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Investment Times

Until the pips squeak

| 30 January 2015 | A A A
Until the pips squeak

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

QuoteThe art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.

The above quote is from Jean-Baptiste Colbert, Louis XIV's finance minister. He said it in the 17th century, and it is a policy which governments around the world have pursued with considerable vigour ever since. I expect to see it in action once again after the general election, whatever the result. One of the big battlegrounds will be the deficit. Despite much talk of austerity, spending has continued to climb. The coalition once aimed to reduce the deficit to £40bn by 2015, but the latest figure is almost £100bn.

This has not been helped by the unexpected weakness in income tax receipts (a mainstay of government income).

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Despite employment rising by 1.3m in the past five years, the number of taxpayers has fallen by 2.2m. The highest paid 1% in Britain pay 28% of all income tax. Corporation taxes show some 830 British firms pay almost half of all corporation tax. Tax receipts have not been helped by the fact that the personal allowance has increased to £10,000, and there has been a huge rise in self-employment, where it is easier to offset expenses against tax.

Compared to 2014 forecasts, the Office for Budget Responsibility calculates a £25bn shortfall in income tax revenues.

Labour are suggesting a top rate rise from 45% back to 50% and a 10% starting rate. Investments which aren't sheltered from tax could also be hit. The Liberal Democrats, who are likely to form part of any coalition planning, wish to align capital gains tax more closely with income tax by raising the rate to 35% and reducing the exemption to £2,500 from the current £11,000.

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History tells us to take all manifesto pledges with a pinch of salt. The reality is whoever gets into power is going to be under huge fiscal pressure, even concerning the ring-fenced areas of the NHS and education.

I believe the electorate should also be wary of taxes which don't affect them right now. When Peel introduced income tax in 1842 the rate was 3% on incomes over £150 which was at the time more than four times average earnings. There are now 30 million people paying income tax. In 1958, stamp duty on house purchases was only payable if the value was over £3,500, 71% more than the average house price. Those thinking that any mansion tax won't affect them should consider the history of taxation.

What does this all add up to? The government has a huge debt mountain to climb, cuts in public spending are extremely difficult to deliver (even Margaret Thatcher couldn't manage it) and stealthy ways of raising taxes are a far more likely route for governments.

I believe investors would be most unwise to ignore the tax shelters endorsed by the government. ISAs and pensions offer a legitimate way to reduce the amount of tax investors pay, and with the end of the tax year fast approaching many will consider using them to the fullest extent possible. ISAs offer tax-free gains, no further tax on income, and immediate access to capital, whereas pensions offer generous tax relief to those putting money away for retirement.

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