Category Archives: Taxation

Banking, Company Law, Economics, Political Decision, Regulation, Taxation

Making Capitalism Work: some initial steps

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The centrally planned socialist alternative has been tried and didn’t work. Even without the bureaucracy and corruption enabled by the communist system, central planning could never be as efficient or effective as a real market. But, as we are currently experiencing, unregulated markets can also lead to disaster. Most of our current trouble lies in the changed role of the financial sector.

When the 18th century canals were built it took on average over seven years from the start of construction to the first revenues being generated, seven years in which huge and not risk-free expense was incurred. Shares, bonds and bank credit were the means of raising the necessary money to get the industrialisation project going. So the financial sector was brought into existence to support the real economy. And it grew in importance, supporting the progress of industrialisation for over two hundred years. But since the 1980s computerisation and deregulation of financial markets, it has been possible to make substantially higher returns from speculation than from the real economy. Consequently the sector no longer supports the real economy with any real enthusiasm. Instead, when it invests in the real economy, more often than not, it does so to extract value, destroying real jobs, purely for its own benefit. It is not just, as Adair Turner once described it “socially useless”, but is actually working against the interests of ordinary people.
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Economics, Political Decision, Regulation, Taxation

Neoclassical Endogenous Growth and a 50% Tax Rate

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Former UK Chancellor Alistair Darling’s memoir describes Gordon Brown’s approach as ‘a shambles’. As illustration, the much quoted description of a speech by the former Prime Minister about “neoclassical endogenous growth theory”. Brown started before the speech was fully written, so that part way through delivery, “a hand appeared from behind a curtain and handed him the rest of the speech.” It may sound pretty shambolic, but much more important than that: what was Gordon Brown doing talking about neoclassical endogenous growth theory in the first place? He was shadow chancellor at the time, not some first year economics undergraduate. It’s an example of what Keynes described as the “madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

In this regard at least, Gordon Brown was far from unique. Politicians, bankers and business people tend to retain a residual belief in the academic ideology they learned at university and business school. When it’s relevant they seem likely to act according to its dictates, and to be eloquent in its defence, no matter how obviously stupid it appears to be. Thus the current debate about retention of the 50% tax rate for those earning over £150,000 pa.
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Bank Bonuses, Banking, Economics, Financial Sector, Political Decision, Regulation, Taxation

Ring-fencing or Separating Banking Activities

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The Independent Commission on Banking (ICB) is expected, when it reports next Monday, to recommend ring-fencing investment banking (the speculative ‘casino’ activities) from the traditional bank role supporting the real economy. The aim of ring-fencing is said to be to ensure the government never again has to use tax payers’ money to bail out the banks when their speculations go wrong.

However, ring-fencing is a hugely ambiguous concept. No doubt the ICB will deliberate at length on its chosen interpretation. But why bother? If the aim is to insulate traditional banking from the high risk, high return speculation, why ring-fence? Why not separate the two completely, as they were prior to deregulation? Then, if the ‘casino’ banks create a bubble that bursts, they can be allowed to go to the wall with a more limited impact on the real economy. But the bankers wouldn’t like it.
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Economics, Moral Hazard, Political Decision, Society, Taxation

Who’s Breaking Society Now?

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David Cameron is following a long line of prime ministers claiming that British society is in moral decline and ‘broken’. The country has always been ‘going to the dogs’. Harold Macmillan suggested it all started when we stopped going to church on Sundays and so lost any regard for what he referred to as ‘Christian charity’. Three questions arise: Is it true? What is the cause? And what can be done about it?

The British system of social relationships between people, and the structure of social institutions and organisation which shape our association with others, are by and large fairly harmonious. Our daily experience of interactions with others, no matter the degree of difference between our ethnicity, gender, age, ability, or economic position, is generally based on mutual consideration and courtesy. Only among football crowds does consideration habitually give way to overt antagonism and even then it is almost invariably laced with humour. Rioting and looting is an exception, and the generous efforts of people in the clean-up operations confirmed the general rule: society is not broken. Yet.
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Banking, Economics, Free Market Capitalism, Political Decision, Taxation

Tea Party Taxation

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US presidential candidate, Michele Bachmann, stands up for the ordinary people of America, the factory workers and housewives, who she says are telling her to stand strong against raising taxes and to fight to reduce government spending, as the way to America’s economic salvation. But even in the self-reliant, can-do US culture, taxes are unavoidable. They are needed to pay for national defence and security as well as those provisions of education, healthcare and social security which support the ordinary people. But, it is argued, raising taxes undermines the US economy and would even be immoral, especially taxes which resulted in the redistribution of income and wealth from one category to another.

The Tea Party approach is by no means unique to the US. Vince Cable may refer to them as ‘right wing nutters’, but the free trade, open markets, minimised government, spending and taxes, are part of the UK coalition government’s mantra of which he is part, just as they are of the GOP in the US. Successive US and UK governments have, since Reagan and Thatcher, broadly accepted these positions. But times have changed and what may have worked as recently as a decade ago, is no longer appropriate, causing harm to both ordinary people and the overall economy, quite undermining Ms Bachmann’s contention. For example, the effects of personal taxation have changed radically.
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Bank Bonuses, Corruption, Economics, Political Decision, Taxation

The Red Herring of Interesting Times

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These interesting times might take our eyes off the things that really matter. During a recent late night discussion on the BBC among the financial cognoscenti, one of the participants warned against getting drawn back into ‘the red herring of banker’s bonuses’. The real issues were the British government and police being in the pockets of the Murdochs, media plurality, the debt crises in Greece, Italy, Ireland, Portugal, etc etc and the future of the Euro, not to mention the changing world roles of the US and China as well as the developing famine in East Africa. Bankers’ bonuses were surely small beer against such giant issues.

Keynes argued that reducing taxes on the poor enabled them to immediately increase their spending which would stimulate growth in the real economy, thus reducing debt and creating jobs. Reducing taxes on the rich did not have that immediate effect, but, the argument ran in Keynes’ day, it enabled them to increase investment in the real economy thus having a long term positive impact on growth. That was then.
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