Monday, 18 February 2008

All Tax is Income Tax

One of this Government's most pernicious fictions is that it is possible to "Target" tax at people who are unfairly avoiding tax, not paying enough, are politically unpopular, like Private Equity Barons, or in the case of Climate Change Levy (0.15% of revenues) or Landfill tax (0.2% of revenues), not paying externalities associated with the business.

Leaving aside the administration of the tax, who actually pays?

Starting at the top:

  1. 33% of tax receipts are from income tax, paid for funnily enough by individuals who have a job - despite the Government's best efforts, this remains most of us, for the time being.
  2. 21% from NI contributions. As far as the employee is concerned, this is another income tax. The employer nets his contribution against the budget for employing that individual. Employer's NI contributions are therefore paid by the employee in the form of lower wages.
  3. VAT, 18% of receipts is paid by the consumer either at the point of purchase, or in the form of higher priced goods as companies can pass any taxes they incur on to their customers.
  4. Corporation tax, 10% of receipts, is paid by employees in the form of lower wages. Lefties for whom a stick wasn't grown they couldn't grasp the wrong end of, believe it is a tax on company profits. It is not.
  5. 6% come from fuel duties, paid either by the consumer at the pumps or in the form of higher priced goods.
  6. 3% comes from stamp duties. Those on shares are paid by share owners: your pension fund for example, and property owners. It also serves to reduce liquidity in the property market, especially for 4 bedroom family homes because of the pernicious Slab approach to SDLT bands.
  7. 2% comes from Tobacco Duties, disproportionately paid by the low waged.
  8. Capital Gains tax, 1% of revenues, is the first tax paid exclusively by the asset rich. It is very distorting to capital markets, raises little and punishes the ill informed because it is often easily avoided by simple planning. It certainly does not encourage long-term share ownership.
  9. Inheritance tax raises about .9%. This is paid by the unlucky, the unwise and those who are unwilling to plan. It does not hit the rich: it hits anyone wealthy enough to die in their own home, if they live in the southern Britain.
  10. The remaining 4% is made up lots of little taxes, including 0.05% from cider and perry duties, which for example is paid mostly by teenagers in bus stops.
Not included in these numbers are council tax receipts, which are paid by anyone who lives in a house or flat (which is most of us) unless they are a student. Stamp duty sees to it that it is unlikely to pay in the short term to downsize to reduce council tax payments.

Because the same people, i.e. us, end up paying all significant taxation, the only statistic worth looking at is the total tax take of government as a proportion of GDP. On this measure Gordon Brown as Chancellor, and now Chancellors puppet master has taken tax from Around 25%, one of the lowest in the OECD to nearly 40%, one of the highest. Near to Germany and France. Yes, we are still below the EU average, but there's no doubt which way we're heading and if you think the EU average is something to aspire to economically, you're a loon.

Now high tax rates, whatever Polly Toynbee may believe, are bad for economic growth. Lefties may think that Government "investment" in public services pays returns by making the place a better one in which to live, but they're wrong. Governments spend, and spend inefficiently making poor use of scarce resources and therefore slow the growth of the economy by diverting much needed capital to activities which generate lower value added. I'm not saying spending on health or education should be cut, but that private sector provision would spend the resources so directed better. In any case, health and education make up a small fraction of Government expenditure: Direct payments in benefits to idle chavs form by far the biggest proportion of Government expenditure (about a third). So much of the tax take is wasted subsidising the 20% or so of the workforce to watch Jeremy Kyle whilst we pay for their council house, their frozen pizza, special brew and Lambert & Butler. The welfare state costs us roughly 10-15% of GDP in unnecessary taxation. This couldn't be cut immediately, but could easily translate into an extra 10% growth over a decade, if this was managed properly.

What I'm saying here is not new, nor is it particularly surprising, except to Labour politicians. But Gordon Brown has taken a country with great public finances, spending under control and a strongly growing economy in which the fruits of that growth were filtering down to people in the form of rising disposable incomes, into one in which peoples' post tax disposable incomes are FALLING despite continued economic growth, as ever more money is sucked into the Government's inflationary maw. Basically about half of the economic growth the country has seen on Labour's watch has been eaten by the Government's wasteful spending spree. The interest on Government borrowing, for example is now roughly the same as the defence budget (yes, while we're fighting two wars).

Have you seen a major improvement in public services? The Hospitals are still a bit rubbish, roads are in disrepair, your bin only gets emptied every other week, the Police have decriminalised burglary, and the Army still hasn't got the kit it needs (yes, even though we're fighting 2 wars). All that money has been spent instead on creating a Labour-voting client state, rather than improving your public services. Disagree? How much of the extra Money the NHS has received has gone into wages? Most of it. This is deliberate and political, and once the electorate see this, they (apart from those suckling at the teat of tax-payers cash) will turn against the perpetrator of this vast confidence trick. Every time you see a council tax demand, or a landfill tax charge, or even a speed camera or parking fine, you should mentally add it to your income tax bill and think "what could I do if I was allowed to spend my money myself?" Then you should take a step towards getting that money back by voting Conservative at the next election. Better still, double the electoral benefit: find someone who votes Labour and kick them in the head until they stop twitching.

The sad thing is it was all so predictable. Labour always spend like a drunken sailor in port, until the money runs out. Gordon Brown: Comfortably the worst Prime-Minister in Britain's history. Labour: constitutionally economically incompetent.


Umbongo said...

I was with you 100% until the end of the penultimate paragraph which reads "you should take a step towards getting that money back by voting Conservative at the next election"

Perhaps you missed this gem from the chancellor in the next Conservative administration. Taking Osborne at his word and assuming an election in 2010, even if Labour loses we're going to have Labour-type expenditure (and thus Labour-type taxation) for at least the next 5 years. Should I still vote Conservative?

Jackart said...

Perhaps you missed his recent triangualting wriggle: that 3 years was from the moment it was said meaning it didn't tie him at all should the chancellor bottle the 2007 election as expected.

So yes. Such promises are political necessity.

Mark Wadsworth said...

Here via ASI blog round up (lucky you).

That's a fair summary, but I don't know why right-wingers are obsessed with corporation tax. There is no real distinction between corporate and personal incomes/profits (of course there should be no higher rate tax on dividends - like in Singapore/Hong Kong - different topic), so I don't see why individuals and companies shouldn't pay at the same (preferably low) flat rate.

In any event, VAT is a far more damaging tax and raises far more in revenue.

Corporation tax does not hit reinvested profits, it only hits surplus profits (whether retained or paid out as dividends) and unless a company does something really stupid, does not put anybody out of business.

See here.

V said...

I guess the problem isn't so much the government hunger for tax but how the concept of profit is understood.

As a self employed person, the trick is to ensure that you make no profit, so you can't be taxed. However, you can reinvest any extra wealth you have made without being penalised for it.

You can't pull this stunt with a limited business where the profit dividend is used to entice stockholders. Profit leads to extra investment, and this is where paying for some good accountants is worth its weight in lower taxes!

However, it does highlight your point with is that at the end of the day, it is the working person who ends up paying for everything!

It is a shame there isn't a socialist requirement for everyone to be equally numerate! :)

Devil's Kitchen said...

"Corporation tax does not hit reinvested profits, it only hits surplus profits (whether retained or paid out as dividends)..."

Mark, this simply isn't true. It isn't paid on profits reinvested in that same year, no, but not if a company is saving for a big purchase.

I used to work for a small print company. They wanted to buy a new press (and they needed it) but it would cost of the order of £60,000 for a (cheap) second-hand one.

They did not want to have to borrow money from the bank (they already had a substantial overdraft from the bad management before I got there. Long story, but I improved things a lot).

So, what to do? Well, the sensible thing would be to save the profits year on year, until they had at least the bulk of the cash.

Unfortunately, the government sees that as corporate profit and taxes it. Boom! £10k of your company savings wiped out and you have to wait yet another year to get that new press.


Mark Wadsworth said...


DK, if the company had an overdraft and losses brought forward, then it wouldn't pay tax until it was repaid. If, on the other hand, the company had an overdraft but no losses brought forward, then they fall into the "having done something really stupid" category.

If the investment was a good one, then it must be worth paying 8% interest or whatever to the bank, If the investment made less than 8% it wasn't worth making.

That's why we have interest rates - it demarcates the cut off between "a good investment' and "a bad investment".

Mark Wadsworth said...

Anyway, this does not detract from the "VAT is the worst tax" argument. So there.

Simon Clark said...

"Corporation tax, 10% of receipts, is paid by employees in the form of lower wages. Lefties for whom a stick wasn't grown they couldn't grasp the wrong end of, believe it is a tax on company profits. It is not."

This would only be the case if the firm had a large degree of labour monopsony (monopoly buying power) and no monopoly selling power. It should also be noted that labour is not the only things that firms buy. If they lack a labour monopsony, but have a monopsony on, say, uranium, they will not lower wages, they will lower the price they pay for uranium. But if they are already paying the lowest possible price (the point at which, if you pay the uranium producer any less, he can make more money by doing something else) then this is not an option and their profits will have to take a hit, unless they are a monopoly. Which brings me to...

If a firm has a decent degree of monopoly selling power (and lacks a monopsony) it cannot pass taxes on its abnormal (monopoly) profit on to the consumers (nor to employees or other sellers of the factors of production such as our uranium producer). So, if Uranium Products PLC has a monopoly profit of 10% and the corporation tax rate is 10%, Uranium Products PLC's employees will continue to earn the same wages and consumers to pay the same prices in the short run. In the long run, however, without monopoly profits to invest in rent seeking, consumers will benefit from lower prices etc.

But in most cases, where monpoly power either does not exist to a great extent or is balanced out by market contestability, and where monopsony power either does not exist or is balanced out by labour market contestability, corporation tax is a tax on everyone. The firm will indeed see lower profits but consumers will also see more expensive goods and sellers of the factors of production (be they employees or uranium producers or whatever) will find themselves earning less or being unemployed.


A good demonstration of why corporation tax (if we must have it) should consider bank deposits as investment. They are!

Henry Crun said...

Mark Wadsworth, you sound like an accountant. Therefore you will be up against the wall alongside the lawyers.

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