I’m still not entirely comfortable about assuming that CT readers are necessarily interested in the stuff I put on the Guardian blog. But this bit on the current attempt by the UK government to stop people pretending to be Plymouth Brethren in order to take advantage of a tax loophole given to them (no really) is pretty ontopic. I’m more interested in comments about what this says about the politics of tax policy than in boilerplate rants about why the government shouldn’t give any special treatment to religious groups, so I thought that having two comments sections on this piece would give me two chances of not having the discussion end up going that way.
{ 25 comments }
Kevin Donoghue 08.03.06 at 6:51 am
I’m not persuaded that the demand for investment flexibility has much to do with dodging inheritance tax. At least, that’s not why I hate the idea of being stuck with an annuity when I finally get my hands on the money in my defined-contribution scheme. I hate the idea because it means those bastards in the financial services industry, who have have been getting me lousy returns for decades, are going to have another good laugh at my expense when they present me with an annuity paying the sort of interest rate I could get on a building-society deposit.
You did mention the low rates of course but that’s just the crowning insult. The least they could do is let me screw up my own portfolio.
Jasper Milvain 08.03.06 at 7:31 am
It sounds to me as if the Brethren would also object to wills and family trusts; they’re “planning for the day of your death”, as well. Could the Treasury make the loophole conditional on the invalidation of all such blasphemous instruments, or would the tax-avoiders just swarm around the barrier?
Agh. Another self-answering question, probably.
Jack 08.03.06 at 7:36 am
Kevin,
Annuities are actually just about the cheapest retail financial product, at least for the kind of people who actually buy them, because the terms are relatively transparent and comparable. The financial service industry will make more out of you in almost any other arrangement.
The comparison with building society rates is not like with like because they are short term rates. To get good rates at a building society you will have to be prepared to switch often and suffer if rates fall.
Marc Mulholland 08.03.06 at 7:42 am
“Did I ever tell you I was one”?
Daniel 08.03.06 at 7:49 am
Seriously? Do I have it right on life assurance; it seemed to be what they were saying on the brethrenonline website but I’m not sure I understood it at all well.
SamChevre 08.03.06 at 7:51 am
Daniel,
A geek’s mechanism question here. How does keeping the money in an investment other than an annuity work as a tax loophole? Under US tax law (for an IRA, which seems like the closest equivalent), if you convert the money to an annuity, the income from the annuity is regular income; if you keep it invested, withdrawals are regular income, and the remaining balance is part of your taxable estate. Is British law different?
derek 08.03.06 at 7:58 am
I’m more interested in comments about what [a tax loophole given to Plymouth Brethren] says about the politics of tax policy
What does that even mean, if straight after that, you announce you’re not interested in any commentary on the practice of giving special treatment to religious groups?
Well, not any commentary, I admit; you leave the door open for people to say they think it’s great.
Daniel 08.03.06 at 8:01 am
[How does keeping the money in an investment other than an annuity work as a tax loophole?]
Basically the bit that’s left when you’re dead is quite likely to not attract anything like the marginal rate of income tax.
Daniel 08.03.06 at 8:04 am
Derek: I meant that I’m interested in the question of loopholes generally; there are a whole raft of political issues here, because a lot of people’s normal intuitions about legal principles (no retrospective legislation, predictability of the legal system, laws to be interpreted on content rather than intention, etc) break down in the context of tax policy. This is because, more or less, tax law is the only area of law where there is a large amount of time and effort spent in trying to breach the spirit of the laws while adhering to the letter.
SamChevre 08.03.06 at 8:15 am
Thanks Daniel. So the loophole is that it is taxed only at inheritance tax rates, rather than at income tax rates. That means that this is an unusual tax loophole–it’s more valuable for the less wealthy than the more wealthy.
Daniel 08.03.06 at 8:26 am
#10 well, I oversimplify. The advantage to the wealthy, of course, is “investment flexibility” – that keeping your pension fund means that you can then deploy all the other avoidance means at your disposal. There is also a general public policy issue that buying an annuity is the sensible thing to do (using a savings account as a retirement fund is equivalent to self-insuring your longevity risk, with the state as the residual reinsurer) as well as the tax angle.
Michael Sullivan 08.03.06 at 8:39 am
It’s interesting to read this as an American. If I’m understanding the issues correctly, the difference doesn’t exist here. We have tax deferred retirement plans that work very much like what you’re calling ASPs. IRA money is pretty much yours to do with as you like within certain parameters, same with 401(k) if you roll it over or have a good plan. There are requirements about what you’re forced to withdraw related to life expectancy, but you are absolutely not forced to invest in a particular way.
jim 08.03.06 at 8:49 am
The interesting question to me is How did the exemption get into the law in the first place? If the PB aren’t organized as a denomination, if there is no central headquarters with a staff to look after their interests, who did the lobbying? Who told the Treasury staff about the problem? Who convinced them it was bad enough that it required legislative remedy?
Is this what you mean by “the politics of tax policy?”
Kevin Donoghue 08.03.06 at 8:56 am
Annuities are actually just about the cheapest retail financial product….
Jack,
Part of the charm of Daniel’s post is that it evokes different gripes in different jurisdictions. He’s thinking in sterling, I’m thinking in euros and you (I presume) are thinking in dollars. But more importantly, tax laws are a mess everywhere.
Daniel 08.03.06 at 9:06 am
If the PB aren’t organized as a denomination, if there is no central headquarters with a staff to look after their interests, who did the lobbying?
This is an interesting question, as the PB look on the face of it to be an unlikely lobbying organisation. There is a bit of organisation AFAICT (although it is administrative rather than doctrinal), but not so much, and lots of PB sects don’t even vote in elections for theological reasons I do not pretend to understand. Nevertheless, they have an amount of influence out of all proportion to their size and have quite a lot of exemptions from all sorts of other legislation (I think they have a lot of get-outs from EU trade union laws). It looks to me to be an indication of the sheer power of being for the most part middle-class and polite, not causing trouble and asking nicely (and also being thin enough on the ground that it doesn’t cost too much to be a special case).
SamChevre 08.03.06 at 9:24 am
A similar case (to the PB exemptions) would be the exemptions for the Plain groups–Mennonites and Amish–in the US. Like the PB, they do not vote for religious reasons, and lobby only very rarely (the only case I know of was for being able to continue their schools)–but are exempt from numerous laws, and regulations often exempt them or provide “alternative means of compliance”. They are largely exempt from child labor laws, can be exempt from Social Security taxes, etc. But they are a very identifiable, well-liked group who don’t cause social problems, generally, and so saying “this law keeps us from doing what we traditionally do” has been effective.
Phil 08.03.06 at 9:47 am
My late mother was brought up as a PB, so I can (and will) settle a couple of the doctrinal points nobody’s actually interested in.
On the not voting, some Brethren are very into the ‘peculiar people’ line (1 Peter 2:9, KJV: “But ye are a chosen generation, a royal priesthood, an holy nation, a peculiar people”). What this means is that those who are chosen by God should have nothing to do with anyone else – and certainly nothing to do with the institutions of this world. (Strict PBs also don’t hold with cinema, dancing etc.)
The thing about betting on the day of one’s death relates, almost certainly, to another central PB tenet, which is that the Second Coming is due any day now. At PB weddings, so I was told, they don’t say “till death do you part”; they say “till death do you part or until the Lord do come”.
If some of this is sounding familiar to USAn readers, it’s no coincidence: the PBs were one of the few British successes of the C19 Great Revival, which was hugely influential on American Christianity.
jim 08.03.06 at 11:06 am
@16,
The Amish, at least (I know nothing about Mennonites), and at least initially, sued (or individual Amish sued), to be relieved from legal compulsions which conflicted with their faith under the “free exercise” clause of the first amendment. After a while, legislators and regulators wrote in exemptions, to save having to defend such suits.
So they’re not such a good parallel:
* The UK doesn’t have a free exercise clause
* The previous tax policy didn’t conflict with PB faith.
@15,
I’m cynical enough to distrust an explanation that says asking politely enough will get you favours from Government. I’d prefer an explanation that says there was a financial services firm, with some influence on the Department, looking to expand its market. But I don’t know how one would identify it.
SamChevre 08.03.06 at 11:58 am
Jim,
Do you have a cite? I’m familiar with Wisconsin vs Yoder, of course–but the state was the plaintiff in that case, not the defendant. I’m unfamiliar with any case where the Amish or Mennonites brought a suit on free exercise grounds.
SamChevre 08.03.06 at 1:00 pm
Daniel,
(Dragging this back on-topic). When you say, a lot of people’s normal intuitions about legal principles break down in the context of tax policy, what do you mean? (1)That people don’t have those intuitions in tax policy? (2)That they aren’t good rules for tax policy? (3) Or that taxing bodies ignore them, annoying people who think of them as basic rules?
It seems to me that those rules are good rules for the law in general; that they are also good for tax policy; but that taxing bodies ignore them because they can get away with it (just as the rest of government would if it could get away with it.)
Jake 08.03.06 at 3:57 pm
This is because, more or less, tax law is the only area of law where there is a large amount of time and effort spent in trying to breach the spirit of the laws while adhering to the letter.
I have heard it said that tax law is fairly unique in that it more or less doesn’t have a spirit. Loopholes/Deductions are created in almost direct proportion to the political power of the beneficiaries, rather than out of any sense of the social good, and what’s the moral problem in pretending to be more politically powerful than you are?
Being forced to buy an annuity also seems pretty silly; if you don’t want people to build large tax-advantage estates, one could surely require a “withdrawal” of the pension funds with whatever tax consequences are appropriate before transfer to the heir. Simple, hard/impossible to work around.
John Quiggin 08.03.06 at 4:23 pm
“till death do you part or until the Lord do comeâ€.
Are married people still married in Heaven?
SamChevre 08.04.06 at 7:52 am
John,
Most Christian denominations say no, based on Matt. 22: 23-32
SamChevre 08.04.06 at 7:53 am
John,
Most Christian denominations say no, based on Matt. 22: 23-32
Sumana 08.05.06 at 7:50 am
Daniel, you might be interested in Robin Einhorn’s book on how slaveholders in early US history influenced tax structures in the long term:
http://www.press.uchicago.edu/cgi-bin/hfs.cgi/00/175230.ctl
My old history prof Robin Einhorn wrote it, and I’m reading it slowly. Neat stuff.
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