· Other EU countries aim to strangle the City with regulation
· UK should push for global market regulation instead
· Global regulation must boost competition at low cost
Envious EU countries are out to tie the City of London up in regulatory knots, says a report today from the Adam Smith Institute. The independent economic think-tank says the UK needs to act now to preserve the future of its most important international earner.
Instead of submitting to onerous regulations inspired by our competitors in Paris and Frankfurt, the UK should call for simple and fair regulations that apply across the world. That, it says, would create a world market in which London could excel, rather seeing business move to Singapore and other low-cost centres.
“The UK should campaign for global rules that promote competition and innovation, rather than loading Europe and the UK with costs,” said the report’s author, regulation expert Tim Ambler. Those rules should focus on protecting consumers and promoting trade, not creating larger and larger rule-books that nobody can possibly read.”
Ambler says that thousands of pages of EU regulation could be replaced with just eight key principles to promote honest trading. [See 4-pager.]
“Regulation is already strangling the financial sector and there are just two ways to correct this,” he continued. “One is for the UK unilaterally to cut out the red tape and hope others will follow. But a better way is to recognise that finance is a global industry, needing global regulation, and for the UK to campaign to make this regulation as light as is needed to protect customers.”
Noting that only one new retail bank has been set up in the UK in the last 130 years, the Institute argues that the complexity and cost of financial regulation now seriously discourages competition in the UK and Europe. Increasingly, City firms will see their business by competitors in Asia and elsewhere. It argues that the new City regulator, the Financial Conduct Authority, should be “strangled at birth,” with the Bank of England regulating providers and the Financial Ombudsman Service looking out for customers.
Dr Eamonn Butler, Director of the Institute, added: “Not content with drowning our main industry in red tape, we are letting our competitors in Paris and Frankfurt pile on more. The UK government needs to come out, fists flailing, to campaign for effective but low-cost regulation across the world, rather than allowing us to become an uncompetitive backwater.”
The Adam Smith Institute is calling on the government today (TUESDAY) to slash CGT rates in next month’s Budget in order to boost revenue and economic growth. 2010-11 figures now released by HM Revenue & Customs (HMRC) show that the rise in Capital Gains Tax (CGT) was a failure. It meant to raise more revenue, in fact it raised less.
CGT was raised from 18% to 28% for most taxpayers (entrepreneurs’ relief stayed at 10%) in June 2010, nearly three months deep into the tax year. This unusual timing allows economists to see the impact of the rate changes during the year.
Comparing the 78 days from 6th April 2010 to 22nd June 2010, and the 287 days from 23rd June 2010 to 5th April 2011, shows a marked fall in revenues. The annual equivalent CGT revenues under each system are:
There was a 76% drop in normal disposals (taking 18% and 28% together for post-23rd June figures, because figures are not available for the equivalent split for pre-June). Clearly, many people sought to realise gains before the rate increased, knowing that the Coalition Agreement committed the Government to a sharp increase in CGT rate. There was also a 34% drop in 10% ER disposals, probably because entrepreneurs feared further tightening.
However, this highlights the fact that CGT is effectively a voluntary tax, paid only when people choose to dispose of assets. If they perceive rates to be too high, they choose to keep assets rather than dispose of them. Only a few people are forced to sell assets – many of them elderly people who build up assets throughout their lives and then cash them in to live on.
High CGT rates depress economic activity and prevent the flow of capital to where it can be most productively used. This lowers both economic growth and government revenue. This is why the Adam Smith Institute is urging the government to slash CGT rates to their pre-2010 levels, which would raise more revenue for the Treasury and also stimulate growth.
For example, if someone owns a buy-to-let flat and is thinking about selling it to raise seed money for a new business, the fact that a large chunk of the proceeds has to be paid in tax will deter them. They may well decide to keep the flat and not start the business, thus depriving the state not only of the CGT revenue, but also the taxes that would be paid by the new business and its employees.
People’s reluctance to pay a large cheque to the state is increased by the knowledge that much of their capital gain is actually due to inflation. Indeed, roughly half of taxable gains are attributable to inflation.
Dr Eamonn Butler, Director of the Adam Smith Institute says: “The coalition policy of a sharp increase in CGT rates has failed. Not only has it raised less revenue, it has also reduced the available capital in the economy. That is the last thing businesses need at a time when bank loans are so difficult to get.”
· Wind power unreliability means there is little environmental benefit
· Need for reserve power generation or energy storage facilities to provide for users needs makes wind power a costly energy source
· UK government should stop overinvestment in onshore and offshore wind turbines
The report ‘The Limits of Wind Power”, released today by the Adam Smith Institute and US’s Reason Foundation, reveals that the heavy investment in wind power in the UK and US is misguided. Wind energy will never be suited as the lone or primary source of grid electricity due to its variable nature and will not deliver the environmental benefits expected.
The study looks at the limitations of wind power and argues that wind energy needs either expensive energy storage facilities or reserve power generation facilities to provide for users needs. Wind energy is intermittent and therefore these back ups are needed to avoid blackouts or brownouts.
Reserve power would have to come from facilities that use fossil fuels, which must operate even when not being used to ensure the reliability of the electrical grid. This undermines the supposed environmental benefits of wind power.
In light of this, the UK government is overinvesting in onshore and offshore wind farms. Not only is investment in wind power expensive, but it will also fail to provide a reliable source of energy for grid users. The Adam Smith Institute paper argues that the practical upper limit for wind power’s contribution to an electricity grid is 10% of the total energy mix. At the moment the government is hoping that between 8% - 15% will be generated by offshore wind alone by 2020, an unachievable target.
“Very high wind penetrations are not achievable,” said William Korchinski, author of the report. “As wind’s share increases, system reliability will be adversely affected disproportionately – unless adequate reserve power is available. That power reserve is expensive and lowers any possible environmental benefits.”
In response to today’s GDP figures, Sam Bowman, Research Director at the Adam Smith Institute, said:
“We shouldn’t be too surprised by these GDP figures. Since GDP figures include government spending, cuts to spending will depress the headline rate even if the private sector is doing quite well.
“What we are experiencing is a rebalancing of the economy. In 2012, nearly a million private sector jobs were created, a very positive development. The state is cutting its workforce, freeing up more labour for private sector productivity.
“However, the government is not doing enough to promote the growth of small and medium-sized enterprises (SMEs). EU regulation costs British business £100bn a year, and our taxes on business are killing jobs. Scrapping Employers’ National Insurance contributions for SMEs could create over 500,000 new private sector jobs.
“The government is right to cut state spending and employment, but it needs to promote stronger private sector growth to pick up more of the slack. Targeted tax cuts and deregulation designed to boost private sector job creation are just what the doctor ordered.”
In response to Osborne’s Autumn Statement, Sam Bowman, Policy Director at the Adam Smith Institute, said:
“One thing became clear today: economic stagnation is here to stay. There is no growth and no prospect of growth without a change of course that focuses on deregulation and targeted tax cuts. There is no trade-off between growth and deficit reduction. You can’t have one without the other.
“The key is to go for private sector growth. Government regulation is smothering small and medium-sized businesses, and today’s rate relief announcement is not enough to help them. National Insurance is a tax on jobs and prevents the creation of over 500,000 jobs by small and medium businesses. It should be scrapped. The best way to stimulate the economy is to give small businesses a break.
“The highlight of today’s budget is the rise in the tax-free personal allowance, which the Adam Smith Institute has long called for. It should be raised to the minimum wage level so that the poorest earners pay no tax at all. Scrapping of the fuel duty hike is a good thing, but we should not be too impressed at a Chancellor deciding not to raise taxes – we need cuts to regressive consumption taxes.
“The government and media have focused on trivial changes in spending like the £5bn newly allocated to capital projects. Meanwhile, the state borrows that amount every two weeks – or another £331 million every day.
“Deeper cuts to public spending are clearly needed to cut the deficit, but these are not possible without a fundamental shift away from socialistic monoliths like the NHS. The only way real cuts to expenditure can be made is by shifting to more efficient, market-based models of social insurance for healthcare and welfare. The claim that we can make substantial savings by ‘trimming waste’ is a lie – and we’re fast learning what a dangerous one it has been.”
26 November 2012
With a consultation on minimum alcohol pricing imminent, the Adam Smith Institute (ASI) has released a report showing that the evidence base for minimum alcohol pricing is, to all intents and purposes, non-existent.
Co-authored by John C. Duffy, a statistician with forty years experience in the field of alcohol epidemiology, the report explains that most of the estimated health outcomes, used to justify calls for a minimum alcohol pricing of 40p or 50p per unit, have come from a single, flawed computer model.
This model, the Sheffield Alcohol Policy Model, is used to predict minimum pricing’s effect on everything from NHS expenditure to unemployment, and is based on false assumptions and wild speculation, which render any predictions meaningless.
Arguments for minimum alcohol pricing based on this computer model should be ignored and the Sheffield Alcohol Policy Model should not play a role in the debate.
The model is deeply flawed for a number of reasons:
· When calculating health outcomes, the model assumes that heavy drinkers are more likely to reduce their alcohol consumption as a result of a price rise. This contrasts with ample evidence that heavy drinkers are less price-sensitive. The majority of alcohol related harm is linked to heavy drinkers who are much less likely to be deterred by price rise than a casual consumer. By claiming that any price rise will lead to bigger drops in consumption amongst heavy drinkers, the model ignores the complex psychological and societal factors leading to alcoholism and alcohol-related violence.
· It bases its calculations on controversial beliefs regarding the relationship between per capita consumption and rates of alcohol related harm. A low rate of per capita alcohol consumption is no guarantee of better health outcomes. There is little to be gained from making moderate drinkers reduce their consumption slightly.
· The model provides figures without estimates of error and ignores statistical error in the alcohol-harm relationship. Patterns of consumption and harm are not the same in all countries. When Denmark reduced the tax on spirits by 45% in 2003 it did not experience any increase in alcohol consumption, and instead there was a decline in alcohol-related problems. As alcohol has become more affordable as a result of rising incomes we have seen a decline in alcohol consumption across most of Europe and the US. There are, of course, examples where higher prices have reduced alcohol consumption and alcohol related harm, but it is clear that price interventions are highly unpredictable and cannot be easily extrapolated from a computer model.
· The model ignores other potential negative social outcomes of minimum pricing, such as a likely increase in the illicit alcohol trade and the greater poverty it may push many consumers into. It also ignores some of the health benefits associated with moderate drinking habits.
Alcohol-related harm may rise, fall or stay the same under a minimum-pricing regime. The evidence simply does not exist for reliable forecasts to be made about the consequences of such a far-reaching policy. The Sheffield Alcohol Policy Model is riddled with flaws and wishful thinking. It has no merit as a guide to policy and the government should not base legislation on such speculative and weak statistics.
Christopher Snowdon, co-author of the report, adds: “In the era of evidence-based policy, it seems that speculative statistics are considered superior to no statistics and a wrong answer is better than no answer. We argue that this is a mistake. The aura of scientific certainty, or even mild confidence, in computer-generated numbers based on dubious assumptions is misplaced. Minimum pricing might reduce alcohol harm, or it might increase it, or it might bring about other unexpected consequences, good or bad. An admission that the evidence base is, to all intents and purposes, non-existent is less likely to mislead decision-makers than a spurious prediction. The only certainty is that minimum pricing will transfer large sums of money from the poorest people in society to wealthy industries. This is a deeply regressive leap into the unknown and it should not be taken as a response to wafer-thin ‘evidence’.”
John C. Duffy, co-author of the report adds: “A supporter of the model might ask me ‘If you’re so smart, what’s your model – what do you predict?’ My answer is that I don’t have a model and therefore I won’t make a prediction. There is not enough information around to produce a reliable model and I won’t invent one that is engineered (by undemonstrated assumptions) to fit the prevailing facts and pretend that it is of any use for prediction. As Taleb says in The Black Swan about those who attempt to justify worthless predictions because ‘that’s their job’—get another job.”
· The government should raise the tax-free personal allowance to the National Minimum Wage rate to achieve a ‘Living Wage’ for all workers.
· A NMW hike would lead to more unemployment among young and unskilled workers, but a tax cut would have stimulatory effects.
· By raising the tax-free threshold and pegging it to the Minimum Wage level, up to 1,297,000 workers would be lifted out of taxation altogether. 1
In a paper released today (Monday) at the start of Living Wage week, the Adam Smith Institute calls for an alternative reform to increase net wages of low-paid workers. It argues that although the Living Wage Foundation’s efforts to increase pay for low-paid workers by working with employers should be applauded, it should not lead to an increase in the minimum wage, which could price low skilled workers out of the employment market altogether.
The paper reviews academic studies of minimum wage increase and argues that an increase in the National Minimum Wage to reach the Living Wage level would endanger employment prospects for low skilled or young workers. The paper argues that the unemployment effects of the minimum wage, whereby the minimum wage acts as a price floor that keeps unproductive workers out of employment altogether, make a rise in the National Minimum Wage too risky to consider.
Instead, the focus should be on the net income, not gross income, of workers. The pre-tax minimum wage is actually greater than the after-tax Living Wage – in other words, the only thing holding back all NMW workers from earning a Living Wage is tax. To address this, the tax free allowance should be raised and pegged to the National Minimum Wage rate to lift the lowest paid workers in the UK out of taxation. Raising the personal allowance to £12,875 would increase the take-home pay of everybody earning under £100,000 by £575 and lift up to 1,297,000 people out of the tax system altogether.
Author of the report and Adam Smith Institute’s policy director, Sam Bowman, says: “It is a national scandal that we tax the people at the bottom of society so much that they can’t earn enough to achieve a basic standard of living. It makes no sense to say that the National Minimum Wage is the least a person should earn and also take away a large chunk of that in tax.
“A tax cut for the poor and middle in this time of low economic growth would be just what the doctor ordered. It would increase spending and repayment of private debt, and relieve some of the burden on the people who can least afford to pay. Taking the poor out of tax makes economic sense, and it is also one of the most compassionate things this government could do for people at the bottom of society.”
1. This statistic comes from data in Low Pay Commission Report 2012, p38. You can read the report here: http://www.lowpay.gov.uk/lowpay/report/pdf/8990-BIS-Low%20Pay_Tagged.pdf
· Just Rewards: Why taking the poor out of tax makes economic and moral sense is a report released by the Adam Smith Institute. You can read the full report at: http://www.adamsmith.org/sites/default/files/research/files/JustRewardsA...
· The government’s policies are failing small and medium-sized enterprises.
· The government should abolish employer’s National Insurance contributions for small and medium-sized enterprises.
· It should also slash costly regulations that are holding back economic growth.
In a report released today (Monday) the Adam Smith Institute (ASI) calls on the government to take radical steps to kick-start employment in small and medium-sized enterprises (SMEs). The UK’s economic growth prospects depend on SMEs creating jobs to deliver a recovery. SMEs account for 99% of private sector firms, and should be exempted from much of the onerous regulatory and tax burdens that currently stifle their success.
Gimmicks such as ‘shares for rights’ and a government-funded business bank will not address the real barriers to SME growth and will only advantage a small percentage of small businesses. In order to restore confidence in the British economy and reduce the burden of regulation on small businesses, the report’s author, economic analyst Vuk Vukovic, proposes a set of policies the coalition government should implement immediately:
· Abolish employers’ national insurance contributions. NI contributions are too high, particularly for microbusinesses. Business surveys suggest that scrapping NICs for small businesses would create a minimum of 500,000 jobs (1).
· Simplify the regulatory system for SMEs. This would reduce the costs of hiring lawyers and accountants to allow SMEs to comply with regulatory standards and therefore free up funds for profit-making activities. Our complex regulatory system is responsible for layoffs, stalled investments and lower profits and is one of the most severe constraints to UK competitiveness. Only a radical simplification of the system will free up small companies from the disproportionate costs of compliance.
· Make it easier for SME employers to hire and fire workers. Britain’s employment laws are a barrier to SME expansion. The fear of tribunals and the difficulties in firing unproductive workers make it costly and dangerous for small companies to take on new employees. In reforming employment laws and adopting many of the Beecroft report proposals, hiring more employees will become attractive and increase labour-market flexibility.
· Reverse the 5.6% hike in business rates. This increase was introduced in April 2012 and places another financial strain on small businesses that many cannot afford.
These proposals would allow SMEs to flourish by reducing costs and uncertainty about employment and industry regulations. The coalition government has failed to recognise the complex environment that SMEs operate in and the heavy costs that the government currently places on them. Only by cutting taxes and regulations for these businesses will we see real business growth in the SME sector.
Sam Bowman, Policy Director at the Adam Smith Institute says “We need a recovery led by private-sector job creation, but small and medium businesses are operating in a world of uncertainty and maddeningly complex regulation. The government needs to radically reduce the regulatory and tax burden on small and medium businesses before it can hope for a recovery.
“Employers’ NICs are a destructive stealth tax on jobs and should be scrapped, and employment regulation designed to protect workers is in fact condemning many of them to long-term unemployment. Implementing the proposals in this report would help to revitalize the private sector and deliver the jobs and economic growth that are so badly needed right now.”
(1) This statistic is based on information from FS and BCC which found that between 44% and 60% of small businesses would take on additional employees if the government ended employers’ NICs. The 500,000 new jobs is based on the lower figure of 44% and discounts sole proprietorships.
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