The Pin Factory Blog

After a wonderful month in Westminster, I bid a fond farewell to my friends at the Adam Smith Institute.

It was an exciting time in UK politics and, consequently, an exciting time to be at a leading UK think tank. Courtesy of the ASI, I had a front row seat for the unfolding of the MP expenses scandal, the historic European Parliament elections and the near collapse of Prime Minister Brown’s government. There was a two-week period when not a day went by without a major media outlet – be it CNBC, the BBC or a national newspaper – calling for an interview with someone on the ASI staff. I had an amazing experience from start to finish.

It was a privilege and a pleasure to work with the outstanding people at the ASI. The people at ASI are of the finest quality as are the ideas and work product they generate. They certainly convinced me to reevaluate my policy positions in a number of areas.

Although I leave 23 Great Smith Street behind, I will certainly remain connected to ASI through the Facebook groups, Twitter and, of course, the Blog.

Change is coming to the House of Commons. I can hardly wait to see what role ASI will play in the development of a new (and better) Britain.

The MP expenses scandal dominated the headlines during much of my time at the Adam Smith Institute. Each day I watched with great interest as new stories unfolded. The one thing that struck me about the public’s response to the scandal was how genuinely surprised so many people appeared to be that the MPs would do such a thing. It was a stark contrast to what I perceive as very low expectations among Americans for the scruples of their elected representatives.

Beginning with Watergate, the American public’s confidence in government officials has been rocked by scandal after scandal. Hollywood and the news media only foment the discontent with sensationalized accounts of government corruption. Public opinion has spiraled downward to the point that there is almost an assumption that all politicians engage in some sort of clandestine impropriety. For example, what surprised the US public about the Monica Lewinski affair was not that Bill Clinton was messing around with an intern, but that he actually got caught doing it.

I believe that this deeply ingrained distrust of politicians is one reason why Americans resist increased state involvement in their lives: they do not trust government to do the right things for the right reasons.

Perhaps the MP expenses scandal will awaken the UK electorate to a similar sense of governmental skepticism. If such a nationwide mentality were to develop and lead the public to take matters into their own hands (i.e. tell the government that it has had its chance at managing the national infrastructure, and it is time for the citizenry and the markets to take over), then what is now a blight on the reputation of Parliament may eventually be celebrated as the first step towards freedom.

Students are not the only people hurt by the UK’s points-based visa application system. Non-EU citizens who seek employment in the UK are also disadvantaged. The government intends to accomplish three objectives with the new migration control system. First, Gordon Brown’s government wants to curtail the number and type of non-EU citizens working in the UK. Second, the government wants to keep visa holders off the dole. The third government objective is to raise money from visa applications.

The first objective has been publicly stated by the Home Office. The second objective is revealed through a review of the new visa application forms. The points-based system requires all visa applicants to have sufficient funds to support themselves, and any dependants, throughout their stay. Applicants also certify that they will not receive welfare benefits whilst in the UK. The third objective is manifest by hike in visa application fees. For example, unsponsored visa applicants must now pay between £675 and £1020 for the application fee. Sponsored applicants must pay a £265 fee. Even students are required to pay £145 to apply for a visa. Applicants in these three categories who have dependents must pay the same application fee for each dependent. Visa application statistics are sparse for the period since the points-based system was launched, but in the 2006–2007 financial year, the UK government received 2.7 million visa applications. That translates into millions of pounds of revenue for the government.

The concerns underlying the government’s objectives can all be traced to the maladies of the welfare state. Welfare states attract people who are content to live on the dole. The new points-based system cracks down on would-be social loafers from non-EU nations, but European freeloaders are left undeterred. This is especially problematic due to the combination of the UK’s high standard of living and relatively generous welfare benefits. Welfare states are also expensive to run, which explains the high taxes and government fees.

The easy way to eliminate the government’s welfare-based concerns is to do away with the welfare system. That may not be politically practicable at the moment, but an effective compromise would be to pare down welfare benefits to the point that the UK’s dole is much less desirable than welfare programs in other EU nations. This will encourage net negative residents to look elsewhere for government handouts. With fewer freeloaders, many of the government’s immigration concerns will be allayed. The Home Office could then relax its points based system rules to make it easier for industrious, innovative applicants to make positive contributions to the UK economy.

One of the many consequences of the new points-based system for UK visa distribution is the limitation imposed on non-EU student interns. The current migration regulations bar non-EU students from undertaking fulltime internships in the UK, effectively pronouncing a death sentence on thousands of UK internship programmes at universities around the world.

The objective of this new policy is simple, to protect UK jobs. The government assumes that a drastic reduction in free student labor will compel UK employers to pay EU citizens to do the work formerly done by non-EU interns. If the volunteer labor supply is depleted, organizations with internship programmes will be forced either to increase their expenses by hiring additional employees or do less work because they cannot afford to pay new staff. The points based system ensures that intern-dependent employers reduce either net profitability or productivity.

I grant that this is an oversimplification. It is possible that organizations that previously relied on non-EU interns might maintain their productivity levels by working more efficiently. It could also be argued that the time spent training interns diminishes organizational efficiency. Astute observers may even point out that intern-dependent employers represent a miniscule percentage of UK employers, so the impact on the economy will also be negligible.

Efficiency is a hallmark of free market economies, but it must be worked out in an unfettered marketplace not artificially imposed by regulation. Although the collective economy will notice little effects from the elimination of interns, market sectors containing an abundance of resource poor, intern-dependent organizations – unregistered charities in particular – will feel the effects of the points-based system most acutely.

The anti-intern policy is far from the top of the list of ill-advised policies set forth by the current regime (see capital gains tax reform, non-dom tax, et al.). Nonetheless, the policy is yet another example of regulation that obstructs free enterprise. Hopefully it will follow many of its poorly conceived counterparts to the policy graveyard.

It appears that President Obama’s plea to buy American was not just an appeal to the conscience of the US consumer; it was actually a sales pitch. When he announced the American government’s acquisition of a 60-percent stake in automotive giant General Motors, Obama took on a new title, Car-Salesman-in-Chief. In addition to democracy and the war on terror, America will now be pushing Corvettes and Cadillacs on the world.

Obvious conflict of interest questions arise from this new venture, which in turn lead to concerns about fairness in the marketplace. Automobile manufacturers will undoubtedly be vigilant in watching for instances of undue influence and market manipulation now the US government has a direct financial interest in the industry. Toyota and Volkswagen cannot be thrilled that the same entity that sets US trade policies is now the majority shareholder in their largest American rival.

The Obama administration insists that it will play the role of passive investor with GM—for example, no government employees will be employed by a company in which the government has invested or sit on such a company’s board. Limiting benefits to individuals is one thing, but will the government be able to resist the temptation to help its investment by tweaking a policy here or relaxing a rule there? It seems unlikely that a market can be free or fair when the market regulator becomes a market player. If the skeptics prove correct, it may not be long until the iconic Uncle Sam abandons his legendary call “I want you for U.S. Army" for the shameless plug “I want you to buy a Chevy."

Discussion of a value-added tax in the US has long been limited to academics and political extremists. That changed when Senator Kent Conrad, chair of the Senate Budget Committee, recently spoke in favor of including VAT in the forthcoming congressional discussion of federal tax reform.

Any VAT proposal will face stiff opposition from American conservatives who would prefer to reduce taxes at every turn. Resistance to a VAT will be all the more hostile if, as rumored, it will be used to support a universal, socialized healthcare system. However, if, and only if, that fight is lost and publicly funded health care becomes an inescapable conclusion, the political right could actually come to favour a value-added tax.

Just walk in to a barber shop in any conservative American community and ask the patrons about their objections to universal health care. There will be those who complain about creating a culture of dependence on the government, those who are concerned about negative effects on the quality of health care, and those who simply do not want to pay other people’s medical bills. This last group might be most inclined to warm up to VAT.

The main criticism of VAT is its potentially regressive nature. Although everyone pays the same markup on purchases, VAT represents a higher percentage of total income for the poor than the wealthy. It is the burden on the disadvantaged, however, that may placate some conservatives because it means that everyone, rich or poor, will be paying for at least some of their own health care. Compared to an increase in the current progressive federal income tax, a value-added tax might be seen by some as a lesser evil.

The US state of New Hampshire has as its motto, “Live Free or Die." The US taxpayer may soon adopt a similar “Live Tax-free or Die" mantra when a provision in US tax laws causes a massive jump in the federal estate tax rate.

During his first election campaign, George W. Bush railed against the so-called “death tax." Soon after taking office, Bush and a Republican-led Congress introduced sweeping tax reforms, including a programme that would gradually reduce, and ultimately eliminate, the estate tax.

The American estate tax system sets a flat rate at which estates in excess of a specified value will be taxed upon the death of the estate holder. That rate has decreased for each of the last nine years, and in the 2010, the estate tax will be eliminated altogether. The estate tax reprieve is only temporary, however. In 2011, the reduction expires, and the estate tax rate returns to the original fifty-five percent level.

Many cynical observers speculate that 2010 will bring there will be a spike in the deaths among wealthy estate holders who hope to avoid the estate tax. Perhaps not wanting to see a sudden depletion of the nation’s wealthiest citizens (and most capable campaign fund contributors), the US Senate recently voted to reduce the 2011 estate tax rate to thirty-five percent. Notwithstanding the Senate’s willingness to compromise, estate holders who die in 2010 will be able to pass on one-third more of their estate to their heirs than those who die in 2011.

Americans are renowned for their tax aversion, but in 2010, the world will find out just how far wealthy US taxpayers are willing to go to remain estate tax-free.