Tax
It won't save taxpayers' money
A lot of people who support the proposals that the government outlined in July 2008 seem to think that it will save taxpayers' money. I can assure them that this is most unlikely to happen for a variety of reasons. The cost of running the scheme will almost certainly outweigh any savings made, with the taxpayer footing the bill. Indeed, it appears that New Deal costs an absolute fortune already. I've seen figures quoted on the New Deal scandal blog that are really quite scary. That whole blog, written by somebody with inside knowledge of New Deal, contains some very revealing insights into the administration and costs of running New Deal.
Jobs that need doing
People suggest that there are plenty of jobs that need doing and that unemployed people could be doing these jobs. That's all very well, but it's clear to me that no employer is willing and able to pay for these jobs to be done. If they are done as part of a forced work scheme, they won't reduce real unemployment, although they would reduce statistical unemployment as such people would not count as unemployed. These jobs will therefore cost the taxpayer more because of the administration required, and that's before you count the cost of people in real jobs who become unemployed as a result of forced work schemes undercutting real jobs. If these jobs are done on a voluntary basis with voluntary administrators, they cost nothing, but then they have nothing to do with unemployment issues except in one respect. If unemployed people genuinely feel that they'd like to do voluntary work, they aren't allowed to do more than 16 hours per week. As the 16 hours limit includes both training and part-time work, the amount of voluntary work they are allowed to do has to be reduced further when applicable, to take account of these. Of course, the government can force unemployed people to do so-called voluntary work, but that brings in all the administration costs that aren't there if unemployed people volunteer within the 16-hour restrictions. Crazy, but that's the way the system operates.
Tax the rich?
One way to pay for these and other schemes, at least in theory, is to tax the rich. Politicians are guaranteed to win approval whenever they announce ideas for taxing the rich, but the problem is that such ideas never bring in the kind of money that is needed. This is partly because there aren't enough rich people to tax, unless you define rich very broadly, but also because rich people consult accountants who know how to avoid paying punitive taxes. If the tax loopholes are closed, the rich people can simply emigrate to avoid paying taxes, as Lewis Hamilton did. He still pays UK taxes on UK earnings, but not on his overseas earnings.
A survey showing the number of millionaires in the UK makes it appear that there are a lot of wealthy people out there who could easily afford the extra taxes. But wait - those figures are arrived at by including property. If I had stayed in more or less continuous emplyment over the last 20 years, by now I might well be living in a property worth half a milion, and quite possibly with the mortgage paid off. This illustrates the problem. A lot of those so-called millionaires owe their status to property prices, something acknowledged by the article. They can't spend the money or pay it in taxes unless they sell up. If a lot of people were to do that, property prices would collapse, and it would affect all property prices, not just those at the top.
Sorry, but though I don't have any vested interest in defending rich people, I can see that while they must pay their share of taxes, and that share must be greater even in proportionate terms than the rest of the population, there are limits to how far the idea can go before it becomes counter-productive. While I understand the appeal of taxing the rich, the reality is that the policy doesn't work unless it can be co-ordinated internationally. In that context, I'm pleased to see that global pressure is beginning to bear on tax havens, but it remains to be seen whether this is effective.
Seeing the various ideas espoused by politicians to tax the rich, I notice that they have two things in common with unemployment policies such as New Deal and Flexible New Deal; they sound great in theory but they don't work because people never behave in the way that politicians want them to. The mansion tax proposal is a case in point, being based on the assumption that rich people would simply pay the taxes without taking any avoiding action.
Mansion tax proposal
Vince Cable of the Liberal Democrats announced an idea that appears at first glance to circumvent the usual problems associated with taxing the rich, since it focuses on their homes rather than other aspects of their wealth. As originally announced, the plan involved an annual tax on properties worth more than a million pounds. In simple terms, 5 pounds a year would be payable on every 1,000 pounds that the property is worth not counting the first million pounds. So a property worth two million pounds would be taxed 5,000 pounds per year, while a property worth three million pounds would be taxed 10,000 pounds per year. Later, the plan was changed to exclude properties worth under two million pounds and the 5 pounds per 1,000 payable annually above the threshold was doubled.
Irrespective of the thresholds and values used, it sounds simple enough but one obvious problem is that property prices at the top end will collapse, partly because people will be less willing to pay so much for such properties, but also because existing owners will want to mark down their value to reduce their tax liability. Some owners may decide to sell up and buy properties abroad, further depressing the prices of British properties. Some owners may find ways to divide up their estates, perhaps by dividing up the land or by dividing big houses into flats. Others may simply sell to property developers who may, if they get planning permission, divide things up as only they can.
There could be a particular problem with some properties that are listed buildings and require a lot of money to keep in good condition. I can imagine that more of these properties will end up being sold, donated or left in wills to the National Trust, thus placing an even greater strain on the National Trust. Perhaps some of them will end up being demolished if the National Trust becomes over-stretched and nobody else wants them. I doubt if Vince Cable has thought the idea through.
Another way out for rich people, depending on how the rules apply, is the question of whether the property is purely a private dwelling or not. Longleat is famous for its safari park, but the profit from that supports the upkeep of the mansion. I don't know the value of Longleat House, but I would certainly expect it to exceed two million pounds. Would it be subject to the proposed mansion tax? If so, would that jeopardise its future? If not, maybe other mansions that are currently private dwellings could be converted into businesses. Yes, I can see plenty of problems with the idea.
When first announced, general opinion within the Liberal Democrats appeared to be against the idea, although that appears to have changed, perhaps due the revised threshold or perhaps because there are no obvious alternatives except raising income tax. The plan was not part of the coalition agreement in any form although Vince Cable now has a Cabinet seat, but it is still possible that the Conservatives will accept the idea as part of a deal to cut the top rate of income tax. Even if this doesn't happen, I expect either Labour or the Liberal Democrats eventually develop the idea as one of their policies. If the mansion tax ever becomes law, I'll be interested to see its effects. As I've already indicated, I doubt that it will produce the results that its supporters hope for, but we'll see.
Like most other people, I like the idea that rich people should pay more in taxes than the rest of us. However, I recognise that if they are asked to pay too much, they will find ways round it. There aren't enough mega-rich people around to subsidise the rest of us; it just seems that way because a lot of them are high-profile. Sadly, if taxes need to rise, we all have to pay to varying degrees. Even though I'm on benefits, I still have to pay VAT. Raising VAT to 20% at the start of 2011 was not ideal but I can think of worse ways of raising taxes.
Better off unemployed?
A newspaper article from Septmber 2008, titled You are better off on benefits, shows that the system is not working as the government intended. Nevertheless, I don't believe that all unemployed people would be worse off financially by returning to work. Housing costs are far higher in London, but there is no special London minimum wage. I can certainly see that unemployed people in London might sometimes be better off on benefits than in a job paying the national minimum wage.
If I lived in London, where housing costs are much higher, my total benefits would be, at the very least, much closer to the national minimum wage, which is set at exactly the same rate throughout Britain. Perhaps the newspaper article titled You are better off on benefits was based on research conducted in London? I don't know, but it might be worth looking into the impact of regional variations. Of course, the News media have their own agenda and will look for stories that fit their agenda, without ever allowing the truth to get in the way. In any case, perhaps the government needs to consider having a London minimum wage at a higher rate than the national minimum wage. It wouldn't help the unemployed directly but it might incentivise those of them that live in London.
Tax credits
The tax credits system introduced a few years ago is supposed to ensure that nobody is worse off in a genuine job than they would be on benefits. Anybody who thinks they are worse off in a job than out of one really ought to investigate what they could claim, if they're not claiming already. As I understand, such people may also be entitled to housing benefit and council tax benefit in some instances - perhaps not the full amount, but even a partial contribution may be worth claiming. I know that a lot of people don't claim what they're entitled to, either because they think that it's scrounging or because they simply don't know what's available. Unless you ask, you won't find out.
Having had a brief discussion with somebody at the jobcentre about tax credits, I have no doubt that in my particular case, the monetary value of any income, even for a part time job involving 16 hours' work per week or more, is greater under the tax credits system than being out of work and relying on benefits alone. However, everybody knows that actually going to work involves some costs including transport and higher food costs - and that's even without considering that you may sometimes be expected to socialise with work colleagues. Even the occasional beer at lunch time (if that is part of the culture) makes a difference when one is discussing money at these levels. Once these extra costs are deducted, the net amount of extra income may be very marginal under the tax credits system. There may even be cases where it really is better financially to stay unemployed, at least in the short term, as the article You are better off on benefits claims.
Any job improves prospects
Of course, any employment makes it easier to find another job, so even if there is short-term pain, it may still be worthwhile for the chance of a better future, but if the government wants an effective tax credits system, it needs to be a major incentive, not a marginal incentive. That would cost money. In the meantime, I know that some people regard tax credits as a trap and I remain wary. The tax credits system is a good idea in principle, but it clearly needs adjustment if it is to work for its intended recipients.
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