Thursday, 14 February 2013

Idiots who know nothing about basic maths and logic

Apparently the whole "ten pence starting rate of tax" debate has resurfaced again, Tory back benchers are in favour; Labour front benchers are in favour, enough to make you suspicious.

Notwithstanding that even by their own standards, income tax isn't the biggest issue. The biggest issue is income-based withdrawal of benefits and Tax Credits, but they pretend somehow that benefits (and hence benefits withdrawal) are nothing to with the tax system. Well duh, that's like arguing that going out for a meal is nothing do with working out how to split the bill afterwards. And the next biggest issue is National Insurance, which kicks in at a lower level than income tax and takes a bigger chunk of wages than income tax.

But let's pretend that income tax (at these low levels) is important, in which case the Lib Dems and UKIP are bang on the money - the most important thing from the point of view of the lower earner is the personal allowance itself. Let's assume there is a straight choice between:

a) Having a 10% rate of income tax on the first £2,000 of taxable income (above the personal allowance) with 20% income tax on everything above that, or

b) Increasing the personal allowance by £1,000 with 20% income tax on everything above that.

Then clearly, some people will better off under option (b) and nobody will be worse off. So if the Tory back-benchers and Labour front-benchers want to go along with the charade that income tax (which only raises about one-quarter of all UK government revenues) is that terrible, then they should be giving all their support to the Lib Dems, who have long been saying that the personal allowance should be increased to a totemic £10,000.
More twattishness from Centre Forum, repeating the tired old lie:

The report says the measures will help remove the current bias towards debt finance, which is treated more favourably by the taxman than equity finance.

I've been railing against this lie for twenty years to no avail. Simple fact is, the tax advantages of debt finance rather than equity finance are not that large. Interest is paid out of pre-tax profits, and there is a withholding tax of 20% on interest paid out, so a basic rate bond holder receives 80% of the post-tax profits. Dividends are paid out after paying 20% - 24% corporation tax, so a basic rate shareholder receives 80% - 76% of the pre-tax profits. The effective rates for a higher rate taxpayer are 40% for interest and 40% - 43% for dividends.

Sure, there are some other subtle tax disadvantages of shares compared to bonds (Stamp Duty, pension funds cannot reclaim a tax credit on dividends), and some subtle advantages of shares compared to bonds (EIS and VCT reliefs, loss reliefs, Inheritance Tax reliefs) but let's assume they cancel out. By and large, the decision whether to raise money by issuing shares or bonds is largely a commercial one, i.e. depends on the investor's risk-reward preferences. Companies issue shares to bold investors and they issue bonds to cautious investors.

But cash from investors is only one input - the most important input is labour. And labour is taxed far more highly than interest or dividends, because there is income tax AND National Insurance; so the overall effective marginal tax rate for a basic rate employee is 40.2% and for a higher rate employee it is 49%.

Can nobody else see the yawning chasm here? Yes, 24%/43% is a bit more than 20%/40% but not hugely so, not sufficient to turn a cautious investor into a bold one. The big difference is between the tax rate on employment income and the tax rate on investment income.

Worse than that, the most important source of funding for productive businesses is perfectly ordinary cash income from customers. And for most productive businesses, one-sixth of that is taken by the government as Value Added Tax.
Twat points for the first person to leave a comment saying "Ah yes, but I pay less than one-sixth of my turnover to the taxman because I can reduce my bill by the input VAT I have paid to my suppliers." Well duh, you've still paid over that input VAT to somebody, the cash has left your business, and your supplier just has to hand it over to the taxman anyway. It all adds up to one-sixth of your turnover.


Lola said...

I shall bottle that analysis. It's vintage Wadsworth.

Sackerson said...

If tax on booze and fags is (as sometimes represented) a sort of healthy disincentive, then clearly work is also a very bad thing. Should there be a government health warning on all contracts of emoployment?

Mark Wadsworth said...

L, thanks. It's a losing battle.

S, ah yes, but the Homeys (and indeed the Socialists, they are much the same people) say it's OK to tax incomes because there's always "ability to pay". And at least your income isn't your personal and private wealth or anything, allegedly.

Kj said...

Heh, from the Centre Forum article:

The think tank recommends making it easier and more attractive for high growth SMEs to access capital through the public offering of shares. Its report sets out a package of measures aimed at changing the culture, market structure, taxation and regulations surrounding these businesses.

Yup, high growth SMEs really need to change their culture, doing all that business without the City getting a cut, it's quite unheard of...

Mark Wadsworth said...

Kj, yes of course, that's what's behind it all.

Which is another argument for having company's funded by deposits which the investor just pays in and withdraws, like with building societies. You can't speculate on that sort of thing.

Kj said...

MW: I agree that's probably a beneficial model. In any case, it'd help to have a tax structure that was entirely neutral as to how and why you want to structure your business.
I wonder what sort of culture change they feel SME-owners should take on. "Enough with all this one-sided focus on the actual business side, you ought to focus more on talking up your future prospects, cause that's where the money is."
Whenever I read about an "up-and-coming" company that is talking about listing before it has any sales (granted, mining companies etc. is a different story), I'm thinking someone is trying to flog of something. The problem is that this sort of thing is what is encouraged wherever Finance is given the opportunity to talk about what "innovation" is.