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Rates of change

Taxation plays an important role when businesses and governments are looking at increasing revenue and cutting costs

As economic times continue to be tough, governments, like businesses in the same position, investigate even more intently ways to deal with the situation they are in. Actions that should be regularly and seriously reviewed as a matter of course but inevitably are given less attention in the good times, rapidly rise up the attention agenda. This is especially so if the business (or government/ sovereign state) is carrying a meaningful debt burden – as most are.

Bottom-line improvement will always be on the mind of business owners and this improvement can most obviously be brought about by increasing revenue and reducing costs. The former can be done by increasing prices (not always a sensible move n a fragile economy and especially if you have competition), increasing the number of customers you do business with and the number of transactions you do.

But increasing revenue, especially through new business and initiatives, product development, etc (and particularly when times are tough) is generally harder than reducing costs. Both revenue increases and cost reduction should be considered but the latter often takes priority.
Governments have similar (although usually somewhat bigger) challenges.

On the cost front, we have seen massive cuts in services, government jobs and benefits, with some attention also being given to how to limit the high cost of the pension promises the Government has made to its armies of employees. These cuts have not come without their repercussions.

On the revenue front, taxation is top of the list. Getting greater returns from their taxation activities would help governments pay down debt – a prime requirement for most. However, this is not easy, especially with the economy balanced on the edge of double-dipping. Striking a balance between being seen to be doing something with a meaningful austerity programme has been essential in retaining a credible international rating but doing too much can harm fragile growth prospects for the economy and the lower the growth the less the tax that is generated. This is a particularly relevant and widespread problem that governments are having to deal with.

What do governments do on taxation? Most need to consider the political as well as the purely fiscal repercussions of tax increases. How any such increases are seen as well as what they do is a factor that needs to be carefully borne in mind. Even relatively small increases in tax applied across a wide tax base can raise serious amounts of revenue. The National Insurance increases will prove that. But imposing any increase in the tax burden on lower-earners is hard to present positively when there is a strong and understandable perception among people in general that it was a section of the higherearners at banks that were a major reason for the problems in the first place. It will generally be accepted that “the rich” should bear a greater share of any tax increases – if not the totality of them. As Steve (or is it Steven now?) Tyler says: “Eat the rich.”

The debate over how much tax “the rich” (whatever they are defined as) should bear has been refuelled by Warren Buffett’s latest incantation.

Now, Warren’s worth a few bob (his wealth is estimated at £28bn) and it is his view that the super-rich should pay more tax. He believes the super-rich like him get off too lightly when it comes to tax because they pay a lower proportion of their earnings in tax than people on middle incomes. He calculates that last year he paid 17.4 per cent of his total earnings in tax compared with 33.41 per cent for his colleagues.
It seems that is because, in the US, there are lower rates of tax on capital gains and dividends than on income.

Jimmy Buffett, on the other hand, may have a different view on all this from down in Margaritaville where, as we know, there is probably a greater importance attached to tattoos and salt shakers than the effective rate of income tax.

We in the UK have a (supposedly temporary) top rate of 50 per cent applying to taxable income over £150,000, so we are somewhat aligned with what Mr Buffett is suggesting but there is an important and interesting question to ask and that is whether this higher rate generates much in the way of extra revenue – the point of imposing it in the first place.

Labour predicted possible receipts of around £2bn but accepted this amount might not flow in full. Against a budget deficit of £139bn, the tax raised by the additional rate is “the peanut”, as an erstwhile colleague of mine would say.

And that is without factoring in the potentially negative effect of high tax rates on enterprise generally, including the deterrent effect preventing some coming to the UK to work and setting up a business and causing others to emigrate. Both could reduce net receipts from the additional rate further.

The Chancellor is apparently looking into this with a view to abolishing the 50p rate sooner than some may think. In order to appease those understandably against a tax reduction for the rich, the tricky subject of imposing tax on the rich in some other way could be considered. The mansion tax or a tax on gains made on sales of £1m plus value properties has apparently been considered – courtesy of the Cable guy – and not a penguin in sight.

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