...a blog by Richard Flowers

Thursday, May 15, 2008

Day 2690: Sooty's Budget Take Two – Doing the Right Thing in the Wrong Way for All the Wrong Reasons


What is really TRAGIC is that Sooty's fix doesn't even WORK: certainly the people who lose out are CUT from those earning between £5,000 and £17,000 to just those earning between £7,000 and £9,300, and the amount that the losers lose is a lot less (about £37 a year, rather than £157).

But that's still SUBSTANTIAL gains for those people earning £30,000 while the lowest earners are PENALISED.

I want to know whether this increase in allowance is permanent, or will it be reversed next year?

And there's a SERIOUS question about whether Sooty knows how to do MATHS.

You see our ESTEEMED Chancellor has said BOTH that Higher Rate Taxpayers will not benefit from the raising of allowances AND that he has therefore lowered the Higher Rate Threshold by £600.

Lowering the threshold by the SAME amount as you raise the allowance means that you pay BASIC RATE TAX (20%) on a SMALLER amount of money and HIGHER RATE TAX (40%) on the SAME amount of money.

This Drawing might help:

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So you pay LESS basic rate tax and the SAME amount of higher rate tax. That means LESS in total.

In other words, if Sooty MEANS what he says about reducing the Threshold by £600, then ALL taxpayers, and this means especially Higher Rate taxpayers get some tax BACK – it's £120 for anyone earning more than about £6,000.

Not enough to compensate the worst off under Mr Frown's budget, but a nice little freebie for the already quite nicely off thankyou.

Here is a drawing of the WINNERS and LOSERS:

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(That big downwards spike at around £40,000 in income comes from Mr Frown hiking up the top end of the National Insurance band. Higher earners pay 11% on an extra £5,200 this year, moving us closer towards having just TWO tax rates: 31% and 41%. Or had you forgotten that National Insurance is just HIDDEN Income Tax?

Average salaries are around £26,000 but I do wonder about the DEMOGRAPHICS. It would be AWFULLY cynical to suspect that that national average is made up of large numbers or workers getting paid around £20,000 and large numbers of managers getting paid around £40,000, because that would mean that FEWEST people benefit from the tax changes.)

Now, I guess it's POSSIBLE that Sooty doesn't ACTUALLY understand how the tax system (which he is notionally in charge of) works. Be FAIR: he's taken over from Mr Frown, who spent the last ten years trying to make it as tangled as possible.

What he PROBABLY wants is to CANCEL out that EXTRA £120 for Higher Rate taxpayers, but without changing the tax RATE. The only way to do that is to make them pay the higher rate on MORE of their earnings, and that means lowering the Threshold EVEN FURTHER.

In fact, you have to lower it by ANOTHER £600. That's £1,200 in total. (Because by making that money taxed at 40%, you are paying an extra 20% on top of the tax that's already being taken. So you need to lower it by £600 because £600 x 20% extra tax = £120)

That would give us a REVISED map of Winners and Losers that looks like THIS:

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Obviously, this would draws more people into the band of Higher Rate taxpayers. But that is hardly anything new; it is so normal that it even has a name: "FISCAL DRAG" (which thankfully does NOT mean Mr Frown dressing up as LADY!).

You can probably bet your shirt that even if Sooty reverses the £600 extra on the Allowance, he WON'T reverse the £600 cut in the threshold next year!

Anyway, what is clear from this is that Sooty has not raised allowances by ENOUGH fully to compensate all of the people that Mr Frown DIDDLED in the first place.

And you know, Mr Frown ADMITTED as much in his answer to Mr Clogg at Prime Monster's Questionable Time.

What he or Sooty SHOULD have done, was raise allowances like this, as much as he could, and KEPT what was left of the 10p band. That would have avoided ANYONE having to pay MORE by DOUBLING their starting rate of tax.

By applying Fiscal Drag – though hopefully NOT at the Despatch Box – you could have done this in a way that was FISCALLY NEUTRAL, i.e. it didn't raise any EXTRA tax but didn't cost more EITHER and would have been REDISTRIBUTIVE – letting the people on lower earnings keep MORE of their salary and taking a little extra away from those who are better off.

Which, of course, brings me to the REAL disaster of this sorry business: where Sooty got the money from. And it's BANK of MAGIC MONEY TREE again.

Yes, basically, the Government has BORROWED £2.7 BILLION to hand over to us as a BRIBE to make us forget that they robbed the POOR to pay the RICH another BRIBE.

It's ALMOST "monetarist" (by which I mean "barmy"). Remember how the THEORY goes: to fight inflation, you cut government spending and borrowing to reduce the amount of money moving about; if the economy is stagnating, throw more money into the system to get it going again.

That's what the Monkey-in-Chief and his Neo-con Reaganomic Replutocrats are doing. And where the Monkey-in-Chief's administration leads the Labour are, as always, soon to blunder in after.

Of course, at the moment we have the economy going backwards BUT the cost of imports – particularly food and fuel – are going through the roof. This means that Inflation is going UP, even though the economy isn't growing, and Ms Caroline "Heart of" Flint foresees house prices falling at least 5-10%: it's the spectre of 1970's style "STAGFLATION".

Borrowing money to give away tax cuts at a time like this is as likely to cause an inflationary spiral (as people spend the money on already expensive imports and drive up prices further, leading to demands for wages to keep up) as it is to kick-start the housing market and get the economy back in action.

Still, VOODOO ECONOMICS always was a STAB in the DARK!

Naturally, all the media coverage has ignored all of this and instead focused on how EMBARRASSING it must be for Sooty to have to re-write the budget just weeks after saying, er, "I can't re-write the budget"

Pointing and going "Ha-ha!" is much easier than HARD SUMS.

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