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Interest Tax Proposals Expose Financial Naivety

The economic situation we are in has amply demonstrated how Labour doesn't understand finance well enough to be left in charge of the economy.  The worrying thing for me is that the Conservatives are showing a similar lack of basic understanding.  What chance do we have of getting out of this mess if both parties cannot understand finance at a basic level?

The Tories' announcements on their proposals to remove tax on interest income for basic-rate tax payers demonstrates a basic lack of understanding, if the Press reports are accurate.  They reportedly said that it was wrong to tax income twice - once when earned and once when saved.  This demonstrates that they don't understand this most basic of financial instruments (earning interest on deposits) and, if they can't grasp this, how can we trust them with the economy as a whole?

Anybody with a basic understanding of finance knows that nobody taxes the balance in a savings account.  What is taxed is the income (i.e. the interest) that one’s savings attracts whilst on deposit.  In the same way as earned income from work, this is income and should therefore be taxed.  For them to say that savings are taxed per se either demonstrates that they don’t understand, or they are being deliberately disingenuous for a political purpose, which is unforgivable in the current climate. 

In any case, if they feel that taxing interest income is wrong per se, even if for the incorrect reason stated above, they should be abolishing it for interest income earned by everybody, not just basic rate taxpayers. 

To extend their assertion further, many people don’t invest all their spare income in deposit accounts but instead choose to invest in shares.  The dividend income they earn from such endeavours is on a par with interest earned on deposit.  Following through the analogy, it stands to reason that dividend income should also come free of tax, as should any capital gains made when the shares are sold.  After all, this money has also been taxed already – when it was earned. 

Some might say that capital gains on the share price constitute something different than the original money invested.  However, to say this should still be taxed when realised because it is new money (i.e. more than the original invested) think on this:  if I left earned interest on deposit, it would attract interest (i.e. compound), which would mean that I would now be earning income on ‘new money’ and therefore should be taxed on that portion.  Could you imagine trying to trace all that and make sense of it all? 

They really should think things through properly before they decide on these things and they clearly haven’t. 

Equally, the Tories have joined the fray in criticising the banks for not lending enough to already over-indebted individuals and corporations, and increasing charges when they do, despite the justification for doing so.  In this and their interest tax proposals, they are demonstrating a lack of understanding that is close to Labour’s equal, when what we need is a group if individuals who understands finance and economics properly to be put in charge to get us out of this mess.



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