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
     
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