Budget » Tax Research UK

The key economic assumptions Osborne is making are wrong – which means he can’t balance his books

Mar 212012

The budget Osborne has offered today includes some massive tax giveaways. There’s almost a billion a year to big business on top of the controlled foreign company £800 million they were already getting. And although he says otherwise, the 45p tax rate is a massive tax giveaway to 300,000 in the UK.

He’s doing this because he’s still assuming there will be growth. Not as much as he did – the OBR have upgraded this year by 0.1% but downgraded the next two. But what’s really worrying is how they think that growth will happen. This is indicated in the following graph, taken straight from the Budget statement:

So we, as consumers, are going to be worse off. That’s good news!

And the government is massively contracting.

And although the OBR say worldwide there could be recession, and certainly no growth, they are nonetheless saying exports will grow – which is utterly implausible and is an assumption that comes from cloud cuckoo land!

But the weirdest assumption of all is that business will invest massively more? Why will they do that? Their customers – whether here, or the government, or abroad – are all going to be consuming less but it’s assumed business will invest substantially more. That is utterly implausible. They just aren’t that irrational. They want a return before they invest – and since this forecast clearly says none will be forthcoming then that isn’t going to happen.

In that case, as ever, this is a budget for balancing the government’s books that simply will not deliver. And it can’t – because the above four variables are the only ones that will drive growth and if business investment does not – as I am sure will be the case – then all his underlying economic assumptions are wrong. And that’s particularly worrying. Especially for his credibility when it comes to the next election.

Why it’s impossible that the 45p tax rate will cost jusy £100 million a year

Budget 10 Responses »

Mar 212012

The OBR and government is saying that the cost of cutting the 50p rate to 45p is just £100 million a year (here, page 50).

So, let’s look at the data I used from HMRC for the current tax year to estimate the revenue HMRC raise from the 50p tax rate. This looked like this:

I stress, this is all based on HMRC data on income, taxpayers and what tax they pay.

Let me just concentrate on those earning over £1 million a year for a moment. They have an average of a bit over £2 million of income subject to the 50p tax and as the nad will be the same for the 45p rate (with fewer allowance offsets permitted) the income will be near enough the same for that rate.

So 5% of that sum will be lost for 14,000 people. That just over £1.45 billion lost revenue from this group alone.

Now how come in that case the tax lost is just £100 million according to HMRC, the government and OBR unless someone is telling the most amazing porkies.

Take the rest into account and the oss is liklely to be £3 billion.

Rarely have we had a budget where such a large lie has been told by someone in such high office for the sake of giving so significant a tax cut to so few.

The OBR data confirms my estimates of tax to be raised by the 50p tax rate were right

Budget 19 Responses »

Mar 212012

I have written extensively on the 50p tax rate and came up with the biggest estimate published on how much the Revenue would raise from it – based wholly on their own figures. That figure was a sum of more than £6 billion.

Now we know the government, HMRC and the Office for Budget Responsibility do not agree. So why is that?

Well, let’s look at the reconciliation table published by the OBR, which looks like this:

So what we learn is that the effect of the tax in 2010/11 was negative – but only because £6.1 billion it may have raised in 2010/11 and after was shifted into the previous year, for reasons Channel 4 have explained.. £5 billion of that was lost in 2010/11. So but for that shifting the tax would have raised the £0.7 billion they say it did raise (which, by the way, out of more than £40 billion paid by those with income over £150,000 is an impossibly small ratio) plus £5 billion. Or £5.7 billion in all, at least.

The shifting could not have happened again in 2011/12 – the year for which I prepared my estimate. That would be impossible. The tax could not have been introduced twice! Despite that the yield is actually assumed to go down in 2011/12 – something that seems so implausible that no reasonable basis it could possible be constructed. In that case let’s dismiss this forecast as a fabrication and stick to the 2010/11 data of what should be now known tax collected plus tax known to be avoided on a one off basis and the revenue but for that one off avoidance would have been £5.7 billion in a year when I forecast it would be between £5 and £6 billion.

In other words, this data looks to confirm all I said and confirms I was right, here.

It also confirms that these forecasts are now simply a matter of make believe. And that is confirmed in the OBR report where they say:

The assumption that the behavioural response to the 50 per cent rate is more powerful than the original costings assumed means that the cut to 45 per cent appears less expensive than it would have done under the original assumptions.

In other words now there are Laffer curve fans in charge it’s assumed that this tax collects no revenue. That’s not fact. That’s assumption and nothing more. Or the ~~lies~~ restatements that I suggested would be made.

Sticking to the facts it should have raised £5.7 billion in 2010/11 which is consistent with my estimate of £6.7 bn in 2011/12 and I therefore maintain my figures to be right and that my estimate of the loss from introducing the 45p tax rate – which will be about £3 billion – is also right.

Which also means that the abolition of this tax rate is a straightforward gift to the rich – as I always predicted it would be.

Osborne turns his guns on the small business community as IR35 is back – big time!

Budget 59 Responses »

Mar 212012

The Budget report includes the following paragraph:

2.207 Personal service companies and IR35

The Government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include:
- strengthening up specialist compliance teams to tackle avoidance of employment income;
- simplifying the way IR35 is administered; and
- subject to consultation, requiring ofﬁce holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged. (Finance Bill 2013)

I can see no press release so this is all we have to go on but let’s consider this at face value.

What it says is that all IT contractors will in future have to have PAYE deducted from payments made to their companies BEFORE those companies get them. That’s the end of their self-employments.

And the same will be true of the army of consultants working for government.

And anyone with most of their consulting income from one client.

How many people will this affect? Hundreds of thousands; maybe more.

Now I welcome this: these people are employees and should be taxed as such. That is obvious. An unlevel playing field has existed on this issue for far too long and as such I welcome this measure. But Osborne is going to alienate one of his key constituencies with this move by the look of it. And that’s another political own goal by this supposedly most politically astute of chancellors.

The budget – an overview of the elephant traps

Budget, Uncategorized 26 Responses »

Mar 212012

I have only just managed to get anywhere near blogging on the budget due to demands of broadcasters so for a moment I’ll stick to my political reactions to what was said and ignore the detail.

This was a deeply political budget – and a failed one at that. The 45p tax rate is a gift to Labour. If the 50p tax rate raised no money then it deserved to go. But as I’ll show later – even the OBR said it should have raised money and in that case they had to keep something or lose too much case – so they compromised on 45p. That’s an admission that higher rates work but they wanted a give away to the rich anyway. My estimate of the giveaway – well that remains at around £3 billion. I’ll come back to this later.

Re the supposed extra tax on the rich – this is simply an increase in stamp duty on houses over £2 million. Sure that taxes the rich but it is so arbitrary that it undermines the principles of any good tax system – not least Adam Smith’s which Osborne quoted. Suggesting it’s fair to pay more tax because you’re mobile has no logic to it at all.

As for the supposed crack down on tax avoidance – that’s Graham Aaranson’s general anti-avoidance rule which specifically says it is no such thing and is intended to allow all tax avoidance bar the very most offensive to continue unimpeded, plus the UK- Swiss tax deal which far from being na anti-avoidance measures specifically permits continued tax evasion by those UK residents who have used that country’s tax system for criminal purposes.

In other words this was a tax give away to the rich.

Middle Britain will gain too. The increase in the personal allowance is worth far more to them – up to Almost £900 for some households as opposed to the £200 or so for the average household Osborne highlighted. And for marginal households this can have serious impact in the loss of tax based credits that will mean there is little or not gain for those on very low pay and the margins of employment. Which makes it another own goal.

The child benefit reforms are a massive complication to the tax system for a so-called simplifying Chancellor, needed to dig him out of a hole. Thousands more households will need to do tax returns to get that one right, and will resent it when they owe many back as a result. Another own goal for Osborne!

That wasn’t the only own goal he had to dig his team out of – the oil tax changes were a slap in the face for Danny Alexander’s ill thought out reforms a year ago.

But most amazing was Osborne’s desire to shoot himself in the other foot politically, Having alienated parents on child benefit last year this year he’s chosen to alienate an even bigger lobby. He effectively announced another increase in state retirement age and at the same time said pensioners will have to pay more tax in the future. So that’s the grey lobby he’s lost, in its entirety. It’s an astonishing faux pas and almost certainly the biggest political gaff of this budget.

Although he has tried others. Budget statement paragraph 2.207 announces an attack on personal services companies. There may be a million of them in the UK – all natural Tory voters. That’s the small business lobby who will be spitting fire at him.

And did he do anything good? Yes, rail investment. That does it for me. After that? No. Nothing at all. It was a give away to big business by cutting rates and the tax base – the subsidy about £1.5 billion a year with no equivalent for small business, job creation, demand generation or a single measure of hope for most of the unemployed.

As for the £10 billion to be cut from welfare – well, heaven help you if you’re sick in future if you can’t reach your retirement age in your early 70s – because George is saying if you can’t work until you drop – well, you can starve instead.

This was a callous, dishonest, really rather nasty budget that was, however, full of elephant traps that should be a gift to a competent opposition.

I hope they’re stepping up to take on the challenge.

The problem with a 7% stamp duty is it perpetuates a bad tax

Budget 3 Responses »

Mar 212012

It’s forecast we’ll get a 7% stamp duty on properties costing more than £2 million today.

The problem with that is it perpetuates a bad tax and does not replace it with a better tax. That would be a land value tax.

This is a fudge, and a poor fudge and is pure political expediency when what is needed is real thinking about how we create a proper progressive tax system and one that reduces and not increases distortions.

But I guess we can’t expect that of a purely political chancellor.

Today’s budget broadcasting schedule

Budget 4 Responses »

Mar 212012

It’s going to be a busy day.

I was to be on Sky at 10.20 – that’s now uncertain due to the situation in France.

I am on the Jeremy Vine Show on BBC Radio 2 at about 1.30 to 2.

Then I’m doing a Guardian podcast.

There are some local broadcasts this afternoon.

Then it’s BBC 24 News at 7pm.

Followed by the Moral Maze at 8 on Radio 4.

That’s it, I think….

Removing higher rate tax reliefs for those earning over £150,000 is not a tycoon tax

Budget Comments Off

Mar 212012

As the Guardian notes in its budget speculation this morning:

Soaking the rich? Osborne’s expected to announce a new tax raid on the wealthy, perhaps by limiting how much they can claim in tax reliefs: recent research for the TUC suggested that people who pay the 50p rate – ie those who earn over £150,000 – are able to claim on average £15,000 a year in tax relief, on their pensions, charitable contributions and so on.

This may be badged as a “tycoon tax”, though some LibDems have already questioned whether it will be strong enough to merit the term.

Well, I didn’t know that I was writing the tycoon tax when preparing that analysis for the TUC.

And let’s be clear: that’s not a tycoon tax. A tycoon tax would have to ensure that the total tax of a person was taxed at a minimum rate. This does not. It simply increases, a bit, the effective tax rate on the part of their income that they declare in their own names. That ignores:

1) The income the wealthy divert to others

2) The income the wealthy have in personal service companies

3) What the wealthy hide offshore – now legally permissible thanks to this government in Switzerland

4) What they convert into gains

5) The part that’s hidden in trusts

And so on.

In which case this is a very, very long way from being a minimum tax rate, a tycoon tax or anything like such a thing.

That’s not to say I don’t argue for restricting such allowances and reliefs: at the very least I see no reason at all why tax relief should be given at higher rates and believe that this state subsidy to the savings and giving of the rich should be removed. But let’s not sell it as something it’s not, please.

Britain’s tax rules – now written for and by multinationals

Budget, Conservatives, Corporation Tax, Tax justice, Uncategorized 27 Responses »

Mar 202012

Felicity Lawrence has written a Guardian article under the above title. Please read it.

It focuses on what for me is one of the big issues of tomorrow’s budget – and that’s the destruction of the UK’s corporate tax base, George Osborne’s deliberate promotion of tax haven abuse and his utter indifference to the need of developing countries to collect tax – which he is deliberately harming.

Take just this one section as indication of why you should read it all:

The new goodie given the go-ahead by Osborne is a further exemption which will reduce multinationals’ tax bills dramatically: the exemption on profits of offshore finance company subsidiaries.

If a UK-based multinational sets up a treasury company in Switzerland and puts equity into it from the UK, which is then passed on in loans to its other subsidiaries to run its operations, with interest on the loans flowing back in profits to the tax haven. The tax rates on these profits will be a maximum of just one-quarter of the current UK rate.

These new policies have been written by multinationals. Labour established a series of working groups to consult on the CFC reform made up almost entirely of tax directors from businesses with large numbers of offshore subsidiaries.

The monetary assets working group, for example, consisted of Vodafone, Shell, Diageo, Tesco, G4S, International Power and BHP Billiton. The intellectual property group included Kraft, GlaxoSmithKline, Associated British Foods, Cable & Wireless, and the insurance working group had Aviva, RSA, XL Group, Prudential, Lloyds and AIG. The banking group came from banks including Barclays, which is famous for sophisticated tax avoidance.

Under the new coalition government, a senior manager in international corporate tax from accountants KPMG, Robert Edwards, was seconded to the Treasury for 20 months to see through developing the policy on CFC rules. His speciality at KPMG? Advising multinationals on tax-efficient cross-border financing and restructuring.

With stakeholders like this, it’s no surprise that tax justice protesters have taken to direct action and occupation.

Daily I grieve on the disaster for the UK of Osborne getting power without having ever won a general election. Rarely has there been a man with so absent a moral compass in high office in this country. New Labour made serious errors – as Felicity Lawrence does not seek to hide, but Osborne is so much worse.

And in the meantime who will pay for this largesse to the largest corporations in the world? Why, ordinary people suffering beenfit cuts, increased taxes and a future with no hope, both here and abroad.

That’s why we campaign.