Imagine that you're a poor peasant living in a village with other poor peasants. You work your fingers to the bone just to survive, yet just when your harvest is ready bandits descend from the mountains and steal a large amount of what you've produced, leaving you with barely enough to live on.

You consult with the other villagers and decide that you must pool some of your resources to help improve your village's security.  You hire your own private army to fight the bandits.

Such stories are how great films are made.  It's also conceivable that this line of argument was used to justify bits of our current state.  Because there are some situations where it is more efficient to pool resources, yet you're worried about freeloaders, it can make sense to force everyone to contribute into the pot from which services are bought.

However, now imagine a system in which the central pot consumes 40% or more of the village's resources.  The state has become every bit as bad as the bandits.  Except, at least with the bandits there was the chance they might not attack your village that year; the state clobbers you for 40% this year and every year.  Where are seven more samurai that can save you from the state's banditry?

In this context, I find it mildly amusing to read that David Cameron is to place 'happiness' at the heart of judging whether government is doing a good job.  Because he seems compelled to completely and utterly miss the point.  Taking someone else's money and giving it to me might make me happy for a bit.  But it also undermines my self-esteem, and might even make me worse off if I come to rely on an income stream that could be reduced or withdrawn tomorrow. 

Even worse, it probably measures only one side of the equation.  While I might be happier, how much unhappier is a country in which your earned income is taken away and given to somebody who definitely didn't earn it, probably didn't deserve it, and is very likely to waste some of it on frivolous purchases?  Government is unlikely to be able to measure all this properly, and will therefore seriously underestimate the happiness-sapping impact of its own existence.

A government that can't recognise that it itself is a significant cause of unhappiness in this country is one that will allow itself to grow to unsustainable proportions.  It's inconceivable that government could even contemplate mapping a course to reduce its size by half.  And that makes me very unhappy.  David Cameron, take note.

Filed under: Current issues, Politics with tags david cameron, happiness, seven samurai, welfare benefits
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Some time ago, I had the good fortune to see Lord Digby Jones speak. There's one bit of his speech that really stuck with me - where he summarised the key difference between the public and private sector.

According to Digby, in the private sector the customer always comes first. Always, always, always. Then investors and then employees. Sure, a business needs employees to make a profit, but it's the shareholders that provide the capital to make it all possible.

Compare this to the public sector. In the public sector, the employees come first. This is why benefits are several times better than comparable terms in the private sector, and why pay has been catching up with - and has now exceeded - the private sector. Such rewards might be justifiable if they were commensurate with services offered to their customers/investors (i.e. us taxpayers) but they're not.

So, how could we hope to make the public sector a customer-focussed organisation?  A real one, that is, not one of those pseudo market-based structures that Tony Blair tinkered with in the late 90s or like we have with the rail franchises...

Filed under: Politics with tags lord digby jones, public sector, tony blair
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Radio 4's Today programme reported this morning that the UK's major banking institutions are meeting to discuss whether they can, as a group, reduce their bonuses to employees. They don't dare act solo, lest key performers leave. But they remain under major pressure from MPs and wider society to act responsibly, given the support given to the sector.

But imagine a different meeting had taken place. One in which they had conspired to raise prices. Obviously, this would have been illegal - a clear example of Adam Smith's prediction about meetings between rivals turning to ways to rip off their customers. So why is it acceptable to conspire to reduce the financial benefits to one stakeholder group, but not another?

To be fair to the BBC, they did observe that the meeting might be deemed illegal under competition law. And also that the Treasury might be distinctly unamused. Hardly surprising, given that half of all bonuses belongs to them. The proposed cut in bonuses neatly offsets the proposed banking levy.

You'll remember, if you read Worstall's blog (and you should), you'll know that corporate benefits are shared between stakeholders and that tax increases tend to be borne most heavily by employees. Doesn't this rather prove it?

Written on my Android mobile phone. Article may be edited later.

Filed under: Current issues, Economics with tags adam smith, banks, bbc, bonuses, hm treasury, tim worstall
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Channel 4 ran a programme last night entitled "Britain's Trillion Pound Horror Story" which, in typically sensationalist terms, sought to expose how appalling our national debt is.  They produced a figure for the national debt of £4.8 trillion, or £77,000 for every man, woman and child in the UK.  You can watch the programme on 4OD here.

There were some truly terrifying moments in this show.  How on earth can Alan Johnson, Shadow Chancellor, not know the figure for the national debt? I know he would accept that he's a bit of a muppet, but it's unacceptable that he can really have no idea.

I was pleased to see them putting the boot into Quantitative Easing, which is just printing money and, even though economists have given it a fancy name, is already leading to high inflation.  At precisely the same time that Mervyn King, having failed to keep a grip on inflation - despite his mandate to do only that - says that interest rates won't be raised to combat it.

The programme also did a very good job of explaining the fundamental imbalance in our economy, with too many public sector jobs, too many service jobs and too many 'secondary tax spending' jobs (those that rely solely or largely upon the public sector).  It skewered the false claims that government spending is ex ante good for the private sector.  Richard Teather (a sometime dedicated Ritchie-basher) did a good job of explaining 'tax churn' by which the state takes straight back money it appears to give to people in benefits.  It's a con, yet we have allowed ourselves to be conned.

The programme finished with a compelling study of Hong Kong, which kickstarted massive growth off the back of low taxation.  Having been behind Britain in the 60s, it is now ahead of our economy measured as GDP per head. It could have been us, if only we hadn't splurged so much money on the state.

Lefties hated it. Twitter was abuzz with people complaining that it was a giant advertisement for the Conservative Party (hah, if only... the Tories are within a cigarette paper of Labour's insanely risky high tax, high spend plans), or that it was the Tea Party setting up stall in the UK.  For sure, it was deliberately right-wing, but that isn't, in itself, a reason to ignore it.  The programme left socialists completely unable to answer its main charges, because its message is - let's face it - a statement of the bleeding obvious.

But how did they get to £4.8 trillion?  Unfortunately, here the programme wasn't entirely honest with us.  The headline figure for debt is about £1 trillion, so they are claiming there's a further £3.8 trillion that isn't properly recorded in the 'official' figures.  But they didn't say what.

We can get a bit of help elsewhere.  The ICAEW published a report a couple of months back which claims that there's a further billion or so.  The largest elements of this are off-balance sheet debts arising from PFI deals, other contingent liabilities, such as guarantees of National Rail's liabilities, and - the biggest of the lot - unrecorded public sector pension liabilities.  These are genuine liabiltiies, as accountants and ordinary people would recognise them, and they should be recorded in our national debt.  But they're not easy figures to estimate.  The pensions figure in particular is very subjective.  Your assumptions over what the discount rate for future payments should be has very significant impacts on the final liability figure.

Another report, published by the ONS, analyses the problem in more detail and produces broadly similar results.  So where did Channel 4 get their figures from?

I suspect they've been a bit naughty, and have included within their estimate a figure for the state pension payments due to be paid to those currently working.  These are gigantic numbers, for sure, given the number of people that will get them.  But they're not liabilities, in the accounting sense of the word.  A liability is 'an obligation to transfer benefits as a result of past actions or events'.  Yet the government has no current obligation to pay a state pension to anyone who is not yet retired.

Yes, you read that right - no current obligation. This is because the government can always change the law to deny you your pension.  In fact it's already done this to some extent by proposing to increase the state pension age.  It may yet abolish any rights under SERPS/S2P, given that nobody quite understands what's going on there.  It's even technically conceivable that the government could abolish the state pension for current workers altogether, although it would face riots in the street if it did.

But, without the figures we can only speculate.  So, would Channel 4 care to tell us where their estimate came from?

Filed under: Current issues, Economics, Taxation with tags alan johnson, channel 4, deficit, hong kong, icaew, martin durkin, mervyn king, office for national statistics, quantitative easing, richard teather, state pension
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Today I attended a presentation of the findings of the Mirrlees Review of the UK tax system.  This represents the climax of a very impressive piece of work from the Institute for Fiscal Studies, who have reprised their earlier (1978) work with Nobel Prize winner James Meade in producing a comprehensive view of what an ideal tax system would look like if you could start from scratch.

Led by Sir James Mirrlees, another Cambridge-resident Nobel Prize winner, the review started with the following three axioms:

1. You must consider the tax system as a whole.  This means that you should look at the overall tax system in its entirety instead of individual components.  It's acceptable for certain bits to be regressive so long as the overall system is, on balance, progressive.
2. You should seek neutrality in the tax system.  But deviations from this are acceptable, so long as the impact on complexity is understood.
3. Achieve progressivity as efficiently as possible.  This means the interaction between benefits, income and taxation must be considered, including the impact on behaviour of the tax and benefits systems.

These are fairly uncontroversial.  And they have identified a number of significant flaws in the current UK tax system:

• Income tax and NI interact in bizarre and undesirable ways.
• There are huge distortions as a result of the different treatment of earned income and corporate profits/dividend income.
• The tax system often ends up taxing the normal return.
• The corporation tax system favours debt over equity.
• There are a whole load of different taxes that apply to carbon, whereas classical economic theory suggests that there should be just one.
• The tax system doesn't address the externalities of road congestion properly.
• The zero-rating of certain goods in the VAT system is an inefficient way to help the poor.
• The interaction between tax and benefits withdrawal is harmful and distorting and has unacceptably high marginal rates.

And the IFS commissioned teams of academics to go away and research key areas for the report.  The key findings, presented today, were as follows:

• Merge Income Tax and National Insurance.  National Insurance is no longer an insurance policy to provide an income in retirement; it's just another tax on income.  Therefore they propose merging it into income tax in order to remove a factor that generates fluctuating marginal rates.
• Stop tapering personal allowances.  Personal allowances are tapered on income above £100,000 and the age-related personal allowance is also tapered.  Tapering creates enormous problems with high marginal rates - the withdrawal above £100,000 creates a marginal rate of 60%.
• A single, integrated benefit should be created.  Currently there are lots of overlapping benefits, which tend to get withdrawn via means-testing fairly quickly, creating high marginal rates of tax/benefit withdrawal.
• There should be special incentives for those with school-age children and for workers aged 55-70.  This is because they are most sensitive to incentives in the decision whether to work.
• The zero-rated and reduced VAT rates should be abolished.  It's madness to give a lower tax rate on domestic energy supply.  And other incentives could be provided in better ways than through the VAT system.
• VAT or some equivalent charge should be levied on financial services.  They are currently VAT-exempt, which doesn't really make sense.
• Replace Council Tax and Stamp Duty with a single tax that is proportional to property values.  This removes a great deal of stickiness in the tax system and also should help with progressivity.
• Establish a consistent approach to carbon taxation.  This is a key theme of the Stern review too.
• Introduce a system of congestion charging.  Road congestion is addressed through fuel duty which, as more cars become more efficient and people switch to electric cars, is becoming an increasingly poor proxy for road congestion.
• Don't tax the normal return to savings.
• Don't provide such large incentives for employers to contribute to pension schemes.  Employers don't pay employers' National Insurance on contributions to their employees' pensions, which perhaps explains why employers contribute more than employees.
• The tax free lump sum benefit in pension schemes should be abolished in favour of a more sensible long-term savings incentive.
• A Rate of Return Allowance should be introduced for substantial holdings of risky assets, such as equities.  But they recommend that the equity ISA savings incentive should be retained.
• The tax rates on income and capital gains should be equalised.
• There should be a more effective mechanism for dealing with wealth transfers.  And, in particular, they believe there is a place for some form of Inheritance Tax.

Each of these recommendations is supported by pages and pages of supporting arguments and evidence.  The findings document runs to 20 chapters, and will be printed in the New Year.  But if you can't wait, you can download draft versions of each of the chapters here.

The presentations from today's session can be downloaded here.

Filed under: Current issues, Taxation with tags corporation tax, council tax, income tax, institute for fiscal studies, meade review, mirrlees review, national insurance, pensions, savings, vat
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What is the public interest? Perhaps it's one of those concepts, like true love, that you can't quite describe but you reckon you'll know when you see it. Well, never fear, because IFAC, the International Federation of Accountants (which also sets International Standards on Auditing), has written a snappy little paper about the subject.

Sadly, it's not very good. It achieves its brevity by sacrificing any pretence at academic rigour. Incredibly, it contains no external references whatsoever. So, while its three criteria - "consideration of costs and benefits for society as a whole", "adherence to democratic principles and processes", and "respect for cultural and ethical diversity" - seem plausible enough, it just feels underbaked given the weight of previous literature on this subject.

Diversity is a necessary cop-out if IFAC is to avoid irritating its Islamic members. But it does introduce a dangerous relativism to the concept of public interest, which we might imagine to be a more universal notion. It brings to mind the Adam Curtis documentary, The Trap, in which James M. Buchanan denies that there is such a concept, merely the self interest of those in charge. They use the public interest as a reason to justify what they want to do in their own interest.

There is a fatal lack of detail in the document. There's so little, in fact, that it's hard to imagine how it could be developed into a usable framework. Luckily, I have one of my own: my view is that accountants serve the public interest by making complex things simpler to understand and by helping people trust information that might otherwise be unreliable. In my view, that provides a way forward in deciding how IFAC should approach its standard-setting responsibilities.

Written on my Android mobile phone. Article may be edited later.

Filed under: Ethics, Regulation with tags adam curtis, ifac, international standards on auditing, islamic finance, james m. buchanan, public interest
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This week's winner of the prize for mealy-mouthed non-apology is our dear friend, Ritchie:

The argument about whether the tax avoided was £6 billion or not is a red herring – as I am sure Vodafone and H M Revenue & Customs both know. The question is why a settlement was reached when HMRC was winning its case. And why the overall tax burden of UK based multinational corporations is falling so fast.

I hope the protestors continue to demand tax justice.

I'm afraid the £6 billion is very much at the heart of the argument.  Vodafone says the number is garbage.  HMRC say the number is garbage.  So why won't Ritchie come out and support Vodafone here?  One can hardly blame them for accepting a settlement offered to them by their regulator.  In law, their liability in respect of those tax years is now extinguished in full.

If anyone is to blame here, it must be HMRC for settling while  the tax campaigners believe they still had a case.  So why is Vodafone bearing the brunt of the campaigners' fury, rather than HMRC?  Shouldn't they be banging down the doors at 100 Parliament Street instead?

Of course, there's a simple answer to that - campaigners are idiots who believe any old half-baked crap they read on Twitter and act on it.  But there's a more complicated answer too.  And that's that tax really does matter in the real world.  Ritchie has been at the forefront of arguments to make tax avoidance, no matter how mild, as bad as tax evasion.  Vodafone is the flashpoint at which that argument meets real people.  By prevaricating over their clear innocence, Ritchie is fuelling the flames of the current dispute and causing real harm to workers at and investors in Vodafone.

He has nominated himself as tax's Witchfinder General and he now has blood on his hands.  He must now make it perfectly clear that he believes Vodafone has no more to answer in respect of their UK tax filings.  The longer he goes without putting a stop to this, it will become harder and harder to wash the blood off.

Filed under: Current issues, Taxation with tags hmrc, idiots, richard murphy, tax avoidance, ukuncut, vodafone, witchfinder general
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Last week it was social cleansing and idiotic talk of a final solution for the poor.  This week similar ludicrous claims are being made in the Guardian about some pitifully cautious proposals to encourage the unemployed to take their first steps out of a lifetime on benefits.

The government's side of the bargain will be the promise of a new "universal credit", to replace all existing benefits, that will ensure it always pays to work rather than stay on welfare.

In return, where advisers believe a jobseeker would benefit from experiencing the "habits and routines" of working life, an unemployed person will be told to take up "mandatory work activity" of at least 30 hours a week for a four-week period. If they refuse or fail to complete the programme their jobseeker's allowance payments, currently £50.95 a week for those under 25 and £64.30 for those over 25, could be stopped for at least three months.

It's not exactly a concentration camp, is it?  In return for continuing to demand handouts from other taxpayers, jobseekers will be required to undertake a minor amount of work.  In doing so, this will boost their confidence and improve their fitness to rejoin the workplace.  It's good for them and it's good for us.  What's not to like?

Well, the main thing not to like, if you're a Labour supporter at least, is the fact that this skewers a main tenet of their political philosophy - that there are people who are so useless and incompetent that society must look after them from cradle to grave, no matter what it costs.  The idea that people might be able to fend for themselves, to become self-sufficient, happy members of society is fatal to them.

Yet we can take some minor amusement from the very idea that it's somehow evil to require people to work 'for nothing'.  The Adam Smith Institute calculates Tax Freedom Day, which is the first day that a taxpayer hypothetically starts working for himself, having first settled his annual tax liability.  In 2010 TFD was 30 May, although if the government had covered all of its expenditure with tax receipts instead of running a deficit, TFD would have been 8 July.  30 May!  That means that UK taxpayers are working for five whole months without being paid, just to feed the stomachless many-tentacled monster that is our bloated state.

So take your four weeks of work and swallow it.  Those of us who actually pay for the welfare benefits you cherish contribute far far more, and you don't hear us complaining about it.

Filed under: Ethics, Politics, Taxation with tags adam smith institute, guardian, jobseekers allowance, labour, tax freedom day, welfare benefits, workfare
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Somewhere along the line in updating WordPress plugins, I managed to screw up image uploading. So, for the last few months, pictures previewed perfectly when writing a post but then didn't show when showing the post 'for real'. As a result, since then I've basically avoided putting pictures into blog posts at all, which seemed like the easiest course of action but made the blog look even more boring than it actually is.

Anyway, I've finally managed to fix it, so pictures should be returning. As soon as I can find any that make sense.

If you find any pictures in old posts that aren't working and I didn't spot, please let me know.

Filed under: Site admin with tags images, meta, wordpress
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Via Ritchie we find this:

The IASB wields a disproportionate level of power over a huge number of people around the world, yet is mostly funded by voluntary contributions from companies and accounting firms. It is no surprise that it considers these organisations to be its principle stakeholders, and looks after their interests first.

Around the table at the meeting, the board considered the costs and benefits of a country by country reporting standard entirely from the perspective of investors and companies. Many investors have made clear that this information would be useful to them, since much risk occurs at the level of the country in the form of political stability. And many companies have admitted that they collect the necessary information anyway, and it would not be too costly to compile it for a financial report.

Yet still it seems that unless the needs of government and civil society are considered by the IASB, a country by country reporting standard is unlikely. Political pressure is necessary to force the IASB to realise the values enshrined in its constitution and recognize governments and civil society as legitimate users of financial reports.

Awww, bless. The IASB didn't produce the answer they wanted, so it must clearly be evidence that they've been captured by their regulatees and that's why they made the decision they did. Rather than, say, the learned members of the IASB concluding that, based on the evidence presented, country by country reporting is a load of steaming Ritchiebollocks.

The point is, the IASB isn't stupid.  They know that this is merely the thin end of the wedge and that once they've produced a limited amount of CBC information, the civil society groups will start pressing for more.  This will most certainly happen if, as expected, the pressure groups find that they're unable to make much of the disclosures presented.

The reason the IASB considers standards from the perspective of investors and companies is that that is what their constitution requires them to do.  It's right that political pressure could be brought to bear to amend their constitution, but any changes would be unfair on investors, who own the companies concerned, and companies, who must comply with the resulting standards or pay the penalty.  If civil society wants to play this game, they could always start their own investment vehicles and use their purchasing power to deliver meaningful change in the companies in which they invest.  Otherwise, they'll have to accept that investors simply don't want to see their money wasted on the insane, useless vanity projects of a bunch of left-wing pressure groups.

Filed under: Accounting, Other blogs, Politics with tags christian aid, country by country reporting, iasb, idiots, julian boys, richard murphy
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