22 May 2010
The increase in Capital Gains Tax proposed by the coalition government will not bring in the estimated extra revenue to the Treasury, according to a new paper from the Adam Smith Institute (ASI). Instead it will diminish funds coming in and widen the deficit rather than narrowing it.
The ASI's research looks at the experience of other countries, notably the United States and Australia, and shows that increases in the rates of capital gains taxes there have led to reductions in revenue. Conversely, it has been decreases in the tax that have led to rises in revenue.
The effect will be even sharper in the UK, claim the Institute. Unlike income tax, capital gains tax can be voluntary - people can decide when to cash in their gains and may postpone this. As the proposed increases are widely seen as temporary and are likely to be lowered later, many people will leave their assets to await a more benign tax rate. The normal annual flow will diminish, leading to a sharp drop in revenues, and reinforcing the experience of other countries.
The Institute also disputes the suggestion that when capital gains tax levels are below those of income tax, people will switch from one to the other to escape taxation. It quotes figures from several countries, which suggests that this does not happen in practice.
The government should not impose an across-the-board increase in Capital Gains Tax, but should instead distinguish between short-term speculative gains and long-term asset appreciation. Without that distinction, the proposed tax increase will do serious harm to the economy. Madsen Pirie, president of the Adam Smith Institute, says:
"In intending to tax the rich, politicians, without understanding the effects of their actions, are proposing measures which will decrease the Treasury's tax take and make the deficit even worse This is hardly qualifies as sensible economic policy."
Thursday 8 April 2010
According to a new briefing from the Adam Smith Institute (ASI), proposals to introduce a new ‘bank levy’ would do little to correct the problems in the banking sector, and act as a distraction from other, more pressing reforms.
The briefing also expresses skepticism that governments would ring-fence the proceeds of such a levy for future crises, suggesting that they would soon become just another tax to finance current expenditure.
Indeed, it has already been reported that Alistair Darling favours national discretion to use the proceeds of a proposed EU-wide levy as the government sees fit, rather than reserving funds for the future.
According to Miles Saltiel, the author of the ASI’s briefing and a City financial expert, imposing such a levy is also likely to prevent banks from rebuilding their reserves – a key economic priority, in his opinion – as well as holding up lending.
Saltiel, who is a senior fellow of the Institute, also dismisses the ill-thought out populism behind ideas such as the ‘Tobin tax’, punitive regulation of hedge funds, and swingeing tax increases on bankers.
Instead he argues that policymakers should focus on six key issues:
(1) The government should abolish future expectations of “too big to fail” and encourage competition by breaking up the nationalized banks. The Williams & Glynn Bank, ABN-AMBRO and NatWest should all be filleted out of RBS, while HBOS and TBS should be split out of Lloyds.
(2) The government should also ensure that failed banks can be run down in an orderly way, by requiring so-called ‘living wills’.
(3) The UK should campaign for derivative contracts to be moved onto regulated exchanges, rather than being traded over-the-counter. As well as reducing counter-party risk, this would be good business for the City of London.
(4) The British government should take the lead in advocating tougher international capital and liquidity ratios. They should also press for stricter rules on what counts as capital.
(5) The UK should restrict how much its banks trade on their own account in capital markets by requiring higher capital reserves to be held against such activity.
(6) Legislation should require honest accounting and transparency. Governments – whose off-balance-sheet obligations dwarf those of the private sector – must not be exempt from such rules.
Tom Clougherty, the executive director of the ASI, added:
“Banking reform is one of the most pressing policy challenges facing the UK, but too often our politicians resort to crude populism rather than grappling with the real issues. This needs to change – having a more stable, more competitive banking sector is vital to our future economic well-being.”
The Lesson of a Levy on Banks is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. A PDF can be downloaded free of charge at www.adamsmith.org/files/a-levy-on-banks.pdf
April Fool's Day 2010
A Westminster think-tank has had to scrap its annual Honest Politician Of The Year Award because no qualifying candidates could be found.
The influential Adam Smith Institute, which organises the annual Award, said that it had considered a number of promising nominees, but found insufficient evidence to prove their honesty to the Award jury.
Anthony Steen MP was nominated for his frank view that people were “jealous” of his Balmoral-type second home. However, the jury ruled this untruthful because Balmoral lacks a taxpayer-funded duck house.
Nicholas Winterton MP also reached the shortlist for so truthfully expressing his opinion of standard-class travellers as “a totally different type of people.” But he was disqualified for falsely claiming that his views had been “misrepresented”.
Next year the Adam Smith Institute will give its award instead to the Corrupt Politician Of The Year. “This should give us many more candidates, said Institute director Dr Eamonn Butler. “Indeed, I can think of 646 already.”
“Corrupt politicians are actually the most honest. They have to do what they are bribed to do in order to stay in business. So when bought, they stay bought.”
Another problem for the Awards is that the trophy, depicting a golden hand in a back pocket, and sponsored by Lord Mandelson’s mortgage broker, has been lost. Stephen Byers held it in recognition of his sincere contempt for Railtrack shareholders, but somehow managed to leave it in a cab for hire. Geoff Hoon and Patricia Hewitt have been hired to ask questions, for the usual consultancy fee.
G Brown 020 7930 4433
Thursday 4 March 2010
Think tank calls for radical reforms to make UK the world leader in 21st Century higher education
The government must abolish the cap on university tuition fees, according to a new report from think tank the Adam Smith Institute. The Broken University, by academic and education expert James Stanfield, argues that if the UK is to be a world leader in the higher education in the 21st Century, all institutions must be free to sell their services at whatever price they choose.
Reforming higher education funding
In contrast to other recent proposals, Stanfield’s report emphatically rejects the idea of merely raising the cap on tuition fees, arguing that such a policy not only fails to recognize the independence of universities, but also completely overlooks the various malign consequences of the higher education sector not having a functioning price system. According to the report, capping tuition fees:
Stanfield, who is also a fellow of the Adam Smith Institute, said:
“There is a lot of talk about the importance of the universities in our new ‘knowledge economy’. But how effectively can any market work when the government is distorting prices to such an extent?
What politicians don’t realize is that tuition fees ought to send important signals about the relative value of different university courses, and help to co-ordinate the interests of students, universities, and future employers. By dictating what fees may be charged, the government is severely retarding the natural development of higher education.”
The report goes on to propose reforms to public subsidy of higher education, calling for an end to the taxpayer subsidizing universities directly, with funding instead being channeled directly to students through an expanded student loans programme. Controversially, the report also suggests that loans be targeted at those students most in need of support, with loans to wealthier students limited to a set percentage of their university fees.
Tom Clougherty, the Executive Director of the Adam Smith Institute, added:
“The funding system outlined in the report would be a huge step forward. Ending the direct subsidy would empower students, because universities would be forced to treat them as paying customers. In the long run, it would also benefit universities since it would help them regain their independence from central government. And it would also benefit the taxpayer, by ensuring their money was used as effectively as possible.”
Stanfield, however, is open about his longer term plans for higher education, making it clear that he believes the government’s £14.3bn subsidy ultimately acts as a transfer of income from the poor to the better off – “taxing the poor to help the rich get richer”, as he puts it – with little economic benefit. He recommends that the government adopt a clear 10-15 year timetable for winding down the government’s support of higher education, so as to give ample opportunity for universities to attract philanthropic donations and corporate sponsorship.
Making Britain a world leader in higher education
Stanfield’s report, which runs to more than 100 pages, also goes beyond university funding to look at the broader question of how to make UK higher education – which he regards as one of our most significant service industries for the future – more dynamic, competitive and entrepreneurial. The report stresses a number of key points:
“It is clear to me that the government’s involvement in higher education is doing far more harm than good. Despite the best intentions, government attempts to subsidize and centrally plan industrial sectors like steel, automobiles and telecommunications all failed miserably. Higher education is no different. It has the potential to become our most successful service industry and provide a vital boost to our economy – but that won’t happen unless the government is prepared to back off.”
Tuesday 23 February 2010
Two influential policy thinkers who defended free-market capitalism in the teeth of the financial crisis will be presented with the National Free Enterprise Award today. Dr Madsen Pirie and Dr Eamonn Butler are President and Director of the Adam Smith Institute, the prominent think-tank which provided much of the intellectual support for the Thatcher government's privatisation and tax-reduction programmes.
The Award, a large trophy in hand-crafted silver, will be handed over at the Institute of Economic Affairs annual conference on the state of the economy, held in the Institute of Directors near Westminster. It will be presented by Professor Stephen Littlechild, the former electricity regulator,who devised the RPI-X formula for regulating rises in regulated utility prices.
The National Free Enterprise Award has a 30-year history. Its lustrous past winners include the airline entrepreneurs Sir Freddie Laker and Sir Richard Branson, hotelier Lord Forte, Nobel economist Friedrich Hayek, politicians Sir Keith Joseph and Margaret Thatcher, Buckingham University Vice-Chancellor Dr Terence Kealey, and financial journalist Neil Collins.
The panel of judges included prominent supporters of free enterprise from various walks of life, and most made Pirie and Butler their first choice for the award. The pair have been much in the news recently for defending bankers during the recent crisis, and pinning the blame on what they see as inept central banks, spendthrift politicians, and incompetent regulators. As Eamonn Butler put it: "The cause of this crisis was the tsunami of paper money that the US and UK kept printing over fifteen years. At first, all of us who surfed on it enjoyed the ride. But inevitably, it crashed into reality and destroyed everything before it."
Pirie and Butler are also critical of the US and UK governments' responses to the crunch, saying that it just conceals the scale of the crisis underneath another wave of borrowing. "But you cannot borrow your way out of debt," they say.
It is a busy week for Eamonn Butler in particular. Total Politics magazine has just voted him one of the 30 Top Political Influencers in Britain, and his new book The Alternative Manifesto – "a twelve-step plan to cure government of its financial alcoholism" – is published on Thursday.
The pair are known for humour as dry as their politics. Butler described his three-decade professional partnership with Pirie as "one of the great double-acts, like Jekyll and Hyde", while Pirie assured journalists that "absolutely no bullying was used on the judges."
4 December 2009
A new report from influential think tank the Adam Smith Institute (ASI) has attacked the government’s Digital Britain white paper – the inspiration for the Digital Economy Bill currently working its way through Parliament – describing plans to intervene in the digital communications industry as “both mad and bad economics”. The report’s author, digital media and communications expert Eben Wilson, put his case bluntly:
“Over the past twenty years, this thriving commercial sector has very rapidly created a vast engineering infrastructure at no cost to the taxpayer, and has generated large amounts of tax revenue in the process. It is hard to think of a better example of something the state should simply stay out of.”
The ASI’s report – Digital Dirigisme – covers the full range of issues addressed by the Digital Britain white paper, arguing throughout that the digital communications industry is characterized by rapid and unpredictable change, which governments and regulators simply can’t keep up with. As a result, their interventions will invariably do more harm than good.
The report goes on to criticize the government for not taking public concerns about the security of personal data seriously enough, describing their approach to this issue as “bland” and “disappointing”. The report suggests that personal identity and all data associated with it should be defined in law as private property owned by the individual. Any use of that personal data without the owner’s consent would thereby become unlawful.
The report also accuses the government of ignoring a “dinosaur in the room” by failing to address the taxpayer-funded BBC’s market dominance, which it says crowds out other commercial players. The report proposes a radical programme of phased privatization of the BBC, coupled with progressive cuts in the licence fee.
Digital Dirigisme – A response to Digital Britain is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. A PDF of the report can be downloaded for free at http://adamsmith.org/images/stories/digital-dirigisme.pdf
5 November 2009
If Guy Fawkes came back today and blew up Parliament, would we notice any difference? An influential Westminster think-tank is not so sure.
The EU writes our most important laws, says the Adam Smith Institute in a paper published today, and ministers are more accountable to the media than to MPs. New regulations, like those giving councils the power to search our homes and freeze our bank accounts, are never even debated. MPs vote as the party whips tell them, not as their constituents want.
No wonder, say the Institute's authors, Professor Tim Ambler and consultant Keith Boyfield, that 80% of us think that Parliament has – er – lost the plot.
According to their paper, Knaves and Fawkes, MPs keep themselves busy – and not just on fiddling their expenses. But much of their time is wasted on trivia, leaving them overwhelmed by the deluge of new law coming from Brussels and Downing Street. Parliament's founding purposes – to make laws, restrain public spending, hold ministers to account, and represent the public – now exist only in name.
Tempting as it is to blow up Parliament and sell the land to reduce the National Debt, Ambler and Boyfield say we should put aside the gunpowder, because these are vital democratic protections that need to be re-asserted.
However, nobody will trust MPs until they clean up their expenses act, and streamline their operation. Britain has 646 MPs while the United States, with five times the population, has 435 Members in the House of Representatives. David Cameron's proposed 10% cut in MP numbers does not go far enough, believe the authors, who suggest a far more radical reduction.
And instead of spending hours discussing road closures and drains, the time devoted to both UK and EU legislation should be proportionate to its importance, says the paper. EU regulations should be more effectively scrutinised, and MPs should be told which of the annual 3,500 'statutory instruments' that currently go through on the nod embody serious legislative changes rather than trivial amendments, so that they can be discussed and voted on.
Ambler and Boyfield would strengthen accountability by making regulators like Ofwat, which sets gas and electricity prices, answerable to MPs, and MPs should be able to question civil-servants directly, rather than having to go through ministers. And Opposition MPs should chair the main parliamentary committees to ensure close scrutiny of ministers and officials.
"Parliament today has lost its power and significance. It should reform itself and not wait to be told what to do by Whitehall, Downing Street, or Brussels – none of whom would be sorry to see it go," says the Institute's Director, Dr Eamonn Butler. "Otherwise, they might find the electorate putting a large keg of gunpowder under them all."
Tuesday, 6 October 2009
One year on from the part-nationalizations of Lloyds-HBOS and RBS, a new report by leading Tory John Redwood MP has pinned the blame for the financial crisis squarely on the government and the Bank of England.
In Credit Crunch: The Anatomy of a Crisis, published today by the Adam Smith Institute, Redwood attacks the notion that the UK economy was well run, and that its problems were imported from the US. He blames bad monetary policy from the Bank of England, bad regulation from the Financial Services Authority, and bad fiscal policy and crisis management by the British government for the severity of the crash. Britain's crisis may have had much in common with America's, Redwood says, but it was very much home grown.
Britain's fake boom
The report traces the roots of the banking crisis to the "false boom" of 2001-2007. A boom fuelled by ultra low interest rates, lax credit controls, and an explosion of lending, rather than real, sustainable growth. These economic conditions encouraged banks, like Northern Rock, to pursue an aggressive growth strategy based on selling securitized mortgages and borrowing short-term from the money markets to finance new lending. As well as driving a house price bubble, this approach sowed the seeds of later disaster.
Blame the Bank of England
The Monetary Policy Committee of the Bank of England must take a major share of the blame for the crash. Redwood explains that having first kept interest rates too low for too long, it then raised them too far and too fast in 2007. They starved the money markets of cash and triggered the first phase of the financial crisis, as Bradford & Bingley, Alliance & Leicester and HBOS had to be bailed out, and Northern Rock, ultimately, nationalized. Incredibly, Redwood points out, in the year that followed the run on Northern Rock, the Bank of England acted as though nothing serious had happened, keeping interest rates relatively high when they should have been cutting them.
The government got it wrong
The report argues that the worst policy mistake of the crisis was the government's. In autumn 2008, just as world markets were showing serious signs of strain, they suddenly decided to insist that the banks hold more cash and capital than they had required during the boom years. As Redwood points out:
"That was the worst possible moment to make such a request, and the worst possible thing to do when markets needed reassurance from the authorities that the banks would survive. As soon as the regulators' demands became public, confidence in the major financial institutions was undermined, and RBS and Lloyds-HBOS were forced into semi-nationalization, at huge taxpayer risk."
Reforming Britain's banks
The result of this disastrous intervention, Redwood says, is that Britain has been left with a banking sector with too few competitors and too many weak balance sheets. He argues that the prime task facing the next government will be to remodel the state owned banks, splitting them up into smaller institutions to encourage domestic competition, and return them to the private sector as soon as possible. The report also suggests that banking regulation should be returned to the Bank of England, who would in future focus on the 'big picture' and set counter-cyclical cash and capital reserve requirements for the banks.