The government should sell off £40bn of assets, says new Adam Smith Institute report
- The government owns around £600bn of assets, many of which do not need to be in the public sector
- A sale of less than a tenth of those holdings—the most peripheral and surplus items, including £23bn of real estate—would net £40bn to cut taxes temporarily or pay down the debt
- Holding onto given assets regardless of price is inefficient on a basic level; valuable assets are best allocated by the market
The government could fund temporary tax cuts worth £40bn or reduce the national debt by the same amount by selling off a fraction of its assets, according to a new Adam Smith Institute paper released today (Thursday October 10th). The report, Cash in the Attic, shows the huge windfall that could be realised by releasing state-owned real estate and firms into the private sector. The government is estimated to own around £600bn of assets.
The report’s author, investment analyst and Adam Smith Institute senior fellow Nigel Hawkins, details how the government could bring in around £23bn from sales of excess real estate holdings and around £17bn from privatisations (excluding the bank stakes) by 2017-18.The report argues that useful resources are languishing in the public sector with no market assessment of their use to society.
Furthermore, the just-beginning re-privatisation of Lloyds TSB, as well as the sales of Royal Bank of Scotland, the government's stake in Urenco, and the Royal Mail, need to be a top priority, Hawkins says. The government should also part with a minority stake in Network Rail to raise around £7bn while still retaining control of the company.
Divestment of the Ministry of Defence’s estate would be another profitable area. Even a very limited approach to defence land sell-offs could raise £3bn, Hawkins says. In health, selling just 10% of Primary Care Trust assets would bring in £500m.
Along with these sales, agencies that already have plans to divest government assets—the Government Property Unity (GPU) and Defence Infrastructure Organisation (DIO) need to be pressured to meet their targets, the report argues.
Sam Bowman, Research Director of the Adam Smith Institute, said: “The government is sitting on hugely valuable resources that it should sell. The Royal Mail privatization is a good start, but going further would be win-win. Sell-offs of real estate and privatization of firms that the government doesn’t need to own would allow those resources to be used more productively by the private sector and net the Treasury some much-needed cash to fund temporary tax cuts to stimulate investment and job creation in the private sector.
“The £40bn of assets that we have identified as being ready for sale are just the tip of the iceberg. We need a slim, efficient government that is as cost-conscious as any business would be. It might be too soon to start planning to move government buildings to an industrial estate in Slough, but that’s what we should be aiming for.”
Quite the best story about tax ever
A quite delightful little story about tax and taxation. You might recall that a while back an IT contractor stole the list of banks account owners from a Swiss bank. And then sold it to the German government who used it to chase those naughty tax avoiders for the money they had avoided/evaded.
We might call this a victory for law and order or we might call this part of it such a victory. For the Swiss have now jailed the man for three years because what he did was indeed theft.
But the part that makes this such a wonderful story is this:
The 54-year-old German-born man appearing before the Swiss criminal court in a striped polo shirt and jeans, said that he had intended to use the bulk of a 1.1 million euro ($1.47 million) reward to pay off taxes he owed in Germany.
At which point I think we can all agree that tax rates in Germany are much too high. For look what happens: people are driven to theft just to be able to pay those taxes.
Update: I'm told by a trustde source that the reason he owes the tax is because he was on the list that he himself handed over. Which is really icing on it, isn't it?
This is really an extraordinarily bad idea
A very seriously bad idea in fact. The point being made is that spending tax money does lovely things. Which indeed it can do. Therefore we shouldn't worry about how we raise the tax money, nor study the costs of doing so, because spending it all is so lovely.
Economists usually think of taxation as inefficient. This column argues that the anti-tax rhetoric evident in much lay discussion of public policy draws considerable support from the prevalent negative language of professional economic discourse. Optimal income taxation doesn’t have to employ the pejorative concepts of inefficiency, deadweight loss and distortion; and this column argues that it is high time for economists to discard them and make analysis of taxation and public spending distortion-free.
This is entirely tosh of course. For it is indeed true that we can do wonderful things with the spending of tax money. I think vaccination is just great, as with a criminal justice system, only one national defence system and so on. But in order to be able to reach that decision I have to look at the benefits of the spending of the tax money as against the costs of having raised that tax money.
And this is where the first level of talking about deadweight costs comes in. A reasonable rule of thumb is that raising £1 of tax means that there's 20 pence worth of economic activity that doesn't happen. At the sort of marginal rates we have now, more like 30-35 pence. Which is fine at times: I think the herd immunity that comes from near universal vaccination (as we can see from when it doesn't happen as with measles these last few years) is worth 135% of the money that is spent on it. The benefits are larger than the deadweight costs that is.
But I also would point to areas of public spending where this test is not passed. I don't, just as my standard example, think that diversity advisers are worth 135% of the money spent on them. I don't think they're worth 2% of it but that's another matter. But they're, to my mind of course, not worth the loss of those deadweight costs: they thus make us poorer in aggreagate, not richer, and making us poorer really isn't the aim of the whole game. Please do note that while there are people who will disagree with me on the value of diversity advisers pretty much everyone has some area of tax funded expenditure that doesn't pass this simple test. Usually, those in favour of the advisers would be against something I'm in favour of, say, Trident.
So that's the first part of why we don't want to ignore deadweight costs: it's the only method we've really got of deciding whether it's worth doing something out of tax revenues or not.
The second is of course that different taxes have different deadweight costs. So, how can we possibly design a tax system for efficiency if we don't look at the efficiency of the different taxes? Sure, there's equity to consider as well: consumption taxes are more efficient than income taxes and one can certainly argue that they're more inequitable. But if we stop measuring these things then how on earth can we come to a rational decision about which we prefer?
So I'm afraid that I really do think this is a very bad idea indeed.
I also have my suspicions about what is driving the idea too. The writer would like higher taxes so that government can "do more". And he'd much prefer that no one started to come up with pesky little arguments about why government might not be the best method to get more done. An easy way of doing that is simply to forbid any discussion about the way in which governent and taxation might not be all that efficient....
We don't want a financial transactions tax because it's an extremely bad idea
The buffoons who are our elected politicians are calling again for a financial transactions tax. The only problem with having such an FTT being that it's an extremely bad idea.
In a report that calls for the Government to implement the Kay recommendations, MPs have called for the Government to consider imposing an FTT to help reduce high frequency trading. Professor Kay, whose report into short-termism in equity markets was published last year, did not contain any mention of the FTT. But Adrian Bailey, chairman of the Committee, said he had found support for the tax during evidence sessions. “The Government should assess the likely impact of the introduction of a Financial Transaction Tax and how the obstacles to its implementation can be overcome,” he said.
There's no particular problem with implementing an FTT. It's just that it's a very silly thing indeed to try and do. As the House of Lords Committee which looked at the same subject pointed out:
A European tax on financial transactions could cost Britain’s economy up to 20 times the amount it raises, a committee of lawmakers said on Friday. Britain has said a transaction tax, dubbed a Tobin Tax after the U.S. economist who devised it in the 1970s, would only work globally and the EU plans are “deeply confused.” Britain is fiercely opposed to the proposed financial transaction tax (FTT), which the European Union said could raise 57 billion euros (49 billion pounds) a year if implemented across the bloc. “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax,” according to an economic sub-committee of the House of Lords, the upper chamber of the parliament.
Perhaps part of the difference here is that I was asked to prepare evidence for the HoL report and did so, while the HoC one seems to have had no one who understood the EU's own report into said FTT. That EU report stating that by imposing an FTT the economy would be smaller than it otherwise would be and that the tax revenue losses from said smaller economy would be substantially larger than the direct revenues from the tax. The FTT is thus a method of reducing tax revenues. We even have a pair of Nobelists (Mirrlees and Diamond) insisting that transation taxes are in and of themselves a bad idea.
Or, as we might more cogently put it, the FTT a damn stupid idea that we really don't want to implement.
Why are tax campaigners campaigning to make the poorest of the poor poorer?
Most here will know that my favourite blood sport is hunting Richard Murphy and his buddies in the Tax Justice movement. But even I am appalled at the latest demand from them: that multinationals should be forced into paying more corporation tax in poor countries. They make this demand because they are willfully blind to the most basic point about corporation taxation: the incidence of said taxes. Here's what is said:
Corporate taxes are incredibly important to many developing countries. When many in their populations are too poor to pay any taxes and when corruption undermines much of the local tax base from commerce (and this fact has to be recognised at present) then the revenues to be earned from multinational companies form a significant part of the tax base of these states. In that case the base erosion that is now well documented due to transfer mispricing out of these countries on royalties, management services, interest, insurance and other charges levied on an intra-group basis, usually from tax haven subsidiaries within the same multinational entity, is of massive concern to these states and forms a major part of the illicit flows that prevent the provision of adequate services by many governments, undermining democracy and blighting many lives over succeeding generations.
We have argued for fundamental reform on behalf of these countries.
They're arguing that the poorest of the poor should be pushed further into poverty as a result of their determined ignorance about that tax incidence. We've known for well over a century now that companies do not actually bear the economic burden of taxes levied at the company level. It is either the workers, in the form of lower wages, or the investors, in the form of lower returns that do. This is not an arguable theoretical point: it's just a truth about this particular universe that we inhabit. No, don't worry about why for the moment, simply take it as being one of those truths.
We also know what it is that influences who carries the burden, workers or investors. The mobility of capital and the size of the economy of the taxing jurisdiction relative to the size of the world economy. The precise splits are argued about, volubly, but but all economists are agreed on those two basic points. It's some combination of the workers and shareholders and the smaller the economy and the more mobile capital the more it is the workers, the less the investors.
One more interesting point: Atkinson and Stiglitz, back in 1980 or so, showed that the burden could in fact be greater than 100%: the loss to workers and or shareholders could be greater than the sum raised in revenue. And yes, the smaller the economy and the more mobile capital the more likely this is and that this burden will be on the workers. So, what do we know about these developing economies where we are told that companies really must cough up more corporation tax in? In fact, that multinational companies must cough up more tax in? Quite: we know that these economies are very small compared to the world economy. That's why we call them developing economies: because they're small and poor ones.
Further, given that we are specifically talking about multinationals, the capital we're talking about must be perfectly mobile. It is outside investment going in: not domestic investment pondering whether to leave or not. If we piece all of this together then we get the ugly reality. The truth is that the burden of higher corporate tax on multinationals in these poor countries will be upon the backs of the workers. Those workers being, by our very definitions of poor and developing country, the poorest of the poor. These are the people we actually want to help and here the "Tax Justice" campaigners are insisting that their wages should be driven even lower. And as Joe Stiglitz has pointed out, their wages could be driven down by more than the actual revenue raised.
This is not, I would submit, a sensible way of improving people's incomes: imposing a tax which we know will reduce those incomes.
As above I usually take my pursuit of these people as a rather jolly blood sport. A day out with the hounds and if the odd vulpine gets harmed well, no matter and that's not really the point of it all: it's the jolly day out that is. But then we find them proposing something quite as barmy, even evil, as this. They simply will not listen to what they are being told about the incidence of corporate taxation. They just don't want to believe that it's not either the company or the evil capitalists who bear the burden of these taxes. As a result they ignore that their recommendations will grind the faces of the poor even more firmly into the dust. At which point the pursuit of their errors become less a jolly day out and more of a necessary duty.
If you want to raise wages in poor and small economies then you want more multinationals to invest in those poor and small economies. Trying to tax said multinationals more so that they invest less and thus depress wages just isn't a good method of raising living standards in these places. We want to tax less, not more.
If big government doesn't provide more public goods then what's the point of big government?
At the heart of the argument about having a government at all is the idea that there are some public goods that would be underprovided in a pure market system. We thus need some communal (and at times, involuntarily communal) organisation to tax so as to provide these public goods to us. At every stage closer to sanity than the anarcho-capitalists we agree with one or other of the classic examples. National defence is better organised through taxation: we tried the market system once and ended up calling itn the Wars of the Roses. Public health, in the true sense of public health like vaccination, is a public good and there's excellent reason to think that taxing everyone to make sure that everyone is vaccinated is a good idea. The reason being that herd immunity that we get from a lare enough portion of the population being vaccinated.
However, that there are good arguments in favour of the existence of government at all does not mean that those same arguments support having any level of government at all. Which brings us to a fascinating paper looking at the relationship between big government and the provision of those public goods:
Theories explaining government size and its consequences are of two varieties. The first portrays government as a provider of public goods and a corrector of externalities. The second associates larger governments with bureaucratic inefficiency and special-interest-group influence. What distinguishes these alternatives is that only in the former is governmental expansion generally associated with an increase in social welfare. In the latter, the link between government size and public goods provision (or social welfare) is negative. We study the empirical significance of these competing claims by examining the relationship between government size and a particular public good, namely environmental quality (notably, air quality measured by SO2 concentrations), for 42 countries over the period 1971–1996. We find that the relationship is negative, even after accounting for the quality of government (quality of bureaucracy and the level of corruption). This result may not prove conclusively that the growth of government has been driven by factors other than concern for the public good, but it creates a presumption against the theory of government size that emphasizes public good provision.
I'm still perfectly willing to agree that there are public goods. And that there are public goods that only government can provide. But as above, this does not mean that this justifies any amount of government. For past a certain size the government turns out to be not very good at provision of those very public goods that are the justification for it in the first place. Quite why we can argue about: my theory would be that when government tries to micromanage inequality say, or concerns itself with the voluntary activities of consenting adults, then it's taking its attention away from what it actually exists to do, provide us communally with those things that cannot be, or only will badly be, supplied by individual action.
I'd thus suggest the Worstall Measurement of government. There are things that must be done, there are things that must be done that only government can do. So let's limit government to only those things that must be done by government: where it is both necessary that they be done and also that the coercion of either the law or taxation is necessary for them to be done. Everything else we'll get on with ourselves: you know, as those free people we are?
As everyone now seems to agree it's time for Plan Worstall
Quite astonishingly we now have both the OECD and the Tax Justice Network in agreement with each other. Cats will lie down with dogs and it is the end of times. What they're agreein on is that the current international corporate taxation system is no longer fit for duty. The system builds upon steps first taken in the 1920s and changes in the way the world works since then have made the basics of the system just not workable.
However, they're both coming up with the wrong solution to this problem. To find the correct solution we need to go back to some basics. Yes, we do need government therefore we do need tax revenue to fund it. While it would be lovely not to have to tax economic value creation we can't raise enough cash for the amount of government we seem to want without doing so. So, great, we need to tax economic activity.
Both the OECD and the TJN seem to think that that must mean that we tax companies. But we know very well that the economic burden of corporate taxation does not fall upon the company: it falls upon some combination of the shareholders and or workers. The only reason we've ever taxed the companies themselves is because they were a convenient place to tax. Now, as the OECD and TJN are stating, they're not a convenient place to tax.
So, why the insistence that we must find a new way to tax companies? For that's not what we want to do at all: we want to tax the economic activity, yes, because we need the money. But why tax inconveniently where we know the real burden doesn't fall? Why not just tax where we do know the real burden falls: on the shareholders and the workers?
At which point I suggest that we simply abolish corporation tax altogether. Tax corporate capital gains and dividends just like income from any other source and be done with it.
Of course, there have also been people who actually know what they're talking about who have looked at this question. The Mirrlees Review for example. But no one's paying any attention to anyone who actually knows about the subject, far better to have baseless speculation from the ill informed like me. At least I assume this passion for the involvement of the ill informed explains why people are talking to the TJN.
With Jesse Norman as a Tory MP why bother having a Labour Party?
Jesse Norman weighs in on this thorny question of whether and how much companies should pay in tax.
The issue of taxation is never far from the headlines, and doubly so in times of austerity. So it’s hardly surprising that the likes of Google, Starbucks and Goldman Sachs have come under fire in recent years for under-payment of tax.
Details, schmetails, but Starbucks doesn't make a profit in the UK, even after you add back in those royalties and interest payments. So no tax is possibly due.
For many of these firms, tax is effectively optional. In avoiding it, they are using their size to advantage themselves over purely domestic competitors – as anyone who has tried to compete with Amazon can testify.
That's even worse: in 2012 Amazon made a global loss: what tax is anyone talking about that can be due from a loss making company?
So, again, how much tax should these companies pay? Patently, the law cannot answer that question. But neither can economics. For economics sees companies merely as bundles of contracts, which allocate different financial incentives to shareholders, directors, managers and employees.
Facepalm. Coase on The Theory of the Firm. No, the whole point about the existence of companies is that they are not merely bundles of contracts: if that's all they were they wouldn't exist and we'd have bundles of contracts instead.
But a politician being ill informed and unaware of the finer points of economics is hardly new so why am I complaining? Well, really, it's about this part:
First, the law. The Companies Act 2006 requires directors to promote the success of the company, but with regard to six factors: the likely long-term consequences of a decision; the interests of employees; relationships with suppliers and customers; the firm’s impact on the community and the environment; its reputation for high standards of business conduct; and the need to act fairly between shareholders. The effect is precisely to prevent managements from automatically pleading a duty simply to maximise shareholder value.
Well yes Jesse: but you're a Tory MP, not a Labour one. You're not there to defend the idiocies of the past Labour Government you're there to try to correct them. This part of the CVompanies Act was deliberately brought in to try and appease the more drippingly social democratic parts of the Labour Party. Rather than now stating that this is the aim and purpose of a company you're supposed to be shouting from the rooftops that they got this wrong. The point and aim of a company is the enrichment of its shareholders, nothing else. You should be agitating to get the law changed to reflect reality, not accepting the fantasies of your predecessors: otherwise what's a Tory for if not to be a reactionary?
Alternatively, if we're to have Tory MPs being so drippingly wet what's the reason for the existence of the Labour Party any more? Who would need them?
Would you blame a cockerel for crowing? A bureaucrat for empire building?
This criticism seems entirely misplaced to me: we should no more be blaming Baroness Ashton for this behaviour than we should be for a tree whispering in the wind or a cockerel crowing at dawn:
EU foreign affairs chief Baroness Ashton has been criticised for seeking to "expand her empire" at a time when other EU agencies are having their budgets cut.
This is simply what bureaucracies do: the aim and point of all bureaucrats.
As the late great C. Northcote Parkinson pointed out a bureaucracy does not exist to actualy do anything. There are no tasks by which it can be measured, no metrics that allow us to decide whether they've all been good little diplomats or not. Therefore the only institutional goal of any such bureaucracy will be to increase the inputs available to it. More money allocated in the budget, more staff hired, these become the measures by which it definies its own success. This is how the Royal Navy ends up with more Admirals than ships, more desk bound pen pushers in their £1,000 chairs than soldiers or seamen who do the fighting.
To complain of this behaviour is no more effective than a parp in a thunderstorm. The only way that one can prevent a bureaucracy from doing this is not to have the bureaucracy in the first place.
The European External Action Service, the EU's much-criticised diplomatic corps, already has 141 embassies or delegations across the world.
Now that it has been invented, now that a budget has been allocated, I confidently look forward to the day when it has more ambassadors than there are countries to be an Ambassador to. It will inevitably happen, assuming that it hasn't already.
Parkinson really was correct: the only way to stop the metastatisation of a bureaucracy is to cut it out of the body politic entirely.
Anatomy of a panic over corporation tax
The current furore over who is and who isn't paying corporation tax is taking on the attributes of a moral panic. Not just that people arre panicking over the morals of it all, but that they're entirely ignoring the evidence as they do so. As examples I offer you two stories from the Mail on the subject. First up is Starbucks and the dastardly manner in which they pay no tax because they make no profit:
Starbucks’ UK sales during the year rose 4 per cent to £413.4million – the biggest increase since 2008. But the company made a loss of £30.4million – after paying £26.5million to overseas subsidiaries in ‘royalty payments’. It also paid £1.8million to other Starbucks companies as interest payments on loans made between divisions.
That the Starbucks brand has a value is easy enough to show: the company has franchisees around the world and they pay a royalty for the use of the brand. We can also consider the differencee in trade you'd get if you opened a caff called "Fred's" as opposed to one using the Starbucks brand. We all understand that traffice and trade are going to be different. That value of the brand should righteously be paid for. However, let's ignore that and also the intercompany loans. Add them back in: Starbucks UK is still making a £2.3 million loss.
Why Starbucks isn't paying the corporation tax due on its profits is thus explained: it's not making any profits that it has to pay corporation tax upon. But such is the moral panic that people are still shouting at them.
As to where the money is going that is simple enough. Try reading Ricardo on rent....or if that's too much for you, read Tim Harford's first chapter in "Undercover Economist". Which uses London coffee shops to explain Ricardo on rent. The competition for the land and or sites which get a lot of passing thirsty traffic is such that rents soar and the landlords get all the money. Which they are indeed taxed upon as rents are one of those things that you really cannot shift about in and out of a tax jurisdiction. Starbucks isn't paying tax this is true: but the economic activity of coffee shops is, it's just through the landlords.
The second is about the water companies:
Britain's privatised water firms have ‘abused’ loopholes in the law to dodge more than £1billion in tax since the election. A dossier of shame reveals nine water companies, seven of which are foreign owned, have racked up operating profits totalling £10billion since 2010 but paid just £541million in tax. This equates to a tax rate of just 5.3 per cent. Corporation tax on operating profit is normally 23 per cent.
The heinous crime they're accused of is to subtract interest on borrowings before calculating their tax bill. Which, given that interest is a specifically allowed expense isn't all that heinous a crime. They then apply the various rules that Parliament has passed to deal with the costs of investment (capital allowances and the like) and so they make no profit. Given that Parliament has specifically put these rules into law it's a little odd to claim that they are therefore shirking their tax duties. Most especially as everyone has been shouting to the skies that they must invest more in their businesses in order to upgrade the quality of the water itself, treat the sewage more carefully, fix the century old leaky pipes and even, because of climate change, start building some more reservoirs. All of which is capital investment that they need to borrow money to do thus attracting the necessity of paying interest and having capital allowances.
They're doing exactly what everyone and the law tells them to do and yet people are still shouting at them.
Richard Murphy, of Tax Research UK, said lax UK rules meant avoiding tax was ‘as easy as taking candy from a baby’ for multinationals. ‘There are several serious problems with the system which leads it wide open to abuse,’ he said.
Well, yes, obviously we were going to get a quote from that fabricator of this current moral panic. But look again at what the Mail seems to believe the tax system does:
Corporation tax on operating profit is normally 23 per cent.
There is no world in which it is feasible to have a profits tax levied upon operating profits. It must be upon net profits, after the deductions of the cost of doing business. But here we have one of the leading newspapers of the country spouting nonsense to the population. This is indeed a moral panic, one in which all evidence is simply ignored. We'll be back to burning witches soon enoiugh, you mark my words.