Falling Tax Revenues Are About To Balloon Our Budget Deficit

[interestrateripoff]

I mean all he had to do was swing!!!!!

Yesterday's instalment of Prime Minister's Questions made clear that we are at the start of a lost year for policy-making. Real decisions, real debates are now off the table. We are left instead with dreary volleys back and forth: "You're cutting spending." "No, you're cutting spending."

This debate is as meaningless as it is pointless. Meaningless because, as anyone who has examined the figures knows, both parties are planning to cut spending in real terms after the election: the only differences are over the timing of the changes, and the departments that will be the biggest victims. And pointless because neither the markets nor, one presumes, the voters are taking much notice. Now that the pre-election marathon is on, no one – not Standard & Poor's, which rates Britain's creditworthiness, not economists calculating their forecasts, not bankers and hedge fund managers – is taking anything either party says seriously. We are in an economic limbo.

Admittedly, this happens before every election. What makes it so dangerous, however, is the timing. As the Bank of England, the Bank for International Settlements and others have pointed out in the past week, we are at a point of extreme vulnerability, both for the economy and the financial system that underpins it.

Indeed, the rather pathetic shadow-boxing between Gordon Brown and David Cameron skirts neatly over the big issue, for which the party leaders have neither an explanation nor a solution. Britain's immediate fiscal crisis – the massive deficits that threaten to cripple the economy in the coming years – is a consequence not of incontinent spending but of a sudden collapse in tax revenues. The debate should not revolve solely around how to make cuts, but also over how to compensate for that forgone tax.

Public spending increases – in terms of central government expenditure – have shrunk dramatically in the past half-decade. The annual growth rate dropped from a peak of almost 8 per cent to barely more than 1 per cent. Expenditure can (and should) be trimmed further: waste can be cut, and the looming pensions and benefits black holes addressed. However, spending growth is as nothing compared with the unprecedented collapse in tax revenues in the wake of the economic crisis.

With the exception of the dotcom bust, the amount of cash flowing into the Government's vaults grew by around 4 per cent a year over the past decade. Since 2008, those revenues have been shrinking at an annual rate of almost 10 per cent. This is the main reason why the budget deficit is about to rise to levels unprecedented in peacetime.

Such revenues fall for two reasons: because you cut tax rates, or because profits and earnings fall. No prizes for guessing which accounts for this collapse. Companies are making less, people are being paid less, and consequently the amount of tax they pay is down.

This happens in every recession – but this recession, as one can never repeat enough, is different. The financial system, which has for years been Britain's golden goose, generating corporation and income tax receipts to die for, is a shadow of its former self. Even the banks making money will be able to offset several years' worth of profits against the losses incurred in the crisis. Even if the economy recovers, these tax revenues are not coming back for a long time.

A telling chart from a recent Organisation for Economic Co‑operation and Development report on the world economy dissected the increases in government deficits. Whereas most other countries' books were plunged into the red because they were spending more in fiscal stimulus packages to mitigate recession, or on unemployment benefits for laid-off workers, the biggest chunk of Britain's deficit was caused by the disappearance of City-related taxes.

We have run out of money, Labour has blown the lot and has nothing to show for it apart from a massive increase in middle management.

An excellent use of taxpayer money.

[dr ray]

Such revenues fall for two reasons: because you cut tax rates, or because profits and earnings fall. No prizes for guessing which accounts for this collapse. Companies are making less, people are being paid less, and consequently the amount of tax they pay is down.

You don't say where the quote was from but the writer is clearly no economist. There is a third reason tax revenues fall : because tax rates are increased. It is shown on the Laffer curve and we are probably at the level of taxation where people will consciously work less as the rewards don't compensate or else will devote all their ingenuity to avoiding tax rather than creating wealth. I am doing the former and I heard Hugh Hendry on an interview saying he was doing the latter.

[Sour Mash]

You don't say where the quote was from but the writer is clearly no economist. There is a third reason tax revenues fall : because tax rates are increased. It is shown on the Laffer curve and we are probably at the level of taxation where people will consciously work less as the rewards don't compensate or else will devote all their ingenuity to avoiding tax rather than creating wealth. I am doing the former and I heard Hugh Hendry on an interview saying he was doing the latter.

Relatively few people are going to be able to afford to work less (or would have the option to move abroad or to employ financial wizardry) to avoid paying unfair levels of tax.

The vast majority of working class people have little choice but to pay whatever tax is forced upon them and end up having to work even harder to make ends meet when taxes go up ... hence the typical average working guy on PAYE gets taxed to the hilt whilst those at the top of the ladder have a wide variety of ways to avoid taxation and generally pay very little.

[interestrateripoff]

You don't say where the quote was from but the writer is clearly no economist. There is a third reason tax revenues fall : because tax rates are increased. It is shown on the Laffer curve and we are probably at the level of taxation where people will consciously work less as the rewards don't compensate or else will devote all their ingenuity to avoiding tax rather than creating wealth. I am doing the former and I heard Hugh Hendry on an interview saying he was doing the latter.

We could also debate the accuracy of the laffer curve, as noted above most of the tax avoidance measures are only available to the rich.

The poor have very little tax avoidance measures, and money in shadow economy will usually get taxed at some point in the chain.

[dr ray]

We could also debate the accuracy of the laffer curve, as noted above most of the tax avoidance measures are only available to the rich.

The poor have very little tax avoidance measures, and money in shadow economy will usually get taxed at some point in the chain.

Most tax is neither paid by the poor or the rich. The 40% taxpayer in the UK pays a huge proportion of the total tax take. I can't remember the exact statistic but recently it has been something like 80% of the total tax take is paid by 40% taxpayers who in 2008 made up 40% of all taxpayers.

This proportion of 40% taxpayers is due to fall by about 1/3 next year. This is the source of the tax black hole.

Some further info

Sure the poor are hard done by but the tax they pay is more than covered by the benefits and services they enjoy.

The only way out of this mess is to make the basic rate tax 40% to bring everyone into the higher tax bracket or make both education and the NHS a fully paid for service

Thank you Gordon Brown - the socialists' great white hope has probably destoyed the welfare state and made huge tax rises on the working classes inevitable

Edited July 2, 2009 by dr ray

[bagsos]

I'm afraid Mr Conway's article starts well then misses the point. Taxes are ultimately all borne by individuals; taxing corporates in any form is merely a way to cut investment, cut jobs and increase unemployment. Taxing company turnover (illegal under EU treaties as the Italians discovered) won't work, nor will restricting interest deductibility (already being done for multinationals). The only way to bridge the tax gap is to have a deep and wide tax increase that hits individuals, is difficult to avoid, does not hit jobs and raises lots of tax quickly. Therefore, general VAT will be 22.5% in 5 years time, and there will be 5% VAT on food, mains water and sewarage.

[grizzly bear]

..devote all their ingenuity to avoiding tax rather than creating wealth.

I was privy to a presentation by a big 4 accountancy firm on ways of tax efficient renumeration for executives. although there were suggestions that tinker around the edges, regular employees can do very little - the ideas were broadly:

a. pay bonuses to top earners before 50% band comes in

b. share based renumeration to suffer CGT at 18%

c. salary sacrifice into pensions for 40% tax payers (saves employers NI)

d. offshore savings for retirement that fall outside pensions rules for high earners, but still gets taxed when paid out and no corporation tax deduction until then - although good option if you want to retire abroad.

[grizzly bear]

I'm afraid Mr Conway's article starts well then misses the point. Taxes are ultimately all borne by individuals; taxing corporates in any form is merely a way to cut investment, cut jobs and increase unemployment. Taxing company turnover (illegal under EU treaties as the Italians discovered) won't work, nor will restricting interest deductibility (already being done for multinationals). The only way to bridge the tax gap is to have a deep and wide tax increase that hits individuals, is difficult to avoid, does not hit jobs and raises lots of tax quickly. Therefore, general VAT will be 22.5% in 5 years time, and there will be 5% VAT on food, mains water and sewarage.

unless the corporate entity is making super normal profits

[dr ray]

I was privy to a presentation by a big 4 accountancy firm on ways of tax efficient renumeration for executives. although there were suggestions that tinker around the edges, regular employees can do very little - the ideas were broadly:

a. pay bonuses to top earners before 50% band comes in

b. share based renumeration to suffer CGT at 18%

c. salary sacrifice into pensions for 40% tax payers (saves employers NI)

d. offshore savings for retirement that fall outside pensions rules for high earners, but still gets taxed when paid out and no corporation tax deduction until then - although good option if you want to retire abroad.

True there isn't much someone on PAYE can do but for the self employed and for people with investment income the last few months have been about finding ways to avoid paying more tax even if it means giving money to charity or reducing income to fall below the "poverty traps" at the £100k and 150K hurdles where the marginal tax rate suddenly increases

[Charterhouse]

I hate to say it but the best bet for tax revenues is another round of huge City bonuses...

Oh, and that would stop all your houses going down in value too - double bonus.

[Sybil13]

This reminds me of the article that I have posted a lot on HPC with regards the loss of tax revenue from the financial services sector.

I originally found this article by doing on a search on Yahoo for CEBR 10% and it was the 2nd listing and the heading on Yahoo was EXPECT THE HOUSING MARKET TO CRASH SOON.

I referred to this in many postings , but now you have to do an actual search on Yahoo for CEBR EXPECT THE HOUSING MARKET TO CRASH SOON. Now it brings up 2 articles by CEBR, one that is about the Easter weekend being the most important time in the EA's calander and this one which was a report released in March 2009.

Expect the Housing Market to Crash Soon

No idea why the two are linked, do you?

Do read it, but the part that seems most pertinent to what is being said here is this paragraph:

...... the huge losses, job cuts and bonus cuts together with the fall in interest rates paid will cause these sources of revenue to collapse. The Chancellor is set to lose £9 billion in corporation tax revenue, £10 billion from less income tax and National Insurance contributions, £2 billion from stamp duty and £3 billion from withholding tax. Adding in all the other sources of revenue, the total tax take is forecast by cebrto drop from £67 billion to £39 billion. Moreover, some of these hits are likely to be long lasting. The scale of the losses that the banks can bring forward means that they will have to pay little corporation tax for many years. Our forecasts indicate that job numbers and bonuses will remain depressed until 2013 atleast. Our tentative forecast is that the tax take will rise to only £46 billion by 2012/13.

This hit on tax receipts is a real blow to Chancellor Alastair Darling’s budget hopes. His predictions in the Preâ€Budget Report do not appear to have factored in more than half of the tax revenue decline for 2009/10 and there is little evidence that the longevity of the problem is yet fully understood in the fiscal part of the Treasury.

[dr ray]

I hate to say it but the best bet for tax revenues is another round of huge City bonuses...

Oh, and that would stop all your houses going down in value too - double bonus.

We are going to see this. One last feeding orgy at the trough before the 50% tax rate, harsher regulation and shareholder/taxpayer revolt kicks in

[bagsos]

We are going to see this. One last feeding orgy at the trough before the 50% tax rate, harsher regulation and shareholder/taxpayer revolt kicks in

I think you will find that, despite his rhetoric to the contrary, the 50% tax rate will be one of the first things to go if DC wins power.

[Guest sillybear2]

I'm afraid Mr Conway's article starts well then misses the point. Taxes are ultimately all borne by individuals; taxing corporates in any form is merely a way to cut investment, cut jobs and increase unemployment. Taxing company turnover (illegal under EU treaties as the Italians discovered) won't work, nor will restricting interest deductibility (already being done for multinationals). The only way to bridge the tax gap is to have a deep and wide tax increase that hits individuals, is difficult to avoid, does not hit jobs and raises lots of tax quickly. Therefore, general VAT will be 22.5% in 5 years time, and there will be 5% VAT on food, mains water and sewarage.

Precisely, and even if they succeeded in introducing an across the board corporate tax hike companies would simply respond by raising prices... ultimately borne by the consumer. Multinationals with significant overseas earnings will just leave.

The financial sector has successfully bought off the government and done its looting, in many ways congratulations to them for seeking out such a naive and weak opponent and taking them to the cleaners, Whitehall still doesn't know what's hit them. Now everyone must pay in the form of higher taxes, the debasement of the monetary base and retirement prospects and deep cuts and the introduction of means testing for public services.

Edited July 2, 2009 by sillybear2

[HPC001]

introduction of means testing for public services.

They are means-tested already.

[Guest sillybear2]

They are means-tested already.

The NHS isn't, it will be before the next decade is out, mark my words. Demographics and PFI liabilities would have made this inevitable anyway, the collapse in government revenues just seals the deal.

[dr ray]

I think you will find that, despite his rhetoric to the contrary, the 50% tax rate will be one of the first things to go if DC wins power.

No, I think not. While the 50% tax is counterproductive as an economic move it is a useful political tactic which allows a fairly big tax rise (say to 30% basic rate) on the lower earners after the next election without seeming unfair.

I heard Liam Byrne essentially admit this on the radio a couple of weeks back when he said that the next few years will be difficult and everyone will need to pay their share but we have made a start

[bomberbrown]

You don't say where the quote was from but the writer is clearly no economist. There is a third reason tax revenues fall : because tax rates are increased. It is shown on the Laffer curve and we are probably at the level of taxation where people will consciously work less as the rewards don't compensate or else will devote all their ingenuity to avoiding tax rather than creating wealth. I am doing the former and I heard Hugh Hendry on an interview saying he was doing the latter.

+1

I actively turned down (didn't pursue it when asked to) a wage promotion because the increase in responsibility compared to the extra net salary, just didn't make it worth it. Right now, I'd quite happily work 4 days a week for 80% of my salary.

[Guest sillybear2]

No, I think not. While the 50% tax is counterproductive as an economic move it is a useful political tactic which allows a fairly big tax rise (say to 30% basic rate) on the lower earners after the next election without seeming unfair.

I heard Liam Byrne essentially admit this on the radio a couple of weeks back when he said that the next few years will be difficult and everyone will need to pay their share but we have made a start

The most regressive tax hikes will come in the form of the authorities inability to stop printing and monetising debt, they won't be able to limit themselves, it will never be quite enough even when inflation starts roaring away, this pure debasement will be celebrated as 'growth' of course.

But when wages continue to fall behind the cost of living, and peoples' standard of living drops, it will be the multitude that carries the burden of this. For higher rate payers, being in the 50% band will be a mixed blessing, at least they will have enough post tax income to pay their gas bill, even if the incentives to work harder, take risks and innovate are ever diminished.

Edited July 2, 2009 by sillybear2

[HPC001]

The NHS isn't, it will be before the next decade is out, mark my words. Demographics and PFI liabilities would have made this inevitable anyway, the collapse in government revenues just seals the deal.

Prescriptions are means-tested in a sense. But ok, you make a fair point.

[bagsos]

No, I think not. While the 50% tax is counterproductive as an economic move it is a useful political tactic which allows a fairly big tax rise (say to 30% basic rate) on the lower earners after the next election without seeming unfair.

I heard Liam Byrne essentially admit this on the radio a couple of weeks back when he said that the next few years will be difficult and everyone will need to pay their share but we have made a start

You have a point there; I hadn't thought of that. I think the tories still prefer indirect tax to direct tax though; I still remember Maggie saying she wasn't going to double VAT then putting it up from 8% to 15% on "non-luxury" goods.

[dr ray]

The most regressive tax hikes will come in the form of the authorities inability to stop printing and monetising debt, they won't be able to limit themselves, it will never be quite enough even when inflation starts roaring away, this pure debasement will be celebrated as 'growth' of course.

But when wages continue to fall behind the cost of living, and peoples' standard of living drops, it will be the multitude that carries the burden of this. For higher rate payers, being in the 50% band will be a mixed blessing, at least they will have enough post tax income to pay their gas bill, even if the incentives to work harder, take risks and innovate are ever diminished.

A few years of socialism and we're not all driving Rolls-Royces but will be in the 50% tax bracket

[Guest sillybear2]

A few years of socialism and we're not all driving Rolls-Royces but will be in the 50% tax bracket

Yup, that's another reason why the authorities will keep printing until inflation pushes nearly everyone into the upper bracket. Take the 'Alternative Minimum Tax' in the US for example, they introduced it 40 years ago to specifically target 155 wealthy individuals, now it rips millions of middle-class Americans a new a$$hole on an annual basis.

[mirage]

Most tax is neither paid by the poor or the rich. The 40% taxpayer in the UK pays a huge proportion of the total tax take. I can't remember the exact statistic but recently it has been something like 80% of the total tax take is paid by 40% taxpayers who in 2008 made up 40% of all taxpayers.

I don't think that can be right.

http://www.hmrc.gov.uk/stats/income_tax/table2-1.pdf

Edited July 2, 2009 by mirage

[Greenenvy]

Amid all this talk of massive taxes that we're all paying, let's not forget that the basic rate is 20p from 6k to 40k. The 6k zero rate could be more generous, but it compares well enough with the 1990s. Still only a tenth of the population are subject to 40p tax, and then on only a small fraction of their income for most (and with pensions relief). VAT on fuel was cut by Labour from 8% to 5%. Corporation tax was cut, even CGT has been cut massively compared with 1997. Council Tax has taken some of the strain.

To make good, taxes will need to rise, and I imagine VAT will be raised in due course- it seems appropriate in order to "rebalance" economic activity.

This will be necessary even with cuts to government spending.