CITY AND SUBURBAN
Tax now and let the losers find out later here's how to get in on the ACT
CHRISTOPHER FILDES
There is no such thing as a painless tax, but next to it is a tax that only experts understand. The victims may never know what hurt them. Or by the time they find out it will be too late. Hence the growing suspicion that a Labour Chancellor, hungry for revenue, would find it by changing the rules of Advance Corporation Tax. Nothing could sound more remote from the average taxpayer, or better suited to a knotty col- umn in Accountancy Age or the Actuary. No marginal seat will be swung by protesters chanting 'Hands off our ACT status.' The extra revenue would come out of people's pockets, all the same, and they might as well know who they are and what would happen to them. It would work like this: companies paying dividends now withhold 20p in the pound, which is the basic rate of income tax. The money withheld goes to pay their corporation tax. Shareholders who are not taxed at the basic rate can reclaim the deduction, and they will be the losers if the rules are changed. They come in four sizes. First are the pensioners, actu- al and prospective — the beneficiaries of pension plans set up by their employers or themselves. Next, charities. Something like £250 million of their income is at risk. Then, shareholders whose income is so meagre that they do not even pay tax at the basic rate. Lastly, investors in Personal Equity Plans — Peps. They must buy their Peps out of their taxed income, but after that, the income from dividends attracts no further tax. It would be simplicity itself to stymie them. All that an incoming Chancel- lor needs to is to announce a new low rate of tax. Sub-basic? Starters? You name it. This would be the rate at which companies deducted ACT from their dividends, and the less they deducted, the less the pension funds and others could reclaim. How about a starters' rate of 10 per cent? 5 per cent? Zero? Just think of the extra revenue this new low tax would bring: anything between £5 and £10 billion. Finders keepers, losers weepers.
In a future state
I KNEW a chairman who was opposed to paying dividends. The money was wasted, he argued, on people like shareholders. Labour's pet pundits, when it suits them, think so too. Companies ought to be rein- vesting their money, they say. Instead, their wretched shareholders keep urging them to pay it out. So a tax change which made it more expensive to pay dividends would help them take the long view. So we can change the rules on ACT, scoop up billions of pound of extra tax, and explain that it is all in a good cause. A tax surcharge levied on the principal investing institutions does not seem the best way to encourage invest- ment, but that kind of thing has never stood between a pundit and his publisher. (You guessed it: this week Will Hutton's publish- ers transport him to a future state.) For that matter, a government that wants us to provide for our old age, now that govern- ments are giving up on this, ought not to tax us more severely when we do.
We deserve better
THE taxes on savings are a jungle, and fid- dling about with ACT will only make it more entangled. Chancellors have a per- verse effect on it. They rush around, invent- ing incentives and stopping up loopholes, and then seem surprised when some tax lawyer makes a loophole out of their latest incentive. With every step they get further away from a system that would treat all forms of savings alike. Philip Chappell, the godfather of Peps (and of personal pen- sions too), had a beautifully simple answer. Cut out the ACT ritual, he said. In fact, cut out all the tax breaks of the pension funds. Cut out the tax relief on mortgages, too. One man's tax break, Philip said, was another man's tax increase. A Chancellor who cut out all the breaks would be left with a system that people understood, and could cut the top tax rate to 15 per cent. That would leave us all the money we might need to set aside for our old age. Alas, the Chappell option is not now on offer. Labour is tempted to use ACT as the Con- servatives used the proceeds of privatisa- tion — to pay pressing bills. As the posters say: we deserve better.
Sterling efforts
I SAY, how thrilling. We could go back into Europe's exchange rate mechanism, if we wanted to. Since we left, the rules have been changed, and the ERM is about as exclusive as Woolworths, but the pound has done so well that it is higher than it was when we had to make our forced exit. Where now are all the proposers and sec- onders who thought it would be such a good idea to join? The Confederation of British Industry, which so completely failed to notice what the ERM was doing to its members? The usual signatories of round- robin letters to the papers? The Prime Min- ister and Chancellor who nailed our colours to this mast, and found it was a cross? Will any of them call for us to go back in again? Their silence speaks for itself. They would be laughed out of court. Joining the ERM was a manifest disaster, being thrown out was an uncovenanted blessing, its benefits came through to the economy and this improvement has shown up in the exchange rate, now that we are prepared to leave it to itself. Still not quite ready to learn from experience, the usual suspects wrote to the FT the other day about the single currency. They were anxious that we should not miss the chance of making the same mistake on a larger scale.
Colonel of the Knuts
THE Knutsford Division of Cheshire was once so safe a Conservative seat that for 25 years it supported Colonel Sir Walter Bromley-Davenport. Since then it has got bumpier. John Davies, Sir Edward Heath's unhappy Industry Minister, sat there, and so did my much-missed Spectator colleague Jock Bruce-Gardyne. Sir Walter advised him on monetary policy: 'There's some- thing called the PSBR — I've got a fellow here who understands all about it — oh, I'm so sorry, he's asleep.' Jock's reckless candour — the Falklands war, so he said, was a mug's game — did him no good with the burghers of Knutsford, and when the boundary commissioners set off a game of musical chairs in Cheshire, Jock lost. Slight- ly redrawn, and relabelled as Tatton, the constituency now returns Neil Hamilton to Parliament, or has done so far. It may be time to send for the next Bromley Davenport.
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