tax notes international - Tuck School of Business - Dartmouth College

FEATURED PERSPECTIVES
We, the taxpayers, are now in a situation in which
not only are we giving the banks money to lend to
businesses, we are also going to relieve the banks of
most of the risk of lending. I can’t help but ask why
we now need the banks at all. The government could
just cut out the middlemen and take over the banking
sector, lock, stock, and barrel.
Of course there is one sector that is immediately
affected by the reduction in base rate — those with
savings. The banks and building societies have taken
the opportunity to reduce interest rates paid to investors,
though some have not passed on the full reduction.
Nevertheless, it was recently reported that some
40 percent of savings accounts were paying less than 1
percent and 26 percent were paying less than 0.5 percent.
If rates on the majority of accounts get much
lower, investors may well consider withdrawing all their
savings and keeping them under the floorboards. At
least there the money will not be at the mercy of the
bank and they can derive pleasure from taking it out
and counting it every once in a while. If we ever experience
deflation, as the more pessimistic have
claimed, the investors will find their savings’ purchasing
power increased and there would be no tax to pay!
As savings income is dropping, there is clearly going
to be a drop in the income tax receipts on that income,
which is why the Conservatives’ latest tax policy seems
an empty gesture. The proposal was to exempt savings
income from income tax for all but those who pay tax
at the highest rate of 40 percent (currently those who
have a total taxable income, after the deduction of allowances,
of £36,000 and above). This, coupled with a
large increase in the personal allowance for those over
65, was stated to be to help the ‘‘innocent victims of
the downturn.’’ All very laudable, but would it really
be of any help at a time when there is little or no income
to be exempted? The cynic in me thinks this is
just posturing before an expected spring general election.
The real practical help for these times has taken the
form not of rate cuts, which are unlikely to stimulate
the economy and in any event would have a delayed
impact, but of allowing businesses to spread their tax
payments over an agreed period. This was a measure
announced in the prebudget report with the setting up
of the HM Revenue & Customs’ Business Payment
Support Service (BPSS). The objective at the time was
to enable ‘‘businesses in temporary financial difficulty
412 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
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