Liebrary: Do income tax cuts for the rich make us all richer? Part 2: more dismal evidence to the contrary

[If you want to read Part 1 click here, but you don't need to] 


It was a former leading Labour politician, Peter Mandelson, who said “we are intensely relaxed about people getting filthy rich”. A philosophy that has been followed doggedly by Labour and Conservatives alike for over 30 years. Ministerial claims of shock at tax avoidance and horror at excessive pay have been nothing but camouflage for this policy. 


Particularly since the cut in the top rate tax from 50% to 45%, in the March 2012 budget, government ministers have been swearing that cutting income tax for the rich makes us all richer. They claim lower tax encourages clever entrepreneurs to come and work hard and give us all jobs, and bring us economic growth. The opposition swears that this is not true. 


Each side says it with such earnest confidence that we ordinary Britons don't know what to think. So we just let the politicians carry on as usual, which the politicians do with great and insatiable appetite.


But the truth is out there, if you know where to look.

The impact of this philosophy is made very clear by the graphs below from a paper by the Centre for Economic Policy Research. Graphs that expose a great and stubborn lie: that allowing people to get 'filthy rich' is good for national economic growth. The lie that if the few get ‘filthy rich’ we will all get mussed up with a splattering of extra wealth ourselves. The fib used to justify slashing personal and corporation tax. It is asserted that so long as there is a feast at the top table we all will get some of the leftovers. The evidence below shows that this assertion is false.

This first graph below shows there is actually no correlation between economic growth and cutting taxes - massive tax cuts for the rich make no difference to growth. The horizontal band of countries, excluding Ireland, shows that countries like the UK and the US who cut taxes most aggressively saw no greater economic growth than Germany, Australia, and many others who made smaller or no top rate tax cuts. Here is yet more evidence against the lie that letting the 1% get rich makes us all richer - evidence that is all around us. That successive governments stubbornly stick to it supports the theory of Goebbels, the nazi propagandist, “If you tell a lie big enough and keep repeating it, people will eventually come to believe it.”

On the other hand, the next graph shows there is a clear correlation between reducing tax and increasing inequality. As their taxes were slashed, the top 1% accrued even greater wealth because

a)      Less was taken away from them in taxes, leaving them more to pocket.

b)      As they were allowed to keep more they were more incentivised to grab a bigger slice of the pie. Not by creating a bigger pie and spreading the wealth, but by snatching a bigger share with excessive pay and excessive profits.

Providing low tax rates and plentiful routes for tax avoidance – which the chancellor George Osborne found so shocking in spite of his complicity – do nothing more than enrich the few with no benefit to the many.

The extraordinary degree to which taxation policy swung in favour of the top 1% is shown in these two graphs. Between 1975-79 and 2004-2008 the UK and US swung the scales in favour of the wealthiest. While Germany, the economic powerhouse of Europe, demonstrated steady growth and steady income shares by maintaining a 60% top marginal tax rate.

Our earlier post (Part 1) showed that the 1% getting richer has not improved the lot of the 90%. A doubling of the income of the top 1% has not improved the lot of the 90% by a jot. To claim otherwise is simply a lie.


The key characteristics that make successful leaders are impossible to define. 


Combinations of character traits create different outcomes. An excessive affection for drink has ruined many men, and yet that famous toper Sir Winston Churchill was a great leader. Like mixing colours the presence of a particular trait manifests itself in strange ways.


But of the essential ingredients found in leaders two stand out:

• A clear objective
• A conviction that the ends justify the means

Of course, to paraphrase Lord Palmerstone, leaders have no permanent objectives only permanent interests (which generally centre around themselves). However, the conviction that the ends justify the means is strong in almost all successful leaders.

It is this conviction that enables leaders to abuse the truth far more frequently, comprehensively, effectively, malignly, and shamelessly than the rest of us admittedly fallible and flawed humans. From tobacco bosses' claims that smoking does not cause cancer, to energy company executives claiming price changes are driven by wholesale energy costs, to bankers promising to provide high investment returns, cheap loans and a prosperous retirement. And to cabinet ministers claiming to be surprised by tax avoidance, misremembering whether or not they authorised aiding and abetting kidnapping and rendition, or experiencing memory lapses whether they authorised a special adviser or best mate to duck and dive on their behalf. 


Look back at the news archives, and you will find these leaders looking the camera straight in the lens with their most earnestly open and honest expressions, only to be exposed as fibbers and liars a few months or years later. In truth, they don't care. They have salted away their rewards, and care nothing for their subsequent exposure.


They know many of us know they are lying. They don't care if we know they know we know they are lying. Their satisfaction is we never do anything about it.


Stopping lies being told is an impossible and futile task. The best we can do is spread evidence to expose them. Sometimes with a tweet and a link. Sometimes with a conversation. Always with evidence.

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Monopoly comes quickly in ConDem Britain

KJ tells Fee about a new version of the famous board game Monopoly - the unregulated free market edition

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Payday lenders and loan sharks: a very British way of lending

Chris and KJ wonder why payday lenders get such an easy ride in the UK

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Shareholders voting against executive pay: the marvel is not that the directors had their bonuses questioned, but that they had bonuses at all

"The marvel is not that the bear dances well, but that it dances at all."
Russian proverb, on a performing bear in a circus.

Remuneration committees have continued to thrust bonuses at their well paid bosses in spite of unremarkable and failing performances. 

The usual defence is that the bosses' contracts legally bind the companies to offer the bonuses. The question left unasked is why the remuneration committees wrote the contracts in this way.

The remuneration committees say they take the advice of "compensation consultants" to ensure their pay is competitive in the market. A US Congressional Committee looked into this, and concluded that the same compensation consultants who were advising on executive compensation were:

“simultaneously receiving millions of dollars from the corporate executives whose compensation they are supposed to assess.” 


The report went on to say -

• The fees earned by compensation consultants for providing other services often far exceed those earned for advising on executive compensation. In 2006, the consultants providing both executive compensation advice and other services to Fortune 250 companies were paid almost 11 times more for providing other services than they were paid for providing executive compensation advice. On average, the companies paid these consultants over $2.3 million for other services and less than $220,000 for executive compensation advice.
• Some compensation consultants received over $10 million in 2006 to provide other services. One Fortune 250 company paid a compensation consultant over $11 million for other services in 2006, over 70 times more than the company paid the consultant for executive compensation services. Another Fortune 250 company also paid a compensation consultant over $11 million for other services, over 50 times more than it paid the consultant for executive compensation advice.
• Many Fortune 250 companies do not disclose their compensation consultants’ conflicts of interest. In 2006, over two-thirds of the Fortune 250 companies that hired compensation consultants with conflicts of interest did not disclose the conflicts in their SEC filings. In 30 instances, the companies informed shareholders that the compensation consultants were “independent” when in fact they were being paid to provide other services to the company.
• There appears to be a correlation between the extent of a consultant’s conflict of interest and the level of CEO pay. In 2006, the median CEO salary of the Fortune 250 companies that hired compensation consultants with the largest conflicts of interest was 67% higher than the median CEO salary of the companies that did not use conflicted consultants. Over the period between 2002 and 2006, the Fortune 250 companies that hired compensation consultants with the largest conflicts increased CEO pay over twice as fast as the companies that did not use conflicted consultants.

Some bosses had the sense to decline the lucre with little public goading, though some wailing and gnashing of teeth was heard as certain packages were sent back. Of course, not all CEOs turn down their bonuses. The shareholders of Citigroup voted against their CEO's multimillion dollar pay package.

Vikram Pandit, the CEO in question, took control of Citigroup in 2007 since when the shareprice dived and is yet to resurface. The shareholder vote is not binding, so it will be up to Vikram whether he declines the money.

In order to avoid a similar humiliation the Barclays CEO, Bob Diamond, agreed to defer, rather than decline, half his £2.7 million bonus. Though that is a small part of his overall £17.5 million package. His deferral is not for the good reasons that the Barclays' shareprice has languished, nor because its dividends to shareholders have been paltry, nor because it is making the news for the Payment Protection Insurance rip-off and the dodgy Interest Rates Swap Agreements it sold to small businesses. It is in order to avoid the humiliation of the shareholder vote, which like Citigroup is also non-binding.

Logica bosses turned down £1m in bonuses: after a year in which the UK-based IT services company lost a third of its value and announced 1,300 redundancies

Rio Tinto Zinc's CEO turns down £1.6m bonus, awarded in spite of languishing shareprice and a US$38 billion bad investment

LloydsTSB CEO turned down a £2.4m bonus, awarded in spite of 2 months sick leave and dreadful share price performance.

RBS CEO, Hester, had a £963,000 bonus snatched from him by public opinion. A bonus awarded in spite of continuing dreadful shareprice performance.

Network Rail's CEO turned down his £340,000 bonus, awarded in spite of running the most inefficient operation in the western world.

"Be not afraid of greatness; some are born great, some achieve greatness, and others have greatness thrust upon them."

William Shakespeare

As is said of greatness, so it is with wealth and the three ways of achieving it.

• Be born to it
• Achieve it, by talent and hard work
• Have it thrust upon you by a remuneration committee

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How collective switching can help households get a fairer deal on energy bills

By Lani Shamash, of thepeoplespower.co.uk, writing on the UK energy market.

Mistrust, alienation and inertia. They’re consumer characteristics which have become synonymous with the UK energy industry as customers, the media and the government rail on a daily basis about the evils of the industry. We all talk about it, we all write about it, in fact I’d go as far as to say it’s a national pastime, a conversation topic so customary it’s become more of a Great British staple than the weather. After all, it’s not just isolated to the energy market, but now synonymous with the pharmaceutical, housing, mobile phone and, of course, financial industries, to name a few.

Clearly, in its current state, the relationship between energy suppliers and household consumers is skewed. And it’s a costly skew too; we collectively over-spend £4 billion a year because we’re on the wrong energy tariff. So when, last week, Nick Clegg announced that he had made a deal with the major energy companies, expectations were high. So what was agreed? Once a year the ‘Big Six’ will tell consumers whether we’re on their best tariff. Anything else I hear you ask? Er, no... That’s it actually.

It’s not much, but it’s a step towards something which we all desperately need; simpler, fairer energy bills. We need it to end the frustration brought on by the thousands of different tariffs which are changed with more regularity than an incandescent light bulb. Or to combat the sense of defeat in the person who throws that quarterly bill straight in the bin before even attempting to decipher its contents. And we need it to prevent the horrifying headlines on the fuel poverty epidemic which, according to a report commissioned by the Department of Energy and Climate Change, contributes to the 27,000 excess winter deathsthat occur each year.

But most of us do nothing. The vast majority of us don’t even switch energy suppliers despite government advice telling us to. It might have something to do with the prospect of a big penalty, a phobia of forms, or a cynical little voice in your head which tells you that they’re all the same, that it’s a lose-lose situation so why bother. But you’re not alone.

You could join dozens, hundreds, thousands, and even millions of other little people to become a real force. Group bargaining’s an old idea, but it’s still a good one, and with the advent of mass internet access the possibilities are endless.
And that’s what thePeoplesPower.co.uk are all about- empowering UK households to get a fairer deal on their energy. The concept is simple: consumers group together in large numbers and thePeoplesPower.co.uk negotiates a better deal based on their stronger combined purchasing power. And there you have it, the balance shifts: customers and suppliers have a relationship which is fairer and more sustainable.

Some of you may question this model, I can hear the cynics nay-saying, the critics doubting; What if the energy companies refuse to play ball? What about green energy? What are you getting out of it anyway?

Well, as much as we all love to demonise energy companies, they’re not the devil incarnate, but organisations which are focused on profit margins like all companies. And getting a massive chunk of custom in one go is great value for them. Besides, this model has been tried and tested already. In the Netherlands it’s helped households save around 20 per cent on their bills. Inspired by our European counterparts, thePeoplesPower.co.uk decided it was time for the UK to go Dutch and set up as a not-for-profit Community Interest Company. But we wanted to offer solutions to the entrenched problems of the energy market, rather than allowing ourselves to become another part of the problem.

The first step was to be totally upfront about what's in it for us. We settled on a £2 referral fee (charged to the energy company) per household switch which allows us to cover our minimal costs (we don’t advertise and our four person team all work as volunteers). £2 allows us to pass on more savings to households and offer something more attractive to energy companies than the standard switching site (who charge energy companies somewhere between £40 and £70 per switch). We also provide members with the option to negotiate for green energy, in this way working to dispel the myth that green energy is an expensive luxury.

We also put a cap on the amount of people we switch in one go. But, surely, I hear you ask, the more people you sign up, the better deal you can negotiate? Well, no, actually, or at least we don’t think so. By keeping the numbers small and capping it at 20,000 per switch, we ensure that all energy companies can participate, big and small. This way we don't compound the problem of an uncompetitive market place. On a practical level, having a cap also avoids switching chaos- even a huge energy company would struggle to smoothly switch 50,000+ people in one go. In this way, we think we’ve found a collective switching model which can work for both consumer and provider, thus restoring the balance, and in turn, our confidence in an essential industry.

To sign-up (it’s free and there’s no obligation): http://www.thepeoplespower.co.uk/
To find out about how thePeoplesPower.co.uk collaborates with Housing Associations to get beyond the ‘switching classes:’ http://www.thepeoplespower.co.uk/energy/housing-associations-sign-up
Twitter: https://twitter.com/#!/thePeoplesPower

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The gang debate the safety of wave-and-pay cash-free systems

Consumers – and con artists – get behind contactless payments

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Stop Britain’s biggest rip-offs, and no budget cuts or tax rises are required. Make sure you ask your candidate about them before you vote

Next time they knock on your door, ask them what they will do about some of Britain’s biggest rip-offs: tax dodging, housing, the banks, gas & electricity bills, and MP's pay. We’ve given you a few ideas to start you off...

Tax evasion and avoidance: HMRC estimates that £35bn is dodged in tax. Nobody can know the actual figure, as so much secrecy surrounds tax dodging. Credible estimates put it at over £70bn. There is a huge and complex list of perfectly legal ways that corporations and the very rich can avoid tax – a bit like “claiming on expenses” but more sophisticated. Yet the ConDems are cutting the number of HMRC staff who investigate tax evasion and avoidance, and their efforts to “simplify” the tax system never include simplifying those loopholes. Labour never focussed on this when they were in power.

Suggest a policy: Increase HMRC staff, and monitor their performance. The cost will be peanuts compared to the sums involved. These loopholes must be closed, and the penalty for deliberate evasion should be a prison sentence.

Cut the cost of housing: The average tenant spends a fifth of their income on rent, and those costs are rising. More and more people are being priced out of the housing market because wages continue to fail to keep up with the rising cost of buying a house. The charity Shelter says 1.6 million children in Britain live in housing that is overcrowded, temporary, or run-down. Yet the government’s proposed building of 150,000 affordable homes over four years is less than a third of what is needed. This will leave millions of families stuck in limbo on housing waiting lists, and push house prices further out of the reach of those on ordinary incomes. Perfectly decent house-owners are genuinely afraid of what might happen if their property prices level off or even fall. But the less money everyone spends on housing, the more everyone spends on other parts of the economy that generate jobs, taxes and pensions for all. Cutting the cost of housing, just as cutting the cost of any other essential service (energy, telecoms, transport, health, pensions, banking) will directly benefit the whole economy. Since the early 1970s UK house prices have tripled in real (inflation-adjusted) terms. In Germany, the cost of residential property has barely budged in real terms in the past 40 years.

Suggest a policy: Build 600,000 affordable homes over the next 4 years.

Taxpayers are still subsidising the banks after the bailout: Taxpayers continue to pay a £50bn “insurance policy” subsidy every year to insure the banks against collapse. As we all know, they just collected on that insurance. No major party intends to fully separate retail banks from investment “casino” banks. Remember, it was the casino banks that were the main cause of the banking crash but, because they belonged to the same company as the retail banks, they dragged their retail banks – and therefore all of us – into this crisis.

Suggest a policy: Force retail banks to sell off their “casino” banks so they are no longer connected.

Gas and Electricity bills: Energy is an essential service. Everyone has an energy bill they have to pay. So if energy firms overcharge us, it affects the whole economy. The suspicion is that the “Big Six” energy firms operate as a cartel and therefore don’t compete to bring down prices. Some estimates put this profiteering at £4bn a year. 

But even this figure may be a gross underestimate. 
The big energy firms are split into "upstream" and "retail." "Retail" sell you the energy, and their profit margins can be reasonable. However, they buy their energy from their "upstream" parent company; nobody knows whether they are hiding their profits in the parent. The energy regulator OFGEM had to hire forensic accountants to investigate whether the energy firms are overcharging us. Absurdly, OFGEM rejected most of the recommendations that came out of that report.

So regulators and politicians prefer to talk rather than act decisively. What’s worse, this is one rip-off that kills. An estimated 2,700 died from fuel poverty over the last winter. Yet last year many energy firms recorded record profits whilst raising their prices.

Suggest a policy: Force energy firms to show us their books. This will reveal whether they operate as a cartel.

MP’s pay: If an MP’s salary in 1975, of £5,750, had simply risen in line with RPI inflation, then in 2007 it would be £34,801 rather than the actual £60,675. Even worse, an MP’s allowances/expenses in 1975, of £3,200, would have risen to £19,367 if RPI inflation had been applied, yet the actual 2007 figure was £90,505. In 1993 an MP’s basic salary was £30,854. This was about the same as a mid-level ordinary teacher’s salary. In 2008 MP’s basic salary was £61,820 – off the ordinary teachers scale entirely. I leave it to you to judge whether our current batch of MPs are ‘off the scale’ in terms of quality compared to those of 20 years ago and before. Overpaid elected representatives, be they MPs, councillors, mayors, etc., will never truly feel the impact of policies aimed at ordinary Britons if their salaries are extraordinary.

Suggest a policy: The pay of elected representatives must not rise faster than the average pay increase for the nation.

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The gang discuss ways to solve the issue of party funding

Gatecrashing the party... donations

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Tax Haven Britain - Bearer Shares and Disappearing Companies

By Richard Murphy, founder of the Tax Justice Network , director of Tax Research LLP, and author of The Courageous State


Alistair Darling, former Chancellor of the Exchequer, has said the UK is not a tax haven. That is not true. It is using any reasonable definition, including that which I proposed. I’ve already suggested one obvious reason why it is, which is the existence of the domicile rule, so let’s take a second example that is less obvious.

This is the fact that the UK allows the issue of bearer shares. This is deliberate. The right survived into section 779 of the Companies Act 2006. As one formation agent who seems to specialise in the more esoteric end of the market has noted, UK companies with bearer shares are ‘our most popular package with UK residents’. It’s not hard to see why:

1) This option allows the names of the real owners of the shares in a company to not just be hidden: they simply aren’t known. As Wikipedia notes:

A bearer instrument is a document that indicates that the bearer of the document has title to property, such as shares or bonds. Bearer instruments differ from normal registered instruments, in that no records are kept of who owns the underlying property, or of the transactions involving transfer of ownership. Whoever physically holds the bearer bond papers owns the property. This is useful for investors and corporate officers who wish to retain anonymity, but ownership is extremely difficult to recover in event of loss or theft.

2) This means that not only can the ownership of a company be hidden, it can be transferred at will without this being known, stamp duty or capital gains being paid, and without any organisation dealing with the company being any the wiser. Money laundering regulation becomes virtually impossible in that circumstance.

3) This does, of course allow companies with such shares to be used to hide all sorts of activity in classic tax haven style.

4) It does also make such a company a perfect vehicle for money laundering in its own right. The company can be created, apparently legitimately, and then be stuffed with cash, following which the ownership of the shares is passed through simple transfer of physical possession of the bearer share (an act for which no audit trail can be created) with the resulting proceeds being liquidated elsewhere.

5) All this is made much easier because UK companies can be struck off the company register without questions usually being asked by any authority on payment of a fee of £10.

The question has to be asked as to why the UK allowed this to continue when bearer shares are known to be used for this purpose and many tax havens are taking steps to prohibit them. For example, the British Virgin Islands (of all places) has better standards than the UK, as Lowtax.net notes:

Bearer shares are now prohibited unless authorised by the memorandum or articles of association, and bearer share certificates must be deposited with a custodian who has been approved by the BVI Financial Services Commission.

A company which had existing bearer shares (created before 1 January 2005), and which re-registered on 1 January 2007, is obliged to deposit its bearer shares with an appropriate custodian on or before December 2010.

There’s another thing you need never do with a UK company. You need never file a set of accounts.

The reality is that a UK company can be incorporated by a formation agent, run by nominees and then after it’s been in operation for a period of 21 months or so be due to file its first accounts but can, instead, simply file a form with the Registrar of Companies to ask to be struck off instead. Being struck off means that the company is dissolved without the need for a formal liquidation. As if by magic the company simply disappears instead.

All that the directors have to state in making this application is:

I/We as DIRECTOR(S) apply for this company to be struck off the register.

In the past three months the company has not:

- traded or otherwise carried on business, or changed its name;
- disposed of for value any property or rights which it would have disposed of for value in the normal course of trading or carrying on business; or
- engaged in any other activity except for the purpose of making this application, settling its affairs or meeting a statutory requirement.

Note that there’s nothing there that requires them to say if they’ve ever traded, if they’ve paid their tax, or if they’ve settled all their obligations to file accounts.

So what does a director of a company that wants to disclose no information do? They stop it trading after 18 months and they can then honestly sign this form after 21 months when the accounts are due to be filed with the Registrar. It costs £10 to file and the company is usually dissolved within a few months. Companies House never asks for the accounts in that case.

HM Revenue & Customs can object. But in practice they almost never do, especially if they know nothing about the company (and the director in question will have ensured that is the case).

As a result anyone can run a limited company in the UK behind a charade of nominees and quite simply no one will ever know what it does because it will never file accounts. And no one seems to care. There is, of course, nothing to stop them then starting the process all over again.

That’s all part of the structure of tax haven UK. Amazing, isn’t it?

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Chris and a monied chum debate revealing MPs' tax returns

Should he or shouldn't he...

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Bearer Shares: perfect for hiding your ownership of a company, profits and wrong-doing. Available in your favourite tax haven, the UK

George Osborne, the chancellor, expressed shock: “I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs, and to be fair it’s within the tax laws".
So, lets take a closer look at one of the provisions made available by Britain's legislators for the tax dodgers:


Many people have heard of "bearer bonds" - a favoured currency of bad guys in movies seeking larger payoffs. Fewer have heard of "bearer warrants", and fewer still of "bearer shares". There are many respectable reasons for bearer securities of the bond and warrant variety. They are as good as cash so long as they are not counterfeit (the same can be said of cash). Take a £10 note from your wallet, and you will find the words “I promise to pay the bearer on demand the sum of …”


Just as you don't have to prove the £10 note in your pocket actually belongs to you when you spend it, you don't have to prove the bearer security belongs to you - just having it is proof enough. The London Metal Exchange, highly regarded for its discipline and probity, runs its trading activities using bearer warrants. How else could several tonnes of copper be delivered by a man on a bicycle.


On the other hand, there are few respectable reasons for "bearer shares". The only reason for incorporating a company in this way is to disguise the ownership. And where in the world would such perfidy be allowed? Well, according to the Economist newspaper, Britain:

Britain (unlike most offshore locations) does not regulate company-formation agents. It even lets firms be founded with bearer shares, which, like cash, belong to whoever happens to have them with him at the time. Most countries have abolished these securities, under pressure from international financial regulators, but one British website offers same-day incorporation of a UK bearer-owned shell for a mere £142 ($227), within four to six hours.

The relevant legislation can be found in section 779 of the Companies Act

(1)A company limited by shares may, if so authorised by its articles, issue with respect to any fully paid shares a warrant (a “share warrant”) stating that the bearer of the warrant is entitled to the shares specified in it.

(2)A share warrant issued under the company's common seal or (in the case of a company registered in Scotland) subscribed in accordance with the Requirements of Writing (Scotland) Act 1995 (c. 7) entitles the bearer to the shares specified in it and the shares may be transferred by delivery of the warrant.

(3)A company that issues a share warrant may, if so authorised by its articles, provide (by coupons or otherwise) for the payment of the future dividends on the shares included in the warrant.

According to one of the purveyors of this kind of company:

As long as you do not have them in your possession at the time you are questioned, you can legally and truthfully say under oath, “I am not the owner of that corporation.” 

This is just one of the many hidey-holes available for those with a need to proffer their finances for inspection - either to the tax authorities, or to the voters. Hidey-holes that the author of HMRC's report on the General Anti-Avoidance Rule (GAAR) says "Such tax planning is an entirely appropriate response to the complexities of a tax system such as the UK’s."


Hand the 'bearer shares' to your accountant (they now belong to him), sign the declaration that you have no conflicting commercial interests, then take the shares back (they now belong to you). Like Eeyore, Winnie the Pooh's asinine companion, putting the burst balloon into the honeypot, "he takes it out again, and puts it in again, and takes it out again, and puts it in again."


The ownership of bearer shares are untraceable by anyone, from the tax man to your ex-spouse's lawyer. Richard Murphy, noted tax expert and director of the Tax Justice Network provides further information in his guest blog: click **here**.

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LIBOR Manipulation - how doping has spiked the lending market and robbed small businesses

Financial Innovation is the great 'unique selling point' of the City of London's financial services industry. We are told it is to hold on to these innovative companies and creative people that we must regulate that industry weakly and tax its top executives frugally. However, history has shown that financial innovation, in its search for innovative opportunity, allows no scam to be left untried. 


As any sporting bookie will tell you, you make more money by successfully betting against the favourite in a contest than you make betting for it. Doping the best horse to slow it down or bribing a cricketer to throw a match are tried and tested ways for your well connected crook to make a bundle. An innovation that was never going to go unnoticed by our financial innovators.


The FSA has suspected that some of our bankers have been doping the London Interbank Offered Rate (LIBOR), nudging it lower than it should be. LIBOR is an index generated by the British Bankers Association, and is supposed to show how much banks have to pay to borrow money from other banks (interbank lending). This is achieved by a panel of banks reporting how high an interest they believe (i.e. not based on what they actually have to pay (and why not, you may ask)) they would have to pay to borrow money.


Now, if this sounds like a 'pulling index' in which guys report how many drinks they have to buy to get a date that's because it is. The more unattractive the guy the more drinks he has to buy and ply. Naturally, most guys would under-report. Which is what the FSA has good reason to believe some bankers have done.


LIBOR is important for a number of reasons, including:
a) If a bank reports that it has to pay a higher interest rate to borrow that means it is "uglier", which in banking terms means riskier. The markets see this as a reason to have less confidence in the bank, which is reflected in the inevitable frowns and scowls next time it turns up wanting to do business.


b) LIBOR is used as a benchmark for some futures and options interest rate contracts. Traders and investors (including your pension fund) bet on the level of LIBOR. The rate going up or down decides who the winners and the losers are. As in any rigged market, the winners are the insiders.


Doping the LIBOR, making it lower than it should be, would create a great opportunity for those bankers who are into that kind of thing.


Consider a horse race.  The favourite is running at, say, 1-5. The favourite is favourite because most punters are betting on it.

• If you bet £10 on the favourite and win, you get your £10 back plus another £2. A 20% gain.
• If you bet £2 against the favourite and win, you get your £2 back plus another £10. A 500% gain.

By manipulating the LIBOR, banks were able to 'dope' the favourite.


One group of punters who got on the wrong side of this rigged bet were small businesses. The FSA is investigating allegations that banks, including Barclays and Lloyds Banks, sold thousands of interest rate swaps to small businesses who wanted to put a cap on their interest rate costs. 


These swaps are bets that meant if interest rates rose the businesses were protected. However, if they fell, then the businesses paid the banks. If a business wanted to get out of one of these swaps it could cost it hundreds of thousands of pounds. Enough to pay one banker his bonus; enough to put the business out of business. More details on this scam are available from Bully-Banks.

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Once again tax law is elasticated to aid, abet and reward tax dodging as General Anti-Abuse Rule is busted to Corporal.

Tax avoidance is an act between consenting adults: the avoider, and the taxman. The avoider breaks no laws only doing what the taxman does not disallow. “He didn’t say no” is the cast-iron defence accepted in the highest courts in the land. The avoider moves through the loopholes and the lacunae left, some meticulously and some incompetently, by Her Majesty’s Revenue and Customs. In the words of St.Paul (Romans 4.15) “where no law is, there is no transgression”. 

To quieten post-budget outrage over his cutting millionaires' top rate tax while cutting millions of pensioners’ incomes, George Osborne talked about a tough sounding General Anti-Abuse Rule (GAAR) to tackle tax dodgers. But he failed to mention that the recommendation of the author of the Treasury report on GAAR is not to introduce one:

I have concluded that introducing a broad spectrum general anti avoidance rule would not be beneficial for the UK tax system. This would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning.  Such tax planning is an entirely appropriate response to the complexities of a tax system such as the UK’s. 

The Treasury report, written by a leading “very clever, creative and talented” tax lawyer, instead suggests a “moderate rule which does not apply to responsible tax planning” – less GAAR, more MAARNARTP (Moderate Anti-Abuse Rule Not Applying To Responsible Tax Planning). Perhaps an unsurprising conclusion, as tax lawyers supporting GAAR have echoes of turkeys voting for Christmas.

The reality is HMRC does not attempt nor intend to shut tax loopholes. It aims to keep them narrow and exclusive. The lower tax rates and supplementary allowances for dividends and capital gains were supposed to be the preserve of the asset owning classes – owners of property and shares. They aren’t really meant for ordinary people who purely depend on their own labour for their livings.

When a group of stubby finger tipped (Sherlock Holmes observed, “Someone who only uses one or two fingers often has blunted fingertips”) freelance computer programmers realised the benefits of operating through one-person companies, letting them deduct expenses and pay themselves dividends to reduce tax, HMRC introduced the IR35 legislation specifically to shut them out:

“The aim of the [IR35] legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships”

On the other hand, for those who the taxman favours there are avoidance corridors that can be negotiated by clever, creative, talented and expensive tax advisors. Each corridor has that JP Morgan “good reason and real reason” signpost. For example, Venture Capital Trusts:

• The good reason: to encourage wealthy investors to back companies whose shares aren’t listed on a stock exchange.
• The real reason: 30% income tax credit on the investment buying shares in the trust; no income tax on dividends paid by the trust; no capital gains tax on gains made selling trust shares.

The extent to which HMRC acquiesces to tax avoidance can be specified mathematically using the “Taxable Income Elasticity” (TIE) scale. TIE is a measure of the degree to which taxpayers will mould, squeeze and reconstitute their income to reduce their tax, (the percent change in reported income when the net-of-tax rate increases by 1%). In the normal course of events all this elastic tax avoidance bounces along inconspicuously, with the wealthiest habitually getting away with paying tax at a rate lower than their cleaners. However, with the introduction of the 50% tax rate, the wealthy did a synchronised bounce. £16 billion of income, according to the Office of Budget Responsibility, disappeared from the 2010-11 tax year (50% top rate tax) and bounced into the 2009-10 tax year (40% top rate tax). This allowed the Chancellor to claim that the 50% rate had failed to collect much additional revenue, making it not worthwhile keeping.

In his own words from the Budget Speech, Osborne stated

“HMRC find that an astonishing £16 billion of income was deliberately shifted into the previous tax year - at a cost to the taxpayer of £1 billion”

When setting the 50% rate, the treasury assumed the wealthiest had a TIE of 0.35. They greatly underestimated the instinct of those who can to dodge tax. Academic studies quoted by the Treasury estimate high earners with TIE of 0.46, going up to 0.7 for the chancers. In contrast those in more ordinary circumstances show a TIE of around 0.1.

The Laffer Curve, from the HMRC report, predicts how much tax will be dodged as the income tax rate is increased. As the rate increases so long as taxpayer behaviour is unchanged more tax money will be collected. However, in practice as the rate goes up the pips start squeaking: tax avoidance, tax evasion, and just plain slacking kick in to reduce the amount of income declared and tax collected. 

So what kind of people are these high earners? HMRC’s report on the effect of the 50% rate shows the breakdown. 50% are in the “Financial intermediation” and “Business Services” industries – i.e. bankers, lawyers, and accountants. Some of our nation's most elastic professions.

In the graph below, by the Institute of Fiscal Studies, the purple line shows what actually happened when the 50% rate was announced. The green line shows what would have happened if avoidance of the 50% tax rate had not occurred. The jump in 2009-10 income followed by the drop in 2010-11 income shows the billions of income bounced into the earlier year to avoid the 50% tax.

With the abolition of the 50% rate from April 2013 announced in the March 2012 budget, there will doubtless be another bounce as income is deferred until the tax rate is dropped.


Thus passed the 50% rate. Conceived by the last Labour government in a moment of last minute mischief, always vulnerable, and still in its infancy horribly strangled by elasticity before it could show its true potential. Yet in its short life the 50% rate burned brightly enough to shine a light on just how dodgy top income earners are.


But does it matter? Is it just envy?


Individual examples of excellence are used to justify high pay for mediocrity and failure. But the objection is not even about unjustified rewards.

In spite of the country getting richer, figures from the Office of Budget Responsibility show the share of the wealth going to ordinary Britons is reducing, with the share going to the wealthiest continuing to soar. 

(In the graph the Gross Value Added is what the nation makes in goods and services. The Labour Share is the proportion of the profits given to the people doing the work).

The government aims to push wages down further by using regional public sector pay deals, reducing the wage competition faced by private sector employers and allowing them in turn to push down private sector salaries.

With the ordinary Briton’s share reducing, they have to work longer to have adequate pensions: by working until you are older you can save longer into the pension, and will have less time to live on that pension.

High rates of top taxation serve a number of purposes, including

• Reduce the encouragement for executives to rip us off by limiting their gains.
• Control the wages going to top executives, as it has become evident the top executives won’t control this themselves, and shareholders are casually ignored (even if those shareholders hold 82%, as the government does in the Royal Bank of Scotland).
• With the Labour Share dropping, taxes to pay for education, health, law & order, defence, pensions etc. have to come from somewhere.

Apologists claim that the top 1% already contribute more than 25% of income taxes. The steady growth in their contribution since 1990 is not a result of increases in income tax rates, nor a reflection of their elastic generosity. It represents the uncontrolled concentration of national income in their hands.

High Pay Commission

For great tax data from HMRC, see: http://www.hmrc.gov.uk/stats/income_distribution/menu-by-year.htm#33

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