There is no such thing as pensions tax relief

Once again we’ve the sight of a politician not grasping reality when planning a raid on other peoples’ money:

Ms Reeves said: “It cannot be right that those on high incomes paying 40 per cent tax only have to save £600 to generate £1,000-worth of pension savings, while those on middle and low incomes have to save £800 to generate the same amount.”

“Replacing tax relief with matched contributions, or a system that was even more progressive, offering higher relief to those on lower incomes than those on higher incomes, should be explored.

“At present, the pensions tax relief rewards those who already have the highest savings and can most afford to save.

“This seems to be a very inefficient use of the £20bn spent on pensions tax relief and is in urgent need of attention.”

There is no such thing as pensions tax relief. There is however something that is pensions tax deferral.

Tax relief would be that you do not pay tax on money put into a pension and also do not pay tax on the pension when it is received. You are relieved from taxes that is. This is not what happens. Instead, you do not pay tax on the money put into a pension: but you do pay the normal income tax on the pension once it arrives. This is not tax relief: this is tax deferral.

Two points flow from this. The first is that we’ve actually got to call this what it is: it’s delaying what tax is paid, not abolishing it. The second is that the costs of this are nothing like what the claim is. Because we do indeed collect income tax upon pensions. And whatever that amount is must be offset against whatever amount anyone wants to claim is deferred. The net amount could go either way, we simply don’t know.

Incomes in retirement are usually lower than during a working life and so the tax collected might be less than that deferred as a result of lower tax rates. Or, perhaps, the investment pot has grown so that the income tax collected in the, say, 20 years of retirement is greater than the tax deferral granted in the 40 years of working. We simply do not know the answer there (maybe someone does, but we do not). But until we do know that we cannot have any clue at all about whether tax deferral actually leads to a loss of Treasury revenue or not. It will affect the timing, obviously, but the amount?

What is being done here is to look only at the cost of the deferral upon revenue and to ignore the income that results from said deferral. And if this is the way that we’re going to discuss public policy then God Help Us All.

Are benefits a subsidy to workers or employers? Yes

There’s an interesting claim out there that benefits are just a subsidy to low wage employers. They can get away with paying low wages because we taxpayers then top that up. Alternatively, we might think of benefits as being subsidies to those people who, for whatever reason, have incomes lower than we think they ought to be. There’s an answer to which of these is true, that answer being: yes.

Jeremy Warner is one this subject here:

Much the same process is evident today in the growth of Britain’s low-wage, low-productivity economy. There is little incentive for employers to improve their productivity, and therefore their wage levels, when labour is subsidised to the degree it now is from general taxation.

By the by, the tax credit system – enormously expanded and enhanced under Gordon Brown – has created a kind of client state of those partially or entirely dependent on the government for their way of life. It has locked in votes as well as disrupted the normal market process by which the general standard of living is raised.

We would make a slightly different point. Whether benefits subsidises the employer or the employee depends upon which benefit. More specifically, a benefit that is paid because of low income, regardless of whether someone is in or out of work, is a subsidy to the recipient. And it’s also an anti-subsidy to the potential employer. It raises the reservation wage (the amount that must be offered to get someone to come into work). However, a benefit that is paid conditional upon being in work will end up as being a subsidy to that employer: for it lowers again that reservation wage.

Here in the UK we really only have one major work conditional benefit, working tax credits. Those really are a subsidy to low wage employers. The impact of the rest of the benefit system is to raise wages.

The interesting out come of this is that if you want wages for the low paid to rise then you should almost certainly be arguing for the abolition of working tax credits. Not that this would increase the incomes of the poor but it would stop that subsidy of low wage employers.

A puzzling policy committment from Scottish Labour

Perhaps we should spend too much time puzzling over whatever it is that Scottish Labour wishes to promise us all given that current indications are that there’s not going to be a Scottish Labour soon enough. But their attitude towards food banks does deserve some puzzling over:

His announcement came the day after he promised a £175 million anti-poverty fund that he said would be used to end food banks in Scotland.

Why would we want to end food banks on Scotland?

It’s entirely true that use of food banks has soared in recent years. But it’s also true that we’ve got to be very careful in determining whether this is a supply shock or a demand shock. And all the evidence we’ve got is that it is indeed a supply shock. As the Trussell Trust itself points out, back a decade and more there simply were no food banks (OK, perhaps two or three) in the UK. Now there’s a great network of them, alleviating the number of tens of thousands of people each week.

It is possible that there was no hunger back a decade. But anyone with any experience of the benefits system of the past would not claim that it did not make mistakes, that it did not underpay, take a long time to pay, take weeks to start getting the impoverished some cash to alleviate their hunger. Some of us here have direct experience of just those situations.

So, it is not that the benefits system is worse today than it was: it’s that we’ve a new technology, those food banks, to deal with an already extant problem. That is, it’s a supply shock, not a demand one.

At which point we come to something of a logical puzzle. The little platoons have worked out a way, a very effective way, to deal with the inefficiencies of the State. The response is thus to nationalise by that very State the thing that alleviates the State’s inefficiencies?

Umm, why not just leave the little platoons to get on with the job they are doing so effectively?

These people are mad you know

Sad to have to say it but this is a most startling claim:

Private landlords are benefiting from subsidies worth the equivalent of £1,000 for every household in the UK, the campaign group Generation Rent has claimed, with tax breaks and housing benefit bolstering their gains from house price increases.

Figures shared with the Guardian by the group suggest landlords could be gaining as much as £26.7bn a year from the taxpayer, equal to £1,011 each for the country’s 26.4m households.

So, how have they calculated this figure?

The group’s figure is made up of £9.3bn of housing benefit paid on behalf of low-income tenants, £1.69bn through the “wear-and-tear” tax relief landlords can claim on their properties, £6.63bn of tax that landlords do not have to pay on mortgage interest payments and £9.06bn of tax landlords do not pay on their annual average capital gains.

Oh dear. Capital gains, capital gains on anything at all, are only taxed when a transaction takes place. Thus the not taxing of a capital gain when a transaction does not take place is not a tax break. Similarly, the paying of interest for the purchase of a business asset is tax allowable. This is true of buying a JCB for a building firm, buying a house to rent out and buying a mobile phone mast to provide service to said house. This is not a tax break therefore. It’s simply a cost of doing business that must be included before calculating the profit which will be taxed. Wear and tear relief is very much the same thing.

Housing benefit is a little more complex. We can indeed view it as a subsidy to landlords. For without housing benefit being paid we might expect rental prices in general to be lower. We might also view it as a subsidy to low income tenants of course. That’s what it’s intended as. The way to decide between who is getting that subsidy is to ask, well, what would happen to prices in the absence of it? If we think that removing that £9.3 billion subsidy would mean that rents in general would fall by £9.3 billion then it is indeed a subsidy to landlords. If we think that prices would stay largely where they are but that poor people wouldn’t have anywhere to live then it’s a subsidy to those poor people. And, of course, if it’s the first then we should simply abolish that subsidy immediately.

Which is rather the point of that thought exercise: those who claim that it is a subsidy to landlords should be campaigning for the immediate abolishment of that subsidy. They ain’t, so they don’t really think it is, do they?

Spotting C Northcote Parkinson in the wild

That Parkinson’s Law is generally applicable is obvious. But in the great man’s work there are other observations which we can spot occasionally out there in the wild as it were. That the Royal Navy will have more Admirals than ships has been true for some time now, that committees and bureaucracy will, in the end, strangle the life out of any and every organisation is also obviously true. He also pointed out what is happening here:

Civil servants went on a £1billion spending spree in just eight weeks to hit the Government’s target of spending 0.7 per cent of the nation’s income on overseas aid.

The extra cash was spent at the end of 2013 on humanitarian programmes in Syria and the Philippines and a fund which was started by billionaire Bill Gates to help victims of Aids, Tuberculosis and Malaria.

MPs said the fact that the taxpayer funds were spent so quickly raised serious questions about whether value for money was achieved. Civil servants are now set to be called in front of an influential committee of MPs to justify the spending.

The point of spending by a bureaucracy is not to provide value for money. Nor is the point of political spending to actually achieve anything. In this story we combine those two to lethal effect.

The point of political spending is to allow a politicians to announce that something is being done so vote for me. Doesn’t matter what is being done, how effectively it is being done or even whether it needs to be done at all, let alone with other peoples’ money. The point is the purchase of those votes.

Similarly, the point of a bureaucracy is not to provide value for money. It is to spend the budget allocated to that bureaucracy and to thus make the case that the budget, and thus the bureaucracy, should be larger in the next budget period.

These two have combined here to produce the sight of a bureaucracy shoveling money out the window, into and on anything at all, in order to enable the politicians to purchase votes.

Well done everyone.

The solution Parkinson offered to such problems was simple. It isn’t possible to reform such practices. One must simply stop doing the thing itself. No, we don’t mean stopping charitable aid to poor people if that’s what we all decide we want to do. But stop running it through these inefficiencies of government.