A Voluntary Tax

In the CP’s 2014 review of taxation, From Each According To Their Means , little emphasis was placed on hypothecation – the principle under which money raised from a particular tax is used for a pre-specified purpose. This makes sense. The primary purpose of taxation is to finance the totality of government expenditure and, subject to borrowing to invest for the future and the cyclical nature of economic activity under capitalism, budgets do need to balance. When, however, there is an opportunity to raise revenue which can be matched with a clear social need for government expenditure, it makes sense, if only for  presentational purposes, to link the two.

Inheritance Tax is currently a “voluntary” tax, not only for the very wealthy but also for large sections of the upper middle class who also see it as their right to pay as little of it as possible. Estates worth less than £325,000 are exempt and the rate of and 40% thereafter is easily avoidable by employing any half-competent solicitor. The Duke of Westminster’s estate, for example, is said to be worth some £13 billion, but no Inheritance Tax will be paid following his death last month as his property is held in trusts. In consequence, Inheritance Tax yielded a paltry £4.6 billion last year. Yet according to even ONS statistics , wealth in private hands is now worth £11.1 trillion, with more than half owned by the wealthiest 10%. If we assume an average lifespan of 60 years between inheritance and death, this indicates an average effective rate of Inheritance Tax of only 2.5%. In reality this average effective rate is much lower due to the wealthy concealing their wealth and the average interval between inheritance and death being much less than 60 years.

Consider now the government’s current level of support for those in residential care homes. According to Laing & Buisson Care of Older People UK Market Report 2014/15. care home charges last year were on average £29,250 per annum, rising to over £39,300 if nursing care was required.  Charges in the London area are significantly higher. Support from local authorities is available (although increasingly difficult to access due to the austerity squeeze from central government), but the care home resident has, in effect to surrender any capital in excess of £14,250 but less than £23,250 at a rate of £250 for every £1 per week of support and 100% of any capital in excess of £23,250. For a small estate of, say £50,000, this is equivalent to paying Inheritance Tax at 72%.

What is to be done? According to the Dilnot Commission in 2011, there should be a cap of £35,000 on the amount an individual would have to pay for their own care costs during their lifetime. Above that level, the state would pay a standard rate for care, regardless of the individual’s wealth. People would still be liable for costs of accommodation and food in a care home, but this would be capped at £10,000 a year. In addition, the commission called for a big increase in the threshold of savings and assets above which the state offers no help with care costs. The limit should rise from £23,250 to £100,000.

These were modest proposals and failed to go to the heart of the problem. The government nevertheless chose to ignore them. Instead it included a vague manifesto commitment to introduce new rules designed to prevent older people from having to sell their homes when they go into care. This has been deferred until 2020. A lifetime cap on care costs in England of £72,000 was also proposed but deferred after council leaders asked for the allocated funding to be used instead to paper over the on-going crisis in day-to-day social care services.

According to another report from Laing and Buisson, residents (and local authorities) currently pay £14.3 billion per annum in care home fees. This figure is likely to increase due to:

  • pressure on fees from cash-strapped local authorities driving many smaller homes out of business, enabling the rest to put up their fees; and
  •   pressure on care homes to improve the pay of their often badly paid and exploited staff. Even the Tories’ so called living wage will have an effect here.

If, however, we disregard the profits earned by care homes – in a sane world they would be run by local authorities, not profiteers – and estimate that the economic cost of the services currently provided is, say, three times that currently paid, this could be paid for by a tenfold increase in the yield from Inheritance tax. Given the current very low effective rate of 2.5%, this could be achieved by abolishing the trust loophole and ensuring other similar scams are not allowed to flourish. With an average rate of tax of 25%, we could have care homes for all with most people still being better off . With a graduated rate of tax, 90% of people could be better off. For example, on the figures above, a rate of 50% on the top 10% of wealth owners and a zero rate for the rest of us could provide care homes for all.

I don’t claim that the above calculations are anything other than rough estimates. The overall position they reveal is, however, undeniable. There is a solution to the problem of paying for care homes: it’s an Inheritance Tax that is no longer voluntary..

 

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DODGY DAVE

Revelations that David Cameron “has done nothing wrong” by avoiding tax are reminiscent of the debacle at the end of the last Tory government. Tories, Dodgy Dave included, think everyone is out to feather their own nests and really don’t see what all the fuss is about.

Taxation policy has played a significant part in bringing us to our current state and it’s abundantly clear that the current tax system in this country is deeply dysfunctional as successive governments shift the tax “burden” from those most able to pay tax to those least able to pay. As the late Ken Gill said: “You pay tax and you buy civilisation.” Most people, but not, it appears, Tory politicians understand that taxes are a price we pay for a decent society.

Even under capitalism it is possible to devise a tax structure that does not place the entire burden of taxation on ordinary working people and their families, but it requires an unapologetically class-based analysis such as that employed by the Party’s Economics Commission in arriving at the Party Pamphlet From each According to their Means, available from the Communist Party Shop or from Communist Party, Ruskin House, 23 Coombe Road, Croydon CR0 1BD, (020) 8686-1659.

The criteria employed by the Economics Commission were that taxes should be redistributive, capable of promoting “social justice,” reflective of the ability to pay, simple to understand, predictable, unavoidable, compatible with each other, objective to assess, transparent and free from interference by those hostile to the interests of the working class, including Tories, parliamentary lobbyists, senior civil servants and the judiciary.

The detailed proposals, included:

  • Tackling the estimated £120 billion lost to Britain through tax avoidance and evasion via introduction of a robust, general anti-avoidance rule which actually “does what it says on the tin” and which includes serious financial or other penalties for those found to have broken the law — giving HMRC the resources it needs to do the job properly along with an end to its current big business-friendly mode of operation; and radical proposals to clamp down on tax havens and the transnational corporations that use them.
  • Unilateral action to end the special tax status of all tax havens under British control
  • Restoration of corporation tax to between 30 per cent and 40 per cent, linked to restoration of a form of advance corporation tax to reduce the incentive for corporations to pursue tax avoidance strategies and windfall taxes on corporations’ recent super-profits.
  • Introduction of new 60 per cent rate of tax for earned income over £60,000 a year, and a 70 per cent rate for unearned income over £60,000 a year.
  • Innovative proposals for the abolition of all current property taxes and replacement with a land value tax (LVT), with the aim of shifting the burden of taxation away from earned income and reducing the scope for tax evasion. This would return to society the value of land that society itself creates and help tackle the evident social injustice generated by the concentration of land ownership in the hands of small elite.
  • Tackling the growing gap between rich and poor with the introduction of an annual wealth tax of 2 per cent and higher rates for the “mega rich,” ending “non-resident” and “non-domiciled” exemption from British income and wealth taxes; and steps to prevent capital flight by implementation of robust exchange controls.
  • Reforming current environmental taxation — which has an important role to play in changing behaviour as well as raising revenue, with the aim of promoting sustainable economic development — by moving to a “tax-and-dividend” approach for addressing the problem of global warming — with Britain acting unilaterally, if necessary, by way of example, with the introduction of standardised carbon tariffs on imports.
  • Support for a financial transaction tax (Tobin tax) on trade in currencies to give Britain greater control of its economic policy and introduction of a financial activities tax (a levy on banks’ profits and remuneration packages).

Now those really would give Dodgy Dave some sleepless nights.

The Property Ladder

Walking around Croydon it’s obvious that there are a lot of home extensions being built by owner occupiers. This is hardly surprising. Homes are seen by owner occupiers as a form of saving – often their primary form – and a recent report by LSE Professor Paul Cheshire forecasts that house prices will double by 2030. This would represent a tax free return on investment of 4.6 per cent a year. It could be even higher: according to the Office of National Statistics house prices have grown on average by 8.75% per annum over the past 47 years. That is much higher than the return on bank deposits and comparable with long run returns on equity investment – especially so as tax is paid on interest, dividends and capital gains on shares but not on your primary home.

Many extensions have the effect of shifting what in many cases would be affordable homes for first time buyers into a more expensive category. They do, however, represent a great investment opportunity for owner occupiers already fortunate enough to be on the so called ‘property ladder’. Not only will the new investment increase in value in line with the original investment but there is also an immediate tax free capital gain to be enjoyed. As rule of thumb, it’s generally thought that £20,000 of building work, providing it’s not totally unsuitable, should add more than £50,000 in property value.

What’s going on here? There are a number of economic and socio-political forces at play. First, we need to ask what is the source of this exceptional high return to owner occupiers. The answer is straightforward: it is a transfer from those who don’t own homes to those who do. Many in the fortunate latter group think it’s an entitlement justified by their hard work paying off their mortgage and they have a right to pass it on to their kids. The fact that these kids may themselves be unable to get on the “property ladder”, or, on the other hand, may already be much better off than those without homes is overlooked. Also overlooked is the risk that predatory care home operators lie in wait for owner occupiers with every intention of appropriating the bulk of their investment. There is also the consideration that banks do very nicely in providing mortgage finance. Banks are essential to modern capitalism and, as the government’s austerity programme demonstrates, nothing must stand in the way of their profits.

Another interesting question is what is the source of the capital gain when an extension is built. According to neo-classical economic theory – the type they teach in universities, award Nobel Prizes for and regurgitate on the BBC and in the capitalist press – market should respond to eliminate all such predictable gains. They call this ‘arbitrage theory’. Marxist economist, on the other hand, recognise that building workers, like every other worker in productive industries, sell their labour for less than the value it creates. It’s this surplus value that accounts for the average capital gain on building extensions. If building workers were to received the full value of the labour power they sold to owner occupiers, on average there would be no capital gain from building extensions. But then if all workers could do this, capitalism would grind to a halt nd we would be forced to begin constructing a socialist society in which, initially, operate on the principle of from each according to their means to each according to their work*.

The underlying issue here is that, according to neo-classical economic theory, value is created when a commodity (including a house) is sold, or merely revalued in a market. Value is created out of thin air in the form of a “consumer surplus” because the seller and buyer have different subjective valuations. Marxist economists, on the other hand, take a more objective view. They consider that value cannot, on average, be created by exchange or shifting market prices. Exchange is a zero sum game – the buyer’s gain is the seller’s loss and vice versa. These are two fundamentally different ways of looking at how markets work in capitalist societies. It’s a theme we hope to explore when the Communist University in South London is relaunched shortly. Watch this space for news of this development.

* Only under a fully developed communist society would we attain the position of to each according to their need

A Reverse National Lottery?

The Croydon CP Collective has been converted into a full Communist Party branch. We will meet at 6.30 pm on the third Thursday of each month  at Party Centre, Ruskin House, 23 Coombe Road, Croydon CR0 1BD. Meanwhile, here is a personal reflection on the National Lottery.

A Reverse National Lottery?

With the chance of being struck by lightning in the UK one in three million, the odds on winning the National Lottery jackpot prior to October of one in 14 million didn’t look too encouraging. Since October, however, the odds of winning the jackpot have fallen to one in 45 million. With such unfavorable odds, the justification for buying a lottery ticket might still be justified by the fact that 28% of what you paid for your ticket goes to “good causes”. But isn’t that what taxation is supposed to do? Thus in practice the National Lottery actually functions as a somewhat inefficient tax. But is it a tax on the gullible or the poor?

A study carried out in 2009 by Theo’s, a British think-tank, found, unsurprisingly, that the poor spent a greater part of their income on lottery tickets than rich ones. Expenditure by the mega-rich is, of course, insignificant – what’s another million pounds when one has billions? Other interesting findings come from US studies. In South Carolina, for example, households with incomes of less than $40,000 a year account for 28% of the state’s population but more than half of its frequent lottery players. According to a Tax Foundation study, more than one American in five thinks that buying lottery tickets constitutes a sound retirement plan.

Regardless, however, of the poor chance of any one individual winning the National Lottery jackpot, someone has to win. That, after all, is the pitch made by the National Lottery to punters. Over the last 20 years, the National Lottery has created five billionaires and 4,000 millionaires. The question must, however be asked: do we actually need five more billionaires and 4,000 more millionaires in the UK? As Thomas Piketty has demonstrated, we are now a more unequal society than at any time since the Edwardian era. Don’t we have enough billionaires and millionaires already?

Equality in the UK would be improved if the National Lottery were scrapped and the “good causes” were supported by progressive taxation. But could we go further than this? One idea to ponder is a Reverse National Lottery. There are thought to be more than 100 billionaires in the UK. Could we not require each one to take up a ticket every week with the ‘winner’ paying , say, £1 million to the Exchequer to fund “good causes”? Just like the current lottery it would generate lots of public interest, media attention and overall fun, while “good causes” would be provided for from the proceeds. The one difference would be that inequality in the UK would go down each week, not up. Now wouldn’t that be a good idea?