The TaxPayers' Alliance - Economics 101

Even the Germans are angry at Darling's tax rises

From today's Financial Times:

"German industrialists have urged Alistair Darling to rethink his “highly regrettable” tax changes for foreign residents. German Industry UK, which represents 250 companies in Britain, wants the chancellor to postpone the new tax measures and allow a period of thorough consultation...

"Some German businesses have been angered by the changes, announced in the pre-Budget report, because the tax break had been used as an incentive to attract Germans to the UK. Without it, the UK’s disadvantages, such as the climate and high cost of living, would weigh on managers’ considerations, Mr Atenstaedt said. It was “not only the super-rich who would be affected, but also hard-working industry people”. He estimated that 10,000-20,000 Germans were working in Britain."

It comes to something when tax rises by Alistair Darling are criticised by high-tax Europe!

Misunderstanding Northern Rock

There are two points surrounding yesterday's events at Northern Rock that really need to be cleared up.

First, the BBC's Business Editor, Robert Peston, is very enthusiastic about Bradford & Bingley's offer to help out at Northern Rock:

"In the worst case of the Rock being nationalised, it could take assets off the Treasury's hands and lessen the very substantial burden and risks for all of us as taxpayers,"

So, Bradford & Bingley are going to take a load of the rather unreliable Northern Rock debt off the taxpayers' hands?  How good of them!  Should Bradford & Bingley shareholders be up in arms about their company's directors using company funds to bail out the Treasury?

Probably not.  The truth is that Bradford & Bingley's directors wouldn't be looking at buying Northern Rock Assets if that move didn't have the potential to be a good deal for the company.  Not because they're bad people but because they have a legal and moral duty to look out for the interests of their shareholders.  So, unless we think the Treasury has somehow outwitted them - an idea so far fetched it would have to be retrieved from the moon - the proper question to ask is:  how are Bradford & Bingley going to get value from a deal for Northern Rock assets?

The answer is obvious.  They'll take some of the best assets - the most reliable mortgages - at a low price.  We'll have a smaller liability but the range of assets that Northern Rock will be left with to pay off its massive debts to the taxpayer will be more than commensurately smaller.

This is particularly worrying thanks to the other big new Northern Rock story.  We've now guaranteed to wholesale lenders that they won't lose money on Northern Rock.  There are two important things to notice here:

1)  Taxpayers are now covering almost all the downside risk.  This is so close to nationalisation that the final taking of the bank into public ownership is increasingly of totemic, rather than material, importance.

Research into privatisation (PDF) for the Competitive Enterprise Institute by Eli Lehrer and Iain Murray seeks to redefine the concept of privatisation and nationalisation in terms of who bears the downside risk as the question "who will lose money if it goes under" is often more important to incentives and real control than nominal ownership.  If we accept Lehrer and Murray's analysis then Northern Rock is already pretty much nationalised.

2)  We've effectively been booted way down the queue of creditors looking to get paid in the event of Northern Rock going under.  When its assets are sold the wholesale lenders will now need to be paid, in order to satisfy the new guarantee, before we are.  With Northern Rock's mortgage book in doubt and plenty of existing claims on its assets - even before any Bradford & Bingley stripping - we should have very little confidence it will be possible to get taxpayers all of their money back.

All in all, the last forty-eight hours have brought a lot of worrying news for taxpayers.

Encouraging words from the Conservatives on tax

Several papers report comments made by Shadow Chancellor George Osborne. He said:

"I will approach each Budget thinking how I can reduce taxes; how can I prepare Britain's economy to compete with China in the world economy. Lower taxes are good for people and the economy. Next year I hope to set out plans for business taxation so that Britain is competitive...

"My ambition is lower taxes. I would like to be the Chancellor that under-promises and over-delivers."

Quite right. It's encouraging to hear positive words about reducing tax from the Shadow Chancellor. George Osborne's inheritance tax announcement in October was so well received by voters, that further tax announcements will be extremely popular, not to mention being the right thing for the economy and hard-pressed families and businesses.

There are three further points to make:

1. We don't yet know whether George Osborne is talking about reductions in the overall burden of tax (real tax cuts), or revenue-neutral simplifications that will allow headline rates to be reduced.

There is nothing wrong with a business tax simplification that removes allowances and exemptions and reduces the headline rate of corporation tax. It is quite likely that Mr Osborne will propose to align accounting profit with taxable profit for corporations, which will simplify the tax regime and allow a revenue-neutral 3p cut in the main corporation tax rate - this option was proposed by the Tax Reform Commission (although the Commission recommended a 5p cut in the main corporation tax rate) and PWC have been commissioned to produce a technical implementation plan.

But there are problems with simplifications that don't reduce the overall burden of tax, as Alistair Darling discovered a couple of months ago. The losers will shout more loudly than the winners. To make simplification work, you have to reduce the overall tax burden.

Similarly, reductions in personal taxes that are offset by higher green taxes are unlikely to prove popular. Green taxes already more than cover the cost of Britain's carbon footprint and, in an August YouGov poll, 63 per cent of the public said that "politicians are not serious about the environment and are using the issue as an excuse to raise more revenue from green taxes".

2. There really is no getting away from the fact that how much tax people and businesses are paying  overall is what counts. The public are likely to see through attempts to give with one hand and take away with the other - witness the reaction to Gordon Brown's Budget in March, which did precisely that.

It is true that Mr Osborne's inheritance tax announcement in October was, at least on paper, revenue-neutral overall. But of course for voters in a general election, who are not non-doms, it wasn't - hence its popularity. It would have been a different story had the Shadow Chancellor said that inheritance tax would be abolished for almost all estates but that, to maintain economic stability, taxes on cars and flights for ordinary people would go up.

The inheritance tax announcement was a genuine masterstroke. But there are few revenue-neutral tax changes that will have the same positive political impact. Green taxes are unlikely to be one of them - let us not forget that the Conservative Party's pre-conference slump in the polls came after the Gummer-Goldsmith report, which recommended higher green taxes, including a possible tax on supermarket car parking.

There is a genuine political space for the Conservatives to move into if they choose. A YouGov poll in August asked the question: "Thinking about the present levels of tax on the one hand and the state of the public services (like health or education) on the other, do you think the party you support should pledge to increase taxes, hold taxes at their present level or to reduce taxes?" The results were: increase taxes - 6 per cent; hold at present level - 38 per cent; reduce taxes - 44 per cent; don't know - 12 per cent.

3. The crucial factor in whether the Conservatives can either offer reductions in the overall burden of tax or revenue-neutral tax changes is how much the Party will spend. We know all this already but it's worth repeating: George Osborne has made it clear that he will not borrow to fund tax reductions, nor will he rely on dynamic forecasting. Therefore, the only way that he can reduce the overall burden of tax is to increase public spending more slowly than economic growth.

The plans of both the Conservatives and the Government are to increase spending by 2 per cent per annum in real terms for the next three years. With economic growth at 2.5 per cent to 3 per cent, this would clearly allow small reductions in the overall burden of tax. 0.5 per cent of government spending is around £3 billion - or close to a 1p reduction in the basic rate of income tax per year, with no need for tax increases elsewhere.

It now looks, however, that economic growth will be significantly lower for the immediate future. Growth is likely to be below 2 per cent in 2008, while yesterday Dresdner Kleinwort put the chances of a recession next year at 50-50. In these cirmumctances, increasing public spending at 2 per cent in real terms is likely to mean higher taxes or higher borrowing.

Given that an election is unlikely before 2009 or even 2010, this will be Labour's problem, rather than a Tory headache. But that's not the end of the story. For there is nothing stopping Gordon Brown/Alistair Darling from publishing the Comprehensive Spending Review, for the following three years, before an election. The Government could easily make the public spending settlement more generous, say, 3 per cent a year in real terms, and dare the Tories to undercut them. If the Tories pledge to match the Government, then no cuts in the overall burden of tax for almost the whole of a first Tory Parliament. If the Tories don't, then Brown can fight the election on "investment vs cuts" all over again.

If the Conservatives don't make the argument now for tighter public spending and reductions in the overall burden of tax, they risk falling victim to precisely this sort of scenario. But here again, there is good news. A YouGov poll in August posed the question: "The money the government spends on public services and other things comes mainly from taxation. Do you think..." and the responses were: "The government spends too much and therefore taxes us too much" - 64 per cent; "The government has got the balance about right" - 18 per cent; "The government spends too little and therefore taxes us too little" - 4 per cent; "Don't know" - 14 per cent. YouGov asked the same question in March 2005 and the responses were 49 per cent, 25 per cent, 11 per cent and 15 per cent, respectively. Voters are therefore more ready than ever for a party to make the case for spending restraint and reductions in the overall burden of tax.

The Tax on Christmas

Christmas is a time of giving, but few families appreciate how much they are being forced to give to the taxman.  Virtually all Christmas purchases, from iPhones to crackers, are subject to VAT, and granny’s sherry attracts excise duty on top, not forgetting the fuel tax levied on journeys to see family and friends.  New calculations by the TaxPayers' Alliance reveal the startling size of the family Christmas tax bill:

This Christmas, British families will pay an average £225 tax on their festive spending, equal to 600 Tesco Finest mince pies as well as 15 bottles of Harvey’s Bristol Cream sherry.

The total Christmas tax bill will come to £5.65 billion, more than enough for the Treasury to buy every single turkey in the EU.

Download The Tax on Christmas (PDF)

Essential viewing from the Centre for Freedom and Prosperity

Two new videos from the Centre for Freedom and Prosperity in the US make a compelling case for tax competition and reductions in corporation tax rates. Exactly the sort of thing we all need to do more of.

Low taxes attract people and businesses

An interesting piece by Arthur Laffer (of the famous "Laffer curve") and Stephen Moore in the Wall Street Journal shows how US states with higher taxes and regulations have lost people and businesses to states with lower taxes and regulations. The authors write:

"The American Legislative Exchange Council has just released a study we've done that presents a 2007 Economic Competitiveness Rating of the 50 states, based on 16 economic policy variables, including taxes, regulation, right to work, the legal system, educational freedom and government debt. Over the past decade, the 10 states with the highest taxes and spending, and the most intrusive regulations, have half the population and job growth, and one-third slower growth in incomes, than the 10 most economically free states. In 2006 alone 1,500 people each day moved to the states with the highest economic competitiveness from the states with the lowest competitiveness."

The two most important factors are tax rates and trade union legislation:

"Of all the policy variables we examined, two stand out as perhaps the most important in attracting jobs and capital. The first is the income tax rate. States with the highest income tax rates -- California and New York, for example -- are significantly outperformed by the nine states with no income tax, such as Texas and Florida. As a study from the Atlanta Federal Reserve Board put it: "Relative marginal tax rates have a statistically significant negative relationship with relative state growth."

"The other factor for attracting jobs and capital is right-to-work laws. States that permit workers to be compelled to join unions have much lower rates of employment growth than states that don't. Many companies say they will not even consider locating a factory in a state that does not have a right-to-work law."

The authors conclude:

"The states losing population are in effect suffering from a slow-motion version of the economic sclerosis that paralyzed much of Europe in the 1980s and '90s, particularly France and Germany with their massive welfare systems. At least the European socialist nations are finally starting to change their taxing and spending ways to win back jobs.

"No such luck in this country. Five of the states near the bottom of our competitiveness ratings -- Illinois, Maryland, Michigan, New Jersey and Wisconsin -- have enacted major tax increases in the last two years. Maryland and Michigan just raised business and income taxes on upper-income earners, while arguing that raising the cost of doing business will attract more businesses. More likely it will induce companies to stay away, and people to move out."

Gordon Brown take note - businesses and jobs will leave these shores if taxes and regulations continue their upward trends.