The TaxPayers' Alliance - Economics 101

Cllr J P Floru: Taxing Europe into oblivion

Last month the French finance minister Christine Lagarde cheerfully announced France’s intention to push for corporate tax harmonisation when it chairs the EU for six months from July.  Since then the EU Commission and pro European politicians have toned it down to make sure businessmen don’t urge for a “no” in the Irish referendum on the constitution on 12 June.  I trust the Irish will not be fooled. 

Tax competition is the most effective method to keep government in check.  As long as there is tax competition between states or regions politicians are unable to tax and spend as if there is no tomorrow.  If the tax rate is lower over the border companies flee and jobs disappear – as recently illustrated by the relocation of several very large companies to Ireland.  Thanks to the Irish Republic’s corporate tax rate of 12.5 % the impetus towards a lower corporate tax rate in the UK has become unstoppable. 

Tax competition is any statist’s worst nightmare.  France, never having been short of statists since time immemorial, now wants the tax base harmonised across Europe.  That we do not live on planet Europe but on planet Earth has passed the little European by completely.  If the UK – as always – gives in, and tax base harmonisation goes ahead, a compromise will result.  We will end up with a medium harsh tax base regime, likely to be worse than the one we have.  And in the world competition Europe will continue to slide down the economic prosperity curve. 

As Churchill said:  “For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

Let’s say “no”, for once.

Shire Pharmaceuticals to the leave the UK

Even if you haven't heard of Shire Pharmaceuticals or their ADHD drug, Adderall, which they describe as the "leading brand in the US market" you should still be very concerned at the possibility they might leave Britain due to high levels of tax, as is reported in City Am.  This is a FTSE100 firm, one of the biggest in the UK.  High tax rates won't raise much revenue if firms like this one leave the country.

High levels of tax have hurt our international competitiveness but, although big companies have left before, this is usually hidden by the fact that it is new investment that goes elsewhere rather than existing companies in the UK leaving.  Now it is becoming more apparent than ever that Britain's long term prosperity is being imperilled by an increasingly uncompetitive tax system.

Non-dom tax plans will lose money

Well, who on Earth didn't see this coming?

"The Treasury is expecting to raise an extra £800 million a year by 2010 from a £30,000 annual tax on wealthy non-doms, as part of an effort to cut public sector borrowing.

But the study warned that the non-dom plan will cost the Government £2.1 billion in lost tax receipts due to "capital flight", in which wealthy individuals leave the UK and take their money with them. Even the Treasury has admitted that 3,000 of the wealthiest non-doms could leave the UK as a result of the tax plans.

According to tax experts at the Society of Trust and Estate Practitioners, non-doms pay £7.16 billion in tax annually. The society has calculated that the departure of the richest would cost Mr Darling more than £2.1 billion."

If you place a new tax on a group with the financial means to live anywhere they choose, who often work in industries that are used to communicating globally, they'll move.  Their companies will relocate so that they don't have to pay more to attract the best staff.  This will put a dent in tax revenues that can easily outweigh the revenue gains from higher rates.  The effect will be exacerbated if you explicitly threaten further tax rises - as the Government did (PDF, Para 5.81).

The Government will pay a price for their shallow populism bashing non-doms.  They'll find it harder than expected to balance the books.  The price British, domiciled, taxpayers are asked to pay will be far higher if London's position as a financial centre is imperiled.

Private equity taxation to rise?

The Financial Times reports that Alistair Darling is considering raising tax on private equity:

"Alistair Darling, the new UK chancellor of the exchequer, is considering an increase from 10 per cent to 20 per cent in the base rate of capital gains tax for investments classed as business assets – such as holdings in unlisted companies or shares owned by employees.

This could be accompanied by an extension from two to five years in the “taper relief” period – the time these investments must be held to reach the lower rate.

Mr Darling, who replaced Gordon Brown when he was appointed prime minister in July, is also examining establishing a fiscal distinction between large buy-outs by “mega funds” and smaller venture capital deals or entrepreneurs selling their companies."

This may appeal to a populist desire to make the rich pay but increasing tax on private equity is, in economic terms, very dangerous.  These firms are the most mobile, the most able to move if they come under attack.

London has done really well out of attracting financial services firms both from the rest of Europe and from the United States, particularly following the onerous Sarbanes-Oxley regulations imposed there following the Enron scandal.  That competitive success has been a key driver of British economic growth.  If it were to be endangered we might all wind up worse off.

In an industry where firms are so mobile and face such low barriers to shifting capital where its treatment will be more favourable this analogy, from George Gilder's Wealth and Poverty, seems particularly apt:

"In an increasingly competitive global economy, a government can no more raise its revenues simply by raising its taxes than a company can raise its income simply by raising its prices.  Like a company, a government must constantly lower its prices and improve its services to expand its markets (its tax base)."

If the government wants to maintain its revenue it will need to keep our tax regime competitive.

Business rates look set to rise to pay for council profligacy

A worrying piece in the Telegraph's business section states:

"Business is facing a series of Government tax raids to pay for the increasing cost of public services.

MPs from all parties on the Commons Local Government Committee last week threw their support behind additional business rate taxes that could raise £1.5 billion.

At the same time, the Government is increasing taxes and levies on smaller companies, employment, business vehicles and waste, adding to operating costs.

The taxes and levies include:

• A new tax on the owners of small family companies that pay themselves using dividends. It may mean couples in business together have to pay another £9,000 a year in tax.

• A 16pc increase in the rate of corporation tax paid by small companies is being phased in. It was announced by Gordon Brown in this year's Budget.

• Local authorities are planning road pricing, vehicle pollution charging and even workplace parking taxes.

• On 1 October, around 6m people will begin to gain longer statutory holidays - costing business up to £4.4bn, mainly in wages.

• Also on 1 October, the National Minimum Wage will increase to £5.52. It has risen by almost 10pc in the last two years.

• New skills training levies have been proposed to ensure more employers train staff.

• A new form of planning gain tax is being considered to ensure more developments are caught. One favoured option has been put on ice but Gordon Brown wants alternative proposals to be ready for the pre-Budget report in December.

• The tax on waste going to landfill sites is rising by £8 a tonne from next year until 2011, effectively doubling the cost of dumping waste in the ground.

• Compulsory employer pension contributions will hit from 2012. Under current proposals, firms will have to pay 1pc of salary from the first day that a new member of staff begins work, rising to 3pc of salary by 2014."

All this extra tax revenue is funding central and local government's insatiable appetite for more spending. An alarming statistic is given: business rates have increased in real terms since 1991, but have fallen in proportion to the total amount spent by local authorities from 29 per cent to 20 per cent.

Local government has enjoyed huge amounts of extra revenue from its three main sources over the last decade - business rates up by more than inflation, council tax doubled, and a massive injection of extra cash from central government, paid for out of general taxation.

The simple question begs itself: what are they doing with all this money? In some cases, cutting services and increasing charges: weekly bin collections reduced to fortnightly, social care for the elderly reduced, fewer meals-on-wheels and new or higher charges for sports facilities.  In other cases, paying themselves inflated salaries, as the TPA's Town Hall Rich List  showed.

Both council taxpayers and business rate-payers are being royally ripped-off by many town halls. It is time to call them to order.

Private equity firms show the need for simpler, lower taxes for all

The Taxpayers’ Alliance exists first and foremost to defend the interests and rights of ordinary hardworking taxpayers.  It is ordinary taxpayers who have to foot the mounting bill for a monolithic government bureaucracy wasting money on pointless, feel good projects.  Taxpayers have seen more of their own money swallowed up by the state and seen comparatively very little in return.  Yet it is the voice of those taxpayers who fund the gravy train that seem to count for least within the political process.  It is thus for the pensioner who is unable to pay spiralling council tax bills, the first time buyer unable to get onto the property ladder due to stamp duty, and the low paid worker who faces cripplingly high marginal tax rates and so little incentive to work that the Taxpayers’ Alliance exists to defend.

Private equity executives, whatever else they may be, do not quite fit the description of the ordinary taxpayer struggling to make ends meet.  However, following the barrage of criticism recently unleashed upon them by various left wing groups and politicians, we felt the need to come to their defence.  Most of the concern has focussed on the fact that the majority of the compensation offered to private equity comes from carried-interest, which is taxed as a capital gain rather than income, and so tax rates of 10% or less rather than 40%.   The interim report of the committee of MPs investigating private equity firms considers both this issue and the use of the non-domicile status as a tax loophole, along with the impact of private equity funds on the wider UK economy.

In the age of international capital mobility, firms are able to easily relocate around the world.  So when many other European countries are moving towards a system which treats carried-interest as a capital gain, it seems foolish for us to move in the opposite direction, by creating a tax system that penalises private equity firms and so gives them a clear incentive to make the most of their foot loose status and move abroad.  Private equity firms have produced £55 billion of investment over the last five years, whilst they contributed £26 billion of tax revenue to the exchequer last year.  That would be quite some loss to the British economy.

There is a broader point here.  One reason the rich do not need the Taxpayers’ Alliance to defend their interests is that they can afford an army of accountants and lawyers to exploit our outrageously complicated tax code to find its numerous loopholes.  It is these loop-holes that allow them to pay much lower marginal tax rates than many of the poorest workers.

A flatter, simpler tax would remove many of the loopholes that allow the richest to end up paying the lowest tax rates.  It is an empirical fact that tax cuts and simplifications lead to the richest providing a greater percentage of total government revenue.  Tax simplification, not clobbering a vital component of the British economy to appease the trade unions, should be the government’s economic priority.  To his credit, Alistair Darling said much the same thing when he asked to be judged on his success in simplifying taxation.  However, as the FT so brilliantly puts it, the government’s claim that it will continue to simplify our taxes is rather like “the Mafia [pledging] to continue deepening its commitment to the rule of law.”

A fact that seems to have escaped everyone’s attention, though, is that rich people paying lower marginal rates than poor people is no argument for raising the rate on the rich, it is an argument for cutting it on the poor.

More excuses for increasing tax on business

The Times reports that this week the government has proposed to allow local authorities to levy an additional tax on businesses in the form of an infrastructure tax which will be paid by business in the city of London, and will be limited to 4p in the pound. This new tax is being introduced to fund the Crossrail system which is estimated to cost the Government around £15 billion.

Business already pays far more tax than it needs to. For the tax year 2007-8 businesses will pay over £50 billion in corporation tax alone. This is more than enough to pay for Crossrail several times over in just one year.

The government could afford projects like Crossrail if it were to reduce the amount of money it squanders in waste. This year the government has wasted £82 billion of its tax revenue, which would pay for five Crossrail systems with £7 billion to spare.

Liberal Democrat Tax Proposals

Download Reducing the Burden:  Policies for tax reform (PDF)

There are some good ideas in the Liberal Democrat tax proposals:

1. Simplification of the tax code and postcard-style returns could ease the administrative burden faced by individuals and companies.  Britain has the most complex tax system in the world, having recently overtaken India; there has to be room for simplification.
2. A cut in the basic rate would give millions of Britons some of their money back.  Very welcome.
3. Replacing the council tax would address the problem of a tax which hits the vulnerable the hardest and reduces pensioners to penury.

However, there are also some bad ones:

1. An extension of green taxes would be an inefficient way to raise revenue, would likely prove regressive and could do serious harm to British industry.  In particular, plans to increase the variation in vehicle excise duty on the basis of emissions would probably still not take lifetime emissions into account: some estimates that do include costs of construction and design suggest that a Toyota Prius Hybrid puts out more emissions than even a huge Hummer H3.
2. Taxing the rich more may appeal to social democratic notions of fairness but could do the British economy serious harm.  Estimates by the Liberal Democrats suggest that the tax bill of a City banker earning £250,000 would be increased by 11,800 pounds.  If the bank that employs that banker moved to another country to avoid the additional bill or international investment was diverted elsewhere we would all lose out.
3. There are risks to introducing a 'General Anti-Avoidance Rule'.  As the Conservative Tax Reform Commission pointed out:  "It is not easy to define exactly what such a rule should say, and experience in other jurisdictions shows that it may take some time before sufficient issues have been brought before the courts to enable to scope of the GAAR to be clarified."  Until clarity is achieved there is a lot of uncertainty in the law which exposes business leaders to unfair legal risk.

In short, a mixed bag.  Certainly an improvement over past Liberal Democrats plans to introduce a new 50 per cent tax band.  This platform would make important positive changes to the tax system by simplifying it.  If only the Liberal Democrats could get over the need to keep these changes revenue neutral they could avoid compensating measures that might undermine our economic competitiveness.

George Osborne gives advice to new Chancellor

In an interesting op-ed in the Observer, the Shadow Chancellor had plenty of advice for Alistair Darling, as he takes over the reins at the Treasury. In one of the key parts of the article, Mr Osborne wrote: “Britain's businesses will be held back so long as we have some of the highest corporate taxes in the developed world. Your first Budget is nine months away. That is plenty of time to prepare a programme of major tax reform. Your objective should be simpler taxes and lower tax rates. You should also shift the tax burden away from income and onto pollution and examine the case for a reduction or abolition of stamp duty on shares.”

It’s good that George Osborne is talking about cutting tax rates and simplifying the system, and we applaud him for that. But as he made clear after March’s Budget, cries of “tax con” will follow unless the overall tax burden is reduced at the same time. Unfortunately, other than an imprecise promise to “share the proceeds of growth” between public spending and tax reductions (which if shared in the wrong proportions could actually lead to a higher tax burden) and reduce the tax burden over an economic cycle (which if it is as long as the previous cycle could last for ten years), nothing is forthcoming from the Shadow Chancellor. If he could only be a little bolder in his plans to relieve families and businesses from the record tax burden, taxpayers would applaud him all the louder.