Jun 2008 12

An interesting observation made in today’s FT: opponents of the Lisbon Treaty (sorry, EU Constitution), both on the Left and on the Right, are arguing that it will threaten Ireland’s 12.5 per cent corporation tax regime.

Leave aside for the moment the extremely important argument about whether the EU Constitution or the proposed Common Corporate Tax Base will lead to harmonisation of corporate tax rates in Europe. The interesting point here is that the Left in Ireland are defending low taxes on business. Now why would they do that?

The fact is that the benefits of low business taxes for Ireland’s economy and hence for ordinary people in Ireland are clear, even to the Left. If only politicians could be that clear in Britain, then companies would not be leaving because of our increasingly uncompetitive business tax regime.

Jun 2008 09

A lesson in how grand government schemes almost invariably fail to produce the desired results may once again have to be painfully learned. That’s the conclusion of a new report by Ned Cazalet, an independent life assurance analyst, with, according to the FT, "a record of correctly forecasting industry trends".

Mr Cazalet argues that the new system of personal retirement accounts proposed by the Pensions Commission and due to come into force in 2012, into which employees will be automatically enrolled, is a "mis-selling scandal in the making". His report says that for many lower paid workers the overall potential returns on contributions could be "hugely negative", largely because of the impact of means-testing. As the FT article states:

"His calculations of the potential return on contributions made under personal accounts take into account all the cashflows being paid into a pension pot prior to retirement, and all the income coming out in pension payments post-retirement.

The income in retirement would be secured by buying an annuity, a contract that promises to pay owners an income until they die.

“Sticking your money in a teapot, for many people is going to produce more,” said Mr Cazalet. According to his calculations, taking into account charges, but excluding means testing, total returns on contributions into personal accounts range from less than 5 per cent to minus 20 per cent.

Including means-testing the returns under most scenarios are negative, “strongly suggesting that there must be a better use to which employees’ and employers’ funds and tax relief could be put”, the report will say.

Returns on just the contributions made by employees, which have the benefit of tax relief and the employer’s contribution, excluding means-testing, range from 8 per cent to minus 8 per cent. Including means-testing many employees will lose out.

Many would be “a lot better off if they put their own money (forgoing employer contributions and tax relief on their own savings) into almost any other medium-to-low-risk savings vehicle”, the report will say."

Mr Cazalet concludes:

“If I was Cazalet Life Assurance Limited, if I was allowed to launch [a product like this] by my compliance officer, I would expect to face a massive fine for mis-selling and probably be put out of business.”

This is massively important, more so since it also refers to current forms of pension saving, and so the conclusion is worth stating again: In 21st century Britain, it is more rational for many people on lower incomes to put their money under the mattress than to save in a pension.

Now, there is a form of savings that is very popular with lower income people – ISAs. There is currently over £200 billion invested in ISAs, almost 10 million ISA accounts were subscribed to in 2007-08, and in 2004-05 (the latest year for which HMRC provides data) people earning less than £20,000 a year subscribed to over 7 million ISAs, out of a total of 11.6 million ISAs subscribed to.  

Surely it would make more sense to go with the grain of ordinary people’s thinking and expand the ISA regime, perhaps by increasing the annual contribution limits as a step towards reducing or eliminating tax on all savings interest. Politicians should have known better than to sign up to the latest grand white elephant – but what would you expect…

Jun 2008 09

A worrying story in today’s FT reports that the 185 top wealth-creating companies in the UK paid 12 per cent of the added value they created in taxes last year, compared with 6 per cent in Germany and 8 per cent in France and Switzerland. This finding comes from the annual value-added scoreboard, published by the Department for Innovation, Universities and Skills.

The reason? As the FT reports:

"The Treasury says the UK has the lowest headline rate of corporation tax in the G7, but other countries often offer more generous tax breaks that in practice mean companies pay lower rates."

The answer is not to expand corporate tax breaks, such as complex R&D tax credits, but to lower rates. The CBI has called for the main corporation tax rate to be reduced from 28 per cent to 18 per cent over the next eight years. Given the number of UK companies moving headquarters overseas, this is now an urgent priority.

Jun 2008 02

German businesses have long suffered from high taxes, with the country’s payroll tax system among the most burdensome in the world. But, in a novel move, the BDA employers’ federation is planning to sue the government to force it to lower rates. From today’s FT:

"The BDA is targeting the decision by the finance ministry to levy €5bn ($8bn, £4bn) a year from the now profitable employment insurance system and channel it into the federal budget.

For years taxpayers’ money has flown in the opposite direction, with the government propping up the depleted finances of the state social security system.

Now the finance ministry argues the levy is needed to compensate for a recent reform of the employment insurance system that makes the federal government responsible for paying the bulk of social benefits to long-term jobseekers.

The BDA claims the levy is illegal and has accused Peer Steinbrück, the finance minister, of trying to consolidate the federal budget to the detriment of the social security system, thus preventing further cuts to social security payroll taxes."

Would something similar be possible in Britain? Would it have any chance of succeeding? It might be worth a thought, especially given the current level of discontent over high taxes.


Company_tax_form Meanwhile, accountants continue to express concerns over the complexity of Britain’s tax system:

"British accountants have a lower opinion of their own tax system than those in Australia, Canada, Hong Kong, Singapore and the US. Respondents to a survey by the Association of Chartered Certified Accountants gave the UK poor marks for fairness, complexity, transparency and communication with citizens.

It is another sign of concerns that complicated new tax rules, a higher tax burden and new powers for HM Revenue & Customs have made the UK tax regime less user-friendly."

Now, if only we could simplify the tax regime, businesses could spend more of their money on productive activities…

May 2008 29

An excellent new video from the Centre for Freedom and Prosperity presents the international evidence on flat taxes, listing the 24 countries, from Slovakia to Mauritius, that have adopted low flat rates and showing how economic growth and tax revenues in these countries have soared. It’s well worth a watch – the global flat tax revolution is here to stay.

May 2008 29


Roger Helmer, MEP for the East Midlands (Conservative) and a TPA supporter, blogs at http://rogerhelmermep.wordpress.com/

Imagine that we had an income tax rate of 10% (wishful thinking!), and we reduced the rate to 5%.  Chances are tax revenues would fall by roughly half.  But what if we had a starting rate of 60% and reduced it to 30%?  Your first thought might be that revenues would also halve.  After all, you’ve cut the rate by half.  Yet all the pragmatic experience, over and over again in many countries over several decades, suggests the opposite.  Revenues might well double.  It’s wholly counter-intuitive.  When Reagan announced major tax reductions, commentators called it "Voodoo Economics".  But Reagan was right, and the commentators were wrong.  When Russia recently reduced tax rates from 80% to 16%, revenues increased by 150%.

The fact is that if people feel taxes are onerous or excessive, they find ways of avoiding or evading them.  They may work less, or move investments off-shore, or hire fancy accountants, or opt for the black market.  Low-income people may decide that welfare is a better deal than work.  Foreign investors vote with their feet, and go elsewhere.

But reduce taxes, and the reverse happens.  People in the black economy will switch to the mainstream and go legit.  The marginally unemployed will look for work.  Higher up the income scale, expatriated investments may come home.  There’ll be less creative accounting, but more capital formation to back entrepreneurs, more inward investment, higher growth, increased prosperity.  And there’ll be more revenues for government to spend on social goods.  (For a more technical explanation, Google the Laffer Curve).

On May 27th, I had the privilege of co-hosting a seminar on the flat tax in the European parliament, with the European Enterprise Institute and the Adriatic Institute.  In the Chair, we had Edward Lucas, a Deputy Editor of The Economist.  Our two main protagonists were my old friend Dan Mitchell of the Cato Institute in Washington, a supply-side tax reform expert, who made the case for a pure flat tax, and Robert Batinovich, a successful entrepreneur and former government official, who argued for a slightly less austere version designed to answer the criticism that the pure flat tax, while it would clearly work, would tend to favour those with unearned income, and therefore be seen as favouring the rich.

Both speakers made a powerful case for lower and simpler taxes, and highlighted the dangers of the EU’s implacable hostility to what it calls "unfair tax competition".  I argued that no tax competition is unfair: rather that the EU’s efforts at harmonisation are a cartel operated by governments against the interests of the people.  The EU’s opposition to low tax rates could come back to haunt it in Ireland on June 12th, since fear of pressure to increase Ireland’s hugely successful 12.5% corporate tax rate is a powerful weapon for the NO campaign.

The debate was very well-attended and successful, and I was pleased that we managed to bring together such a distinguished panel.  I am also delighted that back at home the Conservative Party is starting to respond to public demand for lower taxes, and to feel its way, however tentatively, towards lower and simpler taxes, if not the full nine yards of a pure flat tax.  If we follow this route, then (as someone used to say) "things can only get better".  I am determined to fight Labour’s great fallacy.  Whenever we talk about lower tax rates, Labour politicians ask "Which schools and hospitals will you close?".  But they are the ones closing hospitals.  The proper question for Labour is this: "If you fail to reduce taxes, if you fail to use lower taxes to increase revenues and prosperity, what public services will you have to cut?"

May 2008 20
Are you sure you can ride that thing?

Hurrah! For the first time since 1472 the political cycle has turned. Tax and spend is out, and tax cuts are back on the centrist agenda.

Yesterday, David Cameron finally summoned up the nerve to say taxpayers "can’t take any more pain", and that the economy is being frazzled by tax and spend. And today, Nick Clegg is saying much the same.

But there are of course a few details to settle. Like the one that Tory Shadow Chief Secretary Philip Hammond fell over on last night’s Newsnight – what does it actually mean to say that taxes will fall as a share of GDP over an economic cycle?

Paxman had great fun with poor Mr Hammond. What is an economic cycle? Where are we in it now? Is the current tax take too high? How low should the percentage be?

Hammond wobbled around all over the road.

Well, the economy is sometimes above trend, and sometimes below…

Yes, but where is it now?

Well, I don’t know… that’s for the statisticians to tell us…

You don’t know?

Well, ahhhhgh… Hammond’s front wheel buckled and he ended in the ditch.

What Newsnight highlighted is that much more work needs to be done on this "sharing the proceeds" stuff. As we’ve blogged many times, it’s still no more than a nifty slogan. With Hammond likely to be at HMT within two years, he needs to get some serious content.

We wonder if he has any idea what the job of Chief Secretary to the Treasury actually involves? Chiefy is the most hated member of the Cabinet. While his boss the Chancellor gets all the plaudits for cutting taxes, Chiefy is the one who has to deliver the public expenditure control that funds them. He’s the one who has to say no to all his Cabinet colleagues as they attempt to grab more and more for their own departments.

Cameron’s cabinet will be different, and they’ll all commit to slashing departmental waste on their own turf?

Where on earth have you been these last 150 years? Even poor tortured low tax Keith Joseph found himself presenting a departmental brief arguing for more industrial subsidy cash in those bleak early years of Thatcher. It’s the nature of the beast, and whatever their best intentions may have been, once spending ministers get their feet under their huge new desks, they get turned (Yes Minister, op cit).

Which is why we need clear upfront rules and quantified commitments. Hammond needs a big visible stick to beat off his colleagues. Discretion and Best Endeavours simply won’t work.

It’s time to beef up sharing the proceeds with that Third Fiscal Rule – a fixed and quantified target for cutting the share of public spending in GDP over a cycle, now with added endorsement by the OECD (see many previous blogs, eg here).

Come on Mr Cameron – you’re so nearly en route to the Promised Land. Just one more heave. Or whatever it is you do to ride a bike.

PS The real answer to Pax’s cycling questions is surely that the Treasury already publishes estimates of the cyclically adjusted fiscal deficit, and the Tories would merely be adding publication of the adjusted tax and expenditure numbers. Here’s HMT’s current chart from the Budget, showing we have been in cyclically adjusted deficit every year since 2002-03:

Of course, as we all know, the Treasury numbers are now so massively fiddled, they’re not worth the paper they’re printed on. But the methodologies used to make such adjustments are broadly understood and agreed. What’s more, George Osborne has already pledged to establish an independent fiscal monitoring office to do the calcs (modelled on the NAO). So why didn’t Mr Hammond say that? They need to be far more specific in their own thinking.

May 2008 19

David Cameron’s pledge that the Conservatives will prioritise cutting the tax burden, in a speech this morning, is great news.  It suggests that the Conservatives are taking seriously the need to the end the Great British Taxpayer Rip-off we identified in a report (PDF) last weekend:

"With the rising cost of living, taxpayers can’t take any more pain indeed they want a government that can give them the prospect of relief. And our economy can’t take any more pain without losing jobs to lower tax competitors.


£20 billion wasted on an NHS computer that still isn’t working properly.

£2.3 billion spent refurbishing the offices of MOD civil servants.

And in one year alone nearly £2 billion of tax credits lost due to fraud and error.

These are outrageous examples of a spendaholic culture in government a culture that is the public sector equivalent of the reckless, debt-fuelled spending spree that Gordon Brown’s policies have encouraged in the private sector. The level of government waste in our country today is evidence of an out-of-touch political elite who have forgotten whose money it is they’re spending. Ministers who get in their offices and think ‘great, now how can I spend lots of money.’ People who have become so accepting of government waste that they assume it’s just part of the job and that anyone who objects must be calling for "cuts.""

Political parties have to acknowledge that the time has come for reductions in the overall burden of tax.  We have had revenue neutral shifts of every kind imaginable promised over the last few years and every one has either compromised Britain’s competitiveness – making us all poorer in the long run – or directly hit ordinary people struggling to pay their bills.

That bind can be broken if the Conservatives, or any other party, confront the rising tide of ineffective and often downright wasteful public spending, some of which can be seen in the report we released today on quangos (PDF). 

May 2008 13

Last month the French finance minister Christine Lagarde cheerfully announced France’s intention to push for corporate tax harmonisation when it chairs the EU for six months from July.  Since then the EU Commission and pro European politicians have toned it down to make sure businessmen don’t urge for a “no” in the Irish referendum on the constitution on 12 June.  I trust the Irish will not be fooled. 

Tax competition is the most effective method to keep government in check.  As long as there is tax competition between states or regions politicians are unable to tax and spend as if there is no tomorrow.  If the tax rate is lower over the border companies flee and jobs disappear – as recently illustrated by the relocation of several very large companies to Ireland.  Thanks to the Irish Republic’s corporate tax rate of 12.5 % the impetus towards a lower corporate tax rate in the UK has become unstoppable. 

Tax competition is any statist’s worst nightmare.  France, never having been short of statists since time immemorial, now wants the tax base harmonised across Europe.  That we do not live on planet Europe but on planet Earth has passed the little European by completely.  If the UK – as always – gives in, and tax base harmonisation goes ahead, a compromise will result.  We will end up with a medium harsh tax base regime, likely to be worse than the one we have.  And in the world competition Europe will continue to slide down the economic prosperity curve. 

As Churchill said:  “For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

Let’s say “no”, for once.

Apr 2008 24

An interesting new paper, written by economist Keith Marsden and published by the Centre for Policy Studies, presents further evidence of how smaller governments perform better on a range of measures than do larger governments.

The paper shows how countries with low taxes and spending relative to GDP enjoy faster economic and employment growth, lower debt and higher spending growth on public services (as opposed to income transfers) but do not suffer from higher inequality or lower tertiary education rates than countries with higher tax and spending ratios.


Mr Marsden concludes:

These overall findings suggest that the analysis and prescriptions of the early supply-siders were correct. Of course, tax rates and levels, and the size and nature of government interventions, are not the only factors affecting a country’s economic performance. But this evidence rejects the widely-held view that lower taxes inevitably result in cuts in public services, or at best their slower growth, and widening income inequalities.

Although the turmoil in financial markets is preoccupying policy makers at present, they should not lose sight of the stimulus that tax cuts and the pruning of inefficient government programmes could give to sluggish economies. The need to realign some governmental priorities is also revealed.

Apr 2008 15

Even if you haven’t heard of Shire Pharmaceuticals or their ADHD drug, Adderall, which they describe as the "leading brand in the US market" you should still be very concerned at the possibility they might leave Britain due to high levels of tax, as is reported in City Am.  This is a FTSE100 firm, one of the biggest in the UK.  High tax rates won’t raise much revenue if firms like this one leave the country.

High levels of tax have hurt our international competitiveness but, although big companies have left before, this is usually hidden by the fact that it is new investment that goes elsewhere rather than existing companies in the UK leaving.  Now it is becoming more apparent than ever that Britain’s long term prosperity is being imperilled by an increasingly uncompetitive tax system.

Apr 2008 08

Tax evasion is rightly a crime and honest taxpayers should not have to subsidise a criminal minority.  Equally, there are sensible measures – such as simplifying the tax system – that can be taken to reduce the extent to which people can plan their way around tax (and reduce the advantages accorded to those with expensive accountants).

However, we don’t think that trying to blur the line between tax evasion (breaking the law in order to avoid paying tax) and tax avoidance (arranging your affairs, within the law, in a way that minimises your tax burden) is a good idea at all.  There are a number of reasons why, in practice and economic theory, such schemes turn out poorly whether you attempt to clamp down on anti-avoidance through a grand General Anti-Avoidance Principle or by encouraging the HMRC to become extremely aggresive (as has happened in recent years).

However, the basic problem is that the people who pay the highest price are never the rich foreigners that many on the left like to set up as bogeymen.  It is ordinary people.  Ex-cabbies starting up a business who haven’t done anything wrong but are bankrupted for 88p, for example.  This morning we found this 1909 election poster from the excellent collection at the Bodleian library which illustrates the basic problem pretty beautifully:


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