Realist, not conformist analysis of the latest financial, business and political news

Huzzah For Stupid Ideas – Lifetime Income Super Tax

Again to question that expansion of the universities. Those who wouldn’t be allowed to lecture at the decent ones – the only ones when supply was limited – now appear to be encouraged to think at the modern ones. This does not produce an advance in the quality of thought. As an example, the idea of a lifetime income super tax. The problem identified being that some people have talents, skills, the application, which enable them to make pots of money. Can’t have this, obviously, so we must tax it off them.

Sadly, taxing wealth doesn’t really work, we’re already at the Laffer Curve peak for income tax, so, erm, aha! bright idea:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Consider, for example, a policy whereby taxpayers would pay an additional 5% on all their future taxable income, once they had earned lifetime income far exceeding that of an average person – say £2.5m. Such a “lifetime income super-tax” (or LIST) would be easy for individuals to calculate and for tax authorities to verify. It would use data that tax authorities already collect, and historical data that they already possess. The idea of a LIST is still new (and something that colleagues and I are exploring at MMU’s Future Economies Research Centre), but LISTs have the potential to tax wealth in a progressive yet practical manner. From a taxpayer perspective, the incremental tax increase incurred would be sufficiently small that few LIST-payers would want to give up on the careers and businesses they have built for themselves over a lifetime, including the lifestyle, prestige and personal satisfaction associated with their positions. True, some people may migrate, though this would mean giving up on the communities and markets in which they had thrived. Others will be tempted to work less, choosing to live off their wealth instead. However, any gains they make from liquidating their wealth – and any income they receive from it – would also be subject to the LIST. The impact of the LIST on investment would also be much lower than for conventional wealth taxes. Unlike taxes based on how much wealth someone possesses at a given point in time, individuals cannot consume more to stay below the LIST threshold. As a LIST would tend to target people towards the end of their careers, it would also improve intergenerational inequality. A LIST might even help address gender differences in disposable income – with those (predominantly women) who take time out of their careers to care for children less likely to pay the surcharge. Wealth taxes as they exist today are deeply flawed. But that doesn’t mean that policymakers need abandon taxing wealth altogether. To extend Colbert’s metaphor, it makes sense to pluck the geese with the most feathers – we just need to use methods that minimise hissing. [/perfectpullquote]

OK, except we’ve already got something akin to this. The limits on the size of pension pot that can be accumulated before higher tax rates kick in. This is, economically, the same thing. Higher tax rates on higher lifetime incomes over a certain amount – pensions just being deferred pay after all. So, what happens?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] GPs are increasingly choosing to take early retirement, with the numbers doing so rising threefold over the past decade, data from NHS Digital show. The number of GPs claiming their NHS pension on voluntary early retirement grounds increased from 198 in 2007-08 to 721 in 2016-17, and the number retiring on ill health grounds rose from 12 to 63 over the same period. Over the same period, the number retiring on age grounds fell by 60%, from 944 in 2007-08 to 380 in 2016-17. [/perfectpullquote]

Why’s that then?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The number of GPs taking early retirement has risen sharply following a clampdown on multi-million pound pension pots, new figures show. An investigation shows 62 per cent of GPs who retired in 2016/17 did so before the age of 60 – having made up just 33 per cent of cases in 2011/12. The trend follows changes in pension rules, which mean the cap on how much savers can amass without being taxed has fallen from £1.8m in 2012 to £1 million. It comes amid record closures of GP practices, with senior doctors warning that the profession was being left “on its knees”. The analysis by Pulse magazine shows almost 3,500 GPs have taken early retirement since the clampdown, which reduces the financial gain from staying in work to reach the maximum pension. [/perfectpullquote]

So, err, lifetime earnings limits – or extra tax rates above a limit – have substantial effects upon labour supply then?

What does this mean for the lifetime income super tax? Either that it’ll have to be at such a low rate that the income will be trivial, or we’re going to see this substantial labour supply response.

That expansion of the universities. The hallowed halls are supposed to be places where peeps go to think. Would be nice to have some evidence that this actually happens.

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