The Pin Factory Blog

UK Conservative Party Co-Chairman Grant Shapps MP has started "deficit alerts" on his Twitter account whenever a Labour politician appears on television to demand more spending on this or that. Here is a sample:

@grantshapps: "Deficit Alert! Ed Balls calls for £16.5bn more borrowing "this year" on #Murnaghan - same old Labour answer would mean soaring interest rates."

I am glad that politicians should be so focused on the debt and deficit implications of public policy. But we need to make it systematic.

As ASI Fellow Miles Saltiel has pointed out in the past, the UK's official national debt – about £1trn but who's counting? (precious few in Westminster, that's for sure) – is about one-sixth of the government's total liabilities. Most of those commitments are 'below the line', unseen. They include the cost of nuclear decommissioning, of Network Rail's debts, of future pension obligations, plus future commitments on healthcare, education and (more recently) social care and childcare.

The trouble is that politicians propose measures without any review of their cost, other than the cost in the current year. The full financial impact – next year, the year after and the year after that in perpetuity (since government spending programmes are almost never abandoned) – is never expressed.

I propose that whenever any measure is introduced into Parliament, the Office for Budget Responsibility should audit its future financial burden. New health treatments? Fine, but the Bill has to include the price tag of what it will cost in the decades ahead and an analysis of what that will do to the national debt and interest rates. Better social care? School leaving age raised to 18? Green technology subsidies? All fine if we choose them, but we must be told the long-term price.

Of course, knowing the future cost of their measures would not stop politicians from introducing things that look small but have a big future impact on the budget. But it would at least provoke a healthy national debt about what is and is not affordable. 

I can't wait. Tax Freedom Day is just three weeks away. Add up all the taxes paid by people in the UK – income tax, national insurance, VAT, fuel duty, taxes on alcohol and tobacco, council tax and all the rest. Then work out how long it takes us to earn enough to pay for all these taxes. Then you find that in 2013 the average UK citizen will be forced to hand over to the government everything they earn between New Year's Day and 30th May!

That's five months of the year working for the government, and only seven months of the year working for ourselves. Things don't seem to have moved on much from the feudal system, where the oppressed vassals were expected to work three days a week for the benefit of their lord. We have to work about the same for the benefit of the Chancellor.

The Adam Smith Institute has calculated Tax Freedom Day going back to the mid-1960s, and has published the figures annually since 1992. When England won the World Cup back in 1996, Tax Freedom Day fell on 2 May. That is a whole four weeks earlier than it will be this year. Another four weeks of indentured service to the state.

If you think that's bad, it gets worse. Governments spend everything they raise in taxes from us – and then borrow as much more as they can get away with. The trouble is that is it we taxpayers, or our children, who will have to pay back that debt. When you work out the total – what we call Cost of Government Day – we don't start enjoying the fruits ofour own labour until 13 July!

When people joke that they spend as much time working for the tax collector as they do working for themselves, they are spot on. They work slightly less than half their time to pay taxes, but slightly more in order to bail out the government's over-spending as well.

And it is no joke. High tax and government borrowing drains resources from productive uses, chokes off people's entrepreneurial spirit and reduces UK competitiveness. It really is time, Chancellor, to move Tax Freedom Day a lot earlier.

Apple's played a clever game in getting around some of the US corporate tax rules:

Apple Inc. (AAPL) avoided as much as $9.2 billion in taxes by financing part of a $55 billion stock buyback with debt rather than offshore cash that would have been billed by the U.S. government, Moody’s Investment Services estimates.

That's pretty good really. A $17 billion bond offering has saved them $9 billion in tax.

As background, US companies don't pay US corporate income tax on their foreign profits that they leave in foreign. It's complex but this is the basic outcome. Apple's got some $100 billion in such profits parked offshore and the shareholders, who do after all really own this money, would like some of it. The problem is that the US corporate income tax is 35%, those offshore profits have only paid perhaps 3 or 4% in tax so far, so 30 odd % will be demanded by the taxman if they're taken back into the US to be sent out as a dividend. So, instead, Apple borrows money in the US and pays that out as a dividend.

Hurrah!

Which brings us to the usual complaint but, well, companies should pay tax on their profits. So why am I cheering someone avoiding doing that? The answer there being tax incidence. It never is a company that bears the economic burden of a tax: it's some combination of shareholders, customers and or the workers. In general with corporation tax we say it's split between the workers and the shareholders. The workers get lower wages: because taxing returns to capital means less capital is employed in that economy. It's capital plus labour that raises productivity, raised productivity raises wages. The shareholders because, obviously, the dividends, the profits, are the return to capital and these are being taxed.

So given that we're not actually taxing the companies why is it that we send the tax bill to the company? Simply because it is convenient to do so. There is no economic reason at all to tax company profits. It's just that they're a nice big pile of money that we can tax, without having to go around all of the investors and workers and collect their little bits.

Which is why I applaud Apple's plan. It's becoming increasingly clear (as Google, Facebook, Vodafone, Boots and so on are showing) that companies are no longer a convenient place to go collect the tax money. They're just too good at not being the patsies and coughing up the cash. Given that the only reason we do tax companies is convenience, if it's no longer convenient then perhaps we should stop doing it?

Simply abolish corporation tax altogether. Make income taxes on dividends and other returns from investment the same as they are from any other source of income. There, job done.

And hundreds of thousands of accountants and lawyers will have to go do something productive for a living. Shame, eh?

You'll have noted the current screams from the left side of the aisle about the terrors and inequities of "tax competition". They're squealing as a pig does when it sees the swill bucket being taken away. For the obvious reasons that Dan Mitchell points out here:

But we do know that simple economic theory tells us that monopolists are more likely to raise prices than firms in competitive markets. Likewise, governments are more likely to raise tax rates if they think taxpayers don’t have escape options. And we also know that the proponents of higher tax rates, such as the statist bureaucrats at the Paris-based OECD, are also the biggest opponents of tax competition. The OECD even complained in one of its reports that tax competition “may hamper the application of progressive tax rates.”

Progressive taxes aren't all that much of a bugbear for us here at the ASI. Our income tax proposal has a large personal allowance in it for example, meaning that the average tax rate continues to rise as income does, asymptotically aproaching the flat marginal rate. This is indeed a progressive tax system and as we're recommending one of those we're obviously not against a progressive tax system. There is also Willy Sutton's point, that you tax the rich because that's where the money is.

However, Mitchell's making a slightly different point. Imagine that you don't like the taxes that are being imposed upon you. No, go on, just imagine. You as an individual voter don't actually have much influence over this. Which is why that option of exit is so important. The ability to simply say "The hell with you lot" and leave. We should note that there are very definitely some campaigners who insist that that exit route should be closed off. As, largely, it already is for US citizens. They can leave the US, certainly, but find it very difficult indeed to escape the clutches of the IRS.

Mitchell's also making a very good Smithian point there. It is indeed true that once businessmen have gathered together for that conspiracy against the public then it is indeed competition from alternative suppliers that is said public's only method of beating the conspiracy. And so it is with government: we can only preserve a modicum of freedom (and a modest portion of our wallet) if we are indeed free to choose among competing providers of those governmental services.

Which is what much of the conspiracy among governments is all about: seeking to deny us that exit, that protection from their monopoliy.

"What austerity?" asks the super-sound UK economic commentator Liam Halligan in the Telegraph.  GDP is down to be sure (6.2% below its pre-crisis peak), and we members of the public are indeed tightening our belts. Not so government. It's belt-tightening amounts to just 2.7% "cuts" over six years. That's after previous Chancellor/PM Gordon Brown expanded government spending by half, from 35% to 50% of GDP. Some "austerity" from our politicians!

The present government aimed to reduce its annual deficit to zero by 2015. In the wake of disappointing growth figures, that has now been expanded to 2018. Will it even be achieved? Most of the "cuts" were end-loaded, so the real complaints haven't even started yet.

Meanwhile, annual borrowing continues to add to the national debt. Even if that 2018 balanced-budget target is achieved, says Halligan, it still means that the national debt in 2017/18, at around £1.7 trillion, will be three times that in 2008. And the interest payments on that expanded debt all have to be met. It is money we could have used on something more useful, had we not been so profligate in the boom years.

Only virtual money-printing on a record scale has saved the government. How nice it is to have the monopoly on money, so you can just mint it to pay off your debts. But then your money loses its value, and lenders stop bailing you out again because they know they will be conned.

Investment, meanwhile, the one thing that might pull the UK out of its doldrums, has dried up. Private sector investment was just 1.2% of GDP in 2012, down from 5.8% in 2007. Businesses are sitting on cash, or paying off their debts, rather than risking money on an uncertain future.

As for the government, its "cuts" have fallen mostly on capital expenditure, nearly halved from £47bn in 2008/09 to just £27bn in 2014/15. That is the easy way to reduce your overspending – you don't have to fire anyone, or raise taxes too much, you just let the potholes get a bit bigger. But it does not tackle government's bloated spending appetite, nor lay down capital for tomorrow.

And now the IMF are joining the pleas to go steady on "austerity". As I said: "What austerity?"

Today Britain gets a new welfare system. Well, one tiny part of Britain near Manchester, focused around a single job centre. It is the new Universal Credit system, the brainchild of Welfare Secretary Iain Duncan Smith, who has been thinking about such moves for over a decade.

Britain's welfare system is a patchwork quilt of benefits of different kinds, going to different people, with different qualification rules and different tax implications. Benefits have sprung up under successive governments, all determined to show their credentials in terms of helping 'poor families', often with scant regard for what is already there or what the effects might be. The result is this patchwork quilt – which is altogether too cosy in some places but full of holes in others.

The idea of Universal Credit is to shoehorn around 54 different benefits into just one. Proponents reckon that will be a lot easier all round – easier for claimants to understand, easier for the authorities to administer, and cheaper for taxpayers. Critics argue that there will be losers, and that some people will be unable to cope with the new system. Mind you, whenever you move from an irrational hotchpotch of policies to a more rational one, there will be losers. There will be well-deserving winners too, though you won't hear any objections from them, so every such change is greeted with plenty of outrage and little support. Politicians have to get used to that.

And sure, the new system basically gives people cash rather than spoon-feeding them with cash benefits here and practical benefits there, and some people may find that hard to manage. Most won't, though, and we can deal (and should) with the exceptions separately.

Critics also argue that the computer system behind the new benefit is over-complex and unreliable. That's probably a fair point, if previous government IT projects are anything to go by. Remember the NHS IT project? For what it cost not to deliver a joined-up NHS, we could have given all 1.4 million NHS workers nineteen web-enabled laptops, plus a spare for them to forget and leave on the train.

This tiny roll-out of Universal credit reflects something that PM Ted Heath tried to achieve back in the 1970s with Family Income Supplement and which the Nobel economist Milton Friedman proposed in his 1962 Capitalism And Freedom - that is, a negative income tax. Above the line, you pay tax, below the line, you get cash. Simples! And probably very efficient and effective. We will see.

Regular readers will know that I enjoy making fun of certain of the tax campaigners. And some of it is just fun, pointing out their bloopers. But there do come to be times when I get rather angry at the lies and obfuscations they peddle which bamboozle the good people of this country. Take for example this little story:

Supported by Stephen Fry, Margaret Hodge and Charlie Higson, independent booksellers Frances and Keith Smith delivered a petition calling on David Cameron to take "decisive action [to] make Amazon pay its fair share of UK corporation tax" to Downing Street on 24 April. Over 150,000 people have joined the Smiths' campaign, which they launched last December, saying that "we pay our taxes and so should [Amazon] – please take a stand with us and tell Amazon to pay their fair share".

There's an awful lot of effort that's gone into that. Effort which would have been better directed elsewhere. At least if it had been directed at changing nappies the babies would have been happier: here the effort is entirely wasted.

"Times are tough and getting tougher," the Smiths write in their petition. "We face unrelenting pressure from huge online retailers undercutting prices, in particular Amazon, and it's pushing businesses like ours to the brink. But what's even worse is that Amazon, despite making sales of £3.3 BILLION in the UK last year, does not pay any UK corporation tax on the profits from those sales. In my book, that is not a level playing field and leaves independent retailers like us struggling to compete just because we do the right thing."

There are several points that could be made. One being that selling to Brits from Luxembourg is not tax dodging, it's exactly what the EU intends the Single Market should be. A, umm, single market across 27 countries. A second might be that even if we start to whine about UK warehouses, tax is still not due here. Our double taxation treaty with Luxembourg means that such warehouses do not lead to tax being due. And that's from 1968 or so when Wilson ruled: it's also a standard part of all double taxation treaties and for good reason.

(For example, the metals trade uses warehouses in Rotterdam as the point at which a contract is concluded. The cut flowers business warehouses in a small village near Schipol. Should Holland get all the tax from the world's metals and flower businesses? Or should everyone be taxed where they really are, not the warehouses?)

But there's much worse than this. We've had the Margaret Hodges screeching that we're talking about immoral, not illegal. The TJN and other fools similarly scream about how awful it is that people can do business without paying tax. And it is precisely all of this activism that leads these gentle booksellers to spend their year collecting signatures. To absolutely no avail whatsoever.

For in the year they are complaining about, last year, 2012, Amazon did not make a profit. A $39 million loss in fact according to their accounts. It's simply not true that "tax dodging" by Amazon is leading to the crucifixtion of the independent book shop. That's a lie that's been foisted upon people by the obfuscations of the campaigners.

In fact, if we were to use the favoured "unitary taxation" model that the likes of the TJN are now pushing Amazon would be due a refund, or at least a discount off any future taxes. And how the heck will that help bookstores?

Which is where we come to the major problem that angers me. The lies that are told by the campaigners lead to people wasting their time. There just isn't any tax that Amazon owes anyway. Worse, the Prime Minister of the UK doesn't have any ability to make them pay any anyway, that's all been handed over to the EU. Vast effort wasted on a petition that cannot do anything, about tax which doesn't even exist, delivered to the wrong person. Doesn't that make you angry, that the self-appointed should dissimulate so that the citizenry are that befuddled?

George Osborne will derive little comfort from today's deficit figures, which show the public sector net borrowing requirement down only £0.3bn between the 2011/12 and 2012/13 financial years, after accounting for one-off effects. This puts borrowing at £120.6bn, after last year's £121bn, and ahead of 2014/15's projected £120bn. Total debt stands at £1.19 trillion, or 75.4 per cent of GDP, the ONS says up from £1.10 trillion, or 71.8 per cent of GDP a year before.

A tired – but apparently necessary, given public misconceptions, fuelled by confusions over the debt/deficit distinction from politicians of all strips – point, is that this shows just how much the debt is still going up despite the Treasury's Plan A. I wouldn't draw from this that austerity is not happening – some budgets are being cut very quickly, and overall spending is expected to fall a significant 2.7 per cent between 2010/11 and 2017/18. But debt is rising very quickly.

The revelation of the spreadsheet errors in Reinhart & Rogoff's influential paper (which said national debts above 90 per cent of GDP could slow growth) means we may have less reason to fear high debt will slow growth. But we may still have concerns about the redistributive effects of government debt, at least if we've read recently-departed Nobel laureate James Buchanan's work on public finance. Governments borrow to use resources without depriving the taxpayer. But these resources have to come from somewhere (assume full employment or a central bank meeting a nominal target).

Those who buy the gilts, or T-bills, or bunds, pony up the resources now, in return for a better investment opportunity than was available elsewhere. But assuming that households do not act as infinite dynasties, valuing future generations equally to themselves and therefore assuming households do not save now to pay for the inevitable future taxes (i.e. Ricardian Equivalence does not hold) – then future generations will shoulder the burden.

On the one hand, future generations are likely to be much richer than us. This is a trend that has gone on for at least 250 years in the UK, and for shorter periods elsewhere. In some countries it has gone in reverse (spectacularly in Argentina). But on the whole, we can expect future generations to be richer than us. So why shouldn't they shoulder the burden, given their broader shoulders?

This argument is fairly convincing, but it only goes so far. No one would suggest it would be fair to redistribute infinitely toward users of state-provided services and towards bond-buyers, away from future generations. After all, given the secular decline in growth we've seen since the Second World War, they may not be as much more prosperous than us than we are over our parents. As ever in numerical issues, the question may be one of finding the right balance.

The above chart shows the level of the personal income allowance from 1979 to the present day. The blue line is the nominal level. It seems that chancellors have only ever increased or maintained the current level, and with good reason, given the unimaginable political backlash of decreasing it. But the red line is the real level of the personal allowance, when adjusted for inflation. This tells a different story. Although there has been a general trend for it to increase, there have been many occasions when it has actually decreased, harming the poorest, hard-working families the most. In this way, chancellors have been able to deliver real tax increases, purely through waiting for inflation to have its effects.

In order to stop the abuses of this Inflation Tax, the level of the personal allowance should be linked to inflation. That way, chancellors would only ever politically be able to increase or maintain the real personal allowance.

Secondly, the ASI has long advocated that the working poor be taken out of tax altogether. Thus, the green line shows the level of the national minimum wage since it was started in 1998, assuming a 42.7 hour week (the UK average), for 52 weeks. Even the recent acceleration of the real personal allowance therefore falls far short of taking minimum wage workers out of income tax altogether. To take the working poor out of tax, the personal allowance must not only be indexed to inflation, but raised above this level too.

London's pubs may soon be protected from demolition or conversion after Boris Johnson agreed to list them as 'community assets'. What this means is that any pub which is so listed becomes considerably more difficult to sell. A selling pub landlord will be required to:

• notify their local authority;
• wait for the local authority to notify any “interested parties;” and
• “if local groups are interested in buying the asset they (will) have 6 months to prepare a bid to buy it before the asset can be sold,”

…helped along by government-funded “pre-feasibility grants of up to £10,000 and feasibility grants of up to £100,000” drawn from a £30 million social slush fund.

The Daily Mail reports that “every week 25 pubs close,” with the attendant loss of thousands of jobs, “never to reopen, victims of... cheap supermarket booze, heavy duty on beer and the smoking ban.”

Supposedly, listing “helps to see off the property developers who are the main reason pubs go down.” But are they?

Industry publications further point out that taxation on alcohol is “eight times greater” than in France, which combined with increased input costs “of barley, malt, glass, aluminium and energy” squeezes margins such that “the major UK brewers have seen profits plummet by almost 80 per cent.” Changing tastes and squeezed budgets have contributed to beer sales falling to their lowest levels since the Great Depression.

Many pubs are now more valuable for the land on which they sit than the pints they pull, resulting in their being “demolished or converted to other uses such as residential and retail services which radically alter community spaces and change the tone of the high street.”

This is no bad thing. The father of Austrian economics, Carl Menger, wrote that “if, as a result of a change of tastes, the need for tobacco should disappear completely,” there would be no doubt that tobacco would lose its utility entirely and the services of tobacconists, importers, traders, pipe-makers, tobacco-farmers, and “the specialised labour services of so many people who are employed” in the trade would “cease to be goods.”

This should not mean permanent destitution for those involved. A free market can redeploy its resources towards more profitable purposes. “Many tools and machines used in the manufacture of tobacco products,” Menger wrote, can be “placed in causal connection with other human needs even after the disappearance of tobacco.”

As in many other occasions in life, where goes tobacco, so goes beer. Times, and tastes, have changed. [ ] Yesteryear's East End labourers are now hipsters and carb-conscious yuppies, and City types are more likely to hit the gym at lunchtime than ‘roll down the pub’.

The problem is exacerbated by the smoking ban, the high burden of business rates, VAT and excise taxes, and falling household incomes. Additionally, in the midst of a housing crisis, the human need for housing is considerably more pressing than the human need for drinking in connection with the land on which “our” pubs have been built. One should not therefore be surprised that pubs have become increasingly valuable as property, rather than business, assets.

This is not to say that the Austrian approach is entirely fatalistic on the issue. We can, and should, announce “last call” on government intervention in this sector of the economy – freeing pub business from regulation so it becomes more competitive and liberalising the housing market will reduce the cost to society of both entertainment and places to live, while not interfering one whit with the property rights of pub owners. Listing pubs as “community assets,” however, achieves virtually nothing.