If you are lucky enough to have piles of money earning interest in a bank account, one thing you don’t want to be doing is facing the dreaded tax bill on the interest earned. It is for this reason that many wealthy people put their savings into bank accounts in Switzerland and other countries with strict secrecy laws. Countries, such as Liechtenstein, Switzerland, Andorra, Liberia and the Principality of Monaco have previously had laws in place to prevent the effective exchange of information. This had meant that you could keep your money in an account there and the UK authorities would be unable to obtain any information for their tax records.
However, as part of an ongoing OECD initiative against harmful tax practices, more and more countries have been opening up to the exchange of information. In recent developments, Switzerland and the UK have signed an agreement, which will see them begin to negotiate on improving information exchange. In particular, the UK will be looking at the possibility of the Swiss authorities imposing a tax on any interest earned in their accounts by UK residents. This tax would be on behalf of HM Revenue and Customs. One concern, however, with this attempted crack down on tax evasion is that ‘innocent’ taxpayers could be the ones to suffer.
The following articles consider this recent development. It is also a good idea to look at the following link, which takes you to the OECD to view some recent agreements between the UK and other countries with regard to tax policy and the exchange of information. (The OECD)
Articles
UK in talks over taxing Britons’ Swiss bank accounts BBC News (26/10/10)
Doubts on plans to tackle tax evasion Telegraph, Myra Butterworth (21/10/10)
HMRC letters target taxpayers with Swiss bank accounts BBC News (25/10/10)
Spending Review: Can the taxman fix the system? BBC News, Kevin Peachey (22/10/10)
Britain, Switzerland agree to begin tax talks AFP (26/10/10)
Treasury to get £1 billion windfall in Swiss deal over secret bank accounts Guardian, Phillip Inman (26/10/10)
Swiss to help UK tax secret accounts Reuters (25/10/10)
Reports
The OECD’s Project on Hamful Tax Practices, 2006 Update on Progress in Member Countries The OECD, Centre for Tax Policy and Administration 2006
A Progress Report on the Jurisdictions surveyed by the OECD global forum in implementing the internationally agreed tax standard The OECD, Centre for Tax Policy and Administration (19/10/10)
Questions
- Is there a difference between tax avoidance and tax evasion?
- If there is crack down on tax evasion, what might be the impact on higher earners? How could this potential policy change adversely affect the performance of the UK economy?
- If tax evasion is reduced, what are the likely positive effects on everyday households?
- Is clamping down on tax evasion cost effective?
- What might be the impact on people’s willingness to work, especially of those on higher wages, if there is no longer a ‘haven’ where they can save their money?
- How could tax reform help the UK reduce its budget deficit?
One of the structural problems facing the UK economy is that people have been borrowing too much and saving too little. As a result, vast numbers of people have been living on credit and accumulating large debts, and many people have little in the way of savings when they retire.
So should the government or Bank of England be encouraging people to save? Not according to Charles Bean, Deputy Governor of the Bank of England – at least not in the short term. While acknowledging that people should be saving more over the long term, he argues that the main purpose of the historically low Bank Rate since the beginning of 2009 has been to encourage people to spend, thereby boosting the economy. In other words, if the purpose of a loose monetary policy is to increase aggregate demand and stimulate the economy, then what is needed is increased consumption and reduced saving, not increased saving.
In the following webcast, Charles Bean gives his views about interest rates and counters the criticism that savers are being pid too little interest. He argues that for many the solution is to start drawing on some of their capital – not a solution that most savers find very appealing!
Webcast
Bank of England: savers should eat into cash Channel 4 News, Faisal Islam (27/9/10)
Articles
Savers told to stop moaning and start spending Telegraph, Robert Winnett and Myra Butterworth (28/9/10)
Bean Says Bank of England Trying to Get Reasonable Economic Activity Level Bloomberg, Scott Hamilton and Gonzalo Vina (27/9/10)
Spend, spend, spend, demands Bank of England deputy governor Investment & Business News , Tom Harris (28/9/10)
Data
International saving data (see Table 23) Economic Outlook, OECD
AMECO on line (see tables in section 15.3) AMECO, Economic and Financial Affairs (European Commission)
Economic and Labour Market Review (see Table 1.07) National Statistics
Questions
- What is meant by the ‘paradox of thrift’?
- Reconcile the argument that it is in the long-term interests of the UK economy for people to save more with the Bank of England’s current intention that people should save less?
- Is there a parallel argument about fiscal policy and government spending (see the news item The ‘paradox of cuts’?)
- What are the determinants of saving?
- Look at the data links above and compare the UK’s saving rate with that of other countries.
- What has happened to the UK saving rate over the past four years? Attempt an explanation of this.
With much attention focused on the UK’s rapidly rising public-sector debt, fiscal policy will have to be tightened once the economy is recovering. This will entail substantial cuts in government expenditure and possibly tax rises too, whoever wins the election next year. The danger, of course, is that if aggregate demand is cut, or its growth is severely curtailed, the economy could lurch back into recession. For this reason, it is likely that monetary policy will have to remain expansionary for some time to come. Interest rates will stay low and further quantitative easing could take place.
This was the conclusion of a report by the Centre for Economics and Business Research (see link below). The CEBR argued that Bank Rate will remain at 0.5% at least until 2011 and not reach 2% until 2014. “The forecasts show that the fiscal consolidation is likely to be matched with an unprecedented monetary relaxation. … Douglas McWilliams, one of the report’s authors and Chief Executive at CEBR, commented: ‘We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward. Our analysis says that this ought to work. If it does so, we are likely to see a major rerating of equities and property which in turn should stimulate economic growth after a lag.’
The following articles look at the report and the implications of its predictions for economic growth and exchange rates.
Bank rate to ‘stay frozen’ for five years Times Online (11/10/09)
Mortgage rates to stay low until 2014 Telegraph (12/10/09)
Tax and spending squeeze to keep bank rate low David Smith’s EconomicsUK.com (11/10/09)
UK rates ‘to stay low for years’ BBC News (12/10/09)
Pound plunges as UK markets rally to year high Telegraph (11/10/09)
Tough times ahead as traders poised to offload their sterling Sunday Herald (11/10/09)
CEBR News Release (12/10/09)
Questions
- Under what conditions would a combination of a contractionary fiscal policy and an expansionary monetary policy be most effective in delivering economic growth?
- What would be the long-term effect on private-sector debt?
- How would such a policy mix affect the rate of exchange? Would this help to stimulate economic growth or dampen it?
- How will the size of these effects depend on the mobility of international financial capital?
- Explain the following: ‘Our analysis says that this ought to work. If it does so, we are likely to see a major rerating of equities and property which in turn should stimulate economic growth after a lag’.