OK, Compass roundup

So, Compass insist (it\’s really Richard Murphy, again) that we can raise taxes on the rich and everything will be just hunky dory. There are a few leetle problems with their assumptions though, it should be said.

There are strong grounds for
supporting reasonable proposals to limit the
capacity of corporations to avoid tax by moving
their tax base to national regimes with lower
corporate taxation rates. This would require
international co-operation, probably initially at
an EU level.

Well, there\’s ambition for you. They want to tear up one of the defining characteristics of the European Union. The free movement of labour, goods and capital across the 27 countries. Good luck renegotiating the Treaty of Rome guys.

On a financial transactions tax.

London’s $2–3 trillion a day in transactions is
speculative, the effective tax rate increases
substantially for repetitive transactions, thus
reducing the incentive for speculators to trade
and so reducing price volatility. At times of significant
price change in the market, the effective tax
rate rises, thus dampening speculation and acting
as a disincentive to the herd instinct.68

Yes, they believe that speculation increases price volatility: when every fule kno that it dampens it.

There are, however, other forms of FTT. A tax
could be imposed on all debits – that is payments
– in bank accounts. The rate might be very low –
say, 0.1%. The GDP in the UK is at present
approximately £1.4 trillion per annum. To
achieve this level of national income, several
times this volume of debits is required in bank
accounts (for example, wages paid are a debit, and
when those who receive them spend that cash
they are a further debit). Speculative activity also
creates substantial cash movement for little
income generated. If it is supposed that debits run
at three times the level of GDP, a tax at 0.1%
would raise £4.2 billion, costing the average
household less than £20 a year, far less than most
households pay in bank charges.

You recall how the financial crisis was brought on by people taking their money out of ATMs, tenner by tenner do you? No, me neither, but that\’s what they\’ve decided they\’d like to tax.

The simplest reform would be the
most effective: all UK passport holders should
pay UK tax on all their worldwide income
whether or not they are in the UK.

Congratulations, you\’ve now become a slave of the State. Whatever you do, wherever you go, you\’ve got to pay Alistair Darling. This is to move to the US basis of personal taxation and it does seem perverse to pick up on the very worst part of their system (so bad that they\’re the only country that does it) as the one thing you\’d like to copy.

I also have a feeling that this would fall foul of EU rules: you\’re not allowed to discriminate between different national origins. But if a Latvian (or Frenchman) working in Latvia pays 20% flat tax (or whatever their rate is) and an Englishman working in Latvia has to pay 40%, that looks like discrimination to me.

But finally, here\’s the great guffaw.

They intend to raise the average tax rate (that is, the percentage of total income paid in taxes….this is not the marginal rate) for the top 10% of households from around 34% to 55%. That\’s an over 60% rise in taxation on this group of 2.3 or so million households.

We also see marginal tax rates rise substantially (as of course they would have to). I can see something over 70% easily: top rate of 50%, two sets of NI adding something like 23/25 % (for they will lift the NI cap).

In fact, with their \”minimum tax rates\” of 40% at £100,000 and 50% at £150,000 (ie, withdrawal of personal allowances and of perhaps even the lower rate allowance) we might well have bands where marginal tax rates are above 100%.

Now, we might think that there could be some changes in behaviour over such changes in rates. You know, this Laffer Curve thing: yes children, it really is true, the Laffer Curve exists. The argument is not over whether but at what rate we move from maximising tax income to diminishing it by raising the rate further. That\’s an empirical matter of course but recent rough estimates would put it in the 40-50% rate area (note, for marginal tax rates, not average). So what do our brave boys and girls think of this, the possibility that their tax rises would lower revenue rather than increase it?

Our view on avoidance is
that if the top rate is increased while at the same
time reforms are made to the tax system,
minimising avoidance and evasion, the taxable
income elasticity is likely to be small, if not zero.

Correct, they simply claim that it won\’t happen. That no one will trade leisure for lower income. That hoicking tax rates by 60% will not change work patterns at all.


15 thoughts on “OK, Compass roundup”

  1. So I have to pay for services provided by the state, despite the fact I don’t live in the country?????? WTF.

    After a certain period, you even lose the right to vote if you are living elsewhere.

  2. A lot of people, such as those on the left and the right in their political views, have little idea of how outrageous the US worldwide system of taxing is. If a British couple on a short trip to the US have a baby there, that child is a US citizen and unless they go through a complex, tiresome process, that child, in adulthood, has to file an IRS tax return even if he or she never sets foot in Jefferson’s Republic again.

    The idea of the US as a land of untrammelled free enterprise is a joke. To take another example, about half of the US mortgage market is effectively run by the state (the state-backed mortgage agencies such as Freddie Mac, etc).

    Oh, and Richard Murphy is a weapon’s grade cock end.

  3. Compass rock!

    They keep sending out mass emails asking for ideas for their manifesto and I always reply saying “Sack a few million public sector workers, have a citizen’s income scheme and replace as many taxes as possible with Land Value Tax.”

    I sometimes even get a halfway civil reply.

  4. Hi Tim,

    I hear you banging on about the Laffer Curve still which I personally would’nt as I think it is too much of an over simplification to be taken seriously. However that is not to say that very high tax rates can have damaging effects it is just that the cause of this is the more the rate of progression it too steep and the effects on confidence as to the future rates too.

    For example take the income tax regime of 1979; by the time one was on the cusp of the 83% rate the average had only risen to around to around 50% so the additional income was only worth a third of the value of the rest of the income after tax (17p to 50p per pound). Thus a 50% increase in gross income would only net a 17% increase in the net.

    Hence in the case of an entrepreneur running a business at this level of profit the average tax rate on the upper half of their income was 74% leaving 36p in the pound after tax. So it wouldn’t be worth while for going half the current profit by reinvesting worth 36p to chase additional income worth just 17p. You would have to double your outlay just two net the same amount of after tax income as you have forgone.

    It is this steepness, the reduced value of the marginal pound relative to the average after tax, that matters. This makes reinvestment less appealing relative to spending the current level of profit. In addition entrepreneurs appear to have a higher elasticity relative to paid employment.

    Also once you get to high income, say the top one percent around £150,000, then they may account to 12.8 % of pertax income but an additional marginal band introduced at this level only impacts on the half of income above this level of about 6%. Additionally the figures for the top one 0.1 percent is an income of about £350,000 and a rate set at this level would be incident only on about 2% of all pre-tax income, and of course we are already getting getting about 40% of that already so so only 1.2% of income could be redistributed evan if we had complete confiscation of all income above the £350,000 level.

    In reality with the very high rates post WWII the pretax income share of the top one percent fell from ~13% in 1945 to about 6.2% by 1979 so that suggests that the compression of differentials by a highly progressive tax affects the behaviour of those individuals, particularly reinvestment in business expansion, such as to reduce to overall yield.

    Thus it not simply the rate a la the Laffer Curve that matters but the rate on increase in rates that is important. Of course the to raise significant revenues the progression has to occur in the region around the average incomes from the minimum wage unto the the double the average income at the 90th percentile as this is where in aggregate the money is and rapidly the tax base for bands impinging on income above this level rapidly declines. How steep the the progression can be is a matter of judgement (I mean guessing), but a think most countries have about 80% of the average after tax at the margin; i.e. a 50% pay rise would yield 40% after tax.

    Also one needs to take into account to politics and the effect on confidence too. A steep progressive tax acts as a signalling function; if the the government feel justified in taking the bulk someone income, why that much, why not even steeper and higher rate, which damages confidence in terms of reinvestment. That allied to the fact that a moderately graduated tax will rise to around 40%-60% at the top one percent and further increases yield diminishing returns, suggests that the top rate should be at about this level. The fact that most government around the world have a number of rates rising to a top rate of around half of income at the top 10% or 5% income level is surely no coincidence.

    Look at when Thatcher lowered the top rate to 60%, while high by our standards, reduced the compression of the differentials a lot from the 83% region and signalled an idealogical direction which gave confidence to entrepreneurs, and hence big fortunes were made in the eighties, so it is more than just the level but the direction of travel.

    Hence while I expect that the new 50% rate will not raise the 0.6% of pretax income that a static analysis would suggest due to the signalling effects, (i.e. hit the rich) even though it doesn’t make the tax system massively steeper, a few percent across the board would not have any effect on people’s incentives. Any overall effect would be confined to the relative efficiencies of state verses private spending of the money raised.

  5. I find it hard to believe this guy is a chartered accountant who ran his own business.

    He doesn’t know much about finance and he knows nothing about tax. Perhaps UK Tax Research means he’s trying to find out more about it.

    I love the idea of taxing debits. It’s no different to charging VAT on every transaction but not allowing anyone to reclaim input tax. Not even the headcases in the EU would go for that one.

    Doesn’t understand the difference between tax evasion and tax avoidance. Seems to think that company residence can be decided by a country just saying “You are mine, all mine”. What if every nation did that? Doesn’t understand marginal rates of tax.

    Jeez, there really seems to be no end to this guys ignorance. Looking at his photo on his website (I wouldn’t have publicised myself if I were you, Dick) he should have stuck to commentating on the snooker.

  6. Ho Ho ho.

    Just read the comments on said website.


    Dick’s world seems to run on the premise that we are all idiots and he has a double figure IQ.

    If these commenters actually exist they are trainee accountants applying 11 years too early.

    Must try harder, dick. Sorry. Typo. Dick.

  7. Do they propose a system whereby a (say) Latvian working in the UK pays Latvian tax, not UK tax? If so look to see lots of east europeans pricing UK workers out of jobs- Just what the TUC wants of course.
    Or do they want Our European friends paying both lots of tax- well it would give an advantage to British Workers, but I rather think it involves leaving the EU.
    Much as I want to leave, I’m not at all sure that I want to bugger the UK economy to achieve that. Nor do I want to piss off continentals without very good reason- no-one deserves it and they might retaliate.

  8. Could you point to some papers showing this

    es, they believe that speculation increases price volatility: when every fule kno that it dampens it.

    as I’ve been trying to find some definitive ones and can’t really.

  9. James that is all very interesting and I think it must make sense in its own terms at the very least .You say for example that to raise any money taxes have to hit the middling , well I think you say so .Most people will have the ambition to be in that band at peak earning which is why young people tend not to be in favour of high taxation ( well; one reason anyway). How are we know what effects the prospect of an increasingly progressively taxed country may have over time . With guaranteed pension and job security the low risk Public Sector looks even more attractive and what effect would this have on the business climate or whats left of it . Opportunity cost , how do you calculate that over time and you must because individual choices are what makes the sums
    Another opportunity cost which may be perceived is the ability to afford a mortgage .I think its exceedingly difficult to make international comparisons unrelated to disposable income . Australia for example is taxed in a way not dissimilar to our system but is a highly popular destination for middling Brits of working age because life is so much cheaper and ,… it is said , there are far more opportunities for the ambitious and energetic . That is largely to do with housing costs which is a country that is only behind Bangladesh , South Korea and ..um another one apart from tiddlers is likely to remain a defining exceptionalism for the English. This may not be important at very high bands but as we know they are only the start

    Which brings to another problem , existing latent pressures Suppose you are not injecting policy into passivity suppose as seems infinitely more likely society is actually composed of a dynamic and unstable equilibrium of competing forces in tension. As an example I have been chatting to clients today and a lot of them ( in construction ) are clinging on. Waste has been shed , ambitions reappraised and some cannot afford another set back. Now we are coming into what is almost certainly going to feel like a god awful hangover after Browns cheeky pre-election drinky. How do youi calculate when the tipping point is reached . Tax avoidance after all is a matter of tipping points being reached not uniform effect . It seems like to me , and to the IFS, that any tax on financially literate will raise revenue initially but it will reduce and then actually lose revenue as tipping pojhts accumulate over time . Getting that revenue back may be difficult whatever you do . Have New Labour ever got their revenuie estimates right ? . No they always guess to high , so caution is warranted

    Politically you have dealt with the “Tax Payers Union” well I think . As you rightly say the pot of gold is Mr and Mrs. Ordinary with family and mortgage any Government with aspirations to intervention or even staying where they are right now has its eye on that . Once the principle of progressive taxation is inserted then like Speed Cameras and CPZ s they spread from easy to justify areas into the real objective which is wide coverage . It has been the endless tactic of the left to split the Tax Payer and the shared memories of the country tell us that progressive taxation does not come alone in real life .

    I am , obviously , a rather ignorant layman on the subject but I could go on and on and on inventing other factors that are likely to remain incalculable and this may account for the odd fact of Economist uniquely misunderstanding the Economy when almost everyone lese got it . All of this makes me rather interested in what has actually happened which as I understand it is how the IFS calculated the loss that will occur over timeworn the new high rate( it is a range of possibilities but the conclusion was a significant loss )

    Tim I musty congratulate you Seeing the inevitable link between high tax and shutting down freedom quite as starkly reminds me of what seemed the rather antiquated classical Liberal idea of ones freedom to leave being a vital one . For a long in the industrial age it appeared an absurdly bourgeois idea but its time seems to me to be coming again .

  10. sez noted economist James P: “I hear you banging on about the Laffer Curve still which I personally would’nt as I think it is too much of an over simplification to be taken seriously.”

    I would be fascinated to read your explanation of why Rolle’s theorem is an over-simplification.

  11. I also have a feeling that this would fall foul of EU rules: you’re not allowed to discriminate between different national origins. But if a Latvian (or Frenchman) working in Latvia pays 20% flat tax (or whatever their rate is) and an Englishman working in Latvia has to pay 40%, that looks like discrimination to me.

    The Englishman would likely wind up paying 60%, unless you could offset your English tax against the foreign tax, which I think is how the US system works. Somehow I don’t think the Russians would let me off my 13% tax on the grounds that I am paying 40% to the UK treasury.

  12. What do you mean by a ‘simple curve’, Matthew? You don’t think the map from rate to revenue is injective? Well, yeah, that’s what the Laffer curve says.

    Words mean things. The criterion for Rolle’s theorem to apply is that the function in the interval be differentiable (which implies, minimally: continuous). Are you saying that the function is pathological? We’re not talking about individual behaviour, but aggregate tax take as a function of rates.

    Even if things don’t conform exactly to the criteria, they are sufficiently close for the Laffer curve to apply.

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