A post not from the desk of Mark Wadsworth:
Reports are out today of a January surplus £700 million higher than forecast: Daily Mail, Guardian
What they gloss over though is the main reason for income tax receipts being so high.
Alastair Darling & Gordon Brown being the intelligent sort of chaps they are introduced a 50%(42.5% on dividend) top rate of tax for incomes over £150,000.
As people were sufficiently forewarned of this, those who own & operate private limited companies and pretty much have total control over their reported income in any given year took massive dividends in the 2009/10 tax year. They did this in order to pay the tax at 32.5% in January 2011 (hence the surplus) rather than pay it at 42.5% in January 2012.
Grand theft Labour
3 hours ago
12 comments:
So that skews the tax receipts figures for 2011, does it not and enables the government to report a situation which is temporary and induced?
If i'm understanding your question correctly then yes.
As income taxes are paid near enough 10 months in arrears, the changes to the tax law implemented by Alastair Darling (i.e. the 50%(42.5%) band) are actually affecting the cash-flows and thus the deficit of the 2011 year which Osborne is now overseeing.
I don't know yet if Osborne is stupid enough to try and claim credit for this healthy January, it's also debatable as to whether Labour would shoot him down over it because in terms of political capital they essentially would be admitting "soak the rich" politics is folly.
"whether Labour would shoot him down over it": aye, but on the whole it's the votes of rather stupid people that they're pursuing, so there's not much need to seek intellectual consistency.
"whether Labour would shoot him down over it": aye, but on the whole it's the votes of rather stupid people that they're pursuing, so there's not much need to seek intellectual consistency.
SW & D, it strikes me that GO will claim credit for 'running the public finances better' (and why wouldn't he?) and then Labour will say it's because they increased top rate to 50% (which is true in a roundabout way) so all voters get their prejudices confirmed.
You also have to factor in that what you pay now (Jan 2011) is not only the balance of what is due in the tax year 2009/10, but also the first payment on account for 2010/11. This payment on account is usually calculated on 'What you earned in the previous year'.
So if lots of people have declared company dividends to fall in 2009/10, thus artificially boosting that year's income, their payments on account will rise too, boosting tax receipts in Jan & July 2011. But crucially (if your theory is correct and such people then declare low or no dividends in 2010/11, come Jan 2012 they will have paid large sums on account, but not had the income to generate such payments. They will therefore be due a tax repayment. So tax receipts will fall below estimates in Jan & July 2012.
I suspect the VAT reduction to 15%, which ended in January 2010, also had an effect. VAT is a cost to business and requires you to make a mark-up equal to the rate of VAT simply to break even. Reduce the VAT rate and you make more profit from the same resale price, hence your profit rises and so does your tax liability.
Taxes payable in January 2011 reflect (in part) profits in the financial year 2009-10, nine months of which enjoyed VAT at 15% rather than 17.5%. The additional profit (subject to many qualifications) is taxed at a higher rate than the VAT rate, so January 2011 tax receipts will be boosted and those in Jan 2012 will be reduced.
Jim, excellent point. So we can pencil in a huge minus for next January.
TF, another excellent point. VAT is paid as you go along, so the reduction in VAT receipts from lower rate was ages ago, but the corresponding increase in income tax and small companies corporation tax would be about now (the effect will be less marked with larger companies because they pay corporation tax in instalments).
Jim: "You also have to factor in that what you pay now (Jan 2011) is not only the balance of what is due in the tax year 2009/10, but also the first payment on account for 2010/11. This payment on account is usually calculated on 'What you earned in the previous year'."
Not really because you can claim to reduce your payments on account based on the tax being lower in the following year. Why would anyone pay HMRC a payment on account on which they would receive NIL interest between now and January 2012. It's ALWAYS better in your bank account than the treasury's.
TFB: Although my post was specifically aimed at income taxes, it is a good point you raise. In practice though, wouldn't January's VAT only show up as payments to HMRC during February onwards as most VAT is declared & paid quarterly?
VAT is bound to be high over the christmas period anyway though, all those benefit class chavs getting PS3 & XBOX from our taxes?
SW, TFB's point was more subtle than that!
In 2009, VAT was 15%, in 2010 it was 17.5% and now it's 20%. That tax is paid over constantly and so clearly VAT receipts (in isolation) will have risen over those three years.
BUT all things being, as VAT comes out of profits, taxable profits were highest in calendar year 2009= tax year 2009-10 = tax payable January 2011), they will fall in calendar year 2010 and even further in calendar year 2011.
Found this one today:
http://www.spectator.co.uk/coffeehouse/6722113/the-50p-tax-in-action.thtml
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