be stopped. Interest income held offshore must, after all, be declared by all UK domiciled and resident people: non compliance is not an economic issue, it is a matter of criminality - a fact the IFS recognises by using the word 'hiding' in its statement. Instead of saying so and seeking to uphold the UK's right to tax those evading their social obligation the IFS is instead effectively suggesting cutting government revenue, and that effectively suggesting that criminals should enjoy the proceeds of their crime and be unjustly enriched.

What does that say about the sort of society the IFS wants?

If tax systems reflect the societies that create them then I'm very worried about the IFSs' approach to the society we live in.

And as for its claims for objectivity and lack of bias? I'd like to say I could say I've made my case. Except I still have more evidence to present.