The TaxPayers' Alliance - Economics 101

Private equity firms show the need for simpler, lower taxes for all

The Taxpayers’ Alliance exists first and foremost to defend the interests and rights of ordinary hardworking taxpayers.  It is ordinary taxpayers who have to foot the mounting bill for a monolithic government bureaucracy wasting money on pointless, feel good projects.  Taxpayers have seen more of their own money swallowed up by the state and seen comparatively very little in return.  Yet it is the voice of those taxpayers who fund the gravy train that seem to count for least within the political process.  It is thus for the pensioner who is unable to pay spiralling council tax bills, the first time buyer unable to get onto the property ladder due to stamp duty, and the low paid worker who faces cripplingly high marginal tax rates and so little incentive to work that the Taxpayers’ Alliance exists to defend.

Private equity executives, whatever else they may be, do not quite fit the description of the ordinary taxpayer struggling to make ends meet.  However, following the barrage of criticism recently unleashed upon them by various left wing groups and politicians, we felt the need to come to their defence.  Most of the concern has focussed on the fact that the majority of the compensation offered to private equity comes from carried-interest, which is taxed as a capital gain rather than income, and so tax rates of 10% or less rather than 40%.   The interim report of the committee of MPs investigating private equity firms considers both this issue and the use of the non-domicile status as a tax loophole, along with the impact of private equity funds on the wider UK economy.

In the age of international capital mobility, firms are able to easily relocate around the world.  So when many other European countries are moving towards a system which treats carried-interest as a capital gain, it seems foolish for us to move in the opposite direction, by creating a tax system that penalises private equity firms and so gives them a clear incentive to make the most of their foot loose status and move abroad.  Private equity firms have produced £55 billion of investment over the last five years, whilst they contributed £26 billion of tax revenue to the exchequer last year.  That would be quite some loss to the British economy.

There is a broader point here.  One reason the rich do not need the Taxpayers’ Alliance to defend their interests is that they can afford an army of accountants and lawyers to exploit our outrageously complicated tax code to find its numerous loopholes.  It is these loop-holes that allow them to pay much lower marginal tax rates than many of the poorest workers.

A flatter, simpler tax would remove many of the loopholes that allow the richest to end up paying the lowest tax rates.  It is an empirical fact that tax cuts and simplifications lead to the richest providing a greater percentage of total government revenue.  Tax simplification, not clobbering a vital component of the British economy to appease the trade unions, should be the government’s economic priority.  To his credit, Alistair Darling said much the same thing when he asked to be judged on his success in simplifying taxation.  However, as the FT so brilliantly puts it, the government’s claim that it will continue to simplify our taxes is rather like “the Mafia [pledging] to continue deepening its commitment to the rule of law.”

A fact that seems to have escaped everyone’s attention, though, is that rich people paying lower marginal rates than poor people is no argument for raising the rate on the rich, it is an argument for cutting it on the poor.

Encouraging words from Cameron on trade

For far too long the language and rhetoric of international trade
agreements has been depressingly mercantilist.  If one country agrees to
reduce its protectionist measures it is talked of as a "concession" and
a "sell-out", whilst politicians and diplomats who dogmatically cling
onto their ridiculous trade policies are saluted and commended for
defending their country's interests.  Even the most basic understanding
of economics would be enough to realise why such talk is not only
fallacious but hugely damaging. 

Trade, as Adam Smith so famously pointed out, is a non-zero sum game -
trade is not a fight for a finite, fixed supply of wealth where one
country's gain is another's loss, but a wealth creating process, that
allows us to benefit from the resources, skills and specialisation of
other countries.  International trade benefits both trading parties,
leading to better allocation of resources and so lower prices and higher
incomes.  That one country wishes to "protect" its borders from the
benefits of trade is no reason for us to deprive ourselves of these
benefits.  The fact that one country chooses to throw rocks into its
harbour is no reason to throw rocks into ours. 

It is thus very reassuring to hear David Cameron talk of unilateral
reduction and elimination of trade barriers, particularly in developed
nations.  The only engine to sustained growth in human welfare is embracing free markets.
The most successful developing countries have been those that have
traded their way out of poverty.  Not only is it economic madness to
deprive ourselves of the benefits of free trade, it is immoral to
protect ourselves from goods from developing nations, as this only keeps
these nations in poverty.  First-world tariff and subsidy reduction
would do more than any aid package ever could to reduce third-world
poverty.

We are not going to pretend that eliminating western protectionism will
be a magic bullet.  To start with, many of the highest trading barriers
are actually between developing nations and many third world nations
continue to pursue infant-industry protectionism, both of which only
hinder the growth of these impoverished nations.  Too often poverty
campaigners simply choose to ignore the protectionism of developing
nations, in fact in a depressing number of cases they argue in favour of
its continuation as it flatters their ideological commitment to the
neo-Marxist school of dependency theory, and so ignore the fact that
such protectionism is often just as damaging (if not more
so) than developed world protectionism.  In fact, the Conservative
Party's policy review - headed up by Peter Lilley - proposes some
interesting steps to provide incentives to encourage developing nations
to reduce their protectionism, such as providing compensation for lost
tariff revenue.  This again is to be welcomed.

Our fear is that many of these rigorous and noble ideas will simply be
impossible to implement within the framework of the European Union, as
our hands are tied by French farmers and Italian clothes makers and any
new trade agreement would have to be a collective one endorsed by the EU
Commission and every other member, which, as we previously noted, has been making plenty of protectionist noises of late. 

Speaking to a half-empty Rwandan Parliament yesterday, Mr Cameron said:
"Forget the endless, torturous negotiation about getting something in
return [for dropping tariff barriers] ... Just do it. We can afford it,
Africa needs it and we will all benefit from it."  A refreshingly clear
and principled statement.  Unfortunately, given that British politicians
in our puppet Parliament no longer control trade policy (unlike elected
members in America, Australia, China, India, Brazil or Russia), it is
difficult to know how such a speech can ever be translated into action,
short of EU negotiation to take these powers back.

Government doesn't have a magic wand

                                                        Freedom Fighters?

Harry Potter and the Deathly Hallows, the seventh and last book in the Harry Potter series, has just become Britain’s fastest selling book in history, beating the record held by the previous Harry Potter book. Given that level of market penetration, it is perhaps not surprising that commentators, reviewers and the chattering classes have come to consider some of the implicit themes within the books, and ultimately the lessons they impart to children.

We have, no doubt, all heard of the Evangelical Christians who wish to ban Harry Potter and denounce its satanic influences, and of the more mainstream views that the books offer a clear moral contrast between right and wrong through considering themes like racism and sexism and exploring concepts like temptation, sacrifice and mortality from a mostly Christian perspective. However, in the buzz that surrounds the subtle (and not so subtle) references to Nazism and Christianity, another important interpretation has arisen that particularly interests us at the Taxpayers’ Alliance.

It has been argued, by a Professor at a US law school, that Rowling’s portrayal of government shows the kind of healthy scepticism of politicians and bureaucracy associated with public choice theory. Public choice theory applies the assumptions and analytical tools of economics to the workings of bureaucracy in particular, and government in general. Too often, the public choice theorists argue, the comparison between market and state outcomes has been unfair. It is a well established canon of neo- classical economics that whilst markets are by far the most efficient and effective means of allocating resources and creating wealth, there are cases of market failure. Lack of information (and its asymmetric distribution) and uncompetitive practices by firms, lead to distortions in the price system and so imperfect results.

It is in these cases of market failure that the government often intervenes on the grounds that it will be able to achieve better results than unfettered markets. This is where the unfairness lies. The behaviour of markets in reality (i.e. with imperfections) is compared with an ideal about how politicians, bureaucrats and planners behave (i.e. as enlightened, public interested servants). Reality is compared to a hypothetical. It is this imbalance public choice seeks to reconcile by assuming that government agents are self-interested individuals seeking to maximise their own budgets and power. This leads to Parkinson's Law and the associated Empire Building that is so common in large organisations. As such, government failure occurs just as surely as market failure, and its results are frequently far worse than market outcomes.

Rowling starts the series of Harry Potter novels by describing a bumbling but well meaning bureaucracy, with numerous departments with ludicrous names and dubious raison d’etre. However, as the series progresses the ministry uses its power to cover up the rise of the villainous Voldemort, often by mobilising its full range of coercive power: detention without trial, torture (of children), altering the educational curriculum and turning the press into a propaganda rag. Furthermore, the “Ministry for Magic” is shown to have institutionalised previously sympathetic characters turning them into ambitious pen-pushers with no loyalty, whilst those characters who maintain moral worth are unable to progress up the government ladder. This is an unelected, overtly bureaucratic government that operates without a free press, and uses all of these advantages to peruse its own (damaging) agenda.

The sympathetic characters even set up their own private army to provide the defence force that the ministry is unable and unwilling to provide – the kind of non-state militia fighting for its freedom in the face of government inaction and incompetence that only the most hardened anarcho-capitalist would dream of.

It all adds up to a damning indictment of government.

Rowling has been feted for many things, not least the fact that many young males have discovered the lost habit of reading through her books, yet her greatest and most lasting achievement may well be creating a generation more sceptical of government projects and more open to the benefits of embracing markets, personal responsibility and lower taxes.

Cost of Government Day: Monday 23 July

The TPA has extended the concept of Tax Freedom Day, long championed by the Adam Smith Institute and now an established part of the political calendar (in 2007 it fell on 1 June) and can now provide an estimate of the Cost of Government Day.  This is the date in the calendar year on which the average person has earned enough gross income to pay off his or her share of government spending and regulation.

The result for 2007 is as follows:

• The average person must work for 204 days of the year to pay off his or her share of government spending and regulation.

• The Cost of Government Day in 2007 is 23 July.

The Cost of Government Day calculation is done in two parts:

1. According to the OECD, total government expenditure will be 44.9 per cent of GDP this year. This means that for 2007:

• The average person must work for 164 days of the year to pay off his or her share of government spending.

• The average person was free of the cost of government spending in 2007 on 13 June.

2. The Better Regulation Task Force (now the Better Regulation Executive), which is sponsored by the Government, has estimated that the cost of government regulation is between 10 and 12 per cent of GDP.  Taking a mid point of 11 per cent means that for 2007:

• The average person must work a further 40 days of the year to pay off his or her share of government regulation.

• The average person must work from 13 June to 23 July just to pay off the cost of government regulation.

The Cost of Government Day is an important concept to develop as it captures the hidden costs of government, which encompass far more than stealth taxes:

• Under Gordon Brown, government spending has for a number of years been higher than government receipts.  The resultant government borrowing will have to be paid off by taxpayers eventually – the future bill is being accrued this year.

• The cost of government regulation on the economy is even murkier, but it will eventually fall on taxpayers in the form of lower wages, higher prices and fewer jobs.

Cost of Government Day has been getting later in recent years and falls later in the year than in many other OECD countries:

• In 2000, the Cost of Government day fell on 26 June, almost a full month earlier than this year’s date.

• The Cost of Government Day in 17 OECD countries falls earlier than in Britain in 2007.

Download the full Cost of Government Day report (PDF)

Protectionism in Europe is on the rise

The Wall Street Journal reports today yet another example of how continental politicians hope to use  the EU as a means of enforcing their economically disastrous policies across the whole continent.

Each individual EU country knows that their statist schemes will retard economic growth, and send investors, entrepreneurs and capital to freer countries where markets are allowed to flourish and productive elements are welcome. So to avoid "damaging" competition between EU countries, politicians from countries with uncompetitive regulative and tax system want to force all EU countries down to their standard.

This is why certain EU politicians wanted to enforce harmonised taxes across whole EU, so that more competitive countries like Britain would be lumbered with outrageously high tax rates, and thus reducing our relative attractiveness to investors.  This time it is Germany wishing to enforce their strict controls over foreign ownership of German capital. Merkel knows that intervening in the free flow of capital will send investors away from Germany, so she says it is only "fair" and "responsible" to enforce these policies across the EU.

If such intervention made any sort of economic sense then why only restrict ownership of non-EU groups, why not stop French companies from buying German stocks? Indeed, if restricting ownership made any sense at all why not stop companies from one German region buying companies based in another German region.

Economic laws do not follow artificial man-made borders.  It is thus unsurprising that countries most open to foreign investment are those countries that are reaping the biggest gains from globalisation; seeing higher growth, lower unemployment and better allocation of resources. If this undeniable economic logic does not convince Germany, then they are free to continue to shoot themselves in the foot by introducing populist protectionist measures, however, Germany should certainly not be enforcing its stupidity across the whole EU. Germany should not be able to undermine the foundations on which British prosperity is built.

Ultimately, this is just further evidence of how far apart Britain’s economic outlook is from continental Europe’s, and so further evidence of our need to reconsider elements of our relationship with Europe.

More excuses for increasing tax on business

The Times reports that this week the government has proposed to allow local authorities to levy an additional tax on businesses in the form of an infrastructure tax which will be paid by business in the city of London, and will be limited to 4p in the pound. This new tax is being introduced to fund the Crossrail system which is estimated to cost the Government around £15 billion.

Business already pays far more tax than it needs to. For the tax year 2007-8 businesses will pay over £50 billion in corporation tax alone. This is more than enough to pay for Crossrail several times over in just one year.

The government could afford projects like Crossrail if it were to reduce the amount of money it squanders in waste. This year the government has wasted £82 billion of its tax revenue, which would pay for five Crossrail systems with £7 billion to spare.

Further evidence of tax credit failures

In its annual audit of the department, the National Audit Office yesterday refused to sign off HMRC's annual accounts, "due to levels of claimant error and fraud in the tax credits system". The NAO report was full of damning evidence on the failure of tax credits:

1. Tax credits overpayment amounted to £6.6 billion.

2. Fraud and error in the tax credits system is widespread. Between £1 billion and £1.3 billion was paid in 2004-05 to claimants not entitled to it, with "no evidence to demonstrate a lower estimate" for last year.

The report also criticised the department in other areas:

1. The PAYE computer system is struggling to cope with the changing world of work. As a result, the department may not be pursuing some £800 million of tax due, while taxpayers are likely to have overpaid by £340 million and potentially 5 million people are paying the wrong amount of tax.

2. £135 million a year is being lost because tax due on pensions is not being collected.

3. HMRC missed its target for the proportion of online self-assessment tax returns filed on time.

4. There is also evidence that organised criminals are obtaining fraudulent repayments on self-assessment returns.

All in all, a catalogue of errors, and yet more evidence of how the politicians setting tax credit policy and the civil servants in charge of the department lack the management experience and subject knowledge to deliver effectively.

Liberal Democrat Tax Proposals

Download Reducing the Burden:  Policies for tax reform (PDF)

There are some good ideas in the Liberal Democrat tax proposals:

1. Simplification of the tax code and postcard-style returns could ease the administrative burden faced by individuals and companies.  Britain has the most complex tax system in the world, having recently overtaken India; there has to be room for simplification.
2. A cut in the basic rate would give millions of Britons some of their money back.  Very welcome.
3. Replacing the council tax would address the problem of a tax which hits the vulnerable the hardest and reduces pensioners to penury.

However, there are also some bad ones:

1. An extension of green taxes would be an inefficient way to raise revenue, would likely prove regressive and could do serious harm to British industry.  In particular, plans to increase the variation in vehicle excise duty on the basis of emissions would probably still not take lifetime emissions into account: some estimates that do include costs of construction and design suggest that a Toyota Prius Hybrid puts out more emissions than even a huge Hummer H3.
2. Taxing the rich more may appeal to social democratic notions of fairness but could do the British economy serious harm.  Estimates by the Liberal Democrats suggest that the tax bill of a City banker earning £250,000 would be increased by 11,800 pounds.  If the bank that employs that banker moved to another country to avoid the additional bill or international investment was diverted elsewhere we would all lose out.
3. There are risks to introducing a 'General Anti-Avoidance Rule'.  As the Conservative Tax Reform Commission pointed out:  "It is not easy to define exactly what such a rule should say, and experience in other jurisdictions shows that it may take some time before sufficient issues have been brought before the courts to enable to scope of the GAAR to be clarified."  Until clarity is achieved there is a lot of uncertainty in the law which exposes business leaders to unfair legal risk.

In short, a mixed bag.  Certainly an improvement over past Liberal Democrats plans to introduce a new 50 per cent tax band.  This platform would make important positive changes to the tax system by simplifying it.  If only the Liberal Democrats could get over the need to keep these changes revenue neutral they could avoid compensating measures that might undermine our economic competitiveness.

Are genuine tax cuts coming our way?

Today's Financial Times reports that the Shadow Chancellor George Osborne signalled yesterday that the Conservative Party will be going into the election on a multi-billion pound platform of tax cuts.

So a major politicial party is finally recognising the hardship that ever-increasing taxes is causing to so many families and pensioners across the country, and more importantly, is actually going to go into an election promising to do something about it.

Well, not quite. As the Financial Times reports, George Osborne also made clear yesterday that any proposed tax cuts will be a) matched by tax rises elsewhere, or b) merely aspirations rather than firm commitments. So we're back to where we started - no promises of overall tax cuts in the manifesto, but a hope that the overall tax burden will be lower at the end of the first economic cycle of a Tory government, provided that the proceeds of growth will be shared in the right way.

Well, again, perhaps not quite. The Financial Times article states:

"George Osborne gave his strongest endorsement yet of a £21bn package of tax cuts recommended by the Tories' tax reform commission, including a reduction in corporation tax and the axing of stamp duty. "I want much of what they say to form the basis of a programme for government" [he said]."

Despite the new wave of enthusiasm among politicians of all parties for new green taxes, it would be hard for George Osborne to find an extra £21 billion from green taxes, particularly given their justified unpopularity with ordinary people. Gordon Brown has of course already implemented parts of the Tax Reform Commission report, so if George Osborne implemented all the rest of it, the overall cut would be less than £21 billion. Still it would be a sizeable package and might therefore imply a long-overdue reduction in the overall tax burden.

So you never know - perhaps the Conservative Party is slowly coming round to a sensible position. We will watch future developments with interest.

Regional Development Agencies face the axe

In an interview with today's Financial Times, Shadow Business Secretary Alan Duncan said that Regional Development Agencies must "justify their existence" to escape being abolished by a Conservative government. He said:

"My experience with all RDAs is, after an initial ‘Oh yes, we like them’, people very quickly say in the next sentence ‘But what the hell do they really do?’ and that is the question mark.

I don’t think they are changing the overall enterprise culture of any of their regions. They’re doing a little bit of infrastructure, a little bit of training, a spoonful of sugar here, a spoonful of sugar there.

[RDAs will] have to justify their existence and we’re going to issue that challenge to them. I’m not saying we’re going to abolish them. We might. Who knows?”

About time too! Regional Development Agencies cost taxpayers £2.2 billion a year, pay their executives top salaries, have silly names like One North East and Yorkshire Forward, and fail to prevent a growing regional divide. Scrapping them would allow the small company rate of corporation tax to be reduced by 6 percentage points, a far better way to help regional development.

We hope that Alan Duncan means what he says.

Early thoughts on the Conservatives' tax announcements

The Conservative Party’s Social Justice Policy Group will be presenting its findings tomorrow. It has been widely trailed in the media. Two stories today, in the Financial Times and the Telegraph, will leave taxpayers with mixed feelings.

On the positive side, David Cameron said yesterday that he will go into the next election pledging a full review of Britain’s tax and benefits system to make it more marriage-friendly. If this results in tax reductions for married couples (rather than tax rises for single people and unmarried couples), it can only be a good thing. Families have had to endure years of inflation-busting tax rises, with little to show for the extra spending it has financed. Recognising their difficulties and doing something to reverse Gordon Brown’s tax raids will be good for the economy and a popular electoral move.

On the negative side, however, it is reported that the Policy Group will tomorrow recommend a tax hike on alcohol to tackle binge drinking. We have no issue with the diagnosis that there is a serious alcohol problem in Britain that is leading to social and family breakdown. But we question whether hitting the hard-pressed taxpayer yet again will solve the problem. Why should ordinary people enjoying a pint after work have to pay more? Politicians should realise that raising taxes is not a solution to all the world’s ills.

We look forward to reading the report in full tomorrow.

EU tries to raise taxes in Britain...again

Not content with import taxes which raise the price of food and clothing imported from outside the EU, nor with abortive plans to introduce an EU tax, the bureaucrats in Brussels are at it again.

This time it's VAT. The European Commission is calling for VAT rates to be harmonised right across the EU, which would likely mean some rate of VAT being introduced on food and children's clothing, which are currently exempt from the tax in Britain.

The TPA says:

"This proposal is a double whammy because the EU already adds hundreds of pounds to our shopping bills each year through extortionate tariffs on cheap clothes and food from non-EU countries. The bureaucrats at the Commission should stop meddling in our affairs. People are already finding life expensive with rising council tax bills, higher utility bills and soaring house prices, so taxpayers can’t afford to pay more when they go shopping."

Concerns over Conservative economic policy

Two interesting pieces have appeared in the last few days on Gordon Brown and David Cameron's approaches to taxation and the economy.

Firstly, Fraser Nelson wrote in last week's Spectator:

"During what passed for Labour’s leadership campaign, Mr Brown was asked why he would not raise the top rate of income tax. His reply was instructive. ‘When we came to power, the richest 10 per cent paid 40 per cent of income tax,’ he said. ‘Now it is 52 per cent.’ The richest are shouldering a greater share of the burden, he was saying — and that’s precisely because their tax rate has not risen. If you want them to pay more, incentivise them to earn more. It was a direct echo of Nigel Lawson’s 1988 Budget, and the Conservative doctrine — the so-called ‘Laffer curve’ — from which modern Tories now shy away.

This takes us straight to the heart of the Brown paradox. It is precisely his addiction to tax revenues that has led him to the conclusion that he cannot raise the top rate of tax: higher tax rates, he has finally grasped, mean smaller revenues. This is very different indeed to what he believed before 1997, when he was keen on a new top rate of 50 per cent. But ten years in the Treasury has turned him into that rare thing: a redistributionist Prime Minister who understands and relishes the dynamics of the Laffer curve. ...

In effect, Mr Brown has applied low-tax Friedmanite economics to a tiny section of British society — City financiers — and reaped the benefits as talented foreigners flood to London. In one of many role reversals in the political landscape today, it is the Conservatives who now want to close the loopholes that benefit those in the private equity world. ‘If it looks like income, then it would be peculiar not to tax it like income,’ says George Osborne, the shadow chancellor. Similar moves are afoot in America. But not in Brown’s Britain."

All of this takes us into strange political territory. As Mr Brown vigorously protects his right flank, and Mr Cameron moves the Conservatives ‘into the mainstream’ (as he defines it), it is hard to see which party is positioned where. Mr Cameron says that upfront promises of tax cuts threaten ‘stability’; Mr Brown keeps his counsel. On the environment, NHS reform and private equity, the Conservatives are now attacking from the left. So amid all this political cross-dressing, Mr Brown is presenting himself as the safer bet for Middle Britain."

Secondly, Anatole Kaletsky wrote in yesterday's Times:

"Mr Brown did something I have long suspected he might do, but never fully believed: he started to outflank David Cameron from the Right and to reposition Labour as Britain’s most solidly pro-business party. ...

The minimal implication of these comments [given by Alistair Darling to the Financial Times on Wednesday 4 July] is that economic policy under the Darling-Brown regime will definitely not push Britain in the direction of more protectionism, higher marginal taxes, tighter regulation or generalised attacks against the City, the business community or “the rich”, however defined. A slightly more ambitious interpretation would hold that Mr Brown will actually give Messrs Darling and Hutton more latitude to deregulate and to move the tax system in a pro-competitive direction than he himself enjoyed under Tony Blair."

Business leaders are beginning to take note. Today's Financial Times reports that Martin Broughton, President of the CBI, introduced David Cameron at the organisation's Mersey dinner last night by warning him of business concerns about the "mixed messages" the Conservatives were sending to companies. Mr Broughton noted that corporate concerns about the Tory leader's rhetoric on standing up to big business had been exacerbated by the Party's decision to "announce an airline tax proposal specifically to pre-empt a Gordon Brown speech."He went on to say:

"We begin to ask ourselves, is David Cameron an opportunistic chameleon or a principled politician? Is Cameron PR going to override national interest, common sense or just good old-fashioned Tory principles of lower taxation and lighter regulation?"

It would not be difficult for the Conservatives to assuage the legitimate worries of business leaders. The Party's Tax Reform Commission proposed a serious and comprehensive reform of the tax system that would simplify its worst complexities and reduce its overall burden on families and businesses. All that is required is for the leadership to endorse the Tax Reform Commission's proposals in full.

The Institute of Economic Affairs produced an interested paper from four leading economists on the TRC report. You can download it here.

Alistair Darling promises stability

In an interview today with the Financial Times Alistair Darling responded to calls for change in the tax treatment of private equity firms.  He said that he would "always strive in making change to try and make the [tax] system simpler" but would not make populist changes to capital gains or individual taxation which risked serious unintended consequences.  The comparison to Sarbanes-Oxley that he draws is apt.  Overly onerous regulation can do serious harm to a nation's competitiveness and the UK should not return the favour the US did in forcing financial services firms to relocate to the City.

He also made some moves to make the appointments system for the Bank of England's Monetary Policy Committee more transparent.  Essentially, the system will be the same as before but it will, at least, be reviewed by the Treasury Select Committee which should make it more likely serious weaknesses are spotted before a candidate is approved.

What Darling hasn't yet addressed is whether he will recognise the case for tax cuts.  Sir Digby Jones, the new minister for trade and investment, added his voice to the growing numbers calling for reductions in corporate taxation:

"Sir Digby, the outspoken former CBI director-general who is to take a seat in the House of Lords, stopped short of explicitly calling for a cut in corporation tax, but indicated Britain's system needs to compete with rival nations on the total amount of tax companies pay."

Personal taxation also needs attention.  While we should welcome Darling's refusal to bow to demands for private equity to be taxed into exile, continuing with the policies of the Brown era would be deeply unwise.  Both the economy and ordinary people whose wage increases are dissapearing in rising tax bills deserve better.

George Osborne gives advice to new Chancellor

In an interesting op-ed in the Observer, the Shadow Chancellor had plenty of advice for Alistair Darling, as he takes over the reins at the Treasury. In one of the key parts of the article, Mr Osborne wrote: “Britain's businesses will be held back so long as we have some of the highest corporate taxes in the developed world. Your first Budget is nine months away. That is plenty of time to prepare a programme of major tax reform. Your objective should be simpler taxes and lower tax rates. You should also shift the tax burden away from income and onto pollution and examine the case for a reduction or abolition of stamp duty on shares.”

It’s good that George Osborne is talking about cutting tax rates and simplifying the system, and we applaud him for that. But as he made clear after March’s Budget, cries of “tax con” will follow unless the overall tax burden is reduced at the same time. Unfortunately, other than an imprecise promise to “share the proceeds of growth” between public spending and tax reductions (which if shared in the wrong proportions could actually lead to a higher tax burden) and reduce the tax burden over an economic cycle (which if it is as long as the previous cycle could last for ten years), nothing is forthcoming from the Shadow Chancellor. If he could only be a little bolder in his plans to relieve families and businesses from the record tax burden, taxpayers would applaud him all the louder.

Brown's pensions raid has also cost savers

New calculations by Mike Warburton and Maurice Fitzpatrick at Grant Thornton are yet more evidence of the damage that has been done by Gordon Brown's removal of tax credits on dividends. They show that an estimated three million investors in personal equity plans (PEPs) and equity-based individual savings accounts (ISAs) have lost an average of £2,000 each, or £6 billion in total, over the last eight years.

The reason for this is very simple. Until 1999 investors could reclaim 20 per cent of the tax that they were due to pay on dividends generated from equity investments within PEPs. In 1999 Gordon Brown replaced PEPs with ISAs and halved the benefit, allowing investors to reclaim a maximum of 10 per cent. In April 2004 he removed that benefit altogether.

The £6 billion figure includes not only the direct reduction in income, but also the knock-on effect of the loss in investment returns had that extra money remained in the PEP or ISA. So not only has Gordon Brown whacked pensions, he has also damaged non-pensions saving.

And the result? The savings ratio has dropped from 10 per cent in 1997 to only 2.1 per cent, the lowest level in almost 50 years.  Not something for Gordon Brown to shout about.