CinnabarRed's tax thread

[CinnabarRed]

This may be an act of supreme arrogance on my part - if so, I apologise profusely! But it seems that a lot of people have got questions about tax policy and the morality of taxation, which is my professional field.

So this thread is your chance to ask me any questions you have in this general area. I promise to explain what I know, be honest and clear when I don't know the answer, and distinguish between facts (for which I will provide a reference) and my opinion.

So over to you! I'll be back in the morning to answer any questions posted tonight.

PS: I won't be providing taxation advice to anyone!

I know this is a bit of an old thread but it is still fascinating. Thanks so much Cinnabar (if you are still about) for bothering to post at such length.

What I'd love to know is how the Govt are going to get around the principal of individual taxation when removing cb from hr tax payers.

Dh higher rate; I don't work as we are abroad. Still get UK cb as Forces exempt from not being able to get it if abroad. I get the cb not dh, and I have no taxable income, so am basic rate. I could declare it on my return, but don't have to, as it isn't taxed. Dh doesn't declare it, because he doesn't get it. We should not be linked on any data base, as we have never claimed means tested benefit.

ScaryTeacher - excellent question. I very much doubt anyone in government has given your kind of situation much thought.

However, the main criticisms of the CB changes are based around the issue you've outlined. If one member of a household is a higher rate tax payer then the family won't get CB. But if both are each earning £1 less than the higher rate threshold then the family still gets CB. which completely flies in the face of individual taxation (and is grossly unfair).

What an amazing thread - thanks Cinnabar - it's well worth being resurrected. So, was wondering if you were still answering money-type questions? Will be content with a if you're not...

What I've wondered a lot is why bankers get paid so much. No, seriously...

I work in IT. It's a skilled profession and you can earn up to about £100K if you're good and you work for the right place. But the market won't bear anything beyond that. Any company paying even its most skilled IT guys £500K (say) would quickly go out of business due to competition from leaner operations.

So why are banks different? Why doesn't competition drive down wages? Why doesn't "Asda investment bank" open, paying it's top staff £200K instead of £2 million, undercutting the others by miles, and delivering better value to its customers? It happens in almost every other market - so why not in banking?

Yay, I love this thread!

Cinnabar, will HMRC just use address matching to see which taxpayers are in a household for Child Benefit purposes? Or will it be a new question on the tax return, do you think?

Still happy to answer questions but have three children under the age of 5, none of whom are sleeping - give me a few days!

Ooh, poor you!

Sweet - I don't think they can link addresses, see my query further up. Dh and I have different tax offices, and as we have independent taxation, our tax affairs should under data protection, not be linked in any way.

How will they phrase any new question anyway? Dh can't on his return tick that he receives cb, as I get it (albeit into joint a/c, but before we moved, was paid at the PO in my name, as I wanted to support our rural PO). Under the principle of independent taxation, he could know nothing about my tax affairs, whilst I could know nothing about his, and we each could do our own returns. We could in theory, have entirely separate finances.

If they want to reverse this, then they have to make the tax free allowances transferable imo, which would probably negate any cb savings they would make. Certainly, £6k plus transferred to dh (my allowance in full) is worth more than the cb and my tax refund from GCSE examining every year.

Thanks, scaryteacher. I agree that I don't put anything on my tax return identifying DH, who has a different surname (though I might've ticked a 'Married' box). We may well have different tax offices, no idea!

But don't tax credits work on the basis of household rather than individual income - if so, maybe there will be a separate form to fill out to claim CB rather than it being given 'by default' as before. I guess this form would have to have a line for each adult in the household and if any was above HRT, the claim would fail?

Is Osborne's plan to more-or-less rely on people opting to declare if their household gets CB?

It'll be interesting to see how this is dealt with; as we have independent taxation, how will they check if people do NOT opt to tell them that they have cb? Even if it were to be included as dh's income and not mine, and we got taxed on it, it would still be worth paying the tax, as we would be still be getting 60% of the cb. If it had to be declared as my income, I don't pay tax.

I don't think the idea is to make it taxable at HRT rate - I think it would be taxed at 100%. I think they will ask people to opt out voluntarily before the start of the year - which is what they would prefer from a cashflow basis, of course - but if not, it would have to be through tax.

I still don't know how (or if) they would cross-check though, especially in your circumstances, scaryteacher!

It's not how they'll check Sweet, it's how they frame the legislation to allow them to do so, without compromising the principle of independent taxation, infringing the Data Protection Act, and my right to have my details and income private from dh.

It was also the bollocks about someone on £20k funding CB for a higher rate payer. Higher rate payers by definition fund their own cb through their tax and fund the benefits for others too. Higher rate payers pay more tax, and why no one said that to the Chancellor beats me.

Hmm, interesting. They will ask you when you apply I suppose if anyone in your household pays HRT, but what the comeback would be if you ticked "no" and argued that you didn't know what your DH / DW earned, and what they'd do to check, I don't know.

If you already have it, then are we all being asked to reapply? I think they'll work out it will cost too much to implement initially and wait til the UC is launched, and then everyone reapplies.

Don't forget that independent taxation is a very new thing - the married couples allowance was only phased out a decade or so ago. There's nothing sacred about the basic concept. (Indeed there are still some tax advantages available to spouses/civil partners, such as tax-free asset transfers.) And HMRC have invested huge sums to co-ordinate their various IT systems so it will be easier for them to cross-reference information(remember the outcry about historic PAYE codings last year? That was part of the same project).

I reckon there will be a new section on each tax return asking if a member of the household claims CB and if so to provide their NIC number. It doesn't need to be any more sophisticated than that.

And lying about it would, of course, be criminal fraud...

Definitely not planning to lie about it!! Just interested in the technicalities of how it will work

latebreakfast - bankers can expect huge amounts of money because they are magicians. They make and lose money by playing about with money. They have virtually no connection to the real, physical world and what earnt the money in the first place and therefore don't feel they have to follow its rules. Unfortunately, they thought they were clever, mathematically minded magicians but it turns out that if you start out with nothing concrete, you end up with nothing concrete, even if you are a magician. And the effect of all the money magic is to cause the physical world to disintegrate.

Latebiscuit - here are my initial thoughts on why bankers are paid the amounts they are, although it's still a work in progress and I may add to it/revise it in due course. Way back when I first started working in tax I did in fact do a small amount of remuneration benchmarking, so I'm dredging up old knowledge here.

Very broadly, the value of any macro-economic transaction, including pay negotiations, is determined by supply and demand. If demand is greater than supply then the value (wages) go up; if supply is greater than demand then the value goes down.

That's why footballers are paid a fortune - there are very, very few people in the world with the necessary skills to score goals for Manchester United say. And it's why even quite well known TV actors are paid surprisingly little - loads of people want to be actors and many of them have the skills to recite lines successfully. It's also why the length of training required to perform a job affects how much it's paid - because long training reduces supply of qualified staff.

The demand element is made up of two subsets - demand for someone (anyone) with the right skill set to fill the post, and demand for a specific person to fill the post, perhaps because s/he has skills sufficiently above the norm that they are worth paying a premium. That's why the elite of TV and film can earn megabucks - Jonathan Ross brings skills (and hence viewers) to his chat shows that others just can't.

The wages that a specific job commands also depends on what are sometimes called hygiene factors. Jobs which require unsocial hours or unpleasant physical conditions generally command more than 9-5 jobs in nice warm offices - think of dustbin men, for example.

What doesn't affect wages is how "valuable" a job is to society. Footballers will always be paid more than teachers or nurses.

Turning to bankers specifically.

First, there are very few people with the necessary atributes to be a banker -intellectual capacity, speed of reaction, ability to cope with extremely high stress - and not all of those with the right attributes actually want to be bankers. That means that the supply of suitable people is very low.

Secondly, bankers, and traders in particular, can make fortunes for their employers in a matter of days through speculation or deals. And so demand is very high. (You could argue, of course, that demand shouldn't be so high, that banks should forgoe profits earned through certain behaviours that society deems unacceptably risky or otherwise immoral, but that's an entirely separate argument - one that Rabbitstew raises above.)

Thirdly, the job is incredibly high stress and involves hellishly long hours, which means that hygiene factors also come into play.

Fourthly, and this point is my opinion rather than demostrable fact, I suspect that the "jobs for the boys" culture also inflates wages because it prevents challenge of the status quo, and hence change.

Hope that all makes sense. Happy to be challenged on my logic by anyone interested!

Of course, footballers never used to be paid much at all, even though football has always been popular.

Cinnabar - I broadly agree with your last post.

However, an interesting piece of recent research highlighted by Gillian Tett at the FT suggest that City banker pay has not always been high.

According to the research paper she cited it was very high as a comparison to other jobs with similar skill levels back in 1929. It took almost the whole of the 1930s for them to fall back to the pay levels of other similar jobs and then stayed there at that level until the 1980s when they started their inexorable rise to the stratospheric level they are now.

As it happens City pay has now started falling again and the research paper suggest that it may well fall back to normal levels. Indeed footballers also used to be paid quite normal levels of pay compared to other manual workers - so maybe they will also suffer a similar fate.

I certainly think society has had enough and your point "banks... should forgoe profits earned through certain behaviours that society deems unacceptably risky or otherwise immoral," will happen. The way it will happen and is already happening is society will demand banks hold far more capital against their risky trading operations and hence the banks' ability to earn such huge profits in boom periods (and catastrophic losses in busts) will be much more limited and hence banker pay will fall over time as profits fall.

MoreBeta - I agree. I'm also very much in favour of ringfencing trading operations from retail banking operations. I see no reason why retail banking - which is the business that's too big to fail - should provide uneconomically cheap finace to the trading operations.

Regarding historic fluctuations in relative pay, that's very interesting. I would guess that the link is between bank wages and bank profits, but would need to think a bit more and see more data.

'I reckon there will be a new section on each tax return asking if a member of the household claims CB and if so to provide their NIC number. It doesn't need to be any more sophisticated than that.'

One could put yes, but how would dh know my NIC number if I didn't tell him? It's none of his business, and the fact remains that many married couples keep their financial affairs entirely separate and may not wish their spouse to know this info.

I suspect point 4 has an awful lot to do with it. Points 1 and 2 would only justify a few hundred thousand at most, for those who actually took responsibility for anyone other than themselves. As for point 3, they should be treated like the gamblers that they are if they expect huge rewards for their successes, and accept personal ruin for their mistakes. And if they don't like that idea, then they should be so greedy in times of luck.

or even, should NOT be so greedy in times of luck!... (referring to CinabarRed's post on bankers' pay, of course...).