Jonathan Ostry, the deputy director of the IMF's research department, has an article in the FT this morning concerning the paper he and colleagues published last week on the relationship between equality, taxation, redistribution and growth.
This is an important paper, the findings of which need to be widely known and the article makes clear the views are those of the author so I share his conclusions here. They are:
First, inequality matters, not only for its own sake but also because it makes an important difference to the level of economic growth. More unequal societies have slower and more fragile economic growth. It would thus be a mistake to imagine that we can focus on economic growth and let inequality take care of itself. Importantly, we established that growth is faster in more equal societies than in less equal ones, regardless of whether they have highly redistributive tax systems. The lower growth observed in highly unequal societies does not seem to be a side-effect of redistribution, as some people have claimed.
Second, we found little to suggest that a modestly redistributive tax system has an adverse effect on growth. True, there are some signs that highly redistributive tax systems — the top 25 per cent of our sample — may crimp economic performance. But the levels of redistribution seen on average in the broad cross-section of countries we looked at seem to have had negligible direct effects on growth.
Put these two observations together and you come to an important conclusion for policy. Making the tax system modestly more redistributive seems to have little direct effect on growth.
In fact, this understates, if anything the conclusion they reached. They say that even large scale redistribution does not appear to harm growth.
The article, I know, comes with a few caveats attached but the message is clear: the argument that redistributive tax policies (such as a 50p tax rate in the UK) harm growth has been holed well and truly below the water line.
In unequal societies it is now clear that if we want innovation, opportunity, jobs and growth then tackling inequality through progressive taxation is a very clear way to achieve that goal.
I have already discussed the likely reasons for this finding: what we now have to ensure is that this is widely known and understood.
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“In fact, this understates, if anything the conclusion they reached. They say that even large scale redistribution does not appear to harm growth.”
No, that is not what they say. I quote: “True, there are some signs that highly redistributive tax systems — the top 25 per cent of our sample — may crimp economic performance.”
“The article, I know, comes with a few caveats attached but the message is clear: the argument that redistributive tax policies (such as a 50p tax rate in the UK) harm growth has been holed well and truly below the water line.”
That is an extension to their argument that you yuorself have made, not one they have. We already have a redistributive tax system in the UK. You are twisting the argument they put forward (a redistributive system may or may not affect growth) to a different one – that a redistributive tax system *improves* growth and that we don’t have a redistributive system – purely so you can argue for higher taxes (again) and have a pot shot at the government.
Labour put the 50p tax rate in during the last gasps of the Brown government. if it was such a good policy, why wasn’t it done 13 years earlier?
We have a very weakly redistributive system, unfortunately
With regard to wealth it fails
According to the IMF paper (Fig 7, p23), we are in the top 25% – the “highly redistributive tax systems”.
although it is interesting that according to the BBC, of all G20 nations, only India and Italy impose greater tax on a person earning £240k with a big mortgage and kids than the UK: http://www.bbc.co.uk/news/magazine-26327114
Surely the argument that the UK is somehow a low tax jurisdiction for the rich has been holed well and truly below the water line by this research?
This is, to be polite, a mildly absurd suggestion. You ignore the fact that we provide enormous opportunity for a person earning £240,000 a year to hide that income through mechanisms such as companies and that there are also ample opportunities for that income to be sheltered from tax.
The analysis you use is so simplistic that it is not worthy of further discussion
I wish I knew all these easy tricks for sheltering income. When one rules out concealment, sham and other evasion techniques there’s not a lot that can be done, so far as I know.
EIS is handy, but risky; pensions are restricted; using a company only defers tax and you can’t use the income you’ve deferred the tax on; moving offshore isn’t normally practical if you’re on £240k. EMI is nice, but relies on the business actually growing. Charitable contributions are always good, but of course you no longer have the cash at all. ISAs are relatively small. Converting income to capital is hedged around with all sort of anti-avoidance. Even investing in a project eligible for green capital allowances gets you into capped loss reliefs.
Once you’re up in the millions then people are happier to reinvest surplus income through companies and defer the tax, or invest it through EIS and claim the incentives, or whatever; but at £240kpa I find they normally want to have it to spend. Which pretty much means paying tax now.
Try incorporating
Maybe you have not noticed what LLP rule changes are about
The rest of he profession has
Please do not feign ignorance Andrew: it does not become you
“Labour put the 50p tax rate in during the last gasps of the Brown government. If it was such a good policy, why wasn’t it done 13 years earlier?”
Because for most of that period Labour was led by Tony Blair, a right wing Tory infiltrator. Gordon Brown – no left-winger himself to be sure, but to the left of Blair (that’s not difficult!) wanted to increase the top rate earlier but Blair vetoed it.
I know very well what the LLP changes are about, and it’s nothing to do with incorporating. Are you confusing the LLP changes with the mixed partnership ones?
The LLP changes are mostly about NI rather than tax (the tax bills go down overall if you start treating members as employees), and the problem with mixed partnerships is deferral. Well, the problem with mixed partnerships hasn’t been clearly articulated, but the focus seems to be on deferral – after all, after paying CT and then income tax the overall tax rate is normally broadly similar. Again, NI is a bit of an issue. But in neither case do you get fantastic tax breaks on income, and as I said before if you defer tax by incorporating you don’t get to use the cash.
Andrew
This is pedantry coupled with obfuscation
You don’t get the cash in most tax shelters
The wealthy don’t need cash
Don’y you understand they accumulate?
That’s why they’re wealthy?
Sorry, but if you’re going to make points please credit my readers with some intelligence
Richard
I know what the ones on £240k or so do, because they talk to me about it. They buy houses, and holidays, and cars, and nice stuff for their families.
To do that they need cash.
They don’t sit there watching the cash accumulate in a company, because there’s no point having it if they do that. A fat balance sheet doesn’t get the kids to Disneyland.
Now maybe multi-millionaires are happy not getting all the cash up front, and letting part (or most) of it accumulate for later. But to tax a company proprietor on the profit the company makes would be a serious step change in the way company law and the economy work, never mind tax.
That’s why so many partnerships included a company was it?
Politely, pull the other one Andrew
You have *read* the responses to the consultation document, haven’t you? The ones setting out the cases where, for example, there are regulatory requirements about deferring income, so a company is included to reduce the impact of what would otherwise be a dry tax charge? The Law Society were particularly scathing of this view that the only mixed partnership is a tax avoidance partnership.
It is correct to say that including a company in a partnership can be used to defer tax. But it’s a long stretch to say that’s the only reason for including them. Have you tried discussing the situation with any of your farming clients? Property developers? Investment managers?
If you can explain to my clients exactly why they as individuals should pay 40% tax now on money they can’t take out of the business for the foreseeable future, I’d be very grateful. It can be quite hard to convince people that they shouldn’t adopt a structure that shifts the tax charge closer to the real economic impact, but should instead adopt one that accelerates the tax charge ahead of the economic reward. Neither HMRC nor HMT has produced a policy reason for this. Nor for why only mixed partnerships are being affected when companies aren’t, and neither are other structures.
Also, you certainly do seem to be confusing the LLP question with the mixed partnerships one – or at least you seem to have switched from one to the other without noticing. You might find it useful to go back and remind yourself what the different issues are, if so.
I used a short hand using the term LLPs to cover all issues: please stop being pedantic
And I do not accept that including a company in a partnership has anything but a tax motive. If the retained profits of LLPs were taxed at 20% then you can be sure there would be no corporate partners
Tax deferral is therefore always the motive
As the Lords I think, agreed: you can be one or the other, mixing and matching was always going to be considered tax avoidance. Why deny the truth?
Anyone can defer tax using a company, but then settle the tax on income as a company. It seems unreasonable to expect the best of both worlds but you are doing so.
I’m not being pedantic: I’m being misled by your sloppy use of language. Why refer to the issue that covers both partnerships and LLPs as “the LLP issue”, when there is another issue that only covers LLPs and so is far more clearly indicated by that term?
In my view, if partnership profits were taxed at only 20% then there would still be corporate partners. You can choose to ignore non-tax motives if you wish, but that doesn’t mean they don’t exist. Have you talked to your farming clients?
You still haven’t given the policy motive: why should income be taxed at 40-45%, regardless of whether it is actually available to an individual? Why should corporate partners be looked through when corporates are not? I can see some reasons why companies should generally be looked through, or at least close companies, but not why certain companies should keep the veil and others shouldn’t.
Can you clarify your last point? I can’t see what you’re getting at.
No one needs to use an LLP
The consequences of doing so are known
45% tax can be a consequence
Don’t you for one minute so how self pleading you are, in two ways?
One, please don’t tax as the law intended
Two, please do not penalise the choice to create tax risk in our structuring?
The consequences of using an LLP were known. Now they are changing, but it’s not clear what to. There seems to be neither rhyme nor reason to the changes, so it is impossible to say what the law intends – certainly not the draft law that is likely to come into force in a month’s time. There are a large number of unanswered questions that I and others have put to HMRC to try to find out what is intended.
I would like a tax system where there is a clear link between economic result and tax consequence. It used to be possible to use mixed partnerships to get a closer fit between the two than a simple partnership would allow, but the proposals move us away from that and simply assume that any tax impact is avoidance. They therefore, in my view, over-tax certain structures compared to the economic position – or, rather, they accelerate tax by recognising income inappropriately early. Recognising income too early always used to be a bit of a no-no in the accounting and tax world, I thought.
This tax cashflow issue can be mitigated very simply by incorporating the partnership – and HMRC have confirmed that this is entirely acceptable, mark you – so what we have is a set of rules which force businesses out of a structure which suits their commercial needs into one which is not appropriate for them in order to escape dry tax charges for which no policy justification has been articulated or can be discerned. The tax tail is wagging the dog, at HMRC’s instigation.
I have no problem with much of the new legislation, such as the restrictions on losses from partnerships or bespoke planning around tax attributes. I was chairing a meeting to discuss this exact legislation today, and none of the many experienced advisors present batted an eyelid at those when I asked for comments. Those rules are spot on. The profit reallocation rules, however, are a tangled mess.
Shall we agree to differ?
I think we must 🙂
The main disincentive for people is the appalling cost of housing yet rising house prices are measured as growth – unless we can overcome the madness of this paradox we get nowhere (well-we get oligarchy!). These researchers need to question their unexamined assumptions about growth as they operating with a paradigm that has overtaken its sell-by-date.
Richard
You seem to be oblivious to the fact that a significant proportion of the ‘high earners’ are in financial services and paid under PAYE, so that the opportunity to avoid income tax is basically zero.
This is indirect contrast to people like yourself who can use limited partnership arrangements to reduce their tax bills….
This is simply disingenuous
I suggest you note that hundreds of traders were in the Moyles scheme
Shrinking financial services and channeling money into the creation of goods and services should be amongst the first steps of redistribution.
Until the City is shrunk and brought to heel, any thoughts of redistribution will probably remain a pipe dream.