Friday, November 09, 2012

An Interesting Little Experiment

The Bank of England has said that it will be giving the interest it receives from the debt it holds as a result of quantitative easing back to the treasury. In one way we can regard this as giving George Osborne a way of wriggling out of his deficit targets, in another way though it can be regarded as the first step on a path towards some very interesting monetary policy.

 So..a bit of quick fag packet maths: debt interest currently costs around 3% of GDP, the bank owns about 1/3rd of government debt so this amount in total is about 1% of GDP, this 1% of GDP gives a tiny bit of extra wiggle room to the treasury. An awful lot then depends on how the treasury uses that wiggle room. Assuming the treasury uses this wiggle room as an excuse to reverse a few cuts and undertake a few minor stimulus measures, the policy essentially amounts to a very minor, controlled form of helicopter money.

 My take on this is that this intervention is an attempt by the Bank and the Treasury to experiment with monetary transmission mechanisms. Both will be watching various economic indicators to see how this little experiment plays out in terms of GDP growth, inflation and long term expectations and will use the results as a basis for future policy.

Tuesday, September 18, 2012

How to do a Hatchet Job on Ed Miliband

Step 1: Find transcript of Ed Miliband speech intended for a politically astute audience, the Fabian Society is always a good one.

Step 2: Locate a suitable passage from said speech that uses obscure political language, strange buzzwords or similar.

Step 3: Take said speech snippet and place in an article as evidence of why Ed is clearly out of touch with the ordinary people of this country.

Extra marks will be given for explanations of why the latest poll showing 99% of people wanting Ed Miliband as Supreme Emperor of the universe clearly indicate that his leadership is in trouble.

Tuesday, September 04, 2012

David Davis should learn a little more history

Yesterday we had David Davis offering his opinion on what to do about our economic situation, and while I'm not exactly a George Osborne fan hearing the proposed "solutions" to our problems emanating from the Tory right makes me thankful for Osbornes (relatively) sensible approach to our situation.

There is no doubt that many of the ideas emanating from Davis et al are very bad, for example his proposal for faster deeper cuts has us asking where the new demand will coming from, I've not seen the speech but none of the coverage I've read indicates he can provide a clear answer on this. What I'd like to concentrate on for now though, is a comment he made on Osborne's small business bank idea.

"They may help a small amount. The history of government-sponsored banks is not a very good one in any country in the world, let alone ours."

I've pointed out in the past that the extraordinary growth witnessed in South Korea began with the government nationalising most of the banking sector. Indeed, it's argued that in this case freeing the banks from government control was a factor in the 1997 Asian financial crisis. China is also an example of a country that has used state run banks to aid in it's development.

The examples I give above are reasonably well documented, they are also far from the only examples that can be found. What Davis has said about government sponsored banks is just plain wrong.

Thursday, March 15, 2012

More on Ken Livingstone's Income

While looking into the claims being made about Ken Livingstone's tax affairs I was struck by something very strange:
Mr Livingstone has made attacking the rich a major feature of his campaign. In three years, however, he has now channelled total earnings of £755,778 through the company, putting him comfortably in the top 1 per cent of all earners. - Andrew Gilligan
 Livingstone said that he earned £55,000 in the last year and paid the full rate of income tax on that but did not earn enough to pay the top rate of income tax. - The Guardian
Only one of these statements has Ken in the leagues of the mega rich, the other has him earning a decent but by no means excessive amount. I can't help asking myself who's right?

I'm not sure how much Ken's line of work brings in, but to me the lower figure seems more realistic. To get a better idea I took a look over the accounts for Ken's company, Silveta Limited. Looking over the accounts, the history runs a little like this: In 2009, the company retained a significant amount profit, £232,550 of which was retained in the company, in 2010 the retained profits rose to £284,580, in 2011 the retained profits dropped to £238,646 indicating that the company is likely to have made a loss.

At this point I noticed that these three numbers added up to the figure of £755,776, just £2 off Gilligan's figure. The £2 difference could be explained by the fact that figure for shareholders funds in the account is £2 higher and  Gilligan could have read the wrong column. What Gilligan had done was to take the level of retained profits in the company and treat it as the company's trading profits.

What all this means is that the figures that Andrew Gilligan has been putting out on his Telegraph blog about Ken's earnings are complete and utter nonsense.

Ken Livingstone's Tax Affairs

There's been an awful lot of discussion on Ken Livingstone's tax affairs recently, I thought I'd add some detail and a bit of actual tax law to the matter.

But First..
At this point I'd like to take this post on a tangent and take us on a walk through a few of the terms we use when dicussing tax. So, "tax evasion" , this is where it's a plain fact that you owe taxes but you don't pay, this is the one that's actually illegal. "Tax avoidance" on the other hand is a much trickier term, technically it means a legal way of reducing your the amount of tax you have to pay, but it has become a far more negative term. Tax avoidance is now often viewed as a way of sneaking out of your obligations to the state.

So, should all tax avoidance be viewed in this way? I think a good test here is to ask whether the legal structure you use is consistent with what the intentions of it's creators. For example, I don't think we should view people who use an ISA to reduce the tax on their savings negatively because the creators of the ISA fully intended it be used in that way. On the other hand a British company that opens a small shell company in Ireland under the guise of moving it's "headquarters" is not really within the spirit of the tax law since it is being dishonest about the extent to which profit is being made in each jurisdiction.

..and so on to Ken..
From what I've heard, Ken Livingstone gets his income from various sources books, speaking appointments, media appearances and so on. Given the diverse sources of his income it's fair to say that he's self employed. As a self employed worker he can either register as self employed or alternatively start a limited company and invoice for the work you do through that company, they work in different ways but neither option is an uncommon arrangement.

Some of the Key Differences:
  • A limited company has limited liability, it means that the company is itself a separate legal entity. In the event of the business failing a self employed individual is personally liable for the debts, for a limited company, liability is limited to the company's assets alone.
  • A limited company pays corporation tax on it's profits, a self employed individual pays income tax. However, the key difference here is that self employed profits after tax belong to the individual, in a limited company they belong to the company.
This last difference is important, even as a director and sole shareholder of a company the money is not yours. Anything that you buy for yourself that can not be justified as a business expense is a taxable benefit and needs to have tax paid on it. You could distribute the money to the shareholders (yourself in this case) but if you do this the individual needs to pay dividend tax credit at a rate of 10%, 32.5% or 42.5% in the 20%,40% and 50% tax bands (the reason these figures are lower is that corporation tax has already been paid on this money). The only other way to get money out of the company would be to wind up the company and take whatever assets were left as a capital gain paying an additional 18% (more or less) on that money.

..and the bottom line..
So let's take an example of an individual who makes £300,000 in a year, as self employed they would pay the following (using this calculator):
£128,000.00 in tax
£8,323.00 National Insurance
£130.00 Class 2 NIC's
Giving a total of £136,453.00 in tax

So, the same individual with a limited company (my working, I'm assuming they pay themself a salary of £10,000):
£57,919.19 in corporation tax
£2000.00 in income tax on salary (because earnings are over 100K, there is no tax free theshold)
£332.64 in Employers NI on salary
£404.06 in Employees NI on salary

The remaining £231,676.75 after tax would be distributed as dividend
No tax is due on the £25,000 up to the 40% rate
£28,750 on the next £115,000 up to the 50% rate
£29,485.31 on the final £82,000 over the 50% rate

The total tax liability in the second situation is £118,891.20, so what in fact we have in this situation is that the limited company arrangement saves a grand total of £17,561.18, not insignificant but a good way off from the £50,000 we've seen in other reports.

There are of course a few Ken specific points worth noting from this: The first is that Ken's company had large cash reserves indicating that not all the money in the company has been taken out as dividends, this could be because Ken sees his future income being lower and wants to draw money out of the company over a longer period of time (he would reduce his tax burden if he did this), or perhaps because some has a future business venture planned with the money; a second point is that Ken very recently reached state pension age and therfore no longer has to pay national insurance; reports indicate that Ken part owns the company with his wife so it's likely that any dividend income would be split between them; as a final point, we don't actually know how Ken conducted the affairs of Silveta Ltd this means that any "figure" you might read is little more than a guess.

The Tax Avoidance Test
So, now we get to the question of whether what Ken has done is tax avoidance. I'd say on this point that ultimately the answer is no, with the caveat that he could potentially cross the avoidance line in future by winding the company up and taking a capital gain. Although he does pay less tax structuring his affairs in this way, successive governments have not tried to crack down on this practice (indeed they have made it easier) the only crackdowns that have addressed employees acting as self employed contractors, Ken is quite obviously not one of these. Ken is ultimately acting within both the spirit and the letter of the law.

Update: Have changed the figures, the tax saving is larger than my initial calculation suggested. See comments  for more.

Friday, February 17, 2012

Gini Coefficient Games (Or why John Rentoul is wrong on inequality)

John Rentoul is under the impression that the last 30 years haven't seen massive rises in inequality and cites an ONS report detailing the changes in the Gini coefficient for the UK that shows inequality hasn't really moved since the early 90s. Not a point I particularly agree with, also I find it a little saddening that centre left types like Rob Marchant seem to be cheering him on (surely it's the Tories, not the combined forces of Owen Jones and Compass we should fighting).

To demonstrate my point I constructed a quick Gini coefficient calculator and constructed a set of income data with the total income divided in the following proportions:

Top 0.1% - 7%
99-99.9% - 8%
90-99% - 21%
75-90% - 16%
50-75% - 21%
25-50% - 16%
Bottom 25% - 11%

The Gini coefficeint for this society is 0.369, it's more unequal than the UK, but not a million miles off. We can now play a bit of a what if game, so, first off lets shave 1% of each of the three bands in the 50-99% range and give it to the top 0.1%, this gives us the income distribution below:

Top 0.1% - 10%
99-99.9% - 8%
90-99% - 20%
75-90% - 15%
50-75% - 20%
25-50% - 16%
Bottom 25% - 11%

The effect of this to raise the Gini to 0.382. Now, let's take this initial change a little further, let's try shaving 1% from the 25-50%, 50-75% and 75-90% bands and and adding them to the bottom 25%. The numbers we get as a result of this change are shown below:

Top 0.1% - 10%
99-99.9% - 8%
90-99% - 20%
75-90% - 14%
50-75% - 19%
25-50% - 15%
Bottom 25% - 14%

The Gini coefficient of this set of income distributions is 0.35, by squeezing those in the middle income bracket we have managed to lower the overall measure of inequality. The point of all this is to demonstrate that the Gini coefficient has it's limits as a measure of inequality. You can maintain a given Gini coefficient if you counter a rise in the incomes of the top 0.1% or 1% by narrowing the gap between the poor and the middle classes.

Now maybe all this is a roundabout way of getting to John's final point where he admits that the incomes of the top 0.1% have risen massively. But it is somewhat misleading in the rest of his post to suggest that the wealth of work on inequality has been concerned with Gini coefficients rather than the income of the top 0.1%. As to his final dismissal, I would ask why he believes that it is necessary to accept these vast rewards given that our pre 1980 economic growth record (when these rewards were a rarity) was actually a good deal better.