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Chancellor confirms action on tax avoidance

November 1, 2011

Chancellor George Osborne confirmed to me at today’s Treasury Questions that the Coalition Government is cracking down on various tax avoidance schemes.

The Treasury team of ministers answer questions from MPs each month.  As co-chair of the Lib Dem Treasury and Business Parliamentary Committee I always ask a question.  Today I highlighted the tented occuptations of St Pauls in London and College Green in my Bristol West constituency.  Whatever your feelings about their tactics and the coherence of their grievances, one thing that resonates strongly with the public is the feeling that some people are not paying their fair share of tax. 

I specifically asked about blocking the practice whereby senior company executives are being awarded large loans that are effectively never repaid.  Income tax would still be payable on the notional interest foregone by the employer as this represents a benefit in kind.  But the principal of the “loan” would not attract tax, even though it would be freely spendable by the employee.  This tax avoidance scheme is called “disguised remuneration”.

This years Budget proposed to block the scheme.  When it came to the implementation in the Finance Bill guess which party opposed the measure? Step forward Mr Balls and his unmerry band.  I used to think the more decent Labour MPs were horribly embarrassed by Mandelson’s relaxed attitude to the “filthy rich” and the hands off approach of Brown to the City.  It seems nothing has changed…

20 Comments leave one →
  1. robertjessetelford permalink
    November 2, 2011 12:45 pm

    “The coherence of their grievances”? Could you explain what you mean by this?

    “Labour are bad, Labour are bad, Labour are bad.” It’s about the only line you guys have at the moment, eh?

    I think it’s rich for Tories and Lib Dems to have a go at anyone else for their relaxed attitudes to the banks. You’re free market till you die now, right?

    • November 2, 2011 4:04 pm

      Coherence – from my direct conversations and from interviews I have heard and read people are there for a variety of reasons. Some are political, some personal. Some want something big (the overthrow of world capitalism) or something specific (action on tax avoidance) but there is no joined up theme. So I can agree with some of the specifics but don’t buy into the generalisms. I prefer campaigns that are against things to have an alternative. So if capitalism is overthrown, what replaces it? Communism? If democracy really has failed then what should we try? Dictatorship? Feudalism?

      And yes, Labour and the bankers did screw us all financially. Our economy shrank by 7%. Do you want to join Ed M and Ed B in rewriting history?

  2. rosemary permalink
    November 2, 2011 2:28 pm

    I just hope you will be able to resist the fashionable and foolish clamour for a FTT.

    • roger permalink
      November 2, 2011 11:29 pm

      rosemary – It may be fashionable, but you will have to explain why you think a Financial Transaction Tax is foolish. After all, the oldest form of tax that we currently have – Stamp Duty on share purchases – is such a tax.

      • rosemary permalink
        November 3, 2011 1:43 pm

        This is an EU initiative which would bear most heavily on the UK. Overwhelmingly, in fact, as the FSI is our one viable industry, on which we now depend, and where we have a strong lead over other countries. It is no accident that we are not talking about a tax on French wine or German cars.

        If only we had a whole range of other up and coming British industries to take the place of our Financial Services … but, alas, we haven’t.

        In addition to this is the important argument that it would provide a precedent for enabling the EU to levy tax on us directly.

        An FTT would be yet another raid on pensions. Pensions are dependent on a multitude of transactions, made over many years. Therefore, a minute tax on the face of it, on each particular transaction, would add up to a significant reduction in the total pension at the end.

        It must also be asked whether an FTT would have a bad effect on economic growth by reducing aggregate demand at a time when we should be seeking to increase it. At first sight, it seems that there is no real problem, because in any individual transaction, the amount of a Tobin Tax is minute and painless. However, the total sum that would be raised, and thus taken out of the economy, would be potentially very large and likely to cause an actual reduction in demand. As already said, the size of this reduction in the economy would depend not on our politicians’ judgement, but on that of the EU. The EU would not primarily be concerned with our best national interests.

        This would be the ultimate taxation without representation, and it could be crippling. We would have no say in whether or not it were to be.

        I am confident that our MP is in agreement with all of this. I just hope he and the government hold firm.

  3. rosemary permalink
    November 3, 2011 1:49 pm

    Furthermore, this clamour for a transactions tax doesn’t yet specify what is a transaction. It could ultimately mean a tax levied by the EU on everything, all the way along the line, or it could be as selective as VAT.

    • roger permalink
      November 4, 2011 4:10 pm

      rosemary – From the tone of your reply it sounds as if you probably work in financial services. You are certainly good at replaying their scaremongering about a financial transaction tax.

      I’m afraid I don’t believe that financial services are the saviour of the UK. Indeed it is the behaviour of the banks and their lending policies that created the financial crisis. The credit bubble has been caused by increasingly reckless lending since credit deregulation, when the government effectively gave up responsibility for controlling the money supply.

      The result has been that over 90% of lending has been used for speculation in property, commodities and investments. Less than 10% of lending has gone towards productive purposes such as investment in jobs and services that directly benefit people.

      It is precisely the unproductive, speculative behaviour of the financial markets that a financial transaction tax should aim to dampen. The only way we will get out of the current crisis is by targeting investment to longer-term, stable, productive goals.

  4. rosemary permalink
    November 4, 2011 4:52 pm

    I don’t work in the FSI and I wouldn’t hazard a guess at what you work in. It should be possible to have a discussion on this important subject without having a direct personal interest.

    The failure to regulate the banks goes back to the decision in 1997 by the incoming Labour government to remove control of the banking system from the sole care and responsibility of the Bank of England which had handled it adequately for a very long period. Oversight of banking was then split three ways, between the Bank of England, the newly created FSA, and the Treasury, with uncertainty as to which of the three had ultimate responsibility. This was not a system designed for gale force winds.

    The crises in UK banks had different causes in each particular case. In the case of the first to go wrong, Northern Rock, the problem was simply a policy of over-rapid expansion in the mortgage market, lending money aggressively to people who couldn’t easily repay it. Much the same applies to the Halifax, which was noted for its aggressive attempt to increase its market share of the mortgage market at the expense of competitors. With RBS aka Nat West, the problem was not so much aggressive lending as aggressive expansion by acquisition, culminating in the purchase of a Dutch bank at too high a price. With Halifax and RBS, and indeed Northern Rock, the issue was that they wished to become bigger banks, for purely competitive reasons. Their mistake lay in lending long term, money obtained from depositors at short notice. This meant that if depositors should happen to want their money all at once, the banks would run out of ready cash.

    This was no doubt foolish, and the product of unwise ambition, but it was not essentially a matter of involvement in speculative or investment banking or gambling – what some call casino banking. Nor was the motive so much profit, as to gain market share at the expense of competitors. It will be noted that taking high street bankng as a whole, neither HSBC, nor Lloyds (a very prudently managed bank), nor, above all, the Co-operative Bank which does not borrow money in order to lend it, got themselves into deep waters. Barclays too, emerged usncathed, and did not take any public money. In the case of Lloyds, one of the two banks which was semi-nationalised, the cause of disaster was the shotgun marriage at the behest of the then PM, Gordon Brown, to the Halifax.

    • roger permalink
      November 5, 2011 12:17 am

      rosemary – You have hit the nail on the head when you point out that, for example, the Cooperative Bank does not lend money it does not have on deposit (unlike most of the other banks).

      A financial system is inevitably going to fail horribly if, as it is at present (or at least until the credit bubble burst), it is based on banks trying to outdo each other in extending credit to riskier and riskier speculators.

      It is time politicians stood up for much stronger controls over credit. We need lending to go to productive investment, not speculation.

      • rosemary permalink
        November 5, 2011 11:06 am

        I’m glad you agree. I didn’t want to labour the point, in case you accused me of a personal interest in the Co-op.

        For me, credit cards are right at the root of our problems: inflationary and destabilising, as well as morally corrupting. I have never had one myself, but I don’t know whether I will get through the rest of my life without conforming. I wouldn’t be surprised if those campers on College Green didn’t have a fair sprinkling of plastic cards between them. I haven’t had a bank account since the 1970s, when the big four lost my affections and I wasn’t grand enough to move to Coutts or Hoares. I try instead to seek out the more old-fashioned building societies, but this is a quest which is getting harder.

  5. Paul Bemmy Down permalink
    November 4, 2011 5:08 pm

    Although I agree with much you say, reality is that financial services are still a large part of our economy and that is not likely to change in the short term. I really don’t understand enough about the Tobin Tax to have an opinion. I do notice however, your omission of the last governments part in the credit crunch. Surely they were only to happy to accept, even encourage, the stupid lending that was going on. An economy built on people borrowing and spending what they could not afford, massive tax take, not only from banks profits, but stamp duty and capital gains, all part of the same system, and the illusion fed to the young and gullible that the good times would never end. The banks certainly have alot to answer for, but they were not alone.

    • roger permalink
      November 5, 2011 12:07 am

      Paul – I agree that the last government did not provide effective control over the banks, just as it seems this government is reluctant to do also. The financial sector, and the banks in particular, seem to think they should be allowed to continue with their business as usual. What is therefore to stop this all happening again?

      • rosemary permalink
        November 5, 2011 10:57 am

        I don’t agree the banks are trying to outdo each other in extending credit to riskier and riskier enterprises; rather, they are trying to compete in corporate ambition, which is not the same thing as short term financial greed. It is something else: a wish to be the biggest. This is reflected in their overweening architecture.

        The biggest risk of course is lending to poor people. But who are we to say the banks should never do this? How else are the poor to climb up? Should the rich have a monopoly on credit? For some banks, this is a question of social conscience. For the progressive elements in the US Congress this has also been a basic question of political rights, especially for African Americans, and pressure has been applied by legislation. Thus we come to another test case: it concerns HSBC our largest bank and the world’s local bank. It wanted to enter the US market so it bought Household Bank in prosperous NW America. Household Bank specialised in lending to poorer people. Hence its name. Eyebrows were raised in the City of London at what was regarded as a rash purchase, lending to the poor being necessarily higher risk.

      • rosemary permalink
        November 5, 2011 12:04 pm

        In due course the US housing bubble burst, and poor borrowers found themselves unable to repay; so Household Bank went under. Thus, a hugely risky speculative investment by a major bank went badly wrong. What happened next? HSBC took it all in its stride, without receiving a penny of public money, because it was big enough, and global enough, to cope on its own. Some say we should not have banks that are too big to be allowed to fail. Happily HSBC was so big, government didn’t have to intervene. There was no question of its failing.

        However, the question of social conscience in lending remains open, and there is no doubt that banking could become less speculative if you cut out all sorts of higher risk groups, such as small businesses, start-ups, people with impaired driving licences – white van men – people who show up on CRB checks, or just people with less favoured post codes or from the wrong sort of school. All this social exclusion would cut down the speculative element no end. It would leave banks lending mainly to international big business which is probably what they would prefer to do in the first place, and where the present clamour may eventually take us. No responsible banker in his right mind would have risked lending to Microsoft, Apple, Google, or IBM in their infancies, left to his own conservative instincts.

      • Art of the Impossible permalink
        November 6, 2011 7:59 pm

        Wholeheartedly agree with what has been said earlier on the thread by Rosemary about the corruption involved in the lure of too easy credit and debt. Roger has also got it spot on with this: “It is time politicians stood up for much stronger controls over credit. We need lending to go to productive investment, not speculation.”

        We certainly do, and by speculation, I took Roger to mean commodity futures, short selling, credit derivatives and all the other modern activities that look so “dodgy” to most people because they don’t seem to involve actually creating anything or doing anything useful.

        But then I see Rosemary saying: “The biggest risk of course is lending to poor people.”

        “… banking could become less speculative if you cut out all sorts of higher risk groups” – which is not what many people would have in mind when talking of speculation in the finance industry.

        Now it’s certainly true that in the US there was some very dubious and ideologically motivated lending to people who could not pay back the sums lent at the rates stipulated, but this should in no way be used as a blanket dismissal of the idea of lending to “the poor” which, if conducted properly can be perfectly secure – and worthwhile, contrary to Rosemary’s assertions.

        From 2008: “What worries Professor Yunus – he has a doctorate in economics from Vanderbilt University in the US – is that the global banks have now twigged that there is real money to be made from the world’s poor. They are muscling in on micro-loans.

        JP Morgan estimates that the sector could be worth $300bn. Barclays, Citigroup, Morgan Stanley, and BNP Paribas are launching ventures …”

        And so …

        “The next thing we are going to see is a micro-finance bubble. The players are becoming bigger and bigger. We’ve now got hedge funds and mutual funds going around saying ‘this is a wonderful idea: you can make so much money and help people at the same time’. It’s intoxicating,” he said.”

        And indeed, what Prof Yunus predicted has now come to pass and many poor people are now suffering terribly, because of grossly irresponsible behaviour by lenders who were all too eager to rush in to exploit anyone they can line up as a potential “cash cow”.

        So it seems to me, as an ordinary person, that the main problem is not that poor people are any worse a risk, pro rata, than those with more resources, but that the strong and rich are forever being allowed to over-ruthlessly exploit the desperate needs of the weak and poor, and that when the weak make the wrong choices they are abandoned to go to the wall, whereas when the strong make the wrong choices they are all too frequently bailed out by their cronies in government, creating moral hazard.

        This has to stop.

  6. rosemary permalink
    November 4, 2011 5:15 pm

    As to the property bubble, I couldn’t agree with you more. I think it was very harmful. It still is. House prices are still very inflated in relation to earnings. I long for the good old days when you went to your building society cap in hand, and after an interview with the manager, you got a firm letter refusing you a penny. That is what happened to us. This produced more stable house prices in the postwar generation, though it didn’t feel like it at the time. But do you think people would put up with that now? The problem after 2000 was a property bubble arising from the firm belief of almost every family that house prices could only keep going up for ever. That was the wish of the people, and while the music lasted, most of them were very happy with it. I was simply horrified by the credit card boom and binge. But it would have required something like the resources of a police state to redirect the investment of the country away from property and into infrastructure and industry. As it was, far from keeping its feet on the ground, the government roughly doubled its spending in the years after 2000 – from about 300 billion to about 700 billion – leaving very little to show for it. Hardly any productive investment. Our recent economic history consists of doing what we wanted, and getting short term benefits from it. But the moral is, that doing exactly what you feel like, is not necessarily the way to happiness. And it is no good looking around for scapegoats.

    • roger permalink
      November 5, 2011 12:30 am

      The solution to the financial crisis that happened in the first half of the 19th Century, when the private banks handed out ‘bank notes’ way beyond the value of the deposits left by their customers, was the Bank Charter Act of 1844, which allowed only the Bank of England to issue new bank notes.

      One simple solution today would be to limit the issuance of new digital money to the Bank of England, so that it can be regulated as part of monetary policy.

      • rosemary permalink
        November 5, 2011 2:01 pm

        I think we can agree: the old Bank of England, before it was demoted by Gordon Brown, was a sound institution. It also arranged for more than one tottering bank to be saved discreetly in the night, without bothering the rest of us.

  7. November 10, 2011 10:14 pm – read this and then tell me UK government is taking effective action

    And what about this – ?

    We need money, debt and tax reform – are you aware of the APPG on money reform? Do you support

    Do you accept Mervyn King’s view that our current moeny supply arrangements need structural reform?

  8. Chris Bury permalink
    February 21, 2012 1:22 pm

    I read all about tax and banking. For people who understand these, are very good, and explain to us, poor in understading, more on the subject. Bravo!
    But my concern is; what are we doing with the tax collected. Population who have been restricting themselves in their finances find themselves listening to news about Syria. We are giving support to the insurgents in that country. That money is paid by our tax. Why?

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