It's Carry on Printing

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The Bank of England not only kept interest rates on hold at its Thursday meeting, it also reaffirmed its commitment to quantitative easing, creating £75bn of new money to be spent largely on government bonds.  The policy is unsound, as I wrote last Tuesday, in that it will misallocate resources in response to the false signals it sends out. 

The error has been compounded by buying government bonds.  This drives up the price and lowers the return on them.  Pension funds, which move deeper into bonds as their members approach retirement, thus achieve lower returns on their investments, and pay reduced pensions in consequence.  If the £75bn bung were used to buy corporate paper, it would still be wrong, but would at least have raised company shares, their asset base and their credit-worthiness.

The minor piece of good news is that the Bank may hold back on the second wave of its printing until its May or June meeting, giving it time to assess what effect the April 22nd Budget might have.  It also gives it time to see if the dreaded deflation is indeed rearing its head, or if it must instead start looking to counter all the inflation pumped in.

The fishing police

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The government is trying to give us handy ways in which we can save money and firms can increase efficiency. For example, their ‘Business Link’ website tells us that fixing a dripping tap could save 90 litres of water a week, greatly reducing costs. If we were to extend the analogy of a dripping tap on to the governments waste of public money, we would no longer be talking in terms of taps and drips, but pressure-washers and lakes. Perhaps the government should sort out its own spending and efficiency before preaching to individuals and firms.
 
We all know examples of government waste, ranging from the immoral MP expense scandals to the absurd overpayment of civil servant pensions. The latest example of government waste I have seen from the government is a flashy advertising campaign telling people that they could face £50 fines if they are caught freshwater fishing without a licence. When we are so badly in debt, people are dying in hospital beds and children are leaving schools with no qualifications, is this really the best use of taxpayer money?
 
It is not only the cost of these adverts that is scary. They are sinister and oppressive, saying we could be hauled up in front of judge and fathers could be banned from spending time fishing with their sons if they do not comply with the rules. I know this government has tried to sap the fun and enjoyment from life, but now they are even targeting a very British past time.

The 'fishing police' have already begun to claim victims. Last year this school headmaster was caught without a licence, after paying his fine of £50 he found that he found that he now had a criminal record which could have potentially prevented him from working with children, meaning he would lose his job and the students their headmaster.

Of course, the most efficient way to encourage responsible and sustainable fishing would be to extend greater property rights over fishing lakes, allowing owners to charge a market rate for fishing. This would also provide greater incentives for river owners to promote fish stocks and maintain clean, healthy rivers.

The tax poem

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The Tax Poem

Tax his land, Tax his bed, Tax the table at which he's fed. 

Tax his tractor, Tax his mule, Teach him taxes are the rule.

Tax his work, Tax his pay, He works for peanuts anyway!

Tax his cow, Tax his goat, Tax his pants, Tax his coat. Tax his ties, Tax his shirt, Tax his work, Tax his dirt.

Tax his tobacco, Tax his drink, Tax him if he tries to think.

Tax his cigars, Tax his beers, If he cries tax his tears.

Tax his car, Tax his gas, Find other ways to tax his ass.

Tax all he has, Then let him know, That you won't be done till he has no dough.

When he screams and hollers, Then tax him some more, Tax him till he's good and sore.

Then tax his coffin, Tax his grave, Tax the sod in which he's laid.

Put these words Upon his tomb, 'Taxes drove me to my doom...'

When he's gone, Do not relax, Its time to apply the inheritance tax.

Save the tax havens – we need them

Dr Eamonn Butler argues the case for tax havens. He investigates why the G20 leaders would be so against tax havens and the people who use them.

What is it about tax havens that makes the G20 leaders so keen to crack down on them? Outrage against all those Russian mafia bosses secretly laundering their prostitution and protection racket money through Luxembourg or disgust at Third World dictators being able to siphon millions of their people’s money into numbered Swiss bank accounts in case they need to make a quick exit one day?

Or is it just envy – the feeling of unfairness that billionaires can sip cocktails on their yachts off Bermuda, paying nothing in tax, while poorer mortals like us have to work and slave?

It’s probably a combination of all three, because G20 politicians have hated tax havens for so long that they’ve started to believe their own spin on the subject. But the business of tax havens is actually far more prosaic than any of these rather exotic images. And the real reason why our leaders hate them is that they simply can’t stand the competition.

If you want to pay less tax – as about five billion of the world’s population doubtless do – you have two options. You can evade taxes, concealing your income from the authorities, which is, of course, illegal. Or you can avoid taxes, which is perfectly legal. You might simply claim the full deductions allowed by the tax authorities or maybe move your money into a place where taxes are lower.

 

It’s avoiders, not evaders, who are the tax havens’ staple customers. The image of drug money being washed through the Cayman Islands is the stuff of thrillers rather than reality. Criminals generally launder money at home because it’s far riskier to move it across borders. The bread and butter of tax havens is people like you or me, who put their modest life savings into a respected investment company in the Isle of Man. And we do it because that way our savings don’t get clobbered for capital gains tax every time our account manager decides to sell one batch of shares and buy another.

Few honest people have qualms against clamping down on criminals. But despite all the Godfather-style spin, it’s actually the rest of us whom the politicians want to clamp down on. They figure – correctly – that if we remain at liberty to put our money in the Virgin Islands or some other place where taxes are lower, we are likely to do just that. And our ability to escape puts limits on just how much they can tax us.

This explains why even Gordon Brown is calling for curbs on tax havens, despite the fact that many of them, including the Channel Islands, are British dependencies. Other countries want even tougher sanctions.

It’s pure financial protectionism. The G20 leaders signed a communiqué praising free trade and deploring anticompetitive barriers in goods and services. That’s because leaders don’t make goods and services. But they do make taxes and are really keen to keep out the competition in that sector. They don’t mind us shopping around the world for the cheapest goods, but they certainly do mind us shopping around for the cheapest taxes.

They have only themselves to blame. It’s not just that governments seem unable to rein in their bureaucracies and keep their costs under control. It’s that they have made taxes so complicated. The last time I looked, the UK tax code ran to 9,973 pages, and that was back in 2007. Complexity inevitably creates loopholes – which lean, nimble tax havens are delighted to help people exploit.

Many countries have lower taxes on foreigners who invest there. That’s because they figure their own residents are largely captive. But they know that international investors can put their money anywhere in the world, so countries have to make themselves attractive in order to pull them in. When you have two different tax rates for the same thing, however, you must expect trouble. And you get it. What happens is that domestic investors simply send their money to a tax haven, then send it back again as if it were “foreign” investment and pocket the difference in the rates.

You can’t blame the tax havens for this kind of wheeze. The root cause is high and complicated taxes. The surest way for the G20 to get rid of tax havens would be to cut and simplify their own taxes – to take on the competition directly.

Until they do, that competition serves a useful purpose for the public. It does make politicians think twice about adding to tax rates or complexity. In particular it limits the burden they can put on savings and investment – the engine of economic growth.

If tax havens boast some of the highest living standards on the planet, that’s got very little to do with money laundering. It’s because low taxes encourage enterprise, stimulate growth and promote personal freedom, too. Rather than trying to kill tax havens, wouldn’t the world be better if our politicians instead sought to beat them at their own game?

Published in the Sunday Times here

Blog Review 928

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Architects, their clients, politicians, the civil servants and us.

Yes, our public sector pension funds are in just as much of a mess as this. For the same reason: politicians can promise big pensions knowing that someone else will have to raise the taxes to pay them.

So who gains from deregulation? From supply side reforms? Yes, correct, the consumer.

Speaking of consumers, this might not be the best way to reduce press interest in your consumables.

The damage that the target culture creates.

It appears that tax dodging trusts are not exactly new.

And finally, another classic as if written on Twitter.

Teachers boycott

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It's teachers' conference time, and they want to boycott exams. Just like the old days, isn't it?

Research from Durham University suggests that the value of GCSEs has fallen by around one grade in the last ten years (ie a B is now a C) and that for A-levels maths (maths is easy to measure objectively), it has slipped by 3.5 grades in 20 years (ie a D score in 1989 now gets you an A).

Likewise, despite getting better and better grades on UK exams, the performance of UK kids is actually falling on international exams like PIRLS. The universities too are voicing increasing skepticism at the value of A-level grades, and employers too.

UK kids are falling on international exams because it's harder for schools to teach to the exam, as they do with GCSE and A-levels. Gordon Brown's fixation on targets – specifically, kids getting 5 A*-C grades has focused the whole of the education system on achieving just that, and nothing more. (Hence today's stories that kids don't read for pleasure any more – they just learn how to analyze key passages from the set texts.) Teachers' and heads' pay and pensions depend on hitting the target. So they don't enter kids they think might fail, they focus on turning Ds into Cs and not on the needs of A or F pupils, they work out the easy subjects for their kids, they spoon-feed kids with answer grids and the like. It gets the grades, but doesn't educate the kids. Worst of all, the exam boards want happy customers, and happy customers are schools which get lots of A*-C passes, so they have an incentive to inflate the grade system too. Targets have corrupted the whole system.

The teachers' proposed boycott of exams will do nothing to change this. Exams at 7 and 11 provide extremely useful information – not just about how well the kids are doing, but about how well the teachers are performing. And they resent that oversight, because they believe their own spin about their 'professionalism'. But we all need to be monitored. Of course, the multiplicity of exams has made the 'cram-a-kid' culture more intense. But the way to solve that is to simplify the tests, not to abolish them and the information that they deliver to education managers. The tests were conceived, under the Thatcher administration, as simple pencil-and-paper tests, but they have developed under Gordon Brown into a full-blown targets exercise, raising the stakes for teachers and pupils alike. There's a lot wrong with education, but the teachers' solution is self-centred.

Dr Butler's new book, The Rotten State of Britain, can be bought here.

Eric Hobsbawm speaks out!

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This would be amusing if it wasn't so sad. Eric Hobsbawm tells us that the mixture of current events and those of the late eighties show us that both communism and capitalism have failed. No, really, a shudder in capitalism, as has happened in the past (oooh, 1930s, 1920 ish, early 1890s, 1873....) is a disproof of the system so absolute that it ranks up there with with the results of communism. That economic system so appalling that not even the Russians would put up with it, that economic system so appalling that, in PJ O'Rourke's words, it even managed to make Germans poor?

We have lived through two practical attempts to realise these in their pure form: the centrally state-planned economies of the Soviet type and the totally unrestricted and uncontrolled free-market capitalist economy.

It is to giggle, isn't it? "Totally unrestricted"? I think the only place we could say that has been true of in recent decades is parts of Somalia and while the results have not been all that wonderful they've not been noticeably worse than the semi-Marxist kleptocracy that preceeded it.

The future, like the present and the past, belongs to mixed economies in which public and private are braided together in one way or another.

Well of course. This isn't that much of a revelation. What the argument is all about though is which parts are to be private, which to be public?

It's been said before but it bears repeating, that there are three different sorts of things to think about. There are those things that only government can do and which government must do. National defence, the criminal justice system and so on. There are things that government most definitely should not be doing, like deciding what we all have for dinner each night or what consenting adults decide to consent to in the gonad playtime moments (and no, these things should not be decided democratically nor collectively either).

And then there are those either way things. Where we might rationally differ on whether something should be provided using the machinery of State. Or perhaps financed using the powers of tax compulsion. Or privately: education might be a test case here. There are entirely respectable arguments for the State financing of at least a certain level of education (as being part of a literate population is probably a public good). There are many fewer for State provision of that education. There are also decent arguments in favour of having a purely private education system: most notably that it cannot be captured by those who would teach obedience to their vision of the State.

But there's absolutely nobody outside of a very small indeed anarchist fringe who is saying that the future does not belongs to mixed economies. The argument is over what the mix is.

The closest thing to criminals?

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In a Western democracy the Police Force should be a bastion of a safe, civilised society. But the events of the past week have shown there is a growing gulf between the police and the people they are meant to protect.

 

The police should be there to protect our property, lives and well-being, yet there seems to be a culture of conflict emerging where the police have become separated from society. As Philip Johnston said this week, the videos of police in full riot gear beating the seemingly inoffensive Ian Tomlinson to the ground conjure up images of a paramilitary force under a faraway dictatorship, rather than civilians in uniform serving the public.

Regardless of whether the police directly caused the death of Ian Tomlinson, the video evidence we have all seen is clear. He had his hands in his pockets with his back turned away from the police and was not a threat to them or the situation as a whole. This was not the only damaging story for the police force this week. Clearly the news that a major terrorism operation was compromised because the head of counter-terrorism personally flashed highly sensitive documents to waiting photographers is worrying. At least he has had the decency to resign.

There seems to be a severe lack of leadership within the police force. They resemble a gang who operate as they want and feel free to yield huge amounts of power and ‘flash their badges’ as they see fit with little control from above or suitable repercussions when they make mistakes.

Personally, if I was in need or felt threatened in public, the police would not be the first people I would turn to. Essentially, the police are the front-line agents of the state.