Western standards of trade and investment

In this week's Spectator (3 Jan), Robert Salisbury, reviewing Michael Stuermer's book "Putin and the rise of Russia" says "We have an interest in a stable and peaceful Russia and, even if we cannot hope to impose our own ideas of government on a proud and humiliated nation, we should insist that the rules under which we trade with Russia are transparent and up to Western standards, and the the rules of investment, both outwards and inward, are of an equal rigour".

Amen to the first part of the sentence (though it is the sort of statement of the obvious that doesn't really need saying, and gives us not a clue how to achieve it). But the second part is not only a non sequitur, but it seems to indicate that Mr Salisbury has been living in a cave with no form of outside communication for the past 18 months. Rules of trade and investment "up to Western standards"?

Not that the Russians would ever have been so completely suckered, as our intelligentsia were, by the pin-striped brigade. Nor that Mr Salisbury is wrong that rules (of all kinds) in Russia are more honoured in the breach than in the observance. But they certainly won't be listening now (other than for laughs) to Western exhortations to live up to our standards in trade and investment.

Is this not an example of exactly the limp-wristed European attitude that Mr Salisbury rightly castigates? How are we to force our trading partners to honour any particular rules? We must be prepared to walk away from trades with them. And the Russians believe, probably rightly, that Europe is not ultimately prepared to walk away from trading for their energy, mineral and agricultural resources.

Reputation is hard won and easily lost. The West has a hard slog ahead of it to regain the moral high ground.

Tax reduction priorities

Mark Wadsworth (whose blog is one we recommend in our blogroll) managed to get a long (by their standards) letter published in yesterday's FT, criticizing John Redwood's focus on reducing corporation tax, when in Mark's opinion greater emphasis should be placed on reducing VAT and National Insurance (NI). Well done for getting published, Mark. You are half right.

You are right that some taxes need reducing more urgently than corporation tax, and that NI is one of them. On the other hand, Redwood is nevertheless right that we need to cut corporation tax (if not as a priority above other cuts), and you are wrong about VAT as a priority.

I say this with some confidence, because I happened, the day before, to be browsing the latest version of Taxation trends in the European Union - Data for the EU Member States and Norway, from Eurostat, the EU's statistics office (yes, I am that sad). The figures in there do not support Mark's argument in its entirety.

EU corporation tax ratesCorporation tax needs cutting because, although our biggest competitors have higher rates, we are not only in competition with them, but with the 20 other European countries that have lower rates than us. Not to mention the BRICS countries, and other developing nations. Your principal competitors change according to who is competing most aggressively. The best way to lose your competitive position is to focus complacently only on your old competitors.

(Having said, that, one does need to be careful about what one means by "competitiveness", as Samuel Brittan, pointed out in yesterday's FT. But the conditions that influence where businesses choose to invest and to book more or less of their profits does seem a legitimate area for international tax competition.)

It also needs cutting because high rates of corporation tax distort investment decisions, as companies structure deals and decide their levels of borrowing and saving in order to minimize their tax bills rather than because of the fundamentals. And because experience in countries (particularly in Eastern Europe) in recent years suggests that high rates are at an inefficient point on the Laffer Curve, and that cutting rates to below our current level can increase (or at least, not significantly reduce) revenues.

EU consumption taxesAlthough the comparisons for consumption taxes indicate that the UK's rates are already pretty competitive, it would be misleading for me to suggest that we are in competition over rates of VAT in the same way that we are in competition on corporate tax. Most of us do not have much option to go to another country to consume our goods. The costs of doing so are likely to be very much greater than the tax benefit. Nevertheless, it does raise doubts as to whether further reductions in VAT should be an urgent priority.

VAT does not have much impact on costs of production, thanks to the offsetting of VAT on purchases against VAT on sales. It is effectively a tax on final consumption. Apart from the case of one-to-one transactions involving personal services (e.g. paying in cash for your gardener or cleaner), it is relatively unavoidable. Nor is it so high (at 17.5% nominal, 11% implicit, i.e. taking into account lower rates and exemptions) that it will be deterring significant levels of economic activity, relative to other taxes whose rates are significantly higher. Consequently, a reduction in VAT is likely to have a near-proportionate impact on tax revenues - there is unlikely to be a significant Laffer-Curve benefit.

Mark argues that "VAT does not just increase the price paid by the consumer; it also reduces the net price received by the producer. Thus low-margin producers are forced out of business and output is reduced quite significantly." Well, yes, it will be a bit of both, though the combined effect will remain 17.5% (or whatever rate of VAT applies to the good). The balance between one and the other will depend on commercial decisions, which will be heavily influenced by price-elasticity of demand. If demand is inelastic, producers should be able to pass on most of the cost to consumers without dramatically affecting volume, and therefore profits. If demand is elastic, producers will have to choose between passing on the costs to consumers and accepting a lower level of demand, or absorbing the cost to maintain volume, but reducing margins/profits. Their balance of fixed vs variable costs will play a significant part in that decision.

The net effect, as Mark says, is that some marginal products are not brought to market, the volumes of some other products are reduced, and the prices of goods that are essential or at least strongly desired, are higher than would otherwise be the case. But this is not different in effect to other taxes. Corporation tax also affects either the level of profits or the price at which the company's goods must be sold in order to deliver the return on investment necessary to persuade people to invest (or retain their investment). At the margins, it will also cause businesses not to be setup or to divert their funds into more profitable activities, which reduces the range of products available and the volume of transactions, and increases the price of goods for which demand is inelastic. And income tax and NI increase the cost of producing goods with a significant labour input, causing fewer of those sorts of goods to be produced and increasing the cost to consumers of essential, high-labour goods. All taxes have this sort of effect - it is a question of striking a balance between their impact on the economy and the need to raise revenue. In that regard, 17.5% (or 11% on average) on consumption could be expected to have a less significant impact than 28% on profits or 40-50+% on employment.

EU taxes on labourIt is that latter figure that seems a particularly strong disincentive to something particularly desirable. NI, of course, is part of the tax on employment, and the most regressive part at that. I am in agreement with Mark on this, and yet the European figures once again do not appear to support us. The only countries in Europe with lower implicit (i.e. weighted average) tax rates on labour, including income tax and employer/employee social security contributions (SSCs, i.e. NI in the UK) are the tiddlers of Greek Cyprus and Malta. It seems that the UK government is taxing labour relatively lightly. Moreover, our SSCs are a relatively low proportion of the whole (less than half the average) compared to most of our neighbours, whereas our income-tax rates are higher than average, which might suggest that NI isn't even the place to start if one were reforming UK taxes on labour.

And yet, it is still true that our employment taxes are too high. Eurostat knows it too:

"Despite the presence of a number of low taxing countries, taxation on labour is, on average, much higher in the EU than in the main other industrialised economies. The effective tax rate on labour in the United States was estimated at just 23.9 % in 1999, compared with an EU-25 ITR of 36.3 % for that same year. Carey and Rabesona (2002) estimated a 24.9 % average effective tax rate on labour for the United States in 1999, i.e. 12 percentage points less than the estimate for the EU-15; the difference with Korea (13.9 %) was even more than 20 percentage points. Values for Japan (23.0 %), New Zealand (23.0 %), Australia (25.3 %), Canada (30.3 %), and Switzerland (31.1 %) were far below the EU-15 average, too. Martinez-Mongay (2000) found broadly similar differences between the EU and the United States and Japan. Indirectly this is confirmed by OECD data on the tax wedge."

And that's just the industrialised countries. The comparison with the developing nations will be even less favourable.

In this case, like corporation tax and unlike VAT, there is an element of international competition, as labour can move, if not as easily as capital. We see the effect in the inflow of Eastern Europeans to the UK at the moment (they could equally have gone to Sweden rather than Britain or Ireland, but the numbers were proportionately lower to the high-tax country that opened its doors) or the numbers of French already here, and the outflow of Brits to countries like Australia and the USA. The only country with higher taxes (and then not much, and not in terms of the proportion paid by the employee) to which there are major flows of Brits is Spain, and most of those are going there to retire.

The universal impact of taxes - of preventing some goods being produced, of reducing the volumes of other goods, and of pushing up the price of goods for which demand is least elastic - applies to taxes on employment as much as any other. But it manifests itself in specific and particularly harmful ways. The goods that are not being produced or are produced in lower numbers or are being made more expensive (without the producer benefitting) are jobs. The only way that high employment can be balanced with high taxes on employment is if people are prepared to accept a lower level of take-home pay. But as take-home pay has a significant impact on the sustainable level of demand in the economy, even that would not prevent high employment taxes from having a deleterious impact on the economy and people's wellbeing. And in practice in Europe, there is strong resistance to rebalancing levels of pay to take account of the cheaper labour and lower taxes that can be found elsewhere. The result is predictable and borne out by experience - high unemployment and low growth.

We may look smugly at the relative, official levels of unemployment and growth in Germany, France and the UK and believe that we are doing better than them. But while we undoubtedly have been doing better on average than those of our neighbours who have been slowly strangling themselves for the past decade or more, we are not so much better as the official figures might suggest. Our (un)employment figures are massaged by moving an incredible number on to disability benefit, and our employment figures are entirely dependent on the vast number of additional public-sector jobs (for which demand is unaffected by employment taxes because their "customers" - taxpayers - have no option until election-time but to pay the extra) that have been created since 1999. Worse still are our effective, marginal rates of tax (taking account of means-tested withdrawal of benefits), which provide a strong disincentive for those on benefits to seek work, unless they can jump straight into a high-paying job. We may only be mutilating rather than strangling our economy, and hiding our self-inflicted wounds better than our competitors, but it does not diminish the long-term impact, which is that competitors from outside Europe are catching us up or leaving us behind.

The first priority is clear, and I don't think would be in dispute between Mark, John Redwood and myself (though it would appear that Redwood's party, like the others, would dispute this). We must reduce the size and cost of government as much as possible, so that we are able to reduce the burden of taxation in general. But it will not be possible to reduce taxation to a level which has little impact. Priorities have to be chosen with regard to where the burden of the state should fall. As that burden is effectively a disincentive, it is, in significant part, a question of what one is least reluctant to disincentivize: jobs, profits or consumption (to limit ourselves to the three options considered by Mark). Though it is not ideal to discourage any of these, it seems to me that the least harmful of the three to deter is consumption, then profits, with employment being the least desirable thing to penalize. As things stand, the priorities are in exactly the reverse order. Redwood would rebalance it in favour of profits. Mark would rebalance it in favour of employment and consumption. I would rebalance it in favour of employment and, to a lesser extent, profits.

It seems that Mark and I agree on one other thing, though - perhaps more important than the levels of taxation, to complement the emphasis on reducing the level of tax on employment. Nominal rates are all very well and a worthy target for reduction, but what really matters are effective and marginal rates. This brings into play other factors, such as personal allowances and benefits. In comments on Mark's post, Vindico (a fellow individualist whose blog is now added to our blogroll) suggested that a flat tax be combined with a Basic Income (BI) to achieve a more efficient balance of effective and marginal rates of taxation. Mark agreed enthusiastically, and so do I.

I have been trying to promote BI as an efficient, liberal, compassionate alternative to welfare, and not necessarily a left-wing policy as many seem to assume, for some time. All reforms of the tax system, fiddling with the calculations for means-testing benefits, and sounding tough about forcing people back to work, will have little effect on the draconian levels of effective, marginal rates of taxation on low-earners that keep many of them out of work. Only a Basic Income can solve this. It is a sine qua non of genuine tax and benefit reform. If UKIP were to make it part of their programme, as Mark says they are considering, they would gain at least one more supporter.

The French "right" and competition

GdF is an energy company, Suez operates in the energy and environment sectors. They want to merge. The French government is intervening to tell Suez that it must divest itself of its environment division if the merger is to go ahead. Why is that?

Is it on competition grounds? Quite the opposite. The competition threat comes not from the merging of Suez's environment division with GdF's energy activities, but from the merging of the two companies' energy interests. But the French government is not only unconcerned about creating an energy behemoth, it is actively encouraging it as the desirable outcome. They want to create another "national champion".

Is it because there are few synergies between the energy and environment sectors? Suez obviously doesn't think so, and as it is the active partner, protecting the tasty morsel that is GdF from the terrible fate of being swallowed by a foreign competitor such as Italy's Enel, Suez's opinion ought to count. And there are indeed obvious synergies, for instance in the potential for the use of waste as a source of energy, and in the environmental impact of energy-generating and -supplying activities. The French government has not tried to justify its intervention on these grounds.

No. It is because the French government wants to retain in the merged group the share of influence that it currently has over GdF. As Sarkozy said, "I proposed to Suez that it merge its energy activities with Gaz de France... to build a big gas and electricity group with... the state as principal shareholder."

Let's not worry that its influence has proved so effective that it has made GdF a target of acquisition. Nor that the group in which the French government has less influence (Suez) has been doing better than the group in which it has more influence (GdF). This is not about commercial logic and the good of the businesses in question. It is about power and making sure that the French state has the biggest finger in as many big pies as possible. Commercial logic and competition be damned. The inevitable result of political involvement in commercial activities.

Gordon's Business Council

Is Gordon having problems with his new Business Council already? Curiously, if you go to the No 10 website and look at the index of press releases, there is no mention of the one announcing his plan for the cosy group of corporates advising him (already comments on by bgprior here)

Even more curiously, you can still find the release on the No 10 site if you know where to look. So here it is, if you are struggling.

Does work work?

Lord McKenzie of Luton, Parliamentary Under-Secretary (Lords) at the Department for Work and Pensions, today "called on the expertise of businesses, government and charities to discuss and agree what constitutes 'good work'." As he explained, "we need to figure out exactly what 'good work' is, so that we can ensure workplaces are happy, healthy and productive".

Here we go again. To Labour, everything is standardisable and reducible to the average or the lowest common denominator, and then enforceable by government mandate. In their eyes, my idea of what constitutes "good work" must be the same as yours, which must be the same as everyone else's. All they need to do is work out what this standard of "good work" consists of, and then insist that all jobs conform with this standard.

Why cannot I decide whether a job is acceptable to me, and accept or refuse employment offers accordingly? If the quality of my job disappoints, why can I not be left to decide whether it is sufficiently disappointing that I should look for a new job? If I can find nothing better than my existing job, am I better off having my unsatisfactory job regulated away (assuming my standards of satisfaction conform with the average), or putting up with something less than perfect until something better comes along? Why does government need to intervene in this area? My terms of employment are a matter for me and my employer alone.

Green grants

The Department of Trade and Industry has released £50m over the next 18 months to support the Low Carbon Buildings Programme. It has chosen seven companies to receive its funding. There is an increasing number of companies that operate in the renewable energy field and that was clearly demonstrated by the fact that 53 companies expressed interest in the DTI grant.

Cutting red tape

Tony Blair outlined 500 measures to cut the £14bn cost of red tape to individuals, firms and charities yesterday. The aim is to save up to £2bn a year from measures which include simplifying forms for planning applications and rules covering fire certificates.

Small firms and FSA

Smaller companies' support to the FSA has decreased over the last two years. The main reasons are the continued high cost of regulation and a confusion over FSA's strategic and policy work. The FSA's recent announcement that it will switch to a principle-based rulebook has increased smaller business' fears. Bigger companies are able to pay for consultants to advise on regulations but smaller ones will have to spend a huge amount of their valuable time on getting to grips with the new changes.


Cutting red tape

Tony Blair promised to cut red tape for business by 25% yesterday (28 Nov) in his speech at the CBI conference. In his address today, Gordon Brown is expected to announce reforms desinged to deliver a "more modern, simpler and consistent" tax system. The PM said that bureaucracy cost almost £15 billion a year and they have identified annual savings of £2.2 billion. And Gordon's announcement comes as a response to growing criticism that the tax system has become uncompetitive.

Taxing regulation

A CBI survey found that some of the major British companies have moved abroad and more companies are considering the move to escape high corporate taxes. Businesses are discontent with the complexity of tax rules, aggressive attitudes of tax collection and high compliance cost.

Regulating travel insurance

The Treasury yesterday (23 Nov) launched a public consultation on travel insurance on grounds that "the market is not working well enough to prevent mis-selling." The last consultation on travel insurance was only three years ago when the Government decided that it is not necessary to regulate the sector. During the last review, most of the travel agents were against regulations and argued that the sector's code of conduct is sufficient to prevent any wrong-doing. Much could not have changed since. Regulations is not the way forward but it is the responsibility of the purchaser to check the T&C of the insurace one is buying.

Deal or no deal

The Government has interfered with the flotation of KBR, a subsidary of Halliburton, that operates the Devonport Dockyard, western Europe's largest naval port. MoD is not happy with the sell-off of KBR on grounds that it might have severe strategic/security implications. The Government has warned Halliburton that it might lose the Dockyard if the company will not delay the launch.

The CBI - cheerleader for government intervention, promoter of vested interests, or both?

According to their website, the CBI's mission is:

"to help create and sustain the conditions in which businesses in the United Kingdom can compete and prosper for the benefit of all"

and their policy is:

"decided by our members – senior professionals from all sectors and sizes of business are directly involved in the policy-making process"

In the experience of this author, the CBI are now complicit in the government's ever-expanding intervention in the economy, and listen only to their bigger members. A recent exchange of correspondence seemed to illustrate this attitude. It is repeated below - decide for yourselves.

More on Companies Bill

The Companies Bill passed on the statute book yesterday (08 Nov) and Alistair Darling, trade and industry secretary, said that this is the end of the road for reform. However, this seems to contradict earlier comments by Margaret Hodge, industry minister. She said that the Bill is a first step in tightening statutory controls on businesses.  More rules to the already bulky law - 1,300 clauses - could not serve the Bill's purpose of deregulation and saving companies £250 million a year.

Gordon and his 8,300 pages of tax law

According to the joint report by the World Bank and PricewaterhouseCoopers (PwC) British companies have to struggle with 8,300 pages of tax law, behind only India, and  the rulebook has doubled over the last decade. This is a clear sign of Gordon Brown's preference for complexity.

The Chancellor has a tendency for making even the best and seemingly straightforward ideas so complicated that they end up in a huge mess.  Most people who would benfit from these initiatives will be faced with more bureaucracy and complex procedures that many of them will give up fighting the system to gain benefits they are entitled to. The tax credit system cannot go unmentioned in this case.  

Capping regulation, not prices

The EU has confirmed that it will stick to it pledge to cap roaming prices after a survey found that 70% of Europeans want the EU to act to cut the cost of phone calls abroad. European Union Information Society Commissioner Viviane Reding, who put forward the idea, said that "this [high prices] hurts consumers, it hurts European industry and it hurts Europe."

9 to 5 only....

The BBC reports that the EU employment ministers are meeting this week to discuss the EU working hours law. As a EU rule, the current proposals are complicated - set normal hours, overall maximum hours and the option of opting out. If the proposal will be implemented, they will restrict labour markets. Liberal working hours promote economic growth and lowers unemployment. For example, the UK's economy has performed better than the heavily regulated French economy.

Good intentions?

The Financial Services Authority (FSA) has revealed that it wants to cut its "conduct of business" rulebook, which covers the advertising and marketing of financial products, and the provision of information and advice to clients, from 700 pages to 370. The news is welcomed, but somehow it has taken the FSA more than five years from its establishment to produce a first proposal for reform.

The costly and prescriptive regulation has had a damaging effect on the financial services industry and it is likely that this will stay so for some years to come. It will take at least a couple of years to implement the new proposals and it is not yet clear if they will actually improve the current situation. The FSA announced it wants to move towards principles-based framework but this could easily leave room for different interpretations and to more confusion as to what and to what extent needs to be applied to individual businesses.

The Companies Bill strikes again

Margaret Hodge, the Minister currently responsible for probably the longest Bill in British history, The Companies Bill, has done it again. With no warning, business is now to be expected to publish details of their supply chain.

What on earth for? Do shareholders need this information to assess the value of the business? Or is this just another exercise to provide ammunition for the opponents of business?

What it will certainly mean is more red tape and bureaucracy for business. No wonder that the government have failed to provide an assessment of the impact of the measu

More regulation to cut red tape?

The Telegraph reports today (24th October) on the Government wasting billions of pounds by inefficiently regulating the economy. For example, it costs more than £2 billion for the Health and Safety Executive to comply with the regulatory burden. Most departments and government agencies are reportedly putting plans in place and setting targets on how to reduce the waste.