Monday, 26 March 2012

Landlings and sea creatures

This is a post I've been meaning to write for quite a while now. I've been aware for some time that there seem to be two distinct groups of people in the world of politics and economics, who see the world in fundamentally different ways and don't really understand each other. It's as if one group are landlings, only secure when they have hard land under their feet and terrified of drowning in deep water, and the other group are sea creatures, happy floating in an unstructured, boundary-less medium but parched and shrivelled on dry land.

Today, I commented on an article in the Guardian. I agreed with some of  what the writer was saying, but was concerned about his factual errors and inaccurate statistics. This is not uncommon whenever I am reading articles by people of left-wing persuasion.  Forgive me: I do not mean to make a political point, and I do not intend this as criticism. But it seems to me that hard facts and figures don't sit well with many people whose political views are left of centre, and some who are more right-wing, too. So many times facts and figures are few and far between, and those that are used are poorly researched, maths is wrong, logical analysis is not followed through and anything complex is glossed over. These are my sea creatures. Whether their politics are left or right, their priorities are understanding human emotion, caring for people and for the planet, and "fairness". And to the extent that facts and figures interfere with these concerns, they may feel justified in ignoring them or adapting them to fit. Structure and accuracy is less important to them than emotion and belief: they do not need to anchor themselves to the rock of information, but can float freely in a sea of  philosophical and social constructs. And they are very uncomfortable with the dry, structured world of the landlings. To them, the landling obsession with facts & figures indicates that they don't care about people.

Anyway, I corrected the facts and supplied accurate statistics. I looked up and read the article by Eoin Clarke that the writer had referenced for one of his comments; I obtained figures from the OBR's Economic Forecast for the forecasted 50p tax take; I researched the recessions of 1980-81 and 1973-5. And I wrote my findings in a comment which I admit was fairly critical of the writer.  This is what landlings do, you see, when faced with something that looks decidedly watery. They anchor themselves to the information rocks so they don't get washed away by the tide of emotion and belief, and they develop thick shells to protect themselves from the sun and from the fierceness of the waves. Have you ever tried to prise a limpet off a rock? I have. It really isn't easy. So, many landlings hold rigid views, which may be seen as right-wing or extreme: they like mathematical models and they may prefer to see economics as a natural rather than behavioural science. They see people as essentially rational - well, as they are themselves. And they are very uncomfortable with the inconsistency, illogicality and emotional behaviour of the sea creatures. "Where are the facts? Where is the logic?" they cry.

Now this is the surprising bit, at least to sea creatures. The landling obsession with facts & figures doesn't mean they don't care about people. Generally, they do - just as much as the sea creatures. But their way of dealing with the world is through information and structure. And because of that, the conclusions they come to about the best way of dealing with problems in the world is likely to be entirely different from the conclusions that sea creatures reach. Both groups are after the same thing - the best outcome for people. But one group wants a watery, free-floating world, because that is where they are most comfortable, and the other group wants a world of hard dry land, because that is where they feel at home.

Needless to say, I was challenged. And what I was challenged on was my landling act. I suppose I should have expected it - this was the Guardian, after all, by far the most "watery" of the quality newspapers. The comment was typically sea-creature: he accused me of only being interested in statistics and caring nothing for human emotion, the care of the people of this planet or fairness. And he invented what he thought I believed, and even what he thought I had said. I suspect he decided, because of my criticism of an article that he liked, that I must be a Tory and therefore attributed to me the beliefs that he thinks Tories hold. This is not the first time that someone of sea-creature persuasion has attributed to me, on the basis of no evidence, beliefs that I do not hold. In fact the last time this happened I wrote an entire blog debunking what had been said about me.  And I have no doubt that I will be so challenged again. Because I like water, you see. Yes, when I write about banking and finance - and economics - I research my facts and figures and I do a very good landling act: these are dry subjects, after all. But I am drawn to the sea of emotions and beliefs, even though I may seem a stranger there.

Those of us who, like me, try to bridge the divide between these two groups can end up belonging nowhere. We cannot tolerate the drought and the two-dimensional nature of dry land, but when we are in water we need to feel solid ground under our feet. Many moons ago, I studied coastal ecology for my A-level Biology, and the strangeness of the intertidal zone and the creatures that inhabit it struck a chord with me. These creatures need to be bathed by the tide twice a day, or they shrivel and die, but they cling firmly to the rocks so that they are not washed out to sea. Perhaps that's why Holy Island (Lindisfarne), which I visit at Easter every year, appeals to me so much: this strange place is an island at high tide, but at low tide you can walk across on dry land. For someone who needs both sea and land, this seems an ideal place.

So I defended a creature of the intertidal zone. At least I think I did.  I justified my use of statistics, but I talked about people's lives. Perhaps my original comment was a tide-out comment, and my second comment was a "tide-on-the-turn" comment? And now I am writing this blog, which is definitely written from a "tide-in" place!

Tomorrow I go back to my day job, teaching singing to young people. And in that job, I need to bring together the scientific basis of singing technique, acoustics and musical theory, with human understanding and communication of the emotions contained in the songs that my students will sing. Music is a highly-structured discipline, but without emotion it is cold. So too with economics. A system of economics that has no place within it for human emotion and belief, and that cares nothing for the lives of people, is dead. But complete lack of structure and discipline, eschewing all mathematical models and rigorous analysis, is equally dangerous: the sea is an unpredictable and chaotic place, and without the information anchor we are at the mercy of freak tides and waves. For no-one lives entirely on dry land or in the water. Humans are partly, but not wholly rational: facts and figures tell part of, but not all, the story. Sea creatures and landlings need each other, for each has only half the world.

Saturday, 24 March 2012

Forestalling, tax avoidance and politics

This blog is my contribution to the debate about how much the 50p tax rate might have raised if it had ever got the chance, and how much in comparison the 45p tax rate could be expected to raise. And, of course, whether this has anything at all to do with the real reasons for tinkering with the top tax rates.

The Office of Budget Responsibility's (OBR) estimates of the tax receipts from both the 50p and 45p tax rate are on p. 111 in their Economic Forecast (pdf).

The table refers to "forestalling" about the 50p rate, and "reverse forestalling" about the 45p rate, and provides estimated figures for both. "Forestalling" means bringing forward income in anticipation of a future tax rise, and "reverse forestalling" is delaying income in anticipation of a future tax cut. Both the 50p and 45p rates were announced a year before their introduction. It is hardly surprising that people who are able to vary the times at which they receive income - typically, business owners receiving dividends from their businesses - will do so in order to reduce their tax bill.  So it is not surprising that HMRC's figures (pdf, p.31) suggest that £16-18bn of income from high earners was brought forward into the 2009-10 tax year, which is after the 50p rate was announced but before it was introduced. And similarly, we would expect that following the announcement of the 45p rate to be introduced in April 2013, those who can will delay their income receipts until after that date in order to benefit from the lower rate. We can therefore confidently predict that in the tax year about to commence (2012-13) the 50p rate will raise stuff all, and in the following tax year (2013-14) the 45p rate will raise an AWFUL lot. Of course we won't have real figures for these until, respectively, 2014 and 2015, since self-assessment tax returns don't have to be submitted until the following January after the tax year end. Remind me when that General Election will be, again? 2015, is it? Well, what a coincidence. I have no doubt that the Conservative Party will be proclaiming the success of the 45p rate, and attacking Labour's "high tax policies", as part of their election strategy.

But the forestalling effect is short-term. After all, you can only bring forward or defer so much income. What we really want to know is the long-term effect of these rates. And for that, we need to look at the OBR's original estimates and what it calls the "underlying impact" for the 50p rate, and its estimates for the 45p rate.

(original on p.111 of the OBR link above)

For the 50p rate, the OBR's figures for 2010-11 show the tax only raising £0.7bn against the OBR's original estimate of £2.5bn, a difference of £1.8bn. Both those figures assume zero forestalling. There are of course no actual figures for 2011-12 yet, because tax returns for that year aren't due in for several months yet. However, the OBR has helpfully provided estimates out to 2015-6 for the expected tax take from the 50p rate, which show the take remaining very similar - £0.6 to £0.8bn per year - and therefore a continuing and growing shortfall against the original estimates, which assumed that the tax take would increase. The IFS, in its commentary (pdf, p.13) on the 50p tax rate, noted that the model used to create these estimates was imprecise and the figures should therefore be taken with large amounts of salt. Richard Murphy argues that these figures are ridiculously low, that no-one could possibly avoid that much tax and that the OBR must be deliberately producing low estimates at the behest of the Chancellor, to support his political agenda. I wouldn't put that past Gideon, myself - although claiming that tax can't be avoided to that extent doesn't exactly support Murphy's case for tax reform, either.

But it's all academic now, anyway. We will never know exactly how much the 50p rate would have raised once forestalling effects had unwound, because it will be overtaken by reverse forestalling and other behavioural effects on the 45p rate.  The closest we will ever get to the real amount will be in the figures for 2011-12 that should be produced early in 2013 - but even those will probably still include some forestalling effects, as the OBR's estimates suggest. Beyond that the waters become much murkier. Murphy claims that the figures for 2011-12 will prove that his estimate of £6.7 bn for the real tax take from the 50p rate (excluding forestalling) is right. But his calculation that the real figure for 2010-11 is actually £5.7bn is simply wrong (see comments on his blog), and personally I can't see how £0.7bn can turn into £6.7bn in one year.

However, if the OBR figures are in any way reliable, they do indicate how easily high net worth individuals are able to avoid tax. The 50p rate should have raised a lot more - as the OBR's original estimates suggest. That it apparently falls so far short of expectations even after allowing for forestalling indicates that people have also found other ways of reducing or hiding their income. Some of those will of course be completely legitimate - such as spending more time on the golf course, or emigrating. But many will be exploiting quirks in the tax system that enable income to be diverted or hidden in a way that reduces the UK tax liability. Rather than reducing the rate, the obvious thing to do is to reduce the avoidance, by closing loopholes and clamping down on the use of service companies and offshoring.

Which is exactly what the government is proposing. But they are reducing the rate as well. I am slightly puzzled as to why they are doing this, because low though the estimates are for the 50p rate, they are at least positive. And why a cut of 5p? Why not eliminate the extra band completely? Mind you, on an income of £2m, a drop of 5p in your top rate of tax is a saving of considerably more than most people earn in a year, or for some people, in a lifetime - so what looks like a small cut, and therefore pointless, actually is much more significant both for the Treasury and for the individuals concerned. It looks to me like a massive political gamble: cut the top rate, in the hope of encouraging your high earners to stay in the UK and pay tax here, and hope that tax reforms will reduce avoidance enough to make up for any tax lost. Or, alternatively, clamp down on tax avoidance to try to increase your tax take, while cutting the top rate to encourage your high earners to remain in the UK even when they are stopped from reducing their tax bill through avoidance strategies.  After all, these high earners contribute more tax than anyone else (see chart on p.15 of the HMRC link above). We really don't want them to leave. 

In fact amid all the arguments about Laffer effects, tax avoidance and tax take, few people seem to have noticed the most obvious reason why the Government has chosen to reduce the top tax rate to 45p rather than either retaining the 50p rate or scrapping it completely. The chart on p.26 of the HMRC document already cited shows that the 50p top rate was the highest statutory tax rate in the G20. Reducing the rate to 45p moves the UK to about halfway down the list, lower than its European competitors and comparable with China. Presumably the idea is that this reduction will reduce the incentive for UK top earners to move elsewhere (though they could still move to low-tax jurisdictions such as Switzerland, of course) while still maintaining a higher tax take than scrapping the band completely would give.

So is this really about tax take? Or is it actually a move that supports the Government's stated aim to be an internationally competitive tax jurisdiction? Is it really a "gift to the rich", or is it a clumsy attempt to offset the effect of closing tax loopholes for the very rich, in the hopes of getting them to stay in the UK? I don't know. But to me the whole thing looks more political than financial. When is that General Election, again??

UPDATE 17th November 2013.

It's playing out exactly as I expected. Here, the ONS explains that bonus payments went up by 4% in April 2013 due to delayed payments of (mainly financial sector) bonuses to take advantage of new 45p tax rate:
"A number of businesses reported that they deferred some bonuses that would normally have been paid in March 2013 to April 2013. Thus, total bonus payments received across the whole economy during the period May 2012 to April 2013 was £38.6 billion; an increase of 4% compared with a year earlier."
And Conservative-supporting writers are crowing about the "increased tax take" from the 45p tax rate:

50p tax

No doubt this sharp increase in tax revenues will be claimed by the Conservatives as "evidence" that their tax cut raises more money than "Labour's 50p rate". But it is nothing of the kind. We will simply never know whether the 45p rate will raise more, or less, tax than the 50p rate would have done.