Is this too political?

Let me start by saying that I’m not politically affiliated and not that way inclined.  The following is meant to be a non-partisan, yet critical, approach to political tax policy.

The 2014 Budget approaches and we have newspaper articles and leaks to fuel the fire of debate.  The major parties are already jockeying for position in advance of the next election and manifesto pledges seem to be flowing.

So, I feel the need to ask, what is a fair tax?  It depends on the view from where you are standing I suppose.  Politicians seek to appeal to the widest audience, often with the “we’ll tax someone other than you” message.  Whether it is Amazon and Google, the bankers, the non domiciled, the Utilities, the rich(er people than you), the target is the minority.  There may be good reasons for taxing some of the above differently, but as I’ve said before, tax is a system in equilibrium and fiddling in one area has unexpected consequences.  Consider the 10% starting rate of income tax and the temporary VAT cut under the last Government, they went well didn’t they?  The non-dom annual tax charge was a failure as well.

What was exercising my mind today though was the publicity about the so called “Mansion Tax”. A classic case of an arbitrary and poorly directed suggestion if I ever saw one.  Consider the following examples:

Two successful business people sell their businesses for an identical, substantial sum…… Until this point they have paid the same amount of tax on their income, lifestyle and capital gains.  However, one lives in London and buys a decent house in a smart area of London.  One lives outside of London and buys a very similar house but at a much lower cost.

Under the Mansion Tax regime, one has a substantially annual charge for the mistake of wishing to live in a high value area.  Whilst their wealth is the same as the other business person, one has a higher tax bill.  I already hear you…. the first person could have easily moved out of London, but this is not a simple choice.  If their children’s schools and their family and friends are based in London then why should we tax people differently based on where they wish to live?  Is this fair?

Compare the asset rich, but cash poor, little old lady who lives in a large house, to the high income individual who lives next door.  One cannot afford the annual Mansion Tax charge, whilst one can.

The tax does not seem at all progressive in targeting those who can pay.  It passes the political test of avoiding the majority of people, but arbitrarily hits people in different circumstances.

Consider if you will Inheritance Tax (“IHT”).  Consider one of our above business people. They have a net wealth upon which they have paid tax on the total in earning it and selling their business.  Compare this to our asset rich, but cash poor, little old lady.  She might have lived in the same house for 40 years, and it might be the same value as the business persons’ wealth, but due to house inflation she has a substantial asset on which she has never paid tax.  On death, both pay the same amount of IHT, but one has already paid tax once on all their income, whilst the other has not paid tax yet on their wealth.  Is this fair?

“So”, perhaps I hear you say, “get over it Wallace, tax isn’t fair” and a simple system can never cater for all circumstances.  But, I reply, I think it can be better if politicians could just focus.

Taxing a particular class of asset on an annual basis (a “Mansion”), as opposed to taxing all assets (“a wealth tax more generally), is dysfunctional. Taxing assets on death which have already been subject to tax once, whilst levying the same tax on assets which have never been subject to tax is unfair.

Maybe we should focus more on taxing income?  If we also wish to apply an IHT charge then perhaps it might mimic Capital Gains Tax and apply a higher charge to those assets which have not been subject to tax, as opposed to those which have been taxed already?  No tax is so simple that anti-avoidance provisions could be necessary, but that’s life I suppose.

As a friend once commented, why tax people when they die, you could just as arbitrarily tax people when they get married, have a baby or turn 50 years old?

So what do I predict for this week’s budget?  No idea really.  But I do have advantage of shouting from the side lines whilst having no responsibility for having to make a decision.  I’ll just sit here then…….

Talk to Barnes Roffe today
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