Tax burdens and tax complications - gives a general view ahead of the budget

 

11 October 2024 | issue 1229

Andrew Van Sickle

Albert Camus famously said in Caligula that “it is no more immoral to directly rob citizens than to slip indirect taxes into the price of goods that they cannot do without”. That came to mind this week when I read a press release from John Colley, the CEO of Majestic Wine, about the likely impact of a new alcohol excise duty system due to be introduced in February 2025. 

The basic idea is that the higher the alcohol content, the higher the levy. At present all wines in the 11.5%-14.5% ABV range incur a single charge of £2.67. As of February next year, there will be a separate charge for  every 0.1% of ABV in this range. In other words, there will be 30 different duty rates. A 14.5% bottle will incur a levy of £3.09, an extra 53p per bottle marking a 20% jump compared with a 12% bottle. 

Kafkaesque complication

The previous government, which launched this jaw-droppingly complicated scheme, claimed to be trying to simplify the wine duty system and make it fairer. Not for the first time, however, purportedly well-intentioned meddling has only made things more complicated. The cost of the administration involved for Majestic will run into six figures and may prove prohibitive for smaller retailers. In any case, they are likely to be passed on to the customer. This absurd faff also implies more hassle for small vineyards exporting to the UK, and may well prompt them to seek out markets with less onerous red tape. 

This is just the latest example of the law of unintended consequences, which has been highlighted again and again in recent weeks. Some Budgets fall apart soon after they are delivered; this month’s may be the only one in history to have failed before it has even occurred. 

Having made a big fuss about skewing the taxes towards the rich, the government is finding that this isn’t quite as easy as it sounds. The plans to subject non-doms’ earnings outside the UK to inheritance tax and equalise capital gains (CGT) and income tax have triggered fears of an exodus of private-equity investors, entrepreneurs and wealthy foreigners – and are likely to cost us money. The UK is on track to lose 9,500 millionaires this year, more than double last year’s figure, according to Henley & Partners, which advises the wealthy on moving countries. The Treasury estimates that raising CGT by ten percentage points would actually cost the taxman £2bn a year. 

It also thinks that losing the carried interest loophole alone may cost £350m a year after five years as people refrain from investing and move away. It doesn’t take much to undermine revenue given the contribution high earners make to the coffers (the top 1% account for 28% of income tax receipts, for instance). No wonder that in recent days we have started hearing that the government could water some measures down. 

In a world of mobile capital, and in the absence of international efforts to standardise minimum taxes in various areas (something the G20 and OECD have begun to work on), raising the burden of taxation while other countries aren’t is unwise. That is why only three countries in Europe now levy a wealth tax on individuals, compared with 12 in 1990 (see city view). When it comes to tax competitiveness, Britain is already 30th out of 38 OECD countries, according to a ranking compiled by Tax Foundation, a US think tank. How low can we go? 

Andrew Van Sickle editor@moneyweek.com

Government intervention & unintended consequences...

 DOMINIC LAWSON

Our leaders do policies, but they can’t do human

From heating to eating, voters just do the opposite of what the state wants

Dominic Lawson

Sunday January 29 2023, 12.01am, The Sunday Times

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Will someone break it to Keir Starmer that the policy at the heart of Labour’s promise of a “fairer, greener future” will achieve neither of those goals? He has declared: “It will be Labour’s national mission over the next decade to fit out every home ... to make sure it is warm and well insulated and costs less to heat.”

The Conservative government has already spent billions paying for people’s loft and cavity wall insulation, but those subsidies have been means-tested; Labour’s plan is to extend the handout to all homeowners and tenants. Ed Miliband, the shadow “climate change and net zero secretary”, says that unless the government adopts Labour’s plan, “we will have to import more gas from Putin”.

But what’s this? Reported by just one newspaper and not a single broadcaster, Cambridge University has published the first study of the “long-term effect of home insulation in England and Wales”. The two researchers, Cristina Penasco and Laura Diaz Anadon, studied the energy use of over 55,000 households on a National Energy Efficiency Data Framework panel, which had “retrofitted cavity wall insulation or loft installation”.

Those who had installed cavity wall insulation reduced their use of gas by 7 per cent in the first year, 2.7 per cent in year two ... but by year four “any energy savings were negligible”. With loft insulation, worse still: the energy savings “disappear after two years”. This was because people’s behaviour would change in certain predictable ways: they would take more showers, wander around the house with fewer (or no) clothes on and, if it got too hot, rather than turn the thermostat down, open the windows — a sort of de-insulation. Moreover, the insulation they installed would frequently be followed by the addition of a conservatory: a brilliant way to make your home less energy-efficient, if much more enjoyable.

None of this will surprise economists: it is an example of the “rebound effect”, so named by William Jevons in 1865, when, as the Cambridge researchers remind us, “he observed that more efficient steam engines increased rather than reduced coal use, as engines were put into more widespread use”.

I suspect this will come as a startling shock to the politicians, who can be surprisingly ignorant — or perhaps wilfully overconfident — about the way humans respond to policies designed to change behaviour. The most spectacular example is the introduction of a minimum unit price (MUP) for alcohol by the Scottish government in 2018. Nothing like it had been attempted previously: the first minister, Nicola Sturgeon, boasted that “the eyes of the world will be on Scotland” and that it would “save lives”. To be fair to her, this was encouraged by such august figures as Sir Ian Gilmore, the chairman of the Alcohol Health Alliance, who described the 50p-a-unit minimum price as “evidence-based policy exquisitely targeted at those, and those around them, who are currently suffering harm”: he presumably meant the alcohol-dependent, especially those in straitened circumstances.

How did that work out? Last summer Public Health Scotland published an admirably dispassionate report on what the policy had achieved over five years. It concluded that it had had no effect whatever on the alcohol consumption of heavy drinkers; it just further impoverished them and their families. “People drinking at harmful levels who struggled to afford the higher prices arising from MUP coped by using, and often intensifying, strategies they were familiar with from previous periods when alcohol was unaffordable for them. These strategies included obtaining extra money ... via methods including reduced spending on food and utility bills, increased borrowing from family, friends or pawnbrokers.”

In other words, the policy caused more, not less, misery to the very families it claimed to help. Characteristically, Sturgeon has not conceded that it was at all mistaken. But at least, if her claim was right that the world would look at what she had achieved with her vaunted policy, the rest of the planet’s governments will now be saying: thank you, Scotland, for showing us exactly how not to deal with alcoholism among the poor.

Those grateful will include the Westminster government. But what of its own attempt to improve public health via pricing, with the so-called sugar tax? Last week the Medical Research Council published data purporting to show it had, to a degree, achieved its objective, provoking a slew of newspaper headlines such as “UK sugar tax ‘prevents 5,000 cases of obesity in year 6 girls annually’”.

In fact there was no decline in the levels of obesity in that particular year group. What the researchers did was set up a “counterfactual”: they posited that obesity would have continued to rise as it had in recent years, and noted that in the period since the announcement — not the implementation — of the sugar tax in 2013, the level of obesity in 11-year-old girls had remained the same (while increasing in girls of other age groups and in boys of every age).

It seems perverse to attribute the absence of further growth in obesity in a distinct year group and sex to the sugar tax: why would boys, and girls of other ages, not be affected in the same way? Could something else be behind the lack of increase in obesity of year 6 girls?

This point was made by Christopher Snowdon of the Institute of Economic Affairs on BBC Newsnight on Thursday; he has been a trenchant critic of both the Scottish MUP (presciently) and of the UK sugar tax. In respect of the sweet stuff he has observed that the effect of food companies “reformulating” products to meet Public Health England’s target of reducing sugar in processed foods was to drive people away from the now less sweet versions of yoghurts and cereals and towards other ways of getting their sugar fix. So, in the three years from 2015 to 2018, while sales of breakfast cereals plummeted, the now defunct PHE admitted that overall British consumption of sugar in foods increased from 723,000 tonnes to 742,000 tonnes. That does not constitute a policy triumph.

A reasonable question at this point is: why not stop merely criticising well-meaning policies and come up with better ones? All right. If what you want is to reduce reliance on gas: don’t subsidise the consumer for using it. If you want to reduce alcoholism, recognise that addiction is not affected by price increases and that the appropriate response is more expenditure on rehab and other treatment for this psychological disorder within the NHS.

As for obesity ... rationing aside, I have no idea, since it is an unavoidable consequence of something our ancestors could only dream of: superabundance.

dominic.lawson@sunday-times.co.uk

Far from cutting tourism VAT, it looks like relief is being abolished:

 

The source of Bicester Village’s bitter VAT pill? Brexit

No 11 is scrapping a key tax break that gives foreign tourists rebates.

Sam Chambers

Sunday October 11 2020, 12.01am, The Sunday Times

Economy

Abour 70% of the visitors to Bicester Village last year were tourists

GEOFF PUGH

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Rows of Audis, BMWs and Range Rovers filled the car park outside Bicester Village last Wednesday afternoon. Inside, shoppers were waiting to be ushered into Gucci’s glittering emporium, and the lunchtime queues at Pret A Manger were five deep.

Britain’s pre-eminent discount retail destination is still drawing crowds that the average shopping centre landlord would kill for. The only problem? The visitors’ accents bear the stamp of Birmingham and London rather than Beijing.

Only Buckingham Palace is a bigger draw for Chinese tourists than Bicester Village, a twee, faux high street awash with discounted luxury fashion. Yet its owners fear the government is pulling the rug out from beneath them.

American real estate heir Scott Malkin

DAVE TACON

At the end of the year, the government will abolish the VAT retail export scheme, which allows visitors from outside the EU to claim a 20% refund on goods bought here.

The Treasury expects to claw back £500m as a result — but it could be the death knell for retailers and restaurants already starved of tourists.The Centre for Economics and Business Research (CEBR) has forecast that the move could ultimately cost the Treasury £3.5bn.

“We were around for the ‘tech wreck’, we were around for the financial crisis, and through both of those, spending at our centres grew — but this is different,” said James Lambert, deputy chairman of Value Retail, co-owner of Bicester Village. “We expect there to be a substantial defection of Bicester customers to Europe if this goes through.”

Lambert’s peers at Selfridges, Harvey Nichols and Marks & Spencer have also called for the Treasury to reconsider. It would have a big impact on London’s West End, particularly Bond Street.

With Brexit approaching, the Treasury had to choose between extending the scheme to EU residents, which it estimated would cost up to £1.4bn a year, or axing it to comply with World Trade Organisation rules. It said that fewer than 10% of non-EU visitors used the scheme and that retailers could still offer tax-free shopping on goods shipped to visitors’ homes.Bicester Village is the creation of Scott Malkin, an American real estate heir whose family once owned the Empire State Building. To broaden its appeal beyond bargain-hungry Brits, Value Retail, the company Malkin founded, partnered with tour operators and laid on special discounts to lure tourists to the site in Oxfordshire.

As they came, the brands followed — and Bicester became the template for a further 10 “villages” in Europe and China, valued at £5.4bn. Last year, 7.3 million shoppers visited Bicester Village, roughly 70% of them tourists. Hammerson, which owns Birmingham’s Bullring centre, holds a 50% stake, but has little involvement in day-to-day operations. “It’s the ultimate retail experience in the UK. They could probably let it 30 times over,” said Sam Foyle, of property agency Savills.

Value Retail could not be accused of being an absentee landlord. To ensure its staff chat with tenants every day, they are not provided with a head office. It lets shops on short leases so it can chop and change tenants, and links rents to their turnover — a model that high street chains are now forcing on landlords.

For brands, the centre has gone from being a dumping ground for unsold stock to a way of reaching less affluent customers and turning them into devotees. These days, retailers re-order last season’s best-sellers and slip in some of their new collection at full price. Sales per sq ft can be triple that of central London.

This approach can cause friction, though. One tenant said: “They demand store upgrades each year and if they think the manager isn’t up to it, they’ll ask you to change them.”

While some tenants have bounced back, others say footfall and sales have more than halved. That makes the end of tax-free shopping, which accounted for about a quarter of sales across Value Retail’s luxury outlets last year, all the more galling.

The CEBR has forecast that the move will see UK tourist spending drop by between £1.1bn and £1.8bn, with the loss of up to 41,000 jobs.

Before the pandemic, so many Chinese tourists packed on to Bicester-bound trains from London’s Marylebone that platform announcements were made in Mandarin. Last Wednesday, the waiting room at Bicester Village station was deserted. If tourists don’t return for old-fashioned retail therapy, its boom times may be gone for good.

And another thing... Bernard Connolly on problems with capitalism

Worth reading just for an adult perspective on significant issues, but also helpful for your macro/paper 3:

The problem with global capitalism

The EU sorted out (or not…), we move on to what’s wrong with global capitalism. Two things, says Connolly (which he has, by the way, been warning about for much longer than almost everyone else). The first is the rise of crony capitalism. The industrial revolution saw a lot of people getting rich. But they at least “made something” and helped to set in train a series of developments that “after thousands of years of nothing much happening… lifted people out of poverty and gave them opportunities and standards of living they would never otherwise have had”. Are the people getting superrich today improving standards in the same way? Some are (Amazon, while far from perfect, has improved the lives of many consumers). But there is also a “huge amount of rent-seeking”: large firms have too much power to crowd out the small, and regulators do too little to stop it.

The second is that much of the new wealth has been created simply by those riding on the coattails of Federal Reserve policy (cheap money) by buying into stock and property markets. That creates nothing for anyone else – and is thus politically unacceptable. But it’s hard to reverse. You can deal with the first problem with good anti-trust regulation. But the concentration of wealth created by the equity bubble? That puts the Fed in a “terrible dilemma” – it can’t really be reversed “without crashing the world economy… we’ve seen the extent over the past three months of how dependent the US stockmarket is, not so much on trade talks with China, not so much on China’s growth or global growth, not so much on what happens to wages in the US, but on what happens to interest rates and what happens to interest-rate expectations”.

Fed chairman Jerome Powell has pulled back from rate rises to stop the market falling, but how much longer can he do that for? US unemployment can’t fall much further and if the Fed continues to try and keep US growth at an annual rate of 2.5% (as it plans to) “there will be an L-shaped Phillips Curve, wages will start to accelerate quickly, there will be inflation…  then there’s real trouble” for the stockmarket and the global economy. The Fed got itself into this spot of course – starting with Alan Greenspan keeping rates too low in the mid-1990s, and most recently with Janet Yellen not putting rates up fast when Donald Trump came in with policies that “did increase the level of potential growth in the US.” Had they done that, they’d have less of a bubble to deal with. While the rate of growth would have been less fantastic than over the last year, “the prospects for growth going forward would be much better” as would the politics of wealth distributions. Now, says Connolly, it is all too late. “There is no easy way out.”

• Listen to the full interview here