Thursday, March 25, 2010

Myopia of the Long-Sighted Fool

by Peter Brookes in The Times 25 March 2010

There are three things about Alistair Darling's budget statement that point out just how ineffectual he is in the role of chancellor on the shifting tide of current economic situation. The first is his setting of the personal income tax allowance, the second his long range growth forecasts, the third is the unexpected larger return on taxing bankers bonuses.

"I have no further announcements on VAT, on income tax or on national insurance rates."

Normally by that point of the statement the chancellor has announced changes to the personal allowance at which tax is started to be paid. Apparently the decision to freeze the personal tax allowance at £6475 came when the retail price index dipped below zero in September. At the time the retail cost index which actually has a more direct relevance to the lowest paid was still over 1%. RPI has rising steadily since then to 3.1% now. Instead of taking a mean, or median month over the last 12 months to make the adjustment to the personal allowance the chancellor took the best performing month and used that as a benchmark, or rather as a way to penalise the lowest paid with an extra £48 tax a year. Many of them are not enjoying the luxury of the 1.5% this year that the MPs have received, in fact that is double my increase over the last 2 years.

"This year, as I said in last year’s Budget speech and last year’s pre-Budget report, I expect the economy to grow by between 1 and 1½ per cent. I have decided to revise slightly downwards my forecast for 2011 to bring it into line with those of the Bank of England, to growth of between 3 and 3½ per cent."

The second is what is often pointed out as being Alistair Darling's over optimistic growth forecasts. The independent sources tend come to a figure which seems reasonable, though even the IMF have been over optimistic, yet the chancellor has been prone to double that. Has he realised the error of his ways by scaling back his prediction for next year. Well he hasn't scaled it back by the amount he was wrong and is still well above the scaled back level that the IMF have predicted. Below is the Bank of England's predictions and even they add the caveat that there is only a one in ten prospect of hitting the darkest segment.

"At the time of the pre-Budget report I put in place a one-off 50 per cent tax on the excessive bonuses of bankers....I can tell the House that that tax has raised £2 billion—more than twice as much as was forecast. That is money paid by the banks, and those receiving bonuses will, of course, also have to pay income tax at the highest rate."

The unexpected doubling of the return than what Darling was expecting on bankers bonuses being taxed at 50%. Err, duh. Lets do the maths.

Alistair predicts X returns from taxing Y bonuses at 50%

Therefore 2X=Y

Alistair receives 2X returned from taxing bonuses at 50% therefore bonuses =2Y. Bankers take home after taxation Y in bonuses. So the net effect is negligible to the bankers but and extra bit out of the banks money, when they could be using more of that to pay back the bail outs.

1 comment:

Duncan said...

You're being pretty obtuse here, look; you're right that it will hurt the banks recovery if they pay higher bonuses to make up for the tax on bonuses. Furthermore bonuses are discretionary pay so they're probably not essential. Given these facts why do you imagine banks would simply double the bonuses they're paying out to make up for the tax shortfall? They wouldn't; there's a massive incentive for them not to do so.


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