The Coils of HMRC

To portray the same agony, a modern sculptor would depict Laocoön wrapped in the coils of the tax man.  There is no escape.  HMRC does not do email.  Letters go unanswered for months and one has to wait 45 minutes on the phone before being cut off. The harassed foot soldiers who deal with us are not to blame: their generals creating these labyrinthine coils are.  In a May 2010 speech to the CBI, the Chancellor promised radical tax simplification, saying “The tax system has become hugely complex over the last thirteen years. Since 1997, the tax legislation handbook has more than doubled in length. It is now over 11,000 pages long.”

One can question whether the length of the handbook, or the size of annual Finance Acts, accurately depicts tax complexity but there is no question that both have grown hugely since the 1980s and the Chancellors are mostly to blame.  Tolley’s Annual Tax Guide, at nearly 900 pages, has grown rather than shrunk under this Chancellor’s regime. Up to 1992, Finance Acts averaged below 200 pages.  They then doubled in length.  But rather than exercise any restraint, Osborne’s record is even worse: 668 pages in 2014.  2015 was curtailed for the election but he still produced 352 in March and a further 210 pages in July.

The Office for Tax Simplification was set up in 2010 and is now being made permanent. It has published over 30 reports and made 402 recommendations, starting with abolishing 43 tax reliefs – nice for the Treasury, not so nice for those losing out.  But these are tinkering round the edges.

Rather like the government seeking to engage in more wars with fewer soldiers, the Chancellor has simultaneously cut personnel numbers in HMRC – hence the lousy taxpayer service.

To give, briefly, a worm’s eye view, the forms they sent were completed and returned in early August.  Just before the 31st October cut-off, they were sent back on the grounds of being the wrong forms.  No mention of what the right forms might be.  Several hours of holding my phone next to my ear later, I was informed as to the correct forms.  The file note on that had not been passed on.  

Apparently, if the 31st October deadline was now missed, I would be fined as the original submission “did not count”.  Not to worry: I would win my appeal but I had to be fined first in order to appeal.

The new forms, far more complex than the old, appear to have arisen from HMRC’s new but heavy-handed anti-anti-avoidance rituals.  They have no sense of proportion: my few quid does not need pages and pages of questions.  I can prove my income, where it came from and that one piece of paper would have all the information needed to compute my tax.  The point of the 31st October deadline is that the computation is their job, not mine.  If we were talking large sums, it might another matter.

The same civil service mentality applies money laundering legislation to this village church’s flower fund.  Coils within coils.

Please, George Osborne, give us the radical tax simplification you promised.

Yes, we like this idea from Liam Fox

An interesting idea. For we do indeed know that there're problems with using GDP as the sole guide to how the economy is doing. It doesn't measure distribution for example, counts cleaning up pollution as positive (which it is) but not the original pollution as negative and so on. It also suffers from a grave problem in the way that it measures government activity. It's this which Fox thinks we should address:

We have long been fixated on the concept of GDP growth as the determinant of economic wellbeing, particularly in the political arena. Yet, there is a difference between GDP and wealth creation and it is the latter that ultimately determines our national prosperity. We create wealth when we turn an individual’s idea into a good or a service for someone else to buy. Consider the Keynesian idea of burying £5 notes in bottles in mineshafts and having the private sector dig them up, or Krugman’s proposal to stage a fake alien invasion to boost anti-alien defence spending. Both would boost GDP, but neither would add to worthwhile economic activity. There are better ways to measure whether policies are conducive to wealth creation. If we take total government expenditure out of GDP calculations, then the resulting measure, Gross Private Product (GPP), gives us a much better idea of worthwhile economic activity.

We would most certainly agree that GPP is a useful figure for us to be looking at.

For there's more to it than just some ideas and plans of government not being very sensible, even if they do push the GDP numbers up. We have a basic problem about how to include government in GDP. Which is that we measure GDP at market prices: but there's no market prices for much of what government provides. Thus we have to fall back on simply arguing that the value of what government provides is the amount of money that government spends on that provision. Yes, even we think that a criminal justice system is a good thing to have, adds greatly to the general wealth. Government spending on diversity advisers possibly loss so.

One implication of this is that if we decide to pay civil servants more then the economy grows. Because we are counting the output of the civil servants as being the same as the input we pay them to provide it. So, we do indeed need to change how we view at least some parts of the GDP figures, and looking to GPP seems like a good idea to us.

Stripped, of course, of all that chest beating about it being only the Tories what done it.

Protecting home industry is not a steel

The amount we've heard from politicians and social commentators this week on how unfortunate the UK steel industry job losses are only goes to show how many people are still unapprised of even the basics of economics. Yes it's true, because China can produce and sell steel so much more cheaply than us, it will have a negative effect on our steel industry. But overall that's a good thing - short of wanting buyers to pay inflated prices for UK steel rather than more competitive prices for Chinese steel - which, frankly, only the most narrow Anglo-centric person could desire - it has to be realised that this is just the market's way of signalling that UK steel production is now less efficient than production in other countries, and that the people in the UK steel industry either need to be more competitive or look to do something else. But even if you can't make that argument fly - and goodness only knows why you couldn't - here's something else you should know: artificially protecting UK  industries to stave off foreign competition hurts other UK industries in the process. This was the wisdom of international trade laid down most famously by David Ricardo. Let me illustrate how impeding the process of free international trade actually harms the people the government wants to protect – its own industry (and thus, its own citizens).

Let’s suppose there is a car factory in Newcastle that isn’t doing as well as the executives or the government would like, due to consumers’ preference for cars in Japan. The government introduces a policy that favours car production in Newcastle over car imports from Japan. How on Earth could that not be good for the British economy – Britain’s gain is Japan’s loss, right? Wrong. Quite simply, what you put into the pockets of the car factory in Newcastle you take out of someone else’s pockets elsewhere in Britain (as well as having people probably paying more for their cars). Consider Slough’s boiler factory; what you don’t see is an almost invisible chain of events; the boilers made in Slough are shipped off to Japan and sold to a company that makes its money producing nuclear reactors, the buyers of which are companies who trade in mineral oils, and those companies deal with companies who make cars in Japan and ship them to Britain.

In other words, there is a complex economic process that is going on outside of your peripheral vision, whereby both the car factory in Newcastle and the boiler factory in Slough are both bringing cars into Britain. That is to say, if you protect the car factory in Newcastle from competition you must damage Slough’s boiler factory because somewhere down the line they are the competition.

The Newcastle car illustration is precisely how the argument should be applied to steel in Scunthorpe and Lanarkshire. So the next time you hear a politician announcing how much he or she wants to do to protect British producers in one industry from foreign competition, be aware that he or she is unknowingly proposing an action that hurts other industries in Britain, and amounts to a net loss in economic efficiency.

Liam Fox is on the wrong road to sensible money

Shockingly, I find myself agreeing more with the most recent output from firebrand communist John McDonnell than committed free marketeer Liam Fox. In an FT article, McDonnell clarifies his views on the Bank of England: calling Bank independence "sacrosanct" (in contrast to his earlier utterances); arguing for QE to include purchases not just of gilts but a wider range of private assets; arguing for a higher inflation target to avoid the Zero Lower Bound (ZLB) problem; reaffirming the case for 'people's QE'; and considering nominal GDP targeting.

Let me say that people's QE has been tried, and it failed utterly. This shouldn't be surprising. Markets are better at investing than government bureaucrats, whether by 'investing' we mean 'buying financial instruments' or 'investing in physical and human capital'.

We don't need a higher inflation target to beat the ZLB on nominal interest rates because the central bank has tools other than interest rate manipulation (which I've argued it should get out of entirely).

We don't need to buy a range of assets because portfolio balancing works just fine—again, let the market choose where to put newly-created money, at least until we run out of gilts—then buy foreign currency, not any particular asset.

But I think nominal GDP targeting is a very interesting idea, at least if you target levels, especially market forecasts of levels, and especially if you reduce the discretion the rate-setting monetary policy committee has in reaching it. It is as close as you can get to a neutral monetary policy while you still have a central bank, and mimicks what you'd see with a free banking system.

By contrast I think that Liam Fox's speech to the Institute of Economic Affairs labours under a huge number of misapprehensions and offers few interesting steps forward for monetary policy.

Among Fox's claims that don't add up:

1. That higher inflation leads to lower real pay—false. This is obviously true for a given level of nominal pay, but nominal pay is not fixed any more than any other price is, so if price inflation rises, wage inflation does too. Real wages move towards real productivity—both logically (otherwise firms could poach each others' workers and make easy profits), and in the data.
2. That higher inflation hurts savers or investors—again false. While there may be nominal rigidities in labour markets ("sticky wages") there are few in capital markets. Fund managers and banks are not fooled by nominal values—they move their money around to get real returns. Thus we get the Fisher Equation—extra inflation is simply added to savers' and investors' returns.
3. "Central banks have been the government's lender of first resort"—this is simply not true, central banks buy bonds on the after market at the market rate, not from government directly. What's more, central banks don't hold particular high shares of the stock of government debt right now—there is a lot more out there to hold.
4. More government scrutiny should be applied to central bank actions—does Fox really have faith in committees, the executive, or worse, elected representatives, to do better? The suggestion is essentially to politicise monetary policy.
5. QE only boosts asset prices—false.
6. It's bad if QE (considered alone) led to wider wealth inequality—a strange view to take.
7. That low real interest rates have anything to do with central bank policy—Fox might want to take a look at the trend of risk-free rates over time and across the world. He might also want to look what happens to market rates (i.e. the rates at which 99.9% of capital is lent at) when central banks loosen policy.

What's shocking about all this is that Fox and I share a huge range of views, whereas McDonnell and I agree on almost nothing.

Fox and I are both free marketeers who want a stable macro policy that leaves markets and the price system as free as possible to determine the important micro goings-on in the economy. Fox points to Friedrich Hayek for inspiration, but I think Hayek's views would be closer to mine, as would those of Milton Friedman. This is not to say that others wouldn't share Fox's perspective—Murray Rothbard and Ludwig von Mises come to mind—but I hope he will consider my alternative free market view.

On those new UN development goals

We're having a slightly hard time getting our collective head around the Millennium Development Goals and their successors, the SDGs. For we're seeing people like David Rieff making what to us are the strangest arguments. To go back a bit, the MDGs were the idea that we could make the world a nicer place by getting a bit more development going on. More children vaccinated, shrink the number of people in poverty, spend a bit more in development aid to make that happen, things like that. And off everyone went and things have been pretty good really. Sure, not all of the targets were met, some of them (notably the poverty one) were met early and surpassed. The world is indeed a better place.

And the SPGs are an attempt to take this further.

And yet here's Rieff's argument, and we've seen it elsewhere. The MDGs were not achieved because one of them, the idea that every country should spend 0.7% of GDP on overseas official development aid, was nowhere near met. He's quite happy to agree that the poverty target was met, the vaccination one pretty close and so on. But there's that great gaping flaw in that the spending target wasn't reached.

And yet the true meaning of this story is that if we've reached all of the other goals, or near enough, without the spending, then it's not the spending that is an important goal, is it? And thus it doesn't matter whether that target is met nor whether we have a similar target for the future.

What we've actually proven is the counterparty to Angus Deaton's observations about development aid. He thinks that such aid can delay development but allowing government not to do the few things that government must do. And here we've found that development can happen without that development aid. Thus, perhaps, we can forget about eh development aid and just carry on with what we know works?

You know, Madsen Pirie's insistence that the way that you beat poverty is by buying things made by poor people in poor countries?

A blow to the Nanny State

It's a Daily Telegraph reader's worst nightmare of course – you could be fined if you don't register your nanny – but behind the headline there is a serious issue about the unintended consequences of policy actions.

It's all about the UK government's drive to get us all saving for retirement. A good start, they figured, would be to make employers set up pension schemes, so employees at least had a plan to pay in to. Workplace pensions used to be hugely successful – with the UK boasting more private pension savings than the rest of Europe put together – until Chancellor Gordon Brown killed it with stealth taxes and regulations.

So it seemed like a good idea at the time. Unfortunately, it's based on an outdated concept of 'employment' – a hangover from the mass-production age. People still think of employers as factory owners employing hundreds of people. But today's businesses are smaller, less structured, and less permanent: they are not based on fixed capital, but on mobile talent.

Gone are the days of entering the factory at 16 and retiring from the same place, with a cheap watch, at 65. People shift jobs much more, drift from employment to self-employment to entrepreneurship and back again, and work in different sectors through their lives. For many, their retirement nest egg is not their pension but their home, their investments, their business: forcing them to contribute to an outdated pension concept leaves them less able to invest in these other ways.

And Treasury rule-makers kill any good idea. They are petrified of losing revenue because of the tax breaks on pensions. And they like things neat. So now, even if you are only employing someone part time – and not necessarily as an employee for your business, but as a home help, say, or gardener or indeed nanny – you have to register the fact. And that's true even if the person is part time and you are not paying them enough to oblige you to pay into their pension plan anyway.

Daft, of course: it will make people reluctant to hire others, including part-time home helps and the rest. So less well off people will find it harder to get one of those starter jobs that give them the first step on the jobs ladder.

The point of government is to provide what the voters want, right?

Yes, we know this is from the Mail and that it has to do with property prices. But still:

The row over ‘new’ grammar schools escalated yesterday after experts warned that many families could be priced out of areas where they are built. Estate agents said that the cost of homes near the new satellite school in Sevenoaks, Kent – which was controversially given the go-ahead last week – is expected to jump by ten per cent. A similar effect would be seen in other parts of the country where similar schools are expected to open, including Maidenhead in Berkshire and Aylesbury, Buckinghamshire.

We know very well that houses in the catchment areas of good schools are more expensive than those in the catchment areas of poor ones. It's part of our evidence kit that people desire schools to be good.

Here we are being offered evidence that the creation of a grammar school increases house prices. That is thus, again and as above, evidence that people desire there to be grammar schools.

Which leads to a small musing on that democracy thing. Which is that government is supposed to provide what the people want to have provided by government. That's rather the point of the whole exercise in fact. And thus if we have evidence that people desire grammar schools then government should be providing grammar schools. Because democracy.

We can in fact go further too. A refusal of government to provide the desired grammar schools is in fact a denial of democracy. All of which makes the continued rejection of such schools by the left somewhat problematic: for they are the ones who rail on about the values of democracy, aren't they?

What's really happening in the steel industry

The Guardian worries about what is happening in Redcar and Scunthorpe to the steel industry of Britain:

Politics seems to have absented itself from the old industries. They still employ hundreds of thousands of people, support a highly skilled workforce and contribute millions of pounds in value to Britain’s exports, yet Mr Osborne, who made building the motif of his conference address and put the Northern Powerhouse as its geographical heartland, was speaking of Manchester, innovative science and new technologies. Nor did Mr McDonnell have anything to say about the old industries and their communities that return scores of Labour MPs and employ thousands of trade unionists (although he did say the fate of Redcar workers inspired his U-turn on the fiscal charter). His new team of economic advisers might talk, as the economist Mariana Mazzucato does, of the entrepreneurial state, but it is not the fate of steel workers that inspires their theories.

Steel is a foundation industry for any economy that is based on manufacturing. Closing the plant, supporting and retraining the workforce and cleaning up the site will cost hundreds of millions of pounds. The old industries need a new industrial strategy.

Oddly enough, it was one of us here at the ASI, who explained what is going on with the steel industry. In an article. In the Guardian.

However, no one wants the two blast furnaces there which make up the other part of the plant, as we can now make our ingots of steel out of scrap. It's a standard assumption in the metals world that no one will ever again build a new blast furnace in the rich, industrialised countries. Not only do we not need them, we don't need all the ones we've already got.

So, as I say, that half of the Florange plant is closing because the hippies have won – as they should indeed have done on this one particular point.

Yes, there's high energy costs in the UK as a result of the green obsessions. Yes, Chinese made steel is cheap right now. But the real underlying point is that both Redcar and Scunthorpe are based upon blast furnaces and that's just a level of technology that we don't need very much in this country any more. As a result of everyone going off and doing what we've been urged to do for decades now, work out how to recycle things.

That is, the closing of blast furnaces is evidence of the success of an industrial strategy. Sure, might be a good strategy, might be a bad one, but it is the result of a quite deliberate strategy.

Recapitulation

As the not new saying goes, there's not much new in this world:

This week the firm disclosed "questionable practices" by its management, which had been overhauled last month, and which meant it had to freeze remaining capital.

It said: "the company has used lenders' capital without their permission", leaving a £3.5m deficit between the amount owed to lenders and the capital available to repay them.

The platform, which promised 12pc returns, has currently lent out £23m but said £2.9m of this had not been assigned to legitimate borrowers.

This is about a peer to peer lending firm called Trustbuddy. But there's nothing very new about what has allegedly happened. Absolutely every form of banking that anyone has ever devised has suffered, at one time or another, from the same problem. And that's of course something that we should all remember: absolutely every form of banking will suffer from exactly the same mistakes and scams as every other form of banking.

We watched with rather a lot of amusement as every such scam, mistake and confusion that banking has been prone to since the first goldsmiths started lending out their stock happened at warp speed in Bitcoin over the past few years. And we've no doubt at all that exactly the same will happen in peer to peer lending and any other form of banking that anyone tries.

This isn't to say that peer to peer, or any of the other possible arrangements, are bad ideas. Indeed we're absolutely delighted to see people at least attempting the disintermediation of banking. Civilisation cannot march on to ever greater wealth unless people are willing to try out the available technological space. But some of those being inventive will end up recapitulating past errors and crimes and for us one of the best guides to this brave new world will be a study of the history of how people have used banking to steal from us.

In this field at least, the past is going to be a very good guide to the future.

A few corrections for Brits talking about Democrats and US gun laws

A few quick corrections for Nigel Farage, the Pierce/Maguire double act on Sky News’s paper reviews, and all the other British commentators out there these past few days who have been weighing in on America’s gun laws following the Democratic presidential debate on Tuesday night. If you watched Tuesday night’s debate, you'd probably think the biggest issue for Americans in the 2016 race is gun control. Firearms seemed to be the centerpiece of discussion in the two hour debate hosted by CNN.

But according to Gallup, gun control does not fall into even the top eight issues voters care about going into next November. The most important issue by a landslide is the economy, followed by "the way Government operates in Washington" (someone should e-mail Hillary Clinton to flag up this second one). That may not have been obvious on Tuesday, however, as America’s federal debt, deficit, growth numbers and unemployment figures were not mentioned. Not once.

But back to guns. Brits seem to have a real fascination with gun culture in America. (I don’t blame them – so do I.) But that fascination turns quickly to disbelief - disbelief that there could be any merit to living in a society with guns proliferated everywhere.

This blog isn't trying to convince Brits to take up gun culture in the UK (I already did that here), nor is it meant to explain the better side of gun culture in America (if you're in the market for that, click here). This is simply a red flag, blowing lonely in the wind, to tell you to be wary of the rhetoric I've heard on guns the past few days:

Farage on LBC

“Well, you know, I have to say I think the U.S.A gun laws are insane and… and…and I, you know, I do actually think on this, Obama actually makes quite a lot of sense. I mean the idea that… the idea that you don't have to prove, you know, who you are or have some basic background check before buying a 20-round repeating rifle strikes me as being quite extraordinary.” - Nigel Farage (Transcript credit: LBC)

I'm curious to know what laws - or lack there of - Mr Farage was referring to. Besides two major federal laws on guns - one pertaining to most background checks and one pertaining to manufacturing and importing of guns - almost all gun laws are implemented on a state level.

But Mr Farage was clearly taking issue with the comparably small amount of gun purchases that take place through private sales in some states - but still, he would need to be more specific. In Vermont, for example, you can buy a rifle with no background checks, but this doesn't seem to be a problem whatsoever (more detail below).

We also know that the majority of mass shootings in the States would not have been thwarted with more rigorous background checks, as most guns were obtained legally with background checks or obtained completely illegally through theft.

It seems fair for Farage to flag up problems with gun laws in the US on two simple conditions. 1) He knows what even just a few of the state laws are and b) how those laws actually impact crime stats.

America loses 90 people a day from gun violence

This figure was mentioned this morning by the Pierce/Maguire team, who must have missed that CNN's fact-checker ranked this 'True, but Misleading'.

According to CNN's fact checker, only one-third of the deaths Clinton sited were "violence-related deaths by homicide or legal intervention". (Emphasis mine.)

Of the remaining two-thirds, the majority were suicides - and it's not clear that preventing access to guns will reduce the number of suicides committed.

Bernie Sanders: your anti-gun, American hero

Sorry to break some left-wing hearts, but this claim is probably the most outlandish of them all.

As Senator of Vermont, Sanders has a strong record as a social democrat - except when it comes to gun control. The Law Center to Prevent Gun Violence gave him and his state an 'F' ranking in 2014 for not requiring background checks on private gun purchases, as well as allowing a host of other loose restrictions on firearms.

Of course, Sanders is on the right side of this issue, especially considering his state. Vermont is made up of a relatively high amount of rural gun owners, who value their hunting and protection rights. And despite having almost no gun control measures, Vermont remains one of the safest states in the country, with the least or second least amount of murders per year.

Americans are begging to have their guns taken away.

Americans are pretty sensible. Republicans and Democrats alike support background checks and general gun safety laws. The are also big supporters of gun ownership and the Second Amendment, and support for gun control continues to wain.

In hindsight, both Clinton and Sanders gave a spectacular performance on Tuesday in relation to guns; they talked big on gun control to excite the base, while managing to avoid the promotion of any policy that could be seen as a real imposition on gun owners.

This blog previously read that Bernie Sanders is the Governor of Vermont. This has been changed to Senator.