Time to Worry about U.K. Fiscal Policy?

I’m glad that Boris Johnson is Prime Minister for the simple reason that “Brexit” is far and away the most important issue for the United Kingdom.

Whether it’s called a Clean Brexit or Hard Brexit, leaving the European Union is vital. It means escaping the transfer union that inevitably will be imposed as more EU nations suffer Greek-style fiscal chaos. And a real Brexit gives the UK leeway to adopt market-friendly policies that currently are impossible under the dirigiste rules imposed by Brussels.

But just because Johnson appears to be good on Brexit, this doesn’t mean he deserves good grades in other areas. For instance, the UK-based Times reports that the Prime Minister is on a spending spree.

Boris Johnson is planning to spend as much on public services as Jeremy Corbyn promised at the last election and cannot afford the tax cuts he pledged in the Tory leadership campaign, a think tank has warned. The prime minister’s proposed spending spree would mean Sajid Javid, the chancellor, overshooting the government’s borrowing limit by £5 billion in 2020-21, according to the Institute for Fiscal Studies, which said that the government was “adrift without any fiscal anchor”.

Ugh, sounds like he may be the British version of Trump. Or Bush, or Nixon.

In a column for CapX, Ben Ramanauskas warns that more spending is bad policy.

…with Sajid Javid making a raft of spending announcements, it would seem as though the age of austerity really is over. …So it would be useful to look back over the past decade and answer a few questions. Does austerity work? …As explained in the excellent new book Austerity: When it Works and When it Doesn’t  by Alberto Alesina, Carlo Favero, and Francesco Giavazzi, it depends what you mean by austerity. …The authors analyse thousands of fiscal measures adopted by sixteen advanced economies since the late 1970s, and assess the relative effectiveness of tax increases and spending cuts at reducing debt. They show that…spending cuts are much more successful than tax increases at reducing the growth of debt, and can sometimes even result in output gains, such as in the case of expansionary austerity. …Which brings us onto our next question: did the UK actually experience austerity? …the government’s programme was a mild form of austerity. …Then there is the politics of it all. It’s important to remember that fiscal conservatism can be popular with the electorate and it worked well in 2015 and to a lesser extent in 2010. The Conservatives should not expect to win the next election by promising massive increases in public spending.

Moreover, good spending policy facilitates better tax policy.

Or, in this case, the issue is that bad spending policy makes good tax policy far more difficult.

And that isn’t good news since the U.K. needs to improve its tax system, as John Ashmore explains in another CapX article.

…the Tax Foundation…released its annual International Tax Competitiveness Index. The UK came 25th out of 36 major industrialised nations. For a country that aims to have one of the world’s most dynamic economies, that simply will not do. …Conservatives…should produce a comprehensive plan for a simpler, unashamedly pro-growth tax system. And it should be steeped in a political narrative about freedom… Rates are important, but so is overall structure and efficiency. …a more generous set of allowances for investment, coupled with a reform of business rates would be a great place to start. We know the UK has a productivity problem, so it seems perverse that we actively discourages investment. …As for simplicity, …it’s possible to drastically reduce the number of taxes paid by small businesses without having any effect on revenue. Accountants PwC estimate it takes 105 hours for the average UK business to file their taxes… Another area the UK falls down is property taxes, of which Stamp Duty Land Tax is the most egregious example. It’s hard to find anyone who thinks charging a tax on people moving house is a good idea…in the longer term there’s no substitute for good, old-fashioned economic growth – creating the world’s most competitive tax system would be a fine way to help deliver it.

To elaborate, a “more generous set of allowances for investment” is the British way of saying that the tax code should shift from depreciation to expensing, which is very good for growth.

And simplicity is also a good goal (we could use some of that on this side of the Atlantic).

The problem, of course, is that good reforms won’t be easy to achieve if there’s no plan to limit the burden of government spending.

It’s too early to know if Boris Johnson is genuinely weak on fiscal issues. Indeed, friends in the UK have tried to put my mind at ease by asserting that he’s simply throwing around money to facilitate Brexit.

Given the importance of that issue, even I’m willing to forgive a bit of profligacy if that’s the price of escaping the European Union.

But, if that’s the case, Johnson needs to get serious as soon as Brexit is delivered.

Let’s close by looking at recent fiscal history in the UK. Here’s a chart, based on numbers from the IMF, showing the burden of spending relative to economic output.

Margaret Thatcher did a good job, unsurprisingly.

And it’s not a shock to see that Tony Blair and Gordon Brown frittered away that progress.

But what is surprising is to see how David Cameron was very prudent.

Indeed, if you compared spending growth during the Blair-Brown era with spending growth in the Cameron-May era, you can see a huge difference.

Cameron may not have been very good on tax issues, but he definitely complied with fiscal policy’s golden rule for spending.

Let’s hope Boris Johnson is similarly prudent with other people’s money.

P.S. If you want some Brexit-themed humor, click here and here.

P.P.S. If you want some unintentional Brexit-themed humor, check out the IMF’s laughably biased and inaccurate analysis.

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Nine Key Takeaways from Brexit

What an amazing vote. The people of the United Kingdom defied the supposed experts, rejected a fear-based campaign by advocates of the status quo, and declared their independence from the European Union.

Here are some takeaway thoughts on this startling development.

1. The UK has voted to leave a sinking ship. Because of unfavorable demographics and a dirigiste economic model, the European Union has a very grim future.

2. Brexit is a vote against centralization, bureaucratization, and harmonization. It also is a victory for more growth, though the amount of additional long-run growth will depend on whether the UK government seizes the opportunity for lower taxes, less red tape, and a smaller burden of government.

3. President Obama once again fired blanks. Whether it was his failed attempt early in his presidency to get the Olympic Games in Chicago or his feckless attempt in his final year to get Britons to remain in the EU, Obama has a remarkably dismal track record. Maybe I can get him to endorse the Boston Red Sox, thus ensuring the Yankees make it to the World Series?

4. Speaking of feckless foreign leaders, but I can’t resist the temptation to point out that the Canadian Prime Minister’s reaction to Brexit wins a prize for vapidity. It would be amusing to see Trudeau somehow justify this absurd statement, though I suspect he’ll be too busy expanding government and squandering twenty-five years of bipartisan progress in Canada. Potential mea culpa…I can’t find proof that Trudeau actually made this statement. Even with the excuse that I wrote this column at 3:00 AM, I should have known better than to believe something I saw on Twitter (though I still think he’s vapid).

5. Nigel Farage and UKIP have voted themselves out of a job. A common joke in Washington is that government bureaucracies never solve problems for which they were created because that would eliminate their excuse for existing. After all, what would “poverty pimps” do if there weren’t poor people trapped in government dependency? Well, Brexit almost surely means doom for Farage and UKIP, yet they put country above personal interest. Congratulations to them, though I’ll miss Farage’s acerbic speeches.

6. The IMF and OECD disgracefully took part in “Project Fear” by concocting hysterical predictions of economic damage if the U.K. decided to get off the sinking ship of the European Union. To the extent there is some short-term economic instability over the next few days or weeks, those reckless international bureaucracies deserve much of the blame.

7. As part of his failed effort to influence the referendum, President Obama rejected the notion of quickly inking a free-trade agreement with the UK. Now that Brexit has been approved, hopefully the President will have the maturity and judgement to change his mind. Not only should the UK be first in line, but this should be the opportunity to launch the Global Free Trade Association that my former Heritage Foundation colleagues promoted last decade. Unfettered trade among jurisdictions with relatively high levels of economic freedom, such as the US, UK, Australia, Switzerland, New Zealand, Chile, etc, would be a great way of quickly capturing some of the benefits made possible by Brexit.

8. David Cameron should copy California Governor Jerry Brown. Not for anything recent, but for what he did in 1978 when voters approved an anti-tax referendum known as Proposition 13. Brown naturally opposed the referendum, but he completely reversed himself after the referendum was approved. By embracing the initiative, even if only belatedly, he helped his state and himself. That would be the smart approach for Cameron, though there’s a distinct danger that he could do great harm to himself, his party, and his country by trying to negotiate a deal to somehow keep the UK in the EU.

9. Last but not least, I’m very happy to be wrong about the outcome. I originally expected that “Project Fear” would be successful and that Britons would choose the devil they know over the one they don’t know. Well, I’m delighted that Elizabeth Hurley and I helped convince Britons to vote the right way. We obviously make a good team.

Joking aside, the real credit belongs to all UK freedom fighters, even the disaffected Labour Party voters who voted the right way for wrong reasons.

I’m particularly proud of the good work of my friends Allister Heath of the Telegraph, Eamonn Butler of the Adam Smith Institute, Dan Hannan of the European Parliament, and Matthew Elliott of Vote Leave. I imagine Margaret Thatcher is smiling down on them today.

Now it’s on to the second stage of this campaign and convincing California to declare independence from the United States!

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For Keeping Money out of the Hands of Politicians, Three Cheers for David Cameron’s Parents

I recently wrote a primer on the issue of tax evasion, which is illegal. I made the elementary point that low tax rates and a simple tax code are the best (and only good) way of promoting high levels of tax compliance.

Now let’s shift to the related topic of tax avoidance, which is legal. Unlike evasion, there’s no civil disobedience and no breaking of laws with tax avoidance. It simply means that taxpayers are taking advantage of provisions in the tax code that help protect income from the government.

And we all do it.

• I take the home mortgage interest deduction, even though I’m not a fan of preferences for housing.
• I take the state and local tax deduction, even though i think it’s foolish to have a tax preference that encourages states like California and New Jersey to be even more profligate.
• I put money in a 401(k), which actually is a good part of the code since it means some savings is protected from double taxation.
• And I sometimes turn down some income-earning opportunities because the amount of income I would actually receive after paying tax isn’t worth the time and effort.

All these things I do to lower my taxes are legal.

As Judge Learned Hand correctly opined, nobody has any obligation to deliberately overpay the government.

Tax avoidance also is moral. Tax codes are corrupt and governments waste money, so anything that reduces the flow of revenue to the public sector is helpful.

With that in mind, I want to offer a hearty defense of Mr. Cameron from the United Kingdom. But I’m not referring to David Cameron, the current Prime Minister. Instead, I want to defend Ian Cameron, his late father.

The Financial Times has a summary of what Cameron’s father did to protect against punitive taxation.

Mr Cameron’s father, Ian, was one of the founder investors. Blairmore was incorporated in Panama but based in the Bahamas. The idea was for investors to avoid an extra layer of tax because investors came from lots of jurisdictions and some, at least, would have faced double taxation if the fund had been based in a mainstream jurisdiction — firstly by the country where the fund operated, and then by the investor’s own country when he or she received his profits. …In 1982, when Blairmore was set up, offshore funds were more tax-efficient than UK funds, on which investors had to pay tax annually. …It is also possible that investors avoided paying stamp duty — a tax on the transfer of documents, including share certificates — by using bearer shares, which were exempt from the duty.

I also want to defend David Cameron’s mother, who is still alive and engaging in tax avoidance, as noted by a column in the U.K.-based Times.

He also admitted receiving a lump sum of £200,000 from his mother in 2011, eight months after his father died in September 2010. The handout, which came on top of a £300,00 legacy, could allow Mr Cameron to avoid an £80,000 inheritance tax bill if his mother lives until 2018.

This is perfectly appropriate and legitimate tax planning, and also completely moral and economically beneficial since death taxes shouldn’t exist.

Now let’s consider why David Cameron’s parents decided to engage in tax avoidance. To understand his father’s motives, let’s look at the history of British tax rates, as reported by the Institute for Fiscal Studies in a survey of the U.K. tax system released last November.

In 1978–79, there was a starting rate of 25%, a basic rate of 33% and higher rates ranging from 40% to 83%. In addition, an investment income surcharge of 15% was applied to those with very high investment income, resulting in a maximum income tax rate of 98%.

In other words, David Cameron’s father had to deal with a tax code that basically stole all his money above a certain threshold. Much of his income was earned when the top rate was 98 percent. And when he set up his offshore structures, even after Thatcher’s early reforms, his top tax rate could have been as high as 75 percent.

I frequent use “confiscatory” when talking about tax systems that grab, say, 50 percent of the additional income being earned by taxpayers, but I’m simply expressing outrage at excessive taxation. In the case of 1970’s-era England, even a leftist presumably would agree that word applies to a system that seizes 75 percent-98 percent of a taxpayer’s income (though some British statists nonetheless will applaud because they think all income belongs to the government and some American leftists also will applaud because of spite).

By the way, let’s not forget that David Cameron’s father was presumably also aware that there was lots of double taxation in the United Kingdom because of other levies such as the corporate income tax, death tax, and capital gains tax. So I shudder to think about the effective marginal tax rate that may have applied to him and other taxpayers in the absence of tax planning (maybe they paid more than 100 percent, like the thousands of unfortunate French taxpayers victimized by that nation’s wretched tax system).

The bottom line if that I’m very sympathetic to Cameron’s father, who was simply doing what was best for his family and what was best for the economy.

But I’m not exactly bubbling over with sympathy for the Prime Minister, who appears to be a puerile and shallow hypocrite. I’ve previously shared examples of his government browbeating taxpayers who don’t choose to needlessly give extra money to the government.

And now he’s caught is his own web of demagoguery.

Writing in the U.K.-based Sunday Times, Dominic Lawson has an appropriately jaundiced perspective.

Jimmy Carr must be laughing. In June 2012 the comedian was revealed by The Times as one of a number of showbiz folk to have invested in a scheme that had the effect of minimising the tax paid on their (typically volatile) income. Somehow unable to resist commenting on this story, David Cameron…told journalists that Carr’s behaviour had been “morally wrong”. …In other words: the people are angry and the prime minister wants to be with the pitchfork-waving crowd, not on the other side of the barricades. …now the PM is himself the subject of a whipped-up storm of fury… That is why, in my column of June 24, 2012 (“Cameron’s the clown in this Carr sketch”), there appeared these words: “The prime minister could not resist accusing Carr of ‘morally wrong’ behaviour, a piece of headline-grabbing he will have cause to regret.” …As a result, Cameron has now felt forced to become the first prime minister to make his tax details open to the electorate. It’s a sort of ritual humiliation, but one that will in no way appease those who regard the very idea of personal wealth as immoral. He should never have pandered to them.

Janet Daly of the U.K.-based Telegraph is similarly unimpressed with Cameron’s shallow posturing.

…there is a great mass of voters…who are very susceptible to the impression that Mr Cameron is a rich man who may possibly be a hypocrite when he denounces the tax-avoiding wealthy. …The Prime Minister and his Chancellor had put themselves in the forefront of the assault on “the rich”. This was the modern Conservative party…a major rhetorical revolution that took dangerous liberties with the vocabulary of what was being discussed. The Government began to obscure the difference between tax evasion, which is a crime, and tax avoidance…George Osborne invented a new category of sin called “aggressive tax avoidance”. This was a far nastier, more elaborate form of financial planning… Some kinds of tax avoidance are OK but other kinds are not, and the difference between them is, well, basically a matter of what kind of person you are – which is for the Government to decide. …Mr Cameron says…he has done nothing illegal or unusual… Nor, apparently, have most of the people whose private finances have been revealed to the world in the Panama Papers. …free societies should not create moral “crimes” that can put people beyond the pale when they have done nothing illegal. Mr Cameron may be about to conclude that himself.

By the way, Cameron and his people are not very good liars. Here are some more excerpts from the Times column I cited above, which explained how his mother is transferring assets to David in ways that will avoid the awful death tax.

Government sources pushed back yesterday against claims that the arrangement was a tax dodge. …“Every year hundreds of thousands of parents give money to their children,” a No 10 source said. “To suggest that by giving money to the prime minister there is somehow a tax dodge is extraordinary.” A No 10 spokesman said: “This is in no way linked to tax avoidance and it would be wrong to suggest otherwise.”

This is bollocks, as the English would say. If there was no desire to avoid an unfair and pernicious tax, Cameron’s mother could have left him that money upon her death.

Instead, she made a gift for purposes of hopefully keeping any extra money if her family rather than letting the government grab it. David Cameron should proudly embrace this modest bit of tax avoidance.

It’s definitely what I would do if I ever get to the point where I had enough money to worry about the death tax. Sadly, I don’t expect that to happen because it’s not easy for policy wonks to earn large amounts of money.

But if I ever find a big pot of money that will be around after my death, I know that I’ll want my children and the Cato Institute to be the beneficiaries, not a bunch of greedy and wasteful politicians (sorry to be redundant).

Heck, I’d leave my money to my cats before giving it to the corrupt crowd in Washington.

P.S. Rich leftists often say they want to pay higher taxes, yet they change their tune when presented with the opportunity to voluntarily give more of their money to Washington.

P.P.S. Since I quoted Judge Learned Hand on tax avoidance, I’m almost certain to get feedback from my leftist friends about the quote by Oliver Wendell Holmes about taxes being the price we pay for civilization. Allow me to preempt them by noting that Justice Holmes made that remark when the federal government consumed about 5 percent of our economy. As I wrote in 2013, “I’ll gladly pay for that amount of civilization.”

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More Evidence for the Laffer Curve and Lower Corporate Tax Rates

When the new Tory-led government came to power in the United Kingdom, I was rather unimpressed.

David Cameron positioned himself as a British version of George W. Bush, full of “compassionate conservative” ideas to expand the burden of government.

But even worse than Bush, because Cameron also jacked up taxes when he first took office, including big increases in the capital gains tax and the value-added tax.

But I must admit that policy in recent years has moved in the right direction, at least with regard to corporate taxation.

Writing for the U.K.-based Telegraph, Jeremy Warner remarks that business activity has significantly strengthened.

A survey by EY, published on Monday, showed that the UK is continuing to pull away from the rest of Europe in terms of Foreign Direct Investment (FDI). The UK secured nearly 800 projects last year, the highest ever, accounting for around a fifth of all European FDI, far in advance of any other country. …Such investment is in turn helping to fuel Britain’s economic recovery… Go back 10 years and it was all the other way; companies were scrambling to leave the country and domicile somewhere else. It is perhaps the Coalition’s biggest unsung achievement that it has managed to reverse this flow.

So why has the United Kingdom experienced this economic rebound?

Lower corporate tax rates are key, Warner explains.

…it has done so largely through the tax system, where it has been as good as its promise to make the UK the most competitive in the G20. By next year, Britain will have the equal lowest headline rate of corporation tax – along with Russia and Saudi Arabia – in this eclectic group of economies, as well as at 20pc the lowest by some distance of the G7 major advanced economies. Other G7 countries range from 25pc to a crushing 38pc and 39pc in France and the US. …Britain has also halted the double taxation of repatriated foreign profits and the taxation of controlled foreign subsidiaries.

So the 20 percent corporate tax rate has yielded good results.

Now let’s connect the dots.

More economic activity means more income for taxpayers.

And more income means a bigger tax base.

Which means…can you guess?…yup, it means revenue feedback.

In other words, we have another piece of evidence that the Laffer Curve is very real.

…Reducing corporation tax has reversed the outflow of corporate head office functions, and doing so has substantially added to overall employment, output, income tax, national insurance and VAT receipts. Dynamic modelling by the UK Treasury has shown that lower tax rates are helping to drive a higher overall tax take. The “Laffer curve” lives. …Let business profit from its own enterprise. It’s amazing how effective this principle can be in generating growth, and yes, taxes, too.

If you want more evidence about the Laffer Curve, here’s one of the videos I narrated.

Warner points out, by the way, that the United Kingdom should not rest on its laurels.

If modest reductions in the corporate tax rate are good, then deeper cuts should be even better.

If comparatively minor changes like these to the competitiveness of the tax system can have such dramatic effects, just think what more serious, root and branch tax reform might achieve. In Singapore, the headline rate is 17pc, in Hong Kong 16.5pc and in Ireland just 12.5pc. There’s a way to go.

Though if The U.K. keeps moving in the right direction, that may arouse hostility and attacks from countries with uncompetitive tax systems.

Indeed, the statists at the European Commission have just launched an investigation of three countries for supposedly under-taxing companies.

Here are some blurbs from a report in the Wall Street Journal.

European Union regulators are preparing to open a formal investigation into corporate-tax regimes in Ireland, Luxembourg and the Netherlands… The probe by the European Commission, the EU’s executive arm, follows criticism in Europe of low tax rates paid by global corporations… The probe is likely to consider whether generous corporate-tax regimes in Ireland, Luxembourg and the Netherlands amount to illegal state aid. …The EU’s tax commissioner, Algirdas Semeta, has warned that the region “can no longer afford freeloaders who reap huge profits in the EU without contributing to the public purse.”

This is remarkable.

In the twisted minds of the euro-crats in Brussels, it is “state aid” if you let companies keep some of the money they earn.

This is horrible economics, but it’s even worse from a moral perspective.

A subsidy (or “state aid”) occurs when the government taxes money from Person A and gives it to Person B. But it’s a perversion of the English language to say that a subsidy takes place if Person A gets a tax cut.

By the way, this perverse mentality is not limited to Europe.

The “tax expenditure” concept in the United States is based on the twisted notion that a tax cut that results in more money in your pocket is economically (and morally) equivalent to a spending handout that puts more money in your pocket.

P.S. The United Kingdom also provides us with powerful evidence that the Laffer Curve plays a big role when there are changes in the personal income tax.

P.P.S. Notwithstanding a bit of good news on corporate tax, I’m not optimistic about the U.K.’s long-run outlook. Simply stated, the nation’s political elite is too statist.

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The Moral Bankruptcy of the U.K.’s Faux Conservative Government

As an advocate of small government, I’m often distressed that I sometimes have to rely on Republicans in Washington to fight statism.

Why am I distressed? Because some of the worst people in Washington are GOPers. They may give lip service to fiscal responsibility when campaigning, but then conveniently forget that rhetoric when it’s time to make decisions.

Which helps to explain why spending grew faster under Bush than Obama.

But as bad as Republicans are, there’s no way they could be as bad as the faux Conservative Party in the United Kingdom.

Consider the fundamental debate about whether big government is good and whether we have a moral obligation to maximize the amount of money we turn over to politicians.

Normal people think government is too big and they don’t want to reward a corrupt political class with extra revenue.

And they have strong legal standing for that position. Here’s what Judge Learned Hand famously opined in 1947.

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

Judge Hand obviously is correct. It is nonsense to argue that taxpayers have an obligation to pay more than is legally required.

But not everybody is guided by common sense. And if there was a prize for an absence of common sense (as well as a prize for absence of integrity or principles), the David Cameron government in the United Kingdom would be a strong contestant for that award.

Here’s the latest example of the intellectual bankruptcy of that supposedly conservative government. An official was just forced to resign because – prior to joining the government – he advised people to legally minimize their tax liabilities.

I’m not joking. Here’s an excerpt from a Reuters report.

A tax adviser to the British government has been forced to resign after he was recorded giving tips at a conference on how to pay less tax and “keep money out of the Chancellor’s grubby mitts”, a Treasury minister said. The BBC Panorama investigative program filmed David Heaton – before he joined the government as an adviser on how to clamp down on aggressive tax avoidance – telling delegates at a conference how they could exploit tax loopholes. “Mr Heaton’s statements are directly at odds with the government’s approach to tackling tax avoidance,” Treasury minister David Gauke said in a statement. “Therefore, it is right that Mr Heaton resigned from his position.”

David Gauke, by the way, is infamous for having stated that legal tax avoidance strategies “damage our ability to fund public services and provide support to those who need it.” Hmmm….that phrase seems vaguely familiar. I gather the Tory Party thinks government should be guided by “From each according to his ability, to each according to his need.”

Just in case you think I’m pulling a quote out of context, click here or here for additional evidence of the pervasive statism of the current regime in London.

And take a look at this government poster I photographed in the London subway system. Orwell would be proud.

No wonder I”m so glum about the long-run outlook for the United Kingdom.

And the late great Margaret Thatcher must be spinning in her grave.

P.S. I wrote that this was the “latest example” of the Cameron government’s intellectual bankruptcy. For previous examples, see here, here, here, here, and here.

P.P.S. I started this post with the quote from Judge Learned Hand. Leftists, by contrast, like to share the quote from Justice Oliver Wendell Holmes about “taxes are the price we pay for a civilized society.” What they conveniently forget to include is that he made that statement in 1927, when federal taxes amounted to only $4 billion and the federal government consumed only about 5 percent of economic output. Yes, I’ll gladly pay for that amount of civilization.

P.P.P.S. What’s more hypocritical, the supposed conservatives in the U.K. badgering people to pay extra tax or American leftists utilizing tax havens to lower their own taxes?

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Some Much-Needed Remedial Public Finance Economics for David Cameron and other Statists

In a recent interview with the BBC, I basically accused UK Prime Minister David Cameron of being a feckless and clueless demagogue who is engaged in a desperate effort to resuscitate his political future.

Two peas in a pod

I shouldn’t have been so kind. Cameron manages to combine bad policy and bad morality in a way that is embarrassing even for a politician.

Writing for the Daily Telegraph, Janet Daley eviscerates Cameron’s puerile approach to fiscal policy, beginning with some mockery of his class-warfare approach to tax enforcement.

David Cameron said something last week that was the precise opposite of the truth…the Prime Minister said was: “If you want a low-tax economy, you have to collect the taxes that are owed.” When what he should have said, of course, was: “If you want to collect the taxes that are owed, you have to have a low-tax economy.” Mr Cameron’s statement was one of the more subtle threats contained in the declaration by the G8 – which was pretty much all they could agree on – that they are now the rightful owners of all the wealth produced by anyone except for certain exemptions that they will, subject to minimal notice, decide upon. His remark, presumably designed to provide moral justification for the unprecedented levels of shared surveillance and breaches of data protection that governments are preparing to launch, actually stood on its head the truth about effective tax collection. Which is that the lower rates of taxation are, the less likely it is that payment of them will be avoided or evaded.

She also makes some very astute points about other issues, including the Laffer Curve.

The introduction of the 50p rate of income tax caused two-thirds of those earning a million pounds per year simply to disappear from the reach of HM Revenue & Customs. Whereas under the previous highest tax level of 40p, 16,000 people were prepared to declare earnings of one million pounds, that number shrank to only 6,000 after Gordon Brown, bless him, raised it to 50p. Result: the Treasury lost £7 billion in revenue.

Ms. Daley also comments on tax compliance and the risks of letting governments destroy financial privacy as part of their efforts to undermine tax competition.

If people regard levels of tax as fair (in the true sense of the word, not the Left-wing sense, which actually means “vindictive”), they will not go to expensive and dangerous lengths to escape from paying. The more punitive and discouraging of wealth-creation taxes are, the more they are avoided by stealth or geographical relocation – or by the even more economically disastrous measure of people being disinclined to increase their own productivity. Ah yes, but isn’t this the problem that those heads of government are determined to address? Rather than lowering taxes to levels that those who are taxed find acceptable, they will simply close off all the avenues of escape. There is to be no more possibility, by international agreement (which is to say, the coercion of smaller, less rich countries), of geographical movement for tax advantage.

She closes by opining on why this is really a debate about the burden of government spending and whether taxpayers exist to feed the spending appetites of politicians.

If you eliminate tax competition – if you create a uniform, universally policed tax standard – it is the poorer countries that suffer because they are deprived of the capacity to attract foreign capital. …What is at the heart of all this is the growth of governments: the treasuries of the world are becoming needier and greedier. …Underlying almost all political debate on this matter now is the unspoken assumption that privately owned wealth is inherently evil, and that its only moral justification is to provide revenue that governments can redistribute. …let me remind you of what you may actually believe, shocking as it may sound in the context of prevailing public discourse. Are you ready? It is not the primary function of business to provide funds for politicians to spend.

Amen. The statists and collectivists that dominate the political elite treat us like a herd of cattle to be milked and slaughtered.

We need tax havens in order to impose at least a tiny bit of restraint on the greed of the political class. These low-tax jurisdictions aren’t a sufficient condition to save us from statism, but they sure as heck are a necessary condition.

P.S. Who moved farther in the wrong direction, U.S. Republicans who went from Reagan to Bush or U.K. Tories who went from Thatcher to Cameron?

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Defending Tax Havens

It goes without saying that I’m always ready to defend tax havens when statists are seeking to undermine tax competition, financial privacy, and fiscal sovereignty.

So when the BBC asked if I would debate the topic, I said yes even though I’m in Paris (where supporting liberty is probably a capital crime).

I think the debate went well. Or, to be more precise, I was happy that I got to make my points.

I’ve been in debates on tax havens when I’m outnumbered 3-1, so a fair fight almost seems like a treat.

P.S. If you have a burning desire to watch me debate tax havens, you can see me cross swords with a bunch of different statists by clicking here.

P.P.S. Or if you like watching when I’m outnumbered, here’s my debate against three leftists on state-run TV.

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George Orwell Surely Would Be Amused by the Statolatry in the United Kingdom

I just finished up a trip to London.

In previous posts, I’ve expressed pessimism about the future of the United Kingdom, largely because all political parties have a statist mentality.

I criticized Gordon Brown, the former Labor Party Prime Minister, for being a compulsive redistributionist, big spender, and taxaholic.

But nothing’s really changed under Tory leadership. David Cameron is a vacuous statist, undermining the Conservative Party in the same way that George W. Bush eroded the brand name capital of the Republican Party.

This sign was on a train I rode today. It is sponsored by the UK version of the IRS,  and it pretty much symbolizes how the United Kingdom has turned into a predatory state.

The United Kingdom is in terrible fiscal shape. Government spending has reached record levels, and now consumes a larger share of economic output than the public sectors in failed welfare states such as Spain.

And what are taxpayers getting for their money, other than Orwellian signs?

Not much. They get an increasingly dysfunctional society filled with scroungers such as Natalija, Gina and Danny.

They also get a healthcare system that seemingly prides itself on maltreatment, and a tax system that is more designed to be punitive rather than to generate revenue.

Though the UK government does provide taxpayer-financed sex tours to Amsterdam, so at least a few people are getting screwed as a result of government rather than by the government.

But let’s close by contemplating the mindset of a government that would post such a sign. We already know that Prime Minister Cameron and some of his senior deputies think it’s wrong to engage in legal tax avoidance.

And this is a government that is brainwashing kids into becoming servile snitches, and is even considering a system that would have employers send paychecks to the state and then the government would decide how much to send to taxpayers.

Such a shame since so much of what is good in the Western World came from England.

P.S. This is also a country where they send innocent people to jail for shooting burglars.

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A Miserable and Hopeless Fiscal Outlook for the United Kingdom

If you live in America and believe in free markets and small government, it’s easy to get depressed. We suffered through eight years of wasteful spending and misguided intervention under Bush, and now we’re enduring four years of additional spending and red tape under Obama.

Moreover, it’s not clear things will get any better in the next four years, regardless of what happens on November 6.

But whenever I begin to feel sorry for myself, I remind myself of how bad things could be if I lived in the United Kingdom.

The burden of government spending in the U.K. rose from 36.5 percent of economic output in 2000 up to 48.7 percent of GDP today. This mostly happened under Labor Party rule, but the coalition of so-called Conservatives and Liberal Democrats that took power in 2010 hasn’t done much to restrain government spending.

To augment the damage, taxes also have been increasing. The feckless Gordon Brown of the Labor Party boosted the top tax rate to 50 percent (a disaster from a Laffer-Curve perspective) before getting evicted by voters.

The Tory-Lib Dem coalition is similarly bad. In recent years, the capital gains tax has been increased (see these amusing posters to understand why this was a foolish idea), along with a big hike in the value-added tax (though, to be fair, the corporate rate has been slightly reduced and part of Gordon Brown’s higher income tax rate has been repealed).

But the Tories and Lib Dems aren’t through with their assault on the economy’s productive sector.

Both Prime Minster David Cameron and one of his deputies have argued that people have a moral obligation to turn more of their income over to the government.

And now the leader of the Lib Dems, Nick Clegg, is proposing a wealth tax. He says it will be a temporary measure until the fiscal emergency ends, but I would be shocked if politicians changed its mind after getting their hands on a new source of revenue (just look, for instance, how British politicians went crazy after first imposing an airline ticket tax).

Here are some illuminating excerpts from a column in the UK-based Telegraph.

“Let them eat cake”

…from what can be gleaned, the Deputy Prime Minister seemed to be suggesting a one-off or short term tax hike rather than a permanent change in the way the wealthiest are taxed. He described it as a “time limited contribution” to the “national effort” – since it was becoming clear, he said, that the country was embarked not on a “short economic battle” but a “longer economic war”. Mr Clegg said it would be “people of considerable wealth” who would be asked to make such a contribution.

It doesn’t appear that this plan will get the necessary support from the Tories, but it’s remarkable that it has been proposed. Like the death tax, the wealth tax is a turbo-charged form of double taxation.

P.S. One of the leading Lib Dem politicians got caught dodging taxes, making him the British version of America’s tax-cheating Treasury Secretary. I generally don’t object when people try to protect their income from greedy and incompetent government, but when they also are the same people proposing higher taxes on everyone else, they deserve special scorn.

P.P.S. This post is describing the current dismal fiscal situation, but the title references “a miserable and hopeless fiscal outlook.” That’s because I see no hope of good fiscal policy in the remaining years of the current government, and I suspect the statist failures of the Tory-Lib Dem coalition government will pave the way for a new Labor Party government. Needless to say, that will be – at best – jumping from one frying pan to another. Incidentally, I’m also worried about the United States for the same reason.

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The United Kingdom Is Royally /*@#$&;^%*(

The United Kingdom has a magnificent history and has produced great leaders.

I get inspired, for instance, when I watch these Margaret Thatcher speeches about “public money” and “the poor poorer.” Sort of the same feeling I get when I watch the Gipper talking about Washington being a “company town” and the “unnecessary and excessive growth of government.”

But just as the United States has devolved by moving over time from Reagan to Obama, the United Kingdom has degenerated by going from Thatcher to David Cameron.

Cameron is supposedly a conservative, but it’s more accurate to say he’s an English version of George W. Bush. Some of the lowlights of his tenure include:

• Cameron has undermined the U.K.’s system of personal retirement accounts.
• Cameron is giving taxpayer money to statist environmental groups.
• Cameron has increased the capital gains tax.
• Cameron is increasing the burden of government spending.
• Cameron has whined that it is wrong for people to minimize their tax burdens.

And his statist mentality infects other Tory politicians.

Here is a report on the intellectually bankrupt ramblings of another enemy of freedom, as reported by the Telegraph.

David Gauke, a Treasury minister, told The Daily Telegraph that home owners who allow workmen to evade VAT or income tax were forcing others to pay more. …critics accused the Government of being “unnecessarily moralistic” about ordinary people trying to keep their household bills down. …According to a report by the Public Accounts Committee, more than two million people make cash-in-hand payments costing the Treasury an estimated £2  billion. There is no law against paying someone in cash… In a speech to the Policy Exchange think tank, he said that while using Isas and claiming gift aid on charitable donations was acceptable, buying homes through companies to avoid stamp duty and using service companies to reduce income tax was “morally repugnant”. Mr Gauke said: “These schemes damage our ability to fund public services and provide support to those who need it. They harm businesses by distorting competition. They damage public confidence. And they undermine the actions of the vast majority of taxpayers, who pay more in tax as a consequence of others enjoying a free ride.”

Can anyone imagine Margaret Thatcher saying something this offensive?

Particularly since it is Gauke’s views that are “morally repugnant,” not the actions of people who are trying to protect their property from a rapacious and greedy government.

Keep in mind that the burden of government spending in the United Kingdom consumes nearly 49 percent of economic output according to OECD data. That’s more than Greece, Portugal, Ireland, or Spain!

Sort of makes you wonder how long it will take before investors decide that it’s no longer a good idea to lend money to such a profligate government.

The good news is that the English people aren’t as bad as their politicians. As part of the story, the Telegraph is conducting an online poll, which you can see to your left.

Notwithstanding the statolatry of UK politicians, the voting so far is overwhelmingly on the side of taxpayers rather than the government.

But public opinion doesn’t really matter if government policy continues to drift in the wrong direction.

And, as you can see from this data, the long-term outlook for the United Kingdom is very grim. And we know Cameron isn’t doing anything to address this looming crisis.

Not that this makes the UK special. Thanks to reckless entitlement programs, the same data shows that the United States also is headed for Greek-style fiscal chaos.

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Notwithstanding David Cameron’s Statolatry, Tax Avoidance Is Both Legal and Moral

I’m not a fan of David Cameron, the United Kingdom’s Prime Minister.

Even though he belongs to the Conservative Party that produced the great Margaret Thatcher, Cameron seems to be a bit of guilt-ridden statist with his finger always in the air to see which way the wind is blowing. The policy results are not pretty.

• Cameron has undermined the U.K.’s system of personal retirement accounts.
• Cameron is giving taxpayer money to statist environmental groups.
• Cameron has increased the capital gains tax.
• Cameron is increasing the burden of government spending.

Now I have another reason to dislike Cameron. He just condemned a comedian for legally seeking to minimize the amount of his income that is seized – and then wasted – by the U.K. government. Here are some of the details from The Telegraph.

Prime Minister David Cameron today branded the tax arrangement of comedian Jimmy Carr “morally wrong” after it emerged he was using a scheme which allows the wealthy to pay as little as one per cent of their income. …Speaking at the G20 summit the Prime Minister told ITV News: “I think some of these schemes – and I think particularly of the Jimmy Carr scheme – I have had time to read about and I just think this is completely wrong. “People work hard, they pay their taxes, they save up to go to one of his shows. They buy the tickets. He is taking the money from those tickets and he, as far as I can see, is putting all of that into some very dodgy tax avoiding schemes. …some of these schemes we have seen are quite frankly morally wrong.” …Lawyers for the comedian have…categorically denied any wrongdoing, saying the scheme had been disclosed to the relevant authorities in line with the law. …Chancellor George Osborne has claimed he was left “shocked” after finding the extent to which multi-millionaires were exploiting tax loopholes and vowed to take “action”.

 I have no idea whether the specific “tax avoiding scheme” used by Carr is good tax policy (protecting against double taxation, for instance) or bad policy (such as a loophole that creates favoritism for a specific behavior), but that’s not the point of this post.

Instead, this is a moral question about whether people have some sort of obligation to pay extra tax, merely to get some sort of pat on the head from politicians. The same politicians, by the way, that squander the money on varying vote-buying schemes that undermine prosperity and create dependency.

I’d be willing to condemn Carr if I found out he’s some sort of statist who wants higher taxes for everybody else, but then (like John Kerry) takes steps to minimize his personal tax bill.

But I’d be condemning Carr for hypocrisy, not criticizing the idea of tax avoidance.

The United Kingdom has become a bloated welfare state (with horribly depressing implications, as you can read here and here). If people want to be moral, they should strive to pay the least amount possible to this corrupt and wasteful enterprise. The United States is not quite as bad (yet), but the same principle applies.

Politicians, needless to say, will violently disagree with this ethical viewpoint. So we can all expect more taxes, higher taxes, and additional draconian enforcement measures.

The only good news is that the Laffer Curve will prevent these greedy thugs from collecting nearly as much money as they think.

P.S. To get an idea of how the Conservative Party has declined, compare Cameron’s statist rhetoric to Margaret Thatcher’s comments that “there is no such thing as public money.”

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A Victory for the Laffer Curve, a Defeat for England’s Economy

A new study from the Adam Smith Institute in the United Kingdom provides overwhelming evidence that class-warfare tax policy is grossly misguided and self-destructive. The authors examine the likely impact of the 10-percentage point increase in the top income tax rate, which was imposed as an election-year stunt by former  Gordon Brown and then kept in place by his feckless successor, David Cameron.

They find that boosting the top tax rate to 50 percent will slow economic performance. And because of both macroeconomic and microeconomic responses, tax revenues over the next 10 years are likely to drop by the equivalent of more than $550 billion. Here’s a key paragraph from the executive summary of the new study.

The country is suffering from a 50%-­plus marginal tax rate which even its architect admits was imposed without economic purpose. Now our analysis shows that the policy is set for failure: at best leading to flat growth for a decade and £350bn of lost revenue. The Chancellor should seize the occasion of the 2011 budget to reverse this disaster promptly, for the benefit of public revenues, economic growth, the government’s standing with domestic wealth-creators, and the UK’s reputation with world business.

The authors urge Prime Minister Cameron to reverse this disastrous policy, but the odds of that happening are very slight. I hope I’m wrong, but I have repeatedly noted on this blog that Cameron almost always makes the wrong choice when deciding between liberty and statism.

President Obama wants to impose similar policies in the United States and there is every reason to expect similarly poor results. I’ve already posted evidence from IRS data showing that the rich paid much more tax following the Reagan tax cuts, so it shouldn’t shock anybody when the reverse happens if Obama is successful in moving America back toward a 1970s-style tax system.

To emphasize these critical points, let’s close with two videos. This first video explains the Laffer Curve and why politicians are foolish if they assume that there is a fixed linear relationship between tax rates and tax revenue.

This second video debunks the notion of class-warfare tax policy.

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George W. Cameron Wants to Repeal Partial Social Security Privatization in the United Kingdom

People periodically ask me why I’m so down on David Cameron, the Prime Minster of the United Kingdom. I’ve already pointed out that his pre-election agenda was big government. And I’ve pointed out that his post-election record is more spending.

(and you can read more of my whining and complaining here, here, here, here, and here)

But now I’m really disgusted, because the United Kingdom’s version of  George W. Bush is now reversing one of the few pro-market aspects of British policy.

The Wall Street Journal Europe is appropriately disappointed.

On Tuesday Iain Duncan Smith announced a sweeping reform of the U.K.’s state-pension system. In the name of simplification, the Work and Pensions Secretary plans to raise the basic pension, eliminate the current multitiered system—and pay for it all by rolling back the personal retirement accounts that were first introduced by the Thatcher Government in 1987. Pension systems across the developed world are being stretched to the breaking point as populations gray and governments face ballooning public debts. Britain today is in the privileged position of possessing on top of its public savings system an extensive private one, relatively insulated from the government’s increasingly uncertain ability to deliver on its pension liabilities. Pity, then, that Mr. Duncan Smith’s reforms serve in the long run mostly to entrench the unsustainable elements of the British system and trash the desirable ones.

Addendum: Jose Pinera reminds me that George W. Bush actually proposed personal retirement accounts in 2005, one of the few positive actions of his eight-year reign. So Cameron’s actions may put him even further to the left than Bush on economic policy, a rather challenging achievement.

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Why Is David Cameron Funding the Left in the UK…and Will Republicans Defund the Left in America?

Here’s a new video from the Taxpayers Alliance in the United Kingdom exposing how left-wing environmental groups get funded by government handouts.

David Cameron supposedly is being tough on spending, but I’ve already revealed that overall spending is climbing at about twice the rate of inflation under his new budget. And I’m not holding my breath that he’ll reduce the taxpayer handouts shown in this video.

But we Americans can’t be smug because the federal budget also is riddled with all sorts of giveaways and subsidies to left-wing groups. Labor unions, AARP, and Planned Parenthood are just a few of the groups that have their snouts in the public trough. And I would be shocked to learn that environmental groups haven’t figured out how to scam taxpayers as well.

Back in the 1990s, GOPers had a campaign to “defund the left.” Whatever progress they made, though, had since been completely erased. As Republicans in the House try to figure out ways to restore fiscal sanity, eliminating handouts for left-wing groups would be a great place to start.

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What Happens When Politicians Get a New Source of Revenue?

We’ve been spending too much time on elections, so let’s get back to pointing out inane, foolish, and destructive government policies. Our latest example comes from the United Kingdom, where politicians are pushing airline ticket taxes to punitive levels and harming the tourism industry. But the real lesson from this story is that it is very dangerous to give politicians a new revenue source.

The airline ticket tax was first imposed by a supposedly Conservative Party government in 1994 at a maximum rate of 10 pounds. During the Blair/Brown Labor Party reign, the tax was boosted to a maximum rate of 50 pounds. Now, the new government, led by ostensible Conservative David Cameron, is pushing the maximum tax up to 75 pounds (more than $120) per ticket. Here’s an excerpt from the story in the Telegraph.

Families are avoiding holidays Egypt and Caribbean because of the high cost of air taxes – even before the hike in passenger duty that comes into place on Monday. …The duty, which is paid by all travellers on leaving Britain and added automatically to the price when a ticket is booked, is to increase by 50 per cent to some destinations. It is the second significant rise in two years, and figures show that previous hikes have already influenced people’s choice of holiday destinations. …Bob Atkinson, travel expert at Travelsupermarket.com, said: “Families looking to book for this winter and summer next year will be faced with tax rises of up to 54 per cent on their family holidays. This tax rise is completely out of line with inflation and bears no relation to the original purpose of the tax. …The tax was introduced in 1994 at the rate of £10 on long-haul flights, but increased by the previous Government, which said it was a necessary “green measure”. …The increases mean a family of four flying to the Caribbean will pay £300 in duty compared with the old rate of £200 or £160 last year. Willie Walsh, the chief executive of British Airways, has branded the higher taxes a “disaster”. Earlier this month, he called the duty a “disgrace”.

No wonder families are choosing not to travel. But, more important, imagine what American politicians will do if they ever succeed in imposing a value-added tax. The rate initially will be low (just as the original income tax had a top rate of just 7 percent), but nobody should delude themselves into thinking the rate won’t quickly climb as greedy politicians get hooked on a new form of revenue cocaine to feed their spending addictions.

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We Should Copy the Clever British Campaign against Higher Capital Gains Tax Rates

Here are a handful of the posters being used in the United Kingdom to fight the perversely-destructive proposal to increase tax rates on capital gains. (for an explanation of why the tax should be abolished, see here)

Which one is your favorite? I’m partial to the last one because of my interest in tax competition.

By the way, “CGT” is capital gains tax, and “Vince” and “Cable” refers to Vince Cable, one of the politicians pushing this punitive class-warfare scheme.

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Washington Post Columnist Urges GOP to Move Left

For the umpteenth time, a Washington Post columnist has a turgid piece urging the Republican Party to embrace big government. Normally this type of column is written by a graybeard establishmentarian like David Broder or E.J. Dionne, but Ruth Marcus has decided to play the I-wonder-if-my-enemies-are-so-stupid-that-they’ll-accept-my-suggestion-to-commit-suicide game.

Marcus bases her argument on the fact that David Cameron and the U.K. Conservative Party are raising taxes and (supposedly) slashing spending. I have no idea whether Marcus is being deliberately dishonest, but I’ve already posted the unvarnished data showing U.K. government spending will rise by about twice the rate of inflation this year. If that’s a 25 percent cut, then I play centerfield for the New York Yankees.

Marcus is right about the Tory love affair with higher taxes. Indeed, her poorly researched column doesn’t go far enough. She failed to point out that Cameron is leaving in place the new 50 percent top tax rate, even though it almost certainly will result in less tax revenue.

To put it simply, Ruth Marcus wants Republicans to be like the Tories. But I’m guessing that she wants this result because it means bigger government under the guise of fiscal responsibility.

If Republicans had any brains (always a risky assumption), they will ignore this pre-scripted suicide note and actually do their jobs by saying no to higher taxes and saying yes (finally!) to real spending restaint.

I endured the Ruth Marcus column and it was paintful, so I don’t suggest you go through the trouble of reading it. If you’re curious about what she wrote, here’s an excerpt:

…instead of conjuring up sugarplum visions of pain-free change, the Conservatives are addressing their fiscal crisis with seriousness and specificity. Osborne is about to unveil an austere deficit-reduction plan that will cut most departmental budgets by 25 percent over several years. This is not some dead-on-arrival presidential budget; the parliamentary system means that these are for-real cuts. …Second, the Conservatives call for shared sacrifice, starting in a place Republicans seem never to look: at the top. “It’s fair that those with broader shoulders should bear a greater load,” Cameron said. …”Believe me, I understand that most higher rate taxpayers are not the super-rich,” Osborne said. “These days we’ve really got to focus the resources where they are most needed.” Here in the United States, when Democrats dare to propose higher taxes for households making more than $250,000 a year, Republicans shout “class warfare.” …the Conservatives do not embrace the Tea Party vision of government as malevolent force. “I don’t believe in laissez-faire,” Cameron said. …Cameron’s Conservatives do not suffer from the Republicans’ anaphylactic allergy to taxes. While Republicans insist on extending the Bush tax cuts for the wealthiest Americans, the Conservatives have endorsed tax increases. Yes, you read that right — even though the tax burden is already significantly higher in the United Kingdom. …The value-added tax will go from 17.5 percent to 20 percent. The capital gains tax will increase from 18 percent to 28 percent for high earners because, as Osborne said, sounding more like Warren Buffett than Margaret Thatcher, the rich are “paying less tax than the people who clean for them.”

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David Cameron’s Foolish (or Cynical) Naivete about the Laffer Curve

Even though he’s allowing the budget to grow twice as fast as inflation, some people seem to think the new U.K. Prime Minster is a fiscal conservative. I’m skeptical. Not only is spending rising much too fast (there are promises of more restraint in the future, but I’ll believe it when it happens), but Cameron and the Tory/Liberal coalition government are increasing the value-added tax and increasing the capital gains tax. Perhaps worst of all, they are leaving in place the new 50 percent tax rate that former Labor Prime Minister Gordon Brown imposed in hopes that class-warfare policy would help him get elected. But as this Daily Telegraph story suggests, it is quite likely that the higher tax rate will lose revenue as productive people escape to Switzerland and other jurisdictions not influenced by the politics of hate and envy.

One-in-four hedge fund employees has already left London to move to Switzerland, which is said to have a more stable tax regime, according to consultancy Kinetic partners. Calculations by the company claim the UK could have already forgone about £500m in tax revenues, based on the 1,000 or so hedge fund managers it says have already left the country. …High-profile departures this year include Alan Howard, founder of Brevan Howard, and Mike Platt, founder of BlueCrest Capital.

This story shows both the power of the Laffer Curve and the importance of tax competition. The greedy politicians in England doubtlessly resent the “brain drain” to Switzerland. Like their U.S. counterparts, politicians view taxpayers as serfs who are supposed to blindly produce more income for the ruling class to expropriate and redistribute.

 

While I’m obviously not a big fan of British fiscal policy, America is worse in one important way. At least British taxpayers have the liberty to leave without being raped by the U.K. tax authority. Once they leave the United Kingdom and make their home in Switzerland, they are no longer British taxpayers. Americans who want to move, by contrast, are unable to escape the punitive internal revenue code. Indeed, the United States is one of the few nations in the world to have exit taxes, an odious approach generally associated with loathsome regimes such as the Soviet Union and Nazi Germany.

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Dishonest British Budgeting…Just Like We Do It in America

According to news coverage, United Kingdom Prime Minister Cameron is imposing deep and savage budget cuts. I was interviewed by the BBC recently, for instance, and asked whether 25 percent spending reductions were too harsh. And here’s an excerpt from a New York Times story that is very representative of the news coverage.

Like a shipwrecked sailor on a starvation diet, the new British coalition government is preparing to shrink down to its bare bones as it cuts expenditures by $130 billion over the next five years and drastically scales back its responsibilities. The result, said the Institute for Fiscal Studies, a research group, will be “the longest, deepest sustained period of cuts to public services spending” since World War II. …Public-sector unions are planning a series of strikes. Charities — which Mr. Cameron has said should take over some of the responsibilities now held by the state — say that they are at risk of collapse because they are so dependent on government money. And the chief executive of the Supreme Court, the country’s highest, said she did not know whether the court would be able to function at all if its budget were cut by 40 percent.

To be blunt, this type of analysis is completely false. There are no budget cuts in the United Kingdom, at least in terms of total government spending. Instead, the politicians are measuring cuts against some imaginary baseline, which is the same scam that happens in Washington. So if spending increases by 4 percent instead of 7 percent, that is characterized as a 3 percent budget reduction. The chart shows what is happening with overall government spending in the United Kingdom. Notwithstanding phony stories about budget cuts, spending in Prime Minister Cameron’s first year is climbing by more than 4 percent – twice as fast as needed to keep pace with inflation.

This doesn’t mean that Cameron isn’t doing anything right. There is a two-year pay freeze for bureaucrats, for instance, which is at least a small step in the right direction. But the Tory-Liberal Democrat coalition is not a good role model for those who want limited government and fiscal responsibility. There are promises of spending restraint in future years, but those belong in the I’ll-believe-it-when-I-see-it category. Spending is supposed to increase by less than 1 percent in next year’s budget, for instance, but politicians are very good with tough talk of fiscal discipline in future years. But if we judge them by what they’re doing today rather than what they’re claiming will happen in the future, Cameron’s policies leave much to be desired.

The tax side of the fiscal equation is even more depressing. There is small reduction in the corporate tax rate, but otherwise there is considerable bad news. The new government is leaving in place the new 50 percent top tax rate imposed by Gordon Brown as an election-year class-warfare gimmick. It is boosting the capital gains tax rate from 18 percent to 28 percent. And it increased the VAT rate from 17.5 percent to 20 percent.

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Should Interpretive Dances about Sexual Abuse of Altar Boys Receive Taxpayer Subsidies?

I may have to rethink my pessimistic assessment of David Cameron. As I’ve noted before, he strikes me as a George-Bush-style big-government faux conservative. But according to this Washington Post article, the coalition government in the UK may impose some real budget cuts (as opposed to phony Washington-type cuts that are just reductions in planned increases) on arts funding. The right level of subsidies for art is zero, of course, so I’m sure I’ll still be disappointed, but if Cameron can do the same thing across the budget and actually shrink the burden of government spending to less than 45 percent of GDP, I may be in a position of having to (cheerfully) admit that I was wrong. Here’s an excerpt from the story.

The art scene exploded in Britain over the past decade…. The fuel for that boom: a surge in generosity from Britain’s single biggest patron of the arts — the government. But now cash-strapped and desperate to slash the largest budget deficit in Europe, the new ruling coalition of Conservatives and Liberal Democrats is moving to close the curtain on an era of what they describe as excessive government patronage. The coalition is preparing to cut arts funding so dramatically that it could sharply reduce or sever the financial lifelines for hundreds of cultural institutions from the National Theatre to the British Museum. The cuts would be more than a temporary fix. Officials are calling for a permanent shift toward the U.S. model of private philanthropy as the main benefactor of the arts… The move underscores the profound changes in the role of government that are taking place from Greece to Spain to Britain. It happens as European nations scramble to rein in runaway spending, in part by slashing public funds to sectors that came to survive — even thrive — because of them. In Britain, public aid to theaters, museums and other institutions jumped from $654 million in 2000 to $876 million this year… the budget cuts to the arts are a small part of a broader push by the coalition government to slash spending and right Britain’s finances over the next four years. …critics say the cuts to arts funding — cultural leaders say they have been warned that reductions could reach 40 percent over four years — appear set to be among the deepest… Large arts institutions in Britain often garner more than 50 percent of their budgets from public funds, compared with roughly 10 percent for major institutions in the United States. That is precisely what the British government says must change. Although the cuts have not yet been detailed, some organizations, including the UK Film Council, are already in the process of being shut down. The government has also demanded major institutions come up with contingency plans for 25 to 30 percent reductions in public funding. Officials from the ruling coalition are openly calling for a shift to U.S.-style fundraising to fill the gap. But critics insist it could take a generation or more to open the wallets of the British elite. Compared with the United States, there is a relatively small culture of philanthropy in Britain, with little special social status bestowed on corporations or wealthy individuals who support the arts. …cultural leaders are largely resisting the notion of dramatically increased dependence on private funding, pointing to the severe shortfalls U.S. arts institutions faced as donors cut back in the aftermath of the recent financial crisis. They are also opposed on artistic grounds, insisting it would put more pressure on institutions to censor their works. Spalding, for instance, said it was exactly the independence afforded by government funding that has helped London become a beacon for controversial pieces, such as one staged last year at Sadler’s Wells in which the pope sexually abuses an altar boy through interpretive dance. 

I’m particularly amused by the final excerpt about taxpayer subsidies for an interpretive dance about the Pope molesting altar boys. Is Britain so messed up that a moocher like Spalding thinks it is compelling to cite that bit of “art” as an argument for government funding? I imagine that Spalding thinks of himself as bold and brave for being associated with such a production. Does anybody think that this leech would put on a similar production focusing on Mohammed rather than the Pope?

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The U.K. Version of Meet the New Boss, Same as the Old Boss

As the chart below indicates, the United Kingdom has a large budget deficit solely because government spending has increased to record levels (OECD data). Unfortunately, the new Tory-Liberal coalition government has decided that taxpayers should be punished for all the over-spending that occurred when the Labor government was in charge.

The Telegraph reports that the top capital gains rate will jump to 28 percent, up from 18 percent (the new government foolishly thinks this will result in more revenue). But the biggest change is that the value-added tax will increase to 20 percent. According to Business Week, the Chancellor of the Exchequer (the British equivalent of Treasury Secretary) actually bragged that the VAT increase was good since it would generate “13 billion pounds we don’t have to find from extra spending cuts.” Here are some further details from Business Week about the disappointing fiscal news from London.

British Chancellor of the Exchequer George Osborne increased the value-added tax rate to 20 percent from 17.5 percent in the first permanent change to the levy on sales of goods and services in almost two decades. “The years of debt and spending make this unavoidable,” Osborne told Parliament in London in his emergency budget today as he announced a package of spending cuts and tax increases to cut the U.K.’s record deficit. …“We understand that the budget deficit needs to be tackled but we think the focus needs to be cutting public spending over tax rises,” Krishan Rama, a spokesman for the industry lobby group, the British Retail Consortium, said in a telephone interview yesterday. …VAT has remained at 17.5 percent in every year except one since 1991, when John Major’s Conservative administration raised the rate from 15 percent to help plug a deficit.

The one tiny glimmer of good news from the budget is that the corporate tax rate is being reduced from 28 percent to 24 percent, which is probably a reflection of the strong and virtuous tax competition that is forcing greedy governments to lower tax rates in order to attract and/or retain business activity. There also is a two-year pay freeze for government bureaucrats, but this is hardly good news since a 30-percent pay cut is needed to bring compensation down to private sector levels.

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England Is the New France

The chart below shows everything you need to know about why the United Kingdom is a fiscal disaster. Over the past 10 years, the burden of government spending has skyrocketed from 36.6 percent of GDP to more than 53 percent of GDP. Taxes, meanwhile, have remained largely unchanged, averaging about 40 percent of GDP.

Since the OECD numbers show that the fiscal crisis in the U.K. is solely the result of a bloated public sector, the obvious solution is…you guessed it, higher taxes.

David Cameron’s new coalition government has announced support for a higher capital gains tax and is signalling that this will be followed by an increase in the value-added tax.

There are some proposals to curtail the growth of spending, including some pay cuts for Prime Minster Cameron and other political figures, but I will be very surprised if those amount to more than window dressing. The United Kingdom, I fear, has gone past the point of no return in the journey toward becoming indistinguishable from the decrepit welfare states so common in the rest of Europe.

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Say Goodbye to England

Okay, the title of this post is an absurd exaggeration, but I am not optimistic about the future of the United Kingdom. Government spending has exploded over the last ten-plus years (the largest expansion in the burden of government spending among developed nations), and this unsurprisingly has led to punitive class-warfare policies. I saved this article from the Daily Mail from a couple of months ago because I was curious to see whether predictions about talent fleeing London would prove accurate:

London will become the most highly taxed financial centre in the world when the new 50 per cent income tax rate for those earning £150,000 or more comes into force next month. Taxes will be higher than for financial workers living in the other key centres of New York, Paris, Frankfurt, Geneva, Zurich, Dubai and Hong Kong, KPMG calculated. The findings will raise fears that Labour’s levies are driving businesses and bankers overseas and threatening Britain’s competitiveness. …Tullett announced last December that it will help employees move abroad if they want to avoid the top rate of tax, and Mr Smith said workers are already looking at relocating. Graeme Leach of the Institute of Directors said: ‘The 50 per cent rate is a policy that should never have been announced. The indirect impact on entrepreneurial aspiration, business confidence and foreign investment is likely to be significant.

As we can see from this Bloomberg article, it appears that the feckless big-government policies of all the major parties are driving productive investors and entrepreneurs to jurisdictions with better tax law. Switzerland seems to be the biggest beneficiary. As you read the details below, one thing to keep in mind is that at least Brits are free to emigrate. The U.S. government imposes repugnant Soviet-style exit taxes designed to ransack successful people who want the freedom to move someplace with more liberty:

…more than 100 bankers, hedge fund managers and wealthy retirees are gathered on a cold March night to plot their escape from Britain. Swiss government officials and Geneva-based financial advisers have come to London to lure rich residents with glowing descriptions of the country’s low taxes, safe streets, private-banking options and convenient ski weekends. …Next door, an overflow crowd of 50 more attendees enjoys wine and canapes as they watch the presentation on closed- circuit televisions in a mahogany-lined library, which includes a chart showing the prevalence of English as a language for doing business in Switzerland. A JPMorgan Chase & Co. banker who declined to be identified confides he’s planning to relocate next year. His main complaint: higher U.K. taxes, a theme the Swiss delegation has pounced upon. “Some people think it’s morally wrong to be working for the government for more than half the year,” says Jonathan Ivinson, a Geneva-based tax partner at international law firm Hogan & Hartson LLP… London’s highest earners must now pay a 50 percent tax on incomes above 150,000 pounds ($227,200) that came into force on April 6, replacing a 40 percent top rate. …During the campaign, both Brown and Cameron said they backed additional curbs on the U.K. financial industry — including a bank transaction levy — and agreed that Britain’s dire financial state would lock in higher tax rates for the foreseeable future: …As the taxman’s take grows larger, Switzerland is shaping up as the most-welcoming alternative for British exiles. Light- touch regulation and the willingness of cantons, as regional governments are called, to negotiate special tax rates for both individuals and businesses have prompted at least 30 London hedge fund managers to consider moving to Geneva in the past year, says Shelby du Pasquier, a Geneva-based partner at Lenz & Staehelin, a Swiss law firm. Investment management and advisory services aren’t regulated in Switzerland, apart from anti-money laundering rules, and the federal government and several cantons last year reduced taxes on dividend payments for entrepreneurs, including owners of hedge fund firms, he says. …Geneva has already attracted some of London’s top talent. Alan Howard, co-founder of Brevan Howard Asset Management LLP, Europe’s largest hedge fund firm, has rented office space in Geneva for 60 traders relocating from London. …BlueCrest Capital Management Ltd., Europe’s third-largest hedge fund firm, has opened a Geneva office for as many as 70 traders and analysts who have worked in London on its two biggest funds. They’re being joined by BlueCrest co-founder Michael Platt and Leda Braga, manager of the $9 billion BlueTrend fund, according to people familiar with the firm’s transitional plans. …The departures of those principals prove that the threat to London’s prominence as a financial center is real, says Stuart Fraser, head of policy at the City of London Corporation, which runs the financial district. …U.K. top tax rates will exceed those in Germany and France for the first time since 1989, according to a study by accounting firm KPMG. A banker earning 1 million pounds a year in London will now take home less than his counterparts in Frankfurt, Hong Kong, New York, Paris, Singapore and Zurich, KPMG says. “The U.K. has abandoned one of its key principles when it comes to tax, which is predictability,” says Bertrand des Pallieres, founder of SPQR Capital LLP, a London-based hedge fund firm with about $700 million in assets as of April. He left the U.K. last year and opened an office in Geneva after the new tax rate was announced. It’s not only funds looking at leaving. Broker Tullett Prebon said in December it would allow its 700 employees in London to move to “more certain tax regimes.” Several of Tullett Prebon’s major desks are now planning to move key personnel, the company says. …London Mayor Boris Johnson estimates that up to 9,000 bankers, hedge fund managers and private-equity executives could leave the city, according to a letter he sent to the Labour government in January. …Marcel Jouault is working to make sure that agitated Britons wind up in Pfaeffikon, a village on the shore of Lake Zurich. Pfaeffikon’s 11.8 percent corporate tax rate and 19 percent personal income levy are both Switzerland’s lowest, helping the village lure funds that handle about $100 billion in investments, according to hedge fund research firm Opalesque Ltd.

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If This Is the GOP Future, They Will Be a Minority Party

Did Republicans lose in 2006 and 2008 because they were too far to the left or too far to the right? And which approach should they adopt if they want to regain power in 2010 and 2012? Some people think the GOP needs to be more moderate. David Frum, for instance, says Republicans need to mimic David Cameron in the United Kingdom. And at his website, Frum highlights this (rather disturbing, as I will explain below) video of Cameron making a pitch to the British people.

First, the good news about the video. It is possible that Cameron intends to do good things about education and welfare policy. Unfortunately, it’s also possible that he intends to do bad things. But we don’t know since there is nothing but rhetoric. Speaking of rhetoric, it is troubling that he also has lots of language about a “fair” society and the gap between rich and poor. This doesn’t necessarily mean he intends to push bad policy. A policy of smaller government and free markets, after all, will boost economic growth and help poor people climb the ladder. Shrinking government also will reduce the power of special interests, which will make society more fair. But it’s also possible – and perhaps more likely – that he is using this rhetoric to signal support for more redistribution.

What is most troubling, though, is that Cameron sides with government and against taxpayers whenever he gets specific about policy. About one minute into the video, he endorses the minimum wage and higher fuel subsidies. Fifteen seconds later, he wants more redistribution for food programs. The worst proposal comes around the 2:50 mark, when he endorses wage indexing instead of price indexing for the U.K.’s version of Social Security (which would be grossly irresponsible and undermine one of the best achievements of Margaret Thatcher). Last but not least, he then endorses more spending on government-run healthcare.

These proposals are all bad policy, but they’re also bad politics. If an election is decided on the basis of which party is more excited and more sincere about redistribution, that benefits left-wing parties. That doesn’t mean that a (supposedly) right-wing party will never win an election. Indeed, Gordon Brown may very well lose to Cameron later this year. But that will simply be a case of the electorate rejecting an incumbent party for doing a terrible job. There will be no mandate for better policy. Indeed, it appears that Cameron wants to be like Obama – a big-spending politicians who takes over from another big-spending politician. In the long run, this is a recipe for the Tories to be a minority party. And if Republicans follow the same approach, they also will be a minority party.

One final comment. It should go without saying that right-leaning parties should always be figuring out better ways of selling the message of liberty, freedom, prosperity, and responsibility. And they should be finding the candidates who are best able to articulate that message in an optimistic, forward-looking way to average voters. But that’s not what Cameron represents. From what I can tell, he’s Richard Nixon with a smile.

P.S. Cameron also has surrendered to the left on the global warming/climate change issue, though maybe the absence of any rhetoric in this video is an indication that he realizes the tide has turned and there is nothing to be gained electorally by imposing that particular piece of awful policy.

P.P.S. And he has refused to say that he will undo Gordon Brown’s reckless decision to raise the top tax rate from 40 percent to 50 percent.

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The United Kingdom Is Screwed No Matter Who Wins the Next Election

Prime Minister Gordon Brown has done a terrible job and is widely unpopular.. But even if the opposition party wins control later this year, it may not make much of a difference. The leader of the Tory party, David Cameron, is a British version of a RINO. He has not pledged to reduce the burden of government spending (which, as the chart illustrates, has skyrocketed). He has not pledged to reverse Brown’s dramatic increase in the top tax rate. And now the Conservative Party is expressing support for a huge increase in the value-added tax. The UK-based Times reports:

A rise in VAT is looming whichever party wins the general election, as Labour and the Conservatives draw up plans to balance Britain’s books. Alistair Darling and George Osborne, the Shadow Chancellor, are both considering raising VAT to as high as 20 per cent — the European average — from the current rate of 17.5 per cent, The Times has learnt. …One City source close to the Tory tax team said: “There is a view across the Conservative Party that VAT is going to have to go up.” The Chancellor is also keenly aware that Britain needs to retain the confidence of the credit-rating agencies. He has privately ruled out either raising income taxes or increasing the scope of VAT, but has deliberately left open the possibility of increasing the sales tax in the next Parliament.

P.S. As usual, my technical skills are grossly deficient and I can’t figure out how to get the graph to appear, but click on the box to see how the burden of government has exploded in the United Kingdom (makes George W. Bush and Barack Obama look like fiscal conservatives by comparison).

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