Pension tax relief - 1,000th post!

There have been murmurings that the Government is thinking of cancelling tax relief on pension contributions for higher rate tax payers, so that such pension contributions are no longer effectively paid out of pre–tax income. Robert Peston states on his blog:

“So some would say it’s a bit rum that for every £5,000 put into a pension pot by a top–rate taxpayer there’s a refund of £2,000, whereas the refund on the same contribution would be just £1,000 for a basic–rate taxpayer. Is that fair — especially when there are more than 23m basic–rate taxpayers and less than 4m paying the top rate of 40%?”

Well, the obvious point is that it is not necessarily as manifestly unfair as Peston’s statement would imply (“the rich get two grand into their pension from the Government, the poor only get a grand!!”). The higher rate tax payer isn’t getting special treatment. If the principle is that pension contributions should be out of pre–tax income, higher rate payers get more back because more has been taken away in the first place. Someone has posted an amusing (if somewhat condescending) story in the comments on Peston’s blog to seek to illustrate why the instinctive outrage over tax relief being of greater benefit to those who pay more (or any) tax (“the rich”) is flawed:

“HOW THE TAX SYSTEM WORKS

Suppose that every day, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this: The first four men (the poorest) would pay nothing. The fifth would pay £1. The sixth would pay £3. The seventh would pay £7. The eighth would pay £12. The ninth would pay £18. The tenth man (the richest) would pay £59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers,’ he said, ‘I’m going to reduce the cost of your daily beer by £20.’ Drinks for the ten now cost just £80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men — the paying customers? How could they divide the £20 windfall so that everyone would get his ‘fair share?’ They realised that £20 divided by six is £3.33. But if they subtracted that from everyone’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same proportion, and he proceeded to work out the amounts each should pay. And so: The fifth man, like the first four, now paid nothing (100% saving). The sixth now paid £2 instead of £3 (33% saving). The seventh now paid £5 instead of £7 (28% saving). The eighth now paid £9 instead of £12 (25% saving). The ninth now paid £14 instead of £18 (22% saving). The tenth now paid £49 instead of £59 (16% saving). Each of the six was better off than before. And the first four continued to drink for free.

But once outside the restaurant, the men began to compare their savings. ‘I only got a pound out of the £20,’ declared the sixth man. He pointed to the tenth man, ‘but he got £10!’ ‘Yes, that’s right,’ exclaimed the fifth man. ‘I only saved a pound, too. It’s unfair that he got ten times more than I did’ ‘That’s true!!’ shouted the seventh man. ‘Why should he get £10 back when I got only two? The wealthy get all the breaks’ ‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor.’

The nine men surrounded the tenth and beat him up. The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill. And that, ladies and gentlemen, journalists and college professors, is how our tax system works.”

Question: without the higher rate tax relief, does the balance sway in the direction of private pensions being an unattractive option for the higher rate tax payer, when you weigh the loss of control and the requirement to buy an overpriced annuity at the end of it all against the basic rate tax relief alone? Tinkering with the tax reliefs so that pension contributions are no longer universally taken out of pre–tax income is not about “fairness”, but is in reality just a stealth tax rise. If the top rate of tax needs to go up, put it up and we can vote at the next General Election about whether the move to a slightly more redistributive tax balance that results is democratically acceptable.

Update @13:30: turns out the Chancellor has both raised the top tax rate from 40% to 50%, and restricted pension tax relief for top rate tax payers… but only for people earning over £150,000. Screw those rich bastards, I say…

Labels: economics, UK politics

There’s too much talk about “taxpayers’ money” on the news these days. It’s taxpayers’ money the Government takes, but by the time they’re spending it, it’s everyone’s money.

Labels: economics

Bow'vember

Never mind all this Mo’vember crap*.

It has just occured to me that none of these financial problems that we now face would have happened if the City had not lost the habit of keeping its collective swede up to operating temperature by means of the time–honoured Bowler hat. I say we should bring it back in the interests of restoring market confidence by signalling a return to the old standards of prudence and probity.

Only thing is, we’ve missed November, so we’ll have to call it something else…

*Good cause obviously duly noted.

Labels: economics, london, UK politics

I think credit is due for Sharkster’s posting here, back in the last quarter of 2006. Eat that, George Soros.

Labels: economics

UK Economy

It was confirmed on BBC breakfast news this morning that for the last quarter, the UK went into recession. To clarify, it was added that taking into account all sectors of the UK economy, for the last three months “the UK economy actually lost money”. That ain’t right is it? We’d have been better off just doing nothing? I thought the point was that GDP growth has become negative. Rather than actual GDP becoming negative. Unless we’re in deeper shit than I thought.

In other news, the fact that the pound is now at a five–year low against the dollar doesn’t fill me full of glee in advance of my forthcoming trip to the US in December.

Labels: economics, news

Inflation news

“Mervyn King indicated today^* that a 9.5% rise in the base rate of interest to 15% is “almost certain” to be imposed next month when the Bank of England’s MPC meets to discuss the issue. His comments arise after a radical change in the way inflation is measured has revealed that inflationary pressures in the economy are much worse than previously thought. The substitution of the unwieldy “CPI” method with the much more responsive “price of a Twix in tucola’s office vending machines” method shows that, far from running at around 2.5% as previously thought by the Government, inflation in 2007 was in fact 28.6%”.

* not really

Labels: economics

What exactly do we want the economy to be doing?

This article talks about how problematic it is that the housing market is weakening, consumer borrowing is falling, disposible incomes are falling, consumer spending is down. But aren’t each of those changes exactly what those seeking to manage the economy people were trying to make happen over the last year by repeatedly raising interest rates? Shouldn’t we be saying “whoopee!”?

Labels: economics

I thought this was a well observed article on why people are disproportionately worried about inheritance tax.

Labels: economics, UK politics

Are Mervyn King and the MPC in fact terrorists?

Part of my reaction to Islamic terrorists threatening to blow and/or actually blowing things and people up is the same as my reaction to the Bank of England threatening to put and/or actually putting interest rates up:

what the hell do you people actually want me/us to do?

Labels: economics, UK politics, war on terror

Council Tax

I have written about this before, but it still seems to me that the stories about Council Tax revaluations are based upon flawed logic. It is often quoted that since Council tax bands were set in 1991, the average house price has increased threefold. The implication appears to be that everyone is going to face an enormous Council Tax increase if the bands are reassessed on current prices. You’re three times richer than you were in 1991, so you should pay three times the tax, right? And what about the pensioners? It’s not their fault that their two–bedroom London maisonette, where they’ve lived since 1946, is now worth £2,400,000. How are they going to pay the tax out of £85 a week?

It’s nonsense. Council Tax is about dividing the costs of local services fairly among local residents. The Government has decided that ‘fairness’ can be achieved by making contribution to services proportional to the value of property inhabited. It’s not a capital gains tax, based upon absolute increases in value. Therefore, it doesn’t actually matter much when the valuations were conducted, unless for some reason since the valuation, the prices of some residents’ properties have increased more than those of other residents. Pensioners only get screwed on revaluation if since 1991, their two–bedroom London maisonette has soared in value, while the value of the maisonette round the corner has remained static. If, as is likely, prices within a given area have more or less risen uniformly across the board, the pensioners will be in exactly the same position when bands are set on a revaluation as they were in 1991.

A related article talks about proposals to bring in a new band for houses of £1m plus, which will incur double the tax. This is hard to get particularly excited about either, but I accept that it may be somewhat more prone to producing unfairness. This is because £1m appears to be an arbitrary cut–off, leading to a stark increase. If the situation really is that in some Councils’ territories, historic house price inflation means that many houses are now above that limit, while many remain just below, it could look to be unfair. Greater fairness is obviously more likely to be achieved by a larger number of smaller incremental increases. But is it really the position that there are many income–poor people, particularly pensioners, living in £1m+ houses? I somehow doubt it. And if so, one reaction might be to say “lucky bastards; why don’t you release some equity or move to a cheaper pad, if the Council Tax payments really are unduly burdensome”.

Labels: economics, UK politics

EU farming subsidy

Farmers being paid by the EU not to produce crops that are not needed seemed mad enough in the first place. Now, it is alleged that the “decoupling” of those EU farming subsidies from the land to which they relate has resulted in the surreal dealing in the rights to receive EU payouts by “entitlement traders”.

“This is the final reduction to absurdity of the Common Agricultural Policy. Only the EU could have created a situation where people who are not farmers are paid not to farm” (Neil O’Brien, director of Open Europe).

Labels: economics, UK politics

Newton's third law/badgers/Metro

In the Metro today, someone asks (page 17):

“How many badgers would it take to support the Empire State Building?”.

The answer given is:

“The Empire State Building weights 331,818 tonnes. The average weight of an adult European badger is 11kg. So, according to Newton’s third law, you would need 30,102,040 badgers”.

Now, I am not a scientist, but this seems unsatisfactory. It seems to me that all they have done there is answer the question “how many badgers does it take to equal the weight of the Empire State Building”? Why is Newton’s law applicable?

The answer to the question actually posed depends upon what you mean by “support”. If you mean you mean “act as a foundation for”, it seems to me that the issue is one of strength (principally seperable here into compressive, tensile and sheer strength, depending upon where the load forces are applied), not weight. Badgers’ propensity to break/be squashed under load means they are insufficient to support a large building, however many badgers you have got, unless the weight of the building is spread out over a very large surface area (on the same principle that means that an elephant’s foot does not sink into a muddy field where a stiletto heel would, despite the elephant’s weight). So you need to look at the weight–bearing strength of one badger before it will squash or break (say, 50kg?) to see how many badgers you will need (6.6million?), then make sure that the weight of the building is applied down through a cross–sectional surface area sufficient to contain that number of badgers in load–bearing formation (say, roughly 825,000m², assuming 0.125m² per badger (based upon a length of about half a metre and a width of about half of that again for one badger in a load–bearing stance)). So you don’t need as many badgers as the Metro suggests, but the value of the real estate that would be necessary would be substantial, particularly given land values in Manhattan.

No doubt one of you fiendishly clever lot will tell me why I am wrong about all this.

Alternatively, we could look at the issue economically. The Empire State cost some $41m to build. To amass that amount of money (£22m) from badgers, one could go into the business of selling badger pelts to the traditional shaving brush industry. At an average profit of, I dunno, £2.50 per pelt, one could say that 8,800,000 badgers would be required to have supported the construction costs of the Empire State. One could also look at the question of support based upon current annual running costs for the Empire State, giving a smaller number of badgers but on an annualised basis.

Labels: economics, news, science