The Taxpayer’s Alliance has issued a report on Tax and Entrepreneurship. There’s a great analysis of it at The Other Taxpayer’s Alliance. As they point out, the TPA loves a dubious formula or two to help its case, in this case:
(1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4)
The TPA claim this is used to calculate
the marginal tax rate on income that is earned, saved and invested in a company and then passed on as an inheritance", where "t1 is the income tax rate, t2 is the corporate tax rate and t3 is the capital gains tax rate and t4 is the inheritance tax rate and r is the pre-tax return on an investment in a company.
Maybe, but I’ll deal with that below. The Other Taxpayer’s Alliance has a much better summary of it:
tpa=bs2
I call this a modern classic, but let’s for a moment consider the TPA version. As they say, this calculates
The top marginal tax rate on income earned, saved, invested in a company and then passed on to children.
Oh dear guys: assuming that you really are creating an entrepreneurial trading company the rate of Inheritance Tax is not the 40% you claim (which is a massive assumption in its own right), but 0%. You see — there is no tax on the gift of shares in an unquoted entrepreneurial company. Which means that the top rate of tax is not the 90% + that the TPA claims — but a figure much lower — and lower still when other double counts such as credits for corporation tax paid against income tax are taken into account (as they fail to do)— which does make things look very different.
It really does seem the TPA need the services of a good accountant. Their so called experts would miserably fail any tax test if this is the level of their competence.
And they also, as Adam Lent points out at the TUC, need to consider their positioning:
There’s a logical error here, isn’t there?
- The Taxpayers’ Alliance claims it “is committed to forcing politicians to listen to ordinary taxpayers”.
- The Taxpayers’ Alliance released a pamphlet today claiming that the 50p tax rate for those earning over £150,000 introduced in the last Budget will seriously damage the economy and is grossly unfair to the wealthy.
- Polls consistently found (PDF) that a large majority of ordinary taxpayers support the 50p rate and only a small minority oppose it (57% for and only 22% against in a Populus poll, for example) even after the very negative reaction of the press to the measure.So which “ordinary taxpayers” do the TPA represent then who share their view that the 50p rate is a terrible error?
Clearly not the majority.
Maybe they actually represent the minority of taxpayers so blinded by their hatred of the ‘evils’ of tax, they haven’t noticed that the biggest financial crisis in decades has slightly changed the imperatives we face? Or maybe it’s the even tinier minority who will actually be affected by the 50p tax rate. Whichever, today’s lamentable report from the TPA should finally put to bed any pretence that they speak for the majority of ordinary taxpayers.
Which does, I guess, bring us back to:
tpa=bs2
Which I couldn’t resist repeating.
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[…] when someone really muffs it. Thank goodness I wasn’t drinking my morning cuppa when I saw Richard Murphy’s: The Taxpayer’s Alliance needs an accountant: Oh dear guys: assuming that you really are creating an entrepreneurial trading company the rate of […]
Richard,
You are assuming that the entrepreneur hands on the company itself, that they are looking to build a family firm. Our report wasn’t on family firms but entrepreneurship and, particularly, those new start ups that have the most significant effect on employment (high growth “gazelles”). As family firms are often lifestyle business, non-chain restaurants for example, they are less likely to be those high growth firms that create the vast majority of new jobs.
As they aren’t building a family firm, someone like one of the “Dragons” generally won’t hand on shares in their company but money. That will have been obtained either as a capital gain when they sell a firm or an income paid by the firm. As such, we pointed out that the former can expect to face a top total marginal rate of 86%, and the latter 90% rising to 92% with the new 50p top income tax rate. And, we’ve argued that the top rates matter as big rewards make up for the high risks that come with entrepreneurship.
Someone who hands on shares rather than money will be taxed at a lower rate. The fact that we’ve modelled them handing on money isn’t an error, though. It’s a perfectly reasonable assumption.
Best,
Matt
Matt
That’s surreal
First this relief applies to individuals as well as companies – of which you seem unaware
Second – why should an entrepreneur’s cash be any different from anyone else’s?
Third – as I know – because I’m a serial entrepreneur – tax is the last thing an entrepreneur thinks about – they create companies because they just can’t help doing it. And never, ever, in my time advising hundreds of business has somebody questioned Inheritance Tax as a reason for not starting an entrepreneurial activity
Fourth – you ignore the time value of money – the taxes you suggest arise do not occur together
Fifth – you assume this entrepreneurial person gets their pile of cash and then keeps it in cash. How likely is that? If they reinvest in AIM they still get the Inheritance Tax relief – and I really don’t think entrepreneurs are likely yo sit on cash piggy banks in their retirement
I could go on and on, but the reality is this – your report is make believe fantasy about a world and a tax system that does not exist
Far from being a reasonable assumption yours is a politically motivated artificial construct designed to mislead.
And the tax is still wrong
Richard
Richard,
1) You keep asserting that I’m unaware of things that I’m entirely aware of, that just isn’t relevant.
2) When did I argue that it should?
3) You may or may not think about tax but plenty of entrepreneurs think about the potential returns on their new venture. There is solid evidence for that. And, those returns will be subject to tax.
4) I’m comparing pre and post tax returns in the same time period, hence discounting isn’t necessary.
5) Quite the contrary, I’m assuming that they save and invest. But, that what they hand on to their children will be an ordinary financial asset subject to Inheritance Tax. Unless we’re talking about a family firm, that’s quite reasonable.
Best,
Matt
Matt
Sorry – but you still don’t get it
Two examples:
a) Unless the person dies in harness (when there is no CGT, only IHT) there will eb a time lapse between the CGT and IHT charges, so of course discounting comes into it. Similarly there will eb atime lapse between income tax and CGT. So of course discounting comes into it
b) Entrepreneur’s relief applies to much more than the family business – you really don’t know the subject, do you?
And your not an entrepreneur either – I can tell from (3)
Let me be candid – this is a crap piece of work. If you are going to write about tax at least have the decency to learn something about it. learning a little economics and maybe going out there and seeing what happens in the real world might also not come amiss either
Richard
Richard,
The suggestion that entrepreneurs don’t care about tax is insane. Sure, the first time they set up a business they may be 100% focussed on the business itself. But when they come to sell and see how much tax they pay, they all think “I wonder how I can reduce that next time”. After all, the key top being an entrepreneur is being able to identify where the opportunity exists to increase profits.
And if you say entrepreneurs don’t care about tax, why do you keep having a go at Richard Branson for using the BVI or Guy Hands for using Guernsey. Oh, that’s right – because you have your own definition of entrepreneur, whereas the rest of us have a shared one.
Paul
I don’t agree. Based on a lot of experience.
By the time they worry about tax they’re not longer entrepreneurs – they’e wealth preservationists. Not the same thing at all
And is private equity entrepreneurial enterprise or asset stripping?
And they don’t use BVI and Guernsey. they abuse them
Richard
Richard,
a) The amounts I’m comparing (amount passed on with and without the tax system) are both in the same time period. Hence, there is no need to discount when comparing their value. The question of when the taxes were levied is irrelevant.
b) Unless someone is passing on a family firm, Inheritance Tax is unlikely to be seriously reduced by the exemption for passing on company shares. Most financial investments are subject to Inheritance Tax. Someone might have an exceptional investment strategy that reduces the marginal rate from that found in our report, but those exceptions don’t invalidate an attempt to model what can be expected given normal investment behaviour.
You are, of course, entitled to your opinion about our report. But, no one has yet found any actual flaws in it so I’ll stand by my work. As to learning a little about economics, from looking at your bio it appears I’ve got a stronger economics education than you do. While I haven’t been an entrepreneur, Julie Meyer has and has drawn different conclusions to yours.
Best,
Matt
Matt
Extraordinary
I point out the flaws and you say no one has found any
If that’s your attitude then of course no one will ever find any
As for Julie, I was asked to consider being CFO of First Tuesday etc in 1998 or 1999 – and turned the opportunity down. I didn’t rate her then. I don’t now. I think my judgement was right. She’s not an entrepreneur – she’s a financier. Not the same thing at all.
Richard
Richard,
Well, one of your “flaws” needs to stand up to scrutiny before it counts.
And, from your reply to Paul, it appears you will only accept that someone is an “entrepreneur” if they don’t worry about tax. Dictionary.com goes for the more conventional definition of “a person who organizes and manages any enterprise, esp. a business, usually with considerable initiative and risk.” I’m not going to take it as a flaw in my report that I didn’t adhere to your personal terminology.
Best,
Matt
Matt
All my noted flaws stand up – your comment on timign is ludicrous. It requires that a person creates a business, pays themself an income from it, sells it and then dies all at the same instant to be true. Do you consider that plausible?
And you still refuse to consider the true nature of business property relief.
You also make the extraordinary assumption that an entrepreneur will always sell out before death. Where does it say that in your quote? And where does that quote mention tax? It doesn’t. I wholly heartedly buy the definition – but it’s also exactly why tax is not an issue – the initiative and risk makes the tax small beer.
Sorry – I’m not talking terminology here – except to point out all the flaws in yours – I’m talking about the reality based on a thirty year career as a practising chartered accountant and as an entrepreneur.
And not once, not ever, did an entrepreneur talk IHT to me when discussing a business start up
So let’s state the facts as they are – you’re talking about something you clearly don’t know about to advance your polotical agenda – whcih as the TUC points out – is not in line with the opinion of the vast majority of taxpayers.
Now remind me – how does that make you the Taxpayer’s Alliance ?
And whilst your about it – who does fund you?
Richard
Richard,
I think it’s probably best that we leave this debate. This is going round in circles.
It doesn’t matter when the tax is taken, discounting would only be necessary if the final amount that someone gets as their inheritance happened at different time periods in my numerator and denominator. I’m not sure I can explain that to you any more simply.
Equally, business property relief isn’t significant in most cases when we’re talking about entrepreneurs not handing on a business but the returns they’ve earned from it. There is nothing remarkable about the assumption that an entrepreneur starts a firm, earns money from it and then passes that money – in the form of cash or all sorts of other financial assets – on to their children.
We are funded by hundreds of individual donors.
Best,
Matt
I think there’s a strong argument to be made that the HIGHER the rate of inheritance tax, the bigger the incentive to be an entrepreneur, because big inheritances destroy any link between effort and reward. I run my own business and I think if I’d received a large tax-free inheritance (or I was expecting to receive one in a few years’ time), it would make me much less likely to want to be an entrepreneur – indeed much less likely to want to do anything useful. Why bother working when you are born with a silver spoon in your mouth?
My choice of career is driven by the intrinsic fascination of the work and the attraction of the self-employed lifestyle – and I’d agree with Richard that the tax rate is neither here nor there. Even if I do end up lucky enough to be in the 50% tax bracket it will make not the slightest difference to what I do.
In the current economic climate I’d question whether self-employment or entrepreneurship is inherently more ‘risky’ than being an employee – just look at the number of employees being laid off at the moment!
time out guys! personally my own experience is that successful owner managers tend to engage accountants to help them with tax planning, over the short, medium and long term. Tax is viewed as (yet) another cost to manage. I guess that means you are both right.
Matt
My blog – and I’m having last say
No it’s not true that the discounting will be the same on top and bottom lines
Have you not noticed that people deplete capital in old age as they live on it?
And I look forward to your campaign to eliminate business property relief in Inheritance Tax as entrepreneurs don’t need it. Until I see that I won’t believe you.
I reiterate: your assumptions don’t stack – not at all
Richard
Ding Ding, end of round 12.
And the winner, by unanimous knock-out decision…in the Red Corner…
“This is going round in circles.”
Nope not the debate mate. The stars around your head maybe.