Friday, 10 October 2008

Why do we pay tax on the interest we earn?

A question that has been asked many times I'm sure, but as we make the transition to a different financial paradigm, I'm asking it again.

Problem: We (in the UK at least) have been borrowing (and the banks have been lending us) too much money. The banks don't bring-in enough money in savings to cover this borrowing, and now they can't borrow it from each other either, the whole economy is coming unstuck.

Might be a good time to encourage people to save more, methinks, and what better way than to stop punishing people by taxing them on interest earned on their already-taxed income. At the end of the day, since Mortgate Interest Tax Relief was abolished, we never get any tax back on the interest we have to pay on our mortgages etc, so perhaps restoring some balance to the taxation system is in order. Lets extend the "cash ISA" to its logical conclusion - tax-free personal savings.

Although there are many folk who like to earn free money from slick investments, most of us would be happy to keep whatever savings we have in a safe place, where they are reasonably well protected from inflation. Why, especially now, should government inhibit this by squeezing taxation income out if?

But...if not that...then at least help people offset one set of interest (earned) against another (paid). Encouraging transparent and flexible mortgage-accounts, like Virgin's One account, might be one way to do this, though preferably without having to pay an interest-rate premium to get it.