Banditry

If you think that Gordon Brown carried out a tax raid on pensions in 1997, which was the main cause of the end of final-salary pension schemes in the UK private sector, then you are wrong.

In 1997, the government did indeed abolish the tax relief on dividends paid by firms into pension funds. But on the same day it cut corporation tax by 2%, such that the final outcome of the legislation was revenue-neutral. Profits were taxed less in the first place, in exchange for which people lost the ability to get some of the tax money back if their shares were held as part of a pension fund rather than just as shares. The net effect on the income that flowed from the companies to the people was zero.

There were three real factors which led to the move away from final salary pension schemes in the UK - all of them are based on the fact that before 1997, the cost to a company of offering final salary schemes was understated:

1) Changes in life expectancy: average male life expectancy in the 1950s, when most final-salary schemes were created was 65; it’s now 80. This makes schemes that provide a defined benefit from age 65 onwards an order of magnitude more expensive than they were. Perhaps actuaries should have allowed for increasing life expectancy over time when calculating the costs of these schemes 20, 30 and 40 years ago - but they didn’t, and now it’s payback time.

2) Unwinding of contribution holidays: if you’re a plc, there’s an incentive during the good times, when your pension fund temporarily rises in value because stock markets are booming in general, to cut contributions as the pension fund is nominally overfunded. This is silly. Yes, if you’re a short-to-medium term investor, it’s rational to keep trading within the bubble - but if you’re investing for 30 years ahead, then you are grossly fiscally irresponsible if you base your required contributions on market fluctuations rather than, say, applying historical P/E ratios to your stock portfolio.

3) Introduction of FRS17: the accounting standard FRS17 forces companies to recognise pension fund deficits on their corporate balance sheets. Which is fair enough, as in the long run they’re ultimately accountable for them. However - especially as FRS17 forces mark-to-market on pension fund assets - companies are reluctant to show their financial statements swinging wildly each year based on an institution over which they have absolutely no control.

Overall, it does not make sense for an engineering company or an oil company or a retail company to take financial responsibility for an enormous pot of money (in the case of many companies, a pot of money larger than the market value of the company itself) on which its shareholders have no claim; nor is it especially sensible for an individual to base their retirement plans on the continued existence of an engineering company, oil company or retail company.

People who had private sector final salary schemes before 1997 have done very, very well because of the changes in life expectancy now compared with expectations when the schemes were set up. But this makes them the lucky beneficiaries of actuarial miscalculations. It does not mean the schemes as they existed in 1997 were sustainable, and it certainly doesn’t mean that Labour are evil pension thieves because the unsustainability of the final salary model became apparent on their watch…

Here is a table showing projected growth in real GDP per capita [*] for 2007-08, according to IMF data released this month:

In other words, credible independent people who understand economic forecasting (note: not people who couldn’t tell GDP from a CDR but who think the PM is dour and boring and that therefore everything is going to the dogs) believe that the UK economy is unlikely to see recession, and is highly likely to outperform all of the G7 economies except for Japan over the next three years. Most other economic forecasters hold similar views, with a strong consensus that 2008 real UK economic growth will be 1-1.5%.

So why the hell is there such an insanely overhyped climate of doom going on, with people who shouldn’t really know better everywhere pontificating about how the government has ruined everything and left us all in a terrible position? Is it just that everyone who bothers going on about this kind of thing is a miserable get, whereas the people who think everything will probably be fine would sooner talk about Eurovision and football?

It’s partly due to misleading reporting, of course. Hands up who read this morning’s paper and came away with the take-out that UK retail sales fell when comparing March 2008 to March 2007? Wrong: they rose by 1.1%. The fall was in ‘like-for-like’ sales - i.e. new shops are opening faster than people are increasing their spending. That’s not great news if you’re a retailer, for sure - but it also for sure doesn’t mean that sales are falling…

[*] i.e. stripping out the effects of inflation, so you can’t whine about price rises, and done consistently on an international basis, so you can’t whine about CPI vs RPI. Oh, and please don’t slate the methodology the IMF uses to calculate GDP deflators, at least unless you have at least a master’s degree in a numerate discipline with some connection to economics.

In the UK, all debt for which the government is ultimately liable appears as government debt on the national accounts.

If the debt of a PFI company is guaranteed by the taxpayer (as for Metronet, for example, unwisely) then it appears as government debt on the national accounts.

If it does not appear as government debt on the national accounts, that means that the taxpayer isn’t liable for it.

While there are many arguments possible about the benefits or disbenefits of PFI (and, irrespective of whether PFI is a good thing or a bad thing in aggregate, it is certain that the disbenefits are exaggerated and the benefits understated in nearly all discussions of the topic), this isn’t one of them.

Tax Research has an article criticising the TaxPayers’ Alliance for being a bunch of rentaquote extreme-right-wingers who distort the facts to bash Labour, socialism and anyone who thinks taxes should be higher than 1%, and also criticising the media for taking the TaxPayers’ Alliance seriously.

This is entirely true: the TPA is a lobby group for well-off people. If it - or indeed, anyone whose concern with cutting taxes is motivated by ideology rather than personal venality - were truly interested in tax cuts for moral or efficiency reasons, it would focus on addressing the 80%+ marginal tax rates faced by very poor workers, rather than the frankly immaterial amounts of tax paid by those of us lucky enough to earn or inherit a lot of money.

However, I’m sceptical that Tax Research is in much of a position to comment. As I’ve pointed out several times on this blog (and on another temporarily disappeared blog, which I will mend when I get a free weekend in the UK…), its leader Richard Murphy is equally keen to offer dubious opinions on complicated issues, and is frequently quoted in the press doing so…

I don’t know the detailed substance of the Tesco/British Land sale and leasebank transaction that the Guardian is exposing with glee as a sign of Great Evilness. But I do know some basic things about UK company and tax law, which suggest that the claim that Tesco will be able to avoid paying non-trivial amounts of tax on the profit from the deals is simply nonsense.

If you are a company domiciled in the UK, you have to pay tax at corporation tax rate on all repatriated profits (i.e. all dividends paid to the parent company by foreign subsidiaries). The only way in which you can get the profits from transactions made abroad into the hands of your shareholders is by repatriating the money to the parent company. At which point, the repatriated money is considered to be taxable profit by the Inland Revenue, and hence you have to pay corporation tax on it.

So if Tesco, or anyone else, were to set up a subsidiary in the Cayman Islands and make a stupendous amount of money tax-free, then while Richard Murphy would doubtless be sent into a state of apoplexy, it wouldn’t make a blind bit of difference to the money received by the UK government - Tesco’s shareholders can’t see any of the money (and the payment of dividends to shareholders is the whole point of a plc) until HMRC has taken its cut.

Don’t get me wrong - there are plenty of ways of using different international tax regimes to avoid paying various sorts of tax. If you’re a company based somewhere with lower corporation tax than the UK, you’ve got an incentive to keep your profits here lower than they really are - crudely, by ensuring your UK subsidiary pays higher prices than it should for goods it buys from other group companies [*]. Some once-British plcs have avoided paying UK tax on profits earned abroad by moving their domiciles from the UK to tax havens. And if you own a private company, you can easily pay random amounts of money from the company to blind trusts in the Caymans that you happen to control, to keep your UK profit and hence tax liability at zero [*].

But with very few exceptions, any action abroad which makes a UK-domiciled plc more profitable will, in the long term, generate tax revenues for the UK government at the standard corporation tax rate. And amusingly, that includes avoiding tax that would otherwise be incurred in higher-taxed foreign countries… [**]

[*] literally doing the starred activities in the way that they’re expressed above is illegal, but there are plenty of ways of achieving a similar result.

[**] in most cases profit isn’t double-taxed, so profit remitted from a country where 10% corporation tax has been paid to a country where the corporation tax rate is 30% will be taxed at 20% by the home country. But you don’t get a refund on profit remitted from a country where 40% corporation tax has been paid, so it’s in the UK taxpayer’s interest for British firms to minimise the tax they pay in such places…

[Sorry, it’s a forward so I can’t link the original…]

“Munich Re has launched a bond programme under which $1.5bn in extreme mortality risk will be transferred to the capital markets…. Munich Re said that the programme would protect it against an exceptional rise in mortality after a major pandemic or similar event in the US, Canada, England & Wales, and Germany.”

I’m glad payouts are triggered by Germany as well. Still, it’s going to piss the hell out of the insurees if the bioterrorists go for Bermuda, Scotland, NI and the Netherlands…

If the Northern Rock debacle has done nothing else, it’s certainly given a lot of people a great opportunity to rant about things they don’t understand. The latest example is Granite, the name used for a collection of Special Purpose Vehicles [*] and associated companies [**] used by Northern Rock.

According to hard-left MP John McDonnell, Granite “holds approximately 40% of Northern Rock’s assets, around £40bn… where Northern Rock’s best assets sit outside the reach of taxpayers. So the bill to nationalise Northern Rock will, in fact, be nationalising only dodgy debt“.

The good folk of Commentisfree have gone even further to town, uniting socialist idiots and right-wing idiots alike in a chorus of “someone somewhere has carried out a rather large fraud and I would like that someone prosecuted“-type comments.

There’s only one tiny problem with this kind of commentary: it’s bollocks. The mortgages in Granite are exactly the same quality as the mortgages that stayed in NR, nothing untoward took place anywhere along the line (well, not involving SPVs), and NR isn’t liable for Granite’s debts.

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A surprisingly large number of commentators seem to believe that Northern Rock’s shareholders should be eligible for some kind of compensation, following the bank’s nationalisation. To me, this seems utterly bizarre.

According to the Merril/Citi/Blackstone plan to sell Northern Rock in October 2007 (which was leaked by Bad People, and which certainly can’t be found anywhere on the Internet these days), the bank had mortgage assets in October 2007 of just over £100bn, and liabilities to retail depositors, commercial lenders and the UK government of just under £100bn, giving the company shareholders’ equity of somewhere well south of £5bn (based on its balance sheet, not on share prices).

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