Taxing Questions

We have now had a period when major stories have commanded the media together with the fall out from the very messy election and referendum campaigns. While these go on many other issues vanish from sight. Given what could develop, they might stay out of sight for some time yet.

Drought or more problems arising from the nuclear reactors in Japan or other events around the Mediterranean could be occupying the media space as well as any impacts they may have in the UK.

It is tempting to go with the mainstream but if I have nothing much to add then perhaps picking away at some matters with long term implications might seem to be avoiding the big ticket things but they may be more important for the future.

There seems to be a lot of odd business going in the question of UK taxation. When New Labour with all its mysterious intricacies and money flows within fell from power there was a hope that a fresh and fairer approach might emerge.

This does not seem to be the case. If anything it is not simply business as usual in the London Village, in some respects it may be worse. The selling off of HMRC premises for cash and going into leasehold/rental may have seemed clever. But the substantial annual sums payable over many years will cost a great deal and moreover are going to people and places whose UK tax liability is minimal.

Recent editions of “Private Eye” have been plugging away at what the HMRC is up to and the sight of its top man doing sweetheart deals with the likes of Vodaphone and Goldman Sachs is not a pretty one. Especially, as he seems to be taking decisions without reference to either law or internal advice.

There are other things too. Nicholas Shaxson notes this one:

http://treasureislands.org/britain-outsources-tax-collection-to-criminal-facilitators/

This picks up on other stories:

http://www.ft.com/cms/s/0/6b4f2fb2-74da-11e0-a4b7-00144feabdc0.html#axzz1LJ1j7qxr

And from another standpoint:

http://www.taxresearch.org.uk/Blog/2011/05/03/lets-just-call-it-an-endorsement-of-criminality-or-a-slap-in-the-face-for-honest-taxpayers/

This is one to make you wonder, The British Virgin Islands and Russian roads:

http://bankwatch.org/documents/Vinci_oligarchs_taxhavens_Khimki.pdf

Then:

http://www.guardian.co.uk/commentisfree/2011/feb/07/tax-city-heist-of-century

And:

http://taxjustice.blogspot.com/2011/05/private-eye-on-cdc-and-london-laundry.html

In the meantime:

http://news.sky.com/skynews/Home/Business/Household-FAce-Biggest-Squeeze-Since-1870-As-Incomes-Fall-By-780-According-To-Deloitte/Article/201105115984437?f=rss

Some of these may be from the viewpoint of the Left, such as it is. But there are a lot of people now from other areas of politics who wonder not only just where is all the money going but how on earth we can raise enough to do what is necessary.

The famous 1979 Tory poster said “Labour Isn’t Working”. It does not look as though our taxation system at present is working. This may be another legacy from Labour but the present government could be making matters worse.

When a tax system becomes so inequitable that not only does a regime lose control of it but if the only people they can collect from cannot afford them and revolt then regime change will occur.

It is happening in other places a good question is when it will begin to occur in one part of Europe or another. Certainly, the EU tax and spend policies are making matters even worse.

Gather Ye Taxes While Ye May

In all the debate and argument about what the problems are and what is to be done it is clear that much of the media and many of the politicians simply have not realised the degree of change that has occurred since the 1980’s. Nor has the increase in the pace of change over the last decade impacted on their thinking.

Consequently, they are carrying round in their heads a baggage of beliefs, ideas, and assumptions that derive from not just the late 20th Century but from a longer past. This does not only apply to economics and politics, it has happened across many fields of study.

So when they are faced with practical problems of key importance now and for the immediate future the debate is couched in arguments and policy platforms that are increasingly disengaged from what is actually out there.

One feature of the debate on taxation is the lack of understanding of the realities. We have a government claiming to be attacking tax evasion and criminality yet depending for its work and key support on people who pay comparatively little tax.

But this is tax avoidance which is applauded by many as a worthwhile feature of the economy to advance growth etc.

Cutting through the complications it is my view that we now have an economy part of which is The Taxable Economy and the rest which is The Alternative Economy.

The situation is that The Taxable Economy is not large enough to fund the government’s needs for revenue and to some degree real lending. Nor in present conditions can it be made large enough in the foreseeable future to cover the spending and associated plans. Also, year on year it is declining in real terms.

The Alternative Economy has three parts. One is the legal activities by which tax is less than it might be for those who might pay. This is broader than people assume given the many and varied nature of the tax breaks handed out to all sorts of people and activities. This includes tax avoidance as we know it.

The second is the range of activities that escape tax. This covers activities such as Barter, DIY, helping out the family or the neighbours, voluntary work, “community” work etc. This is normal and unrecorded activity that has always been part of life. In the past for many, especially in the poorer sections of the population, this was a real and vital part of their personal economy.

The third is the illegal sector. Tax evasion, bootlegging, knock-offs, petty thieving (M.P.’s expenses come to mind), pilfering, drugs, trafficking of one kind or another and money laundering and all the full range activity outside the law to yield income and profit with little or no tax being paid.

If my wife cuts my hair without charge, this is Alternative 2. If I claim hair cutting on my expenses, this changes it to Alternative 3. If we set up a charity to cut the hair of the poor at low cost and this allows tax breaks then we are functioning in Alternative 1.

If we set up a company registered in Jersey, cut hair as a job and then ensure that the revenues go there and avoid tax again this is Alternative 1. If you think that this is unlikely then we have a jobbing builder along the street who does just that.

To make matters worse for the imbalance between realisable tax revenue and obligations in the spending commitments of government there is a range of payments that worsen the situation.

One is the discouragement of employment by over regulation and haphazard rules and another is all the obligations to give money to people from whom little or no tax can be realised other than on their spending.

In short the government’s own spending in many areas exacerbates the problem on top of all the tax breaks that have been handed round to win friends and votes.

So the government now has to increase the burden severely on those who have to operate within The Taxable Economy, now largely middling and lower income people. It might be tempting to tax property, but as the USA is finding out, having such a tax is great when the values are rising, but a disaster when they crash.

Taxing the rich will catch comparatively few because many are already in The Alternative Economy and so much of UK economic activity is run by people in other countries. Moreover, as many countries are engaged in a race to the bottom in taxation it will be hard to accomplish.

My fear is that there is no way out of the maze and worse still neither the media nor the politicians have the faintest idea of what has happened under their noses.

Property Tax - The Price Of Folly

No apologies for dealing with this topic again. This is not about the philosophy, morality, or justice of differing tax systems. It is about the brutal realities of the now and immediate future. It is an issue that is not going to go away because of the fiscal situation the government has created for itself, and a network of problems that cannot be easily solved because essentially the horse has bolted taking the jockey with it. At present there is a major debate about how much is to be cut from government expenditures, by what means, and in which services in the public sector. A great many promises have been made by all parties that simply cannot be met without major adjustments.

What is being consistently ignored, because they do not fully understand it, are the issues about revenue, how much can be raised, by what means, and who from. A key feature is that few people realise by how much the tax base has atrophied in recent years in relation to commitments. There is almost too much to explain. To start with the young, if you keep them all at school longer, and then require up to a half to attend university to the age of 21 or more, and demand time out for training almost all the rest, then many fewer are paying much in the way of tax, and moreover greatly add to costs. If as a result of this many are heavily in debt in their early 20’s, then this will impact on their spending, and all the indirect and other taxes involved, and on their decisions on lifestyle.

At the other end of the age scale, early retirement has become a feature of modern life, notably in the public sector, and either in unfunded pension schemes, or in funded ones that are now seriously in deficit. Many of these people do not feature in the unemployment statistics, but even those with better pensions, the minority, will not be paying as much in tax, or spending as much on taxable goods as those in work. As for their savings, many seek out tax free options, and a good many have been inveigled into financial products that are claimed to reduce liability because they have offshore features. Many of those who invested savings recently in the Isle of Man will be paying even less, as their savings seem to have been lost.

Those that did retain savings for income in the UK have now seen major cuts in their investment income, and their tax liability and spending power. Beyond all this there has to be a possibility that one way or another, pensions will have to be reduced or at least capped for the foreseeable future and it is likely that more stealth taxes on pensions could be needed to reduce the burdens. Many of the very old have now been virtually stripped of most of their savings, either by “care” or property rackets run by close contacts and friends of our politicians.

Amongst the working population the scenario is much worse. At one time access to and use of tax havens and related financial schemes and products was restricted to a small and select minority. Over the last decade this has been developed into a major service sector dedicated to tax avoidance and often connected tax evasion. It has now reached out, if not to the toiling masses, then at least to anyone with the wit or ability to manage their funds, income, and assets by their own decision.

A jobbing builder down the street who does lofts and kitchens etc. but nothing big registers his vehicles in a tax haven and conducts his business through one. He does not employ anyone but makes use of a select group of self-employed craftsmen, who I suspect do not pay much tax at all. When I buy goods by phone or on the net, it seems that arrangements for billing and delivery are such to either eliminate or hugely reduce tax payments. Earwigging travellers on their mobile phones on the train tells me that many “suits” in middling jobs have complicated arrangements on and offshore for this and that. Tax avoidance is no longer the preserve of the bosses, it has become a feature and a “right” of the middle classes, broadly defined.

Our local High Street etc. is full of offices of banks, building societies, and travel agents etc. all of which can move handle and move money easily and readily. Yet in the back streets are a handful of “internet facilities” with a little payment office for transmitting funds here and there. There are rarely any people using the computers but often a little queue of men from other shores holding wads of cash. In the last decade many of these men have moved into rented accommodation, and I believe are entitled to housing benefit. The owners of very many of these properties have accounts for transmitting funds abroad, beyond the reach of British taxes. The idea that inward migrants will pay lots of clear tax with few commitments is substantially a fiction. Many are low paid, many do not figure in the financial statements, and morever those in cultures that demand strong family ties often bring over their aged and infirm, at least those in our vicinity do.

Then there are the NEET’s, Not In Education Employment Or Training class of youngsters who may now number up to million, who knows? They have their own tax free zone and where does their money comes from and go to? Last but not least are the several areas of criminal activity, some with apparently legitimate fronts, but which have major funds and assets, often abroad, untouched by any tax liability. Nobody knows how much may be involved here, but the figures are likely to be very large indeed.

You may have noticed, I have not mentioned the very rich, the governing classes, or the magnates of finance and commerce. I suspect that they will be taking every possible advantage to minimise their personal taxes. They are certainly a major factor, but a greater one in creating the path that so many now are following. Nor will I go into all the fiddles, VAT, benefits, etc. off balance sheet arrangements, all yielding incomes and assets to many all of which are untouched by tax.

So, if the government cannot now get at the incomes of so many, if consumer tax raising in the UK is steadily being eroded by outside sourcing, if in creating a greater number of “clients” the government is hugely reducing its tax base, who is left to pay? Those that are will not be able to stand the full price of the financial folly of the last decade from either their incomes or spending, and these in any case are the substantial part of the people who actually vote. In a worst case scenario this is the stuff of revolution, as in 1381, whether it is a property or a poll tax and many in other years and places since. When regimes fail to conserve and balance income and expenditure then they revert to the historical default of property taxes (in regimes with servile or bound labour poll taxes are a form of property tax) that cascade down the classes one way or another and can reach a point where it all breaks down, often with violence.

What is left, that cannot be moved abroad, that you know where it is, and can have a reasonable estimate of its worth and potential for tax? It is physical property, and that is why Property Taxes on an altogether different scale will be part of the struggle and anguish in the coming decades as the government seeks out funds. Vincent Cable’s tentative suggestion of a 0.5 figure on homes over £1 million in value is only the first toe in the ocean. My guess is we could eventually be looking at much higher levels on all property depending on conditions, vital to cover the ongoing deterioration in the fiscal position.

It is within my personal experience that until the 1960’s the then Schedule “A” tax applied to domestic owner occupied properties. On the basis of the kind of property I owned, a modest semi-detached without garage, that tax together with the council rates, also a property tax, the total annual bill ran to about 10% of my gross annual income and they amounted to 4% of the value of the property. So Vince Cable’s modest proposal to tax property asset millionaires is chicken feed.

The Schedule “A” tax on owner occupied domestic property was abolished as a means of encouraging home ownership and for the outgoing unpopular high spending Conservative Government to buy badly needed votes. In those days the whole shape and impact of taxation was very different, so it is very difficult to compare then from now. All I do know was that as a young family with children and an income slightly above the average, we could not afford a car, the housekeeping was very tight, we had little to spend, we hired the TV, and holidays were out of the question. So much for the “Swinging Sixties”.

The past is coming back to haunt us, and the bill will be in the post.