The Harsh Reality - And Why The "Tax Cap" Must Be Rescinded
Our politicians continue to peddle the message that there is a route back to days of prosperity (via an early return to economic growth), and that we can continue to spend, spend, spend.... but the harsh reality is that our government (and most others) has existing commitments already made to its employees and the electorate which it cannot sustain - so we, the people, will be (indeed, must be) disappointed in our expectations.
Weak growth (which is the best that is promised for some years ahead for all major european markets) means that it is likely that political promises will have to be broken, expectations reduced, and "entitlements" in terms of benefits and allowances lowered or removed entirely...... not a message our politicians want to utter nor to be held accountable for, but we are clearly already in a cycle of "salami cuts", with the necessity for a lot more still to come.
The Manx government has gratefully accepted the UK Government's policy of "Quantitative Easing" and the printing of electronic money, as it has kept interest rates down - which has helped household mortgage bills, and those with major debts incurred during the run-up to the "credit crunch" - but provided a very poor environment for those in retirement who had expected reasonable returns on their investments, or those saving for a future pension.
Unfortunately, a corollary of Quantitative Easing is inflation - and in an economy with higher than desirable levels of unemployment and wage restraint, a consequence of the QE policy is to benefit those who are asset rich (e.g. with bond holdings), whilst penalising the poor whose real wages have been squeezed by inflation - in effect, a regressive tax. But given the high levels of debt facing the UK Government (and lots of others), the era of QE and low interest rates is stretching away into the future, as it means government borrowing costs are minimised, and they can "afford" to pay the interest on those debts -
ensuring that it is their creditors who suffer a gradual erosion of the value of their investment.
One of the difficulties facing the island is that it has very high levels of income inequality - 28% of our taxable population has such low incomes that they have no liability to income tax at all, whilst a further
31% are only liable to income tax at the 10% rate - leaving the balance of 41% responsible for a massive 92% of the income tax "take" - whilst some 70+ individuals enjoy a "tax break" of £35 million thanks to the tax cap of £120,000.
Sir Martin Sorrell, head of WPP (the world's largest advertising agency) acknowledges that "concentration of wealth is a serious issue". John Caudwell, a billionaire who made his wealth with Phones4U, now campaigns for social fairness, and has paid income tax of £253 million to the UK Exchequer on his earnings in the past 5 years - and wants other wealthy individuals to stop shirking their responsibilities and to face up to the moral obligation to pay their fair and reasonable share. The tax cap clearly exists under manx legislation as a maximum for income tax liablity, and whilst it is rational to minimise ones liabilities, there are obvious problems for society to have millionaires and billionaires whilst others struggle to make ends meet with meagre pay rises and rising inflation, and a government unable to balance its books.
The inevitable result is that we will see the "politics of envy", resulting in pressure for greater equality in society, and greater contributions from the wealthy who currently enjoy significant tax concessions, such as the "tax cap", and who are able to shelter much of their wealth via low (or zero) levels of corporate taxation, and in an absence of inheritance or capital gains taxes.
No doubt many will have been following the travails of Google, Starbucks, and Apple with their minimal levels of tax payments to the UK and other governments around the world - the analogy with our own manx millionaires and billionaires sheltering their wealth under generous government tax legislation is obvious. It is perhaps time that our government ceases the pretence that the tax cap protects employment or encourages an inflow of wealthy entrepreneurs - and instead requires those wealthy individuals, just like Apple and Google, to pay their fair share of tax - just like the rest of us........ rather than a continual
cutting of services to the public or by pushing the problem on to a younger generation, as yet unaware of the scale of those financial obligations............
Further to my recent article about the government's "stealth tax" on low income families as a result of the failure to raise the personal allowance since 2010/11, I would then query the continuing catastrophe of
public sector pensions. The public sector pension scheme was revamped just over a year ago, after tortuous negotiations with the unions and their members (and at a cost of well over £1 million, paid to the consultants Hymans Robertson). Shortly afterwards, it was proclaimed by government spin as a major success story, quite forgetting that it remains "unaffordable, unsustainable, and unfair to the taxpayer" (to quote Lord Hutton's review of equivalent UK schemes). I would add that it now constitutes a desperately sad situation of "pensions apartheid" - dividing the public sector (where 90% of workers will have a final salary pension heavily subsidised by the taxpayer) against the private sector where only 25% now apparently have any form of pension scheme applicable at all.
And in the private sector, a pension is almost certainly unlikely to be a final salary scheme but more probably a defined contributions scheme with significantly lower benefits. Essentially, these are "pension pots" - the contributions saved by the individual and his employer go into the "pot" and are then paid out as an annuity on retirement - but a pension pot of £100,000 currently gains at best an annuity of £5,500 per year - meaning that a "good pension" of (say) £25,000 per year requires savings in a pension pot in excess of £450,000..... and how likely is that for the average wage earner ?
By comparison and currently, public sector employees contribute approx £20 million per year in pension contributions, but take out over £60 million in benefits - the difference of £40 million+ being courtesy of the taxpayer. Having a job in the public sector is now the equivalent of being born with the proverbial silver spoon. Broadly, many public sector worker will pay in two years salary (5% of salary per year over 40 years) in pension contributions, but then benefit to the extent of half salary (index linked, and with some very important other side benefits) after retirement - which is now expected to be the next 25 years or so - a phenomenal rate of return for a very modest investment. Those pensions are reckoned to be worth the equivalent of another 40% on top of already generous government salaries – and the bulk of those pensions is paid for by the taxpayer, 80% of whom have neither the certainty nor generosity of such a pension. Can that really be considered to be affordable, sustainable, and fair to the average taxpayer ?
At the same time, this is creating an inter-generational divide - with a growing percentage of our population going into retirement as a result of ageing, leaving our younger population effectively to pay all the (rapidly increasing) pension bills. The electorate broadly trusts government to make the right decisions for society as a whole, but on public sector pensions, I fear the trust is sadly (and badly) misplaced - it remains an area dominated by the self-interest of those in receipt of these overly generous, under-contributed, and unfair pensions - which clearly includes our elected representatives......
Mr Teare's latest budget recently presented to Tynwald was widely greeted with enthusiasm- a "steady as she goes" performance that was allegedly just what the island needed. I must disagree.... it was a clear demonstration by a mathematically challenged Treasury Minister to continue this government's willingness to "kick the can down the road" and let later generations pick up the bills for its excesses. No-one enjoys paying taxes, and no-one likes bad news - but the reality is that this government continues to spend the reserves at an excessive rate, whilst meantime failing some fundamental tests of a "fair society".
Why ? Well, let's start with income tax and the personal allowance of £9300- it was last raised in the 2010/11 budget, 4 years ago - and then only by 1% from £9200. In essence, the effect of the failure to raise the allowance every year is to bring more low income people into the tax-paying class (an inflation effect known as "fiscal drag") and which is a "stealth tax" on those living on low incomes.
The personal allowance is widely regarded as the minimum income required for a fairly basic standard of living - and currently, 28% of our taxable population (20,500) falls below this level, thus paying no income tax. A further 31% of our taxable population (22,700) then fall into the 10% tax band paying a total of just £12 million income tax, or only 8% of the total income tax take. Taxing people at this level of income has two obvious consequences - it produces negligible levels of tax, but adds administrative costs by providing work for those employed in the tax offices of government (albeit for minimal tax benefit).
Thus, 59% of the population generates just 8% of total income tax receipts. The 41% balance of our taxable population (29,200) then pays income tax at the higher rate of 20% - but that 41% contributes £135 million, or 92% of the income tax bill. For most of that 41%, their marginal rate of tax is the full 20% - for every pound extra of income, 20 pence goes in tax....... until your annual income reaches some £615,000. At this point, you pay the "tax cap" of £120,000 (also frozen this year) - and thereafter your marginal rate of income tax falls to exactly zero. Just 71 people opted to pay the cap of £120,000, generating a tax take of some £8 million - but their average income was some £3 million each per year, - meaning the percentage of their total income paid in income tax worked out at just 3.8% (according to Government's own statistics).
Those 71 manx residents include (I assume) at least 6 who appear in the Sunday Times "Rich List 2013" - and includes one whose wealth was estimated at £2.3 Billion,and whose annual income is likely to have exceeded £50 million - and who will have paid his income tax bill at an average rate of much less than a penny in the pound..... Had all those 71 individuals paid tax on total earnings at the higher rate of 20%, Government finances would have benefitted to the tune of £35 million.
At a time when government spending is being financed from reserves, and public services being reduced, is it "fair" that those with the highest incomes - and with the greatest ability to pay - pay income tax at an average rate of less than 4 pence in the pound, and actually have a marginal rate of zero ? And at the same time, making those on very low incomes liable to income tax as a result of not increasing the personal allowance in line with inflation ?
ps It's worth pointing out that a single person, on the minimum wage of £6.20 per hour, working a 40 hour week (and with no other allowances) has a total income of £12,896 per year - and thus is liable to income tax of just under £360 - an average rate of 2.8% which is considerably more than the average rate paid by those included in the Sunday Times list..... Had the personal allowance kept up with inflation from 2010, the allowance would now be in excess of £10,500, removing many on low incomes from the tax net.
"Please look at the whole picture, not just a small piece of the jigsaw" implored Treasury Minister Teare at the end of his 2012 Budget speech.
Well there's one piece that just doesn't fit in and we make no apology for returning to it, following our article 25.02.12 :"TAX: Bye, Bye ARI - Hello CGT?".
We focused on confusion created with the abolition of the ARI and a replacement measure on tax distributions introduced via a Treasury Practice Note 174/12. The Note seemed to open the door for a potential Capital Gains Tax on company assets.