The coalition have reduced expenditure, but we are still
running a huge deficit. Why?
Well tax receipts are down, way down. Some pundits say that
our tax system has collapsed. Consider in the first coalition budget in 2010 George Osborne took Labours planned increase in employers NI and moved it to
employees NI raising the effective rate from 11% to 12% for basic rate
taxpayers. VAT also went up from Labours reduced 15% rate to 20%. That did not
result is a collapse in direct taxation, but it did hit the economy hard. A
steady recovery in early 2010 became a continuing recession. Check the figures, the GDP figures for the last financial quarter of the Labour government and first 2 quarters of the coalition actually match our current last 3 quarters growth. But in between, austerity killed the recovery.
However George Osborne also started a reduction in
corporation tax rates from 28% to 21%. The logic for this was the Laffer curve.
Economist Arthur Laffer postulated that as no tax would be raised at zero and 100% tax rates, then there must be a point at which the rate / tax
income curve folds back on itself. In effect a rate at which any increase
results is less tax being paid because the high rate depresses economic
activity. As George would put it, reducing rates would actually increase
the tax take by reducing avoidance and increasing economic growth. The problem
is that no one has ever been able to prove where the “non zero maximum” is. And
so we enter the world of wishful thinking where our prejudices begin to dictate
our perceptions of the truth.
What has happened in practice is that our corporation tax
receipts have fallen significantly even while profits have risen. Large businesses still avoid tax through
legal means such as routing copyright fees through tax havens.
What about income tax? That raises some 40% of our total government
income. Nick Clegg’s input to economic policy was to promise a £10,000 tax
free allowance for everyone. George
trumped this by adding an inflationary increase to the allowance. The problem
is that wages have not risen with inflation but fallen (adjusted by the rate of
inflation) by some 7% on average over the last 6 years. So income tax is down on estimates.
Side issue here – The 40% tax rate comes in earlier than in
2009/10 as this was lowered and then frozen in the early part of the coalitions
life. The right wing press kept quiet – imagine if Red Ed had done this. David Cameron recently announced to a captive party conference that his party if elected
will raise the higher tax threshold to £50,000. Which is where the higher tax band would have been had he not reduced it, but applied
inflationary rises instead.
Back to the rant – reducing the money in peoples pocket has
resulted in prolonging the recession. This is pretty basic economics. This has
lead to a much lower income tax take than predicted in 2010.
There is a third factor in our collapsing tax revenue. George Osborne talks that talk but he has added some tax avoidance loopholes
himself. Tax avoidance has not been reduced as targeted but has most likely increased.
There is an expected tax take calculated at a macro level on aggregate incomes.
The estimated tax gap is the difference between actual and theoretical
tax. This has increased through every
year of the coalition government and is currently around £34 billion.
Remember Jimmy Carr’s tax scam, and David Cameron’s ire. Well
lets remind ourselves that our PM's father was a successful tax accountant
helping the right people to control their tax exposure. Ian Cameron ran a network of offshore funds in
tax havens including Panama and Geneva. Perhaps Jimmy Carr’s fault was that he
was simply the wrong class to be allowed to exploit our tax laws.
The overall impact of these three factors is a tax shortfall
of £50 billion in tax revenue against the coalition's estimates for the
current year made in 2010.
In a past life in banking, one of my bosses warned that by repeatedly
advertising savings rates, we were educating our customers to check the market
and move their savings. The customers who stayed with a firm they had a
relationship with were being encouraged to think differently. Well we have been
educated to think about our tax.
At this point I have to admit minimising my own tax bill by
letting my wife invest our savings, taking advantage of the new £15,000 annual
limit on cash ISA’s and I also arranged a recent IFA bill to be paid through my
pension saving £150 in income tax.
As the headline says, we are all tax avoiders now.
As the headline says, we are all tax avoiders now.
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