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Follow on Google News | Shaw Capital Management Korea: Competitive tax system in UKNow consider UK taxation. Already under this current UK government tax, and stealth taxation in particular, has become the soft default option
By: Shaw Capital Management All informed observers, including the Institute of Fiscal Studies which is generally in favour of higher taxes and redistribution, agree that the 50% new top tax rate will not increase revenue and will probably lower it for this reason. The second reason concerns growth. Growth comes from the innovative activities of entrepreneurs, who are extremely sensitive to marginal tax rates because their activities are risky and any gains uncertain; the more these are taxed the less the expected return and if this drops below some threshold they will not bother at all. The UK needs both to make the fiscal adjustment on the spending side by reviving old-style Treasury control and then quickly bring their tax system back into the land of reasonable incentives, following that up with reforms ‘flattening’ Estimates of the effects on growth of marginal tax rates are for obvious reasons uncertain; but the sort of effect that comes out of empirical studies is an elasticity of one third, i.e. for every 10% reduction in tax growth would rise by 3% (e.g. a reduction of the marginal tax rate from 40% to 36% would raise growth from 2.5% to 2.58%). This effect seems small but it accumulates into something large. So in short the UK needs both to make the fiscal adjustment on the spending side by reviving old-style Treasury control and then quickly bring their tax system back into the land of reasonable incentives, following that up with reforms ‘flattening’ The supporting role of monetary policy This fiscal adjustment, however gradually brought about, is going to be a fairly grim process and it will dampen growth further. It will require the efforts of the monetary authorities to support the economy through it, without pushing inflation over the target. At present the bank credit is not expanding, whereas a growing economy requires bank credit growth usually of twice or more times the GDP growth rate. The Bank of England is keeping interest rates low but has suspended the printing of money (‘quantitative easing’), even though bank credit growth has not responded. But it may well need to restart it. This is something the UK will need to watch and if, as seems likely, inflation falls back to well below the target and the economy falters under fiscal retrenchment, and the Bank of England will need to take steps to get the broad money supply growing again. As we have noted before, other channels for money appear to be working in substitution … UK equity and corporate bonds issues have been substantial recently. So liquidity may turn out adequate even without credit growth revival. Our forecast for the UK Though the UK Budget was predictably vacuous, being a pre-election affair, our forecast assumes that action pretty much along the above lines will be taken after the election by whatever government is in power … hung Parliament or not. The reason is that there is little room for manoeuvre and privately in fact the parties do not materially disagree, except to some degree on what modest room there could be for tax rises instead of spending cuts. So in short we think there will be fiscal retrenchment, monetary policy will provide support, and so the UK recovery will slowly continue. # # # Shaw Capital Management, Korea - Investment Innovation & Excellence. We provide the information, insight and expertise that you need to make the right investment choices. Shaw Capital Management Korea typically offers its clients such services as asset allocation and portfolio design; traditional and non-traditional manager review and selection. End
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