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Home / Tim Worstall /We’d hope that policy making would be a little better informed than this

We’d hope that policy making would be a little better informed than this

Summary:
This is not, of course, a policy maker, it’s Philip Aldrick, the Economics Editor of The Times. But it’s a good guide, as that, to the sort of things that is being said in policy making and influencing circles. One lesson we have since learnt is that more of the austerity savings should have come from targeting wealth. Taxes that skimmed the froth off asset prices that were inflated by quantitative easing and low interest rates would have spread the pain more evenly.No, not really. The entire point of QE was to raise asset prices and thus reduce yields. This would push people out along the risk curve in their investment behaviour and thus mitigate the slump. To tax the returns from those rises in asset prices would be to cancel the very effect which the struggle is to produce. Yes, of

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This is not, of course, a policy maker, it’s Philip Aldrick, the Economics Editor of The Times. But it’s a good guide, as that, to the sort of things that is being said in policy making and influencing circles.

One lesson we have since learnt is that more of the austerity savings should have come from targeting wealth. Taxes that skimmed the froth off asset prices that were inflated by quantitative easing and low interest rates would have spread the pain more evenly.

No, not really. The entire point of QE was to raise asset prices and thus reduce yields. This would push people out along the risk curve in their investment behaviour and thus mitigate the slump. To tax the returns from those rises in asset prices would be to cancel the very effect which the struggle is to produce.

Yes, of course government is like isometric exercise, a lot of effort and going nowhere but we should at least try to not kill the very policy we’re enacting.

This is also a common and mistaken thought:

The highest rate of capital gains tax is 28 per cent, on second homes and private equity “carried interest”, far lower than the 50 per cent top rate of income tax. Even dividends attract more, at 30 per cent.

A familiar structure would be to draw a salary of less than £50,000, taxed at 20 per cent, and take a dividend, taxed at 30 per cent.

This is to miss that there’s a third tax in the mix here, corporation tax. The dividends can only be paid out of post corporation tax profits and it’s a matter of design and policy that the CT plus income tax rate on dividends is about the same as the pure income tax rate upon labour income. The system is deliberately set up to do this.

CT also falls heavily upon the capital value of the ownership of the company. Something that makes £100 a year to distribute is worth more than something which makes £80. If we charge £20 a year in CT to that £100 of profits then we’ve just made the company shares worth less. That is taxation of the ownership of the company, isn’t it?

It’s entirely true that we can - and should- make useful changes to the current taxation system. But it’s rather important that we actually understand the current system before we do so. It’s not entirely obvious that those doing the discussing at present do so.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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