No more income tax cuts

Many years ago, Thatcher made a big song and dance about wanting to cut the headline rate of income tax, which was 30% at the time. Higher rate tax was at a much higher rate, the Beatles who were so pissed off about it they wrote a song about the taxman. Thatcher was right, a top income tax rate of over 90% was probably too high 😉 Notable about post-war Britain was it was flatter in income than today, a lot of money came in the form of the aristocracy, which is still there but somewhat drowned out by the nouveaux riche in the last 40 years. The aristocracy didn’t have too much problem with income tax because their riches came in the form of capital.

Inocme share over time. The bottom 10% have been mullered, particularly since the GFC. Presumably there were no poor people years ago because they didn’t register in the stats

The grocer’s daughter backfilled the hole in the Government’s finances before launching her tax cuts, largely through the free gift of North Sea oil, and selling off anything publicly owned that wasn’t nailed down. The personal finance motto holds – save before you spend on elective nice-to haves, a gracenote that the Liz Truss “I was right all along” tribute band didn’t find the need to play.

In doing that Thatcher established a shibboleth that income tax is in and of itself wrong. In her time, given where she started and these two free gifts, it probably was higher than it should have been.

The first free gift of North Sea oil revenues we seem to have parked in house prices, imagine what we could have done with that otherwise. The beneficiaries of this are primarily Gen X and Boomers¹, and their legacy to their greedy kids as time goes by. Everybody wants to favour their kids over everybody else, this will lead to feudalism as time goes by, hopefully this is will not happen fast enough to be my problem. See the concept of private schools and the bizarre claims that inheritance tax is the most hated tax in the UK. The torygraph gets its knickers in a twist over IHT all the time and comes to exactly the wrong conclusion after acknowledging the rising amounts of dynastic wealth. As for the journalistic flannel of calling it a tax on the dead, if there’s ever an occasion that you can resolutely tell HMRC to eff right off it’s from six foot under. What are they going to do, put your stiff in prison? There’s not enough place for the living as it is.

That article makes much of your 3k a year allowance, I wonder if the AI instance otherwise known as Carl Emerson is aware that humans live about three score years and ten, and start their lives mewling and puking so 20 years of that is written off being a child. So even if you start giving your future wealth away as soon as you come of age that’s £156k you get to give away IHT free, which is not a huge amount against a functional allowance of over a million sods, particularly given the impracticality of getting halfway there 😉

In general if you want to favour your kids then Be No King Tut and give it to them by the time you’re 63. If you’re lucky you get to enjoy them living the dream for seven years or more, and if they piss it all away on the horses then you clearly failed in you parental duty to inculcate good character and deserve all you get, either way IHT is not their or your problem

The second free gift, selling off everything not nailed down, is the source of a large part of what’s wrong with Britain now. Once upon a time we acknowledged a basic and fundamental truth, which is that most Britons didn’t earn enough to carry the stupendous load and lumpy cost base of owning a house on a small island with lots of people.

They still can’t can’t afford the capital investment, but where previous generations could live in council housing now they are at the mercy of rapacious BTL landlords who bought up most of that stock to turn a profit. A younger mustelid was one of the poor people cleansed from cities, so I struggle to find a huge amount of sympathy for the I lived here as a kid crowd, nobody has a right to live where they grew up. I saw that train wreck heading my way a long time ago and took evasive action. Straight into a lesser train wreck, but at least one I could crawl from the wreckage. There still should be a reasonable housing option for people who can’t afford the capex as previous generations ensured, rather than fleecing the poor and banking it into the hands of Boomer/GenX BTL landlords to pass it on to their wastrel children

Other things that needed a decade-long time horizon worked better before privatisation – for instance the market couldn’t be arsed to build reservoirs in the UK, as you can see if you list the reservoirs on wikipedia and rank by completion date. In general I think the results from 40 years of the Great British privatisation experiment are in.

State inefficiency is replaced by private-sector inefficiency, which in itself isn’t the problem, but the short-termism is. To be honest I’d rather see civil servants cream off ‘gold plated pensions’ rather than support overpaid ‘because they’re worth it’ utility CEOs with taxpayer money. This description of privatisation as a modern version of the Enclosures in Britain has cogence.

historic enclosures of common land, excluding some in order to strengthen property rights for others. Think of the American intellectual property regime that (prior to a 2013 court ruling) developed to allow 4,300 human genes to be patented as if they were inventions. Or indeed of its European equivalent, not long ago strengthened in the name of “creativity,” to guarantee fees for the great-grandchildren of ageing rockers for decades after their death.

Some things did respond well – the deregulation of finance was successful in many ways. Utilities and railways, not so much. On the other side of the balance Mick Lynch is poster child for what is wrong with State provision – it allows the Scargills and Red Robbos of this world to rule the roost.

The tough problem with all of this – the right point on the nightwatchman state/European social democracy spectrum is that these are balances of opposing forces. In most such balances the forces should do just that, balance. We don’t need British Leyland back again, nor do we need privatised water, and private housebuilding seems pretty naff.

So what’s wrong with income tax cuts? Nobody wants to pay tax, and nobody wants to pay more tax, for sure. However, despite the rantings of the torygraph who say the tax burden is the highest ever, well yes, Torygraph, meet inflation! I remember paying proportionally more tax on my first job than my last, which was rather better paid than the first in real terms. What else has been happening over the last 40 years?

Since 1970, area rates of poverty and wealth in Britain have changed significantly. Britain is moving back towards levels of inequality in wealth and poverty last seen more than 40 years ago.

Yeah, anyone with eyes in their heads can see that. It’s particularly apparent to me in urban areas. Rural poverty tends to be less apparent because it is more spread out. Poverty is extremely visible in some seaside areas. The JRF says that nearly four million people are destitute.

The problem with the income tax is bad shibboleth is that it makes for bad policy, as tax has to be hidden elsewhere, with proxies for income. Council tax, for instance, uses house valuations as a proxy for income, and the starving of council funding by central government knocking off a third in real terms during the current regime shows up, first in crappy services and ultimately in bankruptcy.

All over the place there are hidden taxes and/or things costing too much, because of the income tax is bad doctrine. Why is income tax worse than hiding the cost of doing things in other places? As for the barmy idea of cancelling inheritance tax, WTF? The Torygraph has quite a good chart on the historical real terms levels of the tax thresholds. Although the article bellyaches about the personal allowance, I note it is still one and a half times what it was in real terms before the GFC, if you want to know what the LibDems ever did for you, then that uplift in the personal allowance during the Coalition was one thing that lasted, even if it is being eroded now.

Obvious future wins for the government are equalising CGT and pension tax with tax on earned income, and I do need to clear that SIPP out before Labour adds NI to pension income, which looks like a logical step. I am obviously maxing the ISA holdings first, with a bit of luck when the Lifetime ISA limit happens they will grandfather historical amounts, in the same way as they did with the LTA when it was reduced.

So I’m going to go out on a limb here. No more bloody income tax cuts, you stupid wankers. I know it’s catnip to your base, but you don’t have Thatcher’s windfalls. You keep on bitchin’ about the untermenschen spending more than they can afford, well, it’s sauce for the gander too.

of non-investments masquerading as alternative investments

Monevator has a bit on whether premium bonds are a good investment, as a basic rate taxpayer with little honest earnings income from selling my time for money (I don’t, now) it seems a maybe.

As I get older I seem to get more sensitive to being ripped off. I can somehow live with being taxed on dividends, but being taxed on cash deposits hacks me off in spades, because when the ‘return’ is less than inflation, then it’s not a return, it’s a reduction in loss. The obvious hint that the Universe is giving me is don’t hold that much cash, bozo, as opposed to the inference the Torygraph’s old duffers draw, bleating for tax cuts while people starve on the streets like in a Charles Dickens novel 😉

That’s 18 months of premium bonds full whack and I got £2525 interest, ending up about 3.4%. Given that the Bank of England tells me the value of this 50k stake has fallen by £4200 obviously I have eaten some crow. Given that bank interest rates have monotonically risen across the period from 0.5% to a shade over 5%, that is a serviceable average. The story of governments stealing value from the masses by devaluing the coin of the realm is as old as history.

BoE Interest rates trajectory

The Premium Bond returns are lumpy as hell

Which presumably why Monevator is telling me that taking the expected return “But this is to misunderstand how probability works.” Because I am, of course, taking a sample from the £121bn total and a very small one at that – n=50000 in my case. I believe that in the case of premium bonds each £1 buys one bond. The prize fund rate is 4.65%, the expected variation were these normally distributed then I’d expect most of my returns to be within 1% of this mean value (that’s ~ 4.6 to 4.7%, not 5.7% to 3.7%!) to get within two standard deviations of the mean. On a 50k stake the noise in the return rate is dominated by the general buggering about of interest rates, and there is some undeclared deliberate fiddling to skew the returns so they can say a large headline figure of possible payouts while keeping most punters happy. The presumption of normality of the distribution is therefore moot. This fiddling is because humans are susceptible to the ‘it could be you’ effect that the National Lottery play on so successfully to extract money from poor people to spend on middle-class ‘good projects’ – a piece of State supported evil perpetrated by John Major’s Tory government in the 1990s.

Robin Hood would not approve. If I were God for a day I would ban the National Lottery in particular, because I have spent too many hours in Co-op shops behind some punter buying Harry Rags and a scratchcard, and I can hear it in the banter ‘twixt punter and sales person that the punter believes there’s a realistic chance of winning. At least the cigarettes deliver a guaranteed win.

However, Premium Bonds aren’t like that, since they don’t relieve you of your stake, and with a large enough sample size you can get the variation down to workable amounts. It’s never going to be you with the million pound prize, I don’t hold Premium Bonds for the infinitesmal chance of shitloads of money. I use them because they are tax free, and about as risk-free on capital as you can imagine. There is the known risk of 10% of the value falling off the wagon every year of late, natch.

Something being tax free gives me a win on two fronts, one is obviously not paying tax on it but the other win is not having to fill in the paperwork. Doing that by hand is tiresome. I use Raisin for unsheltered cash savings, because they act a bit like a nominee account for shares – their intermediary Meteor asset management holds the cash, so I don’t have to sign up with a bunch of different banks. These days that is not just a pain in the arse but a significant hazard of having your personal details spaffed to ne’rdowells, sign up with as few things as possible 😉

Raisin has that advantage for banking, where all the know your customer shit makes this more intrusive. For income Raisin give you a consolidated tax certificate. I wish I had known that would come out (it was in May I think) before I had decided to streetfight adding up all these bits from their website, which I still managed to get wrong, I had held off submitting this the HMRC in a vague hope they would give an official certificate of interest.

I use TaxCalc for doing the tax return. Sure, it’s £35 a year I don’t need to pay, the HMRC online system is serviceable though klutzy and error-prone in my hands as you have to choose to save your work if you are not one of thse hyper-organized people who get everything ready before you start. And TaxCalc does a great job of sorting out capital gains tax and the declarations you have to do.

The rules of declaration of capital gains are complicated – in particular the requirement to declare transactions where the annual proceeds > four times the CGT limit even if the gains do not breach the CGT limit of £6k (now) which would set a limit of £24k, and this implies there is/was a separate £25k limit. So if you bought £100k of Mustelid Enterprises and sold it for £50k you would still have to declare this (proceeds > CGT limit * 4) even though you were nursing a whopping loss. At least you could book this loss and roll it forward to offset against any gains over the CGT limit in future. But say the hard-working mustelids had dropped a 10% gain on you, well, it’s less than the (at that time) 12k CGT allowance. But since you have sold something worth more than 4 * 12k you still have to declare it even if no tax falls due, which is a shit. Presumably if you sold > 48k of shares in total you have to declare it, even if you made zero cap gain. This year that will be 24k due to the lower CGT allowance. Even more complicated, say you are a big churner, say a day trader, and you sell £1000 of shares and buying another £1000 on the turn 24 times in the year, but making no capital gain and no losses. Do you have to declare that even though there’s no tax to pay? Beats the hell out of me as to whether that’s the case.

I took my £12k capital gain last tax year largely on gold and BP shares, but with Taxcalc it is reasonably easy to declare all sales, I am not a shockingly active investor since time has shown most money is made sitting on your hands.

It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!

Jessie Livermore, a well known historical shorter. That is not to say he was advocating being a passivista 😉

But I CBA to work out if I need to declare other sales or combinations, so I declare all. That does produce screeds of cruft in the tax declaration, particularly if I sell a holding I have been building up incrementally over time. But it’s better to declare what’s not necessary than fail to declare what is, IMO. And obviously I sweat the ISA allowance, and I still use the ~3.6k SIPP allowance, although having to pay tax on 75% of it weakens the tax advantage to 6%, that’s £180 a year. I have held some of that as shares over a few years, but I am thinking of drawing the lot out before an incipient Labour government has the bright idea of charging NI on pension income which would turn that measly £180 win into an eyewatering loss 😉

of gold and CGT

The tax on capital gains is lower than that on income for basic rate taxpayers, and you can choose the time and place of battle with shares. Obviously you first max your ISA, which is a decent wedge these days. In a second part of his series on deadbeat investments, Monevator had a piece about whether gold is a good investment. Eh? It’s not an investment at all. Think of it as old-fashioned Bitcoin, with better garb, and a track record of thousands of years rather than ten 😉 Its peculiar difference from investments is that it is a bearer instrument – possession is everything. That, of course, means it is not productive. You can get productive physical possessions like a farm or a business, but you generally can’t run with them. Gold in physical form does peculiar things to the human psyche. The fictitious character of Gollum encapsulated many of these. I don’t really do physical, I do have a couple of sovereigns and a teeny gold bar given to me by relatives.

given to me by my grandfather. Last time I wrote about it it was worth £20, now it’s £57, which is rather better than just tracking inflation, in which case it would be worth £28

Gold is not a financial investment IMO. It is an investment in you. It makes it easier to watch other stuff go down and go ‘meh’. It also makes you do weird shit. F’rinstance my 10 years younger self observed that gold has no place in the ISA, and it only took me a decade to action that, and give this bed-blocker the order of the boot, into the GIA. Some of this was practical, I didn’t have a GIA in those days, because the ISA and SIPP/AVCs were hard enough to keep up with given my limited resources, and the gold holding was not as big as it is now. But even so, I gave up return. Gold is an old man’s pastime, if you are a young gun on the make then steer well clear. But what it does do is offer a little bit of relative constancy compared with the fickle stock market. I have shown the chart of SGLP (gold ETF) relative to VWRL, which is about parity as a holding in my case. The VWRL has been built up over many years, I have never sold a share of this ETF.

No contest in returns, but the suckouts are less sharp

Gold in a GIA is an interesting swing producer of gains/losses, as it has a slight tendency to go opposite to changes in the stock market. The narrowing CGT allowance means it’s more important to balance these, and churning the holdings can be a way to harvest losses – for instance selling SGLP for SGLN, and similarly VWRL has a corresponding Invesco FTSE All-world ETF. Obviously the grand aim is to increase the total amount, which is a capital gain, but within the limited collar of the CGT allowance.

This GIA is not a balanced portfolio. The green pacman is SGLP

SGLP is a much larger part of the GIA than would be rational for my age and risk tolerance, there is the hidden iceberg of the ISA estate that it’s also offsetting. Portfoliocharts shows the effect of gold on reducing the ulcer index, and also the limitations of mo’betta – 20% is about the upper limit, otherwise you risk going to a very specific type of Gollum-esque goldbug hell, eating a significant negative real return for a large proportion of your life. Don’t do that. Again, young guns should steer clear, invest in productive assets.

At the moment gold is showing gains and is probably overvalued. I will have losses to harvest in future, the general feeling is don’t buy any more, and arguably the proportion relative to total networth is on the high side. OTOH I took capital gains enough on gold this last tax year. I am looking to hold a constant amount in gold ounces, rather than cash terms, and hopefully the equities will beat it out and get the proportion down.

My biggest problem is cash holdings, I despise cash with a vengeance and got to pay income tax on the interest. Given the stock markets are drifting down and October is almost through I need to load up. I have contributed the last half of my Vanguard ISA today though they don’t yet seem to allow me to buy ‘owt with it. I try and buy about half in the first part of the year because passivistas keep yattering about time in the market, but I tend to hold about half to contribute about now, because October tends to be bad for equities, and I like the sugar rush of the Santa rally. I bought some in that ISA last week and VWRL is more attractive now than it has been for a while.

All in all, no, gold isn’t an investment, nor is cash/premium bonds. They aren’t productive in any useful manner, and stuff like that is called saving, and then only if you are lucky. The real value of cash is likely to slowly drip through my fingers over time for the rest of my life due to increasing financial repression, dunno about gold. You can’t fight financial repression. It’s like bears. Avoid bears. Don’t fight bears. They will kill you.

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1. I fall into this cohort category, but I am not one of these beneficiaries, buying my first house still counts as my all-time top financial epic fail. ↩