Adam Smith Institute

According the Heritage Foundation and Wall Street Journal's annual Index of Economic Freedom, Britain now ranks as a "mostly free" economy, rather than a "free" one. That's because the UK's scores have worsened in four of the ten economic freedoms measured by the index: trade freedom, monetary freedom, fiscal freedom, and freedom from government. By far the worst scores are in fiscal freedom (where we get 61.2 percent) and in freedom from government (where we score just 40.1 percent). Basically, that means our taxes and public spending have gone up, and we are less economically free as a result.

People will dismiss the Index as being just another pointless list, but these things do matter. Higher taxes blunt incentives to work and produce, and discourage businesses from investing in the UK. That stunts economic growth, making us all poorer. Public spending increases achieve the same end by taking money away from the private sector, where it is productive, and spending it in the public sector, where it is not. The private sector is crowded out, and less wealth is created.

As Fraser Nelson pointed out on the Spectator blog, public spending has grown faster in Britain since 2000 than in any other OECD country (except for Korea). Government spending as a proportion of GDP has risen from 37.1 percent to 44.8 percent, without any real improvement in public services. Given that, it amazes me that so many people still believe that more public spending is, de facto, a good thing. Even the more adventurous Tories are only suggesting that public spending growth be slower than the government plans.

On a political level, that position is understandable. But intellectually, why should public spending rise any further at all? Isn't £600bn a year enough? At the very least, spending should rise only in line with inflation. Better than that though, would be to freeze actual spending, and starve the big government beast. That way, the government would be forced to prioritize, cut waste, and become far leaner and more efficient.

20. "It is wrong that so few people should own so much of the nation's wealth."

The wealth in no sense belongs to the nation, since we are talking about wealth which belongs to individuals. The statement comes down to saying that it is wrong for some people to own vastly more than others. This is not self-evidently true, and there are many advantages to people in society if concentrations of wealth are possible.

Firstly, estimates of the distribution of wealth in society are often wrong. They conveniently count shares and landed property, while often neglecting the entitlements which constitute the main source of wealth for ordinary people. Pension rights are often treated as if they did not exist or had no value to them, while other estimates deliberately omit wealth vested in housing, which is most people's main item of value.

That said, there is nothing wrong with an uneven ownership of wealth. Some people are more prudent, some more successful than others. Some show enterprise and initiative, and the accumulation of wealth represents the reward for their activities. In a free society, even if people started with an equal amount of wealth, there would soon be wide variation.

Possible accumulation of wealth not only stimulates entrepreneurs into socially useful activity; it often provides the means. Wealth can be put to work by investment in creative enterprises. It can create employment, and can lead to the creation of more wealth. Pools of capital are necessary to most economic enterprises; they are a vital tool by which societies become richer.

Of course we want decent living standards for those who cannot make it on their own, but we also want opportunities for those who wish to advance themselves and who can benefit society in doing so. Inequalities of wealth are not important; what counts are the opportunities for people to create the wealth that enables society to improve its services.

The competence of this government has been put into question once again over the ongoing capital gains tax fiasco. The latest concession in offering "entrepreneurs’ relief" is just another example of how out of touch the government with the business community. Richard Lambert, director-general of the CBI employers' body, stated that the new relief would "do nothing to help the real business powerhouses of this country":

[The] real wealth and job creators of the UK's economy ... will be seriously clobbered. The bottom line is that the reaction of the UK government, in the face of an economic slowdown, has been to slap on a major tax hike of £700m. This will have a damaging effect on job creation, investment and savings at exactly the wrong time in the economic cycle.

The most apposite dissection of Brown and Darling comes from Mark Constantine, founder of the Lush chain, in simply pointing out that: "If I ran my business like that, I would get the sack."

All of which is true. Outside the Treasury, we all know that taxes have dynamic effects because they affect incentives. What is less commonly realized, however, is that the greatest dynamic effects are attached to taxes on capital gains and dividends. Raise these taxes and you discourage investment, damaging the economy. Cut them, on the other hand, and you can boost the economy (and ultimately collect more revenue too) – just what is needed in the midst of an economic slowdown. But what does the government do? It raises the tax by £900 million (now £700 million), in a misguided attempt to fill the Treasury's pockets.

Of course, there's nothing wrong with having a flat tax on capital gains. How about we start with ten percent, and then see if we can beat them down to zero?

Now that he's gambled £55bn of the taxpayers' money on Northern Rock, you would have thought that Gordon Brown's record for economic competence would be well and truly buried. After all, the defective regulation he put in place was responsible for the first run on a British bank for 100 years, and many economists are now forecasting a recession. Yet Brown blames all this on international trends and seems to get away with it. People may not think much of him as a prime minister, but they still believe he did a good job as chancellor. The reality is very different:

• The period of low inflation that he likes to take sole credit for was common to most economies around the world, thanks to a growing India and China churning out cheap consumer goods. Low interest rates meant credit was cheap, and that fuelled economic growth. However, it also created a mountain of debt and produced the house price bubble that now looks set to crash.
• In any event, according to OECD figures, the UK has experienced slower growth than most developed economies since 1997. Britain has actually been the slowest growing economy in the English-speaking world.
• Despite fifteen years of economic growth, the UK's budget deficit is more than 3 percent of GDP – a result of Brown's inexcusable profligacy. At this point in the economic cycle we should have a surplus. At the end of 2007, public sector debt stood at £536.5bn, or 37.7 percent of GDP. And that excludes the £48bn buried off the books in private finance initiative deals.
• Public spending now stands at 44.7 percent of GDP – higher than Germany – but there has been no commensurate improvement in public services. The Taxpayers' Alliance recently identified £101bn of waste in the public sector.
• While other countries were cutting taxes to boost their competitiveness, Brown was raising ours. When he became chancellor Tax Freedom Day (the day when we stop working for the Treasury and start working for ourselves) was May 27. Now it's June 1. That's why the average family's monthly disposable income has fallen from £899 to £838 over the last four years.
• Brown's infamous pensions raid cost savers more than £100bn and destroyed the best private pension system in Europe. Just what we needed with a demographic time bomb on the horizon.
• Five years ago Brown sold the UK's gold reserves at $275 an ounce – a 20-year low. Now bullion is worth more than $900 an ounce. His mistake has cost the UK £3bn – as much as Black Wednesday.

The list goes on and on. Brown's 'economic miracle' is really just an economic mirage. History will judge him harshly.

15. "The top rate of tax should be raised so that the rich pay more."

Higher tax rates do not necessarily mean that people pay more, or that more revenue is raised. It depends on other factors, including the total amount of money being taxed. It's all very well for politicians to talk of how they'd spend the extra money derived from raising the top tax rate to 50 percent, but the chances are that less money would be raised, and that they'd have to cut back on spending instead.

Higher tax rates have two important effects, among others. They make it worthwhile for people to avoid them by employing accountants to minimize their tax exposure via tax shelters, or to evade them by simply not declaring income and dealing in cash where they can. The former is legal, the latter criminal, but both mean a smaller tax base to levy the new rate upon. Both are encouraged by higher rates, and made less worthwhile at low rates.

The second effect is that earners have less incentive to work more. If they keep only half of any extra they earn, this is less of an incentive than if they can keep 60 percent. Extra effort and risk become less worthwhile, and people do less of them. Leisure, which costs you the money you could have earned by working instead, becomes cheaper and people take more of it. Some high achievers move abroad to escape the higher rates, and all of this makes the tax base smaller.

In fact well-judged tax cuts result in more revenue, and in the rich paying a larger share of the total. They pay at a lower rate, but pay it on more money. This happened in both the US and the UK with the 1980s tax cuts. The top earners ended up paying a higher proportion of the total tax take, and more revenue was raised.

A new report from Global Vision suggests that while Germany is in shape for economic recovery, Britain isn't – quite a turn-around from a decade ago. While Germany and most of Continental Europe have adopted at least a measure of economic common sense in the last ten years, Britain seems to be taxing and spending itself into oblivion.

OECD figures show that general government outlays accounted for 41.2 percent of the market-price measure of GDP in Britain in 1997 compared with 48.3 percent in Germany. Since then, the share of government outlays in UK GDP has risen by 3.4 percent to 44.6 percent, while Germany has cut it by 4.4 percent to 44.3 percent.

Economists David B Smith and Dr Eugen Mihaita of the University of Derby say that even the limited reforms of 2003, when Germany was facing crisis, have helped. But the real reason why Germany's prospects are rising and Britain's are falling is down to a decade of Gordon Brown. He inherited low taxes, low spending, a deregulated economy, and has spent the past decade letting them all slip away.

Who's part of 'Old Europe' now?

House prices in Ireland fell 4.7 percent last year, or 9 percent when you take inflation into account. Some people see that as a big worry, since house building has been a very large chunk of Ireland's heretofore booming economy. And forecasters say that Ireland's 5.1 percent growth rate last year could fall to just 2.1 percent this year - still positive but things will seem very tight after years of rapid expansion. But house price falls are perhaps just one part of the changes that are needed to make Ireland a more competitive economy. Without its own currency any more (Ireland is part of the Eurozone), there are few ways for Ireland to adjust to a downturn. And anyway, in other sectors such as tourism, manufacturing and services, things are still looking not too bad. Agriculture, too, has benefited from the sharp rise in wheat and dairy product prices.

The government, though, might have a problem, having made tax revenues too dependent on housing. Instead of the old rates system and a short-lived property tax plan, Ireland opted for stamp duty at the point of purchase as its means of taxing house property. With prices falling, so does the revenue. And with growth slowing, other taxes are under pressure too. So the government needs to get more of a grip on public expenditure and the value for money that it gets from public spending: as usual, when things were booming, nobody had to worry too much about being efficient. They do now. But reality is asserting itself, and a benchmarking report on public service pay recommended only a 0.3 percent rise overall.

On the bright side, unemployment in 2007 was just 4.6 percent compared to 17 percent in 1986 before the Celtic Tiger stirred itself, and the number of people in work has doubled over the past two decades. Ireland this year surpassed Switzerland in GDP per head. Norway might be passed in three to four years if sensible policy is pursued. Reinstating the policies that created the Celtic Tiger would take Ireland on a strong growth path in 2009. A return to the high tax-high borrowing policies of the 1970s and early 1980s would undermine growth as it did in Japan, Germany and France.

Ireland's strong ties with the United States should help too, but the essential recipe for success in a small, open economy is simple: invest in education, cut taxes, pursue value for money in public expenditure, deregulate markets, and support world free trade. It's a recipe that would work for Alex Salmond's Scotland just as it has worked in the past for Ireland.

Dr Sean Barrett is a senior lecturer in the Department of Economics at Trinity College, Dublin.

One of the most heartening things about the Northern Rock bank fiasco is how determined the UK's government is not to nationalize it.

In past decades, a Labour administration would have thought nothing of nationalizing a bank, and maybe a few of its customers and suppliers to boot, because the Labour Party believed in public ownership. Indeed, its constitution aspired to seek control of the 'means of production, distribution and exchange'. Clement Atlee's Labour government of 1945 nationalized the Bank of England, the railways, coal, gas, electricity and steel in speedy order.

Some Labour supporters still hanker for those days. But not Labour ministers. Certainly not after the last move to renationalize something that Mrs Thatcher had privatized – Trade Secretary Stephen Byers's replacement of the Railtrack infrastructure company with a new body, Network Rail. It's proved unaccountable and hugely expensive.

The minister who had to try to make this costly train crash work was of course Allister Darling, who is now taking all the Northern Rock flack. Having loaned the bank £35bn to prevent worried savers forming queues outside its door, he is now staring at another £15bn, perhaps, to take it over and try to turn it into a saleable proposition. That's a bill of around £1800 per taxpayer.

But absolutely nobody in government is suggesting that the government should continue to run the Northern Rock indefinitely. So as I say, that's heartening. Now if only we could convince them that governments controlling things is just as bad as them owning things...

Is there a new interventionism in the air in Britain? Faced with a credit crunch, Chancellor of the Exchequer Alistair Darling has said pretty plainly that he believes it's time for interest rate cuts. That's despite the fact that the Bank of England is supposed to be independent. But then who appoints most of the people at the Bank who decide interest rate policy? Yes, you guessed it.

In response to soaring energy - up to 24m homes face double-digit rises in their fuel bills - bills the Chancellor has also demanded an urgent meeting with industry leaders. And officials and watchdogs like Sir John Mogg, chair of the Gas and Electricity Markets Authority, and Alistair Buchanan, chief executive of Ofgem, are being pulled in for talks.

Again, energy prices are supposed to be depoliticized, and the Chancellor cannot order the (private-sector) energy utilities to cut their prices. But he can kick and scream in the hope that the regulator might do so.

Pricing - whether it is the price of credit or the price of gas and electricity - in this country is a sham. Politicians still have too much influence. This week the Bank held off cutting interest rates, but everyone expects it will do so next month. The political pressure will continue to mount. But then politicians want to fix the immediate problems, and if that simply stokes up inflation later, well, so be it. It's not that the Brown government is suddenly more interventionist than the Blair one. The problem is that its principal members are even more cowardly.

A recent publication by the Vancouver-based Fraser Institute argues for the introduction of flat tax in Canada, convincingly showing that the move would make the tax system both simpler and more lucrative. They call for a 15-per-cent flat tax, which would save a significant amount of time, energy and money, estimating that the current multi-rate progressive federal and provincial tax system costs the country around $30 billion per year.

The report argues that the current system is impeding Canada’s economy, constructing strong disincentives for working hard, saving, investing and engaging in entrepreneurial activities. These findings chime with those of the Adam Smith Institute: we have made similar arguments in both Flat Tax – The British Case by Andrei Grecu and in A Flat Tax for the UK – A Practical Reality by Richard Teather. Of the latter, Allister Health, the editor of The Business, wrote the following:

Rarely has a think-tank publication been this influential so quickly. Its arguments have been dissected by the UK Treasury, are well known among the Shadow Treasury team, have had an influence on some parts of the Liberal Democrats and were even adopted by several minor political parties.

Yet despite the press and political interest the research has engendered, there remain obstacles to its implementation. The much discussed Huckabee FairTax, while superficially attractive, is not the answer and may be distracting from the sounder proposals that could be implemented by governments on both sides of the Atlantic. In the UK, as in many other countries, the research is there and politicians are engaging in debate; the next stage is for them to stick their necks out and argue the case.

Now that Mike Huckabee has actually won something in his quest to be the next President of the United States it's time to have a look at one or two of his economic and taxation ideas. As the basic one is the "Fair Tax", why not that? This is the idea that all other Federal taxes will be swept away and replaced by a 23% sales tax.

This is, to put it kindly, insane. Don't just take my word for it though, for detailed reasons as to why it is try Bruce Bartlett. 

The idea's been around for a few years now and from writings elsewhere I've had my share of ALL CAPS emails berating me when I've tried to point out the obvious errors in the idea. 

Even if the rate proposed is correct (it isn't, it'll be much higher) the idea of collecting the entire tax take at the point of the retail transaction simply won't work. We're all well aware of small traders offering two rates for the job, cash and on the books. We've now extended that to the entire economy, as we don't have the chain of people adding VAT on each part of the value they add: only on that final sale to the consumer.

Not that there's any chance of Congress enacting such a tax system, whoever becomes President, but it is slightly alarming that the Republican front-runner at this point is advocating such a system. Which of the two alternative explanations for the advocacy of the idea you find more alarming is up to you: that Huckabee doesn't know the problems with the scheme or does and is still proposing it. 

It's supposed to be the season of goodwill, and I've been thinking about goodwill recently. Not the good cheer and fellowship that is supposed to exist between human individuals, but goodwill in the commercial sense.

The goodwill of a business is the loyalty of its customers, and indeed its suppliers. When people buy or sell a small business, they are not just buying or selling a piece of land, or a building, or even the stock in the shop – although all of those things have value. They are also buying the goodwill. They are buying the trust that customers have in the business, and their willingness to return to it. They are buying the willingness of suppliers to continue to supply it. And they are buying the knowledge of how to make the business work – things like which customers should be avoided because they don't pay, or which suppliers provide the best value for money and the most reliable service.

Until recently, this goodwill and inside knowledge have been a large fraction of the value of a business. Larger companies even put the value of their brand - the name that customers trust - on their books as an asset, as valuable as cash or stock.

But has the internet changed this? How much inside knowledge do you buy when you buy a small business, like a shop. It might indeed be useful to know which customers and suppliers are reliable. But in terms of sourcing the stock which you have for sale, that is a lot easier these days. A quick online search will discover plenty of willing suppliers. And through blogs and chatrooms it's not hard to check the reliability and value of any of them.

I think this must affect small businesses in particular. A loyal customer base is worth something, but the knowledge of how to stock and run a shop, say, is much easier to acquire these days. Perhaps most of that knowledge now can't really be sold as part of the price of the business. On the other hand, this widespread online knowledge must make it easier for people to start new businesses, and add to the competition. What's bad for shopkeepers might be good for their customers.

My true love sent to me: nine ladies dancing, which probably refers in the song to the nine fruits of the Holy Spirit, which include Love, Joy, Peace, Kindness and so on.

Well, it's a bit early for dancing, or even joy. Believe it or not, but if you live in the United Kingdom you are going to be working for the government every single day between now and 1 June, which is when Tax Freedom Day falls. Roughly 40 percent of what we make and earn is snatched from us by the tax authorities to be spent on things that our governments in London, Holyrood, Cardiff and Belfast think that we should be given.

It's been scientifically calculated that the average Christmas present costs 14 percent more than the recipient thing it is worth. If you just gave cash instead, then the recipient could buy something they think is worth the money. When you buy something for them, they never think it's quite right, and sometimes they put it in the cupboard and just forget about it. And it's the same with government. They buy services for us which we don't want - usually because they are very ineffectively delivered. If they gave us the cash - or even vouchers - instead, at least we could get value for our money.

And actually, it's worse. The government isn't giving us all these useless present with their money. It's paying for them with our money!

My true love sent to me: five gold rings. It probably means the first five books of the Old Testament, but to me five rings means the Olympics, which are coming to London in 2012.

Well, they say that. But it's a typical government-led project, so who knows? The London bid for the games put the cost at £3,375m, but in March this year Tessa Jowell revealed that the cost had risen to £9,300m - a tripling of the costs in just a few months. Something of a black hole, which the hole-vaulting Culture Secretary explained as due to VAT, inflation, and a whopping £2,700m 'just in case things go wrong' fund (a figure larger than that the original estimate for building the entire Olympic Park. As the bulldozers move in, it cannot give much confidence to their operators that the costs of all this, including their wages, are still being calculated.

The Scottish Parliament building started with an estimate of £40m and ended up costing £400m. Still, we taxpayers can afford it, can't we?

The Tax Justice Network have a nice little graph here . Their contention is simple: the more of GDP that the government takes in tax then the lower the rate of child poverty. We can thus justify massively higher taxes because we're doing it for the children. I questioned their US figure of 22% of children in poverty because the usual one (US Census) is 12% or so. Here's the definition of poverty that they are using:

Share of children 17 years and under living in households with equivalized disposable income less than 50% of median income; Society at a Glance: OECD Social Indicators, 2005, p.57.

This, of course, is not a measure of poverty, this is one of inequality (or relative poverty, if you prefer). As long as we remember this crucial distinction, the TJN are of course quite correct. The outcomes from the market allocation of incomes can strike some as unfair and different societies seem to have different takes on how much of this they wish to remedy. That remedying done by greater taxation on higher income earners and the single, the money being given to lower income earners with children. This lowers the number of children living in such relative poverty. All of this is, I would hope, obvious, along with the corollary that the less redistribution the closer to the market allocation of incomes we shall be.

All of which means that what the TJN graph actually shows us is that in places where you have less redistributive taxation and spending then you have less redistributive taxation and spending. Something which isn't, if I might be frank with you, a finding which is either surprising or shocking.