Mark Wadsworth

This is a spare 'blog in case my main 'blog at isn't working

Category Archives: Taxation

Well, they would say that, wouldn’t they?

From City AM:

Borrowing was £1.5bn higher in April and May than at the same point last year, knocking the coalition’s plan to reduce the deficit by around £20bn. Spending in the first two months of this financial year was 4.1 per cent higher than the same time in 2010.(1)

Despite the over-spend, Labour last night blamed the UK’s anaemic growth on Osborne’s planned cuts. The deficit reduction “goes too far and too fast”, a party spokesperson said,(2) arguing for a reversal of the VAT hike.(3)

The Federation of Small Businesses this week called on the government to temporarily slash VAT for the construction and tourism sectors, in a bid to kick start the economy.(4)

Yet Osborne’s policy of raising VAT while scheduling reductions in business tax was supported by Berenberg Bank economist Holger Schmieding(5): “Cutting business taxes is the strongest signal to send to global firms (6), while other supply side reforms will help boost the economy in the medium-term.”

1) But both the big parties are doing plenty of Indian Bicycle Marketing. The Tories are allowing the deficit to increase while claiming that they are reducing it…

2) … a delusion which Labour are keen to foster.

3) In which, unusually, Labour would be absolutely correct*.

4) As backed up by the FSB, who actually represent small businesses on the ground in the real economy – these people have to fill in their own tax returns and write cheques from their own bank accounts, and know full well that VAT is a tax on business and that they pay five times as much in VAT as they do in corporation tax or income tax on their profits.

5) Banks love the idea of VAT being increased and corporation tax reduced because they are largely exempt, for every extra £1 input VAT they suffer, they save £10 in corporation tax.

6) Banks are global, they can redirect transactions to whichever jurisdiction they choose; a local building firm or pub landlord can’t just up sticks and relocate to a country where VAT on construction or catering is lower.

* Reducing VAT to 15% and curtailing exemptions for Business Rates were about the only two really good things they ever did. Along with exempting foreign dividends from UK corporation tax and the Substantial Shareholdings Exemption.


Tax breaks for pensions – who benefits?

From The Daily Mail:

The retirement plans of millions are being crippled by pension charges which wipe off up to 40 per cent of the fund’s value, a report warns today.

It sounds the alarm about one of the biggest and most lucrative parts of Britain’s pensions industry – the individual personal pension. Around £230billion of savers’ money is invested in this type of pension, popular with the self-employed and workers who do not have a company pension.

The campaign group Consumer Focus attacks the ‘excessively high costs and charges’ which must be paid by savers to pension firms and financial advisers. Its 60-page report, published today, says there is ‘a baffling array of terms’ for all the pension charges which an ordinary saver has little chance of understanding.

Consumer Focus reserves particular criticism for one of the most controversial charges, known as ‘trail commission’. This is a charge, typically 0.5 per cent of the total pension fund, paid every year by savers to an independent financial adviser until they retire. The adviser may [sic] not do anything after the first year but will receive commission for decades…

We see this all the time, it’s called ‘tax arbitrage’.

If a particular way of investing in something receives favourable up-front tax treatment (i.e. buying shares via a pension fund rather than buying them directly), then the net return to the ‘pensions saver’ will always be driven down to the same level as if he were a ‘direct investor’. What the ‘pensions saver’ gains in tax relief/deferral, he loses in fees and charges (and inflexibility).

The whole notion of ‘encouraging people to save by taxing them at higher rates’ is an exercise in futility. Would people rather not just pay less in tax on their earnings in the first place and make their own decision on whether to spend or save? Those who would have saved will do so anyway*; those who wouldn’t have saved end up slightly better off; and the notion that we have to hurl a £44 billion wall of taxpayers’ or pensions savers’ money at this every year in order to encourage a small percentage of waverers strikes me, as an outside observer, as completely insane.

There are plenty of other examples, in fact, it’s difficult to think of anything to which this does not apply, the same applies to subsidies – they don’t make things cheaper either, they make them more expensive etc.
UPDATE, I just spotted this at CityWire:

The Social Market Foundation is recommending a radical rethink of government policy to get those who don’t save interested in putting money away… The report, Saving on a Shoestring, looks at why some people find it hard to save, based on a new analysis of the government Wealth and Assets Survey and the Child Trust Fund administrative data. It found that turning people into habitual savers only works for the proportion of people who are inclined to save anyway…

Well, duh.

Fuel Duty Fun

From The Daily Mail:

The Treasury is facing a £637 million deficit after fuel sales dropped by one billion litres this year, the AA revealed.

Service stations in the UK sold 835 million fewer litres of petrol and 247 million fewer litres of diesel in January to March 2011 compared to the same period three years earlier. The [15.2] per cent dip in petrol sales and the 6 per cent fall in diesel sales were caused by higher fuel costs and consumers tightening their belts.

Shock horrors! Fuel prices up and sales down! The demand for fuel is price-elastic! Moreover, the demand for diesel (primarily lorries, so we’d expect diesel sales to fall in line with sales of food and so on) is far less price-elastic than the demand for petrol (which is discretionary spending to some extent). Well who’d have thought?

More to the point, the £637 million tax shortfall is mathematically correct but logically flawed. Let’s stick those figures in a spreadsheet:

First quarter 2008:
Million litres of petrol sold = 5,493
Million litres of diesel sold = 4,117
Total = 9,610
Average price (from here) = 106 pence/litre
Fuel duty = 53.65 pence/litre

Petrol sales down 15.2% = 835 million litres
Diesel sales down 6% = 247 million litres
Total = 1,082

First quarter 2011:
Million litres of petrol sold = 4,658
Million litres of diesel sold = 3,870
Total = 8,528
Average price (estimate) = 135 pence/litre
Fuel duty = 58.95 pence/litre

So how much is the fall in tax revenues?

If we just multiply 1,082 million litres by 58.95 pence, we arrive at £638 million (the AA’s figure).

Oh no, it isn’t!

The £637 million figure is of course complete nonsense and is comparing apples with pears on several levels – for example, they overlook VAT – which used to be 17.5/117.5 of a smaller number and is now 20/120 of a bigger number.

So how much is the increase in tax revenues?

The true tax per litre in the first quarter of 2008 was 69 pence (15p VAT and 54p fuel duty); in the first quarter of 2011 it was 81 pence (22p VAT and 59p fuel duty). So the AA could argue (if it so wished) that the tax shortfall is £881 million (1,082 million litres x 81p), but it would be far more correct to say that total revenues were £273 million higher in first quarter 2011 than in first quarter 2008:

Q1 2011: 8,528 million litres x 81p = £6,946 million
Q1 2008: 9,610 million litres x 69p = £6,673 million
£6,946 million – £6,673 = £273 million.

So it’s quite clear we are still not past the top of the Laffer Curve (although we may be getting near it) and there is no ‘revenue shortfall’. Whether you think that fuel duty is a better or a worse tax than other taxes is a separate issue; to my mind it’s like Land Value Tax for roads, so is on the “good” side of the line, as opposed to VAT generally, income tax, National Insurance etc, which are on the “bad” side of the line.

Just sayin’, is all.