Fiddling while Rome burns
I’ve been waiting to use that headline for a while, and the news that Standard & Poor’s has downgraded Italy’s credit rating to A is too good an opportunity to miss. And just in case you were thinking that A still sounds pretty good, remember that A comes after AAA, AA+, AA, AA- and A+.
The reason for the downgrade is that S&P do not believe that the Italian government will be able to bring their public finances under control. This coupled with weak growth and Europe’s second-highest level of accumulated debt, means that lending money to the Italian state is becoming an increasingly risky business.
At the heart of this is political failure. Successive Italian governments have failed to liberalize their economy, failed to tackle corruption, and failed to manage the public finances responsibly. Put simply, they have proved utterly unable to take on the various special interests strangling the economic life out of the country. Even now, faced with a looming crisis and potential humiliation, the Italian government does not seem able to act decisively. And this in the world’s eighth largest economy.
But this problem is hardly exclusive to Italy. Indeed, this is an all-too-familiar story, which has been played out, and continues to be played out, in developed democracies the world over. Continental Europe may be the eye of the storm, but things aren’t exactly looking rosy for Britain, the United States and Japan either. Political short-termism has become chronic, and perhaps even terminal.
This is the path we’re walking down: highly indebted sovereigns will keep on borrowing money until investors lose confidence and the bond bubble bursts, at which point interest rates will skyrocket. What follows could easily be brutal, with some combination of widespread defaults, banking collapses, and eventual hyperinflations (as governments turn on the printing presses in a last ditch effort to keep the show on the road) an all-too-real possibility.
It doesn’t have to be that way. It isn’t too late to do the hard but necessary work of cutting spending, fixing the banks, and freeing entrepreneurs to grow the private sector economy. The only alternative – you guessed it – is playing the fiddle while Rome burns.
We should be more like Sweden!
Yes, I know, it's so easy to make fun of Polly Toynbee's constant mantra that we should be more like Sweden. It's become almost like Peter Simple's Mrs. Dutt-Pauker: so much so that I'm sure Polly has picked up on the joke herself and uses her "we should be more like the Nordics" line as an in joke.
Well, I would if I'd ever been able to discern that she's a sense of humour and I fear that, as with Magie Thatcher, that's just not one of the human attributes she has. Still, I'm happy to say that we really are becoming more like Sweden:
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As you can see, levels of inequality in the two countries are converging. Please note, this is after all of the things we try to do to reduce inequality, after all of the taxing and the welfare spending. So of course as the UK becomes ever more like Sweden Polly must be getting happier, no?
And of course we are continuing to get more like Sweden in other ways. Free schools are very much modelled on Sweden's highly admired system of such free schools. Corporation tax is being cut, just as Sweden has a low corporation tax: it's the standard economics of taxation that corporate taxes are more damaging to growth than consumption taxes for the same revenue raised. VAT has been raised for the same reason: we've not reached Sweden's 25% as yet but better to have the less damaging tax all the same.
Just one thing more to do then, one more thing to bring us really into line with that icy social democratic paradise that is Sweden. Well, OK, if you insist, two. We have to abolish inheritance tax and also the national minimum wage. Sweden has neither. And as we really are told that we must be more like Sweden we should do these two things as well.
Yes?
Is tax avoidance the new fashion trend?
Recently, there’s been criticism of companies such as Topshop and Vodafone for the practice of tax avoidance – minimising tax liability within the law; in other words, companies being based abroad but continuing their business in the country. An analogy can be made with companies shopping around to find the best deal or place to set up their operations.
Arguments have been put forward by groups such as UK Uncut, suggesting that tax avoidance is unfair for those facing public sector cuts in Britain. It is felt that, in this period of austerity, the rich and not the poor should be bearing the brunt of the deficit reduction programme – most potently indicated by the protest sit-in at Fortnum and Mason. But is clamping down on tax avoidance the only coice we have? No.
It seems that tax avoidance is a symptom of the problem of high corporation tax rates – 26% in the UK compared to Ireland’s 12.5% rate. This has lead to lower levels of unemployment and higher rates of GDP growth in Ireland thanks to many new businesses establishing themselves there. The Irish economy is now exporting strongly and this will help them to recover quickly from the effects of the recent recession.
The libertarian response to this issue should be helping companies find the best bargain – that is reducing the corporation tax rate which is certain to make Britain a more competitive place to do business. Furthermore, this response is more likely to help those less well off as real growth and employment benefits all, rather than resorting to ‘penny pinching’ the pockets of a few businessmen.
The solution is not to clamp down on tax avoidance but to make Britain a more competitive place to trade. Reducing the rate of corporation tax means that companies won’t have to go to drastic measures of basing their businesses abroad. It’s a simple method that offers prosperity for all and will continue to drive the best of British business.
Karishma Puri won third place in the 2011 Young Writer on Liberty Awards.
Helicopters vs Gnomes
Helicopter economics is back. Guardian columnist Simon Jenkins writes that current economic strategies have failed to boost the economy, pointing out the absurdity of quantitative easing (which the ASI has been doing since day one), and to the failure of the private sector to fill in the gaps left by cuts in public expenditure. But his main concern is with lack of demand. He wants more cash in peoples' pockets so that they can spend, spend, spend; through VAT holidays, scrappage schemes, consumer vouchers or one-off benefit surges.
And then what? Once you've boosted spending (assuming that you can), how does the economy recover sustainably? Businesses aren't stupid. They'll see that these measures are temporary and plan accordingly: one-off plans in response to one-off policies. The glaring problem with this approach to demand-led policy is that it assumes demand is some homogenous force for good. It assumes that it doesn't matter what you buy, so long as you're buying. Whether it's new cars, televisions, the iPad 7, armaments, giant golden rotating statues, or the age-old classic of paying for people to dig dirt out of the ground and fill it back in again.
Consider the garden gnome. Bob Murphy amusingly points out that recessions are akin to gnomes magically and suddenly reallocating capital and labour away from their most productive uses: the boom became unsustainable, and was eventually and dramatically shown up as such. Markets then quite naturally reallocate as best they can to new productive uses. The problem is that this takes time, and in the meantime some will have to be temporarily unemployed or underemployed, taking inferior jobs to the ones they had. But people like Simon Jenkins think that you can simply prop up the unsustainable status quo and expect it to eventually become productive again.
More sophisticated Keynesians claim that the natural reallocation by the market could be done faster with government help; but without realising that it's in politicians' interests to prop up the status quo, and that in order to boost demand, they need to tax, borrow, or inflate the currency at the expense of those lucky or sensible enough not to get themselves heavily into debt. Not to mention the fact that it's impossible to establish which way to reallocate: you could follow the market, but why harm savers and taxpayers by picking winners when they're emerging anyway? Or you could pick losers, which would defeat your aims.
Rather than causing further problems through demand-led policy, the best bet for growth is to make it as easy and fast as possible for markets to reallocate capital to wherever it can be used best: through free trade, free movement, free planning, and free exchange.
Anton Howes is Director of the Liberty League.
Tax avoiders deserve a medal
Am I the only person to be outraged that HM Revenue & Customs have an 'Anti-Avoidance Group'? Or that the Group says it aims to 'make tax law robust against avoidance'? Or that it will 'quickly and expertly prevent and close down avoidance by effective legislation'? And be 'proactive in challenging avoidance'?
Let me explain: tax avoidance is perfectly legal. It means using the tax regime to your own advantage – organising your affairs so that, under the rules, you reduce the amount of tax you have to pay. What is illegal is tax evasion – deliberately misrepresenting your affairs, concealing your taxable income, smuggling, taking payment in cash and not paying VAT on it and so on. So Revenue & Customs make no bones about it: they will challenge, prevent, and make laws against and close down things that are perfectly legal. You might think that only Parliament can 'make laws', but if so, you are out of date. Officials now have so much discretionary power that they are effectively making our tax laws, not the elected politicians.
I would have no – well, less – problem if Revenue & Customs had an 'Anti-Avoidance Advisory Group' whose function was to spot the tax loopholes that people were exploiting and give advice to politicians about how those loopholes could be closed and how the tax law could be made more sensible. But not a bit of it. The present Group's purpose is to prevent people from benefiting, quite legally, by spotting where the law is an ass. Rather than harass such people, we should give them a medal for public service, in pointing out just how stupid our tax laws are.
What generates these loopholes is the absurd complexity of the tax law. Tolley's Guide, the accountants' summary of tax laws, has reached another record this year, at 14,500 pages. Nobody in their right mind, even with a trained accountant's experience, can know what is legal and what is not. For every person or company who actively exploits the loopholes, there are another nine who don't understand it and are simply petrified of getting it wrong and being prosecuted. HMRC should be doing something to help those nine, not harass the one – because in simplifying the law, making tax intelligible, and simplifying things such that it is obvious what everyone should pay and there are no loopholes to exploit, they would actually be getting to grips with the one as well.
But no, it's a constant, downward spiral. Tax rates are too high, so lobbyists demand exemptions and breaks here and there. With those folk now paying less tax, the rate has to rise for everyone else. So the lobbying spreads further, and the rules and exemptions become even more complicated. Then HMRC sees that it is losing money because people are taking advantage of the rules, and dream up all kinds of extra complications to stop it. Which increases the costs of taxpayers, who lobby for more reliefs and exemptions…which – well, you get the idea. It is a downward spiral of complexity.
It's time to make tax simple and certain. And to ensure that our tax officials are public servants, not public inquisitors.
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