One to watch

As if evidence were needed that our current benefit system is not fit for purpose: http://forums.moneysavingexpert.com/showthread.php?t=3655837

Basically, there's a chap who earns £65k and faces losing his child benefit.  He asks if it's possible to use salary sacrifice to commit enough of his salary to pension so that he won't lose the benefits, and wonders what happens if he goes further.

Based on the responses and what I know of the matter, if he were to put £50k a year into his pension (plus another ~£2k into childcare vouchers) he'd be assessed for benefits as if his income were just over £12k - meaning he'd get all sorts of benefits.  He reckons he'd go from an income of £3300 per month (after paying for childcare vouchers and nearly £4k a year into his pension) to about £3100 per month thanks to all the benefits he could claim.  He'd lose £200 per month, but would have an extra £46k in his pension pot per year (nearly £4k per month).

Sounds like a good deal?  So the benefit state is really good for people with incomes of £65k or so...

The new 50% tax rate: a sure winner!

http://www.telegraph.co.uk/news/politics/8911390/50p-tax-band-will-cost-Britain-1bn-a-year.html

So now someone's come out and said what a lot of us have been saying all along.  The 50% rate will not make any money, and may in fact cost the government £1bn in tax revenues.

That's not all though, because that £1bn in revenue is lost because wealthy individuals seek to avoid the tax, in part by moving their operations offshore.  This can cause the loss of jobs in the UK, and will have a knock on effect.

I find the details interesting as it shows the true pettiness of the left:

Mr Osborne and David Cameron are in favour of abolishing the top rate but are under intense pressure from the Liberal Democrats not to cut taxes on the wealthy. 

Even though cutting taxes on the wealthy will mean more money in the kitty, so less that the poor have to pay?  Who cares, right?  We're not trying to make the lives of the poor better, but the lives of the rich worse.

So let me get this straight

It's bad when we pay the bankers massive bonuses, but it's also bad when we don't?

http://www.foxbusiness.com/industries/2011/10/27/uk-banker-bonuses-to-slump-tax-take-will-suffer-consultancy/

The whole Adele thing

Adele kicked up a bit of a fuss about having to pay 50% tax, as reported (and denigrated) by the Guardian, here: http://www.guardian.co.uk/music/musicblog/2011/may/25/adele-tax-grievances

As Tim Worstall points out, the article is not entirely accurate, but leaving that aside, I'd be very surprised if Adele did have to pay 50% tax.

The agreement that she has with the record company will say that she gets x% of the sales of her album. I've no idea what x is, but bear in mind that all CD sales are subject to VAT.  This is at 20% currently, added on to the pre-VAT price, so effectively removing 16.67% of the money long before Adele sees it.  For a given amount of sales, where Adele would have earned £100, she's now down to £83.33.

Then there's income tax and NI.  Adele mentions paying £4m in tax.  I'm not entirely sure whether she's treated as self employed or as an employee of the music company, but I'd assume the former, meaning NI is 2% and income tax is 50% on the vast majority of the income.

(Of course it'd be better if she was set up as a small company and paid herself dividends, in which case the income tax is 42.5% and I don't think there's any NI - I could be wrong though.  It's worse if she's a normal employee, because then there's Employer's NI, Employee's NI and income tax to worry about.)

This means that of the £83.33 that she would theoretically get, she'll only actually receive £40.00.  This, the actual tax rate that she's paying is more like 60%. 

The money that she will still have to spend VAT on anything she spends on "non-essentials" (and I never really understood how clothing is non essential, but books are essential?), making the effective rate for the money spent thusly 66.67%.  If she spends any money on things like cigarettes or alcohol it's considerably worse.

So there you have it - Adele's tax rate is really more like 60%

Why the Laffer Curve shouldn't matter

The Laffer curve is often cited as a reason not to raise taxes.  I think this is a disingenuous argument that rather misses the point.  Let me explain...

For those of you who don't know, the Laffer curve is a theory that says that there is a level of tax that maximises revenue.  If you raise the tax rate too high, people will be more inclined to avoid the tax, whether by using off-shore arrangements in the case of VAT, by becoming self employed and paying dividends in the case of NI and income tax, or even simply by working less (as each hour worked is worth less to the individual as the government's take rises - there comes a point when it's not worth the bother). 

Further to the above, it has been suggested that the new 50% rate of tax will not increase tax revenue as it is too high - people will work less, employ accountants to avoid the tax or leave the country to avoid paying it (and the people being taxed are those most able to do these things).

I think that this misses the point.  The whole idea behind taxes is that there are some things that we can't buy efficiently as individuals.  Taxes are levied so that government can provide us with the things that only government can provide, while inconveniencing us as little as possible (in an ideal world).

If this maxim were followed, the total size of government would be much much smaller, and thus much less tax would be required to fund it.  The Laffer curve is irrelevant because the purpose of taxation is not to raise as much money as possible, but to provide essentials only, and so we should never get anywhere near the point where we suffer from diminishing returns.

Consider the damage done to our economy by the government taking fully 50% of the fruits of our productive labour and pissing them up the wall...

Transferrable allowances?

I was reading a post on Tim Worstall's site that started out as an indictment of the taxation system but some interesting points came up in the comments.  People were talking about making the tax free allowance transferable within a household - if one person works and supports another who doesn't, then why shouldn't they be able to share their tax free allowance.

It's something that I've considered before, but I'd take it further.  Why stop at household level?  Why not make the tax free allowance saleable?

Consider: If I pay 20% tax and my tax free allowance of £6750 (or whatever it is these days), then that allowance is worth 20% x 6750 = £1,350 to me.  To someone paying 40% tax, it would be worth £2,700 - so if I sold it for £2k, I'd be £650 better off, and the purchaser would be £700 better off.  Everyone wins (except the state - but the state needs cutting back massively anyway).

Now, there's only so many people earning enough to put them at the 40% rate of tax, and it may well be that the total allowances from everyone in the country is enough to reduce all of their incomes below the 40% level - in which case those people who didn't get off their backsides and sell their allowance quickly would lose out.  So why not just scrap the higher rate tax and the tax free allowance altogether and dish out some sort of citizen's income (while taxing all other income) instead.  If you made it big enough, you could even wipe out most of the welfare state.

So - transferable allowances could lead to flat rate taxation and citizen's income - what's not to like?  :D

(do please note that hte proposed merger of NI and Income tax would change the numbers significantly, but don't change the argument)

The Budget: Take with one hand and give with the other?

According to the BBC:

George Osborne has cancelled next month's 4p rise in fuel duty in what he has billed his "Budget for growth".

A further 1p will be cut from pump prices at 6pm - all paid for by a £2bn tax on oil companies.

Now I could be wrong, but my guess is that the oil companies will need to find the money for this from somewhere.  And what's the most likely source of this revenue?  My guess would be petrol price increases.

So the government are reducing fuel duty by creating more tax for oil companies to pay - which is likely to push up the petrol price.  Anyone else see the problem with this? (or am I somehow reading it wrong?)

The Evils of Taxation

 I believe that a lot of what the government does, they shouldn't.  They provide services that could be obtained for less in the public sector, purely because the people in charge think that they know better how to spend our money than we do.  Everyone these days seems to be looking at the way the government spends our money, but before they can spend it, they have to take it from us.  As most people are unaware of just how much of our money is taken, I thought it worth taking the time to quickly explain just how much of our money the government gets it's grubby mits on.  In particular, I'm interested in the marginal rate that you pay.