2010 May » Tax Research UK

The flaw at the heart of Con Dem economic policy

May 232010

Savage spending cuts as global economy slows is folly, economists say | Business | The Observer .

As the Observer notes:

Massive cuts in spending on public sector staff and services will increase unemployment and risk the economy slipping back into recession, economists warned as the coalition government plans to make an extra £6bn of savings in 2010.

More than 240,000 public servants could lose their jobs over the next year compared to just over 100,000 planned by the previous Labourgovernment as ministers block Whitehall departments from replacing departing staff and quangos are shut down.

Private firms that supply the public sector are also expected to be hit, taking unemployment above 3 million for the first time since the early 1990s.

David Blanchflower, who was one of the few economists to predict the severity of the recession, said the government was pressing ahead with cuts based on dogma and ignoring recent developments that allow it to boost investment.

I have predicted it will eventually be worse that that: I see 4 million as the likely unemployment total.

And none of this is necessary. As was reported yesterday, because Labour’s policies were working the budget deficit was £5.5 billion smaller than expected at the end of March – the saving Osborne is looking for by cuitting was, in otrher words, achieved by spendinmg instead.

Yes – I mean that – it was achieved by spending. When there is no private sector demand to take up the slack in the economy – and that is the case now – then only government spending can do the job, create demand, create work, create wealth, and generate government revenue to pay down debt – which is exactly what has been happening – and which works.

This is the virtuous cycle Osborne will destroy.

That’s the falw at the heart of the Con Dems economic policy.

It is what will pull their government down.

We need a bias to the poor

Economics, Ethics 9 Responses »

May 222010

I wrote yesterday about the need or redistribution in society.

When I wrote I was not aware that the Households Below Average Income (HBAI) survey for 2008/09 had just been published. The following comes from Chapter 2 on household income distributions:

Let’s be clear, the absence of the 3.6 million people (not earners) living in households enjoying income of more than £52,000 a year after tax skew the data a little: I know that. But this graph covers 94% of all people living in the UK. And for these people median household income is £21,164 a year.

And just look at how the graph is skewed. Our society is built around a bias to the rich: it’s that 3.6 million to whom the whole of society is orientated.

I believe we need a new bias to the poor – incidentally the title of a book I recommend written by Bishop David Shepherd in the early 80s which annoyed Thatcher intensely – and all the better for it.

The rich – and yes, if you’re one of the 3.6 million you are rich – are able to look after themselves, by and large. My concern is for the rest. But that’s not true of most – and it’s certainly not true of the libertarian right.

I remember several years ago interviewing Alvin Rabushka – creator of the madness of flat taxes – and he said:

“The only thing that really matters in your country is those 5% of the people who create the jobs that the other 95% do. The truth of the matter is a poor person never gave anyone a job, and a poor person never created a company and a poor person never built a business and an ordinary working class guy never drove economic growth and expansion and it’s the top 5% to 10% who generate the growth for the other 90% who pay the taxes to support the 40% in government. So if you don’t feed them [i.e. the 5%] and nurture them and care for them at the end of the day over the long run you’ve got all these other people who have no aspiration for anything more than, you know, having a house and a car and going to the pub. It seems to me that’s not the way you want to run a country in the long run so I think that if the price is some readjustment and maybe some people in the middle in the short run pay a little more those people are going to find their children and their grandchildren will be much better off in the long run. The distributional issue is the one everyone worries about but I think it becomes the tail that wags the whole tax reform and economic dog. If all you’re going to do is worry about overnight winners and losers in a static view of life you’re going to consign yourself to a slow stagnation.”

That’s the callousness of the right. His idea is so brutal: let the middle and poor pay to support the rich. Note how his statistic happens to fit so neatly with the above graph.

Rabushka says none of these people matter.

I say they do.

That’s the difference between left and right.

That underpins what this blog is, in its UK context, about.

Will Ireland quit the Euro?

Economics, Ireland 1 Response »

May 212010

The realisation is dawning that cuts won’t work. There was an article in the New York Times yesterday by two people whose biogs are:

Peter Boone is chairman of the charity Effective Intervention and a research associate at the Center for Economic Performance at the London School of Economics. He is also a principal in Salute Capital Management Ltd. Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

They look to be natural radicals as a result. And this is what they said:

With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro-zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity.

But the bank’s head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible. Some of these nations may be stuck in a downward debt spiral that makes greater economic decline ever more likely.

Prime Minister George Papandreou said this week that Greece needs to see strong investment in order for the austerity program to work. While the government cuts fiscal spending, he said, it needs new private business to employ the dismissed workers so that they are productive, can pay taxes and do not need unemployment benefits.

Precisely. That’s exactly the problem. And exactly as argued here. And here. Like it or not, cut now and the chance of clearing any debt goes for good.

Why? Because despite the absurd logic of the right that the state is crowding out private sector activity the reality is the private sector is simply inactive, and there is no sign that will change. As a chart on the same page of the NYT shows regarding utilisation of US productive capacity:

There’s already excess capacity in the US. That’s true everywhere. No one is going to be enjoying export led growth as a result. So any growth there is going to be is from within domestic economies. And as Greecve has noted, there’s no hope of that if cuts are the only domestic agenda.

It gets worse though. Greece, as the two authors point out is not the worst case scenario. Ireland is, because of its tax haven activity (yes, they do call it one). As they say:

Ireland was one of the first nations to introduce tough fiscal austerity in this cycle ‚Äî in spring 2009 the government slashed public-sector spending and raised taxes. Despite the cuts, the European Commission forecasts that Ireland will have one of the highest budget deficits in the world at 11.7 percent of gross domestic product in 2010. The problem is clear: when you cut spending you also lose tax revenues from people who earned incomes from that money. Further, the newly unemployed seek benefits, so Ireland’s spending cuts in one category are partly offset by more spending in another. Without growth, the budget deficit still looms large.

Ireland’s problems are, sadly, far deeper than the need for simple fiscal austerity. The Celtic Tiger’s impressive reported growth over the past decades was in part based on its aggressive attempts to help major corporations in the United States reduce their tax bills. The Irish government set corporate taxes at just 12.5 percent of profits, thus attracting all sorts of businesses ‚Äî from computer services like Google and Yahoo, to drug companies like Forest Labs ‚Äî that set up corporate bases and washed profits through Ireland to keep them out of the hands of the Internal Revenue Service.

The remarkable success of this tax haven means that roughly 20 percent of Irish gross domestic product is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland’s potential tax base. A more robust cross-country comparison would be to examine Ireland’s financial condition ignoring these transfers. This is easy to do: a nation’s gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are nearly identical, but in Ireland they are not.

When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based onEuropean Commission projections (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected ‚Äî by our calculation ‚Äî to be 97 percent, and 109 percent at the end of 2011. These numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt.

Or as I’ve argued for years: there never was a Celtic Tiger, just a giant con trick.

And now Ireland has guaranteed its banks debts, meaning the problem is even worse.

They recommend three solutions. First, winding up existing banks to remove toxic debt from the system – but directors must bear part of the cost.

Second, tough fiscal measures have to be adopted, they say. Personally I’m not so sure. Only spending works when in this mess. But this means I agree with their final prescription: Ireland may have to quit the Euro to revalue. It may be its only way out, they think.

This is the price for being a tax haven: the effective ruin of a state.

Reflect on it.

And then wonder why I’m angry about the waste that has been wrought on so many lives by so few in the pursuit of greed.

NB for more on this read TJN here.

On the need for redistribution of wealth

Economics 24 Responses »

May 212010

I wrote a very quick blog yesterday morning – knocked off in a minute probably – that has attracted over 20 comments so far.

In it I said in response to a whinge in the Wall Street Journal on the richest in many communities seeing their taxes increase to pay for the impact of the recession:

Quite right too.

1) They caused the crash

2) They benefited most from the bail out

3) They have the capacity to pay.

Your problem is?

The inevitable right wing reaction arose.

And now a hint that I am, for some reason, a Marxist. But I’m sorry – that doesn’t stick, not at all. As I said to one commentator this morning (edited slightly):

What I can say is this: we need a major culture change

I’m not, as you imply, a Marxist. I am a social democrat. Yes, that’s left of centre. Of course it is. It’s also bang in mainstream politics. Unlike most who comment here who are way out on the political extreme of the right.

And as a chartered accountant with considerable business experience I can offer three opinions.

First, the system is not working. Isn’t that plainly obvious?

Second the change required is not minor, it is systemic. Again, isn’t that obvious?

Third, that change requires reallocations of resources within and between societies.

From developed to developing countries.

From banks to real productive activity.

From saving to investment.

From net exporters to net importers by changing the balance of trade – please note Germany and China.

From those with wealth to those without.

The crisis is a reflection of these imbalances.

Defending the status quo – saying in effect the wealthiest (and you say you are one of those) can maintain their wealth is your right.

But I can say without a shadow of a doubt that these imbalances caused the crisis.

And reallocation is required to restore balance.

Does that make me a Marxist?

No. It makes me a hard headed analyst who might pay more tax as a result.

Now – what’s your choice? Do you want to solve this problem? Or perpetuate it? Because let me assure you – nothing but redistribution will resolve it.

I am convinced of that. But let me also add a little more explanation for all those who like to say the recession was caused by bankers alone, or governments allowing easy credit alone, or (although I’ve never heard this said), offshore alone. None of these is true, although each has merit in part.

The reality is more significant. Ordinary people – the vast majority of people – were in reality priced out of some basics of living, like housing, by an elite. That elite – the holders of the vast majority of wealth – forced up the price of many assets – housing in particular. The result was people had to borrow more and more, and one income households had to become two income households and still borrow more and more, just to secure a roof over their heads.

And at the same time that elite, which has had almost total control of resources and yet has proven markedly unable to decide what to do with them, proved enormously reluctant to take risk by investing in the meeting of needs. It did instead spend enormous amounts on creating wants capable of being satisfied through the supply of financial services products, all promoted by their control of the media. Those wants did not generate much wellbeing – we know people’s happiness has not risen much if at all since the 1970s – but they and, more importantly, the resulting financial services products, did result in yet further reallocations of wealth to a decided minority.

Why did those people have to borrow so much? For one reason: whilst overall income was rising in society wages have not or certainly not very much, not in real terms, not for most people. This is especially true in the USA.

And when it became obvious that those who, on the margins at first, had borrowed beyond their means could not repay bad debts arose and some asset repricing took place.

This is real reason why we had a crash: the imbalance in returns between wages and capital. Capital – unproductive capital at that – saw monetary returns rise from the creation of unsustainable financial assets. And people could no longer service those assets – which is why they were unsustainable.

So far a sticking plaster has been put on this. Some (only some) of the assets have been written off. But many more might need to be – especially if cuts send us into a double dip recession, unemployment rises and real wages fall – as they might well do.

But as with the other imbalances I note above – and they are important too, especially those created by Germany and China in particular – we’re not going to solve this problem until the wage / capital return imbalance is solved. Real wages have to rise. Capital returns on artificial assets have to fall. As Wolfgang Sch?§uble, Germany’s finance minister, has said this week:

I’m convinced the markets are really out of control. That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism.

I share that view. It does not make him a Marxist, nor me one.

As he also said:

We must regulate over-the-counter transactions, and we must also focus on the ratio of financial transactions to the real exchange of goods and services. They bear no relationship to each other. I understand that we need new financial instruments to cope with the huge financial tasks that we face. But, forgive my saying so, minimum profits of 25 per cent are simply unimaginable in the real economy. It isn’t healthy.

Again, exactly right.

But add to that the fact that throughout business, and almost universally amongst those with wealth, the claim is made that labour is too greedy when I contend it is just as glaringly obvious that the return to labour is wrong as it is that the return to hedge funds is wrong. If the return to labour had been right labour could have afforded to put a roof over its head without borrowing excessively to do so, or to meet its perceived needs and wants in the market place.

Now you can call that a Marxist economic analysis if you so wish – but Marx was an economist, after all. But that doesn’t make me a Marxist. It just makes me a hard headed analyst. Admittedly, one who’s damned sure he’s right. And that wealth will have to be redistributed as a result. And that attacking real wage rates at this moment – as the Con Dems are proposing – is just another example of their poor economic thinking.

But let’s stop the banal name calling because I happen to suggest redistribution is a pre-condition of solving our economic crisis when it glaringly obviously is, shall we? And shall we instead discuss how to do this with minimal impact in the form of stress on society as a whole – which is a much more interesting issue?

HMRC staff and service levels stretched

HMRC, Tax management Comments Off

May 212010

HMRC staff and service levels stretched.

Yet more evidence that the tax profession agrees with union PCS that staff cuts at HMRC make no sense at all:

The government may be under pressure to cut costs in a variety of areas in the so-called ‚Äòemergency Budget’ to be delivered on 22 June, but HMRC staff shouldn’t be one of them, argues John Kimmer, the newly appointed technical officer for the Association of Taxation Technicians (ATT).

“We absolutely cannot afford to lose any more staff from HMRC – it’s struggling as it is,” says Kimmer.

For more details on the case for investing in HMRC read this.

So much for Tory belief in the “Big Society”

Conservatives, Ethics 3 Responses »

May 212010

The Scotsman has reported:

LORD Laidlaw, the millionaire who bankrolled the Scottish Conservatives, is to give up his seat in the House of Lords in order to maintain his status as a tax exile. Palace of Westminster authorities last night confirmed that the Conservative peer had contacted them to declare he was "not prepared" to comply with new rules which forced peers to become full British residents. Faced with a multi-million-pound bill if he had chosen to do so, the Monaco-based peer has opted to surrender his seat, given to him in 2004.

This man funded the Tories in Scotland.

But hang on, that’s not (they say) why he got his peerage. Take this from the Scotsman from 2003:

BY THE time the great Scots-born businessman Andrew Carnegie died in 1919, he had donated almost all his billion pound steel fortune to good causes, setting a precedent for philanthropy which has rarely been matched.

Yesterday, Carnegie’s extraordinary generosity was recalled as a modern day entrepreneur, reputed to be Scotland’s richest man, signalled his intention to give up to £20 million a year to charity from 2006 onwards.

Who were the talking about. Ahhh‚Ä¶.the soon to be ennobled Irvine Laidlaw.

It is of course so much easier to give away untaxed money – it accumulates so much faster than that which is taxed.

And it’s so easy to buy influence with untaxed money. There’s just so much more of it to go round.

And when the question of paying tax comes comes up – its so much easier to keep the trimmings and resign the obligations.

So much for Tories’ commitment to the Big Society. It’s a grand idea when untaxed. Pity that nasty tax has to get in the way of the commitment, eh?

Profession says they want more HMRC staff – now

HMRC, Tax management Comments Off

May 202010

Advisers warn of taxing times ahead with Lib-Con coalition – Accountancy Age.

I was speaking at the PCS annual conference today in support of my report written for them on the sheer folly of HMRC sacking staff when we need every penny of tax we can find right now – and when the UK tax gap is £123 billion.

It was good in that context to note that Accountancy Age reporting today that accountants are saying the ConDems can’t deliver their tax plans unless there’s:

“both a massive shift in policy and increased high-level staffing within HMRC.”

I’d agree with that.

In fact, I think you’d find it hard to find an accountant who disagrees with it.

Merkel says yes to Tobin tax

Transaction Taxes 7 Responses »

May 202010

Merkel lines up transaction tax – Accountancy Age.

Sentiment for a levy on financial institutions was stronger today after German finance minister Angela Merkel called for an international finance tax.

Chancellor Merkel, speaking prior to a meeting of EU finance ministers tomorrow, said that a financial tax and stronger regulation would show the world that Europe had got a grip of the finance industry.

Very good news.

And the right response to the current situation where excessive liquidity is causing serious harm.

Read more on financial transaction taxes here.

Goldman Sachs backs Angolan oil deal despite corruption risks

Corruption, Development 1 Response »

May 202010

Global Witness has noted today that the investment bank Goldman Sachs is backing an oil deal in Angola by U.S. firm Cobalt International Energy, despite a risk that local partners in the deal could expose Cobalt to prosecution for corruption in the United States, Global Witness revealed today.

Goldman Sachs is a major shareholder in Cobalt and two of its executives sit on Cobalt’s board. Agreements with the Angolan state oil company, Sonangol, give Cobalt shares in two Angolan oil exploration blocks and assign it two local partners, Alper Oil Limitada and Nazaki Oil and G?°z S.A [1]

Alper and Nazaki are obscure companies with no visible industry track record. This is a serious concern as Angola is a poor country afflicted by severe corruption: many observers believe that small and little-known companies are used as fronts by top Angolan officials to enrich themselves privately.[2]

Cobalt has gone ahead with the deal, which was executed at the end of February, even though it warned in its own U.S. regulatory filings: "We have not worked with either of these companies in the past, and, therefore, our familiarity with these companies is limited. Violations of the FCPA [Foreign Corrupt Practices Act] may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition."[3]

“It seems extraordinary that Goldman Sachs would back this kind of deal in Angola, a notoriously corrupt country, at a time when the bank’s own business ethics in the United States are under heavy fire," said Diarmid O’Sullivan of Global Witness. Last month, Goldman Sachs was charged with fraud by U.S. authorities in relation to its dealings with mortgage-backed securities in the United States.[4] The Wall Street bank has denied any wrongdoing.

Cobalt will operate the two blocks, meaning it will be in charge of drilling for oil, with Sonangol, Nazaki Oil and G?°z and Alper Oil as its minority partners. Sonangol declined to explain to Global Witness why it chose these two companies. Alper Oil’s website provides little detailed information about its activities, not even a contact phone number. Nazaki Oil and G?°z does not have a website.

Nazaki Oil and G?°z is covering its own costs but Alper Oil’s upfront costs are being paid by Cobalt, which aims to recoup them out of future revenues. So Alper Oil could make huge profits if oil is found, without investing any capital upfront or taking any risks, and loses nothing if no oil is found.

Transparent management of the oil sector is crucial to the economic future of Angola, a country so poor that the average life expectancy is a mere 46.5 years.[5] But Sonangol’s actions raise serious concerns about whether it is acting in the public interest or the interests of the ruling elite.

In March 2010, Global Witness revealed that Sonangol nominated a son-in-law of President dos Santos of Angola to the board of a key investment vehicle. In August 2009 we revealed that a private company, pre-qualified by Sonangol to bid for oil rights, had shareholders with the same names as top officials, including Sonangol’s chairman.[6] Sonangol declined to comment on these cases.

Cobalt replied to written questions from Global Witness on its own behalf and that of its shareholders, including Goldman Sachs. Cobalt’s letter said: "Please be assured that we have devoted considerable resources towards mitigating the specific risks identified in the statements that you have included in your letter". Cobalt’s letter also said that the company had retained two law firms for the "specific purpose" of addressing these risks and continued to work closely with them.

However Cobalt declined to answer specific questions about the deal, including a request to identify the ultimate beneficial owners of Alper Oil and Nazaki Oil and G?°z, on the grounds that this would “involve selective disclosure of non-public company information and, in some cases, to do so would also be a breach of the confidentiality provisions of agreements by which [Cobalt] are bound."[7]

So it is not clear whether or not Cobalt and its investors know who the ultimate beneficial owners of these companies are. "In the highly corrupt and predatory environment of Angola, the public is being asked to take it on trust that deals with opaque partners are ethical. After the sharp practices of the credit crunch and the fraud charges levelled against Goldman Sachs in the United States, this is a tall order," said O’Sullivan of Global Witness.

He added: "There is an urgent need for the United States and other major jurisdictions to impose tougher regulations on overseas oil investment. The Energy Security through Transparency Act, currently under consideration in the US Senate, would help satisfy this need."

Notes

1. Cobalt International Energy. 10-K filing to the Securities and Exchange Commission for 2009. Page 5. 424B1 Prospectus. Page 106. Both accessed at www.sec.gov

2. Global Witness confidential interviews with foreign and domestic observers of the Angolan oil industry. See also United States Department of State, Angola human rights report for 2009, Section 4. Official Corruption and Government Transparency. Accessed at www.state.gov

3. Cobalt International Energy. 10-K filing for 2009. Page 51.

4. Securities and Exchange Commission. SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages. Press release. 16th April 2010. Accessed at www.sec.gov

5. United Nations Development Programme. Human Development Report 2009. Country Fact Sheet Angola. Accessed at www.undp.org

6. Global Witness. Link between Angolan president’s son-in-law and state oil company raises questions about transparency. 15th March 2010. Private oil firm’s shareholders have same names as top government officials. 4th August 2009. Accessible at www.globalwitness.org

7. Letter to Global Witness from Cobalt International Energy. 18th May 2010.

Disclosure: Global Witness and Tax Research LLP are both members of the Task Force on Financial Integrity and Economic Development