Mansion tax - jobs for the boys (and girls)?

We're in the run-up to the Budget, and the temperature is rising.

Today there's been the spectacle of the Business Secretary trying to dictate the details of the Chancellor's proposals, in a way that would be slapped down very quickly in a single party Government, but which is apparently acceptable in a coalition.

Time and again, under the last Government and under this one, proposals are made and then become policy without the support of a proper impact analysis.

The 50p Income Tax rate was brought in as a political headline grabber without a decent analysis of its likely impact. There's always been concern that by driving away potential high earners, by making the UK appear less business-friendly, and by giving people a greater incentive to optimise their tax arrangements, this has actually had a negative effect on the total tax take. At least it's easy to collect, through the normal income tax system of PAYE and self-assessment returns, and payments are made direct to HMRC.

Now Dr Cable is trying to hit the rich through a so-called 'mansion tax', in exchange for which apparently his party would be happy to see the 50p rate abolished. Someone said on the BBC this morning that a 1% per annum tax on the value of properties above a £2 million threshhold could for some given set of assumptions bring in £1.7 billion, which is an improvement on the most optimistic guesses for the 50p rate. By the way, that's at least £10,000 that the owners of a £3 million property will have to cough up. Each year, and whether they have any free income or not.

Issue	Impact
No mechanism in this country for annual charges by central government on the owners of property - it only gets involved at sale or inheritance	Would the Government ask local authorities to collect the tax and hand it over? Would they pay local authorities a proportion of the collected amount for this service? And would they ask them to identify the target properties or would a whole new register, inspectorate and system of appeals be needed?
Tax would be assessed on unrealised gains	Either taxes have to be paid by liquidating some other asset or they have to be put on account and collected when the asset in question is sold or transferred. And that could be a very long wait.
Valuations can go up and down	It's fair to charge tax against capital gains when the gain is realised, but it must also be possible to reclaim or offset tax if a loss is made

I don't have a mansion or even an average-priced London house, but I fear that yet again, the UK is in danger of introducing a whole new piece of complexity to the taxation system. This will create jobs for the boys and girls - lawyers, tax collectors, surveyors and other hangers-on. However, it's quite likely that there will be little real positive benefit (after these costs) for the public purse, and an increasing level of misery for those affected.

It would be much better to direct the lawmaking effort aggressively at the Stamp Duty system, bringing all property in the UK under its scope, regardless of ownership, and then only giving relief against it under carefully-assessed criteria.

Kiva - an invitation

I just realised that Kiva wasn't among my blog tags. It should be. It's a US-based organisation that allows you to contribute to small loans made by microcredit institutions across the world. It allows people who don't normally have access to credit to develop businesses or personal opportunities that can change their lives.

Some people are worried by microcredit because the institutions that arrange loans and collect the repayments make a profit from doing so. To me, so long as the lending terms are fair and not usurious, I have no problem with that at all. It's all part of the development of an entrepreneurial business culture, and I think it should be applauded.

The process is fairly simple. The lending screens enable you to see the headlines of (usually) the thousand or so loans that are currently fund-raising, and filter them or order them by country, duration, purpose, male/female, individual or group, and so on. Then click through to see full details and make a loan. You can fund your account through PayPal which in turn can be funded from a debit or credit card, or a bank account.  The minimum loan amount is USD 25.00, about GBP 15.77 at current rates, less than a few beers at my local pub.

When you make a loan, the process allows you to make a donation to Kiva's running costs. This is deductible in some way that I don't understand for US taxpayers, but there's no Gift Aid deduction for UK taxpayers and so I decline the opportunity. When I eventually stop doing this, I'll simply donate my whole balance instead.

My experience has been pretty good. Two loans out of 79 so far have ended with a loss, one of USD8.70 when the borrower defaulted, and the other a currency exchange loss of USD0.10. Two more are delinquent, very late with payments but both have paid back more than 80% of their loans.

 I don't know of any equivalent that's Gift Aid-efficient in the UK, but I'd recommend this as a relatively low cost way to make a real difference to people that are doing their best to improve their lives and the prospects for their families. Here's a personal invitation link.

RBS - stop rocking the boat

I love the BBC Radio 4 Today programme, and listen to it every weekday.  But this morning's (23rd February) episode had me shouting at the radio.  Michael Fallon, MP, member of the Treasury Select Committee, and James Barty, of the Policy Exchange, were interviewed by Evan Davis following the Royal Bank of Scotland results announcement - a £700 million loss in 2011 compared with about half of that in 2010.  In the context, that's not actually too bad a set of results.

Evan Davis asked Michael Fallon questions with the drift that we need to change track - sell, hold, or do something else:
(a) the Government should dispose of its RBS shares now and 'cut its losses'
(b) "why do we need to get our money back, we know we've lost the money"
(c) if not then clearly investing in banks is good, and we should buy a couple more
(d) if share price is going to go up why don't we buy more shares
(e) or maybe we should break RBS up into smaller businesses or mutualise

James Barty thought it would be a good idea to give away the shares but with a clawback for the Government when selling.  This would remove the Government overhang of 83% of the shares, and reduce political interference in the bank's management, but it's never been tried in this country.  [Given the known track record of public sector information systems, it could even be a struggle to identify eligible reciipients in a reliable way].

Here's a link to BBC iPlayer - the segment starts at 07:52 (1hr 52mins 15sec into the recording). 

Harm is already being done to the financial sector in this country, with the media fanning the flames of an anti-business culture. The Government is damaging the valuations of banks by imposing stricter banking regulations far faster than competing countries.

The drift of the interview was disappointing, and the questions badly thought out.   It's really unhelpful to the aim of recouping the full public stake in RBS, for the BBC to probe for ways to destroy the value of assets that we're seeking to sell. Stephen Hester has charted a course - stop rocking the boat.

Beach Books 2011

1.  Unseen Academicals, Terry Pratchett

2.  Jigs & Reels, Joanne Harris

3. Chronicle of a Death Foretold, Gabriel Garcia Marquez

4. Shakespeare, Bill Bryson 

5. The Social Animal: A Story of How Success Happens, David Brooks

6. Fury, Salman Rushdie 

7. Notwithstanding, Louis de Bernieres

8. Paradise Lost - Smyrna 1922, Giles Milton

9. The Girl with the Dragon Tattoo, Stieg Larsson

Europe - The Big Half-Truth

Many commentators have criticised the refusal by the UK government to agree to European Union treaty changes that would have ceded control of the UK financial markets.  France in particular maintained the position that these changes, allowing the introduction of an EU-wide transaction tax, were necessary to prevent a repetition of the current crisis.  A transaction tax won't solve the current crisis - it will be a case of shutting the stable door after the horse has gone..  

The big half-truth, bordering on a big lie, is the assertion by politicians throughout the EU that the crisis was caused largely by the banks.  Yes, they were part of it, but most European governments have been surviving on budget deficits, with the gap closed by growing levels of borrowing, ever since the introduction of the Euro.  This money was lent by the banks and low rates were underpinned by the assumption that European sovereign lending was all as safe as German debt.

What has really rocked the banks is the discovery (surprise, surprise) that some governments couldn't close their deficits, and at that point, the assumption of safe sovereign lending was blown out of the water.  The governments have caused the banks to lose stability due to their own inability to address their budget deficits.  Politicians keep blaming the banks to shift attention from their own failures.  They don't want to adopt the debt brake (Schuldenbremsen) proposed by Germany, or they're frightened that their electorates won't stomach it. There's a good article from The Economist here.

The big truth that electorates throughout the EU should remember when they next have a chance to vote is that debt must be repaid, sooner or later. If it doesn't look as though debt will be repaid, the lenders will keep raising rates or bond yields to take into account the risk of default. That's reality.