Wednesday, April 22, 2009

Initial Budget Reaction

Well no-one can accuse Alistair Darling of being boring now! It was the most exciting budget in decades.

The reaction from the Tory Commentariat is interesting: Ian Dale in the Guardian declared he was "fizzing" with anger at the 50% tax rate for earnings over £150k, and Danny Finklestein wrote in the Times that "I think the tax rises will go down very badly with the bulk of voters". Both of course opposed the VAT cut because it benefitted rather more than the top 2% of the workforce.

Their knee-jerk response is very much the politics of the last 30 years. They assume that everyone identifies with the rich and that at least 40% of the population believe they will become part of the top 2% next year. While simultaneously believing that ordinary people are unhappy with the VAT refund on their sales slips.

I'm not sure if this thinking holds anymore. We shall find out if there has been a step-change in attitudes soon enough, at the next election...

Of course Tories will try to get around the "we are the party of the top two percent" by claiming that this hurts "entrepreneurs". But as most entrepreneurs will testify, they take their income in the form of dividends, are careful to retain as much in the company as possible (to fund future growth) and only set the dividend amount to be within the lowest tax rate bands. And when they make it and cash out (usually by allowing their small firm to get taken over by a bigger one for a tidy sum), they take their money in the form of capital gains which are taxed at just 18% (compared to 40% under the last Tory government). And why not if they've created a company and jobs out of nothing. So true entrepreneurs will not suffer at all.

However what could be termed the "officer" class, those who are high level management and directors, who pay themselves big amounts at the shareholders expense, bankers in the City who've done so much to ruin their industry, some extremely high paid staff in councils - these are the types of people who will be taxed at the new 50% rate. But they are not entrepreneurs. If they are encouraged to switch from being rentier types to becoming true entrepreneurs, then good. And if some of the bankers wish to bestow their talents for ruining businesses on the good people of Hong Kong or Dubai instead, I wish them bon voyage and cross my fingers that those countries will take them in.


broncodelsey said...

Of course nothing is as it seems with any of this governments numbers;the 50% new rate is of course misleading, as if you take the reduction in personal allowances and increased National Insurance charges for these earners the real tax rate is a staggerring 60% !

We now have Swedish taxation rates but without their quality public services.

Is there asnyone left in the country that believes any of Darling's figures as only 5 months ago he was telling us that the economy would start growing again in June this year.

However,the New Labour gobbledeguk is fun with a New Labour reduction in public spending announced to-day of £ 35 billion called 'efficiency savings',but if it was a Tory policy it would be a 'cut'
Not forgetting that New Labour has an economic 'downturn, but Tories have a 'recession'.

What happened to that election pledge about not raising tax levels,just went the same way as every other New Labour pledge.

Wednesday 22 April 2009 New Labour RIP.

Quietzapple said...

Most of their screeching is about debt.

Yet the UK's stock of debt, according to Will Hutton, is lower than that in some other leading economies.

The last 100 years' history of the UK's national debt is quite interesting:

I liked Sam Brittan's advice that borrowing to enable people to work productively was at least as desirable as borrowing to fund wars.

The Uk still seems to have a corner shop mentality: not only do people fear that a high rate of income tax for "top people" will lead to ruin for the rest of us, but that it is viotal to balance the books on a day to day basis, like a shop run on a shoe string.

Danivon said...

Broncodelsey - umm, National Insurance is only 1% for employees over the UEL. I've not seen anything to suggest that's changing in 2010.

Still, don't let the facts get in the way of a good rant, eh?

DevonChap said...

The 50% tax band is a foolish risk. The downside is greater than the upside. At best it raised £7billion. But as the IFS say it is possible it will raise less than the 40% rate as it makes tax avoidance more worthwhile AND you risk losing high earners to abroad. Now you might not like them but the government sure liked their bonuses. 40% of a £150,000 bonus is not to be sniffed at.

When a company grows beyond the size one person can manage they need talented staff, who if successful will expect high wages. While you may be right company founders won't be hit directly but their ability to grow will be if they can't recruit the best staff from around the world.

Simple polls asking if someone who earns more than you should pay more tax will show support for this measure. But deliberative poling where people weight up the pros and cons of an issue will find support fade away as people see this will hit then if they aspire to climb the corporate ladder or see the company they work for move to Dublin.

Hughes Views said...

The squealing re 50% could provide a useful reminder that quite a lot of Britons get paid* a lot more than £150k. Might help people realise that an MP's salary really isn't very high.

* but far fewer earn that much...

PS I can remember the "good old days" when top rate was 19/6 in the pound

Anonymous said...

Actually, the capital gains fiddle you refer to will become a real problem now that Labour have cut capital gain tax and raise income tax. Nigel Lawson was right - they should be the same to prevent accountants fiddling cash streams.

The following was posted to

The 50% top rate is ridiculous when combined with an 18% capital gains tax. The difference is so large that the biggest winners will be accountants - people who turn income into capital gains.

For people earning more than £1m a year or so, the incentive to enter into structures that convert income to capital gains is now enormous.

The trick - for those who who care - works something like this.

OffShore company founded called OffCo. Rich Employee buys shares in OffCo for, say £100,000. Over the course of the year Rich’s employer makes payments to OffCo for various reasons. At the end of the year, OffCo buys back Rich Employee’s shares for £1.1m. Result, instead of recieving £1m in income taxed at 50%, he gets £1m in capital gains taxed at 18%.

Of course, you have to be a little more subtle than this. But given that most hedge funds are British Virgin Island domiciled anyway, you don’t have to be much more subtle.

The crazy result of this is that it is quite possible that the government will end with less revenue after the implementation of the 50% tax band - even assuming it doesn’t drive businesses out of the country.
Quietzapple: There are wars and there are wars. Suggesting it makes as much sense to borrow to "enable people to work productively" as it does to borrow for Iraq is fine, suggesting it for WW2 is a gross trivialisation of what the world would have been like if Nazism was victorious.

snowflake5 said...

Anonymous - the capital gains "fiddle" as you refer to it, is no such thing. Labour genuinely does not wish to hurt entrepreneurs, because they create businesses and jobs and take tremendous risks while doing so. That's why we reduced capital gains tax to 18% from the Tory 40%. Most business people arn't engaged in elaborate fiddles in offshore companies. They are engaged in a life and death struggle to survive and keep their employees (and believe me I know this from personal experience, most of my friends come from this small business sector class) - and Labour has explicitly recognised this, not only by not changing the capital gains regime but by extending help to small businesses in the recent budget.

Our intention is that the rentier class - bankers and others who overpay themselves at shareholders expense (looters and thieves of shareholders funds if you like) should pay their fair share of tax to reflect the bailout their actions have caused. In recent years these looters have pretended that they are "entrepreneurs". They are nothing of the sort - they are losers who wish to filch the money of others (shareholders and taxpayers).

I thought your comment was an interesting illustration of the Tory mindset - keep capital gains tax at 40% to penalise the real entrepreneurs and keep top rate of tax low to reward the looter/Tory rentier class. Sorry. The public just won't buy that anymore. Sharholders don't buy this anymore - and it's illustrative of how Tories have reverted to their old aristocratic ways that they no longer care whether shareholders are robbed blind by the officer class. It's left to Labour to say, this isn't right.

snowflake5 said...

Devon chap: "When a company grows beyond the size one person can manage they need talented staff, who if successful will expect high wages."

You are assuming a great deal (I presume you are employed by a fairly largish company and don't understand the dynamics of start-ups).

Small businesses do take on staff, but pay them average wages (£25k) and most often below average (16k to 20k). I have never come across a small business that pays it's staff above £150K!!!

The extremely high wages only tend to occur in large PLC's and they happen without the shareholders permission. In other words some looting is happening.

DevonChap said...

Snowflake, big businesses come out of small ones. Eventually they need top talent when they become mid or large enterprises.

Your agreement seems to be moving along the idea that any salary over £150,000 isn't justified, it's "looting". Well if this is theft, why hasn't Labour done anything about it for 12 years? Is it because you had lots of donors in the city who would have been hit by this? This is a transparent attempt at politics rather than anything to do with principle.

Labour has no principle; no economic competence is now a deeply nasty and corrupt party.

You are an apologist for this rabble. No matter what Labour do, you support it, even if it contradicts things you supported previously. Along with the clear fact you only 'sing when you are winning' (if bad things are happening for Labour you don't blog for weeks but suddenly they do something you think is a minor success and there you are).

Hughes Views said...

Quite right re high salaries in large companies. But it's not much use hoping that shareholders will do much about this. Most shares are held by institutions and managed by people who work for large companies and either receive or aspire to receiving monster salaries.

It's the same sort of circular game that stops non-exec directors being at all effective at reigning in directors' and senior managers’ salaries. The great majority of non-execs are execs in other companies so the system is bound to act as a huge circular back scratching exercise.

It may not be a conspiracy but, as a venerable Old Bailey judge answered when I'd asked him a question from the jury about whether a scam had to have been explicitly discussed to constitute a conspiracy, "a nod's as good as a wink..."

Anonymous said...

Snowy, I am absolutely NOT a Tory, and your sophistry in defending what is an obvious financial loophole that will be exploited by the rich is cringeworthy. It's a sign of what NuLab has become, and it fully explains why Brown was the main obstacle to reform of tax havens and loopholes for over a decade...

Anonymous said...

Less than two days since Alistair Wonderland's budget and his figures are already wrong with a 1.9% GDP contraction in Qtr 1.
Still not much longer for this circus.

Quietzapple said...

Re the 19s 6d in the £ Income Tax:

" . . . income tax was implemented in Britain by William Pitt the Younger in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic wars.

"Pitt's new graduated income tax began at a levy of 2d in the pound (0.8333%) on incomes over £60 and increased up to a maximum of 2s (10%) on incomes of over £200." - WIKI

Income tax always has been progressive here, to go back to a time before the enlightenment when tithes were poll taxes is an aim for some however.

There are those who favour a flat rate on ever £ earned, so the rate might be 15p for every pound for all of us say.

Indeed some extreme right wing tories favour such a scheme, but want to keep schtumn about it until - wait for it! - they have won the election!

Sounds like 1979, when Thatcher had kept back the weight of most of what she was to get up to.

Snowflake, I hope you don't mind my mentioning the censorship in operation on freedom luvin' devil may care Paul Staines' blog aka Guido Fawkes, this refers:

snowflake5 said...

DevonChap: "Snowflake, big businesses come out of small ones. Eventually they need top talent when they become mid or large enterprises"

I wish the entire economy was a network of small privately-held businesses. They think long term, they provide valuable services, the owners are fully engaged in the business, they care about their staff (mainly because they know them personally and it's hard to dehumanise someone you deal with on a day-to-day basis). I'm not sure larger is better at all. The larger they get, the less nimble, and the more unstable they seem to become.

With large businesses, the top brass deliberately distance themselves from the staff, the better to dehumanise them, and this then allows Fred the Shred types to take pleasure "shreding" the staff, while also convincing themselves that they are somehow "special" and different from their staff and thus justify large salaries at the expense of the shareholder.

If these staff at big companies were really "top talent", how come they got into so much trouble? Barclays actually wanted to buy Lehman Brothers in autumn 2008! Luckily it got vetoed by the Treasury and FSA - civil servants and politicians on a fraction of the salary of the "top talent" at Barclays, understood the risks better. Yet the Barclays guy still pays himself £22m as he thinks he is "top talent". Well let him pay 50% tax, it will go some way to paying for the government guarantees the state is putting up. He is patently NOT an entrepreneur and shouldn't be rewarded as one. Entrepreneurs take real risks with their own money, they don't gamble with other people's.

I also notice that the same people screaming about how the 50% rate, also complained vocally about the VAT cut (which independent reports say has worked). Is it because the VAT cut helped rather more than 2% of the population?

DevonChap said...

So the collapse of Lehman's was better than if it had been taken over in an orderly way? Sorry, it would have been better for the world if Barclays had bought Lehmans. Then we would only have had to bail out 1 bank, rather than 3. Your truimph of the civil servants was actually a failure of Brown's triparate system. The BoE would have understood the implications on the whole banking system of Lehmans going down, but the FSA, who stopped Barclays' bid only had to look at the effect on Barclays. Crazy.

Quietzapple said...

The 2.5% VAT cut was a simple piece of very effective and almost instant demand management, so simple and clear cut it stood out a mile. Some in the UK car industry claimed it helped them hold out for a little longer, and every little helps.

IF only Germany had followed suit quickly they might not have had their -1.8% 'Growth' quarter so soon.

The Tories loathe Labour's most effective and efficient policies most, because such threaten the ascendancy of their wannabe plutocracy, for that is Cameron's intention.

Their growing arrogance is leading them to imagine they deserve - have a right to - power over us all again.

Praguetory said...

"Well no-one can accuse Alistair Darling of being boring now! It was the most exciting budget in decades."

Are you joking? I'm fairly interested but I had to switch off through boredom within minutes. This was a do nothing budget.

snowflake5 said...

DevonChap: "So the collapse of Lehman's was better than if it had been taken over in an orderly way?"

That wasn't what I said. I said that Barclays wouldn't have coped with Lehmans, the toxic stuff in that bank would have brought them down, and our government would have had to bail them out too (worse than RBS). Even HSBC couldn't have coped with Lehmans and wisely stayed away.

Lehmans should have been nationalised by the US govt the way Bear Stearns was, because only the might of govt could have managed to deal with the toxic stuff.

Unfortunately, the Bush administration is much like the UK Conservatives - ideological fools who believed that nationalising Lehmans was like going back to the 70's.

P.S. I note that while the Tories pretended to support Obama and his policies, they are opposing them now as fiercly as Bush, Limbaugh and co. How quickly the mask has slipped. Hypocrites all.

Quietzapple said...

Snowflake wrote: "P.S. I note that while the Tories pretended to support Obama and his policies, they are opposing them now as fiercly as Bush, Limbaugh and co. How quickly the mask has slipped. Hypocrites all."

Aaahhh but what joy that they may have helped - just minutely! - Obama get elected!And, of course, they have to condemn Obama together with Brown/Darling as they care almost solely about their own skins - a fourth electoral defeat concentrates their tendentiousness wonderfully!

DevonChap said...

I didn't say I thought Barlcays could have coped with Lehmans without government support. What I said was "we would only have had to bail out 1 bank, rather than 3". The one being Barclays. That would have been cheaper for us and the World in the long run.

I don't think the Tories said they supported Obama's policies. They supported him for what he represented (Most were clear they had more in common with John McCain who also had a great back story). The 2008 election was a dream choice, worthy of the West Wing seasons 6/7.

snowflake5 said...

Devon Chap, all three would have needed rescuing regardless - by not getting involved in Lehmams, we limited it to two. Yes, the collapse of Lehmans made things worse all round (and they should have been nationalised by the US govt), but banks were already falling like nine-pins before that.

The US govt persuaded Citigroup to take on Morgan Stanley (the way they were trying to persuade Barclays to take on Lehmans), and it totally trashed Citigroup - which before this was the world's largest bank, stronger than even HSBC. Would Barclays, a much smaller bank, have coped? Delusion!

The Bush administration should have simply nationalised Lehmans and Morgan Stanley and left Citigroup alone, and they wouldn't be facing half the mess they now are. If RBS had left ABN Amro alone, they would have been fine too - but they were egged into the deal by Barclays. Barclays are an incredibly lucky bank - their managers make all sorts of dubious decisions but are saved from themselves by others intervening!

Anonymous said...

At least Gordo cheered the country up with his performance on YouTube,everyone enjoys a clown.

At least he wasn't picking hios nose this time.

DevonChap said...

Snowflake, you say we only resuced 2 banks. HBOS, RBS and Lloyds makes 3. I know you were dodgy with numbers but didn't think you were that bad.

Quietzapple said...

I have begun to tackle the abuses and libels - much of it applied by rote - like your Anonymous pervster, Snowflake:

Even some of their grandees have nasty minds . . .