Is tax avoidance the new fashion trend?

modelRecently, there’s been criticism of companies such as Topshop and Vodafone for the practice of tax avoidance – minimising tax liability within the law; in other words, companies being based abroad but continuing their business in the country. An analogy can be made with companies shopping around to find the best deal or place to set up their operations.

Arguments have been put forward by groups such as UK Uncut, suggesting that tax avoidance is unfair for those facing public sector cuts in Britain. It is felt that, in this period of austerity, the rich and not the poor should be bearing the brunt of the deficit reduction programme – most potently indicated by the protest sit-in at Fortnum and Mason. But is clamping down on tax avoidance the only coice we have? No.

It seems that tax avoidance is a symptom of the problem of high corporation tax rates – 26% in the UK compared to Ireland’s 12.5% rate. This has lead to lower levels of unemployment and higher rates of GDP growth in Ireland thanks to many new businesses establishing themselves there. The Irish economy is now exporting strongly and this will help them to recover quickly from the effects of the recent recession.

The libertarian response to this issue should be helping companies find the best bargain – that is reducing the corporation tax rate which is certain to make Britain a more competitive place to do business. Furthermore, this response is more likely to help those less well off as real growth and employment benefits all, rather than resorting to ‘penny pinching’ the pockets of a few businessmen.

The solution is not to clamp down on tax avoidance but to make Britain a more competitive place to trade. Reducing the rate of corporation tax means that companies won’t have to go to drastic measures of basing their businesses abroad. It’s a simple method that offers prosperity for all and will continue to drive the best of British business.

Karishma Puri won third place in the 2011 Young Writer on Liberty Awards.


Dealing with trolls

On Tuesday a man called Sean Duffy was jailed for 18 weeks for “internet trolling”. He was convicted of an offence under Section 1 of the Malicious Communications Act, which reads as follows:

(1) Any person who sends to another person—

(a) a letter, electronic communication or article of any description which conveys—

(i) a message which is indecent or grossly offensive;

(ii) a threat; or

(iii) information which is false and known or believed to be false by the sender; or

(b) any article or electronic communication which is, in whole or part, of an indecent or grossly offensive nature,

is guilty of an offence if his purpose, or one of his purposes, in sending it is that it should, so far as falling within paragraph (a) or (b) above, cause distress or anxiety to the recipient or to any other person to whom he intends that it or its contents or nature should be communicated.

Now, there is no doubt that Sean Duffy’s posts – so far as I’ve been able to ascertain their contents – were despicably vile. I do not wish to defend him or his comments. Indeed – subject to the slight caveat that he may suffer from Asperger's syndrome – he deserves all the condemnation and moral opprobrium that may be heaped on him.

But am I the only one who is rather disturbed by the breadth of this legislation? Surely behaviour like Duffy’s is better dealt with privately – offending parties ought to be socially stigmatized and voluntarily blacklisted by website owners and Internet Service Providers. Just because something is offensive, even morally repugnant, does not mean that it should be a crime.

The way I see it, there is no need to balance the allegedly ‘competing claims’ of freedom of speech and public protection. It is merely a question of letting people assert their property rights to punish or censure unacceptable behaviour. Indeed, I’d go further – it seems to me a sad sign of societal weakness that we are depending on the state to be our arbiter of decency.

Still, this story does raise another interesting issue. Why is it that people on the internet are, quite often, so unspeakably rude? Is it the sense of anonymity? Or is it just that the internet provides an outlet for certain maladjusted and socially inept individuals, who we would not usually encounter in our day-to-day lives? I honestly don’t know.

Whatever the reason, I just wish people would remember that good manners cost nothing, but count for a lot. Even on the internet.


The so-called War on Poverty

An interesting post from the Cato Institute’s Dan Mitchell on the latest poverty stats in the US. Apparently poverty was declining in the US until LBJ launched his “war on poverty” which dramatically increased the scope and scale of the American welfare state.

Mitchell adds, “the so-called War on Poverty has undermined economic progress by trapping people in lives of dependency.” Note that the US uses an absolute rather than relative measure of poverty, so these statistics really are something to be concerned about.


Kevin Dowd: The Decapitalization of the West

A harsh dose of reality from the indispensible Kevin Dowd. The lecture above was given on Monday night. Dowd weaves together the strands of economic breakdown created by central banks, bailouts and high taxes into a tapestry of ruin. It's gripping and horrible, and essential viewing to anybody who thinks the worst is behind us. Dowd's message: you ain't seen nothing yet.

Kevin Dowd's most recent book is The Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System.


Inflation's impact on housing


UK inflation rose last month, and seems to be heading up to 5% on the official CPI measure, more on the traditional RPI. And it's amazing how a few years of inflation can completely confuse people about market signals. Most people, for example, might imagine that house prices have fallen a tiny bit. In fact – as surveyor James Wyatt of estate agents John D Wood told a meeting of the Economic Research Council this week – house prices have fallen 22% in real terms over the last three years. Indeed they have fallen more in many parts of the country.

That is despite a real interest rate that is around -4.5%. But then part of the trouble is that, at these negative rates, the supply of people willing to lend money has dried up. Banks, for their part, see the money supply, M4, also going negative in a big way. They know that this is going to make the housing market even gloomier, and houses are people's main asset. As prices continue to fall, people are going to struggle to repay the loans they already have. No wonder the banks are hoarding cash instead of lending it: and the proposals for tougher capital requirements, both from Basel III and from the recent Vickers report, will simply increase that credit crunch.

And this falling market has a very interesting social effect, says Wyatt. The biggest losers are home owners round retirement age who want to downsize, since the value of larger homes has fallen particularly fast. It is on track to be the largest distribution of wealth between social groups in perhaps fifty years. Maybe it might make up for all those years of the retiring generation expanding its own benefits at the expense of future generations, thanks to the mechanism of public borrowing.

Central London, as usual, is defying the downward trend. That is because a crashing pound has made it much cheaper for foreigners to come in and snap up prime property in prime locations, and planning laws restrict new developments. The trouble is they can afford to hang on to their luxury London bolt-holes for decades, which reduces the supply of such property, and keeps the price high. And stamp duty, which makes it more expensive to move, is prompting people to extend their homes – upwards, outwards and downwards – instead of moving. And that means the rest of the market is pretty thin too. What a tangled web we weave when we mess around with money, interest rates and taxes.


The tobacco-stained torch


During debates on the smoking ban, freedom is often invoked by both sides. On the one hand, your smoker or smoking-supporter argues that surely they should have the freedom to smoke wherever they like. On the other, supporters of the ban counter that it is unfair to subject non-smokers to tobacco smoke, and all its inherent risks, against their will just because they wish to be in a particular public area. Why should the right to smoke trump the right to be free of smoke?

That argument is probably one for the philosophers, and I’m not much interested in it because a policy solution to the problem does not require it to be answered. Libertarianism offers a perfectly just and amicable solution to the smoking dispute without the need for any intervention by the state at all. As with so many things, the solution is property.

The decision about whether or not smoking should be permitted or prohibited in a particular bar, restaurant or place of work should be entirely at the discretion of the owner of that property. This is a fundamentally just solution. After all, why should a smoke-averse individual who wishes to be in a particular bar trump the wishes of the owner of that premise, who smokes and like smokers? Similarly, what smoker could assert the right to smoke in a premise where the owner has forbidden it? Not only is this system just, but it also allows the market to find the balance between smoking and non-smoking venues. After all, smokers and non-smokers will both constitute consumer markets, generating demand for facilities in which they can either smoke or avoid smoke. The invisible hand will provide smoking, non-smoking and mixed facilities in the proportion to which they are required by the habits of the population. Property rights are upheld, and each side gets what it wants.

The only potential contested ground lies in the remaining grey area, ‘public spaces’. There are two kinds. The first is government property, which does not pose a serious problem as the government can exercise its right as property holder to ban or permit smoking the same as any other. The second, and more problematic, kind is public areas that are ‘held in common’ by or for the people. Should the government be treated as property holder in this instance, or should it not own these areas at all?

Henry Hill is the winner of the 2011 Young Writer on Liberty Award. He blogs at


How the developing world can reform

From the bustling markets of Marrakesh to the telecommunications experts of Nairobi, the dynamism and entrepreneurial flair of businessman and traders in the developing world is clear. However, too often their growth is smothered by a toxic mix of corruption, red tape and protectionism. The recent debate over the ring fencing of the international development budget is distracting from the supply-side reforms that we should be encouraging. Reforms such as trade liberalisation, deregulation and privatisation have been a proven success but they are ignored whilst aid money is too often used to fatten already bloated bureaucracies in developing countries.

Taking an axe to the EU’s Common Agricultural Policy, eliminating the hugely wasteful and burdensome system of subsidies and enabling free and therefore fair trade would be a major step in helping thousands of businesses in the developing world. Assuming however, that at least in the medium term, the eurocrats and producer interests conspire to prevent such reform, there are still policies that those of us who support free trade and free markets can support to help lift millions of people out of poverty and indignity.

Firstly, serious questions should be asked as to why for example in the Republic of Congo it takes on average 235 days to legitimately set up a business when in Rwanda it takes only 3 days. The UK could make non-emergency government transfers conditional on the recipient governments reducing unnecessary and burdensome regulations on setting up businesses. Essentially, pay them to cut red tape.

Secondly, efforts should be made to encourage developing countries to learn from India’s remarkable success in trade liberalisation. From 1991, when it underwent a period of tariff reduction and FDI liberalisation, research shows that in liberalised industries there was aggregate productivity growth of 16% with consumers benefiting through lower wholesale output prices. The UK government could use its aid budget to partially offset short term falls in revenue resulting from tariff reduction.

Thirdly, the UK could provide expertise on the privatisation of industries such as telecommunications and banking, a policy which has had considerable success in numerous developing countries already. Helping to free such markets from the dead hand of the state would go a long way to increasing the underlying trend rate of economic growth. Such steps would help realise the potential of the developing world, greatly improving living standards over the long term.

Adam Memon won second place in the 2011 Young Writer on Liberty Awards.


Vickers report fails the competition test

The Independent Banking Commission has striven mightily for two years and finally produced a mouse, and a malignant one at that. The report boils down to two recommendations: ring-fencing the retail subsidiaries and increasing equity requirements along the lines of Basel III but to a greater extent.

The final report makes a whole range of assertions, notably about competition, which are not supported by logic or evidence. For example: “The recommendations in this report will be positive for UK competitiveness overall by strengthening financial stability.” (p.15). One could strengthen financial stability by raising the equity requirement from 7.5% to 100% but it would obviously be disastrous for competitiveness.

Reading the report, it becomes clear that the Commission has no real idea of the competitive consequences of their recommendations, if implemented. In the main report we are told that the issue will be justified in detail in Annex 3 but when we get to these 46 pages we find that competition is not addressed at all:

“The Commission’s recommendations to improve UK financial stability are far-reaching, and would have important effects throughout the economy. The aim of this annex, which provides more detailed analysis to support aspects of Chapters 2 to 5, is to set out how the recommendations would improve financial stability and the nature of the associated costs. It covers the following aspects in turn:

• the economic importance of banks1 and the costs of banking crises;

• an examination of the effects of the proposals on:

• the diversification of banks’ assets;

• the liquidity and funding of banks;

• the interconnectedness of the banking system; and

• the ability of banks to bear losses;

• how, and the extent to which, banks currently benefit from an implicit government guarantee;

• the nature and broad magnitude of costs which could arise (i) for banks affected by the proposals, and (ii) for the economy as a whole; and

• a summary of reasons to expect that the proposals would promote UK financial stability both effectively and efficiently compared with alternative approaches.” (p.269)

In short the Commission is relying on a non sequitur, which is a fatal flaw throughout the report.

Turning to the first of the recommendations, ring-fencing is a pious myth. The News of the World was ring-fenced within the Murdoch empire. That does not protect the group, nor its shareholders, from disaster within the subsidiary or at the top levels of the group. As RBS showed, the big disasters began with the group CEO, unsupervised as he was by outside directors, shareholders, Bank of England or the Financial Services Authority. If the business of either ring-fenced sibling goes bad, the parent will have to pick up the bill and the whole enterprise affected. The idea that ring-fencing will allow the UK government to withdraw its implicit guarantee for banks too big to fail is part of the same myth. What a government now declares and what it has to do when the time comes are two different matters.

How will ring-fencing apply to foreign owned banks trading in the UK? The Commission reckons that the UK retail banking market is, for all practical purposes, a matter for UK banks only. That may be the case now but if UK banks are penalised relative to foreign-owned banks (what the Commission calls the “super equivalence” objection) that may not remain the case. Other EEA banks are free to trade in the High Street and that includes Iceland. It would be difficult to refuse banking licences to reputable banks owned outside the EEA as that would inspire retaliatory action by their governments and London would be the net loser.

Turning to the Commission’s second recommendation, Basel III has the powerful advantage of being a global set of rules: the proverbial level playing field. The Commission happens to this Basel III does not go far enough, e.g.:

“2.20 As to the cost of equity capital and effects on growth, the Commission’s conclusion from various cost-benefit analyses is that there is a powerful case for the global minimum equity requirement being a good deal higher than 10% of RWAs, and for it to be accompanied by a minimum leverage ratio well above 3%. Much of the higher cost of equity to private parties relates to tax effects, which is a private, not social, cost and in principle could be offset by tax reform. In sum, the Commission believes that the Basel baseline is by some margin too low.” (p.28)

That is a valid point of view that could and should be tested in the court of world opinion. The Basel proponents will say that it already has been. What is not sensible is to flounce off and say that the UK will hobble its own players in the global market. The Commission claims, but see above, that the higher standards will actually attract foreign business and be positive for UK banks. Quite apart from their lack of logic or evidence for this assertion, it is torpedoed by the nature of competition. The proposal is to enforce these higher standards against the wishes of the banks themselves. If the banks thought the higher standards would indeed be good for their businesses, they could adopt them whenever they pleased. Clearly the banks do not agree with them and outsiders should reckon that banks know their business better than this Commission does.

In short, this report has substance in inverse proportion to its length (363 pages). Fortunately it is not due to be implemented until 2019 and that should give plenty of time to bury it.


A free market in labour: libertarians, employment and the unions

Trade unions are an interesting problem for libertarians. Although they are essentially anti-liberal forces, most attacks on trade unions historically stem from the authoritarian Right. Too often the conflict between unions and business leads to many potential subscribers to libertarianism supporting decidedly illiberal business practises, due to a misconception that one can either be pro-business or pro-union.

For a libertarian, employment must be approached in a manner that is independent of the interests and prejudices of either side. Employment legislation inspired by libertarian principles would at once counter the serious business abuses that justify trade unions whilst removing the ability of unions to act as monopolies.

A libertarian believes that human beings should be free to undertake exchanges with each other free from force, fraud or coercion. Trade unions found their origins in defending workers against abuse by business, abuse often supported by the state. A libertarian state that functioned properly would not collude with anti-liberal business practises and would protect people from forceful, fraudulent or coercive practises that might necessitate trades union membership.

But libertarian employment law would undermine unions too. Like most things, labour is a commodity. A job is a contract between an employer and an employee in which the latter’s labour is traded at a given rate for remuneration in wages and perhaps other perks. Despite this trades unions are not seen as what they are in business terms: cartels working to inflate prices (wage costs) by restricting the labour market. While the horrors of the closed shop and the flying picket have (for the most part, student politics aside) disappeared, the fundamental leverage behind a strike is the idea that a union can exercise a labour monopoly and use the threat of withdrawal to coerce employers.

No libertarian system would ban strikes or unions. People are free to associate with each other as they wish and no libertarian would argue that a worker does not have the right to withdraw their labour. What is critical is that a libertarian recognises the right of an employer to replace that labour. In the same way in which a libertarian government would fight monopolist practises on the business side of industry, so it should strive to create a free market in labour. Not only would this be morally right in accordance with libertarian principles, but it would allow the market to adjust British wages back to internationally competitive levels.

Henry Hill is the winner of the 2011 Young Writer on Liberty Award.


Has the Vickers commission delivered?

Should the UK really want to split the investment and retail arms of the banks? I'm really not sure.

The first pro argument is that, when people put their hard-earned cash in the bank for safe keeping, they tend to think that the bank keeps it safe in their vaults. Or at the very most, lends a bit of it to reputable local businesses. The reality is that the bank can take your money and do whatever they like with it – gambling it on the international markets if they want. Sure, when you turn up to draw money out again, they have to give you some – but they can do that from all the other people's deposits that are sloshing through over its counters. Unless, Northern Rock-style, people figure they've taken too many risks, and everyone wants their money back. So retail customers are being exploited to feed the bank's risk-taking.

Second, after the stock market crisis of 1929, America separated the retail and investment banks through the Glass-Steagall Act. From there on, we enjoyed almost 70 years of relatively stable financial markets. But after the 'big bang' deregulations in London and pressure on politicians in the US, Glass-Steagall was repealed in 1999. And look where we are now.

Third, if we are going to insulate retail customers from risky investment banking, the split has to be complete. If these functions remain part of the same institution, with just regulatory restraints in operation, the bank will undoubtedly find a way round these so-called Chinese Walls.

Fourth, many of our hybrid investment-and-retail banks are too big to be allowed to fail. If risky investment banks blow up, retail customers will lose their money and will have to be bailed out by the taxpayer. That is not a risk that taxpayers want to bear.

But there are many arguments on the other side, too.

First, the mechanics of this split are expensive. Systems will have to be re-jigged, branding changed and regulators and bank compliance officers hired. Even the Independent Banking Commission, which is proposing the reforms, says that will cost £10bn. Such is the way of these things that it will probably cost a lot more.

Second, it will put London at a disadvantage compared to other financial centres. Not only is there the extra structural and regulatory cost. In addition, UK banks' investment arms will no longer have access to all those funds that come through the retail sector; and the retail banks will no longer be able to give their savers the better deals that their lucrative investment activities once made possible.

Third, and more tellingly, the policy aims at the wrong target. It was not the investment banks that caused the banking crash. Arguably it was the inevitable consequence of a twenty-year binge of money and credit engineered by Western governments, and the inability of Western regulators and central banks to understand what was going on and act sensibly to deal with it. But even if you do blame the banks, which banks were the first to get into trouble? It was of course, the small former building societies like Northern Rock, which could not hack it as banks; and Halifax, which got swallowed by Bank of Scotland; and those like the Royal Bank of Scotland, which came a cropper because of injudiciously large takeover strategies rather than investment failures.

Fourth, the split would not obviate the need for future bail-outs; it would make them 100% certain. The whole purpose of the proposed split is to protect retail bank customers. The idea is that retail banks would be more conservatively managed and therefore less likely to fail, so there would be little need for any taxpayer bail-out. In fact, since the newly-split retail banks would be in no doubt that the government would be obliged to step in if things went wrong, they would have every incentive to act as riskily as possible, offering their customers the highest returns and the lowest costs they could squeeze out, so as to have an edge over their competitors.

So what should we make of all these arguments?

First, even if you believe the banks should be split, you have to concede that legislators will mess up the process. True to form, they will do it in some ham-fisted way that completely undermines successful banks and puts at risk the UK's financial services sector, with all the jobs, income and deficit-busting taxes that it generates.

Second, if people knew what the banks were doing with their money, would they still hand it over the counter for 'safe keeping'? Hardly. The real problem is that there is a lack of proper information in this market. Rather than split up the banks, we need the banks to tell their customers what the real deal is. If there is indeed a demand for low-risk but low-reward retail banking, the banks would then have every incentive to do their own ring fencing and provide what customers want. People would know that their money is not just put in the vaults, and they could choose exactly how much risk to accept. It seems like one of the first duties of a market regulator – to make sure that customers get the right information – but one that regulators have so far failed to deliver. Let us focus on that before we let ham-fisted politicians loose on our banks.

Third, our biggest problem is not the need for retail/investment separation, but the fact that we have too few banks and they are all too big to fail. Partly it has been the very burden of regulation that has driven all the mergers in the sector – banks these days need fleets of compliance officers to make sure all the boxes are ticked, and small banks can't afford that. And in other ways, public policy has promoted this giantism. But then, when one of these leviathans get into trouble, it's a major national (and indeed world) problem. We need to remove the bias towards large size. One useful policy, which could be implemented very quickly, would be to put more onerous reserves requirements on banks, the larger they are. Then banks would have an incentive to break themselves up, but in a way that made commercial sense, rather than how politicians might think it should be done.

Fourth, we need to recognise that separation of retail and investment banking is a second-best solution to problems that are of governments', rather than the banks' own making. It may be justified on the grounds that we have a banking oligopoly, and hence far too little competition, far too large banking institutions, far too little information to customers and far too much reliance on governments and regulators. We really need to attack those core problems, rather than treating the symptoms.