I posted this thread on twitter this morning:
The government has just released new data on the cost of UK tax breaks, which is money the government gives out because some things aren’t taxable or because costs can be offset by revenue. Tax breaks on savings will cost £59bn this year. A thread…
To summarize the data on the fiscal cost of subsidizing UK savers last year and this year (2022/23), I have prepared this table:
For those looking for the source data on this topic, the data is available here.
To put this in context, I have prepared the following table showing the number of months spent on other essential services that could be covered by spending on subsidizing the saving of the rich:
Now let’s ask ourselves why we need to spend £59bn a year subsidizing savings, who gets the relief and what do we as a society get for that uncollected tax, and what should we expect?
The first thing to consider is who gets these tax breaks. The best data on this comes from the Office for National Statistics and shows the distribution of wealth in the UK, including how much you get from having pension savings. The data It is from here.
The obvious evidence from this chart is that the vast majority of pension wealth belongs to those in the top 10% of income strata, with most, if the remainder, spread across the next two deciles. The evidence is unequivocal: most of this subsidy goes to the rich.
In fact, based on ONS wealth data, it is likely that 46% of all pension tax breaks go to the top 10% of the income group.
Then, given the fact that this group is likely to get tax relief on their pension contributions at a 40% tax rate when most others get a 20% tax rate, it is almost certain that the Wealthier people in the UK enjoy an allowance for their pension contributions in excess of £30. billion year.
Let’s get clear on what that means: the subsidy given to the savings of the UK’s richest people is enough to pay for the NHS for more than 9 weeks a year or to pay for education for 20 weeks a year.
The obvious question to ask is why should a group that is already so privileged in terms of wealth and income receive such a huge and utterly disproportionate subsidy from the state, given at a rate denied to the majority of the UK population? ?
When we know there is supposedly a desperate shortage of funds for public services, why are we subsidizing the rich to get richer instead of providing the health, education and other services we need?
And let’s clarify that society receives almost nothing in exchange for this subsidy. First of all, that’s because most of those who get the subsidy will save anyway: they have more than enough to live on, so they’ll save anyway. The subsidy does not change their behavior.
Of course, it can be beneficial to support the saving of those who would not otherwise save. But a savings subsidy of no more than £5,000 a year at a 20% tax rate could be more than enough to get it done.
Make this simple change and almost all of the wasted subsidy would be recovered. And, I insist, the subsidy is washed to a large extent by the way in which pension funds are saved.
Pensions save in cash, stocks, bonds (government and private company versions), property, and little else. Cash simply withdraws resources for use in society and does not generate net useful earnings for an economy.
Saving cash may be totally rational on a personal level, but from a macroeconomic perspective, from which the government must view this activity, saving cash in banks does nothing to help economic activity in the economy.
Investing in stocks is very similar. Almost no companies now issue shares to support their business. New shares are issued in mergers and acquisitions. Most companies are actively buying back shares to inflate their prices.
So almost all shares outstanding do not provide new funds to promote real investment in the economy. Buying them is gambling on the financial markets under any other name.
Bonds make more sense, except that governments don’t need them to finance their activities, as quantitative easing has shown. So they too are just saving mechanisms. And while corporate bonds can finance investments, most finance mergers.
So, what is the social advantage of saving in pensions and ISA? Almost nothing at all. No new economic activity is created in most cases, except for the ruinous and value-extracting activities of the City of London. Their parasitic activity depends on these subsidies.
Therefore, there is currently no justification for these massive subsidies. They increase inequality. They divide society. The only business activity that wins is in the City, and that does not add value, and almost no real investment in the economy results from pension savings and ISA.
Despite this, my research with Professor Andrew Baker, also from the University of Sheffield, has shown that over 80% of financial wealth is held in accounts of this type. That’s disastrous for the UK because it means it’s harder to find funding for the real economic activity we need.
So what can be done? Three options. First, mass cut the reliefs in the way I have suggested. Limit relief to 20% on £5,000 or more pension contribution a year – few lower-paid people earn more. He could be persuaded, perhaps, to go to 10%.
I emphasize, I would let existing funds survive: I am not in favor of retrospective reforms of past contributions.
Then remove the ISAs unless they are reformed. ISA reliefs are now replicated in other tax laws that allow for tax-free investment income of £1,000 a year and generous CGT allowances, so ISAs are simply moneymakers for the very rich now.
And if these changes aren’t acceptable, change the rules about what the funds are used for. I suggest that all ISA funds be deposited in a government owned investment bank that is required to use the money in question for real social and green investments.
£70 billion a year goes to SAIs. There were almost never any net withdrawals. This money could be used to transform investment into sustainable social housing and the green economy.
And for pensions, require that at least 25% (and perhaps more) of contributions go to similar types of employment that create investments with social and sustainable objectives, very narrowly defined to avoid abuse. The government investment bank could use these funds.
Do this, and suddenly completely useless subsidies for the rich are transformed into socially useful investment funds for the benefit of society at large, and all simply using tax breaks for a better purpose without needing to raise a single penny of additional taxes.
Of the options I prefer the path of investment banking. But unless it happens, I will continue to ask why the biggest recipients of public assistance in the UK are the already rich, rather quietly and strangely unnoticed. That doesn’t make sense at all.
And for those who oppose what I’m proposing, in that case, please justify why the richest ten percent of people in this country receive more subsidy per person on average for their savings than those with universal credit to pay the cost. of life. I can’t, how can you?
