Adam Smith Institute

Once again, Ireland seems to be the destination of choice for companies driven out of the UK by high taxes. Last week, reports Dominic White, WPP, Glaxo, International Power and AstraZeneca all hinted that they could follow Shire and United Business Media's plans to switch domicile to Ireland.

Why the rush? Well, Corporation tax is 30 percent in the UK, compared to just 12.5 percent in Ireland. After Alastair Darling's not-a-word-of-consultation attack on non-doms, many companies feel they just can't plan ahead under such a capricious regime. The Irish Development Agency has seized its chance and is actively courting UK decision-makers.

White might also have mentioned that Ireland is near. It's in the Euro area and part of the EU. There is no language barrier. Ireland has a well-educated, cultured population. It's green and pleasant (if a bit rainy in parts). The peace process has eroded the old national resentments and made the life and cultures of Ireland and the UK much more integrated.

With such stiff competition on its doorstep, why can't the UK government see what it must do?

Dear Prime Minister,

Might I suggest a little something on a subject dear to your heart? We are all waiting for your expected announcement this week on the likely classification of cannabis, should it be upgraded to a Class B drug from the current Class C? We're waiting breathlessly, of course (those of us who indulge perhaps more breathlessly than others) to see whether you're going to ignore the advice of your own hand picked advisors, whether you have bought the entirely spurious arguments about increased drug-induced psychosis and indeed whether you think the higher THC contents in modern 'erb make it more dangerous than previously. That last really confuses me I'm afraid: we've long had alcohol that comes in varying strengths, from beer to wine to whiskey, and consumers seem not to unintentionally down pints of whisky nor purchase beer by the 25ml shot, so I'm not sure what anyone thinks the problem is here.

But anyway, on to my suggestion. Might we try the Dutch solution?

"Coffee shops", where small amounts of cannabis have been legally bought and smoked since 1972, have become a major industry and a popular tourist attraction in cities such as Amsterdam.

Tax on the 265,000kg of soft drugs sold last year in the 730 cafés netted the government £315 million.

Rounding out our numbers, and ignoring the point that we have many more people than Holland, currently that £300 million in tax revenue would keep the governmental machine running for an entire five hours! A small enough contribution you might think, but every little counts, does it not? We might also think of the spending savings: the upgrade will raise the possible sentence from 2.5 years to five in jail for simple possession. Given the 3 million regular tokers we are thought to have, do your finances actually contain enough money to cover that potential 7.5 million man years of jail space you might need?

I mention it only as an option, of course: I do understand that you "wish to send a message". It's just that, well, to send a message, umm, don't you know anyone in the advertising industry? I'm sure they'd be delighted to help at considerably lower cost.

yours etc.

Tim Worstall

I was in Oxford last week for a Union debate. The motion was "This House believes City pay is indefensible in light of growing social inequality." Naturally I was in opposition, along with the Telegraph’s Damian Reece. I put the case that it mattered more to have a richer society than a more equal one. When a country becomes richer, it often happens that income disparities increase, because some can manage wealth creation faster than others. Modern China is an obvious example. Fortunately, unless the rich store their money in brass pots in the garden, it circulates. What they save or invest provides capital pools to create more economic expansion; what they spend creates jobs, be it in the auto or travel industries, in services such as restaurants, or in areas like interior design.

Furthermore, with capital and talent never more mobile, attempts to limit rewards in London would simply drive both to more amenable surroundings, with loss to the UK of the economic success they bring. I don’t know if our eloquence won through, or whether the Oxford students were looking to the rewards of their own future careers, but the motion was defeated, as the house voted not to criticize the high salaries.
 

I was on Radio Five yesterday morning, discussing whether we should all have to reveal how much we earn. A survey by Hudson, a recruitment consultancy, had found 60 percent of people would be happy to reveal what they got paid. The trades unions leapt on this, saying that all salaries should be disclosed in order to tackle pay discrimination in the workplace. I was on the other side of the debate.

My first argument was that this was a fundamental issue of privacy. How much someone gets paid should be between them and their employer. If people want to tell their co-workers their salary, fine. And if a company wants to adopt a fully transparent pay policy, then that's entirely up to them. But we ought to be vary wary of government legislation forcing their hand – frankly, it's none of the state's business.

My second point was pragmatic. In most businesses, the ability to negotiate pay and conditions privately with individual members of staff is vital. Imagine you are running a business, and you have a team of four or five people doing the same job. You know, however, that one of them is more valuable to you than the others and that he or she is likely to be poached by another firm. You will want to reward that person more, but without upsetting the others. That becomes much harder to do if pay deals have to be disclosed to the whole staff.

I didn't get the chance to make my third point, which was that 'pay discrimination' is itself a misunderstood concept. Men are paid an average 15-18 percent more than women doing the same job, but the evidence does not support the view that it's the result of discrimination. On the contrary, it seems to be the result of life choices that women freely and rationally make – i.e. to have children and take time off to look after them, to work part-time or flexible hours. Europe-wide research last year found that unmarried, childless women actually earn three percent more than the average man doing the same job.

... ASI Fellow Tim Worstall writes about the importance of taking the poor out of income tax altogether. We particularly like the bit where he describes us as "bleeding heart classical liberals". Click here for the article.

Gordon Brown's decision last year, as UK Chancellor, to scrap the 10p starting rate of income tax is coming back to haunt him Rising outrage from backbench Labour MPs eclipsed his American trip. A revolt is in the air.

As Robert Chote of the Institute of Fiscal Studies observes in the Sunday Telegraph, the 10p rate does add complexity to the tax system. Scrapping it hurts people in the £5k-£20k range, and noticeably helps those in the £20k-£40k bracket. Helping the rich at the expense of the poor? No, says Choate: by raising tax allowances for pensioners and tweaking tax credits, Mr Brown compensated many of the poorest. The trouble is, he didn't compensate them all. The tax credit changes may help those with children, but not childless people of working age. Some 5.3m people are worse off.

The move to scrap the 10p rate is seen by experts like Choate as a welcome simplification of the tax system. But by relying on his over-complicated tax credits to soften the blow, Brown is simply extending one complexity as he reduces another.

The Conservatives have seized the political ground by saying that they would restore the 10p starting rate. A good dog-whistle policy, but the wrong one. It's time we scrapped the need for tax credits and took the poorest people – certainly those on or below the minimum wage – out of taxation entirely. That would be one great simplification. Another would be to cut out the other tax complexities and extend the 20p rate to everyone. It's called a Flat Tax, it works, and you can read about it here and here.

I keep an eye out for web mentions of Tax Freedom Day – that day in the year when we at last stop working for the tax authorities and at last start working for ourselves. And over the last couple of weeks, I've spotted lots and lots of mentions, because Tax Freedom Day arrives this month.

If you're an American, that is. The Tax Foundation has calculated that Tax Freedom Day this year will fall on April 23. That's three days earlier than in 2007, thanks to President Bush's tax rebates, designed to kick-start the US economy. But it's still later than it was during the whole of the 1980s (thanks, Mr Reagan) and the early years of the George W Bush administration.

None of this is any consolation to hard-pressed British taxpayers, though. Tax Freedom Day doesn't come in the UK until June 2 this year. That's also a little earlier than last year, but the general trend has been upwards in the UK for some long time.

So as the Americans are heading off to the beach to celebrate their liberation from taxes on April 23, we Brits will still be slaving away for the benefit of HM Revenue & Customs. Slaving for nearly another six weeks, in fact. Isn't that just too long to be in thrall to our political masters?

And so it continues. The debate between those who favour tax cuts and those who say they do yet will not offer them is not leaving quietly. Should the economy worsen over the coming 18 months there is little doubt that between now and the next election this debate will intensify, especially if the Conservative assume power after 2009/10.

The reason that this issue needs addressing is that public opinion now shows a majority believe taxation levels are too high and that large amounts of public spending are wasteful. The taxpayers of the United Kingdom are beginning to feel uneasy about how well prepared they are to face a downturn in the economy. They now want some of their coerced investment in UK Inc to be handed back as the promised returns haven’t realised. Yet despite these demands there is little on offer.

The Conservatives need to develop principled arguments that can be used to support limited tax cuts in their first term should they become the majority party in Westminster. They need to focus on alleviating the crippling income tax and National Insurance burden on the low paid and making Britain a leading place to create wealth through a reduction in taxes on business. By encouraging economic growth this way they can tackle the massive debt they are likely to inherit through improved receipts (see: the Laffer Curve). In conjunction with a reform programme centred on cutting public sector waste they could have the country back on its feet in no time.

Aping the government's promises will not aid any necessary recovery. The public is looking for leadership on this issue, a leadership that would take a well set out risk or two so that we do not have to suffer for any longer than is necessary. Yet from Westminster all that we are offered is indecision, is it any wonder we are increasingly turning our backs on the ballot box.

The SNP government in Scotland has decided it wants to replace council tax with a local income tax.

The problem is, their local income tax is not a local tax at all. Although its proceeds would be used to pay for local services, it would not be set or collected locally. Basically, three percent on income over the personal allowance would be added to a person’s usual tax bill. Aside from higher income taxes being precisely what nobody needs, this is hardly a recipe for increased local government accountability.

The problem with local government finance is that councils themselves raise less than 30 percent of the money they spend. Being so reliant on central government for funding makes local councils merely the agents of the centre. This means that there is no meaningful link between taxation, representation and spending. There is little incentive for efficiency, little accountability to voters, and little policy choice come election time. The reliance on central government funding has another nasty side effect: if a council needs more money, it has to raise council tax quite substantially to make a real difference to its budget. The SNP’s proposed reform addresses none of these issues.

There is another problem. Based on broad assumptions, the Scottish government says any household with an income of less than £58,000 would be better off. They may be right. But that means households earning more than £58,000 a year will end up paying more. This is the problem the Lib Dems encountered in the 2005 when they campaigned for a local income tax. A middle class couple, say a teacher married to a nurse, could easily end up worse off. That’s always bad politics.

What’s the solution? By happy coincidence, VAT raises almost the same amount of money as central government distributes to councils in grants. Replacing VAT with a local sales tax (set and collected locally) would be the simplest way of making councils self-financing, as Douglas Carswell argued in this ASI paper. Of course, competition in policy is the essence of true localism, so we shouldn’t be too prescriptive. I’d tell local government they had three permissible sources of revenue - property taxes, sales taxes and service charges - and leave the rest up to them. If people started moving out, they would know they’d got something wrong.

The UK's Tax Freedom Day 2008 will fall on 2 June. That means that average Brits are spending more than five months of the year working for the Chancellor, rather than working for themselves. Last year's date turned out to be 4 June – later than forecast due to the slowing economy. But in fact Tax Freedom Day 2008 is only one day earlier, since this is a leap year. And the date assumes that the Chancellor is right about his growth forecasts – with less growth, the taxes take a larger share of our income.

While the tax burden is bad enough for average families, the tax paid by poor families has been doubled. Next month, the starting rate of income tax goes up from 10 percent to 20 percent. This means that people on the minimum wage will pay a tax rate of 31 percent (20 percent plus 11 percent National Insurance) on over half their income. Under the Adam Smith Institute's flat tax proposals, people on the minimum wage would pay no tax at all.

As usual, the Budget speech was significant for what the Chancellor did not say. He did not mention that government spending will soar to £600 billion this year – that's £10,000 for every man,woman and child, twice as much as in 1997. Is the average family of four really getting good value for the £40,000 it pays out? Is the state catching twice as many criminals, doubling educational achievement, or treating twice as many NHS patients? If the government sector had grown only in line with inflation, rather than far above it, taxpayers would be £200 billion better off – enough to abolish income tax, corporation tax, capital gains tax and inheritance tax. Just think what that would do for our international competitiveness.

Now we have high taxes which make the UK uncompetitive. It used to be a very attractive place to locate, but now we have the seventh highest corporation tax in Europe. Our taxes on middle-class families are the OECD's highest. Combined with the increase in capital gains tax on entrepreneurs, and the assault on non-doms, Britain is now a much less attractive place in which to start and run a business. The Chancellor's growth forecasts overlook that. Tax Freedom Day may come later than he thinks.

It's Budget day in Britain. We've a new Chancellor, but one under the shadow of his predecessor, Gordon Brown, who is now Prime Minister. That's a pity, because the public finances need repair. Spending and debt have both soared, to levels that the current economic climate makes unsustainable. It's not a problem that you can solve in one day – particularly with the markets so jittery. It needs maybe a five-year programme of reconstruction, at a pace that taxpayers and investors can afford. A new start. But we won't get it.

Ten years ago, UK public spending was lower than the (roughly) 40 percent of GDP that the OECD averages. Now it is much higher, at 45 percent. And as spending has grown, the government has consistently been on the over-optimistic side of prudence. Receipts have been overestimated, and spending underestimated, in almost every Budget.

And what has the extra money bought us? The NHS budget has almost doubled. Education spending is up by around 50 percent, as is policing. But our health, education, and crime figures just aren't keeping pace.

Many economists believe that countries prosper more when their public spending is less. And they certainly prosper more when business is not facing the constant assault of regulation and taxation – and of the uncertainty that goes with both. That's why we need a long-term programme to reduce the burdens, not fickle, headling-grabbing stunts like the assault on non-doms.

We need policies such as an annual phasing down of corporation tax, right down to the Irish level of 12.5 percent – which would create more investment, employment, and wealth. And getting a year-by-year better grip on spending by not replacing civil servants who retire. And a genuine strategy to reduce the cost of regulations – not just talking about it.

In the private sector, many people are now struggling to pay off the debts they accumulated in the good times. In the public sector, the government now faces exactly the same problem. Over the boom, when it should have been building up a cash chest that would help us all through the bust, it has carried on spending and borrowing. Like those private borrowers, it needs to take a long, hard look at its future finances and produce a long-term plan to get itself out of the hole. We need a new beginning. How sad it is that the political realities make that impossible.

There seems to be a consensus among economists and policy experts that the UK needs a more conservative fiscal policy. And not before time either, given that we have been operating a cyclical budget deficit for the past five or six years, despite years of uninterrupted economic growth and low unemployment. Unfortunately there is also a consensus that the state of the public finances will not allow for much radicalism.

The policy response being adopted by both opposition parties is, at a basic level, quite similar. Neither the Conservatives or the LibDems are promising up-front tax cuts, but both are committed to making the tax system simpler, fairer and flatter and to shifting the burden of taxation away from production (taxes on income and profits) towards consumption (more specifically, taxes on pollution).

As long as the proceeds of green taxes are really used to bring down taxes in other areas, I have no problem with them. All things being equal, we want to encourage production and discourage pollution, so the policy makes sense. And of course, the ASI has been campaigning for tax simplification for years, so any moves in the direction would be very welcome.

However, even simplifying taxes can turn out to be harder than expected. The trouble is that the winners from simplification tend to be ungrateful and the losers tend to be aggrieved. And if you're not cutting taxes overall there are always going to be losers from simplification. That probably means you need a very clear manifesto commitment to simpler taxes, especially if you're going to have a small majority (almost inevitable after the next election).

Another option is to introduce lower, simpler taxes through an alternative, opt-in tax system like the one advocated by Fred Thompson in his ill-fated US presidential bid. People could opt-out of PAYE and into a self-assessed flat tax system instead. Over time most people would probably opt for the simpler system, and we would end up with a much better tax system without having to fight major battles over the removal of popular complexities.

56. "Maximum working hours are needed to protect workers' health and fitness."

It surprises many to learn that health and fitness go with wealth; the more money you have, the more you are likely to be fit and well. By limiting working hours we are denying people in the lower economic strata the chance to improve their lot by working more.

In the lower economic bands people are paid by the hour and earn more by working more. It is not as true of many middle class jobs, where people can be required to work late without consequential increases in salary. A working hours limit is not what it seems, either. It rarely puts a limit on the actual hours worked; more commonly it requires that all hours worked beyond a set level shall be paid at overtime rates. This, in turn, can make employers less ready to offer those extra hours, since they can cost too much.

The result of a maximum working hours limit is to restrict the income that people can earn, which matters most to those lower down the economic scale. Of course, most people will choose to achieve a sensible work/life balance, allowing appropriate time for rest, leisure activities, and family life. It should be their choice where possible, however, because they know their own circumstances and priorities more than outsiders can. Employers, too, have an interest in ensuring that the hours worked do not undermine the safety and efficiency of their employees.

A working hours limit increases the costs of business and the price of its goods and services. It can mean that extra staff are required, which involves the extra administrative costs and benefits required for each extra employee. And it can require a trade off between extra job opportunities and lower productivity, resulting in less successful and even less viable businesses.

The Government finally took heed of the Adam Smith Institute’s advice and put the former state owned turf accountant – the Tote – up for auction. The Tote enjoys a valuable statutory monopoly of pool betting along with an empire of 450 betting shops across the country.

Originally, the Government was committed to selling the Tote at a knock down price to its own management ‘for the good of racing’, although this curious term was never defined by ministers. In reality, racing has been doing very nicely of late. Indeed, there never been so many racing events held in this country. Meanwhile, many prominent racehorse owners remain as tax exiles, huddled in offshore centres or clustered in the Gulf states. They hardly need a hand-out from the British taxpayer.

Auctioning the Tote offers the first real opportunity to identify precisely how much the business is worth. The sale of the Tote ranks as Gordon Brown’s first privatisation measure. There is likely to be interest shown from various bookies, including Gala Coral, BetFred and Paddy Power.

Neil Goulden, Gala Coral's chief executive, is busy writing a letter to the government confirming its interest. Meanwhile, a clutch of private equity firms are likely to show an interest in the Tote. Currently, one of their main problems is to find a rewarding home for their stockpiles of money – a message underlined at last week’s Super Returns conference held in Munich. Significantly, Gala Coral is itself owned by a consortium of private equity houses comprising Candover Investments, Cinven and Permira. All of them have deep pockets

Gerry Sutcliffe, the minister responsible for the sale, told MPs yesterday that the government would begin taking indicative offers straightaway. So, if you fancy a flutter, give him a call. The guide price is £400 million.


Keith Boyfield is the author of At Odds With Taxpayers: Why a Cosy Deal on the Tote is Bad for Punters and the Public. In 2004 the Adam Smith Institute submitted a formal objection to the European Commission concerning the Government’s proposal to sell the Tote to a Racing Trust for a figure well below its market value. The Commission agreed with our complaint and ruled that the Government’s plan constituted an illegal use of state aid.