27 Apr 2012, 6:16pm
personal finance rant:
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  • Tax, Early Retirement and the Laffer curve

    Warning. This is a rant. It lacks charity and the milk of human kindness. This sort of thing happens when you discover other people spend more of your income than you do…

    I received what is probably the last P60 form I will get. This is a form that states earnings and tax paid over the year 2011/12 up to the 5th April. I learned that I paid more in tax and National Insurance this year than I have been living on. To the tune of 60-100% more. That’s right. If I retain my car in the coming year I will have paid 2/3 more tax as I am living on. If I don’t keep the car it will be 100%; I will have paid two years’ worth of running costs, in tax. For some strange reason that really pissed me off. It’s not even as if there is any 40% tax in there, FFS!

    How the P60 looks to an Ermine

    I’m really, really, sick of paying for other people’s children’s private school education and the general benefits culture. And I’ve done my bit for society, I paid too much 40% tax before discovering how to avoid it and turn it into something that works for me using AVCs.

    I used to think it was only swivel-eyed nut-jobs that talk about the Laffer curve. Either I have become one of those swivel-eyed nut-jobs, or the Laffer curve swings dramatically to the left for people of independent means.  For the benefit of any of the real nut-jobs Laffer never said that you increase tax revenue if you cut taxes. He merely said in some cases you do. I have never paid 50/45% tax, and never been near. As a retiree I will be a 20% taxpayer, but nowhere near the 40% tax rate unless it keeps coming down.

    The idea of the Laffer curve is if you tax people too much, and they give up and work fewer hours or retire early. Well, Q.E.D. in my case perhaps. Tax too little and you obviously get nothing at the limit case of a 0% tax rate, tax at 100% and everyone will be on benefits, so it is postulated that there is a optimum point, where Government realises the highest revenue. The French finance minister Jean-Baptist Colbert put it far more elegantly in the 17th century

    The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing

    I’ve been plucked enough, thanks. I will never get any benefits*, because most are means tested on capital assets. I’d be lucky if I get my State pension in 16 years’ time, because no doubt that will be means tested by then.

    an Ermine is not a Goose and he doesn’t like his fur plucked…

    I am already over the tax threshold if I take my pension, indeed some of the incentive to take it early and use investments to make up the actuarial reduction is to slow the invisible hand of the thieving barstewards of the government getting their mitts on more of it. I’m seriously looking at using a VCT to lose enough to get below the tax threshold if I have a desire to earn money in future. A VCT is to be looked at more like a lottery ticket rather than an investment, however, one discounted by 30% tax saving.

    The reason is I want to be able to play with microfinance and dabble with various ways of making small amounts of money, little bits of writing and perhaps the odd bespoke electronic gizmo, if there is a business case in the horrendous regulatory burden of CE marks, RoHS and testing that’s arisen since I last manufactured electronics for sale. It’s probably not going to be a big part of my life, but I want to see if there is some entrepreneurial streak in this salaryman.

    However, I can’t relate to giving up 20% of a lousy £100 earned that way, it would just really piss me off, and most of the ideas I have are non-physical things like writing and software, where you can’t write any input costs off to tax, they are the pure product of mind. I’m not going to rack my brains writing for the frickin’ government to pay for Ray’s Sky TV, thanks all the same. Unless it’s successful enough that I’m earning £2000 or more, in which case I guess I am no longer retired.

    Now if I can’t drop my taxable income so I can capture 100% of the fruit of my micro labour then sod it, I’ll not bother, I don’t need to earn money through working, and I don’t have a Calvinist world-view that work is good for the soul. Ian Duncan Smith can stick his work till 70 right where the sun don’t shine in my view.

    I am actually prepared to throw away the excess over the tax threshold, in VCT lottery tickets, or in paying an accountant to find a way for me to buy trees or some other slow-paying capital asset to write off as an input cost. Part of the problem is I have never been a sole trader, my previous non-employment forays were as a limited company which precludes lowering one’s personal income thereby reducing tax liability.

    The endless fight over the last three years to keep the thieving hands of the taxman off more of my earnings has highlighted just how much of my lifetime earnings disappeared in tax, and I just don’t want to feed the Beast any more. I’ve done my share over the last 30 years and that’s fine. In the unlikely event that I do get a State Pension they will no doubt be back for more tax. Until then, back off, guys.

    Don’t come away from this thinking I would have benefitted from Osborne’s tax cuts – I am not even in the top fifth of the UK income distribution, though for some reason I am further up the UK wealth distribution.

    I didn’t inherit that wealth. I am further up the wealth distribution than I was up the income distribution for two reasons

    • I am an old git at the end of my working life and
    • over those 30 years I didn’t buy more consumer shit than my salary could bear. I spent less than I earned.

    The difference between what I spent and what I earned is my accumulated wealth. I paid taxes on earning it. Unlike disciples of Ayn Rand, I don’t have too much of a problem with that. In the end I have no desire to enter the fear and loathing that is the US healthcare system, and the history of the privatised services show some services are better done in the public sector. Our water supply and railways were all more reliable in my experience before privatisation. The old Water Boards actually built reservoirs in the 1970s in response to droughts, and though the food was rotten, you didn’t have to raise a small mortgage to travel by train in the 1970s, and you could establish what the price of a ticket was a straight function of destination and timing, rather than the byzantine mess it is now.

    But what I do have is a problem with being taxed after I have taken major steps to pay my own way. I probably won’t get a State Pension because the buggers will means test it and conveniently ignore my 30 years plus of NI contributions.

    In theory I could claim tax credits or Universal Credit. If the government pisses me off so much I will do just that, just to get my own money back. It really is bizarre that I could be entitled to benefits just for watching the TV all day. What the hell is the point of me paying tax, and then going to the Labour Exchange and claiming the same money back? Where on earth is the sense in that, it’s a waste of my time and the DHSS’s time. This is all part of the anomaly of having a low starting tax threshold, and an outrageously low starting NI threshold.

    I’m not saying all tax is bad, and my 30 years of it should entitle me to the benefits of the NHS, and returned my debts to society in terms of schools etc. But when it’s getting to the feeling that I have no wish to use my modest talents to create wealth because of the Beast on my back then something is deeply wrong.

    This is the counterbalance of bollocks like this, and it damages the UK economy when people who can create things and ideas choose not to. Somebody might want one of my telemetry systems, and if they pay me for it I might spend the payment on crisps and beer, and it would presumably reduce their business costs or allow them to do something they couldn’t otherwise do. Likewise if I interest someone with my writing and it makes me money. If we want to keep a relatively high level of benefits then a high level of taxation is needed to service it, and some people get to write intemperate rants like this rather than working out how to make useful goods and services.

    Benefits are there to compensate for transient economic discomfiture caused by losing your job, and also to collectively support those amongst us who for reasons fo physical or mental incapacity can’t work. What seems to have happened is the benefits blanket has widened to encompass those who won’t work, or support lifestyle choices that are beyond their means.

    Don’t get me wrong. If I could live in a world where the Fairness Fairy waved her magic wand and we all got to live the lifestyles we wanted to without reducing other people’s quality of life by taxing the crap out of them, I’d be all for it. In the 1970s I was told that we wouldn’t need to work more than two or three days a week and would struggle to find what to do with our leisure time. Unfortunately what happened was that people invented things like iPads and mobile phones, bottled water and Sky TV, so everyone feels they need to spend more money to pay for all these things. Not only that, but half of the promise came true – the world of work only needs about half of the number of people that want to buy all these things.

    Thus we have the tragedy of there being jobs for about 60% of the people who want them, but these jobs demand a higher level of skill than many of the potential candidates. However, until recently we believed enough wealth was created in the economy that we could pay a lot of the 40% either middle-class pay by inflating the number of jobs in Government, or a acceptable working-class standard of living in benefits, particularly if they had children or if they claimed to be incapacitated. Only in the last five years did we discover a lot of that wealth was borrowed money.

    The losers from this policy are spread across society. The young in general seem to be getting the short end of the stick as the world they expected to move into has been suddenly hammered. The truly incapacitated also take the shaft, because they get lost in the noise of the numerous malingerers cluttering up the system. Those who have built unsustainable lifestyles on the benefits teat are also going to be mightily dischuffed when the gravy train starts to dry up.

    Addendum – The Ermine gets an upside for baring his needle-sharp teeth in the mirror!

    One of the benefits of writing the first draft of this intemperate rant a week or so ago was that the whole concept of paying too much tax even as a retiree pissed me off so much I reinvestigated the technical reasons that made me believe I had to draw my pension immediately on leaving The Firm, to get a Sharesave scheme that was particularly advantageous. I discovered that the technical reasons ceased to apply to me earlier this month, and since I am still on the payroll I can defer my pension and still get Sharesave.

    Since I can only get £10k a year into a S&S ISA there’s no point in liberating my pension commencement lump sum early and then stressing how can I invest a cash lump sum so it doesn’t get destroyed by inflation. The Firm’s AVC cash fund is good enough 1, and tax-free. So I don’t need to become a basic rate taxpayer, and I may now consider doing some of those microfinance jobs because I will be so income-poor I won’t pay tax on them. As well as that, an additional benefit is each year I don’t draw my pension it goes up by 5% (because the reduction due to early retirement is less), though since I will be a 20% taxpayer on it the increase is in reality only 4%. It’s not easy to get that sort of return on cash at the moment.

    There’s also a more indirect business case for delaying my pension for a few years, also due to the distorting effect of taxation. There is an ambition to lift the UK tax threshold from its current £8000 to £10000 over the next three years. Saving 20% of £2000 is £400 worth of tax I don’t have to pay, adding up to £1200 over the next three years. It isn’t a lot of money, but I am sure I can spend it better than the Government, and it compensates me a bit for not having the utility of the money now. I also don’t need to buy expensive VCT lottery tickets until I can get my head around the issues. And I have more years to sling the redundancy money into ISAs before I have to work out how to invest my pension commencement lump sum.

     

    *That paragraph was written before I discovered I can defer my pension, which opens up more opportunities. I may well claim working tax credits, if you can’t beat the buggers, join ’em… In which case the statement I’ll never get my go at the benefits teat won’t hold. I still won’t build a lifestyle on the extra money, though. I’ve seen what happens to people that do that and it ain’t pretty.

    Notes:

    1. addendum to the addendum Sep ’12 it used to be, but since changed adversely
    16 Oct 2010, 11:38am
    economy:
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  • child benefit, the law of unintended consequences

    You know how it is, sometimes, when you have to let the heart of darkness shine through. This is one of those times…

    One of the comments made me think, as they should 🙂 on my careless use of Gore Vidal’s comment

    it is not enought to succeed, others must fail

    in my post on entering a family-unfriendly economic system

    I’m not actually that mean. I don’t take any particular pleasure in seeing others take the shaft here, and I don’t expect to gain from the withdrawal of CB from the better off. It’s not like I suddenly expect to get a non-child benefit, and somehow I don’t expect any tax cuts to happen while I am still working 😉

    However, I do wonder if Labour’s approach of trying to eliminate child poverty by slinging cash around didn’t have some pretty ropey results that we are going to have to live with for a long time.

    What’s that again – how can any right-thinking person be against an attempt to reduce child poverty?

    I can. And before I get hammered for being a mean and nasty child-hating SOB who wants children to be poor, it may be necessary to point out that not being for something doesn’t necessarily mean I am for the converse. If you are not intellectually up to understanding that, please read no further!

    There are some things that are assumed to be good regardless. A reduction if poverty is always good, natch? What kind of mean-spirited git must this guy be, does he want to see the workhouse and children sweeping the chimneys?

    Well, get this.

    the government’s target of halving child poverty by 2010 is defined in terms of relative poverty. [1]

    Now that, I do have a problem with. The trouble with relative poverty is this (from the same reference)

    The reason that we believe that relative poverty is important is because we believe that no one should live with “resources that are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities.

    I didn’t realise that Labour had changed the definition of poverty to this. (oops, they didn’t change it at all. My bad, see SG’s comment and BBC reference below) and To me child poverty means being cold, not having enough to eat, being deprived of emotional connection. It doesn’t mean not having a mobile phone or a games console.

    The problem here is that I believe there is more variation in intellectual talents, drive and capability that can be encompassed by the spread which is inherent in the definition living in a household with less than 60% of the median income.

    Don’t get me wrong – if there were an easy way to prevent this happening (ie households spending < £100 a week excluding housing costs) I’d say go for it. It is when it has the result of bankrupting the country

    that I start to think it’s gone too far.

    There are other things that are wrong with this sort of social engineering. When I was at school, the average number of children per household was 2.4. Most people think it’s the poor that have all the kids, but there is some economic effect on people’s decision of how many children to have. It first struck me when I started at my current company, at the callow age of 28, just how many people there were there with three children, and in some cases four or five. These were people who were reasonably well-off at the time.

    For more recent examples,  David and Samantha Cameron have three children. Nick Clegg and his wife have three sons. Ed Miliband has two, the Browns had three kids, the Blairs had three. I’ve chosen politicians because this information is easy to get hold of, but it shows having larger than usual families isn’t just something the poor do. I would say that where there is more money around, people have more kids than the replacement norm of two, just not the crazy numbers we associated with the Victorian poor.

    And so finally I reveal my heart of darkness. If poverty is measured relatively, why did we throw money at people who have poor prospects so they could have more children than their economic situation permitted?

    Relative poverty isn’t about putting food on people’s plates, or heating their homes. It is so that they can live the typical lifestyle people are accustomed to. Child poverty is about having a mobile phone and being able to go on school trips these days.

    Let’s take a moment to think about this for a moment. My parents didn’t have a television set when I was a child. Does than mean they were poor? I don’t have a mobile phone personally. Does that mean I am poor? No. My parents, and I, think for ourselves, and we choose not to spend money on things that other people regard as essential needs…

    Benefits are about securing the bottom two of Maslow’s hierarchy of needs. When we drift into the upper reaches we run the risk of distorting behaviour. These children will continue to have poor prospects, all other things being equal. Having children isn’t the sort of thing that improves your economic situation in industrial economies. Once poverty in terms of the lowest parts of Maslow’s needs have been addressed, it becomes devilishly hard to address the others. Everybody has a mobile phone and Playstation? There’ll be a new set of consumer thneeds that the kids will think they need. And so on and so on.

    So by sponsoring the poor to have children, we are actually damning more children to poverty. These are children that wouldn’t exist were it not for the distorting effects of well-meaning efforts to reduce child poverty. The reason for this is that social mobility has dropped in Britian from a high-water mark in the late 1960s.

    Why has social mobility dropped in Britain? According to Blanden et al this is because of the right cods that we have made of university education because we couldn’t man up to the task of telling some of the little darlings that their classmates were brighter than them. So we make the exams tell everybody they are great, and tell wannabe university students that of course there is equality of opportunity, as long as they can pay about £65k for the fees. Then we wonder why for some reason there are fewer kids from poor backgrounds going to university. D’oh, perhaps the reason is they can’t find the money?

    So all that, in a roundabout way, is why I’m asserting that the result of efforts to attack child poverty by paying the poor to have more children than they can afford may result in more child poverty in the future, as the poverty echoes down the generations. Perhaps we should have been smart here and only sponsored the first, or first and second child.

    I can relate to addressing child poverty in terms of food, heating etc. But in terms of relative poverty, then what on earth does success look like?Is there a standard kit of consumer goodies children should have not to feel left out? Do we take the rich kids’ toys away and give them to the poor kids? Oh, and shouldn’t we have asked ourselves what success looks like before we embarked on this journey, anyway?

    There’s a separate argument about whether we as a society want people to have more kids rather than, say, importing people for the workforce. However, if that is the issue, then we want to sponsor rich people to have kids, because they will push them and help them educationally. We’ve actually been doing that for a while, and have only just recently announced that we want to stop. Perhaps we are going about this all the wrong way.

    We really need to have the courage and honesty to ask ourselves what it is that all this social engineering is aiming to do, rather than starting out with a muddle-headed goal like eliminating relative child poverty. If we want bright kids to become the dynamic knowledge workforce that will drive Britain into the 21st century, then we first need to fix the education system so we can distinguish the bright kids, and we probably wouldn’t go about it by sponsoring the people to have children that we’ve been sponsoring for the last 10 years… If their kids are bright we’ve queered the pitch for them educationally so they can’t afford to get ahead anyway.

    It doesn’t greatly upset me to be 4% poorer to do this sponsoring. But it does upset me that we don’t seem to know why we are doing it, we have chosen a metric that seems to be unachievable by definition, and that by our actions we might be adding to the sum total of human unhappiness in Britain to come as the extra children of the poor have extra children themselves. The road to hell is paved with good intentions…

    Source:

    1. http://www.poverty.org.uk/summary/social exclusion.shtml
    15 Oct 2010, 4:30pm
    economy personal finance:
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  • we’re entering a family-unfriendly economic system

    There’s been a lot of hue and cry about the changes to child benefit and stuff, and Stephanie Flanders of the BBC has spelled it out over a couple of posts.

    She gets away with it where it’s probably incendiary for me to tackle this, because

    a) she’s an established writer and understands the subject better
    b) she’s a woman
    c) she has kids

    But I’m going to tackle it anyway, because the reason why we are entering a family-unfriendly economic future surprised me, even though I had a gut feel of it. The thrust of her argument is that

    Labour tilted the tax and benefit system in the direction of children and families, particularly low income single parent families. For better or worse, that is what their target of eradicating child poverty encouraged them to do. It is going to be hard to raise serious money from the benefit system without tilting it back.

    Now I had been aware that I wasn’t personally getting any of the gravy over the last 10 years. That’s a good thing in many ways, having managed to screw down my outgoings there are limited ways the government can manage to shaft me. They can’t take away my benefits because I don’t get any. They can raise taxes and obviously the VAT increase next year will hit me.

    But what I hadn’t realised is just how much gravy people with children did get out of Labour. The government can reduce the deficit by either taxing more or spending less, and because the ConDems emphasis is on the latter, it means that people with children will be taking most of the pain, just as they took most of the gain in previous years. Single parents are apparently about 16% better off as a result of Labour’s changes, whereas I am about 4% down. That great sucking force you hear out there in the distance is the sound of much of that about to be rolled back.

    Relative to people with children I expect to be 20% better off when Cleggeron have finished. Unfortunately this will be achieved along the lines of the second part of Gore Vidal’s aphorism

    it is not enough to succeed, others must fail

    I don’t expect to be any better off at all, it is just that families with kids will lose a lot of the extra bungs and sweeteners society has given them to make having children easier/less expensive.

    Before people start screaming that it isn’t fair, perhaps you might want to ask yourself whether getting free gravy was fair in the good times. It wasn’t fair to me, for instance. Twice in my life I asked myself the children question, and each time I didn’t really feel I could manage to support a family for 18 years.

    Before the aggrieved hordes of the Daily Mail and the Torygraph seize on that as proof positive that as a higher-rate taxpayer it shows I know you can’t raise kids on 44k of course I could have kept the wolf from the door, but to me life is about more than that. Many people get an awful lot out of having children, and if I had that sort of desire I would prioritise this up the stack and manage somehow.

    I didn’t do it because I didn’t want to hard enough. It’s called making choices in life, knowing your values and acting accordingly. It’s not the Government’s job to get involved in my lifestyle when if comes to such individual and personal decisions, unlike with services we all need, like healthcare and policing. And yeah, I know it’s different for guys.

    It’s going to be a rough ride, people.

     
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