As the Public Accounts Committee has noted this morning:
The Government knows too little about the tax reliefs it provides: whether they work, or offer value for money, or even how much they actually cost, says the Public Accounts Committee in a report published today, Monday 20 July 2020.
They added in their press release:
The ten most expensive UK tax reliefs cost the public purse £117 billion a year - equivalent to giving up around 5% of GDP in foregone tax revenues. But the Government's own, scant evaluation shows that only one of the four reliefs costing more than £1 billion a year has the intended effect on economic behaviour.
And I would suggest that they were right to note that:
Among the most expensive, pension reliefs, was forecast to cost £38 billion in 2018-19 - but the Government has not made any assessment of whether that huge cost actually encourages saving for retirement or reduces dependence on state retirement benefits, or whether it just enables those already saving comfortably to save more.
This was also telling:
The £15 billion cost of VAT relief on the construction of new dwellings may subsidise new luxury properties, or affordable homes: the Government doesn't know.
The Committee's suggestion is:
The Committee is calling for the Treasury to set out clearly the range of UK tax reliefs, with their intended objectives, so proper assessment can begin on whether these breaks are achieving what they're meant to, for the people intended, and providing value for money in doing so.
I wholeheartedly agree, except for the fact that pension tax relief costs £54 billion a year because it is wholly inappropriate for HMRC to suggest that current tax income from pensions can be offset against the current cost of pension contributions that will give rise to future pension payments.
I would also add that the Committee was wrong to only consider allowances when undertaking its review. HMRC has no more idea about why tax exemptions and reliefs are given than it has allowances. Add all these together and the sum is in excess of £400 billion.
What the Committee is rightly saying is that a tax system which can give away more in reliefs than most government departments are responsible for spending, and by some considerable margin in many cases, is out of control.
It is essential now that tax spends be reconsidered. I define these as the value of the tax reliefs, exemptions and allowances a government grants to promote social, economic, industrial and other policy objectives. And to do this we really need to do a full UK tax spillover analysis. Andrew Baker and I have argued for this, here, and here.
A tax spillover analysis is a risk assessment tool. It seeks to explain how tax gaps arise. It does so by appraising the way in which one part of a tax system within the jurisdiction being appraised undermines another part of the tax system within that same jurisdiction, or the tax system within another country. It also appraises whether the tax system of the jurisdiction being considered is undermined by the tax system of other locations, treated as a whole. As a result of the way in which tax spillover assessment is designed it identifies the areas of greatest risk within a tax system and, because of the documentation process used in the appraisal methodology, makes it relatively straightforward to identify which issues need to be addressed to improve the quality of the tax system itself, and resulting tax transparency.
If this were done we'd identify why we give tax reliefs, exemptions and allowances, what benefit they provide and what risks they create. At a time like the present that seems by far the most important thing to do improve our tax system. The Public Accounts Committee is taking steps in the right direction.
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it is a great shame that various parliamentary committees come up with entirely reasonable reports and insights and how often they are overlooked and avoided.
How will public sector employees, many relatively low paid – be able to afford much higher pension contributions if tax relief is removed?
I am suggesting the removal of higher rate reliefs
Your comment misses the point then
This government has, of course, made huge changes to tax reliefs on pensions. Under the last Labour government a wealthy individual could contribute £325,000 a year to a pension and get tax relief. Under today’s Tory regime the wealthiest individuals can contribute £10,000. Of course, you won’t give them any credit for this.
I’m happy to do so
The last labour government made a great many mistakes
“the fact that pension tax relief costs £54 billion a year because it is wholly inappropriate for HMRC to suggest that current tax income from pensions can be offset against the current cost of pension contributions that will give rise to future pension payments.”
Except that it’s not a fact. Pension relief given today will result in pension payments at a later date and tax will be paid on those pensions.
You don’t approve of the government’s way of balancing the timing differences but you don’t offer an alternative. It is patently obvious that pension contributions today will result in pension payments later and that they will be taxed. The fact that you, as a claimed tax and economics ‘expert’, cannot produce a figure for that tax speaks volumes about your claim. Whatever the figure is, your claim that it is £0 is laughable.
How much tax?
When?
And if we removed the relief the answer may indeed be none
And we would be a lot better off
But the line thing we can be sure of is payment of tax on past contributions has nothing at all to do with tax relief on current contributions and so the accounting is not just wrong – but grossly wrong
Like much of government accounting, isn’t this a cash basis? That is, the “cost” is the difference between the tax relief on pension contributions made this year, versus the tax paid on pension payments made this year.
Even if you removed or radically curtailed the relief today, presumably you’d continue to tax all of the pensions currently in payment, and all those which become payable in the future, at marginal income tax rates, for decades to come. Admittedly, for many people, income tax on the pension payments is likely to be less than the tax relief that was given on the pension contributions, not least because pensioners tend to have lower incomes and so much of their income is within the personal allowance and basic rate.
I can see a coherent rationale for limiting tax relief on pensions contributions to the basic rate (and tax relief on charitable donations too) but I suspect the result would be many people saving less for their retirement (and making fewer, lower donations).
But you rather prove my point
The tax from past contributions will still come in for many years to come even if we ended all contribution relief now (which I am not suggesting)
So, they are wholly independent variables that should not be offset
You’d have to make some heroic assumptions, but it would be an interesting actuarial exercise to work out how much income tax will be paid over time on the pensions which have garnered tax relief of £54 billion in 2018-19. Has anyone done that? Might it be more than £16 billion?
Who knows?
And what is the discount rate?