Wednesday, June 02, 2010

CGT - more welfare for the wealthy

 Is there any group in society more jealous of its privileges, more militant in defence of its perks, more determined to avoid paying tax than the ‘hard working’  British middle classes?  The howls of anguish at the proposal  to tax capital gains as income, part of the ConDem coalition agreement, illustrates how difficult it is to tackle what is called the middle class welfare state.  People who complain about welfare scroungers and benefits tourists see nothing morally wrong with avoiding  tax. 

     Taxation is complicated but this much is simple and straight forward.  For the last decade, under policies introduced by Labour, wealthy individuals have been allowed to avoid paying tax by declaring income as capital gains.  Instead of paying 50% on their earnings, they get to pay just 18%, and until two years ago, only 10%.   More than anything else, this made London the tax haven of choice for private equity capitalists the world over.  Come to Britain, said Labour, and pay less tax than your cleaner.  

   Brass plates appeared in discrete Mayfair streets, signaling the emergence of a new generation of asset strippers.   By buying companies, loading them with debt, and then selling them fast, venture capitalists found they could pay just 10% tax on their earnings.  It took a bit of jiggery pokery with the tax inspectors, but nothing that a good accountant couldn’t sort out - often with the active agreement of HM Revenue.  In those heady Labour days, there was a view in government that whatever financiers did was right, almost by definition. We wanted more rich people to come here, so Labour let them pay as little tax as they could get away with.  It was a morally corrosive approach to financial regulation which helped feed the bubble that popped so disastrously in 2008.

     And it wasn’t just the super-rich who benefited.  There was a boom in creative accountancy as tax experts showed how anyone who ran a business - right down to the single person companies in media, building and services - could start paying themselves in capital gains rather than boring old income, which had the misfortune of being taxed.  Buy-to-let boomed as word spread that amateur landlords’ gains were almost tax free.   Indeed, in the early years of this decade it appeared as if every middle class person in the country had a second home or two or three.  As the yields on private pensions dropped through the floor, thanks largely to the charges and commissions applied by the insurance companies who run pension funds,  the word went out through the dinner party tables of Britain.  There’s only one place to put your money: in bricks and mortar. As house prices boomed, we turned from a nation of shop-keepers to a nation of property speculators. 

    It had to end. It should have ended with the financial crash, but the government and the Bank of England leapt to the aid of the property market by slashing interest rates almost to zero and introducing schemes that allowed people to stop paying for mortgages they couldn’t afford without losing their homes.  As a result, property prices actually rose during the worst recession in 80 years.  This was economic insanity. What Britain needs is productive enterprise,  not property speculation; it needs capitalists who develop new goods and services and employ people,  not petty financiers making windfall gains from a property bubble.

    Anyone who worked for a living and paid income tax was made to feel pretty stupid in Labour’s bubble economy.   So is it any wonder that we have a shameless society where huge numbers of people are living on welfare?  The fish rots from the head.  Everyone wants a free lunch, a tax break. We go on about the Greeks, and how tax avoidance became a national sport there - well look around the middle class suburbs and you’ll see the same mentality. They like to style themselves as “prudent” savers looking to their retirement, but that begs the question of why they haven’t put their money into tax efficient pensions.   Anyway, real savers have been ruined by the property bubble because zero interest rates and high inflation mean that they are losing around 3-4% of their wealth every year.

    But the ones who pay the real penalty are the next generation - who have to pay the absurd property prices bequeathed by the housing bubble. They will find themselves in a form of debt peonage, forced to work to pay massive mortgages, university debts and private pension payments, now final salary pensions are a thing of the past. Those who can will leave the country taking their skills with  them; many of those who stay will feel they have to go into financial services to make ends meet.  But a society that lives by financial arbitrage is a society that has lost any sense of the value of things. 

   On Friday, David Cameron promised to turn Britain into a society that lives by enterprise rather than debt and speculation.  Well, if he’s serious he must make a stand on CGT.   The only thing wrong about the Liberal Democrats’ proposal is that it doesn’t go far enough.  If we want a sane property market, we should remove CGT exemption on first as well as second homes. Why should this one asset be given special treatment? Do that, and the housing crisis would be solved within five years. All housing would become affordable again as homes became places to live not pension providers.. 

    So, the CGT row is important: not just for the money lost to the public purse - almost as much as last week’s £6bn cuts programem - but because of what it says about us as a society.  The tax breaks on property, presided over by the banks,  helped pervert the UK economy and deprive it of productive energy. Speculation drives out economic creativity and turns active citizens into moral and economic parasites.  Tory backbenchers - many of them personal beneficiaries of the capital gainst tax dodge - have been pressing David Cameron to drop the idea, or introduce a “taper” so that after a few years the capital gainst rate falls to zero.    If Cameron gives in we will know that the coaltion is mere window dressing for an old-fashioned Tory party in hock to special interests.   This is more than just a tax issue: it is a test of the durability of the coalition and the society we want to live in.

2 comments:

Anonymous said...

Excellent article. As a person who worked for the Revenue for twenty five years the transformation of the tax system under first the Tories from 1979 and then with New Labour was quite something. When I joined the Revenue I think the top rate was 65% for the highest earners in the country. Thatcher got that down to a flat higher rate of 40%. The big winners were the rich, there was no doubt about it. The basic rate taxpayer - most of us - gained very little in comparison and anything we got the rich benefited from also so their rewards were great indeed.

But then in those days CGT rules were clear too, especially on "second homes" and the sale of such properties ; ) No "grey areas". Mind you CGT rules on second homes are still clear. It is simply one group - MPs - who are allowed to mess with them and this astounds me for the Revenue, now HMRC, indulges them in a manner I never saw anyone being indulged when it came to their tax liability. In my day if you sought to evade tax and you were caught you didn't just wave a wee cheque about for the tax due and smile sweetly: you had interest and penalties to pay too. You may even have faced jail.

And thank you for mentioning house prices Iain. For that alone is at the centre of the mess we have seen. This myth that sub-prime existed only on the other side of the Atlantic was exactly that: a myth. Sub-prime mortgages were doing very nicely in the UK thank you. As were insane mortgage products introduced to combat obscene house prices no one could afford on normal mortgage products. So we got "self-cert" mortgages, 135% mortgages and products which allowed people to borrow six and seven times their annual salaries. And now, after the crash, still I see various allegedly economy-wise people talking about how we must hope property prices will "recover". Recover? Have we still not got the message that inflated house prices got us to this place and that balance is needed in any economy that wishes to stay healthy?
Jo

RevStu said...

Blimey, Iain - if even professional journalists no longer know the difference between "discreet" and "discrete", there's truly no hope...