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Stealth Tax is a term used for a tax levied in such a way that is largely unnoticed, or not recognized as a tax. Generally used in the UKmarker by Conservatives to attack the New Labour government's behaviour. The phrase Stealth Tax should not be confused with double taxation or privatisation.

Origins

On 16 September 1996 the National Association of Pension Funds demanded a reverse to a tax on UK pension funds' dividends. Anne Robinson, their director general said pension funds are being "taxed by stealth".

The exact phrasing stealth tax has been in British political use since 1998 and referred to tax rises that apparently circumvented the 1997 New Labour manifesto commitment that "over the five years of a Labour government ... there will be no increase in the basic or top rates of income tax".

Anne Segall of the The Daily Telegraph claimed on 17 January 1998that, "taxes will rise by £7 billion this year ... as a result of a variety of measures introduced or extended by the previous chancellor Gordon Brown. Mr Brown's 'stealth' taxes are directed mainly at middle-class voters and in particular at middle-class professionals and those with savings".

On October 19, 1998 Frances Maude, then Shadow Chancellor (the opposition finance minister) claimed the Chancellor Gordon Brown was imposing "stealth taxes ... designed to conceal their effect".

Previous Prime Minister Blair only made occasional references to stealth taxes, such as on 1 November 2001 in relation to Company Car taxation, 9 November 2000 in relation to Fuel prices and on 21 October 2002 in reference to Pensions.

Examples

One example of a stealth tax is in the United Kingdommarker, where the British Government diverted revenue from the National Lottery to fund public spending.

Another form of stealth taxation occurs when deductions or exemptions are reduced based on income level resulting in more taxable income, but the same tax rate for a higher total tax. Under 2007 US tax law 1040 Schedule A itemized deductions and the $3,400 personal exemption are phased out (reduced) at higher income levels ($234,600 for married filers).

Stealth taxes might be recognised as taxation but remain largely unnoticed, as with Value Added Tax (VAT) in the UK between 1979 and 1991, during which period it rose from 8% first to 15% (compensating for a large reduction in the higher and basic rates of income tax) then to 17.5% (when the Poll Tax was replaced by a council tax), somewhat shifting the burden of taxation away from income onto consumption.

Taxation policy

Regressive stealth taxation

Stealth taxes can be viewed as regressive, as more affluent people are less affected by VAT, for example. State lotteries may also be viewed as a form of taxation, and there is evidence that they are played more by poor people than by the affluent.

In January 1999 Conservative culture spokesman Peter Ainsworth described the National Lottery's New Opportunities fund as a "stealth tax". and Conservative leader William Hague claimed The Labour stealth tax amounts to £1,500 for every working person. In Parliament on 3 November 1999 William Hague accused the government of levying a £500 million 'stealth tax' that would hit IT companies.

Increasing the stamp duty tax paid on house sales in the UK was also described as a stealth tax. Michael Portillo claimed that the children's tax credit was a 'stealth tax on marriage'. Conservative Archie Norman claimed that increasing the Council tax was This is the ultimate stealth tax hike - local residents foot the bill and local councillors take the blame.

On 8 June 2005, revaluation of houses for council tax was put forward as a steath tax, Anne Milton MP asked Will the Minister guarantee that the average council tax bill will remain the same for my residents in Guildford, or will he come clean and admit that the revaluation is simply another opportunity to impose a stealth tax on hard-working families and pensioners?

Inflation as stealth taxation

A graphical demonstration of inflation.
However, inflation is not limited to physical currency, but also includes increases in credit and account balances available for electronic transfer.


Any person living in a country using fiat currency (vis-à-vis a hard currency) is prone to the stealth tax of inflation. Inflation is typically resorted to by governments using fiat currencies because, in small increments, most people will never notice the effects of the policy.

How it works

When governments aren't able to bring in enough revenue through taxation or borrowing from private citizens and corporations, it resorts to borrowing from its central bank through credit, i.e. debt financing. To do this, the central bank typically makes a simple bookkeeping entry, crediting the accounts of the government with the newly created amounts of currency, which the government then spends on the open market.

The expenditure of this newly created money allows the government to outbid other buyers. This causes prices to rise, first in a few limited sectors of the economy where government demand for goods and services is relatively high, and then slowly trickling out through the rest of the economy as the new money continues to change hands in transactions.

At the same time as prices are rising, people living on fixed incomes see their cost of living go up. For those who save, the value of their savings deteriorate.

Example

Imagine there is one trillion monetary units in the economy. Governmental budgetary shortfalls are 50 billion units. The central bank credits the government with the newly created, additional money to meet the government's shortfalls. This equates to a five percent increase in the money supply.

\frac {0.05T\, \mathrm{units}}{1T\, \mathrm{units}} = .05\, \mathrm{growth} = 5%\, \mathrm{inflation}


Now, imagine a person had 100 units in their bank account before the inflation, and did not touch it until after the inflation occurred. Also imagine this person wanted to buy a video game console which was priced at 100 units. Unfortunately for that person, the cost of the console is now 105 units due to the five percent inflation of the money supply. The person can no longer afford the product he wanted to purchase because the money he saved is now less valuable. Although the person still has 100 units to spend, it will not buy him what it would have before the inflation occurred.

\frac {100\, \mathrm{units}}{105\, \mathrm{units}} \approx .952 = 95.2%\, \mathrm{original\, value}


By increasing the amount of money in the economy, the government has diluted the value of each unit of currency. It is equivalent to if the government had originally taxed the buyer an additional 4.8 percent.

Typically, the connection between the government's deficit spending and the resulting inflationary pressures are not made by consumers. Blame is typically attributed to corporate greed (example: the increase of the cost of petrol since the year 2000 being characterized as the intangible fault of greedy oil companies instead of due to measurable things like inflationary pressures, increased demand in developing economies, and reduced supply as a result of conflicts like the Iraq War), while the government does not face the unpopularity which generally results from increasing taxes.

Had the government enacted a five percent tax, they would have collected the amount of money necessary to meet the shortfall. Additionally, the government would have gotten a discount on the goods and services they needed: an economic slowdown due to consumers having five percent less money to spend tends to drive prices down as sellers attempted to move their products. The resulting economic slowdown may not be a bad thing, however, as the government spending may absolutely offset and balance it.

References




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