Mark Wadsworth: Scrapping pension relief for higher rate taxpayers could pay for income tax and NI cuts

Mark Wadsworth is a Chartered Tax Advisor. He blogs here.

The eternal fall back when people talk about pensions is that “We must encourage people to save” and give the matter little further thought apart from assuming that the only form of encouragement is tax breaks. It is, in fact, mathematically and logically impossible to improve people’s incomes in retirement by tweaking the tax system, and by and large it reduces it. A few salient facts (annual figures unless stated, figures for 2011-12 where available):

1. The total value of all the tax breaks for pensions saving are soaked up in fees and charges by the pensions industry

The total cost of income tax and National Insurance reliefs before netting off income tax withheld from pensions in payment is £51.9 billion (pdf) (total income tax withheld from pensions in payment is £8.4 billion) and the total value of fees and charges levied by the pensions is in the order of £50 billion. Thus all the tax breaks taken together do not increase the retirement incomes of pensions savers by one penny, and it is far cheaper to top-up the state pensions to the level of Iain Duncan Smith’s proposed Citizen Pension of around £150 per week.

2. Sixty per cent of the value of tax breaks for pensions saving accrue to higher rate taxpayers

In other words, if the value of the tax breaks were not siphoned off by the pensions industry, higher rate taxpayers would receive tax relief worth £30 billion. If the value of the relief were halved it would save £15 billion, more than enough to scrap the higher and additional rates of income tax. Using HMRC’s ready reckoner (pdf), this would only ‘cost’ £13.1 billion. In other words, higher and additional rate tax only have to be imposed to fund tax breaks for higher and additional rate taxpayers, the whole thing is a negative sum game. Please note, this would actually lead to regressive tax rates, because of National Insurance, so is not necessarily the best kind of tax reduction (see point 4).

Mark Wadsworth: A case for legalising cannabis

Mark Wadsworth is a Chartered Tax Advisor.  He blogs here.

Having spent a couple of hours reading and understanding the ACMD's report, it surprises me that cannabis was made illegal in the first place.

The public's concerns about cannabis are “real” in that they exist (see section 11) but the question must be, are those concerns justified? Or are they merely fuelled by misleading headlines such as 'Cannabis use linked to 40% rise in risk of schizophrenia'?

Mental health

The report confirms that the risk of 'psychotic outcomes' appears to be 41% higher in those who have used cannabis (8.7.1), even though... there are very considerable difficulties in establishing a 'cause and effect' relationship between the use of cannabis and the subsequent development of a psychotic illness.' (8.3).

Even assuming that the risk of a 'psychotic outcome' is doubled for frequent users (8.7.2), what are the overall risks? '€œSchizophrenia is a serious mental illness affecting about 0.5% of the UK population over the course of their lives.'€ (8.1.2). So, frequent use increases the risk from a negligible 1-in-200 to a still negligible 1-in-100.

Mark Wadsworth: Time to look at Land Value Tax?

Mark Wadsworth, a Chartered Tax Advisor, sets out the case for Land Value Tax. He wrote a paper for the Bow Group on the subject in 2006, and a subsequent article on ConservativeHome addressing concerns.

1. Land and location values

Before we look at economic theory or the existing tax system, it is best to look at the facts, for example a table published in the Daily Telegraph recently:

House prices are made up of the value of the bricks and mortar and the location value, which is broadly speaking, the value of the plot of land on which it is built. The cost/value of the bricks and mortar element of an average home is around four times a household's disposable income, so while the house price-to-income ratio has fluctuated between four and seven over the last half a century, the average value of a plot of land has ranged between a negligible amount and three times a household's disposable income over the same period.

Mark Wadsworth: Keep tax simple

Earlier today ConservativeHome posted a short account of Mark Wadsworth's proposals on tax reform.  The post produced a very negative response.  Mark has penned the following response...

I agree wholeheartedly with commentators such as the TaxPayers’ Alliance, who have explained how government spending is running out of control and what terrible value for money the taxpayer is getting – see for example the Bow Group’s report entitled “Stand And Deliver” of January 2004.

I am quite convinced that state spending can be cut back from 42% to 37% of GDP without cuts to “frontline services”, and possibly even beyond that. However, assuming that it will take at least one Parliament to cut back State spending to 2001 levels, my research is designed to show that 10,000 pages of tax legislation (and as much again for benefits and pensions) could be replaced by on a fiscally neutral basis with ten simple proposals such that few people are better or worse off overall. As State spending is cut back, the flat rate of income tax that I suggested would also come down.

Turning specifically to Land Value Tax (which is only one of ten proposals in the report - a pdf of which is here), my starting point was those taxes that relate primarily to property ownership, to wit:

Current receipts

Council Tax                                                £20.2 bn
less Council Tax Benefit                               £(3.6)bn
Stamp Duty Land Tax                                £4.9 bn
Inheritance Tax                                          £2.9 bn
TV licence fee (net of collection costs)     £2.5 bn
Capital gains tax                                        £1.1 bn

Total                                                          £28.0 bn

I have explained the (largely negative) impact of each individual tax in Proposal 5 of my full report. As far as I can see, the above taxes are nuisance taxes and stealth taxes, that, taken as a whole approximate to a Land Value Tax of 1% of the value of your home less an exempt amount for each household of around £70,000; the total tax raised by the new tax would also be around £28bn (depending on the precise rate and the precise value of the exempt band).

I believe that I answered most of the objections raised by ConservativeHome bloggers in my detailed report, specifically:

1. Owners of more expensive properties will of course pay more in LVT than they did in Council Tax and the TV licence fee, but this is not as unfair as it first sounds;

a. Higher earners will have a marginal income tax rate that is 3% lower (only the Guardian mentioned this point)
b. Higher earners will not have to pay tax on ANY capital gains (whether on shares or land and buildings) or dividend income (see Proposal 4).
c. Non-working spouses will be entitled to the BCB of £4,160 per annum and older pensioners will be entitled to a non-taxable Citizen’s Pension of £6,500 per annum, on top of any State Second Pension;
d. The additional LVT will just be IHT, CGT and SDLT in easily affordable instalments.

2. Pensioners will be allowed to roll up unpaid LVT with interest to be repaid on death/sale.

3. A working couple on average incomes will save around £2,500 income tax a year under my system (because of the more-than-doubled personal allowance), so even if they lived in a property now worth £600,000, the additional LVT and the income tax saved would be broadly equal.

4. Stamp Duty Land Tax is 4% of the sale price of valuable homes; this tax will also be scrapped.

5. Scrapping CGT on long-term investment properties and second homes will ensure more liquidity in the housing market; especially for owners of holiday and second homes who may have to pay higher LVT bills. It would be hypocritical to hit second-home owners with higher LVT and then discourage them from selling by charging CGT and SDLT as well.

6. As to Council Tax and local authorities’ tax raising powers, remember that Council Tax only forms one-fifth of local authority income; one-fifth is Business Rates and the rest is grants from Whitehall. Councils in the South East and South West (mainly Conservative or Lib Dem controlled) have the lowest spending per head but the highest council tax, because the Formula Grant is skewed dramatically in favour of Labour controlled councils.

7. If local authorities were to raise all their income from Council Tax, then Council Tax would have to increase four-fold; by the same token income tax could come down by 2% or so. If such a system were implemented, the impact on cash-rich income poor households (primarily pensioners) would be much more dramatic than under my proposals.

8. I do not think that the Lib Dems have trumped anything. ALTER have proposed a Land Value Tax but do not intend to scrap Inheritance Tax and rather than scrapping Capital Gains Tax the Lib Dems somehow hope that they can quadruple the revenues from Capital Gains Tax.

9. There is of course a danger that Labour will come back in and reintroduce Inheritance Tax; you will just have to make sure that they don’t!