Thursday, 2 July 2015

True cost of Labour's pension tax raid: the square root of fuck all.

The Telegraph is still pumping out the line that Gordon Brown's Pension Raid has cost the "taxpayer" a cumulative £100 billion since 1997.


Rounded to the nearest £ billion or per cent...

Back in 1996-97

The mainstream corporation tax rate was 33% and the ACT credit which pension funds could reclaim was 1/4 of the cash dividend received.

* Total UK plc profits (say) £80 bn, corp tax payable £26 bn = post-tax profits £54 bn.
* Half of the £54 bn post-corp tax profits paid out as dividends.
* Half of retained profits and half of dividends belong to/paid to pension funds.
* Pension funds suffered £13 bn corp tax indirectly (half of £26 bn) and reclaimed £3 bn ACT (1/4 of the £13 bn cash dividends they received) = net direct and indirect tax bill £10 bn.
* Average tax rate 25% (£10 bn divided by half of £80 bn).


Mainstream corporation tax rate 31%.

* Total UK plc profits (say) £80 billion, corp tax payable £25 billion.
* Pension funds suffer half of that corporation tax = net indirect tax bill £12 bn.
* Average tax rate 30% (£12 bn divided by half of £80 bn)

So yes, initially this was a modest increase in their overall tax rate and a modest increase in their overall direct and indirect corporation tax bill of £2 or £3 bn.


The mainstream corporation tax rate is 20%, half paid out as dividends and half belongs to pension funds.

* Total UK plc profits (say) £160 bn, corp tax payable £32 bn.
* Pension funds suffer half that corporation tax = net indirect tax bill £16 bn.
* Average tax rate 20% (£16 billion divided by half of £160 bn).

This is now lower than the overall average rate they were suffering pre-raid.

In summary

You can reasonably argue that pension funds 'lost' £2 or £3 bn in 1997-98 compared to 1996-97 but in the meantime, they are 'winning' about £4 bn a year i.e. instead of paying overall rate 25% on their half of £160 bn, they are only paying 20% overall rate.

I'm not sure when the break-even year was, but all things considered, the losses and gains net off to a very small figure, nowhere near an overall loss of £100 bn and quite possibly a small overall gain. If you want the Excel formula, it is "=FA^0.5".

And of course, pension funds are not "the taxpayer". Everybody else is clearly miles ahead of the game as his overall indirect corporation tax bill is now 13% lower than eighteen years ago.


Lola said...

I don't think it is cost. It is principle. Pensions are deferred pay. The deal is you don't pay tax on income and gains in a pension fund and you get tax relief on the contributions. Then when you get your pension you pay tax on the whole annuity as if it was pay. So it's really tax deferment. The question therefore is should all dividends received by Pension schemes not be subject to tax at all?

Mark Wadsworth said...

L haha the only people who get tax relief on pension contributions are the pensions companies :-)

James Higham said...

Tried to get the root of FA on my calculator and failed miserably.

Random said...

They also don't mention Lamont's 'grab' in early 90s.

Lola said...

MW. Yes yes. But I was discussing the 'principle'...

Mark Wadsworth said...

JH, there's a short cut, just hit "0".

R, go on, run that by me again. I fucked off abroad after Thatcher got in and did not return until she was safely deposed. I have no idea what Lamont's pension grab was.

L, if we follow that principle to the n-th degree, then pension funds and other 'savers' should get a 100% tax credit on their net dividend income to compensate them for all the taxes suffered directly or indirectly by the companies in which they owned shares i.e. VAT, corporation tax etc etc.

By that token, the accrued 'pension grab' over the last eighteen years was in the order of £1 or £2 trillion.

But they are trying to compare the pre-97 rules with post-97 rules.

Which is what I did.

And applying a sensible comparison, they have probably just about broken even by now.

Lola said...

MW. Whoa. pensions defined as deferred income. As in wages or interest on capital. Implicit in that are all the other taxes paid throughout the supply chain. I am not at all arguing with your calculation. I am just saying that all non taxpayers including pension funds must therefore logically get 100% of the dividend.

Mark Wadsworth said...

L, sorry not clear what you mean.

The principle is simple.

Some people who are prudent and have a bit of income to spare will save.

The reckless and those who have no spare cash will not save.

It does not matter how many whizz bang tax breaks you dream up, you cannot change human nature.

So 99% of the subsidies go to people who would have saved anyway and only 1% actually tip people from not saving into saving.

And 100% of the subsidies are soaked up by pensions companies, trustees, middlemen, managers, administrators and indeed accountants and tax advisors.

That is also entirely predictable human nature.

Far better to get rid of the tax breaks and reduce the overall rate of tax for everybody by five percent (or halve national insurance or VAT or whatever) and have done with it.

Lola said...

MW. You know full well that I would ditch all taxes and subsides including alleged pension tax breaks in the blink of an eye. But, the agreed definition of pensions are deferred pay. Logically therefore you don't tax dividends paid to pension funds. Both Lament and Brown betrayed thus principle. Whether or not it has any fiscal disadvantage is immaterial.
FWIW the vast majority of people are naturally thrifty, but after a century or so of cod keynesian brain washing they have rather got out of the habit. And socialism, obviously.