Tax Break

Who said tax is boring?

Archive for the tag “Tax Policy”

Brother, can you spare a dime?

attlee_churchill

Not quite Laurel and Hardy

He is best remembered through the prism of the witticisms of his arch-rival, Winston Churchill: ‘A modest man, who has much to be modest about’; ‘A sheep, in sheep’s clothing’; ‘Up drew an empty taxi, and out stepped…’, but Clement Attlee, the fiftieth anniversary of whose death is being marked this year, had many arrows to his bow. His sound defeat of Churchill in the 1945 election heralded in the Welfare State and wholesale Nationalization (including the Bank of England, coal and steel, and the railways), which changed Britain forever. Even Margaret Thatcher, who staked her claim to a place in history on unravelling much of what Attlee had done (with mixed results – someone recently suggested that Virgin Trains’ motto should be ‘The first time is always the worst’), referred to him as, ‘all substance, and no show’.

Fast-forward seventy years and it seems everyone, apart from the Americans, talks the talk about looking after the weaker elements in society and redistributing income, but doesn’t walk the walk of being willing to pay the price. There is more show than substance.

The latest evidence comes from that country up there in social Valhalla, Norway.

Six weeks ago the conservative government introduced a Voluntary Tax Payment Program. When I first read this, I assumed it was a Voluntary Disclosure Program for naughty Nordics – but no, it is what it says. If, after paying nearly 50% tax, you fancy paying some more, your contribution will be gratefully accepted by the government.

Well, according to the latest available statistics (at least, available to me), the total take has been around $1,500 – which includes tax lawyers and accountants making small contributions to see how it works (and, it has to be assumed, claiming their payments as a business expense). It also turns out that this is not Norway’s first voluntary payment scheme – they set one up in 2006 to which around 90 people have, to date, contributed a total of $85,000 – all, curiously,  anonymous ‘donations’. This might sooth a tax evader’s conscience while financing a government minister’s sleigh expenses, but it won’t do much for the relief of the poor.

When push comes to shove, the vast majority of people pay taxes because they have to, whatever their political hue, and high taxes are a toxic election loser. Only the Americans tell it as it is. The main reason for their dogged refusal to adopt VAT is considered to be the ease with which additional revenue could be raised resulting in ‘inflationary’ pressure on government spending, with the dreaded prospect of turning America into a European-style welfare state.

Modern attitudes are perhaps neatly reflected in a statement by a left-leaning political pundit on the reason for the large turnout of Labour-supporting young voters at the recent British General Election. Referring to the inability of the young to step onto the home-owning ladder due to the exorbitant cost of housing, she said: ‘They didn’t vote conservative, because they have nothing to conserve.’

Back in 1945, despite the Conservative Churchill’s massive personal popularity and acerbic witticisms, there were less egocentric reasons to elect Clement Attlee and his Labour colleagues.

The Balls In Her Court?

1966 all over again?

1966 all over again?

What with the World Cup and Wimbledon, the last few weeks have been jam-packed with balls – an appropriate time, perhaps,  for the British Labour Party to present its ideas for the future of tax policy should it win the next General Election. But more of that later.

I grew up thinking the Queen was so prim and proper that if any man were to use fruity language in her imperial presence (even her colourful husband), he would be hoisted on a gibbet outside the Tower of London.

Then, in 1992, the BBC  aired a documentary, the title of which they had filched from an old series about someone else entirely: “Elizabeth R”. In contrast to the earlier, professional production which starred Shakespearean superstar Glenda Jackson, this latest offering was Reality TV in its infancy, a camera crew following the matriarch of a rather dysfunctional family for an entire year as she happened to run into just about everybody who had the power to destroy the world (Celebrity Big Mother).

Among the documentary’s many fascinating scenes was one dealing with the preparations for a State Dinner at Windsor Castle in honour of the, then, President of Poland:

The Queen is observed  in an anteroom with her family waiting to escort the President and his wife to dinner. Passing the time of day with her daughter, Princess Anne, she informs her that she has been showing Lech Walesa (the former Gdansk shipyard labourer) around the Castle. She cheekily mentions that,   amazed by the size of everything,  every time he had entered a room he had uttered the only two words he knew in English, “Quite interesting words”. Anne stops her in mid-flight: “Was it ‘Good Heavens’?”. “Bolder than that,” comes the reply. The Queen produces a wry smile, implying that her sense of humour may be slightly more ribald than one might have imagined.

Michael Foot always had a sense of occasion

Michael Foot always had a sense of occasion

Well, if Labour wins the election next year, one hopes that – as she approaches 90 – Her Majesty is still game for a laugh. For the party that once tried unsuccessfully to put a “Foot”  in No. 10 Downing Street is now likely to put “Balls” in No. 11.

Shadow Chancellor, Ed Balls, gave an interesting talk at the London Business School last week.  Surprisingly for a Labour Economics man, he  informed his audience that a Labour Government would provide tax breaks for businesses, especially small ones.

Before announcing the positive news, however,  being Labour Balls had to dampen the good cheer of the satanic captains of industry crowding the auditorium – so he announced that a Milliband Government would reverse the current Government’s  corporate tax rate reductions. The rate would, however, be kept at the lowest in the G7, that is less than Canada’s 26.5% (Karl Marx, bless Mother Russia for annexing the Crimea and getting kicked out of the G8). Against this there would be substantial Business Rate  (local property tax) reductions, which would serve as a significant incentive to small and growing businesses. There would also be provisions to encourage the long-term holding of shares.

The most controversial announcement, however, was that Labour is considering an “Allowance for Corporate Equity”.  The concept is not new and has been tried in Croatia (failed), Italy (failed),  Brazil (as always, different), Belgium (EU Commission trying to make it fail) and Australia (gave up trying).

The basic concept of ACE is that debt financing and equity financing are equated. In an ideal world this would lead to less volatile companies – a case in hand being Manchester United, a once great football team, that was saddled with tax-deductible debt by its unlamented late owner, Malcolm Glazer. By providing a notional deduction against a company’s capital (and assuming interest and dividends to shareholders are treated similarly), there is effectively no tax on a risk-free investment – tax only applying to “super-profits”.

The potential advantages of such a system, in addition to canceling the debt/equity advantage, are that:  there is tax neutrality regarding investment; it cancels out the effect of differing depreciation rates (the higher the depreciation rate, the lower the capital on which the allowance is calculated); and inflation can be compensated for through changes in the notional rate of deduction.

The downsides are that: in a global economy, the headline corporate tax rate is highly relevant in attracting foreign investment; and there can be issues with foreign tax credits. Then there is the small question of how to calculate the risk free rate  that achieves neutrality.

Seen in this light, it appears far more sensible to follow the approach taken by several countries in recent years to restrict interest deductions to a fixed percentage of EBITDA (earnings before interest, taxes, depreciation and amortization), thus widening the tax base and permitting  reductions in headline rates. But at least the Labour Party, under its soft-left leader, is not threatening the raining down of fire and brimstone  on British Industry.

Power couple?

Power couple?

Of course, should Labour fail in its bid to form the next Government in 2015, the likeable young  Milliband will almost certainly be sent packing. While Mr Balls was a credible candidate in the last leadership contest in 2010, it is thought that, this time, he will support the candidacy of his wife, who is shadow Home Secretary (Interior Minister). Should Mrs Balls make it to No 10 in 2020, the Queen will doubtless be thankful that Yvette Cooper had the good sense to keep her maiden name when she married. If, on other hand, Ms Cooper makes her husband Chancellor of the Exchequer, they will be neighbours. What would that do to the, by then,  ancient Queen’s constitution?

 

 

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