Adam Smith Institute

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.

I'm very glad to see the UK's Chancellor of the Exchequer, Alistair Darling, getting roundly beaten up on his proposals to raise taxes for non-domiciles. His opposition counterpart, George Osborne, is keeping rather quiet. But then it was Osborne who started this hare running.

Of course, Osborne's plan, to lift a few grand from the richest folk who live in the UK and pay tax elsewhere was relatively modest, and had been tested among business groups (who weren't pleased, but didn't see it as very troublesome). The idea went down well with the public, who rather like the notion of making foreign zillionaires pay at least something to support the Health Service, and that prompted Darling to come up with his clumsy, disastrous copy.

In fact, non-doms already pay about £7bn in taxes. Darling's plan to charge them £30,000 for the privilege of living in the UK would add £500m to that. That's hitting them big (they're not all zillionaires, you know) to raise a tiny (less than 0.1%) increment to total government revenues. As Madsen Pirie made plain in the Adam Smith Institute report The People Economy, wealth-creators these days are highly mobile creatures. Even the Treasury estimates that the new tax might drive away 3,000 of these foreign entrepreneurs, but the CBI it could well be nearer 8,000 – in which case the Chancellor would end up with less revenue, not more.

Since Osborne's under pressure from Conservatives who think tax is already too high, and Darling's advised by Revenue officers who think it's too low, the plans are actually chalk and cheese. But the public can't see the difference, so Orborne can hardly start beating up the Chancellor, and it is being left to business groups – which makes it look like special pleading. That's a pity. Investors are easily spooked by tax rises and indeed tax uncertainty. They don't have to live and invest here. In the attempt to be more populist than the Conservatives, the Chancellor could end up doing the UK – and his own revenues – a lot of damage.

This has been all over the place, The Guardian's attack on the evils of Tesco obeying this country's tax laws and paying the amount demanded by the rules.  Unfortunately, it really has been all over the place so let's collect it.

First we had the investigative report which showed the sad fact that after 6 months of investigating two Guradian journalists still don't know the difference between a company and a limited partnership. We're also told the shocking news that Tesco's doesn't in fact pay the headline rate of corporation tax, having an effective tax rate of 20%. As Parliament has pumped out thousands of pages of tax allowances, credits and the like over the decades why this is a shock is a little puzzling. Further, the effective tax rate of the Guardian Media Group was 16% last year.

We then had a Guardian leader where the writer was entirely unaware of the theory of tax incidence. Just because someone is signing the cheque doesn't mean they are the person bearing the burden of a tax. (See here for the schoolboy's version.) Then Vince Cable weighs in and in the comments we're told that the offshore vehicles that have got everyone so riled up don't in fact save any tax anyway.

Then of course Polly weighs in : Dr. Johnson comes to mind, Polly on economics is not so much wonderment at it being done so well, rather that it is being done at all. We've also had Richard Murphy (who seems to be the person advising the writers on tax matters) telling us that large companies had lots of unpaid tax on their balance sheets. Tsk, like the Guardian Media Group with £30.5 million, tsk, tsk. And again we're told in the comments that Tesco's Caribbean adventures won't save it any tax, and again here.

Two points from all of this spring to mind. The first is that the newspapers really do have a problem now: on just about any and everything, their readers in aggregate know more than their journalists do. And comment systems are making it clear that they do. The second is that those on The Guardian really know very little at all about how the tax system works: perhaps that's why they're so insistent that taxes should be higher?

After all, if you don't know what's already going on, it's easy enough to hold ludicrous views, isn't it? 

A year ago, a leading article in The Economist remarked, "Tax havens are an unavoidable part of globalisation and, ultimately, a healthy one". Now tax havens are back in the public eye, with the news that HM Revenue & Customs paid £100,000 for the (stolen) bank details of wealthy Britons with cash stashed in Liechtenstein. Leaving aside the questionable ethics of purchasing illegally obtained information, are HMRC right to go on the offensive against tax havens? After all, don't tax havens cost the Treasury vast sums of money, and force the rest of us to pay more?

Well, yes and no. Certainly, HMRC has a duty to prevent the illegal non-payment of UK taxes and it's probably true that substantial sums of money are indeed being squirreled away overseas. But I still agree with The Economist's sentiment that tax havens and the tax competition they engender is a good thing. And the reason is that competition drives governments towards better tax policy.

The reason that wealthy individuals are able to hide money in tax havens is the British tax law has become overly complex (to put it mildly) and correspondingly full of loopholes for the well-advised individual to take advantage of. Tax competition should therefore drive governments to simplify the tax system, making it fairer, more transparent and cheaper to administer as a result.

Tax competition also helps to keep tax rates low. In a globalized world economy, where companies, capital and high-income individuals are increasingly mobile governments can only raise taxes so much before it becomes obvious that they are losing out. Tax competition helps to keep government lean and encourage them to provide more value for money.

If you believe in high taxes and ever-growing government and public spending all this is, needless to say, rather horrifying and requires urgent international efforts to co-ordinate tax regimes. If, on the other hand, you believe in small government and low taxes, then it's time to give three cheers for tax havens!

47. "A national minimum wage prevents the exploitation of young workers."

Many young people make less useful employees than those with a few years experience. They may have enthusiasm and energy, but have yet to learn the habits of work, and the preferred ways of doing things. They have to be trained, and to learn, and this costs time and attention. This disadvantage is made up by the lower wages generally paid to young employees; they may not yet be worth as much as older ones, but this is compensated for because they don't cost as much.

When the state sets a minimum wage, it is legislating to have young employees paid more than the market rate. In some sectors this is not a problem, but in others employers might find it not worthwhile to employ any at the required rate. The result in the US has been that whenever Congress has raised the minimum wage, there has been an increase in youth unemployment, worst for ethnic minorities.

It's like fixing the price of anything. You can't make it worth more than it actually is, but legislators can alter the supply, in this case of jobs. The UK minimum wage recognizes this by setting a lower rate for younger employees. Low wage campaigners don't like this, but it has ameliorated the youth unemployment that a standard minimum wage would have caused. If employers have to pay young people the same rate as more useful employees, they are less likely to hire them. However, young people have an economic advantage when they cost less; it gives them a selling point when they might otherwise have none.

The great majority of top CEOs in the US started employment in a low wage job. If those jobs had been priced out of existence by high minimum wages, many of them might never have got that vital first start. Far from preventing the exploitation of young people, minimum wages can seriously damage their prospects.

Yes, tax competition does pose problems for politicians who buy votes with other people's money. Tim Worstall points out on the GI site that "if people are able to pay lower tax rates elsewhere then they might just leave and go and do precisely that." Thus the presence of more tax-attractive places restrains the big spenders. More to the point, though, as Tim emphasizes, is that tax competition brings choice and with it the opportunity for people to satisfy different preferences simultaneously.

Some prefer the greater State services (however incompetently delivered) that higher taxation brings, there are even those who prefer greater regulation. Excellent, let those who desire such things have them. And thus the point and value of having competition in such tax and regulatory jurisdictions: people get to choose which they prefer.

The Institute of Chartered Accountants in England and Wales publishes a quarterly survey of business confidence, and the current report is the third in a row that makes rather depressing reading. Business confidence is, of course, down. In fact, it's the lowest it's been since the surveys started in early 2004.

The number-crunchers say that business confidence has sunk faster than the overall economy – which may just indicate the effect of a gloomy media, and the complete collapse of confidence in the financial sector. But however well the real economy is holding up, if people are too nervous to make investment decisions now, that can't be a good sign for the future. The accountants are predicting very low economic growth for 2008 – though they think that preparations for the Olympics, interest rate cuts, and consumers dipping in to their savings will spare us a true recession.

Reading this Telegraph piece about why we should all be celebrating Ralph Vaughan Williams and the 50th anniversary of his death I was thinking, yes, why not?

He cycled all over Surrey to rehearse village choirs for his beloved Leith Hill Festival, where all manner of people - very few of them rich or educated - came together to sing the great choral masterpieces.

In 2008, the Philharmonia, among other orchestras, is featuring Vaughan Williams's orchestral music - and not just in London. Richard Hickox, a conductor with a fine record of promoting British music here and abroad is conducting The Pilgrim's Progress both in London and Sydney.

But there is no extra funding from the Government - and it takes money to enable the great man's music to be properly rehearsed and performed.

Hilary Davan Wetton is one of Britain's most versatile and dynamic conductors. He is Musical Director of two major choirs (the City of London Choir and the Guildford Choral Society), the Milton Keynes City Orchestra, and has made a number of acclaimed recordings. He appears frequently as a guest conductor with choirs and orchestras both in Britain and overseas, and performs regularly on Radio 3. He has a real commitment to young people, both through work with youth orchestras and audience building.

I've no doubt that both of my sisters will sing some Ralph Vaughan Williams this year and that my uncle would have if he were still with us. But none of them have ever had the effrontery to ask that you should pay for their pleasures.

George Osborne's speech on tax yesterday, which he delivered at Policy Exchange, was structured around Adam Smith's four principles of taxation: efficiency, certainty, transparency and fairness.

On efficiency, Osborne said we needed to cut corporation tax in order to compete globally. On certainty, he said a Conservative government would think through tax policy properly, with an eye on the unintended consequences. So no more announcing a government policy (like the capital gains tax reforms, say, or the tax on non-domiciled residents) only to have to U-turn a few months later. On transparency, Osborne said he would not implement stealth taxes and would seek to simplify the tax system. On fairness, he repeated his pledge to abolish stamp duty on houses under £250,000 for first-time buyers and raise the inheritance tax threshold to £1 million.

All of which is welcome, sensible stuff. The overall message of the speech was: we want to cut taxes, and we will when we can – but politics means we can’t promise spending cuts, and the economic forecast means we can't be too radical about cutting taxes. From an electoral perspective, Osborne's probably got it right.

Of course, in the long term the best way of making the tax system efficient, certain, transparent and fair would be to implement a flat tax. How about aiming for the following by 2020: a personal allowance of £20,000, with a 20 percent flat tax on all personal income (whether from wages or capital gains, or whatever) above that. Abolish corporation tax and inheritance tax altogether – in fact, get rid of all the other taxes levied by central government. Then make local government self-financing with locally set (and thus competitive) property and sales taxes.

What could be more efficient, certain, transparent and fair than that?

35. "No-one should be given an unfair start in life. That is why there should be no inherited wealth."

Parents seem to want their children to have a better life than they did, and are prepared to devote energy, resources and time in order to achieve it. It seems to be a normal attitude which goes with parenthood. If society tries to thwart it, parents finds ways of achieving the same end. If inherited wealth is banned, then it will be jobs, or patronage, or some other advantage which will be secured. In socialist countries, for example, parents used their influence to secure good government jobs for their children.

Death taxes are very unfair from the point of view of parents. They earn money and pay tax on it, then when they die the state comes along to tax it again, and takes away much of the provision they'd worked so hard to give their children. It removes much of their motive to generate wealth and aid society with new opportunities in the process. From the recipient's point of view, the bequest from parents comes as a lump sum when most have already bought a house, and is available to give them a chance to invest, or even start up a business.

Inherited wealth allows capital pools to accumulate and boost enterprise and economic growth. Without heritable wealth, most family businesses, including such things as shops and farms can be broken up by death, with a consequent economic loss to society. Everyone loses from this, not just the rich, as employees and customers are hit.

In Britain inflation and rising house prices have meant the death tax now hits middle income people, rather than the very rich it was intended for; the really rich plan ahead to escape its net. The tax does more damage to the country's economy and future well-being than is justified by the revenue it brings in.

Under Blair, Labour was never so foolish as to come into direct conflict with the City. The government tiptoed around it in an effort to nurture the powerhouse of the British economy. But led by Brown, with Darling as Chancellor, they are now clumsily treading on the collective toes of many in the business community.

The latest blunder is the proposal to introduce a tax on non-doms. Designed as an attempt to gain an extra £800 million in taxes, it turns out that it could potentially lose £2.1 billion in revenue for the Treasury. The simple reason being that these individuals are contributing remarkably high amounts to the British economy, and with this latest imposition adding to the climate of uncertainty, many doyens of their respective professions will simply move out taking their businesses, jobs and money with them.

It was in fact the Tories that came up with the idea of taxing non-doms in the first place, with Labour choosing to copy them. However, unlike on Inheritance Tax, Labour would have done well to ignore George Osborne, the shadow chancellor, on this one.

It took the radicalism of Margaret Thatcher’s economic policy to undo the disastrous economic policies of the Labour governments of the post-war era. We can only hope that the Brown-Darling team do not leave the UK in such a state. We will also have to hope that the next government will actually cut taxes. We're keeping our fingers crossed.

30. "Private equity firms do nothing but make excess profits at the expense of jobs."

Private equity firms specialize in making more efficient use of resources than is currently being made. They look for opportunities where a firm is under-performing. Typically they might consider that not enough use is being made of the firm's resources, and that better management and organization might get more out of them. These are in no sense "excess profits," though they are higher profits; that is the point of the exercise.

Very often the private equity bidders will put their own money into a venture as well as borrowed money. They calculate that the return they can get a company to yield will be sufficiently greater than the interest on the loan to make it worthwhile, and that their own funds will see a significant return in the process.

It is not true to say that private equity takeovers result in job losses. They can in the short term, but most often their effect is to improve the company's performance, to secure its market position, and to expand the areas in which it succeeds. The net result is more jobs, not less, and more secure long-term jobs at that.

The shareholders benefit, too, from the higher than market price the private equity group pays for their shares. In cases where some shareholders opt to retain minority holdings in the restructured firm, they gain, too, from the enhanced performance achieved by the new owners.

The economy as a whole gains by having its resources used more efficiently and contribute more to the economic growth of the nation. The firms taken over by private equity nearly always become more competitive as well as more successful, able to bring business to the country that might otherwise have gone to foreign competitors.

The rise of private equity groups has brought benefits throughout the economy, turning under-performing firms into success stories.

It's one of the tropes of our times, that the inheritance tax is such a spiffingly new and inventive idea that it must be progressive. In one way of course it is new, starting in 1986 (with the origin as Estate Duty in 1894), in another, it's really rather old.

Feudal England worked on the basis that everything, most especially the land, belonged to the King. Whilst you might have an estate, even the hereditary right to one, you only ever held a lifetime interest in it. At your death, your inheritors would pay a fee to the next lord up in the fedual chain. This progressed all the way to the top, where those who held lands directly from the Monarch paid him at their own moment of inheritance. There were other such details, such as heriot, the right of a lord to seize the best animal or clothes of a serf from his estate.

Fortunately we got rid of such things as the medieval system faded away: land holdings became freeholds, owned absolutely, property rights actually meant that things were inheritable rather than held only for life.

Until, of course, the system of inheritance tax came along again. What is ours is not ours to do with as we wish again, to dispose of as we please. Our inheritors must pay again a fee, to the State this time instead of the feudal lord, for the enjoyment of our property, what we have built and paid for. 

Thus, far from being progressive, the inheritance tax is in fact medieval, positively feudal: we're now simply regarded as serfs of the State, ripe for the plucking upon our passing. 

26. "Government must 'prime the pump' by stimulating demand through increased public spending."

Some urge that when the economy slows, and people are not spending or investing as much, government should step in with projects of its own to boost demand with public spending. In fact when government does this it destroys private sector jobs by taking away the resources which would have sustained them. Taxes are higher than they might otherwise be, leaving less to be invested in private business and to spend on its products.

Moreover, government uses those resources inefficiently. The administrative costs of sustaining each job are higher in the public sector, and the funds themselves are used less effectively. "Priming the pump" often means spending on infrastructure and civil engineering projects, all capital-intensive and less productive of jobs.

Even in labour-intensive areas, such as the public services, most of the extra money it puts in is swallowed up by increases in the public sector rate of inflation. It simply puts in more cash for public employees to bid for. This happened with the huge sums pumped into UK public services in the post-2000 budgets. All of the money was swallowed, but service improvements were not remotely commensurate with the enormous increases in spending. Indeed, some things became worse.

Private money goes where economic factors signal it should, but government cash follows political demands which are not as commercially viable or as sensible.

It takes a lot of money to sustain each public sector job. The private sector employs more people for the money. "Priming the pump" is a now discredited notion from Keynesian days. It creates a temporary and artificially high demand in certain sectors at the expense of others, followed thereafter by massive dislocation and unemployment when that artificial demand ceases. It tempts government to create artificial short-term 'booms' ahead of elections, with the consequences coming after they have been safely re-elected.

President Bush’s plans to bail out subprime loans by freezing interest payments for adjustable mortgages is ill conceived enough. But did you know that it was another government intervention that goaded these people into making those mistakes in the first place? That is exactly what George Mason University Economist Walter E. Williams is saying in an interesting commentary for the Washington Post:

As with most economic problems, we find the hand of government. The Community Reinvestment Act of 1977, whose provisions were strengthened during the Clinton administration, is a federal law that mandates lenders to offer credit throughout their entire market and discourages them from restricting their credit services to high-income markets, a practice known as redlining. In other words, the Community Reinvestment Act encourages banks and thrifts to make loans to riskier customers.

If a contractual agreement is willingly entered into and agreed upon by a borrower and lender, it is binding and if broken by one party or the other, harsh penalties should ensue.