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Solving The Deficit

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We have been told repeatedly by the Conservatives in the past that the way for the economy to grow is to cut taxes across the board, and that lower tax rates lead to higher taxes in total being paid.

Since growth will be by far the most important factor in reducing the deficit, why aren't the Conservatives and their orange poodles cutting taxes?

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They need the tax revenue to help pay off the deficit.

It's like saying you could make your business more efficient if you bought a better van, but you can't afford it so you have to make do with the one you've got.

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How about telling the banks where to shove their toxic crap.

Too late.

Gordon bought it all for you at 100c on the dollar when it was worth about 30c on the dollar.

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They need the tax revenue to help pay off the deficit.

It's like saying you could make your business more efficient if you bought a better van, but you can't afford it so you have to make do with the one you've got.

Exactly... and in the past we have been told that cutting taxes was the way to increase general wealth as well as the tax take. So why isn't this policy? Were they wrong before?

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Exactly... and in the past we have been told that cutting taxes was the way to increase general wealth as well as the tax take. So why isn't this policy? Were they wrong before?

No. They were lying. It requires a degree of sophistry and a poker face to deploy a plausible argument that lowering taxes increases tax-take in the real world. Fine in opposition or when it's politically expedient to buy votes have give-away budgets, but when it comes to the crunch they know it's all just so much ********.

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They are cutting corp tax and small business taxes as well as abolishing the tax on IT contractors (I forget the name) all these tax cuts are deisgned to get employment up and are a good start.

I am sure the personal tax cuts will come in the future, 1 year before the next election to be exact.

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Exactly... and in the past we have been told that cutting taxes was the way to increase general wealth as well as the tax take. So why isn't this policy? Were they wrong before?

Back to our old friend the Laffer Curve. As far as I can see, there are a few problems with the Laffer curve :

1. It is assumed that there is a global maximum in revenues. There could well be a variety of local maxima, especially as capital is globally mobile.

2. The Laffer curve does not take time into account. If tax rates were above their optimal level, it takes time for the economy to adjust to lower taxes and grow at a faster rate so we would see a short term fall of in tax revenues. We would see the reverse if taxes were raised above the optimal level. Short term gain for long term pain.

3. Markets understand that tax regimes are never permanent. This lack of trust means that the full benefits of lower tax regimes are never realised.

4. We have no way to ever know the shape of the Laffer curve so using it to set tax policy is guesswork or intuition at best. Assuming that it completely and accurately reflects reality is foolish.

That said, the Laffer curve is intuitively appealing and is certainly logical at both ends of the curve (0% taxes result in no tax revenue and 100% taxes result in no tax revenue).

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No. They were lying. It requires a degree of sophistry and a poker face to deploy a plausible argument that lowering taxes increases tax-take in the real world. Fine in opposition or when it's politically expedient to buy votes have give-away budgets, but when it comes to the crunch they know it's all just so much ********.

excellent summary.

they do believe in tax cuts, but not for you.

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It largely depends on how optional the taxes are. Take capital gains tax. It is a tax I choose to pay, and the event that triggers the tax is my selling something for a profit. The higher the tax on the profit, the less likely I am to choose to pay it. So if the tax is high, I choose not to sell, and I’ll simply take the yield on the asset instead. If the tax is lower, then tax on the profit is a much smaller part of the decision.

A simple worked example. Say I have a house that is worth £250K, and I paid £100K for it. Say the worst case CGT ideas had been implemented, so 50% on the profit with no indexation. So I’d be looking at getting rid of something worth £250K and instantly handing over £75K to the government. Unless I believed that my asset was going to lose that £75K anyway, I’d be nuts to sell. You could look at it from a yield perspective as well – if my £250K was getting 5%, I’d need to be very sure that my new asset was getting > 6% to keep up.

If you look at income tax, the effects are far longer term. If my tax rate goes up to 50%, am I going to not work as hard? Probably not, after all, I still get 50%, so each pound is worth something to me. Would I optimse the hell out of my tax position? Of course – indeed this year I will be paying less tax than last year. Would I eventually go and work somewhere else? Yes, but I’m not at my threshold yet.

Corporate taxes? Laffer is alive and well. Look at the very significant UK companies that operate subsidiaries in the UK. Ireland, for all its other troubles has at least got this bit right.

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Exactly... and in the past we have been told that cutting taxes was the way to increase general wealth as well as the tax take. So why isn't this policy? Were they wrong before?

No. Politics, logic and economics rarely have some grand astronomical alignment where they all point people in the same direction.

Cutting taxes can spur growth and raise revenue. In the current situation it would reduce the deficit at the expense of making debt as a proportion of GDP worse.(as GDP would fall) Non-growth and deflation caused by substantial cutbacks in spending are politically unpalatable. What I suspect the Government is doing is waiting for the economy to flat line or shrink by itself and then start cutting fast and hard. They need to identify the dead wood now in order to excise it at the right time for them - the right time being when the economy is already pointing downwards again so that they can cut without being blamed for causing the second dip of a double dip recession.

Cutting does improve the finances of a Government and economy. It requires efficiencies to be made which can only ever be a good thing in the long run. It is the opposite but equal of economic cycles. The inefficiencies must be forced out somehow or it eventually comes to a creaking halt.

Edited by jareth

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Exactly... and in the past we have been told that cutting taxes was the way to increase general wealth as well as the tax take. So why isn't this policy? Were they wrong before?

Nope

It's very simple really

All politics today is designed to keep the aspiring middle class poor, with punitive taxation, over regulation and the monopolization of commerce by corporations. Small businesses, creativity and enterprize are crushed by all of the above

Nothing will change under Cameron, that's for sure.

It's all about resource allocation, and that means keeping the majority of people just beyond the threshold of MISERY where they might sharpen their garden implements.

The postwar age of relative prosperity is OVER

Get used to it cos it ain't gonna change any time soon

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If trickledown theory worked then the way to create prosperity would be to give all the money in the world to one man. This fabulously wealthy individual would surely then produce such a vast outpouring of secondary wealth creation that we would all be better off.

Or- he might not turn up in your shop any time soon and you would go bust. ( Though the rumour that he has been spotted on your continent recently might keep hope alive for a little while.)

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They are cutting corp tax and small business taxes as well as abolishing the tax on IT contractors (I forget the name) all these tax cuts are deisgned to get employment up and are a good start.

I am sure the personal tax cuts will come in the future, 1 year before the next election to be exact.

That's a good point. Personal tax cuts (and consumption tax cuts) stimulate demand, but the side of our economy that needs to grow is the production side -- stimulating another consumer boom will mainly benefit* exporting countries able to satisfy that demand.

Therefore it's corporate and payroll taxes that should be cut, which appears to be what they're doing.

* to the extent that further increasing global imbalances can benefit anybody, i.e. on paper and only until the music stops.

(typo)

Edited by huw

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It largely depends on how optional the taxes are. Take capital gains tax. It is a tax I choose to pay, and the event that triggers the tax is my selling something for a profit.

Isnt the event that triggers it, admitting you sold something?

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We have been told repeatedly by the Conservatives in the past that the way for the economy to grow is to cut taxes across the board, and that lower tax rates lead to higher taxes in total being paid.

Since growth will be by far the most important factor in reducing the deficit, why aren't the Conservatives and their orange poodles cutting taxes?

On the whole tax cuts don't increase the tax take. This argument primarily derives from vested interests who use it to drive their own personal agenda, which is to say, to decrease their own tax bill. It's a bit like the BTL brigade saying that they increase the suplus of affordable homes.

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Cutting back on benefits , public sector , taxes leads to mass unemployment.

That MU is going to change everything, the Govt doesn't want to default due to the political

implications but if this is the worst economic situation seen, how ultimately will it be solved?

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An interesting article from a little while back discussing the costs of taxation:

http://business.timesonline.co.uk/tol/business/columnists/article7018471.ece

Consider the minimum wage. I am not allowed to pay someone £4 to spend an hour shopping for me. According to our Government, that would be unfair, even if my employee agreed to it. Yet I am free to add an hour to my own shopping by walking to a distant supermarket in search of a £4 saving.

I am also allowed to spend an hour cooking my dinner, even if I would be unwilling to pay someone more than £3 to do it for me. Contrary to what you may have read on the Directgov website, working for less than £5.80 an hour is not illegal in Britain. It is illegal only if the payment is made in money.

Taxes have the same effect. Because most are levied on money-based transactions (with the notable exceptions of poll and property taxes), they inhibit trade and, hence, the division of labour. And the greater the rate of tax, the greater this malign effect.

Suppose, for example, that you are willing to pay up to £10 an hour to have some work done and that the cheapest qualified labourers are willing to work for anything over £9 an hour. Then you should find someone to do the job. But if incomes are taxed at 20 per cent, the most the labourers can earn from you is £8 an hour and they will be unwilling to take on your job. You will have to do it yourself or go without.

Britain’s enormous regulatory and tax burdens on trade lead to an excess of do-it-yourself. People with neither talent nor inclination cook, garden, teach, drive and shop, to name but a few of the more common amateur activities. They are thereby drawn away from doing things they are better at and enjoy more.

What is the cost of such restrictions on the division of labour? Terry Arthur, of the Institute of Economic Affairs, has estimated that, at present tax levels, the cost is two thirds of every pound of tax collected. In other words, the marginal cost of transferring a pound from private hands into the coffers of Her Majesty’s Revenue is 67p.

Mr Arthur may be wrong, of course; estimating such “invisible”, deadweight costs is notoriously difficult. But even if his estimate is three times the real cost, the implications are profound. Taxes, minimum wages and the other regulatory burdens the Government places on money-based commerce are far more costly than politicians and voters seem to realise.

It is always worth bearing in mind that higher taxes have an effect on economic growth.

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An interesting article from a little while back discussing the costs of taxation:

http://business.timesonline.co.uk/tol/business/columnists/article7018471.ece

It is always worth bearing in mind that higher taxes have an effect on economic growth.

A VI article from an anti-government think-tank. It's about as unbiased as a Stuart Laws house price article.

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Isnt the event that triggers it, admitting you sold something?

Well, yes. I go as far as avoidance, not evasion.

Britain’s enormous regulatory and tax burdens on trade lead to an excess of do-it-yourself.

Anecdotally, DIY wasn't particularly popular before VAT was charged on labour - then it was introduced and a large body of people said "stuff that, I'll do it myself".

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We have been told repeatedly by the Conservatives in the past that the way for the economy to grow is to cut taxes across the board, and that lower tax rates lead to higher taxes in total being paid.

Since growth will be by far the most important factor in reducing the deficit, why aren't the Conservatives and their orange poodles cutting taxes?

It's probably because they've been left with a god-awful mess and they're trying to be pragmatic rather than ideological atm.

Their theory is a bit flawed anyway. Whilst low taxes on production are desirable because of the associated economic benefits, the surplus income would almost certainly get trapped in the housing market and so the net gains would only be accessible to a certain privileged group. These money flows in turn would cause speculation and ultimately end up as another financial collapse.

Edited by Chef

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They have cut taxes.

I will be paying less next year as the personal allowance has gone up and I don't buy many things that attract the full rate of VAT.

They have also cut corporation tax, and it will continue to go down. We need jobs, and one way to get them is to entice international corporations to have their HQ in Britain. Another way is to make employing people cheaper - raising the PA does that as well.

Cut taxes from the bottom and It would make a huge difference I reckon. You could even increase the basic rate of income tax so that the benefit faded out by the time you are a higher rate payer.

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It largely depends on how optional the taxes are. Take capital gains tax. It is a tax I choose to pay, and the event that triggers the tax is my selling something for a profit. The higher the tax on the profit, the less likely I am to choose to pay it. So if the tax is high, I choose not to sell, and I’ll simply take the yield on the asset instead. If the tax is lower, then tax on the profit is a much smaller part of the decision.

A simple worked example. Say I have a house that is worth £250K, and I paid £100K for it. Say the worst case CGT ideas had been implemented, so 50% on the profit with no indexation. So I’d be looking at getting rid of something worth £250K and instantly handing over £75K to the government. Unless I believed that my asset was going to lose that £75K anyway, I’d be nuts to sell. You could look at it from a yield perspective as well – if my £250K was getting 5%, I’d need to be very sure that my new asset was getting > 6% to keep up.

If you look at income tax, the effects are far longer term. If my tax rate goes up to 50%, am I going to not work as hard? Probably not, after all, I still get 50%, so each pound is worth something to me. Would I optimse the hell out of my tax position? Of course – indeed this year I will be paying less tax than last year. Would I eventually go and work somewhere else? Yes, but I’m not at my threshold yet.

Corporate taxes? Laffer is alive and well. Look at the very significant UK companies that operate subsidiaries in the UK. Ireland, for all its other troubles has at least got this bit right.

I can join the club of those who have rebelled against the wasted spend of our tax payments - but have taken a slightly different route.

I no longer pay myself a salary or dividends from the consultancy day job. Instead I just leave it growing in the company bank account. This is easier for me to do as I paid off my home mortgage as soon as I could so now have low outgoings.

Then when I do finally buy the bigger home, it will be financed through an offset mortgage with an annual Directors loan - so hopefully living mortgage free.

I wonder how many of us bigger earners have now had enough and are actively avoiding paying tax?

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I can join the club of those who have rebelled against the wasted spend of our tax payments - but have taken a slightly different route.

I no longer pay myself a salary or dividends from the consultancy day job. Instead I just leave it growing in the company bank account. This is easier for me to do as I paid off my home mortgage as soon as I could so now have low outgoings.

Then when I do finally buy the bigger home, it will be financed through an offset mortgage with an annual Directors loan - so hopefully living mortgage free.

I wonder how many of us bigger earners have now had enough and are actively avoiding paying tax?

Hmm you would have to pay benefit in kind tax on the deemed interest of that directors loan. Since your official remuneration is so low, your probably entitled to tax credits -fill your boots :-).

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I can join the club of those who have rebelled against the wasted spend of our tax payments - but have taken a slightly different route.

I no longer pay myself a salary or dividends from the consultancy day job. Instead I just leave it growing in the company bank account. This is easier for me to do as I paid off my home mortgage as soon as I could so now have low outgoings.

Then when I do finally buy the bigger home, it will be financed through an offset mortgage with an annual Directors loan - so hopefully living mortgage free.

I wonder how many of us bigger earners have now had enough and are actively avoiding paying tax?

The more money one has, the more optional paying taxes becomes.

In the act of trying to raise revenue to help those who need the most help in society by raising tax rates, governments increase the number of people who are most able to pay tax who choose not to.

While I have no idea how to define the "real" Laffer Curve function, it is naive to ignore the fact that those most able to afford taxes are also the most able to avoid paying it in a completely legal way.

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  • 260 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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