Encouraging investment

I missed it at the time, but my attention has been drawn by discussion of the woes of corporate pension funds to a policy document published early in 2010 by the Conservatives setting out George Osborne's plans for the economy.  Section 2 is the plan for "Creating a more balanced economy"  "We will create the conditions for higher exports, business investment and saving as a share of GDP".

The section laments low levels of business investment in the UK, and lists some rather insubstantial ideas to increase it.  Then it goes on to discuss savings " Over the longer term, we will reverse the effects on pension savers of the 1997 abolition of the dividend tax credit for pension funds".  This is a reference to Gordon Brown's so-called 'raid on pension funds', which I thoroughly approve of.

So having identified insufficient business investment as a problem for the UK economy, Osborne proposed a tax break which would encourage businesses to pay dividends rather than reinvest profits.

When Gordon Brown Got It Right

I disagree with a lot of what Gordon Brown has done as Chancellor and Prime Minister. But he did get one thing very right - when in 1997 he abolished Advance Corporation Tax (ACT) (with effect from 1999).

In the UK, companies are required to pay Corporation Tax on their profits. ACT required them to pay that tax in advance on that portion of their profits they chose to distribute to shareholders as dividends. The ACT paid was subtracted from the Corporation Tax charged at the end of the tax year.

Payment of ACT was deemed to discharge the shareholders' obligation to pay basic-rate income tax on dividend income. Shareholders not required to pay income tax, including Pension Funds, were entitled to claim back that tax.

So far so plausible, until one spots that the ACT was both set against the company's Corporation Tax obligation, and claimed back by Pension Funds. So despite its name, it acted not as a tax but as a government subsidy for Pension Funds. By abolishing it, the Chancellor not only simplified, for once, the tax system, but also removed a subsidy and so saved money for the public purse. This abolition is what is referred to in those journalistic and political circles which disapprove of government subsidies unless they go to the relatively wealthy as "Gordon Brown's Pension Fund Tax Grab".

And now George Osborne, in his speech to the Conservative Party Conference, has promised to reverse in some unspecified way this "tax grab". He made this pledge in a speech heralding economic austerity for all, including pay freezes in the public sector. Reportedly the pledge got the biggest cheer of the whole speech.

Sometimes I think the Conservatives might not actually be worse than the present lot. Then they kindly put me right.