2011 February » Tax Research UK

Are British banks getting billions in hidden subsidies?

Feb 142011

A new briefing from think-tank nef (the new economics foundation), released the day before Barclays announce their full year results, asks whether banks would be making any profit at all without billions in hidden subsidies from the British taxpayer and bank customers.

Read it here.

As the report says:

The briefing concludes that there [are further] hidden subsidies [that] must be investigated and that if the Independent Commission on Banking is to properly do its job, it must establish a full picture of the de facto hidden subsidies being enjoyed by the banks.

Disclosure: I contributed on quantitative easing

The real explanation of Project Merlin

Banking Comments Off

Feb 142011

Too good not to repeat: a comment left here by Paul to whom the hat tip is offered:

Interesting title ‘Project Merlin’

As I remember it Merlin summoned forth a monster (finance) to restore a rightful order (feudalism/neo liberalism) which then foundered on a grail quest (the big society) and human frailty (elite criminality) and left the land in darkness.

Looks like a plausible explanation to me.

How to tackle bonuses – and high pay – by removing tax relief on the payments

ConDems, Corporation Tax, Tax justice, TUC 15 Responses »

Feb 142011

The Guardian notes today that:

The unions will today turn up the pressure on the banks with a demand that bonuses should be treated as profit and therefore be liable for corporation tax. Even though the corporation tax rate is being cut over four years from 28% to 24% it is still twice the level of tax banks currently pay through employers’ national insurance contributions.

TUC general secretary Brendan Barber said: “Making mega-bonuses liable for corporation tax could drive reform of our boardroom bonus culture and raise revenues.” He added: “The government cave-in on bonuses last week will have only increased public anger.”

The TUC wants all pay and bonuses that are more than 10 times the average level of pay to be disclosed, as well as the ratio of directors’ pay to the average pay per employee. Staff should also have a seat on remuneration committees, he said.

I am pleased that the TUC has picked up this policy initiative, which is something I first wrote about some time ago.

The economic logic of this proposal is very simple. Maximum pay should either be 10 times median pay in the UK or 20 times the anticipated minimum wage. The number happens to come out at about £250,000 in either case. it is very obvious to anyone that no one need earn more than this figure to live a very good life of more than adequate material sufficiency in the UK. Therefore, any distribution to a person over about this sum must be of profit, and not pay as far as the company making payment is concerned. But profit distributions are not tax allowable in corporation tax. As a result no tax relief should be provided on them for the purposes of that tax. This has the obvious economic consequence of increasing the cost of payment of the bonus, and so reduces the amount of bonus payable, reducing pay differentials as a result, which is the intention of the proposal.

I would stress, however, that this does not mean that if paid by an employer who does not get tax relief on it the resulting receipt by the employee is not taxable as income from employment. It should, of course be treated in a way, and also be subject to National Insurance. The logic of tax deduction for corporation tax need not be matched by the treatment for income tax or National Insurance. There are ample cases where there is a mismatch between economic justification for a payment and tax treatment. This is one of them. There is no pretence in the proposal that the result is tax neutral. It is meant quite deliberately to tax something (bonuses) that is causing harm to our society, and in that context tax justice is achieved by inequality of treatment, and not by equality.

Disclosure: I advise the TUC

There is an alternative

ConDems, Economics 2 Responses »

Feb 142011

For those in London this weekend there is a conference that looks worth attending. Hosted by Ken Livingstone on Saturday at Congress house, Great Russell Street, London WC1B 3LS, the conference will include a broad range of progressive politicians, leading economists, anti-cuts campaigns and activists on the economic and social alternatives to the ideologically driven Tory Government cuts that will make hundreds of thousands of people redundant and decimate our civil society.

Speaking on the economic alternatives to the Tory cuts will be leading economist Victoria Chick, Emeritus Professor at the University of London and economic commentator Duncan Weldon, economic blogger Mick Burke and Sinead Pentony, Head of Policy of Irish think-tank TASC who will look at the lessons from the Irish cuts agenda.

The broad range of representatives from the anti-cuts movements includes: Len McCluskey, Gen Sec Elect, Unite; Frances O’Grady, TUC Deputy Gen Sec; Clifford Singer, False Economy; Daniel Garvin, UK Uncut; Mark Wallinger, Artist, Save the Arts.

The leading role that students and young people have played in opposing the cuts will be a key theme with speakers including: Kanja Sesay, NUS ‚Ä¢ Jody McIntyre, journalist ‚Ä¢ Josie Long, comedian ‚Ä¢ Laurie Penny, Journalist ‚Ä¢ Christine Quigley, London Young Labour ‚Ä¢ James Mills, Save EMA ‚Ä¢ Mary Robertson, SOAS Occupation ‚Ä¢ Cat Smith, Compass Youth ‚Ä¢ Aaron Kiely, Kent Occupier ‚Ä¢ Conrad Landin, blogger.

The conference will also address the impacts of cuts on women, saving the arts, progressive policies for housing and transport, defending trade union rights, London’s environmental polices, tackling racism, international justice and much more.

A full list of speakers and sessions visit http://www.progressivelondon.org.uk/

And no, for the record, I won’t be there. I have family commitments, elsewhere.

Does Scotland want to be a tax haven?

Tax Havens, Tax justice Comments Off

Feb 142011

Nick Shaxson asks the question in the Daily Record.

I’ve already dealt with it for Northern Ireland.

When you get angry about bank profits just ask who gave them that money

Banking, Economics 11 Responses »

Feb 142011

This is bank reporting week – when it is widely predicted the banks will report profts ranging from recovering to healthy, with massive bonueses to match.

The starkest evidence that the 2008 crisis has been wasted – that the the essential reform needed to reform the world economy by eliminating the cancerous culture of big finance – will be there for all to view.

People will rightly ask the question “how do banks get away with it?”

But they might better ask “How do the banks get this cash that they then abuse?”

The answer to the second question leads to the answer to the first question. And the answer is easy to provide. You provide the banks with their profit. They effectively tax you, your assets and your future to hoover up the cash they then use to pay bonuses, and to declare as profits sums disproportionate to any risk they take and any contribution they make to society, well being or the economy.

We know banks have not passed on to consumers the almost zero cost of credit they now enjoy as a result of low offical interest rates.

We know banks contine to charge excessively for a great many of the services they supply.

We know banks get a hidden subsidy when doing so becasue as consumers we compare VAT inclusive prices – but the price banks charge for their services don’t include VAT which they don’t charge. And I am quite sure that the banks exploit that. They charge the price they would if VAT was included and pocket the difference themselves. And there’s nothing but a change in VAT law or a Robin Hood Tax to stop them doing so, so they’re exploiting you again.

But worse, much worse, is the fact that they help strip your future of hope. Banks are part of the whole pension industry infrastructure – often trading on those fund’s behalf even when the banks do not own the pension company in which you save. And pension funds provide the most enormous pool of assets for which the supposed trustees are almost wholly unaccountable. After all, when did you last receive accounts from your pension fund rather than a simple note that they’d simply lost what you’d contributed to them in the last year (something that is almost inevitable as UK pension funds still insist on investing almost 70% of their assets in equities – that is shares – even though the average rate on shares over the last decade is 0% and very few fund managers do as well as the average rate of return – a fact that is when you think about it inevitable when management costs are taken into account.) One reason for that appalling rate of return is the churn and the charging that results from it – all of which in turn helps boost bank profits, at your expense and at cost to your future well being.

So who pays for bank profits? You do. Or as an economist would put it, the incidence of this excessive profit is on you, the ordinary person in the UK. Those same economists love talking incidence when it comes to taxes on banks – they ignore it when it comes to charges. But of course the charges are the more important issue. And banks aren’t clever enough to make profits out of nothing (except when creating money for nothing). They have to make it from somebody – and that somebody is you.

So let’s go bank to that first question, which was “how do they get away with it?” Well, because we’ve let them do so. And it looks like this government will continue to let them do so. And we do that in very large part becasue they’ve made sure we don’t have the information to see by just how much they’re exploiting us – and our future well being.

But it’s really not hard to see the link. The flip side of the pension crisis is current excessive profits in financial services.

Or to flip it again- current excessive profits in banking are destroying our futures.

How much clearer can I be?

Why the banks won’t be paying tax this year

Banking, Corporation Tax, PWC, Tax avoidance 7 Responses »

Feb 142011

Project Merlin claims the banks will be making a tax contribution of at least £8 billion to the UK Exchequer this year. It was a number that anyone with an ounce of knowledge of recent banking tax history could see was artificial. This just doesn’t even vaguely relate to the tax that banks pay if you bother to actually ask people what tax banks really suffer.

Of course, in popular perception the tax that banks pay is corporation tax – and rightly so. Most of the other taxes that will very obviously go to make up this tax are other costs of sale on which they get tax relief – like VAT included in their purchases, or taxes actually really suffered by other people. Employer’s national insurance is an example of the latter – it’s a tax that all economists agree is really paid by employees who simply see their gross wages reduced to reflect that part notionally paid by their employer. In other words, this is not a real cost to banks at all.

And if in doubt that VAT is not a real cost consider the simple fact that banks only pay VAT themselves becasue they do not charge VAT on their services to their customers – which means that their products are relatively underpiced compared to almost all other services a consumer can buy, most of which will have VAT included in them. In this case the VAT paid by banks is not a measure of what they’re paying, it is a measure (yet again) of the way the tax system is used to provide them with a hidden subsidy.

So let’s get back to the one tax the banks do pay as a charge on the income they make – which is corporation tax. As the Mail on Sunday notes today, based on research I did for them, the likelihood that any of our big banks will be paying any serious sums in corporation tax for a while to come is remote in the extreme. That’s because the 2009 accounts of each of the major banks shows just how much deferred tax asset they’re sitting on relating to tax losses that they can offset against their future profits – including those subject to Project Merlin. The figures are:

HSBC _ £4.2 billion

Barclays – £1 billion

Lloyds – £4 billion

RBS – £5.1 billion

Add them together and that’s more than £14.3 billion of tax that’s not going to be paid any time soon. Or at UK current corporate tax rates some £51 bn of profit that needs to be earned before tax is paid.

Now of course not all that tax will not be paid in the UK, I admit.

But let’s also be candid – these are UK banks and so some of it definitely will not be paid here. Which makes Project Merlin look even more like a sham.

And whose accounting logic is behind it? Why, PricewaterhouseCoopers and its Total Tax Contribution of course – their purely political form of accounting designed to add up every penny a company pays to government for the sole purpose of seeking reduction in the one rate that really maters – which is corproation tax.

The Total Tax Contribution was the invention of John Whiting when he was at PWC. Of course he’s now director of the Office of Tax Simplification. No coincidence there then, eh?

Toby Young – tax avoidance without a moral compass

Uncategorized 18 Responses »

Feb 132011

Toby Young is, I admit, not a left wing favourite , for all sorts of reasons, including his dedication to opening a supposed ‘free school’ meaning the eviction of a great many charity organsiations from their premises in Hammersmith, which is sure indication of his belief in the ‘Big Society’.

He was never, therefore, going to provide an objective review of Nick Shaxson’s book ‘Treasure Islands’, but he’s written one for the Mail on Sunday all the same.

The title gives much of the game away about what he thinks of tax avoidance. It’s entitled “Why the super-rich deserve their tax holiday”. But he then provides no evidence to support the claim. It appears that his best evidence that tax avoidance is legitimate is that:

“If you buy fresh squeezed orange juice the price includes VAT. If you buy standard concentrated orange juice there is no VAT. So if a key reason you buy concentrated oarange juice is that it is a bit cheapert, you are avoiding paying VAT. Is that wrong?”

No. It’s simply the wrong question. In simple economics no one makes that choice on a tax motivated basis. They do so on the basis of price, and the most it reveals is that on occasions the boundary between zero rated foods and standard rated foods is a little arbitrary. So what does that prove? Only that in any legal system boundaries have to be drawn and sometimes there are slight price distortions as a result. It’s a price society deems worth paying, and rightly so.

But does that justify the rich opting out of society, as he is saying is permissable, and that they do so through supposedly legitimate but morally dubious activity that clearly abuses the spirit of the law – something all our Big Banks have suggested they can clearly identify in the last week? No of course it doesn’t.

In which case what does Toby Young’s inane justification prove? Well, I’ll suggest three things. First it suggests he has no moral compass. Second, he has no idea about the subject on which he is pontificating. And thirdly he is the last person I’d want to entrust a child’s education to.

Mubarak has gone – now where is his money?

Corruption, Switzerland 8 Responses »

Feb 112011

The good news for Egypt is Mubarak has gone. The hope is the transition to a democracy will be smooth. The question is, where’s Mubarak’s money?

This from Bloomberg a few days ago was interesting:

The Swiss government is examining whether Egyptian President Hosni Mubarak has assets in the country after Tunisia’s former leader Zine El Abidine Ben Ali’s accounts were frozen last month.

“The Federal Department of Foreign Affairs is looking into” whether Mubarak or his family have any assets in the nation’s banks, and “the government will be informed, ” Finance Minister Eveline Widmer-Schlumpf told SF in a television interview broadcast late yesterday, adding “there are no entirely clear signs, ” of whether Mubarak or his entourage do have assets in Switzerland.

Mubarak has said he intends to stay in his position until September even as daily rallies in Cairo call for him to step down.

Protests spread to Egypt after Tunisia’s former President Ben Ali left the country for Saudi Arabia. The Swiss government has said it blocked “tens of millions” of Ben Ali’s assets.

Switzerland’s reputation as an international banking center depends on the ability to check whether funds deposited in its banks had been acquired legally, Widmer-Schlumpf said. The government would act “appropriately, ” after the Mubarak investigation, she said, without being more specific or saying that any potential assets would be frozen.

Let’s cut through that and state what really happened: when Ben Ali was in power Switzerland held his money without question being asked or concern as to its reputation. Now he’s out of power they changed their tune. There’s a word for that and hypocrisy is not good enough. If they could block in days after he fell they always knew the right answer and chose to turn a blind eye.

Have they done the same for Mubarak? Let’s see.

What we do know is that money has fled Egypt. My friends at Global Financial Integrity have proven that.

Now it’s time to give it back – and yes, the focus will be on Switzerland. And then London and Singapore.

Hat tip – Dennis Howlett re Bloomberg