2009 July » Tax Research UK

Don’t nudge – say it as it is about public services

Jul 242009

‚ÄòNudge’ by Thaler & Sunstein is one of the in books of the moment. I agree with this (page 10):

The false assumption is that almost all people, almost all of the time, make choices that are in their best interest or at the very least are better than the choices that would be made by someone else. We claim that this assumption is false – indeed obviously false. In fact, we do not think that anyone believes it on reflection.

They are right about the assumption – of course it is false. We quite clearly do not have the capacity to make all the decisions that are required of us to manage a modern life. Without others taking most of them for us (others often, but by no means always, being backed by government) chaos would ensue and the quality of life for all would be vastly lower, however defined, than that most enjoy now. Thaler & Sunstein are right, of course, in that respect. It is why they quite openly promote a system of paternalism.

They’re wrong to say that on reflection everyone would agree with them. Far too many professional economists still base their work on the assumption that not only is it possible for an individual to make all the necessary decisions required to determine their well being, but that we should assume that this is what actually happens and we should base our economic planning on this assumption – however false it clearly is. Worse, they so clearly think this possible they are quite unable to identify the influence of others on their own work – and so claim they are objective when making this absurdly wrong claim – and at the same time suggest that anyone who challenges their obvious error is casting aspersions on their objectivity. Of course those who make that challenge are doing just that – because the claim of objectivity is as false as the claim that Thaler & Sunstein identify.

The situation they create is worse than that though. Because these economists now dominate their profession – and allow no one into it who disagrees with them – those who hold this belief influence government, the media, politics and society. Hence we get a false agenda of ‚Äòchoice’ – which is seen as the prime virtue of desirability – when it is now known that choice is often crippling and most people simply want something that works – nothing more or less.

There is something more sinister still about their agenda though.These people openly promote the idea that government is wrong because it supposedly denies people choice. So tax is a bad thing because it denies people the choice about how to spend their money – even though the vast majority of people are clearly happy that we have an NHS, state education, security forces, and much more besides that they could never enjoy without having passed over the decision making authority on these issues to government – knowing the government will (most of the time, but not always) decide on these issues better than they could themselves – which is why we have had so few changes of government in the last 30 years.

Why sinister? Because this economic viewpoint – invariably right wing – feeds straight into the libertarian views of the likes of the Taxpayer’s Alliance – an organisation with no intention of representing taxpayers at all but with every intention of undermining the vey process of government which underpins our well-being by denying it the revenues it needs and by deliberately undermining its working by turning those for whose benefit it works against it by spreading false accusation of maladministration – almost none of which stand up to real scrutiny.

Day in day out that same message is seen in papers like the Daly Mail and Express – suggesting that government is daily undermining the freedom of their readers. And yet, the moment the government really does threaten to return a decision to the readers of such papers there is uproar – as the Express yelled on Monday when saying that a charge to visit a GP would be outrageous – although clearly any libertarian would have to support that market based logic.

What this therefore says is that Thaler and Sunstein are right again – no one can actually hold these views upon serious reflection, but that the capacity to reflect in that way has been drummed out of many professional economists and their slavish, non reflecting journlaitisc followers who promote this cause out of what is, in this case, clearly misguided self-interest, but who do in the process provide a platform to fanatics who do immense damage to many in this country.

That though is ultimately the flaw in the logic of Thaler & Sunstein’s ‚ÄòNudge’ thesis. They call it ‚Äòlibertarian paternalism’. I’ll agree with the latter. The former is pure pretence. It is about providing the illusion of choice when the reality is that either none is available, or it is incredibly constrained, or in fact (as fashion evidences day in, day out) the desire to make ‚Äòchoice’ is actually all about the need to conform under a veneer of difference.

That is the reality of much of life. Advertising sells the lie of choice when it is actually selling a person dissatisfaction with their state of compliance with societal norms. Economics as taught at present says we are all free to choose when that is absurdly and obviously wrong. And Nudge offers the appearance of choice whilst saying its really only exercised at the very margins of service supply.

In which case let’s be honest. Let’s say in this complex modern world some things can’t be done with choice on the agenda. There is room for only one health service if we want a truly excellent one – as the contrast of the UK’s NHS with the US debacle proves only too clearly. There is room for only one education system if all children are to get access to excellence. We can only have one police force in an area, one fire service, one provider of refuse services – and only one regulator of an activity if it is to be done properly.

Of course we can have choice on a great many issues. Many consumer goods, despite their obvious similarities in many cases, can be offered in a bewildering variety of options if that does not result in waste (a big proviso, I might add). And, for example, there is no reason why the country cannot support the vast number of market based service organisations it enjoys without apparent problem of any sort. That’s all fine.

But let’s not pretend one size fits all – and that we can choose on everything. We can’t. We don’t even want to. And if we did we’d probably get it wrong. So it’s up to the state to do the most complex things – to take the stress of these decisions away from us – but to then supply these services at an excellent standard.

Which is what actually happens, by and large. Most people are big fans of the NHS, their local school, the police, our troops and much more besides. Which gives a lie to the claim that people don’t like what government does. They do.

I know the Left is looking to redefine its purpose right now – James Purnell, Jon Crudas, Alan Simpson and others are planning to do this at Demos. I hope others join in. But James Purnell, at least (but not the other two, who I know somewhat better) is making a serious mistake when he claims the left is about ‚Äòequality of capability’ (which sounds horribly like equality of opportunity when we do want greater equality of outcome – and should be honest enough to say it). He’s right that the Left is about a belief in equality – but one way of evidencing that is by saying we believe in the State supplying first rate services equally accessible to all that ensure that individuals have the freedom to devote time to the choices they face in other dimensions of their lives that matter to them sure in the confidence that in many key areas where they do not have the competence or resources to decide the job has been well done for them.

This requires tax.

This requires us to believe in democracy.

It requires pride in public services.

It requires that those services be well managed.

But most of all it requires us to have the conviction to say we can decide to do this. That we believe that collectively a government can make good decisions for others. That this is a significant part of what government is about. This is why it deserves support. This is why we fight for excellence in these services. Because on the basis of that excellence – which with renewed confidence we can deliver better then ever before – can be built better lives for all people in this country – lives which will include the freedom to decide on those things which as individuals are best reserved to us alone.

So no nudging please – let’s go out there and be explicit about what we believe in, what we want and what we stand for.

Resolution

Ethics, Guernsey 1 Response »

Jul 202009

I have noted the response to the approach from the very weird Resolution entity to Friends Provident plc.

Friends Provident has rightly said that it is not open to offers from a tax haven based company, nor one that pays 10% of its profit to an LLP controlled by what seems to be its true management.

More on this at TJN, here, and like them I say – it’s good to see a company (and an old Quaker company at that) willing to stand up and be counted to be doing the right thing.

Misplaced passion

Economics 4 Responses »

Jul 202009

From Paul Krugman ‚ÄòDepression Economics’:

The truth is that good old fashioned demand side macroeconomics has a lot to offer in our current predicament – but its defenders lack all conviction, whilst its critics are filled with a passionate intensity.

Not so this defender.

But he’s right – the Left has to argue with the passionate intensity of the Right.

I know we haven’t, for the good and simple reason that our case is proven by the fact that the arguments are rational and the evidence shows them to work in practice. But that doesn’t mean we can afford to ignore those who would oppose the justice they promote with a wholly unjustified passion.

Putting people before cuts

Economics 8 Responses »

Jul 172009

As I mentioned earlier in the week, I’m in a form of Purdah right now – for practical purposes out of broadband connection a lot of the time. It’s not something I find especially comfortable – which is odd as for the vast majority of my life this would have made no difference to me whatsoever.

It does right now, for good reason. All about I read of the supposed pressing need for massive cuts in government spending. The Tories have made it a mantra, the Lib Dems seem to have caught it, and Mandelson is in the Mail saying we have no choice but make massive cuts in government spending.

I showed last week that if cuts in government spending resulted (as they will ) in a person on £25,000 losing their job that this could cost the government £23,000 in lost revenue and extra spending. And that is before any indirect benefits are taken into account. The reality is that when there is mass involuntary unemployment, as now, caused by a lack of aggregate demand in the economy caused in turn by the refusal by banks to supply credit then to cut government spending is not just the wrong way to cut the government deficit, there is real, possibility that such a policy will increase the deficit.

Danny Blanchflower, writing in the Guardian this week has agreed – and he is one of the few economists who can rightly say he foresaw what is happening now. Those who did not, as he can also rightly say, are those who wholly failed to predict the current crisis.

I am aware that my basis of forecasting is simplistic – but can see no reason in principle why I am far wrong when I suggest that making 2 million people unemployed might cut the government deficit by £4 billion. Remember it’s running at more than £170 billion at present – meaning £4 billion is neither here or there.

But for 2 million people this policy would be a disaster – and for millions of others it would create fear meaning they would cut back on all spending to the point that a vicious downward cycle of depression would be created by government cuts anytime soon.

There is only one group who win from this – those already financially secure. In a depression there are remarkably few of these – in fact Goldman Sachs and a small fellow elite of bankers who are guaranteed not to fail whilst making vast profits from the unfettered advantage government has given them are amongst the very few who could enjoy any such situation.

But don’t doubt they will be the people who will seek to tell the government what to do. All governments have lived in the thrall of our bankers – failed economists that they are to a man and woman. They are also people about as far removed from entrepreneurs as it is possible to get as they only gamble other people’s money, not their own – with only an upside for themselves.

Their consensus view – that the power of government must be cut (except in so far as it underpins their own well-being) has to be challenged now.

Whether this is the job of unions, or Put People’s First, or the Green New Deal, the Tax Justice Network, those who support The Other Taxpayer’s Alliance, or Compass, or more besides, does not wholly worry me. What does worry me is that there is a vacuum of those who are arguing for sane economics, who are arguing that people come first, who are saying that cuts will cause massive harm and absolutely no good, and who are willing to explore just what cuts will mean so that when we come to a general election next year people realise that there is another option – that cuts are not the only way.

I can play a part in this – as can some others I am now working with. We can show that tax can be raised at present (as the Guardian ha noted is necessary). But more expertise is required. Expertise that shows what happens when you cut education by 10%, benefits by 10%, defence spending by 10%, and more besides. And do remember swine flu – which will massively increase health spending – or should we ignore it?

Only then will people realise what the insanity of cuts means.

We have to make this clear now. Not with threats. Not with exaggeration (none will be needed), just with clear, simple, examples that show time and again how this will impact on people’s lives.

And we have to begin now. Next January will be too late.

I happen to think ‚ÄòPut People First’ remains a great slogan. If another is needed, so be it. But can I ask all experts in these areas to begin thinking how this issue can be communicated? Because that is what we need to do. And if enough come forward I am sure we can build the right tool for communicating the message. But the message comes first.

Time to bury the Oxford report

Development, Economics, Ethics 6 Responses »

Jul 162009

Tax Justice Network: Time to bury the Oxford report.

The dispute with Oxford University’s Said Business Scholl of Tax continues:

Professor Mike Devereux has a riposte in the FT:

The researchers involved are first-rate, independent academics. As is well known, the centre was initially funded with an endowment from the Hundred Group of companies. But contrary to the implication from the Tax Justice Network, the centre has always operated independently. Not once has the Hundred Group, or any other business group, sought to influence the centre’s research.

The centre is now widely financed, and has received a substantial grant from the UK Economic and Social Research Council, after academic peer review. The specific report in question was commissioned and financed by the UK Department for International Development.

The report’s criticism of existing work is intended to be constructive, rather than destructive. We find it disappointing that the Tax Justice Network seeks to spread innuendo about the messenger rather than to engage in constructive debate about the research. Those in developing countries deserve serious and balanced research on issues of tax evasion and avoidance.

He’s right, but Oxford cannot supply it. Precisely becaause The 100 Group funded, as TJN notes to provide biased opinion. Take a look at this article in Accountancy Age, reporting on the centre’s aims from the outset:

“The culmination of this mission, he (Christopher Wales of Goldman Sachs) says, was the creation and launch of the Oxford University centre for business taxation (see box) on 4 November this year. Based at the Sa?Ød Business school and backed by £5m-worth of funding from the influential Hundred Group of Finance Directors, the centre has been set the goal of using academic weight, alongside HM Revenue & Customs and business expertise and assistance, to achieve a more competitive tax system for British businesses.”

That’s not seeking objective, balanced or academic comment. That’s right wing think tank land. And that’s where Oxford is on this issue.

And that’s no doubt why they found as they did in the report they produced, which as TJN reports (link at top) is so riddled with errors it needs to be almost entirely rewritten.

Who is the IASB kidding?

Accounting, IASB 6 Responses »

Jul 162009

The IASB has issued a two page plus new accounting standard for small and medium sized enterprises. As Accountancy says:

The international standard-setter has today published its long-awaited International Financial Reporting Standard for SMEs after five years of consultation on the standards.

The International Accounting Standards Board aimed to produce a standard which is less complex than full IFRS and which would improve comparability for SME users of accounts, who comprise 95% of businesses.

Commenting on the standard, IASB chairman Sir David Tweedie said: ‚ÄòFor the first time, SMEs will have a common high quality and internationally respected set of accounting requirements. We believe the benefits will be felt in both developed and emerging economies.’

That is ludicrous. These things are too complex for developed economies – in developing and emerging economies they would represent madness – and add no value at all to users or tax authorities. These countries should adopt the UN’s SMEGA – Accounting and Financial Reporting Guidelines for Small and Medium-sized Enterprises. These make vastly more sense – and are short, comprehensible, sensible and appropriate.

Just about the opposite of the IASB offering.

Rebuilding the bias to equity

Economics 3 Responses »

Jul 152009

I was re-reading a speech by George Osborne the other day. He said in March:

Our corporate sector’s excessive dependence on debt is deep rooted in the structure of our economy. In particular, economists have long pointed out that our corporate tax system favours debt financing over equity.

Interest costs are fully deductible with very limited restrictions, while the returns on equity receive little or no tax relief.

Gordon Brown’s decision in 1997 to abolish the dividend tax credit for pension funds made an existing imbalance worse. The result is that the UK is widely regarded as having the most generous tax treatment of debt interest of any major economy. That’s economically inefficient at the best of times, but it makes even less sense now that we understand more about the dangers of excessive leverage. There are several ways that we could begin to undo this imbalance by reducing the costs of equity financing relative to debt.

I have long argued that there is a powerful case for looking at stamp duty on shares, which raises the costs of capital and reduces investment. But I believe the time has come to look again at the generosity of interest deductibility in our corporate tax system.

Interesting idea George – as he went on to say he might abolish tax relief on interest paid.

He did not say where this is leading of course – to the Flat Tax idea of no tax charge on interest received – which undermines any prospect of progressive taxation – which I am sure is a Tory goal – but let’s leave that aside for now.

The reality is Osborne does hit a relevant target. I have seen estimates hat suggest 80% of bank lending is offshore i.e. in the Euro-dollar and other markets which float pretty much outside regulation and get recorded largely in tax havens. How else is Cayman the fifth biggest financial centre in the world?

Private equity exploits this to the full. They load their UK companies with debt and pay the interest offshore where it is not taxed on receipt. In effect for every £1 of interest paid a 28p tax subsidy is given by the UK taxpayer – an extraordinary mechanism for shifting wealth from the poorest to best off in our society.

This is ludicrous – but has Osborne got the right answer? I’m not sure. Why not tax at source instead? That way give relief in the UK by all means – but at least capture the tax revenues due here as well.

This then creates a bias to equity – a bias we need in banking and in business if appropriate incentives for risk taking, for building up buffers of capital reserves and if incentives for profit making rather than bank management are to dominate in our economy – where the reverse has been true for far too long.

I suspect I’ll have more to say about this – as this is a key tax issue of the future – but if Osborne is serious think how equity is brought back into vogue using the tax system and how to capture the tax yield on low risk capital at the same time – rather than use a supposed swipe at gearing as the prelude for a wider, and seriously retrograde swipe at the whole tax base on which society depends – which is what I fear he is doing.

Elsewhere, again

Switzerland Comments Off

Jul 152009

I note another of my blogs has appeared elsewhere. This time my comments on the UBS case made last Friday are no on the blog of the Task Force on Financial Integrity and Economic Development, which I recommend to any reader of this blog.

A country is not a company

Economics 8 Responses »

Jul 142009

The poverty of comment on this blog on macro-economic issues always strikes me.

I blame a simple, but fundamental conceptual problem. Over the last twenty or so years he corporate model of thinking has become pervasive; so much so that we suffer that profoundly annoying phrase ‚ÄòUK plc’ far too often.

The UK is not a plc. It is a country. A plc is a company. They are not the same.

For example, a company can shed its labour force, pay the compensation due and they are gone – no longer its concern. The person made redundant then becomes and externality.

If a government makes someone redundant and there are no other jobs for them to go to (as now) there is no externality: unless they leave the country the person is still needing to be housed, fed, clothed, kept warm, be educated, protected, consume healthcare and so on. All you do is cut one budget and add it to another. And, as I showed recently, that might give no real saving at all – indeed – it can add to government cost in many cases.

It’s no good assuming we have full employment and so government can behave like a company – we do not have it right now. Those who do so make the same disastrous assumption that was made at the beginning of the 1930s – which created the great depression – which is that the unemployed simply go away. Even more now than then they do not.

This is why the right decisions for companies facing a cut in revenue do not work for a country in the same scenario. A company might cut cost to cut borrowing. But a country can cut borrowing by keeping people in work – by spending in fact to avoid the massive social risk of unemployment and by spending to keep up tax revenues – and the growth it creates does, what is more, actually pay for the borrowing – so spending cuts borrowing, not increases it.

A depression is a shortfall in aggregate demand. You don’t solve it by increasing the shortfall in aggregate demand by cutting government spending during a recession / depression. You increase demand for as long as is required – and then you cut.

This is macro thinking. Cutting spending now is micro thinking – small minded thinking – and it’s wrong. And will be disastrous.

Someone please tell the Treasury, and remind them they’re running a country, not a company, please?