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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Regulatory clampdown on regulators

Written by Blog Editor | Tuesday 01 April 2014

New research today (1 April) reveals that errors made by regulators are persistent and predictable. Regulators misjudge key facts and are inconsistent, say behavioural economists, so greater supervision of regulators is needed. Fortunately the Regulatory Conduct Authority (RCA) is there to improve things.

Examples of regulators' mistakes includes over-simplifying the complex world of retail products, focusing only on prices and neglecting product innovation. They also over-discount the future, introducing regulations for immediate gratification. And they are overconfident in their ability to identify what customers actually want.

The RCA plans to identify and prioritise the problems caused by regulators and to 'name and shame' the least competent. It is also attempting to discover whether it is just some, or all, regulators who mess things up. The RCA will then 'nudge' regulators into upping their game. Former water regulator Sir Ian Byatt and former gas regulator Claire Spottiswoode have both supported the RCA initiative.

Download this paper.

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Think piece: Bitcoin and the English legal system, Part II

Written by Blog Editor | Monday 17 March 2014

Commercial lawyer and ASI Fellow Preston J. Byrne continues to explain why, despite the cries of his inner libertarian, more government involvement in Bitcoin would be a step forward for the cryptocurrency-cum-payment-system, rather than its end.

I should begin by thanking the numerous individuals who privately provided feedback on my proposition that cryptoledgers need law, and therefore the state.

I am pleased to report that the proposition was overwhelmingly opposed, with a few exceptions.

My position, however, remains unchanged. To set the scene for later discussions, I will provide the primary objections and my responses in outline.

Read the whole thing here.

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Press release: Who pays corporation tax?

Written by Blog Editor | Monday 17 March 2014

  1. Nearly 60% of Corporation Tax comes from workers’ wages, making the tax a regressive and stealthy form of income tax
  2. Most of the remaining burden of the Tax comes from capital owners, an economically inefficient way of levying revenues
  3. The government should cut Corporation Tax more quickly to increase workers’ real wages and raise the level of investment in Britain

Almost 60% of the Corporation Tax burden falls on workers’ wages, a new report by the Adam Smith Institute has found. The report, released ahead of this week's Budget, reviews existing academic studies into the incidence of the Tax and recommends that the government reduce or abolish it.

The report, ‘Who Pays Corporation Tax’, authored by the Institute’s Head of Policy Ben Southwood, proposes that the government significantly reduce, or abolish the corporation tax to reduce the burden on workers, and that it accounts for the lost revenue through either cutting spending or, if necessary, raising the money through more efficient means, such as property, income or consumption taxes.

According to the report, the Corporation Tax’s burden is split between workers— it reduces their pay without appearing on their pay slips—and capital, distorting decisions therefore reducing investment, UK growth and future living standards.

Though economists argue about the exact way in which the tax is initially and eventually split between capital and labour, all agree that the burden is shared primarily between the two.

Ahead of the Budget on Wednesday, the report’s findings should embolden the government to accelerate its corporation tax cuts to increase workers’ real wages and the level of investment.

Ben Southwood, author of the report and Head of Policy at the Adam Smith Institute, said:

"Tax avoidance scandals are often presented as if they were a struggle between the common man and the man—but economists know this is far from the truth. Corporation tax is partially paid by workers through lower wages, and the remaining chunk, though paid by capital owners, is likely to come out of investment, hitting growth and future living standards.

"If it can be done without introducing new distortions, we should definitely abolish corporation tax and get the revenue from a more effective tool with fewer side-costs."

Eamonn Butler, Director of the Adam Smith Institute, added: "In his Budget this week the Chancellor may announce a modest cut to Corporation Tax. He should go much further: cutting the Corporation Tax significantly will put more money in workers' pockets and boost the economy by stimulating investment. We need to grow our way back to prosperity by cutting back the state. The Corporation Tax should be the first tax to go."

The key findings of the report include:

  1. While most of the substantive details are hotly disputed, the best studies of corporation tax find that in an open economy, workers bear a significant part of the burden of the tax, along with owners of capital. In a closed economy—like the world as a whole—the burden falls mainly on capital owners.
  2. Though results have been contested, the average empirical result puts the burden on workers at 57.6%. Averaging theoretical studies is much more difficult, mainly because each study gives such a wide range of results over such varying sets of circumstances.
  3. Nearly all economists agree that taxes on capital are highly distortionary, and thus unattractive as means of raising revenue. Owners of capital do tend to be wealthier than non-owners, but capital taxes are far from the best way of redistributing wealth.
  4. Transparency is a virtue of a tax system, and many workers are unaware that their wages are lowered by corporation tax.
  5. In the presence of an extremely complex regulatory and legal regime like the UK’s, the costs of corporation taxes become even higher by distorting key decisions like choices between debt and equity.
  6. The interaction between corporate income taxes and corporate gains taxes may complicate the question, necessitating reforming both in order to properly reform one.

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@adamsmith.org / 07980 627940. The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.

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Think piece: Bitcoin and the English legal system

Written by Blog Editor | Wednesday 05 March 2014

Commercial lawyer and ASI Fellow Preston J. Byrne explains why, despite the cries of his inner libertarian, more government involvement in Bitcoin would be a step forward for the cryptocurrency-cum-payment-system, rather than its end.

When Mt. Gox went offline last week, taking half a billion dollars’ worth of bitcoin with it, many of the cryptocurrency’s public advocates – some of whom lost “life-changing” sums –  moved swiftly to its defence. Erik Voorhees’ rallying cry, in particular, was a standout piece of Austrian rhetoric, warning against the near-universal social-democratic impulse to “cry out for Leviathan’s intercession” to remedy every petty inequity and misfortune.

This reaction should not be a surprise. Many early adopters, and practically all bitcoin users I know personally, are libertarians (Roger Ver, in his video-recorded post-Gox appeal for calm, can even be seen wearing a voluntaryist lapel pin). Many are mathematicians; few are lawyers. From this outside perspective, I’ve therefore arrived at a conclusion with which most of them will disagree.

To achieve its full potential, cryptocurrency needs a legal system in the traditional sense. It therefore needs a state.*

Read the whole thing.

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Think piece: cryptocurrency gets real

Written by Blog Editor | Tuesday 18 February 2014

ASI fellow Preston Byrne explains why bitcoin's recent problems do not mean the cryptocurrency-cum-payments-system is over. In fact, the promise of cryptography in payments and contracts is as exciting as ever.

Last week was a horrible week for Bitcoin: as "transaction malleability" (in effect, a form of distributed denial of service attack) entered the lexicon, $2.7 million of Bitcoins were stolen from Silk Road 2, Russia banned it and the App Store followed suit, the value of a single Bitcoin fell to roughly half – as against USD – as it was 14 days ago.

One could be forgiven for thinking it is "all over" for cryptocurrency; the sector is more than just Bitcoin, however, and as a whole the market tells a very different story. Slowly but surely, the one-trick crypto pony is becoming a multilateral ecosystem and one of the more interesting of these developments was the establishment of Ethereum, a project to build a platform to run smart contract protocols.

“What the hell is a smart contract?” You ask.

Read more here.

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Young Writer on Liberty Competition 2014

Written by Blog Editor | Monday 20 January 2014

The Adam Smith Institute invites you to enter our annual student competition, Young Writer on Liberty. This year's theme is:

Three policy choices to make the UK a freer country

Each entrant must write three essays in the style of the ASI blog, each no longer than 400 words, and each explaining a different policy choice that could make the UK freer, richer and happier. No policy choice is out of the question—indeed counterintuitive policy choices may be particularly interesting if backed up by strong arguments.

The winner will receive £250 and have their three posts published on our blog. They will also get a box of liberty-themed books and the opportunity to do two weeks of work experience here at the ASI.

Twos runner-up will also have their posts published on the blog, as well as receiving a package full of interesting books.

Last year's winner was George Kirby, who argued that we should legalise markets in organs, that there should be greater roaming rights in the UK, like those enjoyed in some Nordic countries, and that the UK would benefit from US-style federalism.

Entrants must be 20 or under on the closing date, 21st March 2014. Please submit all entries to schools@adamsmith.org. Good luck, and I look forward to reading all of your pieces!

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Comment: Minimum wage increase will hurt the poor

Written by Blog Editor | Thursday 16 January 2014

Commenting on the Chancellor's backing for an above-inflation rise in the National Minimum Wage, the Adam Smith Institute's Research Director Sam Bowman said:

"A minimum wage increase will hurt the poor, particularly young people and vulnerable groups like migrant workers. Most of the empirical economic evidence has found that increases in the minimum wage cause increases in unemployment. The evidence also suggests that minimum wage increases lead to slower job creation for low-skilled workers.

"Minimum wage work is usually a stepping-stone to something better where employees can acquire human capital. There is also evidence to suggest that minimum wages stop young workers from acquiring the skills that allow them to get better jobs in the long run, so today’s increase could have far-reaching harmful effects by keeping people in low-paid jobs.

"One way to actually help low-income workers would be to raise the income tax and National Insurance threshold to the current minimum wage level, which would give these workers a take-home pay equivalent to a minimum wage. That would require spending cuts or tax rises elsewhere, but it would be a responsible and effective way to improve the lot of the working poor that would carry none of the unemployment risks that this minimum wage increase does – in fact, it would create jobs.

"Increasing the minimum wage runs an indefensibly high risk of creating more unemployment and harming the people that supporters of the increase want to help. Even if the immediate impact is not large, this increase will lead to a long-run decline in job creation and standards for Britain's poorest workers. It will hurt the very people it is supposed to help."

For further comment please email media@adamsmith.org.

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Video: Ayn Rand Lecture 2013 by Lars Seier Christensen

Written by Blog Editor | Wednesday 18 December 2013

Lars Seier Christensen is CEO and Founder of Saxo Bank. You can read a full transcript of this speech here

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Introduce school vouchers and liberalise free school creation to improve UK education

Written by Blog Editor | Thursday 05 December 2013

As Britain faces dire PISA education rankings, the government should liberalise the free schools application process and give parents a voucher for a place in any approved school, state or private, says a new research report from the Adam Smith Institute and the Centre for Market Reform of Education. (School Vouchers for England: Harnessing choice and competition for greater quality and equality in education. Executive summary here.)

The move would abolish the restrictions that prevent poorer parents from accessing England’s best schools. Proximity-based admissions should be scrapped, being replaced by lotteries and subsidised transport in cases of oversubscribed schools.

At a time when many areas will face a 20% shortfall in places by 2015, urgent and cost-efficient action is required, the report says. Parents may be left without schools to choose from unless the government accelerates the development of new free schools.

The government therefore must simplify the school creation process, says the report, cutting through red tape and introducing a voucher system so that parents can signify where and how they require schools to be built.

Gabriel Heller Sahlgren, co-author of the report and Director of Research for the Centre for Market Reform of Education, said:

“Parents are currently restricted to choosing schools they can afford or the schools they can afford to buy a house near. Giving parents a voucher, redeemable to all state schools and participating private schools, would usher in a new era of social mobility and reverse the decline in the quality of English education.

“A voucher programme would expand the number of schools that parents could choose. Parents could choose participating private schools, which would be incentivised by the prospect of a more steady income. The resulting increased competition between schools to attract pupils would cause significant improvement in education.

“Good schools in sparsely populated areas would be incentivised to expand by receiving more pupils and money. Similarly, bad schools would be incentivised to improve by the threat of losing pupils, and therefore funding. A voucher programme would avoid the need to build more costly free schools, as well as the huge costs and regulations surrounding which have hampered the government’s education reforms."

Notes:

A copy of the paper is downloadable here: http://www.adamsmith.org/sites/default/files/research/files/Voucher%20pa.... An executive summary of the paper is downloadable here: http://cmre.org.uk/uploads/publications/Voucher%20exec%20summary.pdf.

Please contact Alexander Blackburn to arrange an interview with the paper’s authors by calling 020 7799 8903 or 07400 902 290, or emailing ablackburn@cmre.org.uk.

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The Trading Dead: The zombie firms that threaten Britain's recovery, and what to do about them

Written by Blog Editor | Monday 18 November 2013

Zombie firms threaten to cause a “lost decade” of economic stagnation – new Adam Smith Institute report

  • Up to 108,000 “zombie firms” threaten to cause a “lost decade” of stagnant growth and productivity
  • Corporate insolvencies are unusually low, suggesting that zombie firms are holding up capital and labour that could be used productively elsewhere
  • “If a business can be saved, it is entrepreneurs who are best place to make the changes required” says OpCapita’s CEO Henry Jackson

Over 100,000 “zombie firms” are threatening the UK’s recovery from the Great Recession, according to a new report by the Adam Smith Institute.

Record low interest rates and the willingness of banks to show “forbearance” to unprofitable firms is damaging productivity, undermining competitiveness and preventing workers and money finding its way to the companies of the future.

The Trading Dead: The zombie firms plaguing Britain’s economy, and what to do about them, by Tom Papworth, identifies “zombie firms” as heavily indebted firms that can generate enough revenue to pay down debt interest but not debt principle and are dependent on low interest rates to continue doing so. The paper argues that many of these firms require either insolvency or restructuring for a strong economic recovery to emerge. The report is sponsored by OpCapita, an international private equity partnership that specialises in turnaround through operational change.

The report shows that Britain’s “productivity problem” may be partially due to zombie firms holding up capital and labour in relatively unproductive sectors, raising the costs of entry for new, innovative firms. The two main factors responsible for the zombie phenomenon are low interest rates and bank capital regulations. Low interest rates may be misdirecting money to unproductive zombie firms, and bank capital regulations (such as Basel III) discourage banks from foreclosing on zombie debtors, which would worsen the liability on their balance sheets. This also discourages business lending by banks in general.

The report finds that private sector rescue of zombie firms is possible, but only for some. This rescue, in the form of corporate restructuring, must also be done in a decentralised “bottom-up” fashion by individual entrepreneurs and investors such as private equity firms using their local knowledge of specific firms and industries. A government-led drive would likely suffer from chronic inefficiencies.

Tom Papworth, Senior Fellow of the Adam Smith Institute, said “We tend to see zombies as slow moving and faintly laughable works of fiction. Economically, zombies are quite real and hugely damaging, and governments and entrepreneurs cannot simply walk away.

“Zombie firms stop workers and money being redeployed to more productive uses, they prevent new, better firms entering the market, they undermine competitiveness, reduce productivity and slow the growth of the whole economy. Low interest rates and bank forbearance represent a vast and badly targeted attempt to avoid dealing with the recession. Rather than solving our current crisis, they risk dooming the UK to a decade of stagnation.

“Zombie firms need to be confronted with the reality that they are not profitable. With timely interventions by knowledgeable entrepreneurs, many firms can be restructured and saved. But others must be liquidated to allow resources to feed the growth of the future.”

Henry Jackson, CEO of OpCapita and the report’s sponsor, said: “Turnaround specialists are uniquely placed to help Zombie Companies to restructure and return to profitability – a far better outcome than that they continue to limp on indefinitely. And when private equity steps in it is using its expertise and insight to bring the radical changes required for a failing business to survive.”

The report sets out the role of investors in identifying firms that are ripe for restructuring through the seven key aspects of a successful turnaround: crisis stabilisation, new leadership, stakeholder management, strategic focus, critical process improvements, organisational change and financial restructuring.

Henry Jackson concluded:

“If a business can be saved, it is entrepreneurs and turnaround specialists who are best placed to effect the changes required. Private equity firms have the insight and knowledge to do that, and they are prepared to take the risks to get it right. Delivering change in such circumstances is often extremely hard and carries inevitable risk. But genuine improvements in profitability can create long-term sustainable value.”

To arrange an interview with the report's author or for further information, email media@adamsmith.org or phone 02072224995. The report can be read in its entirety here.

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