Is it time to introduce a Labour Tax?

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People who recognise that incentives matter generally oppose taxes on work. Confiscating a fifth, two fifths or even a half of each further pound that a person earns is a great way to encourage them to spend more time in the garden.

Yet the inescapable truth is that the government needs money. Whoever wins the next general election, the new government will be faced with outstanding debts of £173bn. Assuming that it does not have the courage to introduce the swinging cuts needed to pay these off quickly, taxes are going to have to rise. And because the only tax increases that really yield the desired amount of revenue are those on immobile factors of production, and because taxes on land (the most immobile factor) remain politically impossible, this means that taxes will have to fall on immobile labour; aka. basic rate taxpayers.

In the absence of sufficient public spending cuts, therefore, I propose a labour tax. And in the interests of transparency, it should be called The Labour Tax. Though it would effectively be an increase in the basic rate of Income Tax, it would appear separately on people’s wage slips: an additional line below Income Tax and National Insurance.

This tax would have two unique and vital features. Firstly, by being distinct from Income Tax and hypothecated to the repayment the national debt, it would clearly demonstrate to taxpayers how much Labour’s reckless borrowing and economic incompetence was costing them, month after month. And it would remind people every month exactly who ran those debts up in the first place.

Secondly, it would be a part of the enabling legislation that the tax automatically expired upon the final repayment of the national debt. Once the country was back in credit and Labour’s profligacy was paid off, the tax would cease and every taxpayer would automatically be substantially better off. And they would know why.

The government of the day might then want to declare a national holiday, a one day rest for people to sit about and contemplate how long and how painful was the burden of debt left to them by Labour. And if the government also chose to hold a General Election on that day, the electorate might carry that thought with them to the ballot box. If so, one could be sure that the instigators of this financial mess never saw office again.

The elephants in the room

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I've just come back from a conference in the US, and it definitely seems to me that the US Republicans are likely to make the same mistakes the British Conservatives made after they were booted out in 1997. They are letting themselves get too negative, too angry, and too introspective to win back the public.

Now, it's true that Obama is governing far to the left of where he campaigned. And yes, he does want to end US exceptionalism and turn America into a European-style social democracy. And of course, the money he is throwing around in stimuli and bailouts is truly unprecedented. So a little anger is justified, and a little negativity is entirely understandable. But it can't become a defining characteristic, otherwise voters just switch off. You have to have something positive to say as well.

None of that means that the Republicans need to sell out on their policy positions. There are of course some 'modernizers' who think American conservatives need to embrace environmentalism and socialized medicine before they can become electable again, but these people completely miss the point. As amazing as it seems to people who spend all their time obsessing about policy, most voters (and particularly those swing voters who actually decide who wins) don't really care. What matters is the appearance of competence and likeability. Or to put it another way, the Republicans didn’t lose in 2008 because people suddenly rejected all the policies they stood for; they lost because they were seen as incompetent, corrupt and alien.

What they need to do now – in political terms – is to rebuild that tarnished brand. They need to find a new way of talking about politics and the economy, and a new way of presenting themselves. And they can only do that be being positive, and hopeful, and develop their own vision of how to solve America's problems. Think of Reagan when he beat Carter.

If they can do that, then they stand a real chance of winning back Congress in the mid-terms and winning back the presidency in 2012. But if they just carry on moaning like the world's about to end, they don't stand a chance.

Viral or Virus?

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The expansion of the internet into our daily lives was always going to have an impact on politics. This, coupled with the image sensitive nature of New Labour had a defining impact on the Blair era. When Gordon Brown entered government we were promised an end to the spin culture that had damaged our trust and questioned the motives of politicians. Instead, he has exacerbated spin and created a new culture of lies.

Brown’s latest attempt to ‘get in touch’ with the electorate has backfired, forcing him to make the characteristic U-turn. He released his original statement regarding MP’s expenses via YouTube, complete with unusually white teeth and overbearing grin (I see nothing worth grinning about when it comes to expenses.) He was also criticised for not breaking the news to parliament in the traditional way. Personally, I think the internet is a good tool for breaking news to the public, creating greater cohesion between politicians and the electorate. But, Brown's atrocious performance has forced him to remove the comment section on Downing Street's YouTube portal: another example of him simply being unable to take criticism.

The internet is a great opportunity for us to see the real side of politicians (as many MP’s blogs have done), allowing greater levels of transparency, democracy and participation. Instead, the Prime Minister has tried to close another avenue of accountability, distancing himself further from the public.

If politicians were honest about how they represented our interests and spent our money they would not need to hide behind a curtain of spin and deceit. They would have the confidence to tell us the truth.

Blog Review 945

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It would appear that logical inconsistency is not restricted to the pages of The Guardian.

A welcome addition to the free market blogosphere from a country which most certainly needs such advocates.

A note to certain MBA students. No, A. Hitler is not a good role model nor management guru.

Just as booze prohibition was a bad idea so too drug such. Even the excuses as to why it doesn't work seem to be similar.

Is regulation or the law needed to deal with asymmetric information? Looking at markets where regulation and the law are impossible to use, apparently not.

Although it is true that in certain markets what is being sold is not quite what is being bought.

And finally, well spotted that man.

Deflation or inflation?

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As reported in the FT, the Retail Price Index (RPI) slowed to -0.4 per cent during the month, after remaining flat during February, the Office of National Statistics reported last week. The ‘D’ word is on the lips of many commentators, while those with student loans have the sparkling wine chilled, with the prospect that the taxpayer will be helping to pay off their most liberal of educations.

However, the RPI is only one side of story, as the Consumer Price Index (CPI) is still at 2.9%. Even more disturbing for those that work outside of the bubble of the public sector, the London Chamber of Commerce and Industry has calculated the Business Price Index (BPI), which shows that annual inflation for businesses stood at 6.1% throughout the UK in the forth quarter of 2008. The reason? Apparently: “BPI inflation has continued to rise because even though labour costs are muted, the costs of capital are increasing sharply as a result of the credit crunch."

The battle of minds between those fearing deflation against those predicting inflation continues. It will be interesting to see who is proved right and why. One thing that is beyond debate is that given the fact that businesses are facing a tough time, raising National Insurance contributions by 0.5% from April 2011 is not a good idea; yet that is exactly what this government s going to do.

Football taxes

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What Michel Platini hasn’t been able to achieve from Geneva is the destruction of the Premier League’s superiority over the rest of Europe. As continually evidenced by the achievements of the ‘Top 4’ over the past few years in the European Cup (otherwise known as the Champions League). After this report in the Sunday Times (Arsene Wenger warns of Premier League Tax bomb) he’s probably opened the bubbly and sent messages of congratulations to Brown and Darling, telling them that at the end of their tenures in Whitehall they’ve assured jobs at UEFA.

Mr Wenger is correct in highlighting how the latest tax increases may well impact negatively on the sport and coupled with the falling pound it can only make importing the top stars pricier. Obviously the clubs will channel these higher costs in two directions, raising the prices to sponsors and tickets, merchandise prices etc. to the fans. At the end of the day (you can’t write a blog about football and not have the number one cliché in there) the fans are the ones who will be stumping up the cash to pay for higher tax rates albeit via higher sponsor prices (Sky, BBC, Setanta, ITV etc.) and higher direct costs. The ordinary taxpayer is being squeezed from all sides and is past the squeaking stage.

Unfortunately for Platini, Brown and Darling the football clubs will find ways around the higher tax bills, and the Premier League gravy train will continue to move forwards. Brown and Darling will face declining tax revenues as players, managers and owners move their holdings overseas, to warmer and kinder climes. Brown and Darling have made the UK a terrible place to do business (and live), they’ve ensured wealth will not be settling on these shores, unless it is taken by force. Britain has become akin to the Wembley pitch: in serious need of renewal, while the Head Grounds Man needs to be fired due to habitual incompetence.

Is Britain Finished?

Dr Eamonn Butler points out that the Government will find it increasingly hard to pay off its huge debt, whilst warning of the problems that could occur if the Government goes through with the increased tax percentage on the rich.

The country’s only chance is a leaner, sounder and less indebted government.

Hope springs eternal in the breasts of politicians. None more so than in Alastair Darling, Britain’s chancellor of the exchequer, as he delivered his annual budget speech to Parliament last week.

He conceded that Britain’s economy was in a bad way. It would shrink by 3.5% this year, rather more than the 1% dip he forecast only in November. But hey, every country is in a bad way right now, and by 2011-12 the U.K. will be growing again at a record, rip-roaring rate of 3.5%. Crisis? What crisis?

Unfortunately, British budgets tend to unravel pretty quickly. Ever since the £5billion “stealth tax” on pension funds that Gordon Brown somehow forgot to highlight in his 1997 budget speech and which helped to kill half of Britain’s workplace pension plans, people listen to the chancellor with more than the usual skepticism, waiting until the number-crunchers expose the real figures a few days later.

We only had to wait a couple of days before the Office for National Statistics punched a hole in the chancellor’s optimism. It reckoned that the U.K. economy shrank 1.6% in the last quarter of 2008, and another 1.9% in the first quarter of 2009 — the biggest six-month fall since records began in 1948 and much more than the government had assumed. The International Monetary Fund piled on even more gloom by predicting that this year’s drop in British growth would actually be 4.1%, and that the economy would also shrink next year, when the chancellor had counted on a turnaround. It is all bad news for a government desperately trying to borrow its way out of the crisis while soaking the “rich” by raising the top tax rate to a confiscatory 51.5%.

Another popular British sport is watching the government default on its borrowing estimates. The last time the government managed to stay within its own budget deficit forecast was in 2000. Recently, the difference between planned and actual borrowing has become spectacular. In his 2008 budget, the chancellor figured he might have to borrow £70 billion between now and 2011. Last week, his estimate was five times that — £348 billion. By 2013-14 he will need £703 billion of debt finance, twice as much as he forecast just five months ago. Britain would be borrowing for the next 22 years — and that’s on Mr. Darling’s heroic economic assumptions, which can’t possibly be met.

* * *

Britain’s Labour leaders have been keen to blame bankers, particularly American ones, for the country’s woes. To some extent, though, Labour leaders have brought this crisis on themselves. They saw financial services, not manufacturing, as Britain’s future and encouraged it. Financial wizards left Manhattan for London, attracted by the lower taxes and easier regulatory environment. The City’s financial market boomed, contributing 8% of GDP and 15% of all corporate taxes. But Britain’s heavy reliance on financial services left it seriously exposed when the banking crisis finally hit.

Add to this the imprudence of the public sector and private households. Over the past 10 years, Britain has grown on the back of government and consumer spending, both fuelled by debt. But while households are now cutting back and paying down their debt, the government is spending and borrowing even more.

There comes a time when short-term borrowing turns into a long-term problem. Britain’s government debt is still triple-A rated, but a recent auction of U.K. government paper failed to sell in full and some traders already price it lower than some commercial companies’ debt. Britain’s government could find it harder and more expensive to borrow the huge amounts it seeks.

Already, the government is beginning to look desperate. Mr. Darling plans to hike the top income tax rate from 40% to 50% (plus 1.5% compulsory National Insurance contributions) on people earning more than £150,000. By scrapping certain tax deductions, those making more than £100,000 would also have to pay higher taxes.

This is all eerily reminiscent of Denis Healey, the Labour chancellor of the late 1970s, who promised to “tax the rich until the pips squeak” with rates as high as 83% on income from work and 98% on investment income. In the end, he had to ask the IMF for an embarrassing bailout.

The trouble with taxes is that above a certain level, raising them is counterproductive. People will find it economical to hire expensive accountants to avoid paying the full amount. If everything else fails, they may take themselves and their money abroad to gentler tax jurisdictions, as the actor Michael Caine just threatened to do.

The Treasury claims that the new 50% rate will bring in £1.3 billion next year, but the Institute for Fiscal Studies says it might not raise anything at all, since perhaps 70% of top earners will either evade or avoid it. The Center for Economic and Business Research thinks that as many as 25,000 top earners may leave the country, costing the government — and the London financial market — hundreds of millions of pounds in lost tax revenues and investments.

Taking 51.5% of people’s earnings sends all the wrong signals. It absurdly suggests that the government is better at spending our money than we are. Higher taxes will simply induce people to spend less and leave entrepreneurs with less for investment, neither of which will help Britain recover.

When Margaret Thatcher’s government slashed the top rate to 40%, high income earners actually paid more, and contributed a far bigger proportion of total revenues, than they had before. Even former Labour Prime Minister Tony Blair denounced the 50% tax rate as “wrong, seriously wrong.”

Interestingly, while higher income earners are supposed to bleed for the nation and businesses have been hit by the full force of the recession, government workers and their generous index-linked pensions have been left largely unscathed.

And what of the Conservatives? There has to be a general election in Britain before June 2010, and with an 18-point lead in the polls, they are the clear favorites. It would then fall to party leader David Cameron and his colleagues to sort out Britain’s debt mountain. Will he have the steel to bring the public finances back into order?

He has spent much of the last few years trying to make the Tories look kinder, gentler — majoring on social justice rather than tax cuts. He’s even said that, although the new 50% rate was a “pathetic piece of class war posturing” rather than sound economics, removing it would “not be a high priority” for any future Conservative government.

But that’s because although Mr. Cameron may have tried to rebrand the Conservatives, he still shares one of Mrs. Thatcher’s core principles — that a nation, like a family business, has to balance its books. Already he is calling for a “government of thrift” where civil servants get paid for “producing more with less, not less with more.” Like the Iron Lady, he warns of the evils of debt and inflation.

He must know that if he becomes prime minister and fails to deliver a leaner, sounder, less indebted government, his party will be finished. Even worse, so will be Britain.

Dr Butler is director of the Adam Smith Institute and author of “The Rotten State of Britain: Who Is Causing the Crisis and How to Solve It” (Gibson Square Books), published last month.

Published in the Wall Street Journal here