Just to run through what I’ve understood of Ritchie Murphy’s latest gut spasm about taxation.
A number of things that are stated as necessary.
Horizontal equity – therefore the source of the increase in financial well being doesn’t matter. All should be taxed the same way. Therefore capital gains should be taxed like income. Further, an increase in uncrystallised capital gains should be taxed like income.
There should be a 15% unearned income supplement to the standard income tax rate to account for the absence of NI on higher incomes.
Uncrystallised, untaken, capital gains should be taxed as income.
There should be no inflation indexing of capital gains.
Finally, and the leap I’m adding here, is an implication of that it doesn’t matter what that source of increase in financial position is. I take this to mean that an increase in the capital value of a defined benefits pension should be taxed the same way as an increase in the value of a defined contributions pension. Which should both be taxed the same way as just an increase in the value of savings that might be used to pay for old age. Or, in fact, savings that should be used to pay for anything else.
So, let’s run through the effects of that.
Capital gains are to be taxed at the top marginal rate of the recipient. 40 to 45% then.
There’s a 15% surcharge on investment income. 55 to 60% then.
There’s no indexation allowance.
Defined benefits pensions should be taxed as defined contribution, both the same as an increase in simple financial assets.
So, civil service pay – or say the pay of a GP, like the Spud’s wife – rises 10% simply because of inflation. Given the last year or two we can imagine that pretty easily. OK, the pay related pension rises by 10% because it’s defined benefit with a link to pay. The standard calculation is that the capital value of a defined benefit pension is 20x the annual income from that same pension. That’s an underestimate but that’s what’s used.
So a 10% rise in this year’s pay leads to a 200% of this year’s pay rise in the capital value of the defined benefit pension. All rises in financial wealth are to be taxed the same, at that 60%. The tax bill – for those with a defined benefit pension like civil servants and GPs – of a 10% rise in pay will be 120% of this year’s total wages.
Has anyone told Mrs. Murphy yet? And can we all just be grateful that lithium is getting cheaper as more mines open?
Yes, there is a joy at the idea of senior civil servants – and GPs – facing a 120% tax on this year’s income just for an inflation matching pay rise. But that is where Spud’s logic and insistences take us.
Now yes, I have gone to the extreme with this. But we can relax my conditions and still end up at the same place.
OK, so defined benefit pensions will be privileged. But let’s say share prices rise 10% (a not unusual variance in stock markets) and you’re nearing retirement age. Your pension fund – defined contribution, or even just plain savings outside a formal scheme – rises 10%. On, oooh, £300k say? So that’s a £30k increase in capital value – £18,000 in tax please. Oh, and you don’t get a tax credit if the markets fall. House prices rise – 60% tax on that. No credit if they fall tho’.
Yes, I’m aware that the numbers are different in the two cases. Because the rise in the value of a pension fund is the capital value of all the future pension payments. The rise in the capital asset like shares or the house is the rise in the value of just that thing. There’s not that net present value thing to consider which is why the multiple.
So, can we all just agree on crazed loon on the loose here? Good, thank you.
Because there’s one further joy. We’ve been told that the behavioural responses to these tax changes will be much of a muchness. Will even out to no change, no change really, in labour supply. Folk are going to face 120% of annual income tax bills because of the change in value to their pension from a 10% catching up with inflation pay rise? And this won’t cause changes in labour supply?
As I’ve been pointing out for more than 15 years now, man’s a loon.