The global recession has plunged nations into huge debt. Many national treasuries have cavernous black holes instead of coffers of gold. It is the worse economic slump in the living memories of mo
The global recession has plunged nations into huge debt. Many national treasuries have cavernous black holes instead of coffers of gold. It is the worse economic slump in the living memories of most people and it will take years for governments to recover their deficits. We will probably have to endure spending cuts and increased taxation. If you want to minimise the future tax you pay you will need to take positive action.
Since the start of the downturn billions have been pumped into stimulus packages, tax receipts have slumped, and the growing numbers of unemployed have swelled the amount of benefit payouts. It could be decades before the debt is paid off and taxpayers are likely to suffer years of high taxation and more stealth taxes to help meet treasury deficits.
For example, in the UK Budget in April, the Chancellor of the Exchequer, Alistair Darling, said that the Government would have to borrow ?175 billion this year and ?173 billion in 2010 to compensate for the shortfall in tax revenues. Over five years he would need to borrow ?703 billion.
Immediately following the Budget, the Institute for Fiscal Studies (IFS) said the Government would need to find ?90 billion every year to fill the tax hole. This would cost every household in the UK an extra ?2,840 in tax or spending cuts.
Interest payments alone on the UK national debt will cost an estimated ?30 billion in 2009/10, ?42 billion in 2010/11, and ?58 billion by 2013.
The UK?s overall national debt stands at over ?800 billion. In the last UK fiscal year tax receipts fell by ?22 billion due mainly to less income and corporation tax, less VAT and a slumped housing market.
The International Monetary Fund (IMF) said in July that the UK has spent ?1,227 billion ? 81.8% of gross domestic product – in banking bailouts, the biggest for any major economy. Worldwide, the IMF put the cost of the financial crisis at ?7.1 trillion. In April the EU said that European governments have committed ?3 trillion to rescuing banks, with another ?400 billion for restructuring or rescuing financial institutions and a further ?300 billion for recapitalisations.
In the US, taxes dropped by 11.7% overall during the first quarter of 2009 compared to the same period a year earlier, according to a report by the Rockefeller Institute of Government. It is the largest such decline in the 46 years such data has been available. Personal income taxes fell by an ?unprecedented? 17.5%, sales tax was down 8.3% and corporate income taxes fell 18.8%. Preliminary figures for the state fiscal year 2009 indicate around 8% decline in total taxes, 13% in personal income taxes, and 5% in sales taxes.
The UK Government has estimated that it will need ?6 billion to cover care for the elderly over the next 20 years. Longevity is not just a problem for the UK as many governments face a huge economic challenge to fund the cost of an aged population where there will be fewer in employment contributing to social care and pensions for the older generation.
A US census bureau report entitled ?An Aging World: 2008? reveals that the number of people in the world 65 and over is increasing at an average of 870,000 every month and that within ten years the world population of those aged 65 and over will outnumber the under fives for the first time. By 2040 the number of those over 65 is expected to double from 7% of the global population to 14% – swelling to 1.3 billion from 506 million in 2008.
In the UK, tax will rise to 50% for those earning over ?150,000. It would not be surprising if other European countries followed suit. A 2009 study by KPMG shows that the top average personal income tax rate has dropped over the past seven years. However, KPMG says that there are indications that reversal is on the way and that some European countries are proposing rate increases for its top earners.
It brings to mind the 1966 Beatles song ?Taxman? written by George Harrison in protest against the 95% ?super-tax? imposed on top earners by Harold Wilson?s Labour Government. Here?s an extract:
?Let me tell you how it will be
There?s one for you, nineteen for me
?Cos I?m the Taxman
Yeah, I?m the Taxman
Should five per cent appear too small
Be thankful I don?t take it all
?Cos I?m the Taxman
Yeah, I?m the Taxman
If you drive a car, I?ll tax the street
If you try to sit, I?ll tax your seat
If you get too cold, I?ll tax the heat
If you take a walk, I?ll tax your feet
Taxman
?Cos I?m the Taxman
Yeah, I?m the Taxman??
Let us hope that taxes will not hit the astronomical heights of 95% but it is highly likely that taxes will have to rise, in one way or another, wherever in the world you live. Higher taxes will take a chunk out of your finances and could reduce your wealth or the amount you leave your family. There are structures available which provide effective tax planning and legitimate tax mitigation. An experienced financial adviser like Blevins Franks can advise you on how to protect your wealth from taxation in the future.
By David Franks, Chief Executive, Blevins Franks
25th August 2009
