Corporate tax competition

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The Confederation of Danish Industries (DI) is urging the Danish government to cut corporate taxes from the current 25% in order to maintain Danish competitiveness. This recommendation comes after the new German government announced it plans to cut corporate taxes by half, from 30% to 15%.

Deputy Director General of the DI, Tine Roed, argues that because Germany is Denmark’s largest trading partner, a lot of Danish companies would be tempted to move their businesses south of the border. This is compounded by the new “green taxes" imposed upon Danish industries together with the indications that the opposition would raise taxes if in power.

The British government should carefully follow the actions of the new German government. Unfortunately the UK has put itself in a position where it is not able to act this decisively because of the already extended public borrowing: about 12 percent of GDP this year. Germany’s deficit on the other hand only accounts for about 5 % of GDP this year, thus leaving more room for the German government to act on changes in the global economy.

As Jeremy Warner pointed out in The Daily Telegraph, the UK is in a situation where tax cuts are not likely. As a short term measure, Mr Warner suggests a dual action of tax raises and expenditure cuts. Why, you may ask is suggesting we raise taxes? Because: “spending cuts take time to implement and sometimes involve substantial upfront costs". The ideas is that a shorter period of higher taxes might increase government revenue, taking us out of the debt spiral quicker, followed by tax cuts so the economy is not too adversely damaged.

However, given where we are on the Laffer curve, the government might not have Warner’s luxury of extorting more revenue with a quick tax rise, and more worryingly, governments are rarely keen on cutting taxes once they have been instituted.

More powers for Scotland

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The Scottish Secretary has announced that the government will introduce a White Paper on implementing 39 of the 42 proposals made by the Calman Commission on Scottish devolution. The most eye-catching proposal is that the Holyrood Parliament will get partial control over income tax.

Well, I’m certainly glad that some tax powers are being devolved. But as I wrote at the time, the Calman Commission’s proposals are a bit of a dog’s breakfast. Take the tax proposal. Under the plans, HM Treasury will take 10 percent off the basic and upper rates of income tax in Scotland, and reduce the block grant from Westminster to Holyrood accordingly. The Scots will then decide how much additional income tax they want to charge – if they go for rates higher than 10 percent, they’ll be sent more money, and if they go for lower rates, they’ll get less.

My first problem is that this arrangement would institutionally entrench a naïve view of taxation – that a higher rate always means a correspondingly higher amount of revenue, while cutting taxes has an equal and opposite effect. Everyone except the Treasury, which insists on sticking with its static model of the economy, even though it hasn’t correctly predicted tax revenues in years, knows that this is rubbish. In the real world, taxes affect incentives, incentives affect behaviour, and behaviour affects tax revenue. Sometimes, cutting taxes will raise revenue, and raising them will reduce it. It’s called the Laffer curve.

Furthermore, does everything to do with devolution have to be such a muddled fudge? Couldn’t Calman and the government just embrace a simple principle – that the Scottish Parliament should be made responsible for raising the money it is in charge of spending – and follow it to its logical conclusion? You could do this very simply. My preferred option is to keep VAT and National Insurance as UK taxes, split North Sea Oil revenues 60/40 in Scotland’s favour, and then transfer responsibility for all the other taxes to Holyrood, and let them do what they want. The sums more or less work out.

Reform Scotland has produced an excellent report on Scottish fiscal autonomy. Click here for details.

The Canutes

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Following the 'hack' of the Climate Research Unit, at UEA last week David Aaranovitch and George Monbiot have written quite different pieces that attempt to answer the questions it raises. The former continues in the vein of a fervent climate change supporter by sweeping the questions under the rug, the latter is contrite yet still needs more evidence to prove that perhaps the climate change science is partly flawed. (For an excellent round up of discovered flaws see Bishop Hill, more here). The accusations of foul play will continue to pour onto the net over the coming weeks, but they won't have any effect.

The self-proclaimed gods of climate change abatement meet in Copenhagen next month in an attempt to thrash out a Kyoto II type deal. To the assembled there is no questioning of the science: the climate is indeed warming. We have seen rulers like this before attempting to stop the tide from coming in: we know they get their feet wet. Within climate science currently there are many different arguments over what may cause the earth to warm: solar cycles, carbon dioxide emissions, clouds, the affect of the oceans trapped heat, even volcanoes. All contribute to the global climate, some more so than others e.g. water vapour. Yet politicians are solely concerned with one thing: CO2.

Consider the effect that sulphur dioxide has when it reaches the stratosphere following a massive volcanic eruption. It is well documented that afterwards the climate is changed both globally and locally. In the short term. Surely if politicians want to have an effect be it long or short term then putting sulphur dioxide in the stratosphere is a cheaper and more efficient way to go. Politicians have become blinded by the media spotlight and are failing to consider all sides of the argument. As we shall see in Copenhagen next month, when the Canutes will attempt to stop the sea from rising, the ice from melting, the rain from falling etc. They are doomed to failure and with it, they will drag others into poverty, and further hinder our progress.

MPs: always on the take

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Chris Mullin is right when he states that £64,000 isn't peanuts. It's not. It's 253% more than the national median wage, or roughly double if you include a London weighting figure of 20%. (The Family Spending 2008 figures conclude that London living is 20% more expensive). So it's fair to conclude that politicians have an easier life than the majority of us on their 'basic' salary. Let's also not forget that they can expense much of their everyday spending whilst also eating subsidized food and drink, and should they garner a ministerial position then they're really raking it in.

Yes, their expenses should be published, down to the last nut and bolt. Yes, their other jobs should also be listed along with how much they earn for those positions. But neither of these solves the question of their pay. The Senior Salaries Review Board will continue to 'advise' the prime minister, meaning that the MPs will still set their own pay. A solution to this problem needs to be found as many in this country don't trust politicians (historically trust in politicians was declining before the expenses scandal) and therefore feel they are paid too much as of now.

MPs have achieved little for the reward they receive. Their remuneration isn't a reflection of the overbearing, unproductive and stultifying effects that their actions have on the rest of us. The UK's political class is in fact acting as a successful glass ceiling to the growth that we all could profit from without their interference. Their pay is purely a reflection of their self-centred and self-aggrandizing nature. A suitable pay cut would be sufficient to drag them back to earth and reveal the hardships that they have brought upon us. Connecting their pay to the median wage, as a base, would firmly ground them. Further linking that with growth and removing their ability to vote on their own pay rises would act as fair punishment for the years of theft they engaged in.

Closure on tax havens

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Mr Brown... no, not Gordon, but Bob Brown, the leader of the green party in Australia, urges the Australian government to take an active part in the struggle against tax havens. Bob Brown has said to The Australian that it's time, "for the Rudd government to follow the lead of the Gordon Brown and Barack Obama administrations in Britain and the US and take action against tax avoidance." Mr Brown goes on to say, “If one, or both, of the major parties vote no, I will call for a division to put it on the record, and then seek an explanation from them for their positions. They will say `it's a complex issue involving international law', but we all know that tax havens should not be encouraged by any government or potential government.''

Jumping on the bandwagon is not always the smartest thing to do, and the UK and USA are not exactly the places to turn for economic advice at the moment. When the two major Australian parties hopefully turn down Mr Brown's motion, they should not, as he suggests they will, defend their action by saying it’s a complex issue; instead they should refer to the ideas in The Economics of Tax Competition, Harmonization vs. Liberalization by Daniel Mitchell of the Cato Institute and views expressed in the videos soon to come up on ASI's website of this event held earlier this year. Tax havens represent one of the core reasons why governments are unable to increase taxes even more than they do, creating a natural buffer on government spending.

The reason for turning down Mr. Brown's motion of banning tax havens should therefore be to maintain an incentive for national governments to do things better for less, surely needed as much now as ever.

Superfreakeconomics

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The follow up to Freakonomics, the successful debut by Levitt and Dubner, has been out for over a month now. Superfreakonomics - subtitled - "Global cooling, patriotic prostitutes and why suicide bombers should by life insurance" is another fantastic book on economics laid bare in simple terms for the layman to understand. You can pick this book up and open it wherever, and read about why it's more dangerous to walk home drunk than to drive home drunk or indeed why experiments with monkeys had to be ended due to their behavioural changes when money was introduced into their community.

Superfreakonomics shines a light on the subtleties that incentives have on human behaviour and explains why certain things occur. They uncover the truth surrounding the infamous, Genovesse murder in New York and the connection between TV and crime in India and the US. The chapter on cooling the globe is fascinating as it raises the question about what we as humans are prioritising and whether it is the correct approach, especially as there are plenty of cheaper alternatives.

This book is a fabulous, eyeopening and educational read. A superb follow up to their previous work which, again, is easy to absorb and understand and can be read in an afternoon.