2011 September » Tax Research UK

The curse of TINA

Sep 192011

Adam Curtis wrote this recently on his BBC blog under the above title:

The guiding idea at the heart of today’s political system is freedom of choice. The belief that if you apply the ideals of the free market to all sorts of areas in society, people will be liberated from the dead hand of government. The wants and desires of individuals then become the primary motor of society.

But this has led to a very peculiar paradox. In politics today we have no choice at all. Quite simply There Is No Alternative.

That was fine when the system was working well. But since 2008 there has been a rolling economic crisis, and the system increasingly seems unable to rescue itself. You would expect that in response to such a crisis new, alternative ideas would emerge. But this hasn’t happened.

Nobody – not just from the left, but from anywhere – has come forward and tried to grab the public imagination with a vision of a different way to organise and manage society.

It’s a bit odd – and I thought I would tell a number of stories about why we find it impossible to imagine any alternative.

I suggest he slightly overstates the case (but only very slightly) and what follows shows how the right set out to create the myth of free markets – a myth not matched by any reality.

It’s well worth reading.

This is a story of the most audacious takeover of thought ever attempted – and how it has been so successful.

Some of us stand up against the corruption inherent in that thinking. I’m delighted to be one of them.

Cable is right: we have to assume the economic crisis is now like war

Economics, Uncategorized 2 Responses »

Sep 192011

Vince Cable and I talked quite a bit at one time. Then he got into government and things changed and fault lines appeared. Well, so be it, but Vince spoke a lot of sense today when, according to the Guardian:

In keynote speech at Lib Dem conference, business secretary says reduction in inequality is needed to turn economy around as UK faces ‘economic equivalent of war’

He’s right. That is the state we face.

It’s why I’ve been writing about nationalising banks.

The right (none of them from George Osborne to the lunatic fringes of his own party and on through UKIP to the libertarians) don’t get this. It’s as if they’ve massively overdosed on Hayek: a sharp bit of economic grief is good for us all they say – and didn’t you know (they say) that all those unemployed are so either becasue a) they want to be or b) the state forced them to be and if only it stopped interfering in the economy all would be OK?

Well, Vince has this right. First, Hayek and those neoliberals who share his belief in markets if not al his solutions got things fundamentally wrong: there’s no such thing as a market equilibrium for a start (shocking to those who are true believers, I know and a bit like denying the virgin birth as far as they’re concerned – but much more far fetched when it comes to the conditions needed to believe it true).

So three things follow. First, Cable is right to challenge Osborne’s policy of non-intervention from which only the rich can win (and that’s his intention, of course). Second, we need to prepare for chaos, and failure to do so is gross irresponsibility. Third, don’t be calm – get very, very angry with those on the right who are stupid enough to say everything is OK when it glaringly obviously isn’t.

Is a one off wealth tax the answer?

Economics, Tax justice 16 Responses »

Sep 172011

This video is on the web site of Church Action on Poverty right now, whose campaign for Fair Taxes I am pleased to support:

When Greg Philo first suggested a tax of this sort I admit I was not convinced.

Well, times change. The FT reports this morning (with apologies for lengthy quote, but it’s a pretty important issue):

As Italy’s economy and its banks lurch deeper into the eurozone sovereign crisis, some are calling for a one-off mega tax on Italians’ substantial private wealth as a way to offset fears about its €2,000bn ($2,750bn) public debt.

“Private wealth in our country is close to €10,000bn. A tiny percentage of that can contribute in a major way to a step down in our total debt,” says Corrado Passera, head of Italy’s largest bank, Intesa Sanpaolo.

The idea of a mega tax on Italians’ total private assets has gained support in the past week as spreads on Italian debt compared with Germany remained close to a euro-era high – despite the European Central Bank’s decision to buy Italian bonds.

Proponents of the wealth tax argue that it is the fastest way to make a notable cut. They also point out that swift action will allow less time for people to move their assets to tax havens.

A senior private banker who spent the summer at work watching the value of his clients’ investments plunge in the market rout, agrees that ending tax evasion is vital but argues that a wealth tax is needed sooner because its impact will be felt within days not years.

“There’s no time left”, he says, echoing comments made by Ms Marcegaglia, the head of Italy’s business association this week. “We are already on the precipice”.

The unthinkable is becoming thinkable. Greg Philo was ahead of the curve.

The reality is that we are facing something little short of total meltdown. In that case asset values will be wiped out: paying a wealth tax then becomes a viable and welcome alternative to ensure that the state – whose existence and smooth operation is fundamental to the maintenance of wealth – is kept in place.

I have no idea if such taxes will happen, but it would no longer surprise me.

Network banking: the radical reform the UK’s banking system needs

Banking 14 Responses »

Sep 162011

I wrote the following on 20 October 2008. Not much has changed since then (regrettably) and we’re now heading for another banking crisis, so I offer it again:

Everywhere you turn at present you read or hear people saying there is a need for a fundamental reform of the banking system. The difficulty is that as yet I have not seen anyone say how to do it.

I have, of course, already offered my opinion on what I would do if I was to be appointed as a director of a major bank and I also outlined my longer term strategy, which would involve divesting those banks of their low risk assets in a fairly short period to leave a core banking operation, probably under state control. I note that seasoned observers suggest that this is the likely policy to be adopted with regard to RBS.

Neither is, however a fundamental reform of banking. They are an appropriate commercial response to the mess into which these banks have descended. Something much more radical is needed if we are to address the systemic flaws that have been found to exist in our banking system.

There are in essence four such flaws. The first, and perhaps most shocking to those in government who had not appreciated it, is that the state has absolutely no control over the payment mechanisms on which our fundamental economic order depends. We had no choice but to bail out banks because they were the only people who could actually facilitate the exchange of money in our economy. Social chaos and major economic turmoil, probably associated with a breakdown in law and order, would have occurred if the banks had not been rescued.

Second, and perhaps just as shocking to those in authority, is that it has become glaringly obvious that the government has almost no control over the money supply in the UK. About 3% of the cash in the UK economy is actually issued by the Bank of England. The rest is electronic money, and as I have explained here, this is created by the commercial banks and not by central government. The commercial banks do as a consequence take the profit from this activity. Unsurprisingly if they make cash out of thin air and then charge people for the privilege of using it they have, they do during a period of massive monetary growth maximise their profit by the creation of enormous quantities of new money through offering debt. That is exactly what we have seen.

Third, as the banks have fallen over it has become very clear that we might end up with very few banks and a wholly uncompetitive market for their services. This seems undesirable to almost everyone.

Fourth, and finally, it is very obvious that the banks have been unable to regulate themselves, whether that be with regards to capital adequacy ratios, the payment of appropriate incentives, the appraisal of lending, money laundering (to which many of their tax haven subsidiaries appear to have been oblivious) or any other issue.

These problems cannot be resolved by merging a few banks. They cannot be resolved by stripping out of the banks those assets that can be disposed of now to make payments to shareholders in compensation for those assets that must remain under state control for some period of time. They can only be resolved by a radical and fundamental reform of our banking system.

I have applied myself to this problem and without suggesting that the solution that follows is either fully developed or without potential flaw, I offer it nonetheless as a basis for discussion. It seems to me that any reform of the banking system must achieve the following objectives:

1. The basic payment system must be under the control of the state;
2. The state must have control of the creation of all money and must profit from the creation of that money
3. There must be sufficient banks in the market to both offer choice to consumers and to prevent any one bank becoming so large that its failure could represent a fundamental threat to the economy as a whole
4. The banking system must be better regulated and monitored in the future to prevent a recurrence of the problems that have created the current crisis.

I call my solution Network Banking. Think of it as a bit like Network Rail. The basic infrastructure of banking will be entirely owned by the state. The banks themselves will be franchised operations, offering different levels of services and rates to attract deposits, which at the end of each day they place on secure reserve with the Bank of England. Based upon the volume of deposits they attract when compared to their proven risk profile they will be allowed to make loans using funds that they themselves borrow from the Bank of England.

They will make their income from the difference between the loan income they can generate and payment that they make to the Bank of England for the funds that they borrow. They will make their income from depositors by charging for some services (although basic banking would be provided free, as of right), from the difference between the amount they earn by placing sums on deposit with the Bank of England and the amount they pay to depositors, and from the sale of a limited and regulated range of additional services such as credit cards, life assurance, pensions and low-risk investments.

It is possible that some banks will simply be deposit taking institutions under this arrangement. It is also possible that some will only be dedicated lenders, given access to central funds simply because of their proven ability to manage them. It is now obvious that the two skills do not need to be located in the same institution.

But which ever option is chosen the banks will in effect become franchise operations. They would raise capital to cover the risk inherent in their own lending decisions which would relate to the margin that they could lose in making loans. This loss would, however, be much less than the total loan, which would still be owed to the Bank of England at the end of the day, giving them an incentive to intervene long before a crisis situation arose, largely because the majority of any bank’s capital would be supplied by the Bank of England, because the funds that they would lend would come from that source. This reflects the practical reality that we now know that the equity in banks does now really belong to the state, and is supplied by it.

What each franchise operation would do would be to add particular skill in certain areas. Some might become specialist business lenders. Others will be mortgage type operations. The interest rates that they offer might reflect the risk profile that they in turn assume regard to their lending. So, for example, those who want to lend a business might have to offer higher interest rates to attract money and may well be allowed to have relatively low loan ratios in proportion to that money, but with their income being earned by charging relatively higher loan fees to their customers, but with a significant expected added value element resulting from the supply of business advice.

In every case however the depositor will know that a reasonable proportion (but not all, in the case of very high-value depositors) of their funds will be subject to guarantee, and all of those funds will be placed on deposit with the Bank of England each night to back that up.

The result will be that in reality banks are unlikely to compete very much on interest rates (and as we’ve seen, by and large those that have done so have failed so this is no problem) but they will be competing quite heavily on the quality of service supplied. We are likely to see the development of niche markets for banks that will have a special understanding of customer need as a result. This is a genuine market activity for bankers.

These niche banks might be quite small. This particular arrangement will allow that. Some of the things that the state owned Network Banking operation will supply to each bank will be:

1. The basic trading platform for the bank, which means that it will not be necessary for each to develop its own IT to do this independently, so removing the massive inherent problem of economies of scale which have caused concentration in the banking market to date for this reason;
2. The rule book by which they will operate. Again, to date this has been a massive problem leading to a concentration of supply from a small number of banks. But there is no reason why each bank should have a separately approved rulebook. They should be required to work to one common high standard.
3. A regulated structure within which it will know it can work. In other words, it will know what options it has available to it if it chooses to lend to certain markets. It will know the constraints upon its activity if it fails to attract depositors to finance that operation. The rules of the game within which it will have to work will be clear.
4. An oversight regime. Each bank will have to submit returns regularly of their ratios of deposits to loans, with profiles of each to ensure that they are working within agreed capital adequacy ratios. But, if one proves it cannot fulfil the ratio requirements then that bank will not fail: the franchise will be redirected to somebody else who can do so. This is, after all, what happens with rail franchises. The service does not stop. The operator changes.

Of course, none of these banks would undertake high-risk trading on their own account. These are banks: they are not investment operations. Companies that want to trade in derivatives, financial products of other forms, foreign currency for speculative purposes, and so on will be allowed to do so. But they will be entirely separately regulated, will have to use their own capital for this activity, but will not be banks, and I suggest it should not be possible for a bank to own them. The stock market should supply their capital, not depositors who do not know the risk that they face by doing so.

This will leave one apparent gap in the market, which is the supply of business finance for small and medium-size entities. The simple fact is that banks have been very poor at doing this anyway. Much has been provided by way of leasing, specific asset finance such as factoring, and very little indeed has been genuine capital to fund enterprise. If that is what we need then another source is required: in effect the Bank of England will have to allow specialist banks to operate as venture capitalists to small enterprises and that might require us to take a stake in those companies as is common in the German model banking. This would be good news, but it is a radical reform that may not be part of the banking system at all, and we should be aware of that. We cannot ask a reformed bank to do what existing banks have not.

What this revised scheme does, however, do is the following:

1) It puts money under the control of the Bank of England;
2) It recognises where the real equity risk is, which is with the state;
3) It provides the necessary investor protection;
4) It brings the basic transaction systems upon which our society depends under state control, where they should be;
5) It brings control of the money supply under the control of the state, where it should be, and from which it should benefit;
6) It ensures that no bank will be too big to fail: if a franchisee collapses and another can be put in its place but neither the depositors or borrowers will be prejudiced;
7) It encourages competition both with regard to rates and with regard to the level of service that the bank will supply and banking expertise will be rewarded, which is an essential development which has been lost in the current system.
8 ) One standard rulebook will be in place. There will be no argument about what standards should be in operation;
9) All banks will have their lending subject to regular monitoring. The risk of overexposure which brought about the current situation will be eliminated, subject to competence within the central banking authority, of course.

Better still, much of the infrastructure to do this already exists. For example, the banking platform of one of the banks now under state control could be developed for universal application. No doubt the financial services authority has a standard rulebook which it expects people to comply with, and which could now be put in force. When banks are already under state control they have effectively lost their equity base and so a change to a franchise arrangement will be easy to do. The banks are already not lending to each other, but are instead placing their funds on deposit with the Bank of England each night. They are, therefore, already halfway to this structure. And so on.

We have no option but change banking. We cannot go back to where we were. I am sure that the above idea will need significant development. But I offer it as a platform for discussion as the basis for a radical new approach to banking in the UK which could reduce risk, enhance state control, and yet provide substantial consumer choice which is lacking in the current market. That’s a bold claim, but I think it is justified.

This time we nationalise the banks – and I mean all of them

Banking 34 Responses »

Sep 162011

George Osborne agrees the Euro is in a crisis and urgent action is needed

The IMF say a vicious circle of weak growth and weak balance sheets is fuelling a crisis of confidence and political dysfunction in the EU and US (otherwise called the Republicans) could derail any hope of recovery.

The market is being flooded with dollars that EU banks can’t get from inter-bank sources.

And everywhere there is political inaction.

This is a phoney war: this is the crisis I talked about earlier this week developing as I suggested it would.

So yes, we need to print money, as I have already suggested, and we need to do something else.

Candidly, we have to prepare now for the complete, even if temporary, nationalisation of banking.

In 2008 we let banks off the hook. We threw hundreds of billions at them – and they took it all and gave nothing in return.

Now they are in crisis again – a crisis at least as bad as in 2008. And they need capital very, very badly in very short order. There is no functional market that can supply that capital in the timescale required - it’s weeks at most, maybe less. So only government can. Bail out 2 is now inevitable. I think the IMF at least know that.

The fact is the banking system is now failing again. It’s systemically failing. And in that case only nationalisation can save it.

And it’s only nationalisation of the banks that can also save nation states from failure too at this moment. The reason is simple: if the banks are brought under state control then first of all we can undertake radical reform of the way in which they operate before handing parts at last back to private owners (on which more in another blog, later). And second, we can do what else that is really needed: which is massive cross cancellation of debt so that balance sheets of countries and banks are deleveraged all at the same time in an act of mass debt forgiveness – the ultimate Jubilee.

Oh I know this is radical. But not that radical. The threat we’re facing is at least as bad as that of war: both threaten the well being of the state and all who live in it. And in times of war the state takes control of assets – and returns them afterwards, if appropriate.

That’s what must happen now. Ring fencing is fine – and might be appropriate in 2019 when this mess has been sorted out. But for now prepare for the whole hog - because we won’t survive unless the banks move under state control and very, very soon, and not just here but across the whole of Europe and beyond.

VAT consignment relief and the Channel Islands – it’s time for the final whistle

Guernsey, Jersey, Uncategorized, VAT 32 Responses »

Sep 162011

It seems worth reproducing the following exchange from Hansard this week in full:

Jonathan Edwards: To ask the Chancellor of the Exchequer what assessment he has made of the potential effects of the provision of low value consignment relief on entertainment products sold by mail order from the Channel Islands on independent high street entertainment stores. [70987]

Mr Gauke: We have not performed an assessment but we are aware of the impact on high street stores, and the Exchequer. The Treasury is currently considering further measures to stem the impact of LVCR.

Jonathan Edwards: To ask the Chancellor of the Exchequer whether he plans to remove low value consignment relief for(a) music and (b) other entertainment products sold by mail order from the Channel Islands. [70989]

Mr Gauke: The Government have not finalised their plans for changes to the low value consignment relief for goods imported from the Channel Islands at this time but is reviewing options.

VAT: Entertainments

Jonathan Edwards: To ask the Chancellor of the Exchequer what discussions he has had with (a) the European Commission,(b) multiple retailers and (c) independent stores on the effects of low value consignment relief on (i) music and (ii) the general entertainment industry. [70988]

Mr Gauke: The Government have been in contact with the European Commission to discuss their options to restrict the low value consignment relief and has received representations from a number of trade sectors affected by LVCR. Ministers are now reviewing what options are open to the Government to make further changes to LVCR.

VAT: Imports

Jonathan Edwards: To ask the Chancellor of the Exchequer what estimate he has made of the revenue foregone by the Exchequer due to the provision of low value consignment relief in each of the last five years. [70990]

12 Sep 2011 : Column 1045W

Mr Gauke: The estimate of the revenue foregone by the Exchequer due to the provision of low value consignment relief in each of the last five calendar years is as follows:

Loss of VAT (£ million)

2006 90

2007 100

2008 130

2009 140

2010 130

For consistency and ease of comparison, the figures in the table assume a constant standard rate of VAT of 17.5%. The actual cost for 2009 is slightly different from these figures reflecting the temporary cut in the standard rate of VAT.

The position is clear, massive, organised abuse is going on.

I’ll tell you – although Gauke is not doing so – that the EU has said the UK has carte-blanche to act to stop this abuse altogether – so the only question now is when will they do so?

The Isle of Man’s VAT abuse has been stopped. Now this one needs to be closed too.

Yes I know it has consequences for Jersey and Guernsey. But that’s something they will have to come to terms with. Promoting tax abuse is not the basis for an economy, and they should have realised that by now. The message has been spelled out loud and clear.

So, when are we going to get an announcement? That’s the only question left.

Yes, I make mistakes

Blogging 4 Responses »

Sep 152011

It seems a matter of great delight to some in the Crown Dependencies that the EU has finally aproved their much altered tax systems.

As has been well known, I campaigned against these systems. And I think I can claim some small credit at the very least for forcing change in them, as I have in securing other change in the tax systems of the Isle of Man in particular.

But I did say, it’s quite right, that there was a chance they might still be rejected. And they weren’t, after some pretty heavy undertakings being given by the islands instead.

So you can say I was wrong, if you like.

So what? The person who never took a risk was never wrong. I take risks. So I’ll get things wrong, sometimes.

I can live with that. It’s the price I pay for effecting change. And I’ll settle for the change plus the odd wrong prediction any day.

So telling me I’m wrong is a truism because it’s inevitably correct. But I’ll take it as a compliment because it means I might have impacted on you on the way, especially if you’re in financial services or government in the Crown Dependencies. And that’s what really matters in this case.

Comments: yet again

Blogging 4 Responses »

Sep 152011

It looks like the trolls are out again.

Saying ‘you’re wrong’ is not debate. And it’s deleted as a result – as I say I will do in the comments policy.

And don’t say a) it means I’ve given up or b) I’m censoring as a consequence.

It actually means I have a life. And that I can’t be bothered with those who seek to deny it.

So you’re wasting your own time if that’s all you’ve got to say.

The Isle of Man is already denying what it said to the EU on zero / ten

Isle of Man Comments Off

Sep 152011

The Isle of Man Today web site is noting, as I have this morning, that the EU has given tentative approval to the revised tax system in that island.

It also notes:

Concerns have been raised by a former assessor of income tax Mark Solly, and the Positive Action Group, that the abolition of ARI will lead to the development of a two-tier tax system in the island.

Mr Solly, who will be guest speaker at PAG’s next public meeting at the Manx Legion Club in Douglas on Monday night, fears it will lead to a reduction in tax take and also make it possible for wealthy individuals to shelter income in companies, minimising their tax liability – and placing a further burden on the less well off.

Treasury officials insist that the ARI’s abolition will not lead to a significant loss in tax revenue as measures already in place will be sufficient to prevent tax avoidance.

Mark Solly is obviously right, and the EU know he is right, of course, which is why they sought and got assurances from the Isle of Man. Let me quote some from what the Isle of Man said to the EU this week:

In the absence of the attribution regime for individuals, taxpayers availing themselves of the legislative choice to structure their affairs such that the 0% corporate tax rate applies will be doing nothing artificial, and nor will they be seeking to escape what is normally payable.

With such clear constraints, the general anti-avoidance rule provided by Schedule 1 of the Income Tax Act 1980 cannot be used to replace the attribution regime for individuals.

And let me note the examples given by the Isle of Man:

We would now like to present a small number of examples to illustrate better how we expect to apply our tax code following the abolition of the attribution regime for individuals.

1 An existing company, with activities or investments providing an annual income of 1,000 subject to the 0% corporate income tax rate and wholly owned by an Isle of Man resident individual, pays 100 per year in dividends.

The retention of 900 per year in undistributed corporate income is not a transaction, has no avoidance motive, and so cannot be challenged.

2 The same company as in example 1 is sold after five years for a market value to an unconnected third party.

At this point the company has a retained income reserve of 4,500. However, it is the share capital which is being sold in a transaction by the shareholder, there is no avoidance motive and the sale cannot be challenged.

3 The same company as in example 1 is put into members’ voluntary liquidation after five years and its net assets are distributed to the shareholder.

This transaction does not have an avoidance motive and so cannot be challenged on that basis. However, the retained income reserve of 4,500 is an income distribution and will be subject to income tax in the hands of the shareholder.

4 The same company as in example 1 is sold after five years to a connected party.

In this case a technical enquiry will be made because, depending on the exact circumstances of the disposal transaction, there may be an avoidance motive and the general anti-avoidance rule may be applied.

5 An Isle of Man resident individual transfers investments into a company in exchange for shares in that company. The investments provide an annual income of 1,000 subject to the 0% corporate income tax rate and the company pays 100 per year in dividends.

In this case a technical enquiry will be made because, depending on the exact circumstances of the transfer transaction, there may be an avoidance motive and the general anti-avoidance rule may be applied.

In these simple examples, it can be seen that the Isle of Man Government will apply its general anti-avoidance rule in a restricted set of circumstances which bear no similarity to the operation or effect of the attribution regime for individuals. Specifically, the retention of undistributed income from year to year by an Isle of Man company will be treated in exactly the same way for tax purposes regardless of whether the shareholders of that company are resident or non-resident persons.

So what the Isle of Man Treasury officials are telling the press is just not quite true. There will be a loss to the Isle of Man. and there will be exploitation of the form Mr Solly describes.

And as the Isle of Man also told the EU:

It is possible that national revenue may fall by more than [£2.4 million], but because any additional amount will be as a result of changes in taxpayer behaviour, we cannot estimate any further cost with confidence; either as a timing difference or as an absolute loss of revenue. We will monitor national revenue statistics carefully following the abolition of the attribution regime for individuals. Should there be a severe negative effect caused by the absence of the attribution regime for individuals, then our Government would need to re-examine its policy options. But let me make it clear to the Members of this Group: any such options will not include a reintroduction in any form of the attribution regime for individuals or of measures with equivalent effect.

That does, I think, provide some clarity.