CinnabarRed's tax thread

Yes, it is true, but not as much as you might think. If you read the Eire tax code it's spookily familiar - and that's because huge chunks are lifted straight out of the UK legislation! So both countries have got similar tax bases.

Ask any questions you like. I'm delighted to be able to respond to some of the myths out there. There are some really important things that do need to be discussed and brought into the open, and it bugs me that the debate sometimes get clouded with non issues.

Well, I have to say that agree with some of Sachs's article. In particular:

• the increasing divide between the rich and the poor/middle classes
• the imperative for spending cuts while protecting the basic needs of the poor and vulnerable
• his conclusion that companies and individuals are increasingly mobile internationally
• his analysis of current US tax policy.

However, I disagree with his assertion (I can't see any supporting evidence) that corporation tax competition is driving a race to the bottom, caused by rich individuals and multinational companies threatening to leave high tax countries.

First, it's too simplistic to simply look at headline tax rate; you have to look at the base of profits to which the headline tax rate is applied too. I refer to this as the overall tax take, and it's a far fairer method of reviewing how competitive a particular jurisdiction is.

Secondly, it's not that multinational companies are threatening to leave the UK. They are leaving the UK, and in droves. In my view, what has happened over the past decade is that the UK tax base has steadily widened, and contemporaneous decreases in tax rate (from 33% to 30% and then 28%) have not compensated. But undoubtedly companies are putting their money where their mouth is; when such a strong message is being given it would be a foolish government that didn't listen.

Thirdly, in my professional job (advising governments on tax policy) I'm simply not seeing a race to the bottom. Quite the opposite. Instead considerable pressure is being put on low tax regimes to step into line with the international norm. For sure the most pressure is being put on the tax havens, but Switzerland and Ireland are getting their fair share of grief.

I do have a question in my mind over whether the Chancellor has gone too far back the other way. The reform to CFCs will definitely take some income out of the UK tax net (rightly, in my view) and I'm not entirely convinced that he also needed to reduce the tax rate from 28% to 23% as well. Time will tell.

Regarding Northern Ireland having a lower tax rate to the rest of the UK, I think it's bonkers.

It would only make sense if there was evidence that it would encourage new business from overseas into the UK. I don't think it would; I think it would simply divert profits from the rest of the UK to NI, and so throw money away. My evidence for this is the roughly 40% of Eire's tax take is paid by US parented groups; that's about the same figure as in the UK. Which suggests to my mind that we're already pretty much maxed out at inward investment.

Yup, I'm with you here Spidookly. It's interesting to note that the UK has the second highest wage multiple (i.e. the multiple by which the highest paid company director exceeds his/her company's average wage) in the World, behind only the US.

On a completely unrelated topic, I thought you might be interested in the evidence that Dave Hartnett, permanent secretary to the Treasury, gave to the Treasury Select Committee on 16th March in connection with the Vodafone case. DH is the most senior Revenue official in the UK, and used to run HMRC until a year or so ago.

He said: "...I thought I would construct the £6 billion [that some tax campaigners alleged was owed by Vodafone] for you, very quickly - how we think it was constructed and why we think it is simply wrong. The profits to which the £6 billion allegedly relates arose in Luxembourg from activities in Germany and Greece. The calculation is based on gross income, not on profit, so the calculation takes no account of non-taxable amounts -tax losses, overseas tax paid and all the things you would normally set off in getting to a tax liability. There are a lot of roundings and extrapolations in it, and there is no attempt at all to analyse the controlled foreign company legislation and look at exemptions. Our view [i.e. that of HMRC] is that the £6 billion is frankly - I hope this is not an inappropriate word-absurd, and that no serious or reputable practising accountant in this country, be it public sector or private sector, would be able to endorse it."

And here's another quote from Dave: "Small business in the UK makes up about 50% of the tax gap [the difference between the tax that should be collected and the tax that is collected]; big business makes up less than half of that. We have more evasion in small business than we do in big business. In fact I cannot remember - maybe if I went away for a couple of hours I could think of something - seeing a case of evasion in very big business in the recent past."

HMRC is investing £900m into their compliance effort and expect to raise £7bn for that investment. Of this, 5% is going to tackle avoidance by big business, 60% to tackle evasion and avoidance by small business, and 35% towards individuals.

Finally, talking about the size of the Tax Gap, Dave Hartness confirmed that HMRC estimate it to be £42bn. When questioned about the £120bn+ figures that some people bandy around, he said: "£120 billion proportionately is where Mexico would be. I don?t think we are Mexico."

Ah, yes that makes more sense.

But I come to the same conclusion - the market failure is that the investment banks are part of something bigger that is too important to fail (i.e. the retail banking system) so they don't truly bear their own risks.

The retail and investment banks need to be separated.

The last year for which I have a detailed breakdown of expenditure is 08/09. In that year, state pensions were £62.7bn. All other benefits combined were £67.3bn, so state pensions amounted to less than half of the benefits bill.

Total government spending across all departments was £620.7bn. So state pensions account to around 10% of all spending.

Personally, I'd prefer to cut quite a lot of other stuff before I started to reduce state pensions.

On bank salaries, let's start by separating out retail banking operations and investment banking operations. I don't think anyone thinks that retail banking staff in high street branches are overpaid? They earn around average wage. If you want to put your savings into a bank that doesn't overpay its employees then look for one without an investment banking division. How about the Co-operative Bank, that might not have investment banking?

Some investment bankers do earn megabucks (although their support staff don't, of course). Spidookly, you would be right to say that public opinion doesn't accept their salaries, but the general public isn't "the market" for employing investment bankers. That would be the other investment banks, private equity and hedge funds. Those are about the only other organisations that pay elite salaries. In my view, banker salaries will stay sky high for as long as the activities of the investment bankers earn more in profits than the investment banks pay out in salaries.

Now, you could certainly argue that the investment banks didn't make profits during the recession. (In fact, a handful did - Barclays Capital, for example.) In a free market, a number would have gone bust. The problem was that the investment banks are typically still owned by retail banks, and the retail banks couldn't be allowed to fail. There would have been complete meltdown if NatWest, say, had gone under.

I would force the banks to separate the ownership of the investment banking divisions from the retail divisions. It would make the retail parts more secure, and would mean that the investment parts would be forced to bear the risks that they take (rather than the taxpayers).

No, I agree the current level of cuts is too deep, too fast.

But when targeting cuts I wouldn't cut pensions, frankly. The state pension is paltry as it is.

Over-remunaration is tricky. Everyone gets paid what the market will bear. That's why footballers earn so much more than TV stars, for example. There are so few people with Frank Lampard's skills; there are several hundred who can do pretty much what Frank Skinner can do.

I think I'm going to write a separate post about why companies and individuals go offshore when I get a spare moment. There are all kinds of reasons, and all kinds of different types of offshore. Some definitely promote secrecy, but some don't.

Ooh, interesting question. I haven't thought about that before.

So, off the top of my head, no I think there will always be a need for production and consumption at some level. Things break (crockery and glasswear), or wear out (sofas) or get consumed by use (paper, ink), or aren't suitable for a new purpose you would otherwise put them to (clothes for DS won't be suitable for new baby DD).

It may not be at the level it is now. Apart from anything else, as we consume the World's resources at ever increasing rates, it becomes more and more likely that at some point our quality of life will start to get worse rather than improve.

So much we manufacture depends on oil, for a start. According to Material World on Radio 4, more than 200 different categories of product use oil in the manufacturing process (quite aside from the energy needed for manufacture).

Does that seem reasonable?

Oh, and may I ask nottirednow where you were redirected from?

Hi nottirednow.

There's a lot in your post. I'm going to start answering your individual points and hope they add up to a coherent reply.

"The structural deficit needs to be dealt with - and that involves dealing with the issues related to an aging population."

I agree that the structural deficit needs to be dealt with. I'm not sure I agree that it's due to an aging population. I think that it's as much to do with persistent overspending in the good years from Brown (i.e. we didn't put money aside for a rainy day in the boom, but instead increased public spending at a faster rate than tax revenues went up). I'm a left wing Keynesian when it comes to economics, but the whole point of Keynesian theory is that public sector spending should only prop up the economy when the private sector can't.

As well as rebalancing the economy in terms of industries (which I'll discuss below) we also need to rebalance in terms of private sector/public sector/consumer. Last week the independent Office of Budget Responsibility (OBR) forecast that household spending would rise by an average of 1.2% over each of the next three years. This is less than half the rate of growth seen in the decade before the credit crunch, when consumer spending was the most significant driver for growth.

Over the coming years consumer and government are likely to shrink as a share of the UK economy. Slower growth in consumer spending and an outright contraction in government spending are the symptoms of a rebalancing of UK growth. The government's hope is that much of the slack will be taken up by a revitalised private sector. The Chancellor's twin aims are to shrink the deficit and to raise rates of return on capital.

A higher return on capital increases the incentive for firms to expand, take on new people and invest. The good news is that corporate profitability has rebounded strongly in the last year. On average, profits for FTSE350 companies rose by 37% last year. Over the next three years, the OBR expects corporate profits to grow far faster than wages. This would spell a rise in companies' share of GDP and a decline in consumers' share of GDP.

The OBR is also forecasting a marked shift in activity towards exports and capital spending. Over the next three years the OBR expects exports and business investment to rise by an average of 8% a year - almost twice the pre-recessionary trend rate.

The latest jobs data offer some evidence of rebalancing in action. In the last year 132,000 job losses in the public sector have been more than offset by the creation of 428,000 jobs in the private sector. Rebalancing the UK economy means a desynchronised recovery, one in which the government and consumer spending take a back seat and the corporate sector thrives.

"This government have finally done something about that by increasing pension age but they are still devoting more attention to those of working age and imposing higher cuts on them. That is driven by ideology not economics."

The thing about the pensions time bomb, though, is that we're not paying out all that much to pensioners now (relative to tax income). So there's not much room for the Chancellor to manoeuvre when it comes to pensions - he can only make savings in areas where we're currently "overspending" - however you define that. The pensions time bomb is going to be a massive issue in 20 years, as the population ages and we have more people retire and fewer people working. But it's not a massive issue right now.

"We have a substantial number of unemployed young people in this country. The working population will increase if we postpone retirement and/or get young people into work. However there has to be work for them and they have to have appropriate training for it. The tories under Margaret Thatcher allowed a decling in manufacturing and permitted the heavy current reliance on the financial sector. Our education system fails to turn out enough employable young people."

I agree almost entirely. We really need to do something about youth unemployment. I do think that the announcement in the Budget about a massive (400%?) increase in apprenticeships and vocational training is the right way to go. I'm not really qualified to judge whether it's enough, but as a matter of common sense it's obvious to me that the number of graduates we're currently producing from our universities isn't matching what the economy needs.

FWIW, the part I don't agree with is that we're overreliant on financial services. As a sector, it's around the same size as manufacturing and smaller than oil and gas. FS and oil are the two sectors paying the majority of tax in the UK. But on the other hand there's no harm in promoting manufacturing and high tech industries, which the Chancellor did in the Budget.

"Finally the question - those with money often pay lower rates of tax than those on low incomes. This may be perfectly legal but is perceived as unjust and contributes to unrest in society. We allow a massive difference in remuneration between those engaged in financial services and others. This encourages the brightest and best into financial services. We also allow massive profits to be made from property transactions, with the profits being passed through various offshore accounts. I don't know how we deal with this - it is an international problem. Do you have any suggestions?"

As it happens, the main area where financial services employees make tax savings is by receiving remuneration in the form of shares rather than cash. Which are approved by HMRC and the government, on the grounds that it alings the interests of employees and shareholders.

The people who do take the piss are the private equity partners and hedge funds. This is because they receive their profits in the form of capital (taxable at 10% or less) rather than income (taxable at 50%). If I were the Chancellor I'd start taking a pop at them. Not enough to drive them offshore, but perhaps doubling their tax rate to 20%. I've said it before on this thread, but I really dislike the attitude of some private equity partners.

Property transactions aren't a big deal at the moment because of the depressed property market. The main reasons deals are structured offshore is to avoid stamp duty land tax. Stamp duty is a very odd tax, and one that is almost unique to the UK. Very, very few other countries have a tax on documents. Stampo duty raised a paltry £8bn last year (total tax take was £410bn) and I'd be inclined not to bother once the deficit's under control again.

Hi Scaryteacher. I've spoken to my expat tax specialist colleagues. They haven't heard anything about the changes in Belgium, but are contacting their opposite numbers in our Belgian practice.

Obviously I can't give you tax advice because I don't know enough about your circumstances. However the UK/Belgium double tax treaty does make it crystal clear that only the UK has taxing rights over income from HMG (which I assume makes up the majority of your income as couple). As your rental income doesn't make a profit and your other income is below the taxable threshold I'd hope that you won't suffer any additional taxation.

I'll keep my ear to the ground and let you know if I hear anything more.

All the best.

Oh, and the private sector won't touch evaders with a barge pole. The most we will do is tell evaders how to turn themselves in. In fact, we have a legal obligation to inform on evaders under anti-money laundering regulations and the Proceeds Of Crime Act.