Zigurds G Kronbergs – Wordsmith

The coalition government’s decision to introduce a higher capital gains tax rate of 28% goes at least some way towards bridging the income tax/capital gains tax chasm that this blog identified, so one should be grateful. However, not to reintroduce the full link with income tax (rates up to 50% therefore) shows a lack of will, which I suppose is attributable to Conservative resistance to ‘raising’ taxes, except VAT of course.  There is still a 22% gap between the top rate of income tax and capital gains tax (50% and 28%), exactly as in 2009-10 (40% and 18%), so in that sense we have not progressed at all.  The argument that it would stifle entrepreneurship is well worn, if not shop-soiled by now, and is trotted out every time any proposal to increase the ‘front line’ taxes surfaces. Of course, there is a point at which high taxation does indeed adversely affect the economy, but we should have been far from it here, especially given the generous extension to entrepreneurs relief also announced in the Budget. Individuals disposing of their businesses or making other major business-related disposals can now enjoy a reduced 10% rate of capital gains tax for the first £5 million of gains over a lifetime (as opposed to £1 million previously, and the would-be £2 million proposed in Alastair Darling’s last Budget in March). Why people making speculative non-business gains should not pay up to 50% (depending on their level of income), however, is a question that has yet to be answered.

This blog does not take up a party-political stance, although of course I have my strong opinions on which party is most, and least, deserving of a vote.

Nevertheless, after observing last night’s debate between the three leaders, I am prompted to make the following observation about the National Insurance ‘controversy’.

You will recall that Labour has enacted a one-percentage-point increase in all NI contributions to take effect from 6 April 2011. The Liberal Democrats would not repeal that rise in the current economic circumstances. The Conservatives have promised to withdraw the rise for all but the highest earners.

For all that NI contributions are a ‘tax on jobs’, it might put things into perspective to note that the United Kingdom has one of the lowest rates of social security contributions for employers in the European Union. Here in Belgium, for example, employers pay around 35%, which is fairly representative of most EU Member States. Only in Denmark do employers pay no social security contributions at all; until recently, neither did employees. The burden of a distinctly more generous benefit system than the United Kingdom’s was met out of general taxation.

Food for thought …

The UK Budget speech, the last before the General Election, will indeed be delivered by the Chancellor of the Exchequer, Alastair Darling, on Wednesday 24 March.

The Treasury is expected to confirm today that the 2010 Budget will be delivered on 24 March. If this is correct, it makes it extremely likely that the General Election will not take place before May.

The Saeima (Parliament) is still sitting as I write, but it has already voted for a series of tax increases, as proposed by the Government. In short, they are as follows:

• the rate of personal income tax is increased from 23% to 26%
• the special 15% rate of income tax for the self-employed is abolished. This will mean that the rate of tax on self-employed profits will rise from 15% to 26%
• income tax is to be payable for the first time on investment income, such as dividends, deposit interest etc. The rate of tax on dividends, deposit interest, and profits from with-profit insurance policies will be 10%
• tax on capital gains from the sale of shares and immovable property will be 15%
• tax will become payable on the private use of a company car. The rate will depend on whether a record is kept of private mileage and on the type of car
• the maximum deduction for medical and educational expenses is reduced from LVL 300 to LVL 150 (this change will not affect expenses for which the deduction is claimed in 2010, however)
• the rate of immovable property tax on land is increased from 1% to 1.5% (this change was already legislated for), but the resulting increase in tax payable is limited to 25% in 2010
• immovable property tax is extended to private residences. Residences with a cadastral value not exceeding LVL 40 000 will be taxed at 0.1%; those with a cadastral value exceeding LVL 40 000 but not exceeding LVL 75 000 will be taxed at 0.2% and those with cadastral values exceeding LVL 75 000 will be taxed at 0.3%. The minimum tax for any residence will be LVL 5 (about EUR 7 or GBP 5.50)
• corporate income tax is unchanged at 15%

Further details will follow when they become available. It is my understanding that all the increases will take effect from 1 January 2010 (except as indicated).

The Saeima rejected an amendment from the SCP (Association for an Alternative Politics) to introduce a progressive income tax, at rates ranging from 20% to 40%.

the Latvian parliament, the Saeima, votes on the Government’s budget tomorrow, Tuesday 1 December.

It seems that the Government has bowed to internal and external pressure, and is no longer proposing to reduce personal and dependants’ allowances. Instead, there will probably be a progressive property tax, a progressive capital gains tax, and an increase of the single rate of personal income tax, from 23% to 26% (the rate was reduced from 25% to 23% for 2009). A pity that there is still no move among the governing coalition to introduce a progressive income tax, however (see previous blogs).

More tomorrow after the vote.

I had the good fortune to appear on Flemish TV a week ago last Friday as a UK expatriate to comment on the predictable but nevertheless disappointing and appalling treatment of Herman van Rompuy’s appointment as first ‘President’ of the European Union in the British tabloid press.

Shame on you, editors, for peddling this xenophobic and EU-hating pap.

Here is the link:

http://www.deredactie.be/cm/vrtnieuws.english/mediatheek_en/2.3815/1.638181

In case any readers of this blog don’t yet know, the United Kingdom’s Pre-Budget Report (PBR) will be delivered by the Chancellor of the Exchequer, Alistair Darling, on Wednesday 9 December.

The Pre-Budget Report, a ‘tradition’ initiated by Mr Darling’s predecessor, Gordon Brown, contains a summary of the state of the UK economy and signals the main lines of financial and tax-related legislation that the Chancellor will propose in the actual Budget, in March or April of the following year.

This year’s PBR will be more than usually interesting. First, it will be the last before the next General Election, which must take place by June 2010 – an election that the Government is widely expected to lose. Whether that means there will be some radical initiatives to strike a battle note for the election or nothing controversial, as the legislative process for the Budget will inevitably be truncated, remains to be seen. Perhaps a mixture of both. Second, it is over a year now since the financial crisis broke, and the United Kingdom remains in recession, unlike France or Germany, for example. It will be fascinating to hear how the Chancellor explains this and what he proposes to do further to bring the recession to an end.

No sooner was the metaphorical ink dry on my last posting than no less a personage than the President of Latvia, Mr Valdis Zatlers, weighed into the debate. Mr Zatlers, who has no executive power, but can refuse to sign a Bill and remit it for reconsideration to the Saeima (parliament), agreed that the proposal to reduce the personal allowance even further was unfair on the lower income groups. He floated the idea of a progressive immovable property tax.

Currently, Latvia charges tax at 1% on the so-called ‘cadastral value’ of land and buildings, although residential dwellings are exempt. After much intense debate among the governing coalition parties, the 2010 Budget proposes to introduce a flat tax of 0.1% on the cadastral value of residential dwellings. The President suggested that a higher rate be charged on those dwellings above a certain cadastral value.

The pressure on the government, from the President, the external lenders and much opinion within the country has proved almost irresistible. The government is now contemplating a climb-down on the personal allowance, and may instead raise the needed revenue from raising the rate of personal income tax back to 25% (it was 25% before 1/1/2009, but was reduced to 23% as compensation for the VAT increases) and, yes, a possible two-rate structure for the immovable property tax.

As the Latvian government submits its 2010 budget to parliament, the debate is again raging over whether or not a progressive income tax (PIT) should be introduced. Currently, as is the vogue in several countries in Central and Eastern Europe, the taxable income of individuals is taxed at a single rate (in Latvia’s case, 23%), no matter how high or low it is. Actually, that’s not quite true, as business income is taxed at 15% (which is the corporate tax rate also).

For a second year running, Latvia has to find new budget savings of LVL 500 million (about EUR 700 million) in order to comply with the conditions of the emergency international loan it had to call on early this year. The government has chosen to do this for 2010 by a combination of spending cuts and tax increases. It is extending the scope of property tax to personal dwellings and may be introducing a capital gains tax and extending income tax to dividends, hitherto exempt. However, its headline measure is to reduce the personal allowance for the second year running. The personal allowance is the amount of taxable income an individual may derive tax-free. Initially, it was set to be LVL 1080 in 2009, but the emergency 2009 budget slashed it to LVL 420. Now, the government is proposing to reduce it still further, to LVL 300 (LVL 25 a month) for 2010. To someone earning LVL 1000 per month, the extra tax resulting (LVL 120 x 23% = LVL 27.60) is of no great consequence. To someone earning the minimum wage (LVL 180 a month), however, LVL 27.60 represents a considerable further loss of income.

This measure would thus hit the poorest people the hardest, which seems scarcely fair. An alternative that the Prime Minister and Minister of Finance have already ruled out is introducing a higher rate of income tax for those with high taxable incomes. Support for a progressive income tax of this sort is by no means limited to the parties of the left, but the government (at least so far) is set against it. As the Prime Minister himself has admitted, however, international lenders would strongly prefer a PIT to the personal allowance cut.  It is true that a leading politician from the People’s Party has likened a PIT to communism (!!), seemingly unaware of or deliberately concealing the fact that a PIT is in place in the great majority of developed and developing nations (including most Member States of the European Union and the United States — hardly a bastion of Leninism).

There are sensible arguments against a PIT, but to my mind, they are weak, and in Latvia’s case especially, easily rebuttable.