The TaxPayers' Alliance - Economics 101

Possible U-turn on capital gains tax

In what appears to be at least a partial climbdown, the  Government is considering re-introducing a capital gains tax retirement relief of £100,000 for small businessmen who sell up and retire. The Times reports:

"Three weeks after Mr Darling announced his plan for a single 18 per cent rate of capital gains tax he is to soften the blow by giving £100,000 in tax relief for small businessmen who sell up and retire. It means that business owners who would have faced a near-doubling in the tax they pay on selling their assets – from 10 per cent to 18 per cent – will now pay far less."

"The U-turn comes after sustained pressure from the CBI, the British Chambers of Commerce, the Federation of Small Businesses and the Institute of Directors, which joined forces against the Government after being flooded with complaints from their members."

It will be interesting to see what finally does appear, and whether Alistair Darling will raise other taxes to meet the revenue shortfall, but this is a very positive step. The Government is finding it increasingly difficult to raise taxes, which can only be a good thing.

On another note, the same Times report reveals that doubling of the inheritance tax threshold for married couples (or at least those who didn't have the know-how to take advantage of the existing loophole, which is probably a considerable number and in any case underlines just how complicated inheritance tax is) announced in the Pre-Budget Report was considered for inclusion in the March Budget:

"The Times has also learnt that Mr Brown intended in his last Budget as Chancellor in March to announce the £700,000 inheritance tax threshold for couples that was finally introduced by Mr Darling on October 9.  It was removed from the March Budget after Mr Brown concluded that the cost of making the changes retrospective to enable husbands and wives to use the allowance of their late spouses would be too high. He had also decided that a 2p cut in income tax from next April would be the eye-catching feature of his final package.

"But his decision to hold back on inheritance tax opened the way for the Conservatives to grab the initiative at their Blackpool conference with plans for a £1 million threshold. Mr Darling then went some way to matching the Tory plans by dusting off the proposals that were almost adopted in March and setting a threshold of £700,000 for couples from 2010.

"Ironically the capital gains tax changes eventually would have raised nearly £950million a year and would have gone a long way to paying for the inheritance tax shake-up, which will eventually cost £1.4 billion annually."

Now imagine how things would have looked had Gordon Brown listened more closely to the TPA and included the inheritance tax measure in March. It just shows how tax cuts make winning politics.

IPOD generation: government failing to learn lessons

The think tank Reform has released an updated version of its important report on the IPOD generation. This time, it focuses on government policies, or lack of them, to deal with the central problem that young poeple are facing - higher taxes to deal with an ageing population, but no guarantee that they will not have to provide for themselves when they reach retirement age.

The report argues that much of the developed world is facing up to the demographic challenge:

"The developed world is facing an unprecedented demographic change, as the “baby boomer” generation moves into retirement and the ratio of working age people to retired people falls sharply. Politicians will face temptations to increase entitlements to healthcare and pensions; but these will place an unfair burden on the smaller numbers of young people.

"The OECD brought together the global discussion in its latest Economic Outlook. It argued that most developed countries must make urgent structural reforms to contain future spending on pensions and healthcare. If such changes are not made, the higher spending will necessitate higher levels of borrowing and debt – reducing investment in a manner described by the OECD as “explosive” – or higher tax burdens, undermining economic growth.

"The right policy response is to rein in public spending. The best means to do this are fiscal rules that include explicit expenditure targets. 11 OECD countries now operate an expenditure target.

"The policies outlined by the OECD are now under active discussion in many countries, with the best policy discussion taking place in the USA. Arguably the most important global policy maker is the Chairman of the Federal Reserve in the USA. Ben Bernanke made intergenerational fairness the central theme of his outstanding presentation to the Senate Budget Committee in 2007 (included as an Appendix to this report). His predecessor as Chairman, Alan Greenspan, also singled out the demographic issue in his recent autobiography, warning that “almost all of the developed world is at the edge of a demographic abyss for which there is no precedent”."

Unsurprisingly, Gordon Brown's Britain is singled out for criticism:

"The policies which have tipped the tax / spend balance against young people – higher health and pensions entitlements and higher public spending overall – have remained in place. And the specific decisions of both the Pre-Budget Report & Comprehensive Spending Review (PBR & CSR 2007) and Budget 2007 have actually worsened the situation.

"PBR & CSR 2007 pledged major spending increases on both healthcare and state pensions. NHS spending will increase from £90 billion to £110 billion (cash terms) by 2010-11. State pensions will increase in line with earnings from 2012, or at the latest from the end of the next Parliament...

"In 2012, a typical grduate will face an effective tax burden – including near compulsory payments on higher education and pensions – of 49 per cent."

The solution? Spending control, tax reductions and education reform:

"a new concept for economic policy making – the “investment margin”, which measures the resources available to individuals to spend on training, healthcare and retirement;

"a “Growth Rule” for public spending which would deliver a rate of public spending of 35 per cent – the level of Ireland and Australia – within two Parliaments;

"co-payments for healthcare. This is realistic given the high net worth of the baby boomer generation;

"targeted tax reductions, with one option being a much higher income tax personal threshold of up to £15,000; and

"education reform based on choice and supply side liberalisation."

Quite right. And something to be done on public sector pensions too.

Jeremy Leggett on Renewable Power

Leggett's article for Comment is Free is so idiotic it is positively painful. I'll fisk it and then quickly conclude with a little examination of his dubious byline:

"When Britain and Germany raced to scale up their aircraft industries for war in the 1930s, the British competed rather well. Recovering from a late start, we rapidly produced machines capable of winning the Battle of Britain.

Today, the two nations are on the same side in a different battle, but Germany alone is mobilising as fast as it did 70 years ago."

If we're on the same side why would we want to race the Germans? Who cares if they win. Their gain is not our loss. Quite the opposite. If they develop the renewable technologies we can use them. Welcome to post-mercantilist economics.

"Our common enemy is global warming, and it is already at our gates. But while our German allies are turning out the renewable energy equivalents of Messerschmitts by the factory-load, Britain is again slow to spring into action."

Okay, they can bring the renewable power technology; we'll bring the City, Canary Wharf and associated financial innovation. We can't produce everything so why should we distort our investment market in an effort to race the Germans for the renewable energy market? Specialisation can make us all better off.

"Worse, as we learned yesterday, officials responsible for UK mobilisation have told the prime minister it is impossible for us to build modern-day Spitfires in any number. We should instead oppose European targets set recently for such mobilisation and join other laggards in order to persuade the Germans to scale back their own efforts."

Perhaps they've realised that big subsidies for renewables may not be a particularly efficient way of reducing emissions.

"On Tuesday one of the main architects of Germany's renewable energy policy, Hans-Josef Fell, was in London to give a press conference on peak oil. In this issue lies another, related imperative for nations like Germany and Britain to be mobilising for renewable energy as if for war. A group of German scientists, the Energy Watch Group, has completed the latest in a crop of studies showing that oil is depleting far faster than previously estimated, and that a global energy crisis is imminent. Renewable energy and energy efficiency are the only technologies that offer any hope of staving this off in time."

Anyone who pretends to have a good idea of the amount of oil left in the ground is trying to fool us or themselves. Besides, shortages of hydrocarbons aren't an externality so the market will create the proper incentives to switch to other sources of power. There is no market failure here for government to address.

If all you're worried about is dwindling reserves then you're worried about them increasing the cost of hydrocarbon-based power. The idea that the best response is raising the cost of hydrocarbon power is pretty bizarre.

"Fell spelt out Germany's success with renewables. In 2000, when he and other parliamentarians pushed through a law to fast-track renewables markets, such sources contributed 6% to the national electricity mix; the target was 12% by 2010. Three years ahead of the target, they are approaching 14% - and have created 200,000 jobs in the process."

Have they created more jobs than would have been created if the free-market had invested the capital instead of it being forced by the state into the hands of renewables companies? Opportunity costs!

"International investment patterns tell the story. Some $1 trillion, globally, will go into energy this year, and more than $100bn of that will be invested in renewables. Renewables make up just 2% of the global mix, excluding large hydropower schemes, and yet about a tenth of global energy investment now flows into them. Renewables companies are lining up to be quoted on stock exchanges, and those already listed have strong share prices. But as things stand, only a tiny proportion of this investment bonanza is heading into Britain."

Almost all of that development is utterly dependent on subsidies. It isn't a competitive industry at all. What that means is that each country pays for the investment either from its exchequer or through a levy on energy production.

"The German renewables market is being fed by funds raised from a levy on energy bills to guarantee premium prices for renewable electricity. Britain's Department of Business, Enterprise and Regulatory Reform says the UK's renewables obligation, a certificate-based scheme for growing renewables markets, works better. Ofgem and the Carbon Trust are among the many who disagree. It is easy to see why. In 2006 the cost to the average German household of the tariff was £12 a year. The average UK household paid £7 a year under the renewables obligation, but that delivered significantly less renewable capacity. German windpower capacity is 10 times that of the UK today, and the energy it produces is 30% cheaper; German solar power capacity is 200 times that of the UK."

An energy production levy is particularly cruel as it means taking money from the very poorest. We demonstrated in the TaxPayers' Alliance report on green taxes (PDF) how regressive any measure increasing the cost of electricity is. Poor families pay more, as a portion of their income, than the average and the rich pay the least. While £7-12 pounds isn't a lot of money it is significant and could be spent in another way or deliver a tax cut that might make a small but meaningful difference to a number of poor families. That is quite a price to pay to distort the market in favour of renewables.

"Consider the stakes here. If we fail to contain global warming, we put the economy at risk. If we continue to ignore peak-oil warnings, we will plunge into the chaos of a third global energy crisis. If we continue to allow investment to flow uncontested into countries with a renewables vision, UK plc loses out on any prospect of a serious share in the next global business revolution."

1) Britain's renewables subsidy won't make a significant difference to global emissions. It makes no important difference to the amount of risk the economy is at from global warming.

2) I've dealt with 'peak-oil' already. "Oh no! An energy crisis is coming and we'll all suffer as energy gets more expensive. Better make it expensive now to end the suspense!"

3) There are plenty of plausible "next global business revolution". I think the market is better at identifying them. Renewables, which are dependent on big subsidies, are a particularly poor candidate.

"· Jeremy Leggett is author of Half Gone: Oil, Gas, Hot Air and the Global Energy Crisis"

The Guardian's byline tells us only that he has written a book about energy policy. This suggests that he is an 'expert' in the field and little more. How has such an expert produced such a poor article?

It appears the reason is that the article is more corporate PR flyer than intellectual search for truth. If you look at his profile on Comment is Free it turns out that instead of being an independent expert he is actually "chief executive of solarcentury the UK’s largest independent solar electric solutions company". If that isn't enough "he is, in addition to his solarcentury role, a director of the world’s first private equity fund for renewable energy, Bank Sarasin’s New Energies Invest AG". This is a man with a massive personal stake in subsidies for renewable power that guarantee its future. For the Guardian to put him up as merely a concerned author writing on his subject instead of mentioning front and centre that he is a part of the renewables business he wishes to see subsidised is an abject failure of journalistic standards.

I'm all for business leaders speaking for their industry. I don't mind newspapers printing what they have to say. However, that depends upon two key conditions being met:

1. They must have something interesting and coherent to say. Instead, this article just ignored basic economics and spouted phony analogies about Spitfires.
2. It must be clearly acknowledged - in a prominent position on the same page as the article - that they have an interest in the matter.

Neither condition was satisfied with this article. Deeply shoddy.

Unfunded public sector pension liabilities rise again

The Telegraph reports that the official estimate of unfunded public sector pension liabilities has risen to £620 billion, up from the previous official estimate of £530 billion. This works out at around £30,000 per household over the next four decades.

Of course, the official projection is at the low end of the range of estimates that have been produced. Watson Wyatt puts the figure at £960 billion, while former Bank of England economist Neil Record, in a recent paper for the Institute of Economic Affairs, estimates the total liability to be £1,025 billion - around 80 per cent of national income.

Whatever the true figure, you can be confident of two things:

1. It's going to be closer to the IEA and Watson Wyatt's estimates than the Government's.
2. There will be no escaping from the bill to taxpayers.

This needn't be the case if our politicians were slightly more imaginative. Here are two suggestions:

1. Raise the public sector retirement age to the state pension age for existing public sector workers as soon as possible. This is completely fair, given that public sector workers no longer earn less than their private sector counterparts. It is not, as the unions claim, a breach of contract, any more than the decisions to raise the state pension age are a breach of the national insurance contract. Let's have equal treatment for public and private sector workers. This should reduce the unfunded liability considerably.

2. Get serious on restraining public spending. This means abolishing individual agencies and programmes that are unnecessary, rather than merely shuffling the deckchairs (as in the Gershon process), and in the case of the re-named DTI abolishing whole departments. This will allow taxes to be reduced and the deficit to be eliminated. Part of future budget surpluses can then be put into a special "Future Fund" to pay off part of the remainder of the currently unfunded liabilities, as Australia is doing at the moment.

If these two suggestions are enacted, the amount left over will be drastically reduced, making life easier for taxpayers.  So which Party will get serious about public sector pensions? The problem is not going to go away.

More corporate tax cuts in prospect in Canada

Tax-news.com reports that Canadian Liberals, who reduced the federal corporation tax rate from 28 per cent to 19 per cent when in office, are now proposing to reduce the rate even more, and by more than the 0.5 per cent reduction proposed by the incumbent Conservative Party:

Liberal Leader Stephane Dion has pledged to further reduce the Canadian federal corporate tax rate to better compete with other countries and strengthen Canada's economic sovereignty. ...Dion told the Economic Club of Toronto..."A lower corporate tax rate is a powerful weapon in the federal government's arsenal to generate more investment, higher living standards and better jobs." ...The previous Liberal government reduced the federal corporate tax rate to 19% from 28%. Dion said he would go deeper than the Conservatives have done with their reduction to 18.5% in 2011. ..."If you lower the corporate tax rate, you lower the cost of capital for Canadian companies. Therefore, these companies are induced to spend more on capital equipment. As for foreign investment, we need a big hook to snare investment, including Canadian investment, that might otherwise go south of the border. Finally, it would strengthen Canadian companies against foreign takeover," Dion concluded.

It's great news for taxpayers when politicians are competing with each other to reduce taxes. The same argument for corporation tax reduction applies in Britain too...

Britain's economic prosperity built on a mountain of debt

An interesting new paper  from Policy Exchange argues that Britain's strong economic growth over the past 15 years is not as positive as it seems. It has, instead, been built on the back of a surge in house prices, leading to a lower savings ratio and a huge increase in private debt, which has been mirrored by a relentless increase in public debt. In addition, a rising population has meant that while GDP has grown by 49.3 per cent in real terms, GDP per capita only increased by 41.9 per cent. The authors continue:

"The expansion of the public sector artificially inflates the GDP growth data. And it cannot continue much longer. Judging by the fiscal deficit trend, the UK is now in worse fiscal shape than almost any other major Western country."

So what to do? It's worth reproducing the authors' conclusions in full:

"As we have seen, the UK’s economic performance over the past 15 years was boosted artificially by some exceptional circumstances. How long these conditions will last is difficult to tell. But it would be unwise to rely on them any further. House prices cannot increase in double figures for much longer. Without a buoyant real estate market, households will need to borrow more carefully again. The recent jitters in financial markets, culminating in the first run on a UK bank since Victorian times, and the strained state of public finances suggest that growth could slow down soon...

"When the World Bank analysed the conditions of doing business in countries around the globe, the UK came out as the best place to do business in only one respect: the ease of getting credit. In other respects the UK fared less well. For example, the UK came only 54th in the category of dealing with licences, a clear indicator that there is room for improvement. According to the British Chambers of Commerce, the cost of regulation to business for the past decade has been above £50bn.

"Earlier we saw that other Anglosphere economies in the OECD had a better growth record than the UK. It is worth noting that in these economies the ratio of public expenditure to GDP was significantly lower than in the UK. In 2005, 45.1 per cent of the UK’s GDP was spent by government. This compares unfavourably with state spending in Ireland (34.6%), Australia (34.9%), the US (36.6%), Canada (39.3%) and New Zealand (40.6%). Although unsurprising, it is also worrying that the UK’s high public expenditure has coincided with a rising tax burden. It has already gone up from 34.8 to 37.3% of GDP in the last decade. UK business leaders frequently point to the level (and complexity) of taxation as one of their top concerns.

"Although the UK government has increased its overall spending substantially, our infrastructure still lags far behind our competitors. In terms of the public capital stock per person, the UK had only accumulated about half the OECD average in 2006. Consequently, in the competitiveness report published by the World Economic Forum the overall quality of the UK’s infrastructure ranked far behind countries like the US, Germany and Japan as well as the OECD average.

"All this presents UK economic policy with a challenge: to improve our infrastructure while reducing tax and regulatory burdens. This would increase the UK’s still disappointing productivity. In the long run, this is the key to economic growth. An economy built on lower taxes, lighter regulation and better infrastructure will be more sustainable than one built partly on rising house prices and extra debt."

The paper briefly mentions increasing future liabilities such as public sector pensions. This is crucial. If Britain is already swimming on a sea of debt, think how much worse will it get when the baby boomers retire. There are currently no sensible proposals to deal with the unsustainable burden of unfunded public sector pension liabilities from any of the main parties. Those not lucky enough to work in the public sector will see their retirement age rise over the next few decades, but affordability issues still remain. In addition, Lord Turner's plans for semi-compulsory retirement accounts represent a new burden on top of, rather than replacing, existing provision.

So it is refreshing to see another country embrace a better way. The Southeast European Times reports that Romania is gradually replacing its state pension scheme with a system of competing private retirement accounts:

"Under a new system launched last month, more than 3 million Romanian workers under 35-years-old must opt for one of 14 competing private pension funds before January 17th, 2008. Those ages 35 to 45 can also decide to join one of the private funds.

"Starting in 2008, 2% of every worker's general income will be redirected from the state budget to the chosen private fund. This contribution will gradually increase to 6% by 2015, and the current 9.5% social security contribution to the state system will diminish accordingly.

"Several million Romanians will become investors, and the private pension system will educate them in the spirit of a free market economy," says Romanian President Traian Basescu...

"A Commission for the Surveillance of Private Pensions System has been set up, and 17 companies have been licensed to administer the private funds. "The system is safe," insists Commission President Mircea Oancea. "A company not able to reach the minimum efficiency needed for a pension fund would be placed under a special supervision. If it continues to fail, the Commission would designate another company to take over the fund."

Similar boldness would be welcome in Britain. Indeed, it is crucial if we are to get to grips with looming challenges.

Tax burden higher than in 1975

An interesting snippet from Greg Mankiw's blog - according to the OECD tax revenue as a share of GDP in the UK is higher than it was in 1975, the hight of Old Labour socialism. This needn't be the case if our politicians didn't act as a high-tax cartel.

Capital gains tax: an alternative view

We've criticised the Government for raising capital gains tax on small business by 80 per cent, and supported the many justified complaints from business groups and others.

But in the interests of debate, here is an alternative view from a respected commentator - Martin Wolf in the Financial Times:

"The system of taper reliefs introduced by Mr Brown made no sense. They were an example of his belief that the man in the Treasury knows best. The underlying idea was that short-term speculation is bad. But the market liquidity, on which London's position as a financial centre rests, depends on speculation. Furthermore, there is no reason longer-term holdings of financial claims would promote investment in longer-term assets, as Mr Brown believed. These tapers merely represented arbitrary interference in decisions on how long to hold assets.

"It is also impossible to justify the distinction between business and non-business assets. As an employee of Pearson, my holdings via "save-as- you-earn" and executive incentive schemes are counted as business assets, while my holdings in other companies are not. This distinction presumably rests on the assumption that employees will work harder if they hold shares in their employing company. There is no reason to believe this, except perhaps for a handful at the top. Far more compelling is the opposite argument: people should diversify their risks away from shares in their employers.

"It is true a capital gains tax on shares involves an element of double taxation, to the extent that companies also pay capital gains tax via corporation tax. In fact, corporation tax ought to be abolished, as Willem Buiter of the London School of Economics pointed out in a letter to the FT yesterday. But the existence of this bad tax cannot be used to justify a higher capital gains tax on personal holdings than business ones.

...

"If anything, Mr Darling could have gone further towards a comprehensive income tax, while lowering marginal rates. Is this unthinkable? Far from it. Nigel Lawson, arguably the most reforming chancellor of the past half-century, brought capital gains tax into line with income tax in his famous 1988 tax-lowering Budget. Let none of today's Conservatives pretend that Mr Darling has introduced some interventionist Labour wheeze. On the contrary, he has taken a step away from one, towards the rather more sensible position left by Mr Lawson."

Is Martin Wolf right? Should corporation tax be completely abolished and capital gains taxed in the same way as income? Would this be a good thing if the overall burden of tax was lower as a result? Please let us know what you think.

Taxes highest for 20 years - and this is being felt across the country

The OECD has just released an update on its historical tax burden series. It shows that taxes in Britain are at the highest level for 20 years.

This is very worrying. While other countries are stabilising or reducing their taxes, Britain’s tax burden continues to rocket. A decade ago this country had among the lowest taxes in the OECD, now we have some of the highest. Faced with the growing challenge of China and India, this is completely the wrong direction to go. Britain’s economy cannot compete with India and China on wages and nor should it, but we can stay competitive if we have a low, simple and transparent tax system. The current tax regime has none of these features.

Importantly, this is being felt across the country. Jeff Randall's excellent "Real Business in Brown's Britain" series in the Telegraph, in which he has journeyed across the country to discover the challenges facing small businesses, is scathing:

"The proportion of start-ups that had achieved an annual turnover of £1m-plus after five years fell sharply during Brown's years at the Treasury, down from 29pc in 1998 to 16pc in 2006.

"And even though the UK's stock of companies has been rising, the rate of entrepreneurial activity has been falling: the proportion of adults who are either setting up a business or running one is down from 7.7pc in 2001 to 5.8pc in 2006.

"Research by the University of Sheffield suggests that behind this decline lies "crowding out" by a bloated public sector, which has created about 680,000 state-funded jobs since Labour came to power in 1997.

"For many small companies battling to survive in Britain's fast-shrinking manufacturing sector, this country is no longer a rewarding place to be, as I discovered on the next leg of my journey.

...

"Looking round the world at rival locations, Duncan concludes: "This [Newport] is by far the most expensive place to operate." He includes in that tax, wages and the cost of logistics, such as transport. As a result, Tomoe may be forced to say "hwyl fawr" to Wales.

""It's possible that one day we won't manufacture here," says Duncan. He would regret leaving, but he's paid to run a profitable business for Japanese shareholders with an international perspective. "We are seriously considering moving overseas because Britain has become so uncompetitive." "

Higher taxes reduce labour supply

A new paper, "Labour supply and marginal tax rates" by AJ de Bruin from the Erasmus University in Rotterdam, investigates the effect of labour income taxes on the supply of paid labour for several Western countries over the last two decades.

For the countries with the best data, namely France, Italy, the Netherlands and the United States, the paper finds labour supply elasticities of approximately 0.43, 0.2, 0.15 and 0.18 respectively. This means that the amount of paid labour would increase between 1.5 percent and 4.3 percent in the selected countries if the tax pressure on labour income was reduced by 10 percent (i.e., a reduction in the marginal tax rate from 40 percent to 36 percent). Moreover, the structure of the models shows that the time required for such an effect to materialise in the respective labour markets would be between one and two years.

So - cut income tax rates; increase labour supply, grow the economy and get back a large part of the lost revenue. Simple, really.

Australia cuts taxes - again

While it's great news that, in Britain, tax cuts have become fashionable to talk about again, we don't yet have a plan from any of the main political parties to reduce the overall burden of tax. The Conservative conference announcement was very welcome, but on paper at least, it was revenue-neutral. Last week Alistair Darling used the language of tax cuts, but increased taxes overall.

So it's refreshing to see that the Australian government is cutting income tax again. Over the next three years, A$34 billion of tax cuts will be enacted by 2010, in three ways:

1. Rate cuts: the top rate will be cut from 45 per cent to 42 per cent, while the second highest rate will be cut from 40 per cent to 37 per cent.

2. Threshold increases: the 30 per cent rate will kick in at A$37,000, up from the current  A$30,000; the  40 per cent rate will kick in at A$80,000, up from A$75,000; and the 45 per cent rate will begin at A$180,000, up from A$150,000 at present.

3. Low income tax offsets:  the low income tax offset will increase from A$750 to A$1,500, increasing the effective tax free threshold for people on low incomes from A$11,000 to A$16,000.

These tax cuts come on top of a phased reduction in income tax year-on-year since 2000. Between 2000 and 2006 the four income tax rates were reduced from 17, 30, 42 and 47 per cent to 15, 30, 40 and 45 per cent. At the same time the 30 per cent threshold was raised by a quarter, the 40 per cent threshold was raised by a half and the top rate threshold was tripled.

These tax reduuctions, coming after a reduction in the main corporation tax rate from 36 per cent to 30 per cent, have stengthened the Australian economy. Growth has averaged 3.6 per cent over the past decade, the national debt has been paid off, tax receipts and public spending have grown consistently, and unemployment has fallen to a 30-year low.

It's no coincidence that an election is coming up - John Howard clearly sees tax cuts as a way to reverse his standing in the polls. Hopefully because John Howard has a consistent record of cutting taxes, this latest announcement won't be seen as too little, too late. As his election guru, Lynton Crosby, who worked for the Conservative Party in 2005, said: "You can't fatten a pig on market day." Tax reductions need to be explained to the electorate well in advance of an election.

Capital gains tax increase attacked by business groups

An open letter from the British Chambers of Commerce, the CBI, the Federation of Small Businesses and the Institute of Directors to the Chancellor Alistair Darling has attacked last week's changes to capital gains tax, which saw the abolition of taper relief and the introduction of a new 18 per cent flat rate on all assets. For business assets held for longer than two years, this represents an 80 per cent tax rise. This rise comes on top of the rise in the small company rate of corporation tax from 19 per cent to 22 per cent, which was announced in March.

Business groups are right to be angry at these changes. A simplified capital gains tax regime is welcome, but not one with rates of tax that are penalising to small businesses, who have already suffered so much. 

Importantly, this episode also shows how difficult it is to make tax changes that raise the same amount of revenue (or slightly more). Meaningful tax simplification should be accompanied by a cut in the overall burden of tax. To achieve that, politicians need to get spending under control. 

Australian unemployment falls to 33-year low

The Financial Times reports that unemployment in Australia fell to a 33-year low of 4.2 per cent in September. Could that have anything to do with its sustained period of tax reductions (see Chapter 4 of the Tax Reform Commission report for a discussion); its comparatively low burden of public spending, similar to London and the South East (see yesterday's Times leader); or its welfare reforms, with outcome-based payments to contractors (see chapter 4 of Reforming Welfare from the think tank Reform for an excellent discussion)?

State spending at Soviet levels in some parts of the UK

   

The Times today publishes a regional breakdown of public spending as a share of GDP, produced by the Centre for Economics and Business Research. It makes fascinating, if worrying, reading.

In the UK as a whole, public spending has climbed to 44.1 per cent of GDP, 15th highest in the OECD and the same level as Germany. But in some regions, the share is well over 50 per cent. In Northern Ireland, a Soviet level of 70.5 per cent of GDP goes on state expenditure, while public spending as a share of regional income is higher in Wales, the North East, Scotland and the North West than in France, the OECD country with the highest share of public spending overall.

By contrast, public spending in the economically successful London and the South East is 31.4 per cent and 33.5 per cent respectively - below the level in Ireland, Australia and the US.

As the Times comments: "It is no coincidence that economic success in London and southeast England is partnered by smaller state incursions." Exactly.

Council tax in the Pre-Budget Report

PRE-BUDGET REPORT PROJECTS COUNCIL TAX RISE OF ALMOST 30 PER CENT OVER NEXT FIVE YEARS

HUGE RISE EQUIVALENT TO £370 PER YEAR FOR A BAND D PROPERTY IN ENGLAND

Buried in the small print of the Pre-Budget Report is some very worrying news for council taxpayers, who have already seen council tax almost double over the last decade:

• The Government’s projection of the increase in council tax between 2007-08 and 2008-09 can be found in Table B8.  Council tax revenue is projected to increase by 5.1 per cent, from £23.7 billion to £24.9 billion.
• Paragraph B.52 explains how “the council tax figures for 2008-09 onwards are based upon the arithmetic average of council tax increases over the past three years”.  This means that the same increase of around 5 per cent is expected in future years.
• This 5 per cent, compounded over the five years to 2013 where the public finance projections end, would add up to a 28 per cent increase in council tax revenue. 
• Average council tax on a Band D property in England in 2007-08 is £1,321.   Increasing this by 28 per cent would mean an increase of £370 a year for an average Band D bill.  This means that by 2013 an average Band D bill could reach £1,691.

Matthew Sinclair, Policy Analyst at the TaxPayers’ Alliance, said:

“These new rises will mean more pain for council taxpayers, particularly retired people who are the ones that suffer most from this unfair tax.  With no clear accountability for council tax rises it is too easy for government to blame councils and councils to blame government when big new bills land on people’s doormats.  Taxpayers need a cut in council tax not inflation-busting increases.”

Download the TaxPayers' Alliance response to the Pre-Budget Report's projections for council tax (PDF)

Hong Kong cuts tax rates: no surprise there

The Financial Times reports that Hong Kong will cut corporate and salary taxes by 1 percentage point to 16.5 and 15 per cent respectively.

This really isn't surprising. The Hong Kong government knows how to maintain the city's world-leading position, although the tax cuts have only used a small portion of last year's financial surplus. It's also true that a few years ago Hong Kong raised tax rates slightly.

But at least they are now being reduced. If only national insurance contributions could also come down again.

The Pre-Budget Report/Comprehensive Spending Review

Alistair Darling has finished speaking, we’ve taken a look at the Pre-Budget Report and Comprehensive Spending Review, and here are some key measures of interest to taxpayers:

1. The inheritance tax threshold for married couples has been doubled, from £300,000 to £600,000, rising to £700,000 by 2010.  This move will also benefit all widows/widowers.  The threshold will then be increased in line with house prices. 

It’s very good news for taxpayers that inheritance tax has been cut in this way, although single people will not benefit.  The TaxPayers' Alliance has long been arguing that inheritance tax is unfair, unpopular and unnecessary.  Last week’s pledge from the Conservative Party to raise the inheritance tax threshold to £1 million was very welcome.  While the Government’s reform does not go as far as the Conservative plans, it is nevertheless also a very welcome move. 

We have also witnessed a huge political shift in the last two weeks.  Tax cuts are now seen as potential vote-winners by both main parties.  Taxpayers will benefit enormously from politicians of different parties trying to outbid each other on tax reductions – expect to see more inheritance tax-style battles in the months to come.

A note of caution on the inheritance tax announcement: it has been said this afternoon that the doubling of  the inheritance tax allowance as introduced today is already available to couples who take out a zero rate Discretionary Trust, which in practice pools their inheritance tax allowances.  Many couples, though, would probably not have been aware of this – another example of how complex inheritance tax is and how the very rich are, in practice, less likely to pay it.

2. Alistair Darling’s statement this afternoon increased taxes overall, by £1.2 billion in 2009-10 and £1.4 billion in 2010-11.

The benefit for the economy as a whole of the inheritance tax reduction will be wiped out by the fact that the Pre-Budget Report increases taxes overall.  This is absolutely the wrong direction in which to go.  The tax burden has already increased by around 3 per cent of GDP in the last decade while other countries have been cutting their tax burdens.  Britain’s hard-pressed families and businesses desperately need a cut in taxes overall.  It’s the best way to help Britain’s economy compete in the long-term.

(a) Air passenger duty will be replaced by a tax levied on flights.  The new tax is projected to raise £520 million more than air passenger duty by 2010-11. 

It is a sensible environmental move to tax planes rather than passengers, thereby incentivising aircraft to be full rather than half-empty.  It should not be, however, an excuse to raise extra revenue.  This change is yet another stealth tax increase.

(b) Capital gains tax will be overhauled.  Taper relief will be abolished, and a new 18 per cent flat rate on 100 per cent of all capital gains will be introduced.  The current individual capital gains tax allowance, and its transferability for married couples, will remain.

On the face of it, this is a major simplification, replacing a complex system of taper relief with a single low flat rate of capital gains tax to be applied to all gains.  Unfortunately, it is also a tax rise, bringing in a projected £900 million more than the current regime by 2010-11.  It will hugely increase costs for small businesses, who were hit earlier this year by the phased increase in the small companies’ rate of corporation tax from 19 per cent to 22 per cent.  In addition, it will almost double the rate of tax paid by private equity bosses, who are highly mobile internationally. 

(c) A consultation on the status of non-doms will be launched, with a suggested charge of £30,000 for non-doms after 7 years. 

Alistair Darling has already pencilled in extra revenue of £800 million in 2009-10 and £500 million in 2010-11 from changes to residence and domicile taxation. 

(d) Local authorities will be allowed to levy a supplementary business rate.

This measure, which was proposed in the Lyons Review of local government that reported in March, is yet another way for local councils to raise revenue.  Faced with a council tax cap of 5 per cent, many town halls have been raising charges in as many areas as possible and cutting back on frontline services, while increasing salaries and spending on publicity.  Expect to see many councils enthusiastically take up the opportunity to slap yet more taxes on local businesses.

3. Public spending will increase by £2 billion more than was projected in the Budget in March.  This extra money will be spent on education and health. 

It’s extremely disappointing to see that the new Chancellor is following his predecessor’s failing model of spending even more money without getting politicians out of the management of public services.  We can confidently predict that the extra spending will not deliver the promised results unless it is accompanied by genuine public service reform.

Matthew Elliott, Chief Executive of the TaxPayers' Alliance, said: “It’s good news for taxpayers that the inheritance tax threshold for married couples has been doubled, but the benefit for the economy as a whole will be wiped out because Alistair Darling’s statement increases taxes overall. We need a cut in the overall burden of tax to give families some of their hard-earned money back. It’s also disappointing to see that the new Chancellor is following his predecessor’s failing model of spending even more money without getting politicians out of the management of public services, which is the only way we will see real improvements.”

  

Tax credits "unfair" to poorest households

The Parliamentary Ombudsman, Ann Abraham, has released a report calling Gordon Brown's system of tax credits "unfair" to some of Britain's poorest families.

Ms Abraham also accused HMRC staff of failing to apply overpayment guidelines properly, which had led to some "unduly harsh decisions" that had "caused extreme worry and anxiety to many low income families ... The outcomes of some of those decisions seemed to fly in the face of the aims of the tax credit policy." As a result of this mess, the report found that 363,000 families are being pushed into debt. 

This is really not what tax credits should be about.   

Disposable income at 10-year low

Research by the price comparison website uSwitch.com found that disposable income - the money left over after taxes, mortgage/rent payments and household bills - has fallen to just 32.6 per cent of gross income, compared with 34.5 per cent in 1997.

The biggest increases in household costs, apart from house prices, were income tax, national insurance and council tax. It cannot be clearer - higher taxes mean lower disposable income. It's time for politicians of all parties to realise that the best way to boost families' spending power is to cut the overall burden of tax.

Why inheritance tax cuts are good politics as well as good policy

Two polls over the weekend showed that the Conservative plans to raise the inheritance tax threshold to £1 million are popular with voters:

• YouGov for The Sunday Times found that 66% of voters thought the £1m threshold for IHT was a good policy.  Only 18% thought it a bad policy.
• BPIX for the Mail on Sunday found that 71% supported "the Tory plan to cut inheritance tax".  Only 17% opposed it.

And here's one reason why. An analysis by the Financial Times today shows that at least a quarter, and possibly as many as two in five, of families in marginal seats are theoretically liable to pay inheritance tax. So much for Ed Balls' argument that only 7 per cent of estates pay the levy.

It's also reassuring to hear that Gordon Brown is also planning to look again at inheritance tax, and could raise the threshold and/or reduce the rate. A tax-cutting competition between politicians is exactly what taxpayers need. We hope it will lead to a cut in the overall burden of tax, bringing genuine relief to hard-pressed families and businesses. 

Myopic Unions

The Royal Mail's managers have stepped back from the brink and are not going to play the Grinch this Christmas.  Unfortunately, the workers have not and are now on strike with threats that regular stoppages could continue for some time.  This is an abuse of politicians' willingness to waste money and puts the lie to the notion that people working in the public sector have some kind of special public-service ethos superior to that found in the private sector.

Strikes in the postal service are also an incredibly myopic strategy as they undermine the Royal Mail's business in the long-term by encouraging customers to stop using an unreliable postal service.  Blogger FreeBornJohn writes:

"I am adding new instructions to all communications with my customers. Until now, some have paid by internet banking (bacs) and some by cheque-in-the-post. I'm going to change my system. All invoices and correspondence from my business already go by email. Now I'm going to alter the terms of business so there's a surcharge (small) for cheque payment, or a discount for bacs, depending how you want to look at it. I anticipate I'll be getting more than 95% of payments electronically by the end of this month.

This isn't because I'm anti-Union (although I am), it's because I don't want to be inconvenienced by the mail service and have the opportunity to make alternative arrangements.

I won't be the only one doing this. Yet again, a trades union is committing suicide."

He also makes a telling analogy with an earlier postal strike that destroyed Royal Mail business by encouraging adoption of the fax machine.  For firms operating in competitive markets it is imperative that Royal Mail unions do not have the power to undermine their ability to serve their customers.  Many can stop using the Royal Mail and when it cannot guarantee reliable delivery they will.  In the medium to long term the members of the Communication Workers Union will regret this strike more than anyone.

George Osborne pledges to increase inheritance tax threshold to £1 million

In his speech to the Conservative Party Conference, Shadow Chancellor George Osborne pledged to reduce two taxes:

1. The threshold for inheritance tax would be increased from around £300,000 to £1 million.

2. The stamp duty threshold for first time buyers would be increased from £125,000 to £250,000.

This is great news for millions of ordinary families, who will no longer have to worry about the burden of inheritance tax at a time when they are grieving over deceased relatives. It is also great news for up to a million first-time buyers.

The TaxPayers' Alliance has been saying repeatedly that inheritance tax is unfair, unpopular and unecessary. Polls show that it is one of the most hated taxes in Britain. It is very positive that politicians are finally listening.

Unfortunately, these two tax cuts will be paid for by a flat £25,000 levy on all people who register as non-domiciled for tax purposes, meaning that the overall burden of taxation will remain the same. We hope that the Conservative Party recognises the urgent need to bring the overall tax burden down.

Matthew Elliott, Chief Executive of the TaxPayers' Alliance, said: "It's great news that ordinary families will no longer have to pay inheritance tax and that young couples will be exempted from stamp duty when they buy their first home. This is a victory for all those who have campaigned against the unfair inheritance tax. It's been a long and sometimes lonely battle, but we are now starting to see genuine results."