George Osborne, 6 March 2009:
Gordon Brown's decision in 1997 to abolish the dividend tax credit for pension funds [dogwhistle] made an existing imbalance worse. The result is that the UK is widely regarded as having the most generous tax treatment of debt interest of any major economy. That's economically inefficient at the best of times, but it makes even less sense now that we understand more about the dangers of excessive leverage. There are several ways that we could begin to undo this imbalance by reducing the costs of equity financing relative to debt.
...I believe the time has come to look again at the generosity of interest deductibility in our corporate tax system... by reducing the tax breaks for debt we could potentially fund a significant reduction in the headline rate of corporation tax - a key determinant of our international competitiveness.
George Osborne, 30 March 2009:
First, action is needed to help savers. At the moment, income from savings in bank accounts suffers from double taxation – the money is taxed when you earn it and then any interest is taxed again. For basic rate taxpayers, this unfair double taxation of savings should be abolished. This would benefit the 1.8 million savers in the West Midlands by as much as £7,200 per year. And the biggest the biggest benefits would go to people who are dependent on income from savings and do not have other income. This would not only help savers today, but would help encourage more saving in the years ahead.
Glossing over the 'double taxation of savings' myth (which is not true. The interest on net incomes is taxed once and once only. It is Inheritance Tax which double taxes the net income) and all the other inaccuracies, dogwhistles and inconsistencies, what does he actually want to achieve:
1. Does he want people to save MORE, i.e. lend more money to banks for them to lend on to businesses, or
2. Does he want businesses to borrow LESS, i.e. borrow less from banks, i.e pushing interest rates (ultimately paid to savers) down even further?
That's what happens when people indulge in one-sided economics. Although each of his aims is deeply flawed in itself, I admit that each one, taken in isolation, might have some electoral appeal. But they actually cancel each other out and we end up with the worst-of-both-worlds.
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Further, I am sick and tired of this 'Brown's pension raid' mantra (see also John Band's excellent diatribe):
1. Sure, nominally the UK's collective pension funds are worse off by £5 billion to £8 billion a year, but this is only a small fraction of the value of the annual tax breaks for pensions savings or the couple of £100 billion that pension funds lost over the past year or two through malinvestment. Let's keep things in perspective.
2. If removing the tax break for the dividend income of pensions funds is so terrible, why is he now proposing to (effectively) subject part of the interest income of pension funds to corporation tax as well? That makes him a supreme hypocrite AFAIAC.
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There is a middle-way, of course: do nothing. Scrap the Bank of England Monetary Policy Committee and allow the markets to set interest rates (I'd rather pay 20% tax on 5% interest than 0% tax on 1% interest), that sorts out the savers. And higher interest rates would, all things being equal, discourage over-borrowing by the corporate sector.
And as to the tax system, there are far better ways of aligning the taxation of share and loan capital - you just have withholding tax on the interest at the same flat rate as corporation tax; and scrap Stamp Duty, capital gains tax and higher rate income tax, as I've been saying for ages.
Tuesday, 7 April 2009
Joined up Opposition
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11 comments:
I struggle to follow you if I `m honest. On pensions we used to have them now we don`t .Thats the point surely and it was to do with chnages in accounting more than anyhthing else ( I think)
N, in olden times, taking company and pension fund together, dividend income of pension funds was taxed at effective rate about 11%, now it's taxed at 28%.
Interest income of pension funds was and is taxed at 0%. If you disallow it for corporation tax (without taxing it again on the pension fund), the effective rate would also be 28%. If you disallow half, then the effective rate is 14%, and so on.
"Sure, nominally the UK's collective pension funds are worse off by £5 billion to £8 billion a year, but this is only a small fraction of the value of the annual tax breaks for pensions savings or the couple of £100 billion that pension funds lost over the past year or two through malinvestment." Mark, that's bollocks. First, 8 billion a year for a dozen years, ignoring compounding, equals near enough 100 billion which clearly isn't a "small fraction" of a couple of hundred billion. Compounding would further strengthen my point. Secondly the loss is in addition to that 200 billion, not an alternative. Thirdly, anyone with any sense knows that you should not bugger about with people who made pension savings as a long term commitment - it's too close to retrospective legislation and will just make people very distrusting of any long term savings incentives or related government policies.
D, if you're going to be like that, then tot up the cumulative value of all the tax breaks for pensions and you'll come to several hundred billion over the last decade. All that 'Brown's pension raid' did was shave a tenth or a fifth off the annual value of the tax breaks.
And the money that the government spends has to come from somebody. I refuse to have anything to do with pensions, so there is still a huge net transfer via the tax system from people without pension savings to people with them.
MW: "I refuse to have anything to do with pensions, .. "
Ugh?
MW: " .. so there is still a huge net transfer via the tax system from people without pension savings to people with them."
Shouldn't we then find ways to encourage those without savings to save their own pension, rather than discourage those who have ?
Anon, because the whole pensions system is a massive great scam that is there for the benefit of the 'pensions industry'. The total cost/value of pensions tax breaks is about £47 billion that appears to get swallowed up in fees, charges and underperformance.
Seeing as UK pension funds have largely been invested in UK shares, UK commercial property and bonds over the last ten years, and the returns on these have been minimal, I'll make my own investment decisions, thank you very much. Why should we 'encourage' people to invest in this massive Ponzi scheme?
If my pensions minister Former Tory drops by, I'm sure he'll explain the way forward.
Hello.
You say "I'll make my own investment decisions, thank you very much.", which is fair enough, but most of us just don't have the time/knowledge/intelligence to do a good job of investment. What else are we to do, apart from hire a professional to do it for us? I wouldn't try and service my own car on the grounds that some garages are unreliable, as I know I'm not competent to do it. Feeble, maybe, but true.
Francis, the people who service your car are probably pretty good at it; they are competing in a free market with others; and they pay taxes rather than creaming off subsidies (unless you count compulsory MOT test as a subsidy to garages, moot point).
Pension fund trustees and the whole baggage are not in any way skilled. They are in fact useless - they just invest in unit trusts and tracker funds and so on, you could easily invest in shares directly yourself without the need for all these middlemen; they operate as a cartel and they swallow up all the tax breaks/subsidies.
So your comparison is a red herring and insulting to car mechanics.
OK, apologies to all the car mechanics here. However, it's still not obvious to me why running a pension fund shouldn't be a legitimate job. Why doesn't someone start an honest one and take business from The Cartel? Fear of assassination by corporate Ninjas?
Francis, it is impossible to run an 'honest' business in an industry swamped with subsidies and regulations, as a less honest guy will always have a slight edge. You might as well be a drug dealer who refuses to carry a weapon.
MW
If I understand you correctly, you're saying that (1) Brown didn't damage the pension system as much as he is reputed to have done and (2) the whole set-up is a scam whereby the breaks are sucked up by the riff-raff who are allowed to run schemes because they have a (useless) bit of paper which allows them so to do.
I couldn't agree with point 2 more and, as you write, because the system is, among other things, riddled with [unbelievably] complex regulation the breaks never reach those they're supposed to benefit. With point 1, though, Newmania has a point.
Although post hoc ergo propter hoc is never a completely successful argument, since Brown's raid the private pensions system has collapsed - and collapsed not just since the endless boom busted but was in serious trouble during the boom years. OTOH (and believe me, it is costing me blood to write this) John Band's posting is, as you say, correct as far as it goes. Brown's raid is not the sole cause of the private pension collapse. However, it appears to me that Brown wanted the money and was uncaring both as to its immediate (and long-term) effects and (despite being a financial genius) patently ignored the factors to which Band alludes.
As it happens, Brown got a bonus. By neglect he punished both the non-public sector and the natural supporters of that sector who could expect to benefit from their savings. There was no equivalent raid on unfunded public sector pensions. After all, how can you raid a Ponzi scheme?
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