Tax Changes

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JollyScot
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Tax Changes

Post by JollyScot »

So with the current large increases in spending how does everyone think their governments are going to try and plug the gaps in their costs. That is the leaks of potential plans coming from the UK, I guess to get our reactions to them. With the scale of the spending however and the already high amounts of debts be interesting to think about how they will try and save their sinking ships beyond inflation.

The proposed changes just now for us seems to be
  1. Increases in Capital Gains taxes, either just a general increase or potentially brought in line with income tax rates. So up to 45%.
  2. Increase of dividends to be in line with income tax rates, the are broadly there already when accounting for corporation tax paid and the fact yo don't accrue pension benefits from the payment. There is potential to have a higher than income tax marginal rate at this point though.
  3. Having capital gains tax on your main residence, currently this is tax free as long as it is you main home.
  4. Increase in the corporation tax rates, not sure to what level however. Potentially back to the 28% seen before current government cut it back.
For the first two, capital gains and dividends as there is no allowance for inflation in capital gains it is probably going to make it quite hard to outrun inflation on investing if the changes were to progress. It would also make it much less attractive to work and invest at the same time. This would push you up through the tax brackets much faster and at that point I suspect many will have a line where turning up makes less sense. Could result in far more ERE people in that regard.

There has been little mention of tax increases on the worker only portion of the workforce leaking out. However I guess they don't have much of anything at this point so I can get that.There are all the cuts that will need to come as I can't see the tax rises saving UK from its debt. However I have not looked into those.That will probably be where the assets poor kind of taxes will fall by making them pay for a few more, currently free, things.

I know in the US you are spending even more that we are over here. One of the benefits of your reserve currency, are you worried about the level of changes that will need to come to balance your books.

UK-with-kids
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Re: Tax Changes

Post by UK-with-kids »

The obvious big one is tax relief on pension contributions. At the moment a higher rate taxpayer can save huge amounts of tax by keeping their income below the higher rate threshold. Salary sacrifice is a particularly efficient way of achieving this as the company saves their 13.8% employer's national insurance as well. I believe you can pay £40,000 per year into your pension at the moment, and this "costs" the Treasury around £40bn per year.

And don't forget everyone turning 55 can currently withdraw 25% of their whole pension pot completely tax free. That benefit could easily be scrapped.

There are small annual tax free allowances for dividends (£2,000) and capital gains (£11,000) so those could be cut.

Then there's the option of further tax grabs on landlords. At the moment landlords have to give 6 months notice to tenants and all evictions have been suspended due to Coronavirus. If you raise capital gains tax on residential property (the rates are already 8% higher than the general rates) and simultaneously raise taxes on rental income then there is nowhere for landlords to go except to keep paying the taxes. And remember that higher rate tax payers already can't deduct mortgage interest against that rental income any more.

Introducing capital gains tax on a primary residence would be a huge step. So far it's only been done for 'accidental landlords' who are forced to move away for work or other reasons - this took the form of abolishing 'lettings relief' and cutting the automatic deemed residence period from 3 years to 9 months. I guess this could be brought in for huge capital gains over a certain amount. But it ultimately will hit house prices, which isn't going to go down well.

Then there is inheritance tax, which is 0% on up to £1m of the family home. This gives random children a massive windfall, which isn't particularly fair. But it favours wealthy families who are the same people who fund the party who are currently in charge, hence why it was their flagship policy.

There will certainly be tax rises on the self-employed. They tried that a few years ago but the tabloids jumped to the defences of 'white van man' and they backed down. But when the Corona subsidies were given to the self-employed the Chancellor specifically said that if self-employed people want the same support as employed people then they have to pay the same taxes.

What should really happen is that tax should rise on the elderly. We've shut the economy down to save them and this has disproportionately hit the young. Asset prices have risen and the old are both still alive and much richer. Scrap the pension triple lock (which keeps pensions rising above inflation and higher than workers wages). Make pensioners pay national insurance, not just income tax. Stop giving such generous benefits to millionaire pensioners (like paying the winter fuel allowance and giving free TV licences to the ones who can afford to go on a cruise over the winter anyway).

They should also charge new taxes on the likes of Amazon, Facebook, Netflix and so on, and also the supermarkets who have made millions out of the crisis. But the so-called "digital services tax" might threaten the new trade deal with the US so they might avoid that area.

What the government will dare to do in practice I have no idea. There's an argument that we can borrow at negative rates so should borrow instead and build, build, build. I can see that working really well until it doesn't, and billionaires start shorting sterling we have to go begging to the IMF again.

JollyScot
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Re: Tax Changes

Post by JollyScot »

Yeah I can see landlords getting hammered, they are almost universally hated in the UK. I have been an accidental landlord once, potentially going to happen for a second time and it really isn't a good deal. At the moment there are two tiers of landlords, those who have done it outwith a company and those who have done it within a company. We will need to see if they try and port over some of the changes to the company lot too.

The pension one is interesting, as they already tried to do this but the result was all the specialist doctors the NHS relied on just downed tools and stopped working. I remember looking into this and there was a band of income just at the end of the higher tax rate where your marginal tax rate was 80%+ because they lost the pension allowance. A lot of them decided to just take less hours than deal with HMRC demanding money back on their pension contributions.

I am using my unused tax allowances just now, if this was not avaiable then I wouldn't have worked at all. So anecdotally I can see the difficulty on going after them. As even if they say, we are all in this together. I'm not sure that is going to work a second time round. Especially after everyone watching the mega rich have their wealth multiplied through it again.

I think their wiggle room will be more limited than they expect. If Brexit does go through as a no deal and at the same time a massive hike in taxes to the high paid professionals. I would expect a lot of them to up sticks and move, even with the ability to move starting to come under strain.

UK-with-kids
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Re: Tax Changes

Post by UK-with-kids »

JollyScot wrote:
Sun Aug 30, 2020 8:15 am
The pension one is interesting, as they already tried to do this but the result was all the specialist doctors the NHS relied on just downed tools and stopped working. I remember looking into this and there was a band of income just at the end of the higher tax rate where your marginal tax rate was 80%+ because they lost the pension allowance. A lot of them decided to just take less hours than deal with HMRC demanding money back on their pension contributions.
Yes but that was slightly different as it had to do with two specific things:
1. The taper situation which you refer to - IIRC somewhere around £100,000 of income.
2. The confusingly named "lifetime allowance" which has nothing to do with how much you're allowed to put into your pension fund, but which acts as a kind of punishment if your investments are too successful. That kicks in at a fund value of around £1m, which at a typical actuarial valuation of a defined benefit pension of 25 times (which is the same as the 4% rule of course) means a pension entitlement of only £40,000 pa.

It would be far easier to stop higher rate tax relief on pension contributions full stop. That would affect anybody earning over about £50,000. The vast majority wouldn't be doctors, they'd be high earning professionals who got to keep their jobs over Zoom, and most of them probably wouldn't even notice (the number of times I tried to explain to my colleagues about how much tax they could save doing this!) The would probably close the child benefit loophole at the same time.

It wouldn't be hard to exempt a specific profession if they were worried about the impact on doctors for example.

UK-with-kids
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Re: Tax Changes

Post by UK-with-kids »

Another thing I didn't mention before is ISAs. (For those not versed with UK tax shelters, these are non age restricted wrappers where you can hold investments free of income or capital gains taxes).

It's crazy that you can put £20,000 per adult into ISAs (and another £20,000 per child IIRC). Who has that kind of money lying around apart from the already capital rich?. Introducing some kind of overall limit, perhaps even merged with pension funds, would be much fairer. At the moment people are using ISAs as de facto pension vehicles without the means tested tax on income withdrawn. This used to be called "unearned income" and heavily taxed.

But again, we're into the territory of how much they want to upset their core base of voters and, in particular, funders. And they won't go too far down that road. Otherwise they could easily generate billions with more capital taxes on owners of close companies, farmland, trusts, woodland and so on.

JollyScot
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Re: Tax Changes

Post by JollyScot »

It might be easier and I suspect you are probably right that there are a lot of employees who would never realise their pension contribution amounts. Those who do realise are generally the self employed. Once you switch over from just a general employee package to managing it on your own you think about it a bit more. Most with a company wouldn't fill the pension too much as there wasn't an "employer match" the same. They would manage their income levels instead.

I am one of those who use the ISA allowance. It allows you to eventually shift investments into a flexible tax free wrapper (like pension without restrictions as you say). If it were to go that would be a big hit. The worry for me is that they change taxes to such a large extent that they cap the point where it is worth taking part. I don't know where the line is, enough to not result in a war I guess.

I wouldn't be keen on it being raised to such an extent that those long term high tax paying workers leave. As the net will slowly expand to the ones who remain. People still confuse the high paid professionals with the ultra high net worth individuals. My worry is that the cutting spending doesn't seem to be in the realms of consideration at the moment.

I can generally be talked into most changes if it is made fair. I think the description of fair will vary depending on what group you fall in.

Some will see those who have less paying comparatively less as being Fair
Some will see everyone paying broadly the same percentage as Fair
Some will see Government taking money from some to provide for others as Fair
Some will see allowing individuals to decide if the want to help or not as Fair

That is not the UKs speciality though, we are very good at changes with a large number of exemptions to specific groups and then the "normal" workers getting hit with some pretty high numbers.

I guess I am starting to think that a huge amount of my earns are going to sent into a money printing and spending blackhole. Then after it has all collapsed anyway those who contributed a lot will still be blamed for not doing enough. I think it is going to be a difficult 5-10 years regardless of what they do.

nomadscientist
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Re: Tax Changes

Post by nomadscientist »

One reason for not proposing increased taxes on labour at this time is that there is huge unemployment, and frankly many may be wondering whether working was ever worth it.

Ultimately by far the most revenue comes from taxes on labour and consumption, not capital and certainly not finicky little things like who exactly gets a free TV license.

It will either be income taxes or inflation (and inflation is a stealth income tax rise via band compression).

Seppia
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Re: Tax Changes

Post by Seppia »

The governments would love to do that with inflation (a regressive tax that impacts mostly the poor), because its impact is hard to grasp by the masses.
The problem is it seems they have been trying for a while to spark it, without success.
Now the US are throwing the kitchen sink at it (the Central Bank just basically made it a clear goal to have inflation outpace interest rates) let's see if they succeed.

JollyScot
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Re: Tax Changes

Post by JollyScot »

Yeah if everyone is printing as fast as they can then it will be harder to see who is making the biggest mess. I guess figure out which country is doing the smallest amount of it and then compare the relative currency shifts.

A massive cut in supply with everyone locked down
A massive increase in money with low interest and payments made

You would think inflation will follow, I have given up trying to follow the logic of that though. I have been waiting for a reset for longer than it "should" have taken

nomadscientist
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Re: Tax Changes

Post by nomadscientist »

In 2008/9 there was serious concern about inflation. I don't think governments were trying to spark inflation; they were trying to prevent deflation without accidentally overshooting. Today, no one seems to care. Also, the coronavirus reaction has taken place in an unusual mental universe with no thought to cost; the debts being run up are comparable to world war spending.

The lockdowns promote deflation. People are not spending. Instead they're hoarding money. This should cause deflation but it hasn't because of printing. If demand returns to normal inflation can suddenly explode.

JollyScot
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Re: Tax Changes

Post by JollyScot »

We had a relatively small inflation rate here the last period but it included a -15% energy swing. Once that unwinds a little we could see the jumps begin to accelerate. I am not overly trusting of the official numbers the way the come up with it seems somewhat dubious. So they may well try to hide the inflation, but longer term people will get angry at being poor and as you say not know how to explain why.

jacob
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Re: Tax Changes

Post by jacob »

The more practical/actionable question is: What is the government NOT going to tax?

The inflation measure has largely been broken because the financial markets (stratospheric money) have been detached from the economy (street level money). What's confusing is that the two have the same units (dollars, pounds, ... ) and are fungible. However, financial security ownership is strongly Pareto and "inflation" only measures "consumer" items and not financial securities. If e.g. "the cost of FI" was also a consumer measure, CPI would have been up because expected investment returns are lower now meaning FI is [much] more expensive now than it was in 2009. +FI would me a MAJOR part of people's expenses---what confuses this picture is that we usually think of FI as savings ... not an expense of buying freedom. However, if that expense was rolled into the CPI, then *BOOM*... you'd have your ~10% annual inflation over the past decade. (I did not bother to calculate .. it's something on that order .. maybe 7-13%).

All that deficit (printed) money goes and has gone somewhere. However, as long as it goes into boosting the prices of securities and bonds that are mostly owned by the proverbial 1%, it does not matter for CPI inflation. Even if that small fraction of the population doubled their consumption, it would not move the mainstreet prices very much.

In the US the current strategy of the era (last 20 years) has been that deficits don't matter as long as the debt can be refinanced at increasingly lower rates. So far so good. In particular, if rates are 0% then technically an infinite amount of debt can be carried w/o losing solvency. This strategy is compatible with long term growth expectations going down (the 30yr rate ~ the expected return of the nominal economy). This in turn is compatible with productivity having trended down for years and years.

Intuitively this boggles the mind ... but if one thinks of financial markets as representing more of a scoreboard between the have-yachts and the have-nots, it makes sense.

JollyScot
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Re: Tax Changes

Post by JollyScot »

It could be that like last time the "inflation" sticks to the financial assets. It just seems to becoming so extreme that we are heading to some sort of revolution.

Seeing a few individual gain a few billion a day as the local companies around you struggle to survive is going to make for an angry population.

I'm not sure the billionaires will be tolerated the same out the other side. US seems to be a very extreme wealth increase for a few in the pandemic. UK and Europe less so, I'm not sure we've been buying up quite the same level of assets.

If it comes out that there are tax rises everywhere but there are a few, obvious, huge winners who still saunter on as is. Going to be a tough climate.

The cost of buying freedom has jumped, I agree. I have reached the point where I can watch my earnings still increase with work. It just gets increasingly pointless. Have enough to retire, not enough to make meaningful investment impact to local area.

But the gulf between where FI is possible to the, as you describe have-yatchs, is expanding faster than you can earn. Eventually it might be that you can't out earn the printing press at all.

Negative interest is so daft that it should be a non starter. Yet here we are.

giskard
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Re: Tax Changes

Post by giskard »

jacob wrote:
Sun Aug 30, 2020 3:26 pm
The more practical/actionable question is: What is the government NOT going to tax?
Yes. I think we will see a lot more experiments with wealth taxes. See California's proposed 0.4% wealth tax that is 10 years retroactive. Will that creep down to all levels of society as income taxes have, or will it be impossible to enforce outside of equity markets?

I'm expecting property taxes to begin to skyrocket in US, since state and local governments cannot print money and they are also all now running huge deficits.
jacob wrote:
Sun Aug 30, 2020 3:26 pm
FI is [much] more expensive now than it was in 2009. +FI would me a MAJOR part of people's expenses---what confuses this picture is that we usually think of FI as savings ... not an expense of buying freedom. However, if that expense was rolled into the CPI, then *BOOM*... you'd have your ~10% annual inflation over the past decade. (I did not bother to calculate .. it's something on that order .. maybe 7-13%).
This is an interesting way to look at it. Beyond that asset price inflation is bleeding into many things, such as insurance prices (can't make as much money on the float), state taxes (pension fund shortfalls). Housing is the other obvious one. To me CPI is of little real value when most people have housing as their biggest expense and in most metro areas in the US it's easily doubled the last decade. When talking about FI the inflation is easily visible here.

UK-with-kids
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Re: Tax Changes

Post by UK-with-kids »

jacob wrote:
Sun Aug 30, 2020 3:26 pm
The more practical/actionable question is: What is the government NOT going to tax?
This question reminded me of a Monevator article from a few years ago - They Don't Tax Free Time https://monevator.com/tax-free-time/

The ERE mindset and lifestyle is quite resilient to tax increases as both earning and spending are low. As that article highlights, working less is automatically a way of avoiding the taxes you would have paid on earning the money and then spending it. They also can't really tax acquiring things second hand or free, make do and mend, and so on.

Wealth is the riskier area if you're living on a balance of 25 or 33 times your spending as your level of wealth makes you an outlier. I would argue that it is kind of actionable if the government targets the owners of residential rental properties for example, as you could rearrange your affairs to own something different. But wealth is harder to tax and has rarely taken the form of an annual charge on investment account balances, it's usually only levied when you sell. Although Cyprus was an example of that happening when they taxed bank deposits.

JollyScot
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Re: Tax Changes

Post by JollyScot »

Agree you can figure out a way through all of the issues with enough thought.

Capital Gains:- Purchase buy and hold forever items and either sell some annually to harvest some or never sell. Then on bullion if you wanted any stick with coins as these are technically still legal tender in UK still so tax free. Bars have been revmoved from the list though so attract tax.

Housing:- Own a house outright that again you never want to sell. Reduce the overhead of your life such that you canget away with earning little. Don't buy second anything or go into property management game.

Investment Income:- Slowly more to tax free based accounts if available, if not keep in a dividend type assets and use this as you income for tax and living purposes.

I guess for me I have found myself with a bunch of gains from owning gold and mining stocks over the pandemic and as such have a very specific worry around that going *poof* in a new budget. I should probably bite the bullet now and harvest some of those gains now.

The Swiss have a wealth tax, so do the French. My guess is the Swiss one is a little better at getting funds from people because people actually want their money there.

tonyedgecombe
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Re: Tax Changes

Post by tonyedgecombe »

I can't see the current government getting a handle on this. They haven't got the backbone for it. Most likely they will borrow more and pass the problem on to their successors.

In the longer term I suspect we will get some kind of land value tax. It has the benefit of being hard to avoid and won't discourage investment significantly.

In the short term I suspect landlords are going to find things toughest. Looking around my local area there are a ton of properties on the market with sitting tenants. I doubt they would be selling if those tenants had been paying their dues. The only people who will shed a tear for them are other landlords.

zocab
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Re: Tax Changes

Post by zocab »

JollyScot wrote:
Mon Aug 31, 2020 3:48 am
The Swiss have a wealth tax, so do the French. My guess is the Swiss one is a little better at getting funds from people because people actually want their money there.
The Swiss do have a wealth tax, but it's close to irrelevant (also only affects local taxation, not done on a federal level). It does apply to all your worldwide assets, but only for residents. In terms of plugging holes it's not significant.

The Swiss probably won't suffer in general - spending has increased, but not a huge amount, and thanks to a balanced budget/historical surpluses, it'll be fairly easy to weather the storm (unless the crisis gets much worse). That's not to say the impact is negligible - there is a bit more spending, and a bit less taxation - but it's still small.

The most significant taxation realted news was... someone wanting to introduce a tax on crisis "winners" (online shops and the like), but not in order to plug budget gaps - rather to support crisis losers. It's unlikely to become reality (IMHO it's a silly approach), but certainly they aren't all talking about hiking wealth taxes/introducing capital gains/etc. because there's no significant budgeting problem.

Other countries, meanwhile - I'm watching with trepidation.

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