"Record capital gains means £8.8bn tax bill"

From Your Money:

Figures from HMRC show that in 2017-18 chargeable gains for CGT were £57.9bn, an increase of 13 per cent on the previous year, while CGT liabilities were £8.8bn, up 14 per cent on the year before.

The number of CGT taxpayers increased by 3 per cent to 281,000 but most CGT revenues came from a relatively small number of taxpayers. Nearly two-thirds (62 per cent) of CGT came from those who made gains of £1m or more – this group generally represents around 3 per cent of CGT taxpayers each year.

The HMRC figures suggested that people paying CGT are most likely to be aged 55 to 64, followed by those aged 65 to 74.

Fascinating.

1. Your first thought would be, why is the annual exempt amount only £12,000? They could hike it to £100,000 at least with barely a dent in overall receipts.

The reason why not is because CGT isn't actually intended to raise much revenue and certainly not to tax capital (or capital gains). That £8.8 billion is barely one percent of HMRC total tax receipts.

CGT was introduced to discourage people from dressing up income as capital gains (which were not taxable until 1965 in the UK). There's still some incentive to do so, as CGT rates are half as high as income tax rates, but this way, people are forced to report their capital gains on their tax returns, enabling HMRC to have a closer look.

2. The fact that about 8,000 individuals paid two-thirds of CGT suggests that a tiny number of people own two-thirds of the wealth (excl. the largest asset class of all, people's main residences, which is probably not quite so unequally distributed).

... but some are more equal than others.

Putting their usual left/right spin on the same press release.

The BBC:

New research by the Institute for Fiscal Studies has found that one in five low-paid men aged 25 to 55 now work part-time.

While 95% of top-earning men normally work full-time, 20% of the lowest paid now work part-time. That means wage inequality for men has risen over two decades, but for women the opposite is the case.

City AM:

Inequality in net household incomes has declined over the last 20 years according to a new report from the Institute for Fiscal Studies – the second set of figures this week to reveal a narrowing gap between Brits at the top and bottom of the scale.

Published this morning, the IFS numbers record household incomes calculated after benefits and taxes, and reveal steadily falling inequality.

The key to this is the weasel wording in the seoond paragraph, "after benefits and taxes".

Fun Online Polls: Panama Papers & Privatising the Land Registry

The results to last week's Fun Online Poll were as follows:

Have you learned anything new from The Panama Papers?

Yes - I didn't realise how concentrated wealth is or how involved the wealthy are in tax evasion. 4%
No - they merely confirm what I already knew or strongly suspected. 86%
Other - please specify. 10%

Not much to add to that.

A couple of commenters said that they had nothing against tax evasion. I don't think that's the important part, what is striking is how much money a few people have. Most of it ill-gotten.
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A couple of people have emailed me and asked me to link to the petition against selling off the Land Registry.

Please sign here or use the widget in the sidebar.

Fun Online Polls: Antonio Conte & The Panama Papers

The results to last week's Fun Online Poll were as follows:

Will opposing fans be able to subtly mispronounce new Chelsea manager Antonio Conte's surname to turn it into an insult?

Yes - 81%
Yes - 19%

Pretty much a foregone conclusion then.
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Many column inches and broadcast minutes have been and will be wasted on this whole Panama Papers episode.

So that's this week's Fun Online Poll:

Have you learned anything new from The Panama Papers?

Yes - I didn't realise how concentrated wealth is or how involved the wealthy are in tax evasion.

No - they merely confirm what I already knew or strongly suspected.

Other - please specify.

Vote here or use the widget in the sidebar.

(As ever, it's nothing that Land Value Tax wouldn't sort out; taxing land values instead of earned income would reduce inequality and be nigh impossible to avoid or evade.)

Good inequality vs bad inequality

From The Evening Standard:

Strong recent employment growth and low inflation had pushed typical household incomes in London up by 2.9 per cent higher than with before the financial crash of 2008, said a Resolution Foundation report. But once the cost of homes was included, living standards fell 3.9 per cent since 2008 – which the foundation said was by far the biggest fall anywhere in the UK.

“Londoners have experienced some of the strongest income growth in recent years, with typical household incomes now well above pre-crash levels,” said Matthew Whittaker, chief economist at the think tank.

“But the wider picture on living standards changes completely once housing costs are included. On this measure living standards have actually fallen over the last seven years, and by far more than anywhere else in the UK.”

This is an example of bad inequality.

Tenants are worse off, owner-occupiers are slightly better off and landlords are laughing all the way to the bank.

Fun Online Polls: Most relevant measure of inequality & Charitable spending

The results to last week's Fun Online Polls were as follows:

Which is the most relevant measure of poverty or inequality?

Total income minus tax and housing costs - 66%
Total assets - 24%
Total income - 9%
Total assets excl. value of main residence - 1%

That is a pretty clear result, and surely the correct one. I can see why 'Total assets' came second, especially if you assume this to mean 'total value of land owned' i.e. the equal and opposite of 'total income minus tax and housing costs'.

And as we well know, the way to reduce this kind of poverty or inequality is not more downwards redistribution via the welfare system. That will not help those being totally f-ed over by the system, i.e. working tenants. The best way is to have less upwards redistribution via the tax system, i.e. tax output and employment a lot less and tax land values a lot more.
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To this week's Fun Online Poll:

How much of their income do major UK charities actually spend on charitable causes?

Vote here or use the widget in the sidebar.

Once you've cast your vote, read the surprisingly well researched article in the Daily Mail.

Fun Online Polls: Syria & poverty and inequality

The results to last week's Fun Online Poll:

If the UK bombs ISIS targets in Syria, this will…

Make us safer from terrorist attacks - 1%
Make us more a more likely target - 17%
Not make any measurable difference - 14%
Be a waste of money better spent controlling our borders and combatting domestic terrorism - 63%
Other, please specify - 5%

A clear majority for common sense from a good turnout of 150 votes. Thank you everybody who took part.

Suggestions for "other" included:

Graeme: Wouldn't it be nice if the people who want to go bombing thought instead about ways of stopping the flow of funds and weaponry to Isil?

Yes, I should have added that to the list of sensible ways of spending money, but Pollcode has a limit on how long the answers can be. And, if we have absolutley fair to Cameron, it appears that the RAF is bombing primarily oil wells, which is one way of doing it.

And slightly more left field:

Enola Gay: The problem is not the bombing. The problem is that the bombs will be sub-atomic.
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This week, as a follow up to point 6 of Ben Jamin's recent post…

Which is the most relevant measure of poverty or inequality:

Total income
Total assets
Total assets excl. value of main residence*
Total income minus tax and housing costs

There's no "other" because we'd just end up with endless permutations.

Vote here or use the widget in the sidebar.

* The third option might sound a bit weird, but is the basis for many means tested benefits. For example, if you have a low income but £16,000 or more cash/investments, you get no Housing or Council Tax benefit or Pensions Credit (or their localised replacements and I know that the rules are slightly different for each and there's a Pension Credit Savings Credit to mitigate this). But if you have a low income, no savings and live in a £1 million home, you can still claim Council Tax Benefit and Pensions Credit.

To sum up: a tenant with a low income and £16,000 savings can fuck off, he is not considered to be poor. A home-owner with a low income and no savings and a £1 million house is a charity case and gets all the goodies.

Wealth and income distribution: New theories needed for a new era

"New theories needed for a new era", say Ravi Kanbur and Joseph Stiglitz, in an article on inequality published for the CEPR here.

I'm not sure why we need new theories when a modicum of common sense applied to Classical Economics does the trick nicely.

What the question really boils down to is can we empirically differentiate between fair inequality and excessive inequality?

In order to answer that question, we must firstly define fair. For something to be efficient, it must maximise wealth and (economic) welfare.

It is therefore axiomatic that for something to be fair it must be also optimally efficient. This is really just restating a banal utilitarian position.   How we measure welfare, which is subjective to each of us, may be problematic, but this has no bearing on the fact that what is fair must also be efficient.

However, applied to (wealth) distribution and Public Finance is where things get interesting.

We know that the taxation of produced factors, Income/Capital is inefficient(deadweight loss) and we know that the value of land capitalised into selling prices is also inefficient(deadweight loss), so;

a fair economic system=fair distribution of Land/Income/Capital=aligned incentives=optimal economic efficiency.

In other words, in a fair and thus efficient economic system,  the exact amount of compensation you owe the community(tax) is rental value of land your property occupies (plus some other negative externalities which are of a minor concern here).

Given the ATCOR principle (all taxes come out of rent), to see if we have fair or excessive inequality today we then only need to compare current taxes paid (% of total tax) to rental value of land (% of total land rent) between households.

We accurately know that the top 1% of households in the UK pay around 14% of total taxes or about 18% of domestic taxation.
Less accurately, because the data on the distribution of land by value is sketchier, they own around 40% of all land by rental value. (based on HMRC, Times Rich List, Pareto distribution).

Therefore they are paying less than half of what they would be under a fair and optimally efficient tax system.

Furthermore, as the value of land has risen faster than the returns to labour and capital, its concentration among the wealthiest percentile is the reason why we’ve seen widening and excessive inequality.

The reason Land does capture a greater return of GDP than Labour and Capital, all else being equal, is covered by David Ricardo and his Law of Rent.

No new theories needed. Wasn’t too hard was it?

Deadweight loss of excess inequality.

Fair economic system=fair distribution of the factors of production=aligned incentives=optimal economic efficiency

For the above to be true, a deadweight loss due to the unfair distribution of Land, Labour and Capital must also occur. However, on the face of it this isn't necessarily the case. 

Let us assume I own all the land in the UK (unfair), which I rent out. Not the buildings just the land. The rental income I receive from this is £250bn per year. Assuming nothing in the current tax system changes, my discretionary income would be roughly £100bn each year, and everyone else’s in aggregate £100bn a year less.

Because there have been no other changes apart from who gets the land rent, incentives to produce have not changed either, so despite the now massive gap in equality between me and everyone else, GDP should remain the same.

However, I postulate there is a deadweight loss due to a “thinning of the market”, hence a drop in output.  

In other words 25 million households demanding one item priced £40 brings the scope for more economies of scale and cost innovation than one person demanding one item worth £1bn.

All the wealth we see around us comes from agglomeration effects, which are bigger when markets are thicker.

A concrete example of this may be England after the Black Death in 1375, in which the remaining workers were able to demand higher wages and lower rents. The economy started to flourish. This transfer of wealth from the hands of the overlords to the masses seems to be the point where feudalism died and the free-market capitalism we know today took root.

More Picketty-related nonsense

James James refers us to this article about Matthew Rognlie, which contains the following embedded chart:



Although Rognlie is closer to the mark than Picketty He's got the shares going to 'capital' and to 'housing' completely upside down. Let's just look at UK household income not business profits (which is a bit artificial but avoids the need for adjustments for double-counting).

According to HMRC tables 3.6 and 3.7 for 2102-13, total taxable employment and self-employment income was £711 billion and total household income from capital (dividends and interest) was £53 bn. I'll ignore pension income because that is just a confusing mix of taxpayer-funded, deferred employment income, dividends, interest and rent.

The total annual rental value of all residential land is £200 bn. The return on bricks and mortar (the actual capital) is something in the region of £50 bn, which we can add to the £53 bn from above.

So... total income = £1,014 bn.

The percentages are actually as follows:
Employment and self-employment = 70%
Capital = 10%
Land = 20%.

If you want to treat 'housing' as a separate category, the split is:
Employment and self-employment = 70%
Capital = 5%
Housing = 25%

In other words, on average, one-third of tenants' gross earnings goes on rent, which we knew anyway. Rognilie's chart suggests that it is only one-seventh, which is clearly bollocks.

"Joseph Stiglitz: Thomas Piketty gets income inequality wrong"

Emailed in by Sackerson, from salon.com

What’s new in your recent work on the distribution of income and wealth among individuals?

JS: There are several things. There’s some debate about this, but I think most readers of Thomas Piketty’s book (Capital in the Twenty-First Century) get the impression that the accumulation of wealth — savings —is responsible for the rise in inequality and that there is, therefore, in a way, a link between the growth of the economy — the accumulation of capital— on the one hand and inequality and wealth.

My paper begins with the observation that in fact, you cannot explain what has happened to the wealth/income ratio by that analysis. A closer look at what has gone on suggests that a large fraction of the increase in wealth is an increase in the value of land, not in the amount of capital goods.

When you say “land,” you’re not talking about land in the Jane Austen sense, that is, agricultural land under the ownership of the lord of the manor, right?

JS: It’s not agricultural land, it’s the value of urban land. I would include in that, broadly, rents associated with natural resources (“rent” is an economic term for unearned revenue). It’s the value of existing assets.

As a footnote, some of what has gone on, in addition to an increase in the wealth/income ratio, is a capitalization of the increase in other kinds of rents, like monopoly rents. If monopoly rents get increased, if the market power of firms relative to workers gets increased, as when you have the ability of a few, like the banks, to get government guarantees — the value of that is increased and gets capitalized. That increases wealth but it doesn’t increase capital. So it’s that distinction between wealth and capital that turns out to be critical. That’s the first idea.

The reason that’s important is that you then begin an inquiry into the explanations of why the value of the land or other sources of the value of rents would have gone up. A lot of my book (The Price of Inequality) is about why there has been an increase in rent-seeking. But the other part is more external in terms of the value of land or the value of assets. That, I suggest, is very closely linked with the credit system….

Stiglitz is a bit of a leftie, but apart from that, amen brother!

ONS WAS is rubbish.

As a follow on from the FT article on the Mansion Tax below, one of the other things it also brought to light is a dispute about the ONS methodology.

The results were based on the ONS Wealth and Assets Survey, which has come in for criticism recently by US and French academics who allege that it does not sufficiently record the assets of the most wealthy households. Professor Thomas Piketty, the author of the best-selling book Capital in the 21st century, said the survey was “particularly bad at measuring the top part of the wealth distribution of the UK”.

The ONS plans to respond to these criticisms on July 18, but said in a statement yesterday that its results came from “a large sample survey specifically designed to collect information on all aspects of individual and household wealth for all private households across Great Britain”. The wealth survey retains the official quality-assurance Kitemark of a “national statistic”.

Here is what the IPPR had to say in its 2013 paper "Property and Wealth Taxes in the UK"

The IPPR wealth tax model allows us to consider the impact of a property tax, with some important limitations. The Wealth and Assets Survey (WAS) data that underpins the model does not capture the value of residential properties that are owned by entities other than private individuals and households.

It is difficult to ascertain the proportion of residential properties owned by companies and trusts, but HMRC stamp duty statistics show that the share of properties whose buyers were not private individuals tends to rise with property value.

For example, two-thirds of properties bought for more than £2 million in 2011 in the UK were purchased by companies or trusts, compared to around 10 per cent of properties worth less than £500,000.

It is also likely that a relatively large share of high-value properties are owned by foreign nationals who are not permanently resident in the UK and are therefore unlikely to be captured in household surveys. In the ‘prime central London’ market, where the majority of high-value properties are located, foreign buyers accounted for more than half of property transactions in 2010.

Furthermore, the ONS puts total (net) UK property wealth at £3.4trn. Even allowing for £1.3trn in mortgage debt, this still puts them some way off the £6.3trn residential property is now reckoned to be worth.

While it's easy to have some sympathy with the ONS, it's figures are relied on in the debate surrounding inequality and tax policy. But, it seems as though they may have grossly under reported the true levels of wealth disparity in the UK.

Regional Inequality. LVT will sort it out.

Every time a city doubles in size, it gains a 15% bonus.15% higher GDP per capita. 15% higher wages. 15% more amenities per capita.

This becomes a positive feedback loop with more people attracted by those benefits. Economists call it agglomeration. 

Given London is not only the largest city in the UK, but Europe too(over twice as large as Berlin), it attracts everyone from around the World for a piece of the action.

The problem lies in the fact this productive surplus is captured by landowners, by the simple expedient of owning a freehold title. Hence higher house prices. 

The right to exclude others from gaining access to this surplus is granted by the State. So the fact it doesn't ask landowners to pay for this privilege is therefore an implicit subsidy.

Given London and the SE has about 60% of land by value, this has some very important ramifications for others parts of the UK. It means taxation on income and enterprise, that has to be raised in order to support this subsidy also falls on more marginal areas.So regions outside the SE are effectively being priced out by tax.

End this subsidy, and lower/eliminate taxation, those areas outside the SE have a far lower tax burden than at present. This would attract much higher investment where it is needed most.

So on a 100% LVT only model. London and the SE would be paying an extra £134 bn per year (2007 figures). Or an increase of 75%.

We don't need redistributive government policy. That has, and always will fail. Just a level playing field so Birmingham, Leeds and Glasgow can up their rate of agglomeration too. 

"Hard working pensioners 2"

Following on from Monday’s discussion the Beeb are reporting on an IFS research study in which it is claimed that UK pensioners' incomes have risen faster than all other age groups in the last 30 years, and also claims that the over-60s are the only age group to have become better off since 2007/08.

 

The Beeb suggests that “the findings may fuel the debate over how much protection pensioners should be given from the government's current austerity measures”.

As yet the actual report Living standards, poverty and inequality in the UK: 2013 does not appear to be publicly available, the IFS website explains that "The Department for Work and Pensions (DWP) has today [13th June] published its annual statistics on the distribution of income in the UK. The latest data cover years up to and including 2011–12.  Tomorrow, IFS researchers will publish a detailed report, funded by the Joseph Rowntree Foundation (JRF), on what these data tell us about living standards, poverty and inequality in the UK."  The link given actually takes you to details  of the Conference organised around the release of the report:-

Living standards, poverty and inequality in the UK: 2013

Date: 10:00 14 June 2013 - 11:30 14 June 2013 Type: Conference Venue: CILIP  [see map] Price: members: Free; nonmembers: Free

On Thursday 13 June, the Government will publish the latest figures on the distribution of income and the extent of poverty in the UK. The figures will cover 2011-12, the current coalition government's second year in office.    The IFS will then release a fuller report, funded by the Joseph Rowntree Foundation on the latest figures and recent trends on Friday 14 June.  Going beyond simply describing the data, it will look at the factors driving the changes in incomes and poverty observed, and will look forward to prospects for income growth and poverty over the coming years.

"The extreme geography of income wealth"

To continue the theme of the previous post ( via City AM) HMRC's Table 2.5 gives a breakdown of Income tax liabilities by income range for 2012-13:

Top 0.1%
Incomes over £500,000, total incomes £44.8 billion, total income tax paid £19.7 billion

Rest of top 1%
Incomes £150,000 to £500,000, total incomes £60.7 billion, total income tax paid £22.5 billion.

Rest of top 10%
Incomes £50,000 to £150,000, total incomes £195.5 billion, total income tax paid £46.6 billion.

Next 45%
Incomes £20,000 to £50,000, total incomes £409 billion, total income tax paid £56.3 billion.

Bottom 45%
Incomes £8,105 to £20,000, total incomes £191.8 billion, total income tax paid £13.9 billion.

Non taxpayers
Approx. 40% of adults with taxable income of £8,105 or less.

Of course, income tax alone is only a quarter of all taxes paid, but assuming that taxes on income and personal wealth generally were halved, the top one per cent would have no problems paying the LVT on their houses based on current site-only rental values (approx. 3% of current selling prices), which would be somewhere in the region of £20 billion a year.

What 'income inequality', exactly?

From The Daily Mail:

An average earner was paid £7.78 an hour in 1986 – calculated at 2011 prices – which had gone up to £12.62 last year, an increase of 62 per cent.

By contrast, the average pay of someone in the top 1 per cent of the earnings league went up from £28.18 an hour to £61.10 an hour, an increase of 117 per cent.

Those in the top tenth of the league saw their pay rise from £14.78 an hour to £26.75 an hour, an increase of 81 per cent.

At the bottom, the lowest 1 per cent of earners saw their pay go up from £3.48 an hour to £5.93, an increase of 70 per cent.

1. Now, as a completely separate debate, I could point out that some of the hyper-earners deserve every penny, if J K Rowling sells millions and millions of books and DVD's, then she can keep every penny of her millions and millions of pounds, nobody is forced to buy them (I do, as it happens). Ditto Premier League footballers, nobody is forced to buy a season ticket or subscribe to Sky Sports (and I certainly do not). And there are plenty of high earners who are just rent-seekers (quangocrats, directors of large companies, bankers etc.), i.e. add little or no value and create little or no wealth (and possibly destroy it). I don't exclude myself from the latter category, by the way.

2. But be that as it may, the ratio between bottom and top percentiles is only a factor of ten. Is it not possible that, broadly speaking, some people are simply ten times luckier than others? The lucky ones will claim that they are hard working, diligent, skilled etc, and possibly they are, but there is still a large element of luck, not only in being born and raised with those innate abilities, but also being in the right place at the right time to be able to use them. The best coal miner in the world would struggle to make a living in the UK today; and heck knows what would have happened to Mark Zuckerberg had he been born twenty years earlier. If we improved the education system, this might go some way to evening things out, remembering always that 'social mobility' means mobility downwards as well as upwards.

3. The ten-to-one ratio is flattened enormously by the tax and welfare systems, plus the value of all the stuff which everybody gets "for free" (NHS, state education, refuse collection, the right to vote, use a public library etc), so if you adjust for this, the ratio is probably more like four-to-one. Whether you consider this A Good Thing or A Bad Thing is up to you, that's just the way it is.

4. There are diminishing returns to scale and/or higher earners/spenders get worse value for money. A £200,000 Ferrari does not make you ten times as happy as a brand new £20,000 family saloon, which in turn does not make you ten times as happy as a fifteen-year old midnight blue Golf Mark II for £2,000. Plus higher earners who send their kids to private school get shafted by the system.

5. The real inequalities of course, and those which are impossible to justify on any sort of level, moral, economic, whatever, are inequalities in the amount of national wealth (primarily land rent):

(a) which some people can enjoy or collect (heavily subsidised and lightly taxed), and
(b) which other people have to pay through the nose for.

So with income inequality, even if the ratio between top and bottom were a hundred or a thousand, at least there is no such thing as negative earnings potential (because nobody is forced to pay to do a job). But with "land", about half the population is paying to live somewhere, so actually they have negative land wealth; most of the other half is enjoying owner-occupation, and the top few per cent are collecting from the bottom half.

If we are going to worry about inequality, that's where we ought to start (and probably finish). Once that's sorted out, everything else will pretty much fall into place.