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Taxing the rich

The Imprudent Accountant considers newspaper leaks suggesting that the government will implement a restriction on pensions tax relief and a new mansions tax.

11th Feb 2020
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Many subscribers will have heard the rumours over the weekend that the government is planning restrictions to pensions relief for higher rate taxpayers and the introduction of a mansion tax.

While this will undoubtedly sound like a terrifying prospect for many accountants and their wealthy clients, like me, anyone with a long memory is probably already laughing.

You will recall that George Osborne (remember him?) loved to leak stories to the papers, typically The Sunday Times, about worrying tax hikes. Mr Cameron’s sidekick would then stand at the dispatch box and deliver a Budget speech in which he boasted about eliminating the tax rises that he had not intended to introduce in the first place.

Such was the success of this far from subtle strategy that after Mr Osborne departed to a role that now enables him to be the recipient of such leaks, Philip Hammond followed suit.

I am therefore taking the latest hints with more than a pinch of salt. Indeed, it is a long time since there was a Budget (the sentence could stop there!) ahead of which there wasn’t a rumour about high rate pensions tax relief.

Having said that, there is no question that if Mr Johnson delivers on all of his manifesto spending promises, the country will be desperately in need of additional finances.

Indeed, with HS2 likely to cost every one of us a fortune and a commitment to hold rates of income tax, NIC and VAT steady, there will need to be some tough fiscal decisions.

However, I don’t see the current government kicking its favourite voters and party donors in the teeth just after getting the party back into power by restricting their pensions tax relief.

A mansions tax is even more far-fetched. The last thing that this government needs is an exodus of the mega-rich.

In any event, in order to implement a property-based tax, it would presumably be necessary to revalue properties. That exercise would certainly boost employment but must take years, particularly if, as one might reasonably expect, the richest in the land use their expensive lawyers to indulge in lengthy appeals against unfavourable valuations.

The only slight novelty that I have seen in the media coverage over the weekend lies in the fact that the Budget is still a month away. In the past, Chancellors of the Exchequer kept their powder dry until the weekend before the big event.

The early start promises many more weird and wonderful tax threats, giving Sajid Javid the opportunity to fire up his backbenchers for hours on end on March 11, as he lists tax rise after tax rise that he is not going to implement, and which nobody would have thought about but for his team’s judicious chats with assorted financial journalists.

The big question is where he is going to find additional tax revenues. Personally, I can’t see this government taxing the rich first time around for obvious reasons.

If they want to get a trade deal with the United States, attacking the Googles and Amazons of this world will also prove problematical.

Unless the plan is to ignore those bold tax-freezing manifesto promises, perhaps the way forward will be some stealth taxes that largely hit Middle England, without causing visible offence to those who voted in a government that promised to “Get Brexit Done” but very little else.

Replies (9)

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By evildrome
12th Feb 2020 10:34

Why will more tax be required?

Have we abandoned our Fiat currency and gone back to the Gold Standard?

Just to break even (i.e. a balanced budget a.k.a zero growth) we need to spend £30Bn.

You cannot run a balanced budget AND run a balance of trade deficit.

(S – I) = (G – T) + CAD

1. (S – I) is the private domestic financial balance.
2. (G – T) is the government sector financial balance.
3. CAD is the external sector financial balance.

If you want (S – I) to equal (G – T) then CAD cannot be negative.

If it is negative to get a "balanced budget" you'd need to deficit spend by the amount CAD is (which was £30Bn in 2018).

And if you wanted say, 3% growth you'd need to add another £63Bn.

So the deficit needs to be at least £93Bn.

And I think the government are aiming at £21Bn.

So.. best of luck with that.

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By k743snx
12th Feb 2020 10:47

Look on the bright side - a mansion tax might get rid of Billy Bragg and he'll "emigrate" to the EU's sunlit uplands.

I agree with the point that middle income earners may be in for some nasty surprises (big hikes in IPT for instance?). The real top bods can (and do) usually get away with it.

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By AndyC555
12th Feb 2020 11:11

The arguments for restricting tax relief on pension contributions really irritate me.

It runs something along the lines that "it only 'costs' a higher rate taxpayer 60p to put £1 in to a pension but it 'costs' 80p for a basic rate taxpayer".

But that logic could be applied to ANY expenditure.

It only 'costs' a higher rate taxpaying plumber £6 to buy a £10 wrench. It 'costs' a basic rate taxpaying plumber £8. Would we use that logic to say this is 'unfair' and restrict tax relief on the wrench? It's nonsensical.

If the "it's unfair" brigade like to point out that 40% of all pension income tax relief goes to the highest 10% of earners, perhaps it's worth reminding them that 60% of all income tax is paid by the highest 10% of earners.

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By C.Y.Nical
12th Feb 2020 11:30

The idea I have seen floated which is more likely than a mansion tax is to introduce additional bands to Council Tax to get more revenue from expensive dwellings. Of course this makes Council Tax more like the old rates system which we were told was unfair because the lonely widow in her mansion paid more than the family of 6 in their semi, even though the family of 6 consumed more council services.

Meanwhile, having effectively destroyed defined benefit pension schemes by removing dividend tax credits, and decimating the senior staff count in the NHS by the pensions cap, the next step will presumably be to deter saving into defined contributions schemes by reducing the tax credits. Following which we will all be told we are not saving enough for retirement.

Politics is all about pendulums. Everything comes and goes in an eternal swinging back-and-forth of failed policies dreamed up by people who haven't been around long enough to remember what happened last time. For the first time in my life I spoiled my ballot paper at the last election. I could see Boris was a fraudster making impossible promises and I have completely lost faith in the system.

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By Michael C Feltham
12th Feb 2020 17:36

For years now, The Budget has been a balancing act worthy of a circus seal...

The main driver for ANY tax has been government's own criminal profligacy: scattering billions around like an octopus on speed. This is precisely what has led to stealth taxes which in point of fact achieve nothing much in terms of defined objectives. Examples are Landfill Tax and Air Passenger Duty. The "justifications" for the first were land pollution and the second "Climate Change". On the first if the tax take had been ring fenced and then used to build urgently needed refuse processing plants which turned waste into energy, fertiliser, board products etc; and the second to develop atmospheric pollution reduction primary power units, then good.

Neither have.

For far too many years, successive governments have simply twiddled with increasingly over-complex tax codes from sheer desperation. They have totally failed to reform wastage, an over-sized civil service, insane overseas aid (Perhaps the £5.2 million grant to an Ethiopian Girl Band Yegna dubbed the African Spice Girls being an excellent exemplar!!); and yet Boris The Buffoon, now demands Britain proceeds with a pointless and wasteful HS2 vanity project and then, his fantasy of a Bridge-Tunnel between Northern Ireland and Scotland!

Yet 2020 government debt is £1.84 Trillion, and a further deficit increase is projected this year. The ratio between Government Spending and GDP still nudges 40%. Debt service of Government's insane debt mountain now exceeds £48 billion per annum.

Yet, this is a country which, according to the fanciful political clique will, once freed from the EU shackles, set the World alight...

I wish!

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By cfield
14th Feb 2020 11:28

If they ever do restrict higher rate tax relief on pensions, will they also be restricting income tax on those pensions to basic rate when the contributor retires and the money comes back out of the pot?

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By cfield
14th Feb 2020 11:55

I often draw an analogy between pensions and health care.

Personal pension contributions get tax relief at source and employer contributions are tax free. As a result, we have a strong pension industry in this country (in spite of Gordon Brown's depredations) and few people are entirely dependent on the state pension. I think most people would agree that is a good thing, apart from those on the extreme left.

Contrast that with private health. Personal health premiums get no tax relief and employer schemes are taxed as benefits-in-kind. Consequently, relatively few employers offer health insurance and most people depend on the NHS, which is now buckling under the strain as the population ages, better treatments become available, and demands on it rise inexorably.

Do we want pensions to go the same way? If so, start taxing them and see what happens. Alternatively, if we want to learn from pensions and have a strong mix of public/private healthcare in this country, so reducing the burdens on the NHS, let's start offering tax advantages. Never a better time to do it.

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Replying to Aethelred:
By cfield
14th Feb 2020 18:24

Aethelred wrote:
it cannot be right that someone living in poverty should have to pay the same (or any) tax on a gallon of petrol as a billionaire pays when filling up his Bentley.

Why not? They're both getting exactly the same.

The only trouble with no consumption taxes is that the whole burden would fall on income tax. If you have a flat rate, it would have to be much higher than the basic rate now. That will produce an enormous cliff-edge. More and more people will decide they'd rather live off the state than have the state live off them. Pretty soon the burden of welfare would become unsupportable.

You've got to have incentives to work all the way down the line. That means keeping welfare spending down, tax rates low and barriers to employment low. Firms must be incentivised to employ people. At present, the opposite applies.

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Replying to Aethelred:
By Ruddles
14th Feb 2020 18:31

Goodbye, again

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