Wednesday, December 22, 2010

TMM solves the UK structural deficit

Well, it's that time of year again, when the media and political classes all get in a tizz about bank bonuses, and while Team Macro Man often cannot believe their eyes at how bankers keep shooting themselves in the foot as far as political sensitivities go, TMM reckon that there are a fair few other areas of society that ought to pay their dues. So in this regard, TMM will attempt to try and plug the UK's fiscal hole by proposing a set of windfall taxes along the lines of the Bank Bonus Tax. But this time, with the *real* culprits.

Banker Tax. As mentioned above, we are often incredulous at how retarded bank PR has been over the past few years, with a seeming inability to accept wrongs or indeed even give an inch to policymakers. In particular, the way banks behaved in 2009 despite unprecedented public support, forced politicians to act. But it didn't have to be that way... UK banks, in particular, blew up as a result of the structured finance books and exceptionally poor decisions by senior management at a few of them (Fred Goodwin, we're looking at you).

Given all those bankers and traders who were in the employ of foreign un-rescued banks who have nothing to do with UK lending, and in jobs like operations or IT had very little to do with the losses that materialised, it seems somewhat unfair that they are made to pay the windfall. Whilst banks may soon try to redefine their activities ("Hello Barclay's Butchers, can I help you?"), it's the other non-bank banks we feel real sorry for, e.g. Blood Banks, Bottle Banks and err. where they keep "man-deposits"?.

Anyhow, the Bank levy is supposed to raise around £2bn, so let's distribute that a little more fairly. HMRC data show that Income Tax and NIC contributions from Financial Intermediation for 2009-10 were £23.2bn. As a ballpark guess, the average tax rate (including NICs) on that is probably about 40%, implying ~£58bn of pay. Again, taking a guess that around 5% of the payroll was responsible for the losses, or ~2.9bn, that implies a tax rate of 69% for those guys to raise the Banker Tax's £2bn.

Accountant Tax. Barry Ritholtz popped this post up as we were writing this. Enough said. They've got to be good for another £2bn.

Ratings Agency Tax. As TMM have oft pointed out, this little lot are directly responsible for the start of all this in the first place with their split ratings on turds. They are currently playing havoc with Europe. We suggest adding a tax of 1 penny on every bond issued that carries one of their ratings. This would either raise a sum of 0.01 x 1 trillion = £10bio, or alternatively drive people to do their own risk assesments. Both being positive outcomes.

Lawyer Tax. So lawyers were never involved in okaying all those structures that brought the financial world down? Guilty! Lawyers to be nationalised and pay to be capped at 100 pounds per hour and bonuses to be payed 1% cash and 99% in legal aid vouchers. Given the UK boasts 151,000 lawyers, probably earning an average salary of £50k, that would raise about £7.5bn.

Labour Party Tax. In running an expansionary fiscal policy, Gordon Brown pushed up the UK's Real Exchange Rate in line with the Mundell-Flemming framework. However, in doing this, the private sector economy became uncompetitive and vulnerable, resulting in large swathes of UK Plc. being sold to the French, Germans and Americans along with their future tax revenues in order to finance the UK's current account deficit. By doing this they were part and parcel of the fundamental imbalance in the UK's economy. Brown's meddling with the regulatory framework also prevented a sensible and coordinated appreciation of the risks prior to the crisis and also an appropriate response during it. While it's hard to put a concrete number on this, the Labour Party membership stands at around 92,000. Guessing that they earn the UK's average salary of £26k, a 69% Labour Party Tax would raise around £1.65bn.

Bank of England Tax. TMM's nemesis, Mervyn King, and the other ivory tower economists that have inhabited the BoE since its independence also clearly contributed to the crisis in keeping monetary policy far too easy to begin with, then far too tight as the crisis evolved and then to outright lunacy as banks started to collapse around them. Not to mention the money market reforms of 2003 and 2006 that sent leverage ratios on HBOS & Northern Rock's balance sheets northwards (we'll do a post on this at some point in the New Year...). Unfortunately, the Bank of England's profits already accrue to the Treasury, so there isn't room for a tax here.

Estate Agent Tax. The cheerleaders of the past 10years of ever-rising property prices. In the UK, House Price to Earnings ratios jumped from around 2.6 in 2005 to around 4.9 at the peak and TMM reckon that the difference between the 2007 peak ratio and the 1989 peak ratio is probably a fair assessment of their contribution, or around 40% of the valuation move. The HMRC data show Real Estate, Renting & Business Activities as paying £43.3bn in Income Tax/NICs in 2009-10, so guessing an average tax rate of about 30%, that makes about £144bn of taxes. Guessing that about half of this payroll (conservatively) was involved in residential & commercial property sales, and applying the 69% tax rate above gives an Estate Agent Tax of £49.7bn.

Buy-To-Let Tax. The next group are those that priced first time buyers out of the market and amassed large property portfolios (anyone remember the stories of people on £26k a year, but owning 10 buy to lets?!). TMM cannot find much data on this, but taking a conservative assumption that there are ~200k buy-to-let landlords each owning a single second property, worth the average house price of £165k and yielding an average 4.5% results in a Buy-To-Let tax take of £1.02bn.

Media Tax. Kirsty Allsop, Property Ladder and all those other "buy! buy! buy!" property programs who provided tips to would be buy-to-letters and property developers (the polite name for "speculative flippers"). In this group, we'll add The Press and the BBC, who get a special mention for Robert Peston fueling the run on Northern Rock, which cost the taxpayer £40bn. It's pretty difficult to find data about earnings here, but as a proxy, the BBC's budget is £4.8bn, so at 69%, the BBC Tax would raise £3.3bn.

The Simon Cowell Tax. To be introduced for reducing half of the population of the world to dribbling morons every Saturday evening and reducing workers efficiency on Monday mornings as the previous Saturdays are discussed. With yearly earnings of $54m, that's another £37m.

UK Consumption Tax (VAT). TMM learned a long time ago never to underestimate the stupidity of the UK consumer - he/she will just go on spending no matter what the consequences. As we all know, overconsumption is unsustainable and represents an imbalance, so hiking VAT pushes up the relative cost of imports to exports in tradable goods. The hike to 20% is expected to raise around £18bn, so why not hike it to 30%? Substitution and a collapse in consumption is likely, so it probably wouldn't raise a huge amount more, but if it's only 50% as effective, that would raise about £36bn.

Overseas Private Infrastucture Company Tax. How did they raise all that money to buy our monopolies? This should be hugely popular given recent experiences at Heathrow and on the trains. An alternative is to go the whole hog where the UK instead sells ALL national interests to overseas purchasers, only to renationalise the lot six month later (the Putin trade). Estimated revenue £10bn.

Footballers Tax. You know the bubble isn't over until these guys go back to being paid thrupence a week for the honour of bladder kicking for their local factory town. Half of the rhetoric offered for taxing anyone with the name "bank" in their company title is that "everyone must do their bit". Except, apparently, footballers, whose money when spent lavishly in nightclubs on imported booze and mock "insert era here" houses is deemed to be helping the economy and anyway they provide a great role model to the youth of today. Ahem. Tax them too. Estimated revenue £500m.

Psycho-delusional Politician Tax. Taxing Vince Cable is about as indiscriminate as the taxes he is suggesting, so let's go for that too. Given all the freebies and expenses putting his earnings at around £280k, at 69% that should raise £190k.

TMM Tax. We realise that there is little chance of getting that lot invoked without the chance of someone trying to get their own back. So we are going to pre-empt it and tax ourselves. Revenue estimate - £ 38.57.

Totting that all up raises an annual £123.7bn which is about 8.6% of GDP and pretty much bang on the OBR's estimate of the UK's structural deficit. Job done. Mr Osborne, we expect your call.

Merry Christmas. TMM will be back in the New Year.


Anonymous said...

TMM, I am as appreciative of your post-Xmas-broker-long-lunch ramblings as I was of Paula Abdul's 3am post-Wednesday-long-night-of-lines drunk dials. Poor projection, no tie, and you really can't tap dance.


Anonymous said...

I find it amusing, unsurprisingly, that Deutsche admits to criminal wrongdoing and coughs up $550 big ones to avoid prosecution and it doesn't even make bbg top stories or get mentioned anywhere. While GS settled a mysteriously similar amount and it was news for months and centre of universal scorn. Hmmm. Kudos to top journalism.

Nemo Incognito said...

Anon, first rule of being a sketchy bank: settle over a public holiday or when something so big happens that no one cares.

Second rule of being a sketchy bank: don't take on an administration that is led by a guy who probably saw the removal of Frank Rains and Stan O'Neal as a "race thing".

Anonymous said...

You loved every minute of it Simon, you old slag... especially when I whipped you with your old school tie after you didn't finish your Brussels sprouts.


P.S. Now I understand the phrase "spotted dick"

Anonymous said...

and who said it was just the USA that was morally bankrupt ... so next up, odds of a no-confidence vote in UK in the next 12months? ... hmm 65%?

Leftback said...

Don't worry about sovereign/muni debt in 2011.
It's contained.

Charles Butler said...

Repetitive narrative tax - keyed to the number of times a diagnosis/prognosis has been previously published.

Research anti-grant - payable by the applicant every time an item appearing in a newspaper is offered as evidence.

Goose-gander tax - to be extracted from every commentator who blamed the finance industry's short-term thinking for the crisis and simultaneously insisted that they mark everything to market in February of 2009.

Eurobond shorts a tad disappointed this morning.

Merry Christmas to all.

Anonymous said...


What are your thoughts on EUR/CHF?
Is the selling done? Or do you foresee more downside?

Merry Christmas