The government has announced today that:
At Budget 2015, the government also announced that it would strengthen the deterrent effect of the General Anti Abuse Rule (the GAAR) by introducing a penalty. The GAAR applies to the worst cases of tax avoidance and has a strong deterrent effect. We expect there will only be a fairly small number of cases brought under the GAAR. It is right that they attract penalties that go beyond the application of the penalty regime in all other avoidance cases to distinguish GAAR cases as the worst form of avoidance. The new penalty will be based on the amount of tax people sought to avoid in a GAAR case.
I was a member of the committee that wrote the GAAR.
I tried very hard to get penalties included in it in 2013. The references that there are to penalties in the guidance notes are largely due to me, but failed to properly address the issue.
Now Osborne has agreed I was right all along.
About time too.
The government has, in the last hour, published a new policy document on tax avoidance and tax evasion.
Much of what that document has to say on progress to date is nonsense, based on vastly overstated claims on tax recovered and misrepresentation of its spending on HMRC, matched to a catalogue of actions which provide greater evidence of opportunity missed than anything else.
But it’s not all negative. There is a welcome revival of the proposal for a strict liability offence on offshore tax abuse and a stated intention to extend it to tax advisers, which is long overdue.
More important in many ways is this:
Today, the government also announced it is asking the regulatory bodies who police professional standards to take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance to protect the reputation of the tax and accountancy profession and to act for the greater public good.
The accountancy profession has long been wilfully negligent on this issue (I use the words intentionally) and it is overdue that accountants be reminded of just what their public duties are, and be reuqired to fulfil them.
For once, I have something to applaud.
Now wait for the howls of protest.
It’s always interesting to see where a Chancellor expects to pick up tax from. I did such an exercise a year ago on Osborne’s 2014 budget and I thought I would repeat it today based on this year’s data (table 4.5 in OBR report fro those interested):
The data covers the main sources of tax revenue, stated at current prices and compares their growth with nominal GDP, also stated at current prices.
The assumption is that there will be nominal growth i.e. unadjusted for inflation, over the forecast period of 28.1%
Curiously VAT does not reflect that fact. It must be that George Osborne thinks that a significant part of growth will be saved. I think that very unlikely.
But he does definitely think there will be income growth, or more likely, increasing income tax rates that he has yet to announce because income tax yields are set to grow by 9% more than nominal growth. That is slightly down on last year though, when the projected rate was 10%.
The optimism in the growth of self employment remains astonishing: this is the only obvious basis for the growth in self assessment yields and they are forecast to grow 26.9% more than nominal GDP, although that is down from the 35% a year ago.
But the one thing you can be sure of is bigger business run through limited companies is going to have a good time. Onshore corporation tax growth (that’s everything but oil, which is the offshore figure) is set to fall in real terms, although not by as much as last year.
However looked at though, Osborne intends to give big business an easy time of it over the next decade whilst making heroic assumptions on the profits to be made by the self employed and significantly increasing the taxes that will be due by the 25 million of so people on PAYE in the UK.
That’s the story of the budget he does not want to tell. That’s the reality that the figures tell.
There are three fundamental flaws in Osborne’s budget.
The first is the assumption that the UK will increase its growth when the Office for Budget Responsibility say that will not happen in the Eurozone and many other markets. I don’t believe that, especially when UK investment rates are so low and productivity is only 80% of that of France as a result.
Second, there is the assumption that the next government can cut government spending at unprecedented rates, especially until 2018. I don’t believe that.
And third there is the assumption that tax revenues from avoiders and evaders can be increased when staff are being slashed at HMRC. I don’t believe that either.
Take those assumptions away and this budget makes no sense. And they are only assumptions, and all in areas where forecasting has, to be kind, been pretty poor in the past.
Osborne’s budget has more holes in it than a Swiss cheese.
The two charts I look at most in the budget statement each year are these, so I’ll share them:
It is quite extraordinary that George Osborne, the so-called ultimate political animal, managed to deliver a pre-election budget today that managed to make Norman Lamont’s similar effort in 1992 look like a masterstroke. Lamont helped give John Major an election victory. His reward was the sack. Osborne has done nothing to help Cameron’s chances. Maybe a P45 awaits him too.
For twenty five minutes Osborne offered dodgy statistics, all designed to support his new chosen measure of deficit reduction, which is the deficit as a proportion of GDP. The only basis on which he could claim success in this area is the Office for Budget Responsibility’s belief that throughout the world the UK is the only economy where growth is likely to improve in coming years. In itself that looks like a wild claim. We should set it in context. Every single OBR forecast on deficit reduction and most on growth have been wrong and in every case have been far too optimistic. The chance that this will be the case this time is remote in the extreme. Osborne’s macro-economics look to be wrong.
At a deeply micro-economic level this budget was about small concessions for political gain, most of which were oversold.
So we had the abolition of a whole tax – class 2 national insurance, which is paid by the self-employed. That will save them about £100 a year. But he did not say how those same people will now ensure they get a credit for their pension each year if their earnings are low in future. The devil may be in the detail, but some already low earning people may be much worse off as a result of this move.
And the abolition of tax on the first £1,000 of savings income will, for the vast majority of people, save less than £100 a year in tax. But once more, the devil is in the detail. Banks will no longer withhold tax from payments of interest on UK bank accounts as a result of this. Remaining tax due will now have to be collected via tax returns and the chance that large amounts will not be collected increases dramatically as a result.
That will not be helped by perhaps the only real surprise move, which is the supposed abolition of the personal tax return for millions of UK taxpayers, many of them self-employed. What’s astonishing in this case is the profound implication of this move, which is no doubt motivated by the desire to cuts thousands more staff from the ranks of HMRC employees. In effect HMRC is going to use information it can gather from third party sources to assess people’s taxes in future, including (apparently) their self employed earnings. But, with many fewer staff at HMRC already planned and its already poor record at even getting rather more basis tasks, such as PAYE notices of coding, right the chance that many people will pay the right amount of tax as a result is minimal, or non-existent. Instead of closing the tax gap this plan risks it increasing, considerably. It is an act of recklessness that will cost us dear.
And as for ISA reforms – these are either designed to make these tax free slush funds or alternatively to continue to provide the support needed to keep house prices high – which is the last thing fist time buyers need.
So what’s behind the scenes? A few things are worth mentioning.
First the Google tax – a measure designed to undermine international efforts to beat tax abuse by companies such as that after which it nicknamed – is to happen, without any effective parliamentary scrutiny. It can fairly be said that Osborne has now torpedoed Cameron’s 2013 call for international cooperation on this issue by taking unilateral action in the UK before that has any chance to happen.
Second, there’s a commitment to sell many more long dated UK gilts to lock in low interest rates. Tacitly, that was, of course, also an acknowledgment that deficits are really going to run for some time to come, even if the rhetoric denied it.
Third, there was no mention at all of how the savage cuts that will make the deficit reduction possible are to fall, barring confirmation that £12 billion will be on welfare.
Fourth, supposedly £5bn will be raised from tackling evasion and avoidance but without tax returns from millions of people and with the HMRC cuts already in progress that’s just plain fantasy.
And there was not a hint of how to fund the new investment in infrastructure that the UK so desperately needs and which is the only way in which growth can really happen given all that is happening elsewhere in the economy.
In other words, this was a budget that ducked issues, all round, and gave little or no clue as to what the Conservatives will have to offer after an election, which was a quite extraordinary omission.
So let me offer a final thought. Osborne trumpeted the fact that at the end of this parliament the richest are paying a higher proportion of income tax than ever before and the poorest a lower proportion than before. Of course they are. That’s because of growing inequality in the UK. And what Osborne offered was a budget for those with money left over at the end of the month and ignored all those who struggle to make ends meet.
In that sense this was a deeply political budget, and that is how it should be judged. And by that criterion it also failed. If by some remote chance Cameron is prime minister in mid May it won’t be due to Osborne’s efforts today. He’d be wise to note how Major rewarded Lamont and send Osborne the same way.
It’s budget day, and that means I am busy.
I’m filming at 11 for a documentary.
ThenI am on Radio 2 to comment on the budget – at about 1.30, I expect.
Then it is to ITN and Channel 4.
And after that I’ll be blogging here and at Left Foot Forward, at least.
And at 6.30 I am speaking in the Wilson Room at Portcullis House, Westminster at a meeting on radical alternatives to austerity organised by Michael Meacher MP at which you are welcome.
Over the past couple of days I have been exploring ways to tackle tax abuse in the UK, setting out the objectives first, and then addressing tax avoidance. This is the first batch of recommendations on tax evasion:
Recent work by the Internal Revenue Service in the USA has suggested that if people know that an income stream is to be automatically reported by the person paying it to their tax authority then the chance that that the income in question will be properly declared on their tax return exceeds 90%. If, however, they know that there is no such reporting then the chance that the income will be under-declared or not declared at all exceeds 50%. This under and non-declaration is what makes up the massive loss to tax evasion in the UK which I suggest could amount to as much as £80 billion a year.
There is, I accept, no chance at all that HMRC would ever have sufficient resources to chase every tax abuser in the UK. There is, however, a real prospect of creating systems that will dramatically increase the rates of accurate declaration of income and gains upon tax returns, and that has to be the goal of any reform that seeks to tackle tax evasion. All the recommendations that follow have this goal in mind.
- Better regulate UK companies
Of those not doing so about 650,000 were exempted from the requirement to do so by HMRC because they said they were not trading, without evidence being provided.
Another near 300,000 failed to supply a corporation tax return despite being requested to do so.
Of the balance more than half a million were too new to be required to submit a return.
Of those that did submit tax returns around 400,000 said they were not trading.
That left just 1.1 million companies admitting that they had traded during the course of the year of which fewer than 1 million paid tax.
It is undeniable that there are a significant number of what are called ‘dormant’ companies in the UK i.e. companies that exist but do not trade, but to believe that 60% of all companies fall into this category pushes credibility to its limits. When limited companies can be created for less than £50 without a single physical signature being required, and when the instant reaction of the Registrar of Companies, who is tasked with regulating UK limited companies, to the failure of a company to submit either accounts or other regulatory documents is to simply dissolve the company without seeking to remedy the default or secure the missing information, then the point has been reached where UK limited companies can be used to undertake tax evasion with almost no risk of discovery arising.
This fact has been confirmed by evidence secured from Parliamentary questions that suggests that up to 99.9% of all tax penalties issued by HMRC for the late submission of corporation tax returns are not paid, implying that there is also no effective regulation of companies who do not supply information required by law to our tax authority.
These facts demand that there be an immediate review of the operation of company law throughout the UK, including in Scotland where there have been no prosecutions for any breach of company law since at least 2009.
The operations of Companies House, which is tasked with regulating companies must be subject to a major review and we believe that the following three things must happen:
- All penalties for the failure to file accounts and other documentation required by law by Companies House must become the automatic personal liability of the directors of the company that has failed to comply;
- Those penalties must be increased so that it becomes as worthwhile trying to collect them as it is collecting outstanding TV licence fees;
- Companies House must be given the resources it needs to pursue all recalcitrant companies so that the UK has a fully effective Register of Companies that guarantees, as far as is possible, that fraudulent and tax abusive trading cannot take place through these entities. If this requires an increase in the current annual £13 fee payable by all companies, so be it: the benefit will accrue to all honest businesses in the UK.
- Reform HMRC’s approach to corporate taxation
HMRC has long assumed that any company that does not submit a corporation tax return is not trading and has made no profit, which is a wholly unfounded and unjustified assumption on their part that has undoubtedly allowed very large numbers of companies to trade and never fulfill their obligations to pay corporation tax, PAYE, VAT and other sums that they might owe.
HMRC must now be mandated by law to require a corporation tax return from every company, every year, without exception, including in the period prior to it being dissolved, and should have the power to make penalties for non-submission of those Corporation tax returns the personal liabilities of the directors and major shareholders of those companies so that each and every such person can be liable for them until such time as the return is submitted and outstanding taxes paid.
- Providing the information to enforce company and corporate tax law in the UK
As from 2016, and in no small part due to the campaigning efforts of tax justice organisations based in the UK, many of the world’s tax havens will be required to automatically supply HMRC with information on those companies that they have registered in their domains that are owned by people resident in the UK, including information on the balances that those companies hold in bank accounts in tax havens.
The purpose of this disclosure is to make sure that HMRC knows which people from the UK operate companies in tax havens and how much money is involved.
The obligation to supply this information falls upon banks in those places where the companies are registered, but the UK has also accepted a reciprocal obligation to supply information in return to be supplied by UK banks on the foreign owned companies to which they supply services in this country, and has, as a result, to now supply this information to more than 90 countries in the world, including the USA. As a result UK banks must now be very sure that they know who owns and manages each and every company to which they provide banking facilities, and where those people are resident.
Despite this new requirement, which is primarily intended to beat tax haven abuse, there is no obligation on a UK bank to advise HMRC of this data for the companies to whom the supply banking facilities in the UK, which is absurd. We will in future be supplying information on who owns UK companies to other countries to help them beat tax abuse and yet will not be using the data that UK banks will have to acquire on who owns and managed UK based companies to tackle the biggest tax abuse problem that we have in the UK, which is tax evasion by small businesses registered in this country.
The solution to this obviously absurd situation is obvious and is that in future every UK bank must be required to collect personal identification information on any person who is a director of or who owns more than 10% of any company in the UK where they supply that company with banking services, and that they must then send this information, at least annually, together with details of the company’s year-end bank balance and the total sum deposited in its accounts during the course of a year, to both HMRC and Companies House.
HMRC should then be required by law use this information to ensure that a tax return is demanded from each and every company that has a bank account in the UK, without exception, and to ensure that tax is paid by them, if due.
HMRC should also be granted powers to request bank statements from any bank that supplies services to any company that is more than three months late in supplying HMRC with its tax return, and if that request has to be made then the directors of the company in question should become liable for all the tax that the company in question owes, if any.
The same information should be used by Companies House to ensure that no company can be struck off its Register of Companies until such time as all accounts that are due for a period when a bank account was in operation have been submitted to it, with personal liability falling on the directors in the event that any such obligation is not met.
In combination these proposals would guarantee that the abuse of UK limited companies should end because every director of every such company would know that they must comply with their obligations set down in law or will be personally responsible for all tax owing by the company in question, with the information to pursue them being made available to the relevant authorities to ensure that people cannot escape their obligations.
This guide outlines how the tax system is regressive, benefiting the rich and penalising the poor. Proportionally tax from working people is not matched by the contributions of the rich. Widespread tax avoidance allows companies and wealthy individuals to shirk their responsibilities to public services. This guide sets out how progressive policies on taxation can rebalance contributions in a way that is fair.
To read all the information in brief simply download our short policy priorities factsheet.
6:30pm | Thurs 19 March | Tony Benn House, Victoria Street, Bristol, BS1 6AY
Click here for full details and to register for free.
Over a period of thirty years top rates of income tax have fallen from 60% to 45%, corporation tax rates will have more than halved, the use of tax havens by UK based multinational corporations is now officially sanctioned and even encouraged by tax law whilst VAT is at its highest ever rate.
At the same time inequality in the UK has risen. The share of national income paid to labour has fallen and investment in our tax system has been reduced, to the benefit of tax avoiders and, inevitably, tax evaders. Those outcomes have all contributed to a now persistent narrative that the government has no choice but cut public services, pensions, benefit payments and investment in our collective futures. This event will challenge this narrative and debate what policies are needed to ensure that an alternative, progressive tax system.
The Tax Justice Network has published a landmark report entitled Ten Reasons to Defend the Corporation Tax. It says of the report:
The corporate income tax is under attack. Nation states are scrambling to offer multinational corporations an ever growing feast of lower taxes, loopholes and incentives. Lobbyists and politicians constantly try to persuade us that the corporate tax is a bad, inefficient, unreasonable tax. Yet it is one of the most precious of all taxes.
One of our ten points concerns revenue. Corporate income taxes have added up to almost US$ 7.5 trillion since the global financial crisis erupted in 2008, in OECD countries alone. This is nearly half of all OECD public health spending and around double the amount spent on public tertiary education, one of the fundamental underpinnings of corporate profits.[i] It is even more important for developing countries.
And yet the corporate tax is disappearing fast. Average headline tax rates are around half what they were in 1980, and on current trends will reach zero in the next two or three decades. We may not even have this much time, given the influence of the large accountancy firms and corporate lobbyists actively working to hasten its demise.
Since the 1970s multinational corporate profits have soared but the constant attacks on the corporate tax mean nation states are capturing a dwindling share of this bonanza. The result is greater inequality, higher taxes for poorer sections of society, distorted markets, and rising fears of plutocracy.
The attached documents outlines ten reasons why it is essential to defend the corporate income tax. In summary, these are:
- Corporate income taxes raise essential revenue for schools, hospitals and the rule of law.
- Less well understood is the fact that the corporate tax helps hold the whole tax system together: without it, people will stash their money in zero-tax corporate structures and defer or even escape tax entirely.
- The corporate income tax curbs inequality and protects democracy. The tax charge falls largely on the wealthy owners of capital: without it, corporations and their wealthy owners free-ride off the public services paid for by others.
- Corporate taxes enhance national welfare. So-called “competitive” tax-cutting is fools’ gold, particularly for the larger economies.
- Corporate tax cuts, incentives and loopholes ricochet around the world. A tax cut in one place may suck capital out of others and prompt other jurisdictions to follow suit, in a race to the bottom where the only winners are the very wealthiest sections of society.
- The corporate income tax is particularly important for developing countries, which rely more heavily on it than rich countries do.
- Corporate taxes can rebalance economies. Corporations around the world are hoarding cash, not investing it. Corporate taxes harness this idle cash and put it to productive uses, via government spending on education, roads and other public services.
- The corporate tax curbs rent-seeking. Because rent-seeking tends to be more profitable than genuine productive activity, the corporate tax falls more heavily on it.
- Tax cuts and special incentives don’t stop at zero: they turn negative. In this race to below the bottom there is no limit on corporations’ zeal for free-riding off public goods and subsidies paid for provided by others.
- Corporate taxes spur transparency and more accountable government. To collect the tax, states must put in place good tracking measures.
Our document also addresses seven common myths about the tax: that it’s fine because tax avoidance ‘is legal;’ that taxes are ‘too high’; that tax is ‘theft’; that the corporate tax is unfair ‘double tax’; that it is inefficient and should be replaced by VAT; that corporate directors have a fiduciary duty to minimise tax; that the tax falls most heavily on ‘workers’; and that the Laffer Curve and so-called Dynamic Scoring are useful guides to policy.
In short, the corporate income tax is worth fighting for.
John Christensen, Director of the Tax Justice Network, said:
The corporate income tax is one of the best and most direct ways of taxing capital. On current trends the tax will soon disappear, ushering in an era of unaccountable, untaxed plutocracy and towering inequality in all countries.
Nicholas Shaxson, the report’s main author, said:
Corporate profits are soaring, as workers lose political battles with the owners of capital; as multinationals shake off pesky regulations; and as public assets are sold off. Yet taxpayers are seeing less and less of this bonanza, as corporations increasingly free-ride off public goods, leaving everyone else to pay the taxes they won’t. The result? Inequality rises, whole economies are thrown out of balance, and democracy and prosperity suffer.
Louis Brandeis, a former U.S. Supreme Court Justice, said:
“We can either have democracy in this country or we can have great wealth concentrated in the hands of a few. But we can’t have both.”
[i] From OECD Revenue Statistics, Comparative Tables, code 1210, corporate tax revenues as a share of GDP. (Data source excludes OECD members Chile, Hungary, Mexico, Poland and Slovenia.) GDP data sourced from OECD national accounts data, GDP, US$, current prices, current PPPs. Total for 2008-2013 is $6.2 trn, with an annual average just over $1tn/year. Adding estimate for 2014 gives $7.3 trn including 2014 . Education data from Education At a Glance, 2013 OECD indicators, and earlier years. The tertiary share has been stable at ca. 1.5 percent of GDP; corporate tax revenues have averaged 3.0 percent of GDP. Education data from OECD StatExtracts, General Government total current Expenditure, % of GDP.
The Guardian has a petition on its web site which I would urge you to sign. They say:
Join us in urging the world’s two biggest charitable funds to move their money out of fossil fuels
To Bill and Melinda Gates, founders of the Bill and Melinda Gates Foundation; Jeremy Farrar and Sir William Castell, director and chair of the Wellcome Trust:
Your organisations have made a huge contribution to human progress and equality by supporting scientific research and development projects. Yet your investments in fossil fuels are putting this progress at great risk, by undermining your long term ambitions.
Climate change poses a real threat to all of us, and it is morally and financially misguided to invest in companies dedicated to finding and burning more oil, gas and coal. Many philanthropic organisations are divesting their endowments from fossil fuels. We ask you to do the same: to commit now to divesting from the top 200 fossil fuel companies within five years and to immediately freeze any new investments in those companies.
There is, I have to say, an even more important reason for their disinvesting from these companies, and that is that fossil fuel companies are the next major global financial crash in the making.
Fossil fuel companies are not just valued on what they make; they are also valued on the basis of the reserves that they hold. This is why they keep trying to find more reserves of oil, coal, and so on. But, in practice, we now know that the vast majority of the existing identified reserves of carbon fuels in the world will have to stay in the ground if we are to have any hope of keeping climate change below 2°, at which point it becomes potentially fundamentally dangerous to the future of human well-being. So, there is a very strong likelihood that the reserves of these companies are dramatically overstated, in practical terms, and as a result that their valuations are also massively too high.
After banks and finance companies fossil fuel companies are the biggest companies by value on the London stock exchange. But, that valuation may be wholly inappropriate for the reasons I note.
Disinvestment is not just about telling these companies to keep fossil fuels in the ground; it is also about a phased, and gentle, programme of these companies seeing their valuations reduced so that a major collapse in the financial markets can be avoided, maybe.
I mentioned I had written a programme for tax reform in the UK yesterday, and set out then the principles that guided it. These are ways I would tackle tax avoidance at present:
Tackling tax avoidance
A whole raft of reforms could be undertaken quite quickly to tackle tax avoidance activity. These include:
- Compulsory country-by-country reporting
The use of tax havens by multinational companies has been a major source of abuse. International banks have used these places to promote tax evasion. Other companies have undoubtedly use tax havens to avoid tax by artificially relocating profits to these places.
Every company is desperate to avoid having its use of tax havens splashed all over newspapers, and there is one way to stop this. That is to require that every company must report in its accounts its trading that takes place in every single jurisdiction in which it operates, without exception, including tax havens. That way we would know which multinational companies make most use of tax havens. We would also know what level of sales really takes place in each location in which such a comfy trades, how many people are employed there, what profits are recorded in that place and how much tax is, or is not paid in each and every country where it operates.
Only if we have this information will we be able to hold global companies to account for their local behaviour. This holding of these companies to account for what they do is at the heart of creating tax responsibility within the large business community.
There will be almost no cost to this reform: the UK has already committed to require the creation of this information for tax purposes under new regulations being promoted by the OECD. Publishing that information will, therefore, impose no significant additional burden on business.
- Extend scope of the General Anti-Abuse Rule
The UK introduced a General Anti-Abuse Rule (GAAR) in 2013, but like many of the reforms introduced by the Coalition Government this one is a charade. It may sound like something useful, but in practice it is almost toothless.
To make the GAAR work three changes are required:
- It must be possible to apply it to commercial arrangements that are, nonetheless, tax abusive e.g. those of Google, Apple and other IT companies that have structured their affairs to make sure they pay little or no tax in the UK;
- Penalties must be payable if it is shown that an abuse has taken place, which cannot be done under the existing GAAR;
- The absurd requirement that permission from a panel of tax experts drawn from the private sector must be obtained before HMRC can make use of the GAAR must be removed. Our tax authority must not be subject to the control of the tax profession in the exercise of its duties.
- Review allowances and reliefs
Tax reliefs and allowance are always introduced for a reason but we are very bad at subsequently appraising whether the objective for the relief or allowance has been fulfilled, and whether or not it has been subverted in use. Allowances and reliefs are an essential part of any tax system, but are costly in terms of the tax foregone that they represent and many do provide an opportunity for abuse.
The Office for Tax Simplification has suggested the elimination of some minor allowances and reliefs but a more fundamental review is needed, especially in the context of tax abuse. The outcome cannot be predicted, but there are many such allowances that may be largely or wholly ineffective or that are simply inappropriate in a time of austerity and for which, as a result, abolition is overdue. Subsidies for the savings of those who are al;ready wealthy would be an obvious place to start, but other opportunities for reform are likely to exist.
- Align income tax and capital gains tax rates
Tax avoidance happens when someone sees an opportunity to reduce their tax bill in ways not anticipated by the law. That requires two things. The first is a loophole, and the second is a reduced tax rate. Closing loopholes is obviously a way to tackle tax avoidance, but so too is closing tax rate differentials.
One obvious area where significant tax differentials are being created is between income tax and capital gains tax, where much lower rates are applied to capital gains than are to income, giving a massive incentive for people to try to misrepresent their income as capital gains.
There is an obvious way to tackle this abuse, which was adopted by Nigel Lawson when he was Conservative Chancellor of the Exchequer, and that is to require that any taxpayer pays their capital gains tax bill at the same rate that would have been used if the gain have been subject to income tax.
These rates should now be aligned.
- Abolish the domicile rule
As recent publicity has highlighted, the UK’s domicile rule is open to considerable abuse. When even the Financial Times says that the time has come to abolish this ancient, and wholly outmoded, rule then it is appropriate for any government to take action.
There are good reasons why the UK may want to provide special arrangements the people who take up short-term residency in this country so that they do not suffer undue taxation, and even double taxation, as a result. We would therefore encourage any government to offer someone coming to the UK the chance to only be taxed on their UK source income for a period of up to 5 years, but after that anyone still living in the UK should be taxed as if they are fully UK resident in exactly the same way as all other people living in this country. The adoption of such an arrangement would allow the domicile rule, and all the abuses that go with it, to be abolished, for good. It should never be the case in the future that the UK can be seen as a tax haven, which the domicile rule has permitted for some of the world’s wealthiest people.
- Restrict all tax reliefs to basic rate
Tax reliefs and allowances are of use in any tax system, and could not be done away with. They have a particular role to play in encouraging some behaviour considered socially beneficial. However, some allowances and reliefs are open to abuse, and for this reason a review of all such allowances and reliefs is appropriate, as already not.
As importantly, at present almost all tax reliefs and allowances are provided to a person as if they reduce their income, and therefore have different worth depending upon who gets them. So, for example, a person paying basic rate tax gets 20% tax relief on a pension contribution they make, whereas a person paying 40% tax gets double the amount of relief for every pound that they contribute to their pension fund. This makes no sense. We should not be subsidising the tax reliefs and allowances of the better off in the UK more than we are those of the 90% of people in the UK who only pay tax at basic rate. As such, in the interests of equality, and to simplify the tax system, and in the interests of removing the incentives to abuse allowances and reliefs, all such reliefs and allowances should be provided at the basic tax rate (currently 20%), without exception, with enormous resulting saving in cost, administration, and abuse.
- Introduce an Investment Income Surcharge.
There is a massive problem with people converting earned income into unearned income for tax purposes in the UK through the sale of their labour through limited companies and the subsequent payment of dividends. We also have a tax system that is profoundly unjust by taxing unearned income at a much lower rate than earned income because national insurance is not paid on unearned income. Both issues can be tackled by re-introducing an investment income surcharge to the UK so that unearned income above a relatively modest limit is subject to a 15% extra rate of income tax as an equivalent to a national insurance charge. There would have to be an exemption for most pensioners, but not for those on very high incomes. The incentive to avoid tax by the artificial use of limited companies would be significantly reduced as a result.
The current government has been behind the bedroom tax that has forced tens of thousands of people living into social housing to move home, break their ties with the communities in which they live, disrupt children’s education and deny many sick and disabled people the space they need to manage their conditions.
And now the Guardian has reported that the Conservatives wan to introduce a tax relief so that all owner occupied homes are exempt from inheritance tax to a valuation limit of £1 million at a cost of maybe £1 billion a year, which is more than the bedroom tax has saved.
The proposal is absurd for a number of reasons.
First, it is likely to push up house prices in the South East when they are already over-inflated.
More importantly, there is no economic justification for this measure. The deaths where this relief will be given will tend to be second deaths in a relationship and so will be of the elderly. The saving will be to the next generation, many of whom will be in their 50s and 60s at the time they inherit, and almost none of whom none of whom will, one would hope, have waited at home for all that time for their parents to die solely for tax reasons (and I am aware of carers, and their special needs which are already catered for in law, as I recall).
So, in that case this is not about any need. It is simply about allowing wealth concentration to continue, which is the exact opposite of what all evidence shows that society needs.
And when the same government is also promoting the bedroom tax it is more cynical than that: this is about serving the needs of a few without need at cost to the many who have very real need.
Or as John Kenneth Galbraith put it:
The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.
It would be hard to summarise this plan more succinctly.
I’m always reluctant to say I am going to start publishing a part work in case I run out of enthusiasm for the task. But a couple of weeks ago I was asked to outline a programme for tax reform for the UK and I know it will not be used in the format in which I wrote it, so I will publish it, in parts, here, as I suspect no one wants a blog of more than 6,000 words in one go.
So let me begin with what I think the objectives of tax policy should be:
Tax policy objectives
Tackling tax abuse takes time, effort and commitment. It has a cost. This means it also has to be well planned and the objectives have to be clear, because if they are not stated then the reasons for change are not apparent. I think that tax reform should be driven by:
- A commitment to social justice that is reflected in a commitment to:
- Reducing inequality;
- Treating all equally with regard to tax;
- Creating fair markets;
- Funding fairly the services that the state needs to supply to the people of this country.
- A desire to close the tax gap, whether it be created by tax avoidance, tax evasion or tax paid late;
- The need to create a level playing field for everyone in the UK, where we all know that everyone is playing their fair part in paying for the public services we all enjoy;
- The necessity of creating a level playing field for British businesses so that they all compete on the basis of the goods and services that they can supply to customers and on their ability to innovate, invest and develop, including by training the staff, none of which is possible if some companies can gain commercial advantage by tax cheating, as is the case at present;
- The wish to promote the UK as a centre for ethical business practices that attracts capital, and so business, into this country because it is known that this is a place of integrity where the rule of law will be upheld, all of which are qualities that businesses with an interest in the long term appreciate.
It would be so good if our political parties could offer their versions of such a statement. Then we might have a much better understanding of what they are trying to achieve. As it is, such statements don’t even make the footnotes of most manifestos.
Danny Alexander has announced a review of business rates to report in 2016. That’s a touch optimistic of him: by then I suspect he will have forgotten what Westminster looks like, but that’s not my reason for mentioning this review.
My question is how can such a review be started without land value taxation being explicitly mentioned?
The ever-present ability of politicians to miss the point is all too apparent here.
I am not alone in proposing green quantitative easing. The following, published over the weekend is a very similar argument to mine:
Here is what the ECB could do to achieve its objective while overcoming both its ‘operational problem’ and the ‘macroeconomic concern’:
- The European Investment Bank (EIB) should be given the green light to embark upon a Pan-Eurozone Investment-led Recovery Program to the tune of up to 8% of the Eurozone’s GDP, concentrating on large scale infrastructural projects while its offshoot the EIF concentrates on start-ups, SMEs, technologically innovative firms, green energy research etc.
- The EIB has been issuing bonds for decades to fund investments, covering 50% of the projects’ funding costs. It should now issue bonds to cover the funding of the Pan-Eurozone Investment-led Recovery Program to the full; that is, by waving the convention that 50% of the funds come from national sources.
- To ensure that the EIB bonds do not suffer rising yields, as a result of these large issues, the ECB ought to announce its readiness to step into the secondary market and purchase as many of these EIB bonds as are necessary to keep the EIB bond yields at their present, low levels.
The merit of this proposal is that, essentially, it recommends that the ECB enacts QE by purchasing a single asset; the solid, non-toxic, non eurobonds issued by the EIB on behalf of all European Union states. Thus, the ECB’s operational concern about which nation’s bonds to buy is alleviated. Moreover, the proposed form of QE backs productive investments directly, as opposed as to inflating risky financial instruments.
The argument is on the blog of Yanis Varoufakis, the finance minister of Greece, and it makes complete sense. He even uses the language of the New Deal to support his case:
Come to think of it, what we have here is the potential for simulating a European New Deal without the need for a federal treasury, for any type of fiscal transfers, or for any new institution. While the richer nations, with Germany at the fore, will not need to pay a single euro toward this European New Deal, Europe needs leadership from surplus countries, like Germany, to bring this about.
So just what is the problem?
There will be no winner in this year’s general election. We all know that. Every political party barring the Labour and Conservative parties know, of course, that they will not. And in truth neither of those parties think they can win either, but just won’t admit it. That, though, is their problem and not ours. In that case we are entitled to imagine what will happen come May 8th.
The Guardian provides some insight into how the likely arithmetic of this works:
If anything like this forecast happens then it’s not just that no party will win; it’s the case that no two parties can win. And that really does take us into territory where we have never been before.
So I want to out forward an idea that’s just a little counter cultural to those used to two or three party politics and the ‘Westminster system’ of whipping MPs to toe lines so that rarely, if ever, does an MP ever have much influence with their vote. And of the outcomes the Guardian notes possible fundamentally changes that and I want to suggest the possibility that it is possible (I stress possible, but definitely not certain) that this might be quite a good thing. The reason for saying so is the potentially contentious possibility that in such a situation democracy might flourish.
Suddenly what different parties and MPs think on an issue will matter.
So too will debate. People will be open to persuasion. That might be especially true if there is no formal coalition and who governs will be the party with the best chance of delivering a Queen’s Speech, which based on the arithmetic on offer cannot be guaranteed to be the Conservatives even though if they have the most seats they have the first chance of trying, which is an option which might also be open to a Conservative / Liberal coalition as incumbents (but not, as far as I can see, to the Conservatives alone in that situation).
But suppose they cannot win support for a Queen’s Speech?
And suppose Labour can?
First, a party which is not the largest in parliament could govern. And it would do so only because it could win the argument for its policies not just with those who supported it, but those who did not.
The point is, that this does at least look possible and takes us into territory the Coalition never went, and that would be a good thing. Because the Conservatives and Lib Dems agreed a programme that was after two years very obviously bankrupt or time expired and has since then wasted a massive opportunity to do good by doing, at best, nothing at all and at worst some harm. That, as a process, was a failure. No one can agree a legislative programme for five years in a few days.
In that case so called confidence and supply agreements that keep one or more parties in continual negotiation with a minority government might just be what we need. Debate will remain fresh. Options will remain open. Negotiation on best outcomes will have to take place across parliament. And, hopefully, best arguments for best policies might win.
You might accuse me of being hopelessly optimistic, and I would have to agree that such a possibility exists. But then, look at where we are and candidly look at where we have been. Something has to be better than what we have had for some time past. It’s just possible that against all the odds this election might deliver what we need right now. That might sound bizarre, but it has, at least to be possible. I will live in hope.
I was delighted to have contributed to a Guardian profile of Margaret Hodge published today. This is the relevant bit:
Richard Murphy, a campaigner and accountant at Tax Research, says it is true “Margaret is not an expert and she does muddle things up sometimes,” but her strength has been to ask the questions that any reasonable person might do without being intimidated.
“She sees over and beyond that,” Murphy says. “That is where she has been amazingly effective. Companies and HMRC rely on the detail to say they have stayed within the letter of the law. But Margaret points out that the outcome is not what parliament intended and therefore something must be wrong. She has upset the cosy relationship between HMRC and big business.”
While tax campaigners like Murphy, Occupy and UK Uncut as well as investigative journalists first highlighted the issue of systemic avoidance by corporations, Hodge brought it to political prominence by forcing executives and officials to justify their behaviour in public.
“Yes, she does a bit of grandstanding,” says Murphy, but there is an innate sense of justice and outrage to her questioning that strikes a chord with the public watching.
And people have been watching across the world. There is a story that she was asked for a selfie by a director of the Organisation for Economic Co-operation and Development (OECD) at a conference in Paris on the grounds that she is now a “tax rockstar”. That’s true, says Murphy: she has literally rocked the world of tax.
Her reputation is well deserved.
And the rest of the article is well worth reading.
I confess to having borrowed the following blog from Geoff Tily on the TUC’s Touchstone blog but it seems pretty important to me because it suggests, appropriately in my opinion, that the short lived Osborne growth spurt is over:
Construction output fell -2.6% between December 2014 and January 2015, the fourth monthly decline in the past six months.
The main factor behind the decline in January was a sharp fall in house-building of -5.1% on the month. There has been only one larger monthly fall in house-building since the coalition took office (-6.6% in October 2011).
Compared with the same month a year ago, total construction output fell by -3.1% in January, down sharply from +5.3% in December, and the worse figure for nearly two years (since March 2011).
Construction, annual growth
With manufacturing also falling into January, these first glimpses of activity in the first quarter are not encouraging.
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- Arrêts du 12.05.15
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