Don’t be bullied by the bankers

Our ears and eyes are being incessantly  assaulted by a mixture of whining and threats by bankers  and the leaders of big business along the lines of how they cannot possibly remain in Britain if the “penal” income tax of 50% on taxable  incomes over £150,000 is not scrapped, corporation tax massively reduced and the multifarious existing tax loopholes for companies and individuals left unplugged.   Let us imagine what would happen if  they carried out their threat and left.

The place to start is to look at the take from the various taxes. Here are the projected Treasury estimates  for  the financial year 2010/11:

 £billions

150           Income tax                                      

 99             National Insurance                       

 81             VAT                                                      

 46             Excise  (petrol,booze and and fags)      

 43             Corporation tax                                 

 25             Business rates                                       

 25             Council tax                                           

79              Other                                                    

548            Total                           

Easy-to-browse Budget document pages 8/9

http://www.hm-treasury.gov.uk/junebudget_easyread.htm

The first thing to note is that Corporation tax comprises a mere 7.84%  and  income tax, National Insurance and VAT combined bring in 60.21%. Hence, although £43 billion is not to be sniffed at it is still a very small part of government revenue. This will doubtless come as a surprise to most people who are besieged with propaganda about how vital corporation tax is to the economy.

Of course there is no prospect of Britain suddenly losing all or most of the corporation tax,  because we know from previous periods of much higher British taxation than is now proposed that most who threatened to leave did not do so and, in any case, most of private enterprise economic activity has of necessity to operate with any country’s tax system.  Moreover, as the Euro bids fair to go over the cliff to oblivion at worst and to stagger along supported by Germany (which will undermine their economy) at best, Britain is looking like more and more of  the  safe EU haven for business and individuals. 

The total tax (all taxes) paid by  the UK  financial sector, according to a recent PricewaterhouseCoopers report, was   “Taxes paid by financial services companies were worth £53.4bn in the 12 months to March” 2010. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8204623/Financial-services-sector-pays-most-tax-to-UK-Government.html

That is a substantial amount but it is only around  10% of the tax collected in 2009/10 financial year.  Again, as with corporation tax,  there is no way the majority of that economic activity is going to move  out of Britain because much of it serves the domestic British market and because Britain has the structural advantage of having many of the internationally important  financial institutions on its soil. But let us suppose half of the tax paid was lost by personnel and businesses moving abroad. Compared to the quite fantastic  sums of money  – hundreds of billions –  which these supposed financial wizards have already cost Britain, a cost which will continue rising as the bad debts keep growing,  £26 billion lost would be a drop in the ocean.  

But the PwC  estimate  of tax paid may be too high. The reported tax take from the City in the  financial year 2008/9 is £32.5bn (Open Europe 28 7 2009 Government reveals City firms contributed £32.5bn in tax revenue in a year) This is  interesting for two reasons: firstly, the £32.5 represents only around 5% of  the total UK budget spend for 2008/9 (excluding the bank bail-outs).  Hence, the idea that the City is massive  driver of tax revenue is objectively wrong. 

The truth is that whichever estimate is taken the  tax paid by  the City is tiny compared with the amount that the taxpayer has pumped into the banks so far – hundreds of billions and perhaps as much as a trillion. Therefore, the total amount in taxes contributed by the City since 1997 is almost certainly much less than the taxpayer has had to pump in to date. Moreover, the pain is far from over because the banks and their ilk are almost certain to have further massive bad debts to announce which will result in more taxpayer support.

The scale of the debt created by reckless behaviour in the financial sector is shown by the growth of the   national debt and its projected future growth. . The Office for National Statistics (ONS) projects a  national debt of £792 billion by the end of the 2009/10 financial year  with another possible £1.5 trillion being added before the crisis is over. (Independent 5 11 2009 1.5 trillion  could be added to national debt). This would leave Britain with a national debt of  £2.3 trillion, substantially more than current GDP which is around £1.5 trillion. Before Northern Rock was nationalised, the National Debt was officially less than £600 billion. ( It should also be borne in mind that the National Debt is substantially larger than the current official figure because Brown’s Enron-style accounting has kept the true cost of PPP and PFI off the books, most of the ongoing debt not being included in the National Debt.)

If we can only guess at what the ultimate cost will be to the British taxpayer, it is clear that that the sums involved are so vast they will  swallow up many years of the tax generated by the City. For example, if  the £2.3 trillion national debt figure is reached, that would mean the profligacy of the banks and their ilk in Britain would have saddled the taxpayer with  around £1.7 trillion pounds (the national debt before the Northern Rock crash was less than £600 billion.). Taking the £32.5 billion tax figure for the City in the past financial year, it  would require approximately  52 years of  tax revenue from the City at that level to meet the £1.7 trillion the taxpayer may have to service and/or pay down  if the predictions turn out to be anywhere near correct.

Even the City’s  contribution during the boom years is overstated, viz.:  “…we are apt to attribute the sudden spurt in Britain’s prosperity in the mid- to late-1980s to a deregulated and reinvigorated City, it owed far more to the massive windfall from the North Sea. Take a look at the numbers. In 1979, when Margaret Thatcher came to power, the amount Britain owed, as a nation, was £88.6 billion. In the subsequent six years, taxes from the North Sea (which had been pretty much non-existent previously) generated an incredible £52.4 billion. “(Edmund Conway Telegraph 4 11 2009).

There is also the question of the amount of tax bankers actually pay compared with what they would pay if they were under strict PAYE, the fate of the vast majority of British employees.   The Daily Telegraph reported (James Quinn  16 Oct 2009) that the tax due on a Goldman Sachs bonus pot of £13.5 billion  for 2009/10 would £2.5 billion.  Let’s do a bit of arithmetic. Suppose all of the Goldman Sach’s bonus pot of £13.5 bn is taxed at 40%. That would be £5.4 billion. Of course they will all have personal allowances and be taxed at the standard rate of tax up to the point where 40% rate comes into play. However,  balanced against those reductions are the NI contributions, both employee and employer, and the new 50% tax band above £150,000. That duty  would almost certainly substantially outweigh reductions caused by  the lower rate tax band duty and the personal allowances.  However, for the sake of simplicity,  let us assume that the higher rate tax band and the NI c contributions  merely balance out the lower rate tax and personal allowances. Instead of the £5.4 billion due at the 40%  tax rate the Treasury is only slated to receive less than half that amount (46.20% to be exact).. The balance is tax avoided at best and evaded at worst.  If it is only £2.5 billion the average real rate of tax on their entire earnings will be around 18% based on the entire sum being taxed at 40%., although  it could be even lower in reality depending  on  the balance  between  tax allowances and the lower rate tax band and national insurance and the higher rate tax band, possibly as low as 15%.  That would be a  substantially lower rate of tax than a worker on average pay under PAYE. Nationalise the banks and that type of  avoidance  would become a thing of the past if politicians have the courage and lack of self-interest to control banking  remuneration. 

The City of London has not been a boon to Britain, but an albatross waiting to be hung around all our necks.  The size of the financial services sector is large but it accounts for only a small part of British GDP. Estimates of its size vary but most  are  in the range of  7-10 percent of GDP. IFSL Research puts the contribution of financial services for 2007 (the height of the boom) as low as £7.6 billion, put employment in the financial services in 2008 at 1.03 million and their positive contribution to the balance of payments  in 2007 at £36.9 billion.

That leaves a great deal of other British  economic activity and employment. Even with every financial institution in the country nationalised most of that banking activity would remain. In addition, the profits to be made by cautious state banking would substitute for substantial parts of the current tax revenue which is spent by government. Moreover,  as economic commentators and politicians are beginning to acknowledge,  Britain’s heavy reliance on financial services has caused  the British economy to suffer  more than any other advanced nation in this recession  because the catastrophic losses sustained by the banks were proportionately larger because the banking sector was larger. Arguably, reducing the proportion of  Britain’s economy which is dependent  on financial services would be a good thing in itself, although nationalised banks restricted to cautious banking should not get into the same sort of difficulty  again.

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