We need one of these in the UK
Soon
Showdown In Chicago
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Oct 182009
In the company of the sane
Economics
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Oct 182009
I am well aware that economics is not a subject on which there will ever be agreement. And I am more than happy to debate the issues involved. And like many, I find the commentary of the Right on such issues, especially on blogs, to be straightforwardly offensive. I have no doubt this is deliberate. The belief of many from the Right’s fringes is that it is best to close down debate by intimidation.
And yet the sane persist in expressing their view – and that heavens for that. The Observer offered an excellent mix of that sane approach to economics today. Take this from Roger Bootle:
A year ago we came perilously close to utter catastrophe, ..but the neoliberal, free-market people are already on the warpath. They remind me of some mythical creature – cut off one head and it sprouts more.
Who is he referring to?:
the "efficient market" gurus. Their spiritual and academic home is the "Chicago School" – the University of Chicago – and their laissez-faire preaching of recent decades led policymakers into the dangerous liberalisation of financial markets that resulted, via vast profits and bonuses, in near-Armageddon.
I suspect that almost all the hostility on this blog comes from those subscribing to their beliefs (beliefs – note): beliefs that have nearly ruined us.
And might still. Note William Keegan:
The.. modern Conservatives give every impression of wanting to begin their economic leeching process as soon as they can, irrespective of the state of the economy. This general approach is certainly redolent of the policy mistakes of the 1930s. Luckily, Gordon Brown, for all the political misjudgments he is widely considered to have made, got the big one right.
Osborne is wild in his repeated assertions that "the country has run out of money". This is not what the chief executive of the Government’s Debt Management Office, Robert Stheeman, tells us. He recently said: "I would say that coming from a relatively low base of the stock of debt, certainly compared to other countries, gives the UK a slight advantage [in financing the deficit]".
That’s one thing Osborne has wrong. But Keegan’s analysis of another is new, and astute:
And now for an aspect of Osborne’s policies which I find especially bizarre, but which has received little comment. Much has been made of the proposed freeze on public sector wages, usually in connection with the supposed need to find "savings", and sometimes in connection with a distorted view that public sector wages generally are much higher than they really are.
But the very idea of a wage freeze at a time like this seems to have gone almost unquestioned. Yet the fact is that the raison d’?™tre for incomes policies and wage freezes is as a weapon in the battle to control inflation. The Conservatives under Edward Heath resorted to incomes policies in the early 1970s, and much of the subsequent Labour government’s time in the mid to late 1970s was taken up with the arduous business of administering an incomes policy.
A wage freeze in a recession is calculated to reduce real incomes and act as a brake on any economic recovery, possibly throwing the economy into reverse gear again at just the time when people are talking about "stabilisation" and possible recovery. Where is the inflation that a wage freeze is designed to combat?
I think this something Darling, Cable and Osborne alike should note.
But is that inflation likely? Back to Bootle:
He is not too concerned by warnings that inflation is about to take off because of quantitative easing. He thinks that deflation, which has dogged Japan for nearly 20 years since its property bubble burst, is a bigger worry: "In recessions, wage growth always gets a big jolt downwards and there is all this talk of wage freezes in the public sector. There is also lots of spare capacity in the world economy, so it is difficult to see where this inflation is going to come from."
Quote so.
Both men talk about banking, of course, but I’ll move to Will Hutton for that, quoting Willem Buiter:
A year ago, most commentators were writing the shadow banking system’s obituary. The importance of the bonus comeback is that it demonstrates shadow banking is roaring back to life, complete with all its risks. What has been created, as LSE’s Professor Willem Buiter says, is nothing less than communism for the rich. Bankers are making untold riches that are collectively guaranteed. Goldman Sachs now knows what it could only guess at before – it is too big and important to be allowed to fail.
Don’t believe that of Goldman Sachs? Try this, again from Hutton:
The all-conquering Goldman Sachs had to turn itself into a bank in order to qualify for unlimited lines of liquidity from the Fed. It received $13bn from the US government to compensate it for the defunct credit default swaps it had bought from the bust insurer AIG. On top, it has issued $28bn of cheap bonds through the Temporary Liquidity Guarantee Scheme. Without government life-support, it would have gone the same way as its peers, Lehman and Bear Sterns.
But the efficient market theorists have it that bankers were right all along, of course.
So what to conclude? Bootle says this?
Countries should now endeavour, he argues, to rein in the financial sector, recognising that leaving the markets to themselves is a recipe for disaster.
His new book calls modern academic economics a "disaster and a disgrace". Echoing the Queen’s question of why so few saw the crisis coming, he says: "They were not even looking in the right direction."
You are not going to be surprised to find I agree. And yet still the apologists (or are they worse than that?) churn out neoliberal economics as if a) it was right and b) there is no alternative.
That was, of course, Thatcher’s mantra.And maybe the last thought on this goes to Andrew Rawnsley who suggests:
If David Cameron wins in the spring, as most assume he will, is he destined to be in Number 10 for two to three terms like a Thatcher or a Blair? That is obviously what the Tory leader hopes for. Yet there is nothing pre-ordained about recent history repeating itself. A reversion to the earlier pattern would see David Cameron become a one-election wonder like a Heath or a Macmillan.
The question is equally important to his opponents. Is Labour fated to be shut out of power for a decade or more? Some of its gloomy luminaries seem to think so. Yet a return to pendulum politics could see Labour back in serious contention for power after just four years out of it.
His reason for saying this?:
The next decade is shaping up to be a much more testing economic framework for government. It may be more redolent of the Sixties and Seventies. Serious economists fear that the tentative signs of recovery are a false dawn before a W-shaped, double-dip recession. It is possible that the Conservatives will arrive in power with the economy apparently recovering only for it to tip back into recession soon afterwards. Their unpopularity in those circumstances could be epic, especially if they take measures which are blamed for choking off economic revival.
I too have suggested this. Actually, I’m still not sure the election is lost to the Left (or what passes for it) as yet – the more Osborne talks the more obvious it will be that his main priority is to redistribute the declining pool of wealth of all sorts within the economy he wants to create to his chums, but in case the message is not obvious before the next election I think it will be very soon afterwards – and Cameron’s legacy will look horribly like that of Heath – a Tory leader whose great achievement was to serve one, short, term before being replaced.
In that case the debate on economics now is if the greatest importance – because Labour has to show it really did do great things to save us from melt down before the Tories do the best to achieve it. In that way the prospects for sane thinking are very real – and the presence of a body of consistent Keynesian thought can only assist that process.
New tax on banks
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Oct 182009
Tax raid on banks planned by ministers – Telegraph.
Crikey – that was quick – Polly argued for this in the Guardian – I’ve argued for it, often and now the Telegraph says it’s going to happen.
Sounds like a Pre-Budget Report warm up to me
And I am quite convinced it is the right thing to do. Banks have to repay society. Banks are liquid now – using government money. If they need new capital they should raise it, not save it. And HMG needs the tax – plus to cost of doing business for banks has to increase.
Go for it, I say.
Oct 182009
The tenth best beach in the world » News » This Is Jersey.
Yes, this is a Jersey story because some think I only feel negatively about the place.
I don’t. So try this:
PORTELET has been voted one of the top ten beaches in the world.
The St Brelade beauty spot was ranked alongside palm-lined tropical paradise beaches in the Maldives, Hawaii, Cuba, Fiji and Thailand by holiday agent Sky Travel.
It was the only place in Europe to make it onto the list.
There is good news.
Oct 172009
Britain must raise taxes by £26bn a year to repair the economy, accountants warn – Times Online .
PWC want tax increases, service cuts and don’t give a damn that recession might turn into depression as a result.
Why should they? They’re all right. So why worry about all those who might suffer from VAT increases, NIC increases and income tax increases whilst losing vital services? PWC don’t need the latter, and know how to avoid the former.
Also from today’s Guardian, by Polly Toynbee:
The Treasury is drawing up a new code of conduct for bank tax affairs. It will oblige any bank operating in the UK to obey not just the letter but the spirit of the law. No more arrangements designed just to avoid tax. No more providing the funds and advice for clients to set up elaborate tax avoidance. No artificial offshore devices, rotating money through countries purely for tax purposes.
But here’s the catch: the code is voluntary, and so far no bank has agreed to sign. Instead banks have called in lawyers who cite the 1936 Duke of Westminster’s judgment that gives anyone the right to minimise their tax. (He had made a fancy tax-free arrangement for paying his gardener.) On their very high horse, bankers proclaim it’s against Magna Carta principles: they say the code gives arbitrary discretion to tax collectors to decide what is an artificial device. They want nothing to do with the spirit of the law, only statutes. That way they can hire the best brains to ferret out loopholes to keep one step ahead of Revenue & Customs. If they won’t sign voluntarily, they know there is a problem because you can’t legislate the "spirit" of a law. However, you could have a general anti-avoidance principle for all, such as the Australians use. Twice MPs tried to introduce one as a private member’s bill, but the government rejected it.
I suspect it’s fairly obvious Polly and I have discussed this: I’m pleased she called. And she has clearly done much of her own reading and thinking about bank reactions to all this stuff – as well as those of the tax institutes that cal themselves ‚Äòrepresentative bodies ‚Äò and are anything but – unless representing UKIP counts in the case of the ACCA.
There is no doubt – putting the Duke in his grave is critical to the future of tax in this country. I discussed many of the issues involved when righting about the need for a Code of Conduct for taxation in 2007, here. Most of all I argued then for a significant change in the jurisprudence of tax. Many think this is based on common law. That is wrong. As I noted in that study:
The legal systems of the world vary considerably, as do the jurisprudential systems that they use. These two possibilities do, however, accord with the broad categorisation of determining obligations in accordance with the principles of either equity or law. For these purposes “equity” is the name given to the set of legal principles which supplement strict rules of law where their application would operate harshly. The intention is to achieve "natural justice." In contrast the "law" refers to laws enacted by Parliament or established by "common law”, the latter being based on precedents set by judges when they decide cases.
It has been commonplace for tax to be charged in accordance with “law”. For example, it was decided in a legal opinion given in the House of Lords in the United Kingdom in 1869[1] that:
If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute.
This principle
remains enshrined in most British tax law (in particular)and appears to heavily influence taxation thinking in general. This decision has implicit within it the following assumptions:
- That the right to hold property is sacrosanct and that taxation violates that property right. As such tax may only be charged when specifically sanctioned irrespective of the equity of the resulting payment, or absence of payment of taxation;
- The letter of the law can be determined without reference to the intent of those who created it or the context which gave rise to it, even if the circumstance in which it is used was not envisioned by those who
didcreated it;
- That it is equitable as a result that some will, or will not, fall out of the charge to tax on the basis of the strict interpretation of the meaning of words which could not have been envisaged by those who passed them into law and whether or not (as is explicitly noted in the legal opinion, above) the resulting charge to tax is equitable or just.
The alternative approach to legal interpretation with regard to taxation is purposive. It may be summarised by an Australian law of 1901[2] on legal interpretation which said:
In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.
In this context interpretation ‚Äòlooks though’ the strict structure of the words in the law to determine their just and equitable meaning, and uses that meaning in deciding upon the application of the law.
The United Nations Universal Declaration of Human Rights is based upon principles. It is concerned with justice and the equitable treatment of all people. In that context a purposive or equitable approach to the interpretation of law is essential if miscarriages of justice contrary to the spirit of equity, noted to be possible in the UK legal decision of 1869, are to be avoided.
Equitable construction of the law is
,therefore considered an essential element of any set of principles for taxation that recognise the rights of the citizen and the mutuality of obligation inherent in the relationship between the citizen and State, and between states.
[1] Partington v. Attorney-General (1869), L.R. 4 E. & I. App. 100, per Lord Cairns at p. 122.
[2] Section 15 AA of the Acts Interpretation Act, 1901 downloaded 4 December 2006 from http://www.austlii.edu.au/au/legis/cth/consol_act/aia1901230/s15aa.html
I stand by that.
But the profession will hate it. They want certainty. We need principles to ensure tax is fair. And unfortunately their interpretation of fair and that of society at large just don’t seem to match. Which is why their objection to a GAntiP can be safely ignored.
Oct 172009
I was an acknowledged source for Polly Toynbee’s column in the Guardian this morning, so I’ll quote at length:
Nothing has changed. Obscene pay is back. Ahead lie years of hard labour to repay debts while Krug flows in the City. No regret, no shame, no punctured hubris. Banks seem beyond the control of mere government. Instruments exist to rein them in – taxation, regulation, law – but their threats to abscond make them virtually untouchable. History may mark this as the moment when financiers passed beyond democracy, thumbing their nose while rubbing our nose in it. How puny the G20 deal looks, delaying bonuses for three years when everyone wanted them banned.
Inside Revenue & Customs there is growing concern at the billions that could be lost from banks avoiding taxes for decades to come. Tax gatherers are eager for the Treasury to take urgent action in November’spre-budget report on two vital issues. As banks move into profit, you might expect them to pay tax. You’d be wrong. They can spread their colossal losses forward forever, offsetting them against tax they owe. All the banks have billions to offset, including those we own. Merrill Lynch put £16bn of its sub-prime losses through Britain, so it may pay no corporation tax in the UK for 60 years. No wonder Revenue & Customs is fuming.
What could be done? There should be a cap on the sum that banks can offset against tax: other EU countries only allow losses to be spread over three years. Tax law says a major change of ownership means a company forfeits its old tax losses. Surely that is the case with Lloyds, RBS, Northern Rock and all the smaller banks eaten up by Santander? No, there’s a loophole if losses were in their subsidiaries. But, says Richard Murphy, director of Tax Research UK, a small change in the law could fix it. It would be worth, he says, a minimum of £10bn – or much more. So let’s see if Alistair Darling has the nerve to challenge bank profits in November.
The estimate is crude – and as usual, too low. RBS lost £24 billion in 2008. HBOS lost £10bn in 2008 and Lloyds £4bn in the first half of 2009. All at 28% would exceed £10bn. But that’s not all of the losses incurred to date and there are plenty to come.
Should these losses be allowed to be carried forward? My answer is no, they should not be. They have not been funded by the companies – they have been funded by the taxpayer – and that is true of the banks not in state ownership as much as is the case for those that are. Without taxpayer cash they would all have failed.
And can this be done? Of course: the opportunity for loss offset has not arisen as yet, so the law cannot be retrospective. So let’s save the cash for better purposes, now.
As Polly notes: it’s a policy that apparently has support in HMRC. I hope it happens.
Oct 172009
This letter was in the Guardian today:
Larry Elliott apparent endorsement of budget rebalancing by raising VAT to 20% is curious indeed coming from an economist with a social conscience (All Osborne has to do now is come up with another £70bn, 7 October). A rise in VAT from 17.5% (where it will soon return) to 20% would raise £11bn, but so too would uncapping national insurance so it is paid all the way up the scale at 11%, the weight of which would fall almost exclusively on the richest decile. Indeed, if revenue-raising measures are needed, how about cracking down on tax avoidance and evasion? These are variously estimated by official sources to cost the Treasury between £25bn and £70bn annually.
But what is particularly galling is that Elliott seems to agree that the "structural deficit" is £80bn, and that it needs to be "put right" by whoever is the next chancellor. Balancing the budget will not fix the economy – indeed, Britain’s output gap is currently £80bn and rising while investment is still falling. So poor are the forecasts for UK growth in the medium term that attempting to achieve balance over the next parliament will almost certainly send us back into recession.
A more sensible remedy would be based on two simple principles. First, government must become investor of the last resort – financing a major programme for "greening" Britain’s infrastructure is a good place to start. Secondly, inflation today is desirable, and printing money – quantitative easing – is the right means of achieving it. Inflation of only 3% over a generation would reduce Britain’s public debt by half.
Plenty of conflicts of interest in here for me: Larry is a co-author of the Green New Deal, George a co-author with me of a forthcoming paper for Compass.
I’m with George here.
To argue that we should balance the budget now makes no sense at all. To argue we do so with VAT is regressive and an abuse on the poorest in our economy – the last who need to pay for banker’s folly. To invest in green infrastructure is the way forward. And inflation at 3% is entirely manageable – and the basis of the asset based prosperity of most now in retirement in the UK, in which case to argue it would harm pensioners is ludicrous: most who would lose (as some would) could not be in their current position of wealth without untaxed inflationary gains having given them their property worth, a worth that now needs to be passed on to the next generation.
