Err, what?

It understates the true cost of pension reliefs because tax paid by pensioners is offset against it and there is no economic justification for that.

We generally think that it’s a good idea that people save for their old age. We also think that income should be taxed only the once.

So, save from, tax free income, pay tax when you take the income later. Seems perfectly reasonable.

And if you were to abolish the tax free bit then you should really lower the tax rate at the other end.

All of which seems an economic justification really, doesn’t it?

The rest of it is the old MOAR TAX argument.

Richard Murphy says:
December 15 2016 at 9:39 am
I am not expecting many replies

And it seems the press is not interested

Not sure why

I wonder too…..

22 comments on “Err, what?

  1. I do bang on about him but I really in this instance see less than a hair’s breadth difference between his policies and North Korea. He is basically talking about removing any incentives for people to save, on the grounds that if they can afford to save, they don’t really need the money. The only resources you should be allowed are those which the state mandates you need. Everything else should be ‘reallocated’ to those whom the state deems worthy of its largesse.

    I have to admit that such an outlook is to me so far removed from reality I find it incomprehensible. It’s as though he is not even aware of the demographic crisis, the crisis in pensions or the complete collapse of the savings culture in the UK, or if he is even dimly aware he just chooses to blithely ignore it….

  2. Also, that pension money… when it is being saved up, it is invested isn’t it? As in it gets used rather productively, or should be.

    And quite a bit of it goes on Gilts. Which are a pretty cheap way for the state to borrow money.

    Sounds a like robbing Peter to pay Paul, then sending them both to the gulag for good measure.

    I suspect newspapers know a lot of their readers are old fogeys and would rather not piss them off with Ritchie’s communistic drivel.

  3. Last year Pols were discussing moving the tax-free bit of pensions from paying in to taking out, to boost today’s tax take at the expense of tomorrow’s tax take. It was patiently pointed out to them that the whole point of not having the tax-free bit at the end of the pension life is because there is no guarentee on earth that would stop any future Pol from abolishing that putative end-of-life tax free bit and still keeping the proposed start-of-life taxed bit.

  4. There is no economic justification for taxing income only once?

    Or for encouraging people to save for retirement and thus not be a burden on the Glorious State?

    Srsly?

    This is getting into Cuban $20 + a rotten apartment with no windows + a ration card territory.

  5. > We generally think that it’s a good idea that people save for their old age.

    Really? Retirees already get £155 a week. I’m not sure why the government needs to encourage any more saving.

  6. abacab

    ‘This is getting into Cuban $20 + a rotten apartment with no windows + a ration card territory.’

    I’ve always been a North Korean kind of guy myself but Cuba is the same vision- and he is too purblind to see that. I think someone described him as the ‘Anti-Bastiat’ – that is pretty close to the mark….

  7. “Retirees already get £155 a week. I’m not sure why the government needs to encourage any more saving.”

    Because I’d like to be able to do more than simply pay the mortgage and eat. Such as catch up on all the things I’ve postponed all my life due to having to spend my time obtaining money in order to be able to afford to stay alive.

  8. jgh,
    And I’d like a Maserati. But why should the government subsidies our wants?

    Don’t get me wrong, I enjoy the bung of tax-free pension contributions. But it’s hard to defend on either moral or economic grounds.

  9. I would have thought it’s harder to defend taxation at all on moral grounds. We call it “extortion” when it’s not a government doing it.

  10. @ Andrew M
    “Retirees already get £155 a week. I’m not sure why the government needs to encourage any more saving.”

    Around here rents are getting on for twice that amount. Does that answer your question?

  11. Tax-free pension contributions and taxing pension withdrawals is (philosophically) exactly the same as just sticking the money in a bank instead. Presumably you advocate snatching money out of peoples’ hands as they try to deposit it into their bank account. Punishing people for using the financial system to save will just result in people sticking their money under the floorboards to the detriment of everybody.

    BTW, 60%-70% of people receiving that full £155 state pension (and it won’t be £155 for a couple of decades) have paid a full set of contributions for it. If you want to take my pension off me I demand the payments back.

  12. Yes, he’s not talking about taxing just the returns from pensions, but effectively taxing the original contributions twice – once when earned and put into the pension fund, and again when taken out of the pension fund.

    Whether it will discourage saving I don’t know, but it will certainly destroy private pensions; with that tax regime you’re better off just taking the money and investing it yourself.

  13. Examining it in more detail, tax-free pension contributions are not a bung to the savers, they are a bung to the financial institutions the savers save with. If you want to put some of today’s income aside to use as future income, what is your decision going to be if sticking it under the floorboards means you keep all of it, or “lending” it to a financial institution results in the goverment taking a slice?

    Banks/etc want to get their hands on that lovely moola to play with. Governments want people’s savings to be used to fund the economy. Look at Japan where people are putting their savings under the floorboards instead of in banks.

    Not punishing people for lending their future income to banks results in people being incentivised to lend their future to banks instead of sticking it under the floorboards where the banks can’t put it into a large pile and use it until you need it back. Taxing it when you take it back from the bank is effectively just a savings interest tax.

  14. What would be the advantage of any pension saving? None.
    May as well simply run your own investments – at the bookies, lending to businesses through such as funding circle, spending it on wine and your favourite animal that goes ‘sizzle’.
    We could all drop dead before retirement age – government tries to get people to not be in poverty in retirement.
    Father in law had worked 40 years when he retired, his state pension was last I looked about £600 odd every 4 weeks, his works pension was another £290 or so a month. Enough to pay his bills and enjoy himself a little. If he had just had the state pension his ability to enjoy himself a little would have been altered, not stopped.

  15. For fairness this must apply to people who get their employers to pay into pension funds. So a worker on an average salary of around 26K with 20 years final salary teachers pension scheme would get a pension of 6,500 and a lump sum of 19,500 which according to http://www.telegraph.co.uk/pensions-retirement/financial-planning/calculator-final-salary-pension-valuation/
    is worth 214500. That works out at £10,725 per year. Tax and NI would be £3,625 (less an allowance for employee contributions.)
    The real fucker will be if you get a promotion to say 32000
    Your income has just gone up to 95K including the increase in your pension value with a tax bill of 32.4k (ignoring pension contributions)
    So I presume he will be advocating teachers working for nothing for a year
    Or will his rules only apply to private sector workers

  16. Not sure how pensions work in the UK, but here in the States we have both types of self funded pension schemes. The traditional Individual Retirement Account which is taxed on withdrawal, and the Roth IRA which is taxed on deposit and tax free at withdrawal. Social Security, which is the state pension is a Ponzi scheme where current contributions fund current payouts and any surplus is “invested” in Government bonds (and spent immediately by Congress).

    The big worry I have with the IRA schemes is that when the public pension crisis hits (pensions for Government employees). The Government will see that big chunk of money in IRAs and say, “You have so much, you must ‘share’ with those whose pensions that we didn’t really fund properly”. Kind of like Darth Vader saying, “I am altering our agreement, pray that I don’t alter again”.

  17. I’d say the likelihood of that not happening is vanishingly small. Or, rather, that when the crunch comes that will be the proposal, and then all hell will break loose. The odds of the US social security system having a soft landing are minimal.

  18. Kind of like Darth Vader saying, “I am altering our agreement, pray that I don’t alter again”

    That’s already the problem here. My independent financial adviser reckons she spends most of time her trying to understand changes made every year in the budget and then going round each of her clients explaining how the changes impact them individually.

    Taxed on the way in and on the way out is immoral as well as defeating the object, which is to encourage people to prepare for old age to reduce the burden on the State.

  19. I do worry sometimes about the money I stick in my ISA each year – I treat it as long term savings, but I’m also aware that at any time a government could change the rules. Certainly the existence of ISAs benefits the asset-rich more than the poor. It isn’t inconceivable they could be abolished altogether at some point, or a limit of say £100k is imposed (might sound generous to the bulk of voters, few of whom save that kind of money, but that’s nowhere near a portfolio you can retire on). Putting money in an ISA is a very long-run bet on British politics as well as the economics.

  20. I do get the nagging feeling when I point out to someone that “Company X is “avoiding taxes” by off-setting previous losses against its current profits, in the same kind of legally mandated, above-board, nothing-sneaky way that you are a tax avoider for using an ISA.” Because at some point the answer is “well shouldn’t we abolish/limit ISAs too?” And you only need so many people to think that, and a government to be strapped for cash enough (and pretty much every government is strapped for cash – opportunity costs, innit?) for a “radical policy initiative” to be born…quite possibly not via the usual birth canal either…

  21. MyBurningEars

    ‘I do worry sometimes about the money I stick in my ISA each year – I treat it as long term savings, but I’m also aware that at any time a government could change the rules.’

    Murphy could also be called the ‘Anti-Bauer’ named after of course the great Peter Bauer. He actually (probably unwittingly) tries to ape his style by making about 7 points in each post. The difference being of course that Bauer was arguably the most influential economics writer in his field (Developmental economics) in history, whereas Murphy is a very strong contender for the title of ‘biggest moron ever to have set foot in cyberspace’.

    The relevance of this being Bauer’s point that pension (or indeed any)rights are dependent on the willingness of future governments to honour them. If Murphy begins to exproporiate pension savings, I assume compulsory purchasing of houses is the next logical step. In the event a government of his stripe comes in and implements capital controls the next step would obviously be people controls as they have in North Korea and Cuba. The veneer of civilisation is surprisingly thin and Murphy has time and again proven he has no regard for the rights of the individual. Would be hard to conceive of a more monstrous individual. Bear in mind his trip to Dachau where he freely admitted his sons could envisage people like himself there…… And there were people like himself indeed

    https://en.wikipedia.org/wiki/Martin_Gottfried_Weiss

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