Posted by Christie Malry on November 5, 2014 at 11:36 am
Ritchie is very proud at how well his alternative personal tax statement has travelled. But if there’s one thing in this world that is and will forever remain true it’s that popularity is a miserable gauge of quality.
And, given that we’re dealing with Ritchie, this is especially true. So let’s have a look at his methodology.
Then I assumed a number of quite reasonable things, all based on the fact that although there were explicit spends in 2013/14 of £726 billion there are additionally what are called tax spends, which are money not collected as a result of reliefs and allowances within the tax system, and there are also some implicit subsidies the government supplies not even included within those totals.
So he’s adopting his usual approach of arguing that various tax reliefs should in fact be considered tax expenditure. So - this argument goes - it’s “tax expenditure” to give me tax relief at 40% on my pension contributions because, economically speaking, it’s identical for the state to write me a cheque for the tax on my contributions as it is for it to simply not tax me on them in the first place.
While in some circles this might work, it produces results in this case that are - and I’m going to use a technical term here - Ritchiebollocks.
Imagine a country with ten identical employees. Each has income of £10,000 from which they make pension contributions of £1,000 and pay income tax and NI of £3,000 on the rest. Their tax return would look like this (sorry for formatting, I'll just have to tidy it up later):
Less pensions ( 1,000)
Sub-total £ 9,000
Tax paid (£ 3,000)
Total £ 6,000
The total government tax take would be £30,000. To make the example easy, let’s suppose this was spent entirely on the NHS.
A fair statement would look like this:
Tax paid: £3,000
Spent on: NHS 100%
Whereas Ritchie would have us say this:
Tax paid: £3,000
Spent on: Pension tax relief 25%, the NHS 75%.
This clearly is an absurd distortion of what actually happened.
In order to make his numbers work, he’d have to pretend that actually, each employee paid £4,000 of tax and then received a cash rebate. But this isn’t what happens, and would require HMT to send out information to taxpayers that don’t reconcile to what they have in fact paid, because their payslips say they only paid £3,000.
This is why allowances simply don’t belong on the personal tax statement. Trying to shoehorn them in manages to create something even less accurate than what the Treasury came up with in the first place. And that’s really saying something.