Scrap ISAs as most of the tax benefit goes to the rich?

princeofpounds

Can anyone give a good fairness or economic arguement for keeping the uncapped isa system? Why not just limit the ISA benefit to 10k of savings or £x of tax relief?

I think all the arguments 'against' your post so far are very good and focus mainly on fairness. To recap:

- The tax relief is quite trivial.
- The people who benefit most are not the rich, but rather the comfortable who can put enough by to fill up ISA allowances, but no more.
- The amounts are capped, annually at least.
- The benefit is universally accessible to anyone who has savings.

But I think there are other points relevant to the precise questions you are asking.

The question of fairness might be a red herring.

The rich already pay more tax and the poor are net recipients, so even if you accept redistribution is how things should be for the entire system in aggregate, it does not logically follow this is how it should be for every tax/benefit in existence.

If the system achieves progressive goals as a whole, that is what matters for society. Otherwise it's a bit like saying that because scoring goals is a good thing in football, each and every player should be a striker.

The next point is that if we accept that savings in a society is a good thing, that we don't do enough, and that government encouragement is required (or at least the removal of government discouragement), then BY DEFINITION this encouragement can only be given to people who can generate savings in the first place.

It is impossible to create a savings tax relief which is not regressive. You can lower the limit at which it is capped perhaps to limit the regression.

Let's say we lower it to £1, so that almost everyone who can beg on the street for an hour can benefit. However, this will totally fail in its OTHER objective of promoting saving because in reality the sum raised in savings will be irrelevant.

The more regressive the tax is, the better it is at achieving its function of incentivising savings (up to a point - there is an argument about diminishing returns in terms of increased savings for each 'unit' of redistribution'sacrificed', but that is a side issue about where to draw the line, not a general problem).

Finally, I won't drone on about the economic argument and may return to it in more detail later, but in brief the amount of investment (as opposed to consumption) a country does it equal to the amount of savings generated. Britain is underinvested and overly consumer-led in its economy and savings rates are low (so low in fact that they have been strongly negative for years.... i.e. that means we built up a lot of debt which we all know is unsustainable). Unless you believe that we are fine on the debt front, which would be a minority opinion.

So in practical terms promoting savings IS likely to be a good thing for the economy. Although that's a seperate question as to whether an ISA structure is a fair way of going about that.

So, to summarise:

1) Looking at 'progressive' fairness on the level of an individual tax policy is a red herring, because it is the aggregate system that matters in terms of redistribution of wealth.
2) Some taxes and tax breaks are designed not to achieve redistribution but influence other behaviours.
3) Encouraging savings is one such tax break where it is impossible for it not be regressive.
4) Minimising that regression is not possible without making the tax a failure for its primary purpose.
5) And, as a separate issue, generating more savings in the economy is likely to be a positive over the long term because we have been dis-saving for too long and built up too much debt as a result.

Ultimately, what you have to realise is that redistribution of wealth is not the only objective of a tax system (and may not even be the primary objective).

the_flying_pig

michaels wrote: »

Because they are cumulative.

I bet if you looked at who benefits most fro mthis tax break you would find it strongly correlated with those who have both the most assets and the most incomes. Even a flat rate income tax takes an equal proportion from rich and poor alike, this tax break does not do that it rewards only those rich enough to save every year.

that's, if i may say so, a bit of a wonky way of looking at it, flitting between the very different concepts of tax and 'tax break'.

sticking with the former:

if you save nothing you pay nothing in tax.

if you save less than £7k or whatver it is p.a. [and bother to use up your ISA allowance] you also pay nothing in tax.

if you save more than £7k or whatever p.a. you do pay tax [albeit not on the first £7k], at a rate proportionate to your income [not to your total savings or that year's amount saved].

so really it's very similar to income tax. you don't pay tax on the first little bit.

it'd be a bit daft to say that an employed person who earns £8,105 a year [and therefore pays no income tax] is getting a big tax break that someone who earns nowt, or only half that, doesn't get.

with the clobbering that savers are getting as a result of ZIRP i'm not really sure that more tax on them would be fair. after all, even 30%/40%/whatever of nothing is still nothing.

Generali

I think ISAs should be scrapped as there is no good reason for people to pay tax on their savings when they already paid income tax on the money they saved!

kabayiri

ISAs must remain because they carry an important message about tax exemption.

Whenever there is a thread in DT questioning the ethics of Sir Philip Green steering half a billion of divis off to his missus in Monaco (or some such), the usual defence is that I can work the same tax mitigation system by clawing back the £50 relief on my cash ISA.

It shows we are 'all in it together'

chucknorris

michaels wrote: »

Sorry, no VI piece to quote, just my own musings.

I can see the country benefits if everyone puts aside some savings for a rainy day (unemployment, sickness, unexpected cost) but beyond having a cushion, ISAs merely act as a tax shelter for those rich enough to have large savings...by definition the rich.

In straightened economic times surely such a subsidy from the poor to the rich should be removed. We are also in an economic situation where whilst it makes snese for people to pay down debt and as mentioned above build up a rainy day fund, incentivising those with spare income to save it rather than spend in the wider economy is liekly to be exacerbating the recession.

Can anyone give a good fairness or economic arguement for keeping the uncapped isa system? Why not just limit the ISA benefit to 10k of savings or £x of tax relief?

The rich? You can only invest/save under 11k a year for god's sake, get real!

ILW

Rich seems to defined as anyone with more than you.

RenovationMan

CLAPTON wrote: »

ISAs contributions are capped

this years cash allowance is 5,640 or double that for S&S

rich people would consider that amount of money trivial.

older people benefit as do the middle income earners

and if course its only the interest that is tax free lets say £200 gross max per annum so saving about £40 - 80 in tax

nice, but hardly going to lead to revolution

Yep, pretty much what I was about to say before I read Clapton's post. £10k for investing and £5k for savings is trivial even to people who aren't wealthy.

If you have real wealth you'd be more likely putting it offshore or at the very least into VCTs.

The best tax haven I have is my pension. 40% tax relief on the way in and less than 20% tax on the way out

Lokolo

Generali wrote: »

I think ISAs should be scrapped as there is no good reason for people to pay tax on their savings when they already paid income tax on the money they saved!

They aren't paying tax on their savings, they are paying the tax of the income from savings.

POPPYOSCAR

ILW wrote: »

Rich seems to defined as anyone with more than you.

Yes, I am struggling with the definition of 'rich' by some.

So my friend spends £1000 going on holiday, I however put £1000 into an ISA. So he is poor and I am rich?

Mikeyorks

michaels wrote: »

Everyone could have the same tax break - first 500 quid of savings income. THis would still be regressive as the poorest woud benefit least

There is a (10%) tax break on savings income. It's subject to indexation and is set at £2710 for 12/13. And it does only benefit the lower echelons of income.

If your earned income exceeds your personal allowance by more than £2710 .... then the tax break doesn't exist.

If your earned income falls into the band 'personal allowance + £2710' ..... then any interest is only chargeable at 10% up to the limit of that band.

If your earned income is lower than your personal allowance - then your interest is tax free up to the allowance limit and the next £2710 of interest is only chargeable at 10%.

In neither case where there is a benefit ....... does it appear to go to the affluent?