The Pin Factory Blog

Am I the only person to be outraged that HM Revenue & Customs have an 'Anti-Avoidance Group'? Or that the Group says it aims to 'make tax law robust against avoidance'? Or that it will 'quickly and expertly prevent and close down avoidance by effective legislation'? And be 'proactive in challenging avoidance'?

Let me explain: tax avoidance is perfectly legal. It means using the tax regime to your own advantage – organising your affairs so that, under the rules, you reduce the amount of tax you have to pay. What is illegal is tax evasion – deliberately misrepresenting your affairs, concealing your taxable income, smuggling, taking payment in cash and not paying VAT on it and so on. So Revenue & Customs make no bones about it: they will challenge, prevent, and make laws against and close down things that are perfectly legal. You might think that only Parliament can 'make laws', but if so, you are out of date. Officials now have so much discretionary power that they are effectively making our tax laws, not the elected politicians.

I would have no – well, less – problem if Revenue & Customs had an 'Anti-Avoidance Advisory Group' whose function was to spot the tax loopholes that people were exploiting and give advice to politicians about how those loopholes could be closed and how the tax law could be made more sensible. But not a bit of it. The present Group's purpose is to prevent people from benefiting, quite legally, by spotting where the law is an ass. Rather than harass such people, we should give them a medal for public service, in pointing out just how stupid our tax laws are.

What generates these loopholes is the absurd complexity of the tax law. Tolley's Guide, the accountants' summary of tax laws, has reached another record this year, at 14,500 pages. Nobody in their right mind, even with a trained accountant's experience, can know what is legal and what is not. For every person or company who actively exploits the loopholes, there are another nine who don't understand it and are simply petrified of getting it wrong and being prosecuted. HMRC should be doing something to help those nine, not harass the one – because in simplifying the law, making tax intelligible, and simplifying things such that it is obvious what everyone should pay and there are no loopholes to exploit, they would actually be getting to grips with the one as well.

But no, it's a constant, downward spiral. Tax rates are too high, so lobbyists demand exemptions and breaks here and there. With those folk now paying less tax, the rate has to rise for everyone else. So the lobbying spreads further, and the rules and exemptions become even more complicated. Then HMRC sees that it is losing money because people are taking advantage of the rules, and dream up all kinds of extra complications to stop it. Which increases the costs of taxpayers, who lobby for more reliefs and exemptions…which – well, you get the idea. It is a downward spiral of complexity.

It's time to make tax simple and certain. And to ensure that our tax officials are public servants, not public inquisitors.

Most in Britain dislike American healthcare. And rightly so, since the US insurance system is a cartel protected by government legislation. However, that shouldn’t make us want to defend Britain’s Soviet-style healthcare either. Both systems are bad.

You can check out the OECD statistics here. Britain's relatively poor cancer survival rates are of particular concern. The UK ranks 12th (and well below the OECD average) for bowel and breast cancer survival, despite a tripling the NHS budget for these services over 12 years. The ASI produced a good report on this earlier this year.

The problem isn’t finance (per-capita NHS spending is considerably above the OECD average), but the politically charged nature of the NHS, and therefore the inability to remove planners and reform provision. Figures for 2007-2011 show that the NHS spent more on “media professionals” (i.e. spin-doctors) than on cancer specialists. Yet pointing this out – as Daniel Hannan did – puts you beyond the pale of dialogue. The NHS’ failures on cancer included a shortage of oncologists, a lack of MRI scanners and an inability to provide cancer drugs. The basic functions of business (recruitment, procurement and provision) are poorly performed by the state.

This also explains the postcode lottery, where some hospitals (apparently) can provide Kremlin clinic standards, whilst many other hospitals resemble MRSA infested cesspits of pebble-dashed, post-war brutalist architecture. The NHS’s futuristic IT project is a categorical failure, having wasted more than £2.7 billion of taxpayers’ money. Moreover, the NHS’s rebuilding projects (using PFI money) may become obsolete through overcapacity, as recently revealed.

From 1999 to 2004, the government doubled GPs' pay . The Sunday Times reported that after a three-year contract (2004 - 2007) increasing pay by 25%, GPs worked 15% less and 33% worked part-time.

These oft’ repeated arguments don’t include the massive oversupplies of Tamiflu (based on public hysteria rather than medical evidence), or the inability to clean hospitals (as shown by MRSA outbreaks), or declining standards in nursing and elderly care, or even the extent to which unnecessary procedures are funded by the taxpayer...

It’s pretty clear that the NHS is failing. It’s funded by a damaging taxes on work and operated according to centrally determined targets. There’s no reason why the UK can’t have privately run hospitals funded by a truly competitive insurance market. It would almost certainly deliver a more efficient and comprehensive health system, and it needn’t challenge the universal access that so many people value. It's the ends that matter, not the means.

Most in Britain dislike American healthcare. And rightly so, since the US insurance system is a cartel protected by government legislation. However, that shouldn’t make us want to defend Britain’s Soviet-style healthcare either. Both systems are bad.

You can check out the OECD statistics here. Britain's relatively poor cancer survival rates are of particular concern. The UK ranks 12th (and well below the OECD average) for bowel and breast cancer survival, despite a tripling the NHS budget for these services over 12 years. The ASI produced a good report on this earlier this year.

The problem isn’t finance (per-capita NHS spending is considerably above the OECD average), but the politically charged nature of the NHS, and therefore the inability to remove planners and reform provision. Figures for 2007-2011 show that the NHS spent more on “media professionals” (i.e. spin-doctors) than on cancer specialists. Yet pointing this out – as Daniel Hannan did – puts you beyond the pale of dialogue. The NHS’ failures on cancer included a shortage of oncologists, a lack of MRI scanners and an inability to provide cancer drugs. The basic functions of business (recruitment, procurement and provision) are poorly performed by the state.

This also explains the postcode lottery, where some hospitals (apparently) can provide Kremlin clinic standards, whilst many other hospitals resemble MRSA infested cesspits of pebble-dashed, post-war brutalist architecture. The NHS’s futuristic IT project is a categorical failure, having wasted more than £2.7 billion of taxpayers’ money. Moreover, the NHS’s rebuilding projects (using PFI money) may become obsolete through overcapacity, as recently revealed.

From 1999 to 2004, the government doubled GPs' pay . The Sunday Times reported that after a three-year contract (2004 - 2007) increasing pay by 25%, GPs worked 15% less and 33% worked part-time.

These oft’ repeated arguments don’t include the massive oversupplies of Tamiflu (based on public hysteria rather than medical evidence), or the inability to clean hospitals (as shown by MRSA outbreaks), or declining standards in nursing and elderly care, or even the extent to which unnecessary procedures are funded by the taxpayer...

It’s pretty clear that the NHS is failing. It’s funded by a damaging taxes on work and operated according to centrally determined targets. There’s no reason why the UK can’t have privately run hospitals funded by a truly competitive insurance market. It would almost certainly deliver a more efficient and comprehensive health system, and it needn’t challenge the universal access that so many people value. It's the ends that matter, not the means.

There has been much speculation recently as to whether the interest rate could become negative if the economic climate continues to worsen. Expectations of a deflationary gap in the near future have deterred an interest rate rise to quell current inflation. The aim of negative interest rates is to increase liquidity in the market creating higher demand for goods, artificially compensating for the decline in consumption. However there are questions as to whether a negative interest rate would actually have an impact on consumption and create the level of demand desired.

When someone borrows money from a bank their debt is bundled up with other borrower’s debt and packaged as a credit derivative. This product is then sold to other institutions who receive the payments the borrowers make on the debt. The risk is now held by the institution that purchased the debt enabling a lower rate of interest than the original bank alone could offer the potential borrower. When the credit crunch started in 2007/2008 packaged debt products became less desirable to purchase due to the increased risk of default created by the subprime market. As a result of the lower demand for credit products banks had to hold onto more of the debt they issued themselves, meaning the interest rate rose to compensate for the higher risk they carried. If the interest rate did not rise then less debt was offered and lending declined.

The interest rate in this circumstance changed from being led by a macroeconomic target to stimulate the economy, to being led by the risk element of the lending mechanism fuelled by the uncertainty of repayment. Even if the interest rate set by the Bank of England reduced and more funds became available to lend the return required by the banks to compensate for defaults increased. The demand for borrowing and risk of inability to make repayments in combination with the lack of demand for packaged credit products pushed up interest rates for borrowers. Even if the Bank of England base rate has reduced the actual rate of borrowing has increased in many cases.

In addition to risk element of lending and the effect on the interest rate, the actual link to the base rate is not present in all lending products. Only about half of the loans in the UK are linked to the base rate. Tracker and variable rate products follow the base rate and CAT standard mortgages (Charges, Access and Terms) have to have an interest rate within two percent of the base rate. However other banking products can have an interest rate at any level the bank is prepared to offer. Even if the borrowers with outstanding debt, which are linked to the base rate, receive a reduction in repayment costs due to an interest rate cut it does not guarantee they will spend it and increase consumption. In fact the majority of borrowers are taking advantage of the low interest rate to pay debt down.

The interest rate mechanism leading to changes in consumption no longer works due to the high levels of debt that already exist. The reduction in interest is merely providing more liquidity and not taking into consideration the problem is one of insolvency. The situation questions not only whether negative interest rates will be ineffective, but whether the interest rate mechanism as an aggregate demand control is capable of working at all anymore.

There has been much speculation recently as to whether the interest rate could become negative if the economic climate continues to worsen. Expectations of a deflationary gap in the near future have deterred an interest rate rise to quell current inflation. The aim of negative interest rates is to increase liquidity in the market creating higher demand for goods, artificially compensating for the decline in consumption. However there are questions as to whether a negative interest rate would actually have an impact on consumption and create the level of demand desired.

When someone borrows money from a bank their debt is bundled up with other borrower’s debt and packaged as a credit derivative. This product is then sold to other institutions who receive the payments the borrowers make on the debt. The risk is now held by the institution that purchased the debt enabling a lower rate of interest than the original bank alone could offer the potential borrower. When the credit crunch started in 2007/2008 packaged debt products became less desirable to purchase due to the increased risk of default created by the subprime market. As a result of the lower demand for credit products banks had to hold onto more of the debt they issued themselves, meaning the interest rate rose to compensate for the higher risk they carried. If the interest rate did not rise then less debt was offered and lending declined.

The interest rate in this circumstance changed from being led by a macroeconomic target to stimulate the economy, to being led by the risk element of the lending mechanism fuelled by the uncertainty of repayment. Even if the interest rate set by the Bank of England reduced and more funds became available to lend the return required by the banks to compensate for defaults increased. The demand for borrowing and risk of inability to make repayments in combination with the lack of demand for packaged credit products pushed up interest rates for borrowers. Even if the Bank of England base rate has reduced the actual rate of borrowing has increased in many cases.

In addition to risk element of lending and the effect on the interest rate, the actual link to the base rate is not present in all lending products. Only about half of the loans in the UK are linked to the base rate. Tracker and variable rate products follow the base rate and CAT standard mortgages (Charges, Access and Terms) have to have an interest rate within two percent of the base rate. However other banking products can have an interest rate at any level the bank is prepared to offer. Even if the borrowers with outstanding debt, which are linked to the base rate, receive a reduction in repayment costs due to an interest rate cut it does not guarantee they will spend it and increase consumption. In fact the majority of borrowers are taking advantage of the low interest rate to pay debt down.

The interest rate mechanism leading to changes in consumption no longer works due to the high levels of debt that already exist. The reduction in interest is merely providing more liquidity and not taking into consideration the problem is one of insolvency. The situation questions not only whether negative interest rates will be ineffective, but whether the interest rate mechanism as an aggregate demand control is capable of working at all anymore.

After an exceptionally high number of entries this year, I'm pleased to announce the winners of the Young Writer on Liberty Award, 2011:

First: Henry Hill

Second: Adam Memon

Third: Karishma Puri

The standard of entries was extremely high and I'd like to thank everybody who entered on behalf of the Adam Smith Institute. The amount of clear and thoughtful writing in defence of individual liberty made even the most pessimistic of us wonder if the world might not be completely doomed after all. 

Even if you were unlucky this time, don't be discouraged! Be sure to re-enter next year, and do come along to one of our excellent student events in the meantime. We'll publish a selection of the winning entries on the blog over the next few days.

Back in 2001, over 72% of Britons owned their own home. In the subsequent decade, this figure has fallen back to 67% and, by 2021, is expected by the National Housing Federation (NHF) to decline further to below 64%. The NHF also expects that, by next year, more Londoners will be renting homes rather than actually owning them. Does this trend matter – and why is it taking place?

Part of the explanation for the latter lies in the increased level of renting, due mainly to financial reasons but also due to more enlightened rental legislation. However, it is the far lower level of new house-build that is of major importance to the housing market. Compared with the previous Labour government’s ambitious target of 250,000 new houses per year, just 105,000 new houses were built in England during the last financial year; this was the lowest figure since the 1920s when ‘the land fit for heroes’ pledge proved to be illusory.

Britain’s leading house-builders are still struggling, most noticeably the highly indebted Barratt Developments and Wimpey. But for them and others, including market leader Persimmon, it is the challenge facing potential buyers to secure mortgages that is pivotal. Having lived though the era of high Loan-to-Value mortgages – epitomised by Northern Rock’s 125% much-maligned Together promotion – banks are understandably implementing far more cautious lending policies especially as property prices – outside London - are not expected to rise appreciably.

In all probability, it will take many years for the property market to recover fully although the NHF’s figures suggest a long-term decline in property ownership despite the popularity of the 1980s ‘right-to-buy policy’. Given the undoubted freedom that property ownership - within sensible financial limits - confers, this would be a retrograde development in furthering the concept of the property owning democracy – a policy that MPs from across the political spectrum have endorsed for decades.

Back in 2001, over 72% of Britons owned their own home. In the subsequent decade, this figure has fallen back to 67% and, by 2021, is expected by the National Housing Federation (NHF) to decline further to below 64%. The NHF also expects that, by next year, more Londoners will be renting homes rather than actually owning them. Does this trend matter – and why is it taking place?

Part of the explanation for the latter lies in the increased level of renting, due mainly to financial reasons but also due to more enlightened rental legislation. However, it is the far lower level of new house-build that is of major importance to the housing market. Compared with the previous Labour government’s ambitious target of 250,000 new houses per year, just 105,000 new houses were built in England during the last financial year; this was the lowest figure since the 1920s when ‘the land fit for heroes’ pledge proved to be illusory.

Britain’s leading house-builders are still struggling, most noticeably the highly indebted Barratt Developments and Wimpey. But for them and others, including market leader Persimmon, it is the challenge facing potential buyers to secure mortgages that is pivotal. Having lived though the era of high Loan-to-Value mortgages – epitomised by Northern Rock’s 125% much-maligned Together promotion – banks are understandably implementing far more cautious lending policies especially as property prices – outside London - are not expected to rise appreciably.

In all probability, it will take many years for the property market to recover fully although the NHF’s figures suggest a long-term decline in property ownership despite the popularity of the 1980s ‘right-to-buy policy’. Given the undoubted freedom that property ownership - within sensible financial limits - confers, this would be a retrograde development in furthering the concept of the property owning democracy – a policy that MPs from across the political spectrum have endorsed for decades.

The number of cases in which the US Patriot Act's "sneak-and-peek" warrants have been used, arranged by category. How many people are willing to bet that the British police have been any better? (Patriot Act: The kitchen-sink approach to national security)

Interesting piece, as always, by John Stepek in Money Morning's newsletter yesterday. Making the point that there's far too much debt around and governments from Greece to America can't repay it on the terms it was lent, he looks at the options. Cuts and backbreaking toil to repay it all; defaulting; or repaying your debts in devalued currency – that is, inflation.

Well, no government is up for prudence and backbreaking toil, of course. Their preference is to dream up some new eurobond or quantitative easing way of inflating their way out of trouble. Stepek's view:

I favour default, I must say. That way you punish lenders who failed to do their jobs properly, and clear a space for more competent ones. You also rapidly and cleanly reduce asset prices to levels where those with capital to deploy are keen to jump in...

But it doesn’t matter what I think. So far inflation is the favoured option for those governments that have the choice. The worry for Europe is that there’s a chance it will be forced into the ‘default’ option before politicians can agree on a way to go for the ‘inflation’ option instead.

That of course is what always happens when you don't get to grips with your debt. Other people do it for you.