Thoughts on politics and life from a liberal perspective

Friday, 20 April 2012

Guido shows why "tax transparency" won't work

Guido (actually I think it was "Neo Guido" AKA Harry Cole) published a blog post earlier this week which "exposed" Lib Dem London Mayoral candidate Brian Paddick's failure to declare income for the tax year 2007/2008. This is in the light of the various shenanigans in the Mayoral contest whereby the main contenders have agreed to publish details of their earnings and tax paid for the last few years in the interests of transparency.

To be fair to Guido/NG it was some good research that led to them deducing that Paddick received a tax free lump sum of close to £390,000 in that tax year. It was not included as part of the disclosure. Paddick claims that it does not count as it is not within the last 4 years which is what the candidates agreed to disclose information about.

So, blimey. A massive tax free lump sum! Paddick must have been very crafty with his affairs to have been able to avoid tax on that scale surely?

Actually no. The lump sum (as the blog post does make clear) was part of his pension. Everyone who has a private pension is entitled to take a tax free lump sum upon retirement. The exact amounts will of course vary but given that Paddick was a senior officer with the Met until his retirement the amount reflects his seniority and time in service.

So the actual story here is "man takes pension he is fully entitled to". There is not even a hint of tax evasion let alone avoidance. He just did what millions of people with pensions are fully entitled to do.

Of course the amount he gets and whether it is fair for police to get pensions like that is another question and another debate for another day.

The breaking of this story though by Guido amply demonstrates why all these calls for "transparency" on tax affairs cannot really work. The tax system is very complex. There are all sorts of perfectly reasonable ways in which income and payments people receive can be exempt from tax or be subject to reliefs of various kinds. Just taking the headline income figures for a certain period and then working out the percentage of tax paid tells us very little. We need to look behind those figures in quite a lot of detail to understand what they mean. Accountants earn so much money because this is not easy to do.

The idea that the media will be capable of applying the level of nuance necessary to properly understand what earnings and tax figures for individuals actually mean is pretty laughable. Even if it is published, the context will get lost in the headline figures. We live in an age of soundbites and if something takes longer than 10 or 15 seconds to explain you can forget trying to win the argument. The headlines will crucify you before you've even opened your mouth.

In this context it is no wonder that Paddick did not disclose that tax year. It would likely have made his proportional tax paid across the 5 years lower than any of the other candidates even though all he did was take his pension.

I fear similar injustices will be perpetrated on those running for office in the future if the current political fetish for tax transparency continues.

1 comment:

Jim said...

Correct. Which is why this ludicrous 'Loads of multimillionaires are paying less tax than cleaners' nonsense is just that, nonsense.

There are any number of legitimate reasons why someone might be declaring a large income in one year, but not be due any tax on it. The obvious one being that if they are in business losses in one year can be offset against taxable income in another. So the sort of people who earns millions (usually from their own businesses) are the sort who might have big losses one year and big profits the next.

Or there are (as we have heard ad nauseam) charitable donations. Or venture capital investments. Or the income could be capital gains not income from employment.

The point is that Parliament has created all these 'loopholes' for a reason - to try and encourage people to do the thing in question - give to charity or invest in new business start-ups. Now that people are doing exactly what the policy was designed to encourage, everyone is up in arms. You can't win.

The best solution is a system of flat rate taxation, no exemptions or allowances. Everyone pays the same % whatever - earned income, capital gains, dividends, savings interest, business profits, whatever.