Thursday, December 21, 2006


"The Times” Special Scrooge Prize

A couple of items caught my eye in last Saturday’s “Times”. The first was the award by “The Times Money” to Gordon Brown of “the Special Scrooge Prize” for performing a recent U-turn on alternatively secured pensions and putting the squeeze on holidaymakers by doubling air passenger duty. They added that the tax burden on individuals has also risen sharply. This year the figure is set to increase by 6% netting Mr Brown a windfall of £399.1 billion, which is 85% more than he received when he took office in 1997.

It is some time since I read “A Christmas Carol” but my recollection is that the point of Dickens’ Scrooge was that he was a miser with his own money and the three apparitions opened his heart so that he became generous. I’m not normally an apologist for Mr Brown but whatever else one may think about him Scrooge seems unfair. My recollection is that he instituted a Christmas party for disadvantaged children and has been one of the loudest voices in the government urging substantial increases in aid to the third world.

Miserly is also an odd description of his purported U-turn on alternatively secured pensions. What he has said is that if a person puts money into a pension scheme and claims tax relief for the contributions he must draw a pension at least from age 75, the amount of the pension he takes must be at least 65% of the pension that the fund warrants, and he cannot take a small pension and when he dies expect his pension fund to pass for the benefit of relatives free of inheritance tax. That does not seem miserly to me. It seems commonsense. Mr Brown originally introduced the concept of alternatively secured pensions to recognise that in the past the religious sensitivities of some citizens prevented them from entering into pension schemes as the old approved schemes required the purchase of an annuity, which such people regarded as a form of gambling. To find a way to enable such people to provide for their retirement in a tax efficient manner like anyone else was surely an act of generosity not miserliness. Of course Mr Brown could be accused of naivety for not realising that people without such religious scruples would abuse the tax relief for pension funds by seeking to claim tax relief on pension contributions, not with the intention of taking a pension but with the intention of avoiding inheritance tax. I find it odd that The Times should regard measures to eliminate such abuse and achieve his original benevolent objective as a U-turn. It seems the precise opposite to me; a measure to remove from the road those who sought to bypass its intended destination.

I find it equally hard to regard an extra tax charge of £5 on a flight to most European Countries and £20 on a flight to a further off destination as putting the squeeze on holidaymakers. That seems to me so small that I am sceptical whether it will achieve its objective of making people stop and think whether in the light of global warming they ought to fly.

As far as the tax burden is concerned, in 1996/97 the standard income tax personal allowance was £3,765 and tax was charged at 20% on the next £3,900 of income, 24% on the next £21,600 and 40% thereafter, which meant that an individual paid £5,964 tax on his first £29,400 of earnings and 40% on any excess. In 2006/07 the personal allowance is £5,035 and tax is charged at 10% on the next £2,150 of income, 22% on the next £31,150 and 40% thereafter, which means that an individual pays £7,068 of tax on his first £38,335 of earnings and 40% thereafter. An individual earning £38,335 in 1995/96 and having the same income today pays £2,470 less tax than the £9,538 he paid in 1995/96. The RPI in March 1995 was 147.5 as compared with 195.00 at March 2006. A person earning £38,335 today whose earnings increased with inflation would therefore have been earning £28,996 in 1995 on which he would have paid tax of £5,867 so his tax bill has gone up by £1,201 because his earnings have increased by £9,349, i.e. he pays an extra 12.85% tax on each extra pound that inflation has given him. There are roughly 30 million taxpayers so an extra £1,200 from each accounts for only a tiny proportion of The Times 399.1bn windfall. Logically the rest of the “windfall” must either be because as a country either we are earning more or more of us are in work or a mixture of the two, not because Mr Brown has acted miserly.

Another curiously is that the pre- Budget Report says that income tax is estimated to raise £146.1bn in 2006/07 and total taxes (including council tax) are estimated to be £487.1bn (including £88.5bn National Insurance). A windfall of £399.1bn would mean that total taxes in 1995/96 raised only around £90bn, which seems somewhat unlikely. A windfall of that size from tax on individuals would mean that in1995/96 many of us received very substantial tax repayments. Funny, I don’t remember that world!

I will save the second item for another day.


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10:46 pm  

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