2011 June » Tax Research UK

Great news – Osborne looks at cutting higher rate tax relief on pensions

Pensions, Tax avoidance, TUC, Uncategorized 4 Responses »

Jun 182011

I’ve long argued that the wealthiest in this country do far too well out of the tax system. In 2008 in the TUC publication ‘The Missing Billions’ I estimated that 570,000 people earning more than £100,000 a year between them enjoyed tax reliefs which one of them needed costing the state at least £8.4 billion a year (page 32 here).

One of the particularly absurd reliefs that those on higher rates of tax enjoy is pension tax relief at higher rates. Why the pension savings of the best off in the country have to be encouraged by being given a subsidy at least twice, and sometimes 2.5 times that given to the 90% who pay tax at basic rate has always been particularly baffling. The logic of any progressive tax system is that the least well off should benefit most. The logic of this tax relief is that those with greatest capacity to save (the best off) get the highest level of tax relief to do so – with the inevitable consequence that the gap in wealth between richest and poorest increases (even given recently introduced contribution caps) as a result of direct subsidies given to the richest by the state. It’s absurd, for example, that a 50% tax payer can get a tax subsidy of £25,00) a year towards their savings from the state at present – which is more than average pay.

So for once I applaud news from the government - that it is looking to axe higher rate pension relief and save £7bn a year as a result.

It’s a move that makes complete sense in this environment.

And it should be followed by caps on all other forms of savings subsidies and the abolition of all tax relief on gifts to charities at higher rate too – although in the latter case the saving should be directed to the charities.

So for once credit where it is due – if Osborne does this I’ll give him full credit for it.

But, on his current track record expect the idea to be dropped by Tuesday.

Hat tip: Frances Coppola

You’re Invited to the 2011 Annual Task Force on Financial Integrity & Economic Development Conference

Development, Task Force on Financial Integrity and Economic Developm 2 Responses »

Jun 182011

Tax Research LLP is a member of the Task Force on Financial Integrity & Economic Development so I’m delighted to share the notice for its 2011 Annual Conference. This is:

Tackling the Shadow Financial System
A Working Plan for the G20

October 6-7 | Cercle National des Armées | Paris, France

As the Task Force says:

The 2011 annual conference of the Task Force on Financial Integrity and Economic Development will take place at the Cercle National des Armées in Paris, France from October 6-7.

Illicit financial outflows from developing countries—which total around $1.3 trillion per year—undermine the tax base in poorer countries, eroding the accountability that is essential for good governance and global stability. The same opacity that facilitates these flows is also partly responsible for the budget crises that are plaguing governments in developed countries, which the G20 has been trying to address. The key to curtailing these illicit flows is transparency. Specifically, the G20 should adopt recommendations in its communiqué that would increase the flow of information between multinational corporations, governments, and citizens – across developing and developed countries. Such financial transparency is the key to limiting future crises and to promoting economic growth across the world.

Speakers and panelists at this year’s conference will address the implications of and solutions to the shadow financial system, including: country-by-country reporting, beneficial ownership of accounts, automatic exchange of tax information, curtailment of trade mispricing, and tax evasion as a predicate offense for anti-money laundering. Breakout sessions will focus on the 2011 Financial Secrecy Index, illicit trafficking, socially responsible investing, media messaging, the “Arab Spring”, and more. Together, speakers and participants will craft a message to the G20 member governments ahead of the November 2011 French summit on how they can address the global ills that result from illicit financial flows.

Click here to register for the conference and view a copy of the agenda.

I’ll see you there.

Tax residence and domicile

Tax avoidance, TUC 14 Responses »

Jun 172011

The government has announced new consultations on the above subjects to day.

I’d suggest they read this, which I wrote for the TUC.

I’ve not had reason to change my mind on the subject since last year.

Northern Ireland’s corporation tax cut: what is it for unless to gamble public money with the winnings going to the rich?

Corporation Tax, Ireland 2 Responses »

Jun 172011

From the Belfast Telegraph this morning:

The debate on whether Northern Ireland would benefit from a reduction in the rate of corporation tax has been one-sided.

The virtual monopoly in the media for the proponents of a reduction in corporation tax raises questions about the objectivity and neutrality of the media in Northern Ireland and whether the public are well-served by what can only be described as a partisan approach in favour of the influential pro-business lobby.

The case against a reduction in corporation tax is well-articulated, but effectively sidelined.

The main critical analysis of the issue is contained in the publication Pot of Gold or Fools Gold, Richard Murphy’s report for the Irish Congress of Trade Unions.

More recently, the Wilberforce Society – a body with no particular axe to grind – has published a report concurring with Murphy.

There has been no intellectual challenge from the pro-business lobby to these critical voices – except that the case for a reduction in this tax is now being nuanced to suggest that, while it may not now be characterised as a silver bullet for our economic ills, it is very much a necessary central plank in the ‘strategy’ to invigorate our local economy.

I think the point in the last paragraph is key: there has been no intellectual response to the challenge I and the Wilberforce Society have raised to this absurd proposal. Mantra seems to be enough.

My fear is that the same will happen in Scotland.

And as Brian Campfield who wrote the article noted:

The former chairperson of the CBI in Northern Ireland, when questioned by Lady Sylvia Hermon at the Northern Ireland affairs committee, admitted there were no guarantees a reduction in corporation tax would create jobs. We are playing roulette with public funds and hoping for a win.

But the hope is against hopeless odds.

So why are we doing this if it is not to provide further subsidy for business owners at cost to everyone else?

The only reason we’ve not got 4 million unemployed is we’re gloriously inefficient

Economics, Uncategorized 19 Responses »

Jun 172011

All writing, hopefully, changes your perception on an issue. Great writing makes you think again and see things differently.

Martin Wolf has written a great article in the FT this morning. He’s addressed the issue of unemployment and provided me with a wholly new insight on why it is not rising as fast as many (me included) expect in the UK at present.

His explanation is a simple one, but so intensely logical it’s hard to see why he seems to be the first to point it out, but that’s the Emperor’s new clothes for you. As he notes (and I’m quoting very selectively from a dense set of data):

From 2007 to 2010, output per person employed rose 5.1 per cent in the US, but fell 2.6 per cent in the UK. The only significant high-income country to register higher productivity growth than the US was Spain, with output per person employed up 6.3 per cent. That, combined with the depths of the recession, explains the huge rise in the Spanish rate of unemployment, to 21 per cent. All other large high-income countries registered productivity falls.

The result? US GDP actually rose whereas that in the UK fell. But UK unemployment has not mushroomed as expected, whereas that in both the USA and Spain has – in the latter enormously.

As he also notes:

One might suppose that these huge contrasts in the changes in output per person employed reflect US decisions to reduce hours of work by laying off actual workers (the “hire and fire” culture) against choices elsewhere, including in the UK, to lower hours worked per employee, instead. This was not entirely the case. In France, Germany, Italy and the UK, output per hour worked fell, as well. Thus, US output per hour rose 6.2 per cent between 2007 and 2010. It fell by 0.5 per cent in France, 1 per cent in the UK, 1.3 per cent in Italy and 1.4 per cent in Germany. Interestingly, Spain is like the US: its output per hour rose 5.3 per cent, partly because of the collapse in employment in construction.

So the conclusions is:

Even though UK productivity performance has been weak, unit labour costs have risen little. Thus, the pain has been shared out among workers via stagnant nominal wages and reductions in hours per worker and in output per hour.

So, by having a continental style labour market, and not as many claim a US style one, we have shared out unemployment. The impact may be on profitability of course: but people are still in work. This to me seems the best explanation as to why, so far, unemployment has not sky-rocketed despite the obvious problems in our economy that I’ve seen. And as Wolf concludes:

If one is going to pursue austerity, as the UK government does, it greatly helps to have poor productivity performance. With US productivity, too, the UK would have a jobless rate of over 12 per cent.

On balance, I am grateful that the UK job market has responded to this recession in this curiously continental way. More important, so should George Osborne be. This has probably not delayed the recovery. It has certainly made it far easier to bear the recession and his austerity.

And note what 12% unemployment would mean: unemployment of 3.77 million, close to that which I forecast. For once, if I’m wrong, I’m grateful. But let’s also note: it’s not private sector efficiency that has given rise to this: more some rather welcome inefficiency.

All money is a confidence trick

Economics 19 Responses »

Jun 172011

I wrote the blog reproduced below in September 2007: Northern Rock was falling over at the time and needed bailing out.

It seems as relevant today: Greece is falling over and needs bailing out. It won’t be alone.

The point is a simple one: this is about money required until confidence is restored, and it is confidence that is key. Because the reality is that confidence is all there is to money because it literally comes out of thin air:

“It amazes me that most people think that money is printed. It isn’t. Only 3% of all money in the UK is created by the government. The rest is created by banks.

How does a bank create money? The honest answer is out of thin air. It happens whenever they create a loan.

Most people think when they ask a bank for a loan money paid in by one person is paid on to them. That’s not true. Not true at all, in fact.

Instead what the bank does is a conjuring trick. They agree to give you a loan. They do it by opening two accounts for you. One is a current account (for ease, let’s assume you haven’t already got one). The other is a loan account. If you borrow £10,000 they mark your current account as having £10,000 in it. You’re now free to spend that however you like.

They also mark your loan account as having £10,000 in it. You now owe that to the bank.

Add the two together and they add up to nothing. One you apparently own (the current account) and one you apparently owe (the loan account). But if you decided to cancel the deal you could straight away repay the loan using the current account and there would be nothing left. Which is why I mean they add up to nothing.

Note there’s no cash involved in this process at all. It’s just an accounting trick. Nothing more.

And now the bank charge you interest for the benefit of having created that money. Even though there is no money as such, even though you think there is, because you can spend what’s in the current account as if it were money. Which is what I mean about the banks creating that money. You can see why they make so much profit, can’t you? They make money out of nothing and then charge you to use it.

Of course they need some cash. That’s necessary to ensure that if anyone does want their money back in straightforward cash they can pay it to them. That’s why they need part of that 3% of money created by the government.

And of course they can’t repeat this lending trick forever because if they did people would realise there was no substance behind the promise they made to you when you agreed to pay them back a loan. That promise is that the money in your current account can be used to pay other people – a promise that is only as good as the bank on which the cheque is written on.

But that’s the confidence part of the rick. So long as people believe the banks will pay they don’t need money. They can just pretend they have it. When people don’t have that confidence they do need money. Trouble is, they always lend far more money than they actually have. That’s the risk in a ‘run on the bank’ of the sort Northern Rock has suffered.

But now that risk has been taken away. The government has said it will cover it. So the banks can lend more money at limited risk to themselves. And so make more interest on something they have created out of thin air. Are you surprised that banks are the biggest companies in the world? After all, their basic product really does not cost them anything to make. Amazing, isn’t it?

You don’t believe me? Actually, you wouldn’t be alone. When explaining this the second greatest economist of the last century (J. K Galbraith) said:

The process by which banks create money is so simple that the mind is repelled

(John K. Galbraith, in “Money: Whence it came, where it went”, p. 29.)

He was right, because it’s true: the process is so simple that we’re repelled by the idea that we pay for it.”

Worcester Literary Festival – June 21 – come along and let’s talk

Blogging Comments Off

Jun 162011

I am at Worcester Literary Festival on June 21, which is next Tuesday.

Full details are here.

Please come along.

The House of Lords are incredulous: of course International Financial Reporting Standard

Accountancy, Accounting, Auditing Comments Off

Jun 162011

The House of Lords recently undertook a review of the role of auditors in the run-up to the 2008 financial crisis. The report was damning, and rightly so.

Now the government has responded and the House of Lords aren’t, overall enamoured with the response. As they note, in particular:

We were surprised by the Government’s denial that IFRS accounting standards had reduced prudence in audit. The Committee’s report concluded that IFRS has limited auditors’ scope to exercise prudent judgment. Auditors’ traditional, prudent scepticism must be promoted, whatever the accounting standards.

Too true: and it will get worse, as I have explained today.

H M Revenue & Customs is letting big business off the hook – according to its own senior staff

HMRC, Tax avoidance, Tax evasion, Tax gap 12 Responses »

Jun 162011

ARC – the Association of Revenue and Customs – which is the union for higher grade staff at H M Revenue & Customs has issued a press release today saying:

The Association of Revenue and Customs (ARC) has described today’s disclosure of HM Revenue and Customs’ detailed plans for the next few years, which show a crackdown on evasion by small and medium-sized businesses but fewer resources to tackle avoidance by multi-nationals and the wealthy, as letting big businesses “off the hook”.

In Autumn the Government announced, as part of its spending review that HMRC would be cut by more than £3bn, although some limited “re-investment” was said to be targeting fraud. Only now have detailed plans emerged, and these show further steep reductions in the senior grades – the grades that deal primarily with large business and the wealthy.

Graham Black, ARC President, said: “This is just as we feared. HMRC is reducing by a further 15% to around half the size it was a few years ago. And while some extra resources are being used, rightly, to target fraud, the number of senior staff capable of dealing with complex avoidance and evasion will tumble yet further, by over 400. “There is a huge tax gap, caused in part by well-advised businesses and individuals stepping aside from taking their share of the pain. Why should banks and major businesses be let off the hook, when most citizens in the UK pay their fair share in taxation? The country cannot afford this madness. The Government is acting like an unhinged Robin Hood – taking from the poor and giving to the rich”.

Graham Black is right: this is madness. Any sane person can see that.

George Osborne can’t. Draw your own conclusions and at the same time decide where he sees his own future career: will he be on the side of the tax avoiders, or on the side of the tax enforcers? I think that the answer is pretty obvious, and that makes him wholly unsuitable to be Chancellor.