Liebrary: Do income tax cuts for the rich make us all richer? Part 2: more dismal evidence to the contrary

[If you want to read Part 1 click here, but you don't need to] 


UPDATE NOV 2016: The rich have been the biggest winners from ex-Chancellor George Osborne’s tax giveaways of £32bn, rolled out since 2010. That’s according to the think-tank, the Resolution Foundation, chaired by the former Tory cabinet minister David Willetts. They say the £32bn - including £17bn on raising the point at which people pay income tax, £8bn on cutting corporation tax and £7bn in freezing fuel duty - would be enough to eliminate the UK’s deficit.


Matt Whittaker, Chief Economist at the Resolution Foundation, said: “The £32bn worth of tax cuts announced since 2010 has been the difference between the government hitting and missing its deficit reduction targets in the last Parliament, or indeed in this one... Tax cuts on this scale have clearly played a role in supporting household incomes, though around four-fifths of the £21bn due to be spent on raising the personal tax allowance by 2020 will have actually gone to the richest half of households.”



It was a former leading Labour politician, Peter Mandelson, who said “we are intensely relaxed about people getting filthy rich”. A philosophy that has been followed doggedly by Labour and Conservatives alike for over 30 years. Ministerial claims of shock at tax avoidance and horror at excessive pay have been nothing but camouflage for this policy. 

Particularly since the cut in the top rate tax from 50% to 45%, in the March 2012 budget, government ministers have been swearing that cutting income tax for the rich makes us all richer. They claim lower tax encourages clever entrepreneurs to come and work hard and give us all jobs, and bring us economic growth. The opposition swears that this is not true. 

Each side says it with such earnest confidence that we ordinary Britons don't know what to think. So we just let the politicians carry on as usual, which the politicians do with great and insatiable appetite.

But the truth is out there, if you know where to look.

The impact of this philosophy is made very clear by the graphs below from a paper by the Centre for Economic Policy Research, "Optimal Taxation Of Top Labor Incomes: A Tale Of Three Elasticities". Graphs that expose a great and stubborn lie: that allowing people to get 'filthy rich' is good for national economic growth. The lie that if the few get ‘filthy rich’ we will all get mussed up with a splattering of extra wealth ourselves. The fib used to justify slashing personal and corporation tax. It is asserted that so long as there is a feast at the top table we all will get some of the leftovers. The evidence below shows that this assertion is false.

This first graph below shows there is actually no correlation between economic growth and cutting taxes - massive tax cuts for the rich make no difference to growth. The horizontal band of countries, excluding Ireland, shows that countries like the UK and the US who cut taxes most aggressively saw no greater economic growth than Germany, Australia, and many others who made smaller or no top rate tax cuts. Here is yet more evidence against the lie that letting the 1% get rich makes us all richer - evidence that is all around us. That successive governments stubbornly stick to it supports the theory of Goebbels, the nazi propagandist, “If you tell a lie big enough and keep repeating it, people will eventually come to believe it.”

On the other hand, the next graph shows there is a clear correlation between reducing tax and increasing inequality. As their taxes were slashed, the top 1% accrued even greater wealth because

a)      Less was taken away from them in taxes, leaving them more to pocket.

b)      As they were allowed to keep more they were more incentivised to grab a bigger slice of the pie. Not by creating a bigger pie and spreading the wealth, but by snatching a bigger share with excessive pay and excessive profits.

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Monopoly comes quickly in ConDem Britain

KJ tells Fee about a new version of the famous board game Monopoly - the unregulated free market edition

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Payday lenders and loan sharks: a very British way of lending

Chris and KJ wonder why payday lenders get such an easy ride in the UK

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Shareholders voting against executive pay: the marvel is not that the directors had their bonuses questioned, but that they had bonuses at all

"The marvel is not that the bear dances well, but that it dances at all."
Russian proverb, on a performing bear in a circus.

Remuneration committees have continued to thrust bonuses at their well paid bosses in spite of unremarkable and failing performances. 

The usual defence is that the bosses' contracts legally bind the companies to offer the bonuses. The question left unasked is why the remuneration committees wrote the contracts in this way.

The remuneration committees say they take the advice of "compensation consultants" to ensure their pay is competitive in the market. A US Congressional Committee looked into this, and concluded that the same compensation consultants who were advising on executive compensation were:

“simultaneously receiving millions of dollars from the corporate executives whose compensation they are supposed to assess.” 


The report went on to say -

• The fees earned by compensation consultants for providing other services often far exceed those earned for advising on executive compensation. In 2006, the consultants providing both executive compensation advice and other services to Fortune 250 companies were paid almost 11 times more for providing other services than they were paid for providing executive compensation advice. On average, the companies paid these consultants over $2.3 million for other services and less than $220,000 for executive compensation advice.
• Some compensation consultants received over $10 million in 2006 to provide other services. One Fortune 250 company paid a compensation consultant over $11 million for other services in 2006, over 70 times more than the company paid the consultant for executive compensation services. Another Fortune 250 company also paid a compensation consultant over $11 million for other services, over 50 times more than it paid the consultant for executive compensation advice.
• Many Fortune 250 companies do not disclose their compensation consultants’ conflicts of interest. In 2006, over two-thirds of the Fortune 250 companies that hired compensation consultants with conflicts of interest did not disclose the conflicts in their SEC filings. In 30 instances, the companies informed shareholders that the compensation consultants were “independent” when in fact they were being paid to provide other services to the company.
• There appears to be a correlation between the extent of a consultant’s conflict of interest and the level of CEO pay. In 2006, the median CEO salary of the Fortune 250 companies that hired compensation consultants with the largest conflicts of interest was 67% higher than the median CEO salary of the companies that did not use conflicted consultants. Over the period between 2002 and 2006, the Fortune 250 companies that hired compensation consultants with the largest conflicts increased CEO pay over twice as fast as the companies that did not use conflicted consultants.

Some bosses had the sense to decline the lucre with little public goading, though some wailing and gnashing of teeth was heard as certain packages were sent back. Of course, not all CEOs turn down their bonuses. The shareholders of Citigroup voted against their CEO's multimillion dollar pay package.

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How collective switching can help households get a fairer deal on energy bills

By Lani Shamash, of thepeoplespower.co.uk, writing on the UK energy market.

Mistrust, alienation and inertia. They’re consumer characteristics which have become synonymous with the UK energy industry as customers, the media and the government rail on a daily basis about the evils of the industry. We all talk about it, we all write about it, in fact I’d go as far as to say it’s a national pastime, a conversation topic so customary it’s become more of a Great British staple than the weather. After all, it’s not just isolated to the energy market, but now synonymous with the pharmaceutical, housing, mobile phone and, of course, financial industries, to name a few.

Clearly, in its current state, the relationship between energy suppliers and household consumers is skewed. And it’s a costly skew too; we collectively over-spend £4 billion a year because we’re on the wrong energy tariff. So when, last week, Nick Clegg announced that he had made a deal with the major energy companies, expectations were high. So what was agreed? Once a year the ‘Big Six’ will tell consumers whether we’re on their best tariff. Anything else I hear you ask? Er, no... That’s it actually.

It’s not much, but it’s a step towards something which we all desperately need; simpler, fairer energy bills. We need it to end the frustration brought on by the thousands of different tariffs which are changed with more regularity than an incandescent light bulb. Or to combat the sense of defeat in the person who throws that quarterly bill straight in the bin before even attempting to decipher its contents. And we need it to prevent the horrifying headlines on the fuel poverty epidemic which, according to a report commissioned by the Department of Energy and Climate Change, contributes to the 27,000 excess winter deaths that occur each year.

But most of us do nothing. The vast majority of us don’t even switch energy suppliers despite government advice telling us to. It might have something to do with the prospect of a big penalty, a phobia of forms, or a cynical little voice in your head which tells you that they’re all the same, that it’s a lose-lose situation so why bother. But you’re not alone.

You could join dozens, hundreds, thousands, and even millions of other little people to become a real force. Group bargaining’s an old idea, but it’s still a good one, and with the advent of mass internet access the possibilities are endless.

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The gang debate the safety of wave-and-pay cash-free systems

Consumers – and con artists – get behind contactless payments

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Stop Britain’s biggest rip-offs, and no budget cuts or tax rises are required. Make sure you ask your candidate about them before you vote

Next time they knock on your door, ask them what they will do about some of Britain’s biggest rip-offs: tax dodging, housing, the banks, gas & electricity bills, and MP's pay. We’ve given you a few ideas to start you off...

Tax evasion and avoidance: HMRC estimates that £35bn is dodged in tax. Nobody can know the actual figure, as so much secrecy surrounds tax dodging. Credible estimates put it at over £70bn. There is a huge and complex list of perfectly legal ways that corporations and the very rich can avoid tax – a bit like “claiming on expenses” but more sophisticated. Yet the ConDems are cutting the number of HMRC staff who investigate tax evasion and avoidance, and their efforts to “simplify” the tax system never include simplifying those loopholes. Labour never focussed on this when they were in power.

Suggest a policy: Increase HMRC staff, and monitor their performance. The cost will be peanuts compared to the sums involved. These loopholes must be closed, and the penalty for deliberate evasion should be a prison sentence.

Cut the cost of housing: The average tenant spends a fifth of their income on rent, and those costs are rising. More and more people are being priced out of the housing market because wages continue to fail to keep up with the rising cost of buying a house. The charity Shelter says 1.6 million children in Britain live in housing that is overcrowded, temporary, or run-down. Yet the government’s proposed building of 150,000 affordable homes over four years is less than a third of what is needed. This will leave millions of families stuck in limbo on housing waiting lists, and push house prices further out of the reach of those on ordinary incomes. Perfectly decent house-owners are genuinely afraid of what might happen if their property prices level off or even fall. But the less money everyone spends on housing, the more everyone spends on other parts of the economy that generate jobs, taxes and pensions for all. Cutting the cost of housing, just as cutting the cost of any other essential service (energy, telecoms, transport, health, pensions, banking) will directly benefit the whole economy. Since the early 1970s UK house prices have tripled in real (inflation-adjusted) terms. In Germany, the cost of residential property has barely budged in real terms in the past 40 years.

Suggest a policy: Build 600,000 affordable homes over the next 4 years.

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The gang discuss ways to solve the issue of party funding

Gatecrashing the party... donations

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Tax Haven Britain - Bearer Shares and Disappearing Companies

By Richard Murphy, founder of the Tax Justice Network , director of Tax Research LLP, and author of The Courageous State


Alistair Darling, former Chancellor of the Exchequer, has said the UK is not a tax haven. That is not true. It is using any reasonable definition, including that which I proposed. I’ve already suggested one obvious reason why it is, which is the existence of the domicile rule, so let’s take a second example that is less obvious.

This is the fact that the UK allows the issue of bearer shares. This is deliberate. The right survived into section 779 of the Companies Act 2006. As one formation agent who seems to specialise in the more esoteric end of the market has noted, UK companies with bearer shares are ‘our most popular package with UK residents’. It’s not hard to see why:

1) This option allows the names of the real owners of the shares in a company to not just be hidden: they simply aren’t known. As Wikipedia notes:

A bearer instrument is a document that indicates that the bearer of the document has title to property, such as shares or bonds. Bearer instruments differ from normal registered instruments, in that no records are kept of who owns the underlying property, or of the transactions involving transfer of ownership. Whoever physically holds the bearer bond papers owns the property. This is useful for investors and corporate officers who wish to retain anonymity, but ownership is extremely difficult to recover in event of loss or theft.

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Chris and a monied chum debate revealing MPs' tax returns

Should he or shouldn't he...

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Bearer Shares: perfect for hiding your ownership of a company, profits and wrong-doing. Available in your favourite tax haven, the UK

George Osborne, the chancellor, expressed shock: “I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs, and to be fair it’s within the tax laws".
So, lets take a closer look at one of the provisions made available by Britain's legislators for the tax dodgers:


Many people have heard of "bearer bonds" - a favoured currency of bad guys in movies seeking larger payoffs. Fewer have heard of "bearer warrants", and fewer still of "bearer shares". There are many respectable reasons for bearer securities of the bond and warrant variety. They are as good as cash so long as they are not counterfeit (the same can be said of cash). Take a £10 note from your wallet, and you will find the words “I promise to pay the bearer on demand the sum of …”


Just as you don't have to prove the £10 note in your pocket actually belongs to you when you spend it, you don't have to prove the bearer security belongs to you - just having it is proof enough. The London Metal Exchange, highly regarded for its discipline and probity, runs its trading activities using bearer warrants. How else could several tonnes of copper be delivered by a man on a bicycle.


On the other hand, there are few respectable reasons for "bearer shares". The only reason for incorporating a company in this way is to disguise the ownership. And where in the world would such perfidy be allowed? Well, according to the Economist newspaper, Britain:

Britain (unlike most offshore locations) does not regulate company-formation agents. It even lets firms be founded with bearer shares, which, like cash, belong to whoever happens to have them with him at the time. Most countries have abolished these securities, under pressure from international financial regulators, but one British website offers same-day incorporation of a UK bearer-owned shell for a mere £142 ($227), within four to six hours.

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LIBOR Manipulation - how doping has spiked the lending market and robbed small businesses

Financial Innovation is the great 'unique selling point' of the City of London's financial services industry. We are told it is to hold on to these innovative companies and creative people that we must regulate that industry weakly and tax its top executives frugally. However, history has shown that financial innovation, in its search for innovative opportunity, allows no scam to be left untried. 


As any sporting bookie will tell you, you make more money by successfully betting against the favourite in a contest than you make betting for it. Doping the best horse to slow it down or bribing a cricketer to throw a match are tried and tested ways for your well connected crook to make a bundle. An innovation that was never going to go unnoticed by our financial innovators.


The FSA has suspected that some of our bankers have been doping the London Interbank Offered Rate (LIBOR), nudging it lower than it should be. LIBOR is an index generated by the British Bankers Association, and is supposed to show how much banks have to pay to borrow money from other banks (interbank lending). This is achieved by a panel of banks reporting how high an interest they believe (i.e. not based on what they actually have to pay (and why not, you may ask)) they would have to pay to borrow money.


Now, if this sounds like a 'pulling index' in which guys report how many drinks they have to buy to get a date that's because it is. The more unattractive the guy the more drinks he has to buy and ply. Naturally, most guys would under-report. Which is what the FSA has good reason to believe some bankers have done.

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Once again tax law is elasticated to aid, abet and reward tax dodging as General Anti-Abuse Rule is busted to Corporal.

Tax avoidance is an act between consenting adults: the avoider, and the taxman. The avoider breaks no laws only doing what the taxman does not disallow. “He didn’t say no” is the cast-iron defence accepted in the highest courts in the land. The avoider moves through the loopholes and the lacunae left, some meticulously and some incompetently, by Her Majesty’s Revenue and Customs. In the words of St.Paul (Romans 4.15) “where no law is, there is no transgression”. 

To quieten post-budget outrage over his cutting millionaires' top rate tax while cutting millions of pensioners’ incomes, George Osborne talked about a tough sounding General Anti-Abuse Rule (GAAR) to tackle tax dodgers. But he failed to mention that the recommendation of the author of the Treasury report on GAAR is not to introduce one:

I have concluded that introducing a broad spectrum general anti avoidance rule would not be beneficial for the UK tax system. This would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning.  Such tax planning is an entirely appropriate response to the complexities of a tax system such as the UK’s. 

The Treasury report, written by a leading “very clever, creative and talented” tax lawyer, instead suggests a “moderate rule which does not apply to responsible tax planning” – less GAAR, more MAARNARTP (Moderate Anti-Abuse Rule Not Applying To Responsible Tax Planning). Perhaps an unsurprising conclusion, as tax lawyers supporting GAAR have echoes of turkeys voting for Christmas.

The reality is HMRC does not attempt nor intend to shut tax loopholes. It aims to keep them narrow and exclusive. The lower tax rates and supplementary allowances for dividends and capital gains were supposed to be the preserve of the asset owning classes – owners of property and shares. They aren’t really meant for ordinary people who purely depend on their own labour for their livings.

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Water companies impose a hosepipe ban

Chris ponders how to beat the hosepipe ban that just came into force

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3 in 100 pound coins are fake

The gang discuss what is really to blame for the pound's devaluation – £44m of fake pound coins, or something else …

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How the government is using the “Public Sector Pay Differential” to divide, conquer, and rip-off both private and public sector workers.

It is a lesson handed down by a succession of marauders, from bloodstained raiders in longboats to their ink-stained heirs in the party political policy units, that a small focussed determined well incentivised force will always scatter a larger uncoordinated opposition. 


Make a well targeted attack, scatter the enemy, then pick them off.

The masters of using a small force to scatter numerically superior opposition - Hannibal, Caesar, Napoleon, "Fast Heinz" Guderian - are joined by a politician no less adept at this tactic: "Faster than I look" Eric Pickles, Secretary of State for Communities and Local Government.

The continuing government assault ostensibly on public sector pay uses the ‘confuse and conquer’ tactic to provide a downward ratchet on all pay, both private and public. As an example of confusion, these two graphs on "Average Weekly Pay, 2011" show the same Office of National Statistics data. Because of the different scales on the left hand side of the graphs one seems to show a big pay differential while the other seems to show a very small difference.

The ratchet being used here is a five-step rip-off.

• Step1 – Transfer low paid staff from public sector to private sector. (According to a report by Income Data Services, "20 to 25 per cent of public sector cleaning jobs have transferred to the private sector over the last 14 years")
• Step2 - include high paid staff from the rescued banks, RBS and LloydsTSB, who since 2009 have been counted as Public Servants by the Office of National Statistics.
• Step3 – Compare public sector and private sector wages. Private sector now looks lower, because of the swap of low paid permanently out and high paid temporarily into the public sector, as described above.
• Step4 – Cut public sector wages - using the differential as an excuse.
• Step5 – Cut private sector wages – which no longer have to compete with a public sector differential.

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