Tuesday 14 August 2007

Lifetime Savings Account - load of rubbish

As cool as most of John Redwood's recent output was, it seems that the Tories are going to re-hash this idea of three years ago.

It was shit then and it's shit now, and little different to a similar shit savings scheme dreamed by Nulabour (i.e. authoritarian left-wing) think-tank IPPR. It's petty minded social engineering at its most pointless.

My preferred solution? Scrap CGT completely, scrap all tax-breaks for investment (a tax-break is a subsidy so by definition it just raises the tax burden elsewhere and hence distorts the system; the deadweight costs always outweigh the benefits), scrap higher rate tax on dividends (basic rate taxpayers don't pay tax on dividends) and tax all interest at a flat 20% with no higher rate tax.

No annual limits, no rules, nothing.

5 comments:

Anonymous said...

"a tax-break is a subsidy"

I assume you are taking the piss. This is straight out of the Polly Toynbee book of Economic Howlers for the simple minded.

It may well have the impact that people and/or businesses will distort their planning to respond to the incentive of a lower tax liability, but "tax not due" is absolutely NOT the same as "other people's tax paid to you".

It was never the government's money in the first place.

" it just raises the tax burden elsewhere "

No it doesn't. The tax burden is raised elsewhere by the Chancellor. That he may be shuffling money around to make up for reduced revenue - note: reduced revenue, not "subsidy" - in such tax breaks. To suggest that it the tax break that causes the burden to be shifted absolves the Chancellor of his moral agency. I'm reluctant to do that.

"basic rate taxpayers don't pay tax on dividends"

Yes they do: they get the money net of the dividend tax credit. Even worse, the individual only gets dividend tax credit at 10%, LESS than the company actually pays.

In any event, if you are planning to scrap CGT, this is all moot as there won't be any dividends - all proceeds will go straight into the share price to be taken as capital and hence tax free.

Mark Wadsworth said...

I work in tax, I know about this stuff.

1) What's the real difference between a tax break and a subsidy? What would you call Research & Development Tax Credits, a tax-break or a subsidy? (it's a load of shit either way).

2) For a given total amount of tax to be raised (and yes, let's keep this as low as possible) if you tax one type of income at a lower rate, you have to tax other types at higher rates. I am in favour of flat tax, preferably same rate on all income (see post on Milton Friedman).

3) This 10% tax credit is a scam, it is a made-up figure. A company pays 30% corp tax and pays divdends without ACT or withholding tax (since 1999 at least). For cosmetic reasons, dividend vouchers say "10% tax credit" and basic rate taxpayers pay, notionally, at 10%. There is no further tax due. Totally pointless exercise. Go figure!

4) You've missed the point on CGT. If there is neither personal income tax on dividends (which I also recommended) nor Capital Gains Tax, then there would be no such distortion as you suggest.

Mark Wadsworth said...

Furthermore, Cleanthes, the point is they are not even robbing Peter to pay Paul, they are robbing Peter to pay Peter, and robbing Paul to pay Paul.

Given that it's the same people paying a bit of extra tax on their wages and saving a bit of tax on their savings income, the sum total gain is (by definition) f*** all divided by 6.

Consider:

High earners pay MORE extra tax on their wages but gain MOST from tax-exemptions (they have most money).

Lower earners don't have so much money so benefit LESS from the tax-breaks and also have to pay LESS extra tax on their wages.

John Page said...

I defer to your expertise, but I'd understood that an argument against abolishing CGT was that it would be all too easy for the highly paid and agile (especially in The City) to come up with schemes to take some or all of their income as a capital gain and this (without CGT) tax free.

Interested in a more expert view than mine.

Mark Wadsworth said...

Scorpion, this goes back to the private equity 10% tax non-issue.

If honest UK employee pays 40% on a share option gain, his employer gets a 30% tax deduction (Sch 23 FA 2003). The Treasury nets 10% of the gain (ignoring National Insurance).

If sneaky private equity guy organises things to just pay the 10% CGT, there is no way that the target/employer company gets a tax deduction. The Treasury gets 10%.

Nothing to lose sleep over, then.

We'd have exactly the same thing with NO CGT, corporation tax of 30% and a flat income tax/NI of 30%. Either way, the Treasury would get 0% of the gain.