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Richard Murphy on tax and economics

Why offshore tax abuse should be a strict liability offence

Fri, 08/22/2014 - 13:52

There has been much debate in the tax profession about the government’s proposal, included in a policy consultation published this week,  that failure to declare  offshore income and capital gains arising that should have been included in the UK tax return should be considered a strict liability offence in UK law, and therefore be a criminal act whatever the intention or otherwise of the person committing it.

It is important to note with regard to this that whilst at present it is possible for the government to prosecute anyone who fails to declare their income on their tax return their failure to do so is not a strict liability  offence. In other words, the government has to prove that they had intention not to disclose the income with the aim of evading tax liability. Mere omission is not enough to secure a conviction and the person’s intention does, therefore, matter, meaning that a defence of honest mistake can be made to a court with the possibility, therefore, of a person being found not guilty despite having undeclared offshore income.

It is also important to note that there are quite a number of strict liability offences in the UK. Examples include speeding in a car, driving without insurance,  driving whilst disqualified, having a firearm without appropriate authority,  and some tax offences including failing to provide information in some situations.

Strict  liability offences are, though, an exception;  it is generally presumed in criminal cases that there must be an intention to commit the crime – called the mens rea in  legal parlance –  but this is not necessary in the case of a strict liability offence. In the case of these offences merely undertaking the act is enough to make the act criminal. The  issue that then appears to be engaging the tax profession, who are up in arms about this, is that someone who has made a genuine mistake with regard to the declaration of an offshore source of income or gain could now be subject to criminal prosecution as a result.

I find myself in a now familiar paradoxical position in commenting on this issue. The tax profession always likes to side with HMRC  against me on matters relating to the tax gap, where they claim that the problem hardly exists, but mysteriously oppose my support for HMRC when it comes to measures that might assist tax collection.  The coincidence cannot go unnoticed: the fact that they lack any hint of objectivity on this issue has to be placed on the record now.  They will not like me saying so, but I would suggest that my own comments are on this occasion considerably more objective: I have no vested interest apart from being a tax compliant citizen of the UK in this matter,  and it is from that perspective that I will view it, albeit that I will bring the attributes of  a chartered accountant  with some knowledge of taxation to the discussion.

There are, I think, four main reasons why the government thinks that failure to disclose income and capital gains arising offshore on a UK tax return in which they should have been declared should be a strict liability offence. These are,  that in the first instance,  those who provide the opportunity for UK resident individuals to undertake activity offshore have a very strong incentive to make sure that the identity of those individuals is not known to the UK tax authority.

I am pleased to note that in saying this the UK government has effectively offered long overdue and welcome recognition to the  redefinition of tax havens as secrecy jurisdictions, which I and the Tax Justice Network have promoted for a number of years. I define secrecy jurisdictions as places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain with that regulation being designed to undermine the legislation or regulation of another jurisdiction and with the secrecy jurisdictions also creating a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so. The  new proposal recognises the significance of the second part of this definition and the threat that it poses and that taking advantage of this opportunity can, I think, in itself be the  necessary evidence of intent  that replaces the need to prove the existence of mens rea.

Secondly, I also  warmly welcome the fact that the government has made very clear that many of those who facilitate this offshore tax evasion are themselves actually resident in the UK and use the cover of a secrecy jurisdiction to also disguise this fact. The government’s implication is very clear: they do not believe that the chance of mistake is very high in the vast majority of cases, if it exists at all. I agree with them,  subject to the point on de minimis limits,  noted below.

Thirdly, and again at long last, the government has now finally recognised something that I said most clearly in June 2009,  when I pointed out (following a meeting at the Treasury) that the prospect of a UK government making any significant use of a Tax Information Exchange Agreement was remote in the extreme because it had to have the evidence of the existence of an offshore bank account held by a UK resident person before it could ask the  secrecy jurisdiction to provide any information upon it. In other words, as I realised at the time, but they did not appear to, these agreements were utterly useless without a smoking gun, and such smoking guns did not exist.  It has taken a long time for the government to reach this point of obvious recognition, but at least it has now done so, and as a result recognised that the inherent bias that this creates against HMRC  when trying to investigate offshore abuse justifies an increase in liability for the abuser.

Finally,  the government also recognises that some jurisdictions are still refusing to consider  tax evasion as a predicate offence for anti-money-laundering prosecution purposes and that this is an impediment to information exchange which can be abused, which does again increase the difficulty in securing information  on those evading tax, and so justifies increased penalty for those who try to exploit that situation for personal gain.

That then is the government’s case, although, as I note below, I think it incomplete. Let’s before considering what else needs to be said to support this new law, consider the objections. Leaving aside the rants of those with vested interest, let me offer this more reasoned comment from Pinsent Mason, a firm of leading tax lawyers:

Tax expert James Bullock of Pinsent Masons said that although the approach set out in the consultation was more measured than the chancellor of the exchequer had implied in April, the proposals could still result in criminal prosecutions for those who simply did not understand tax law.

“HMRC has more powers in its arsenal – and more funding – than ever before and the tax take through their investigations is at a record level,” he said. “Considering the success that HMRC is having in cracking down on tax evasion there doesn’t seem to be the public policy requirement for these extra powers.”

“The detailed proposals are more moderate than many had feared, but the principle remains that individuals shouldn’t lose their liberty and be sent to jail because they have been careless or forgetful or allowed themselves to be misled over what taxes they had to pay. They can already be hit by massive fines,” he said.

Let me leave aside the claim on tax recoveries; they are simply made up figures and the amount of cash recovered is vastly less than HMRC claim and so are not worthy of being included in an argument on this issue and instead look at the rest of this comment, and the objection raised.

The first is  that a person could be prosecuted for simply not understanding tax law.

The second is that this change is not required because HMRC already have the resources they need to investigate such cases.  This is simply blatantly untrue,  not just for the reasons that the government has laid out, already noted above,  all of which are true,   but also because for any self-respecting law firm to make such representation when it is so obviously contrary to what is actually happening with regards to the level of resources available to HMRC  reveals either a total lack of awareness on their part  of what is happening with regard to the resource crisis within HMRC or a willingness to be disingenuous that is hardly conducive to their case.

Third,  to claim that there is no public policy reason to continuing to crack down on tax evasion because some people have made voluntary disclosure to date is again, extraordinary:  the issue is real, ongoing, and a matter of considerable cause of loss to the Exchequer and therefore has to be an issue a public policy.

And finally,  the suggestion that carelessness will lead to prison sentences is a gross exaggeration.  it is not even clear in the consultation that this is the logical consequence of the new proposal. Scaremongering  is not an argument.

Three of these arguments are, on the basis of these comments, not worthy of further consideration: they are, to be candid, complete nonsense.   If the profession can come up with nothing better than this during the course of the consultation process then I have little doubt that the proposal will sail through unhindered by their objections. The first does, however, merit slightly more attention.

There is nothing in the proposal made that does actually suggest that a person will necessarily be prosecuted  as a consequence of not understanding tax law.  Principally that is because  suggestion is made that there should be a de minimis  limit of lost tax revenue below which prosecution should not take place.  This seems a wise, and necessary precaution, meaning that those who are not represented by professional tax advisers who might, as a consequence, have the reasonable defence of not being fully familiar with tax law, are likely to fall out of any risk of prosecution.  Those that remain within the scope will either be committing quite significant offences, for which there is no excuse for non-declaration because either scale alone should mean that they should have taken the precaution of making enquiry as to their liability or that they were  deliberately hiding their affairs from both their advisers and HMRC,  in which case there is, again, absolutely no defence for non-declaration, but the need to prove this intent is avoided, so increasing the chance of successful prosecution against those who deliberately abuse the UK tax system. I would have concern without a de minimis limit: with it I do not.

There is also another fact to consider:  speeding whilst driving a car is a strict liability offence but in practice discretion is used  on occasion  when prosecuting precisely because there are always some margins for error where doubt must play a part. I suspect that  this would also be the case in the tax system so that, for example, if a person suffered real incapacity at the time of making the return I would very much doubt that HMRC would prosecute  simply because even if, by default, the person would be found guilty of a crime there would, at most, be a token penalty imposed, and therefore no one would seek to bring the charge.

In that case I have yet to find any substance to any of the objections that have been raised by the tax profession to this proposal.  But what I would say is that the government has also failed to set out its case appropriately.  They have seriously undersold the public policy reason for making this a strict liability offence and I am disappointed in their having done so. This is because  I think that their own understanding of the tax system  and the way in which it operates is wrong and that their understanding of the reason for tax penalties is also, as a consequence, incorrect.  The tax profession simply exploit this fact.  These are  arguments that I will be developing in much more depth in my new book, The Joy of Tax,  but which I will summarise here.

As a matter of fact, and as I have long argued,  I think that the vast majority of all taxation is paid voluntarily.  HMRC seem to think so as well, having said in recent years that 90% of all taxes are paid in this way (a figure I only dispute because they very obviously, and significantly, understate the tax gap when making an estimate).  The existence of the tax gap does not change this argument: it only proves that those who try to avoid or evade the obligation are acting outside the norms that have been created by society, where compliance is the expectation. The reason for laws compelling the payment of tax is not, then, to require anyone to pay, but because some do not conform to the norm that most willingly participate in with regard to payment and, as a matter of fact, it is always the case that criminal law (and all tax non-compliance can, ultimately, be considered criminal under existing arrangements: it is just means rea has to be proved)  exists to impose sanctions on those who do not comply with society’s norms rather than to enforce a norm upon society.  In that case all non-payment of tax, whether as a result of avoidance or evasion, is considered by definition to be non-compliant behaviour, which is precisely why there is so much moral outrage on the issue.

Now it so happens that of all  the various types of behaviour that are considered to be unacceptable by society when viewed from  the position of the ‘normal’  compliant taxpayer  that of  tax evasion by use of a tax haven  is often considered the most egregious,  a fact that is compounded by the widespread understanding that the use of such places never removes the obligation to declare a tax liability in the case for a UK resident and domiciled person, and that such nondisclosure must, therefore, just about invariably represent a deliberate act on the part of the person undertaking it,  coupled with the perception, which is soundly based, that those participating in this abuse do so because they know of the difficulties  tax havens put in the path of their crime being discovered.

Put all this together and  it is quite clear that there is a very strong public policy reason for the making such abuse the subject of a strict liability offence. Although I am the first to admit that there are many in this country who participate in tax evasion it remains a matter for public opprobrium,  and in its more extreme form, as offshore tax evasion is, a matter where significant sanction is sought, and rarely applied.  It is the very absence of that sanction at this extreme of unacceptability that is then take as a suggestion by some that this issue is of limited importance, which conclusion they then use to  justify their less egregious abuse and it is that that precise policy reason that this penalty is appropriate.

I am disappointed that the tax profession, which is supposedly so opposed to tax abuse, is so unwilling to recognise this, as I see it, fact.

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The Salter Lecture – now on line to listen to

Fri, 08/22/2014 - 12:12

I gave the Salter Lecture at the Quaker’s Yearly Meeting earlier this month. I have already published the text. The event was also recorded and is now available to listen to on line, here. The Q & A is also included.

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Developing nations need more than words from G20 tax reform

Fri, 08/22/2014 - 08:32

The following post was originally published on The Conversation and is by Prof Kerrie Sadiq of Queensland University of Technology, who I have met a couple of times and whose work I greatly admire. It is reproduced here with permission:

Tax reform is squarely on the agenda for the G20 Brisbane summit in November. The current international tax regime is broken and it’s going to take significant effort on a global scale to fix it.

In a recently released CEDA Report on securing the G20’s future, I recommended the role Australia could play in ensuring real and substantive progress is made in international tax reform.

There’s a very real need to ensure the Brisbane summit is not just a “talkfest”. One group that stands to significantly win or lose from reform, or lack of it, is developing nations.

Beyond the OECD

On the G20 tax reform agenda is the specific problem of tax avoidance. Base erosion and profit shifting (BEPS), promoting international tax transparency and the global sharing of information are prominent.

But an often overlooked priority is ensuring developing nations benefit from the G20’s tax agenda, particularly in relation to information sharing. This priority is perhaps the most important in ensuring genuine global success, especially in an era of rapid economic growth in these countries. The work of the G20 and OECD is to be commended, but the question that needs to be addressed is whether it will go far enough in solving the issues facing non-OECD nations.

At a functional level, if developing nations are to benefit from the work of the G20, the tax reform agenda must be responsive to the impact of BEPS in low-income countries.

Many of the world poorest countries rely heavily on corporate income tax. On average, it represents 20% of their revenue compared to 8-10% for developed countries. The same countries are also often the most affected by multinational entities engaging in profit shifting activities.

Data limitations mean it is hard to estimate the cost of aggressive tax planning, but few would challenge studies that indicate it costs developing nations billions of dollars a year. These are the same countries that rely on foreign aid and lack the resources to deal with poverty or fund health care and education.

Getting developing countries to the table

 

The OECD report to the G20 Development Working Group outlines the risks and challenges faced by developing nations. As expected, key findings include a lack of legislative measures needed to address BEPS, lack of information, a lack of capacity to implement highly complex rules and to challenge well advised multinational entities, and a lack of effective legislation and gaps in capacity as compared to developed nations.

The OECD report was produced in consultation with developing nations and various international organisations. However, it sought only to address the flaws in the current system rather than considering reasonable alternatives. If developing nations are to genuinely benefit from G20 tax reform further steps need to be taken.

First, developing nations themselves need to be at the table. The membership of the G20 partially addresses this. But at the recent International Tax Symposium in Tokyo and hosted by the Australian Treasury, we saw developed nations, supported by corporate sponsors, largely leading the charge. Many people question whether developing nations and civil society groups who represent them were able to participate on an equal footing.

Second, the G20 must be encouraged to draw on the work of international bodies beyond the OECD and with expertise in international tax. These bodies go further than addressing the flaws in the current system, and examine new models to combat tax avoidance. The IMF is one such example.

In its recent study on spillovers in international corporate taxation (the cross-border effects from national corporate policies), the IMF recognises the problem is especially marked and important for developing countries and that alternatives need to be considered. Some form of minimum taxation for example on turnover, strengthening worldwide taxation, and the use of a formula to allocate the tax base across jurisdictions are all discussed as possible alternatives.

Australia is in a unique position in the Asia-Pacific region to ensure the tax reform agenda is broad and genuinely inclusive. Developing nations must be able to contribute directly to discussions, and the focus of the G20 must extend beyond the priority areas of the OECD.

If developing nations are to truly benefit from the G20 tax reform agenda bolder measures that are arguably more effective and potentially easier to administer should be considered.

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In a world of need big companies have no idea what to do with their money

Fri, 08/22/2014 - 08:25

There’s a discussion in the FT this morning on the absurd prices being paid for IT company takeovers at present. That’s not especially interesting to me in itself, but the following comment is:

In situations such as these, it matters little if the acquiring company overpays. After all, big tech companies have never had more cash than they have today, and they are finding it just as hard to put their money to work as everybody else is.

I am sure that was not meant as political commentary; it is instead offered as an aside on the way the world is. But the fact is that in a couple of sentences a very great deal that summarises exactly what is wrong with the world right now is said.

Big companies have so much money they do not know what to do with it.

Worse than that: they are actually struggling to find a use for it.

And if they overspend the sentiment is ‘so what?’

In a world of need I think these are statements of fact, casually admitted. What is worse, government policy, to reduce tax for example, is intended to exacerbate this state of excess for the few who command these resources and exploit them for their own benefit.

This is not an environment of wealth creation, innovation, or of efficient markets. This is a world of exploitation, wealth preservation and the protection of power.

The author of those sentences did not intend to summarise all that is wrong with the corporate world, but he did.

In a world of need a few are living with excess beyond imagination and all power is tilted in their favour. No wonder we live in a world that is so stressed.

 

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Who’s that over my shoulder?

Fri, 08/22/2014 - 06:08

I’ve just spotted this:

That’s me being filmed last week for a new documentary – Return to Doncatraz.

There’s more on it here.

 

 

 

 

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Tax receipts suggest Osborne will borrow £13.9 billion more than forecast – and more than last year

Thu, 08/21/2014 - 09:20

The government has, within the last hour, published its statistics on the total tax take for July 2014. I have done a little number crunching.

Taking the first four months of the year take take from 2008-09 to 2014-15 has been as follows:

You would think George Osborne should be relieved; there is an upward trend.

That would be a deeply mistaken conclusion. Taking this data as a proportion of the total HMRC tax receipts for each year (using the 2014/15 OBR forecast here, table 2.8) the data looks like this:

On average from 2008-09 to 2013-14 33.7% of receipts were made from April to July. This year just 31% have been: a shortfall of 2.7%.

Total forecast HMRC receipts are £513,600, which I have always considered optimistic. The July shortfall suggests an undershoot of £13.9 billion.

Assuming all other forecasts remain as stated this would increase forecast borrowing this year from £83.9 billion to £97.8 billion – more than last year’s £95.7 billion.

George has a very great deal to be worried about.

 

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The fourth law of thermodynamics

Thu, 08/21/2014 - 08:31

I noted this on twitter from a number of people:

4th Law of Thermodynamics: The amount of energy required to refute bullshit is an order of magnitude larger than that required to create it.

Dealing with some of the comments on this blog is ample evidence that this is true

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Gambling with well-being

Thu, 08/21/2014 - 07:53

The fact that two members of the Monetary Policy Committee thought it appropriate to vote for interest rate rises now in the UK is, to me, little short of astonishing. Their justification was noted by the Bank of England as follows:

“These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up. They noted that it was possible that wages were lagging behind developments in the labour market to some extent.

“If that were true, wages might not start to rise until spare capacity in the labour market were fully used up. Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank rate in advance of them.”

So these members were willing to gamble the certainty of households going into insolvency, jobs being lost, recession returning and more to avoid a risk of inflation at a time when this is, in fact,  declining.

One has to ask if there is an exercise in either insanity or sado-masochism going on here.

Thankfully these two members were outvoted this time. Don’t expect it to last

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Why is the tax profession so intent on making excuses for abuse?

Wed, 08/20/2014 - 09:24

I note that the UK’s Chartered Institute of Taxation have issued a press release  that says in response to yesterday’s publication by the government of a new consultation on creating a criminal offence of failing to disclose offshore income on a tax return:

Tax advisers have welcomed the Government’s launch of a debate over penalties for offshore tax evasion but expressed concern over proposals for a new criminal offence for those who fail to declare taxable offshore income and gains, which would mean the authorities would no longer need to show the person had acted dishonestly or with criminal intent.

I am bemused by this response. Firstly, this legislation is very obviously a response to the situation found in recent trials where failures to secure convictions resulted from claims of innocent error however improbable I suspect those might have seemed to those bringing the cases.

Second, the CIOT response ignores the fact that the existence of this law does not require prosecution, it only permits it. There is always discretion not to proceed, and it is widely used.

But most importantly, I frankly do not see how there is anything but intent to act dishonestly or criminally in most cases involving non-disclosure of offshore income that has been deliberately located in a place where, to date, in most places automatic information exchange to HMRC has not taken place, which fact will have been known to all account holders. There can be exceptions: mental ill health resulting in mistaken non-disclosure is one I can foresee. That is why discretion is needed. But what this law says is that the onus of proof is on the tax payer, as it should be, and failure to act properly is a criminal offence.

Just what is wrong with that? And why do the tax profession have a problem with it?

 

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The NHS and private medical care do not mix. Why isn’t that obvious?

Wed, 08/20/2014 - 08:54

Time and again we have been told that the presence of private health care in NHS hospitals was an issue about which we should have no concern.

Yesterday we learned that there has been a significant increase in the amount of that private healthcare in NHS hospital trusts. That, of course, is hardly surprising. NHS hospitals are now allowed to raise up to 49% of all their income from the sale of private health care services and whilst none do make sales at anything like that (at present)  it would have been extraordinary if the directors of NHS Foundation Trusts (many of whom will, by self selection, approve of the broad thrust of government policy) had not taken the hint with regard to what has been expected of them.

The fact that those directors might embrace government policy, supposedly in the interests of the hospitals and communities they serve, does not mean that there is any obligation on us to agree with them on this issue and we would be wise not to do so. The reasons for that are, I should have thought, obvious.

Firstly, there is the simple and well known fact that when any issue is made for the target of attention behaviour towards it change. This is in the case of physics an idea enshrined in the uncertainty principle. In management it is well known that the moment you measure something it is automatically assumed that the issue has a higher priority than other issues. Inevitably, and almost invariably because management really do only measure things that are important to them, real on the ground behaviour changes to improve recorded performance. So, managers will undoubtedly be increasing their efforts to promote private medicine as a result.

Second, and as obviously, directors of NHS trusts also want to appease those to whom they report – which are not really the communities they serve but are actually the NHS’s senior management and, in turn, Jeremy Hunt, whose reputation for micro- management is well known. That means they too will really focus on this issue.

And it is the focus that matters most. It means that mainstream care is not given the attention it deserves as priority is given to other activity that is both outside the NHS and has an ethos contrary to it. And the fact that care outside the NHS and with an ethos contrary to it is being promoted is not chance: this is, of course the basis for the US health care model to which this government seems dedicated despite its proven and profound inefficiency.

As a result it is not whether or not private medicine is wrong per se that matters. I would not ban it. I see no reason to. Nor would I VAT exempt it and so subsidise it either. What does mater is that management and services in the NHS are being distracted from their real task by private medicine. And that does matter, a lot. And that’s precisely why the NHS and its hospitals should not be in this ‘market’.

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Adam Posen is right: the unemployed come first

Wed, 08/20/2014 - 08:26

US economist Adam Posen has an article I recommend reading in the FT this morning (and you can read 30 articles a month, free). The headlines say enough to summarise the argument:

First, there is an army of hidden jobless people, many of them supposedly self employed.

Second, this is massively damaging in multitudinous ways, from mental well being, to sustainability, to old fashioned growth if that’s what you want.

Third, inflation is much less worrying – unless you’re very wealthy.

And that’s what economic debate on rate rises is about now. It’s pretty much down to class struggle – wealth versus the rest. Maybe it was ever thus.

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Banking corruption: more of the same. When will it end?

Wed, 08/20/2014 - 06:39

Another day, and more banking scandals.

PWC amended a report to US regulators to hide their banking client’s abuse of US sanctions. They have been fined $25 million for doing so and have been barred from undertaking some work in New York for a limited period.

Standard Chartered are apparently unable to properly identify money laundering risk, also according to New York. They have also been fined, $300 million in their case. And they have been barred from handling some accounts for a period.

So more slaps on the knuckles and more fines that impact little ion the organisations in question. But no prosecutions and no sanctions on individuals.

So the abuse will go on. And on. And on.

And when it does no one should be surprised because that is what happens when a system has been captured for the benefit of a few.

 

 

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Inspiration

Tue, 08/19/2014 - 19:39

Sometimes one has to leave the keyboard behind and get a bit of inspiration.

This is my eldest son, our dog and Brancaster beach, north Norfolk, tonight:

Where was everybody?

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That old socialist, Adam Smith

Tue, 08/19/2014 - 11:01

Having offered one quote from Adam Smith’s ‘Theory of Moral Sentiments’ of 1759 yesterday I thought another might be in order:

When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self–love might suggest to us, prefer the interest of one to that of many. The man within immediately calls to us, that we value ourselves too much and other people too little, and that, by doing so, we render ourselves the proper object of the contempt and indignation of our brethren.

This comes from Part III, Chapter III itself entitled ‘Of the influence and authority of conscience’.

This  opinion from Smith does, I think, set this further opinion from him, from the Wealth of Nations (1776, Book I, Chapter II) in context:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

This is, of course, always used as justification for the benefits to arise from self interest, but in fact its own context makes it clear just how we should view this, and clearly links the matter to the first quote I offer:

But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.

Smith was quite clear: our own self interest had to be very clearly put in the context of concern for others. It’s odd how some have forgotten that.

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Is that what the ICAEW meant?

Tue, 08/19/2014 - 10:42

I was amused by this in an email this morning:

I know Google are tax experts, but the sort you want to hang out with?

(Yes, I know that is not what it meant)

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Forget the problems of monetary union – it’s tax union that matters with Scotland

Tue, 08/19/2014 - 08:48

Much of the discussion on  Scottish independence has focused on the future of the pound.  I am not going to decry the importance of money: it is obviously of relevance. However, since as a matter of fact Scotland can, if it wishes, use the pound after it leaves the UK, and as a matter of fact its influence over interest rates and exchange rates,  whether in a monetary union or not, is going to be minimal  there appears to have been undue prominence given to this issue.

In that case is that there is a much more important issue that should be right at the heart of the Scottish independence debate, which has been almost ignored to date. This is the issue of taxation and the union.  Since, as a matter of fact, it is very likely that Scotland will have significantly more control over its taxation affairs in the future,  whether it is independent or not, this appears to be a considerable oversight,  especially as it is a matter of some significance to us all whether we north or south of the border.

Whether or not Scotland votes for independence is yet to be decided. For that reason, right now, I will only consider the situation where Scotland does, in due course, come an independent state. The considerations will be different – and potentially at least as troubling – if devomax follows a No vote, but one blogpost has to limit its  ambitions.

The scale of the tax problem facing a new Scotland, and for that matter, a new Rest of the UK (RUK),  will be enormous in the case of a Yes vote. Some of these will be purely administrative: take for example the fact that quite a lot of tax is administered north of the border  on behalf of taxpayers in RUK and there  is an immediate issue to resolve. I do, however, assume that this will be within the capacity of both governments to solve in due course. Of much greater significance other legal, political and policy issues involved.

No doubt Scotland will, as Ireland did in 1922, inherit existing UK law as its own, with the added advantage in this case that it has already got its own established legal system. However, in quite significant areas the existing UK legal system is dependent upon international agreements. So, for example, will Scotland inherit the benefit of the UK’s double tax agreements? If  not, what will happen?  Likewise, will Scotland inherit the benefit of OECD membership?  These are not minor issues:  they control international financial flows and without answers both the taxation integrity of Scotland, and also its ability to provide answers to individuals and companies resident within it as to how their taxation affairs will work is  simply unknown.

Then there is the thorny question of the European Union. In this context is not an issue of whether or not Scotland is, as such, a member, but one of whether or not VAT will apply in Scotland given that this is an EU based tax with  most of the parameters for it established in Brussels.  It is known that EU based VAT can be extended outside the EU:  the UK does this in the case of its customs union with the Isle of Man.  Without, however, such an agreement with the UK, or in turn with the EU, there would, quite suddenly, be significant barriers to trading across the border with Scotland absent Scottish EU membership, which it appears cannot be taken for granted. I remain surprised that this has not come up in debate.

It is of special significance if Scotland does want to establish its own autonomy with regard to VAT rates, and there is no reason why it should not. VAT  is, after all, a major fiscal weapon, as was discovered in both  2008 and 2010. The moment that  happens  real trade barriers between RUK  and Scotland exist.  How will these be managed?  How too will the enormous potential for fraud that might result ( as is seen between Northern Ireland and the Republic) be tackled?

Then there is income tax. Will Scotland want to have different rates?  Much of the debate about autonomy is focused on granting such powers, but how will they be used?  Politically it would seem that the demand for greater equality is higher in Scotland than it is in the rest of the UK. Will the tax system be used to deliver this? If so, what sort of information exchange is going to be required between RUK  and Scotland to ensure that those who are resident in Scotland  pay higher rates of tax there, if due?

And,  just the sake of asking it,  how will residence between the two states be agreed  and will domicile have any role to play  or will this be considered a special case, as it has been in the history of UK and Irish taxation?

All of which still leaves the  thorniest question untouched,  which is corporation tax. We  know that Alex Salmond wants to reduce Scottish corporation tax rates to rival those in Ireland. This is, with all due respect to him,  a vain and wholly unproductive policy.  He has, first of all, to only notice the troubles  within the Irish economy to realise the difficulties that the resulting financialisation caused it.  Being a corporate tax haven  is like  drifting up the creek without a paddle. Once  the route is set there is nothing you can do about it:  you are a captive to its fortunes  and you have, in effect, given up all your options to a corporate sector that has captured significant  control  of your economic policy with any change in the corporate tax rate thereafter being nigh on impossible for fear of being held to ransom by the ever present threat that your oh so friendly tax-driven investors will simply up and leave. Is that what Scotland wants?  Being held captive by the City of London might be bad enough;  being held captive by a range of major investors might be no better.  Being subject to retaliatory  action for such aggressive tax behaviour might be even worse.

The fact is that  we know that tax competition is harmful to the well being of  democracy, effective government and those who are dependent upon the state for some or all of their well-being:  that is precisely why those who oppose the power of the state are so keen to promote it. The risk  is that an independent Scotland may be dragged into tax competition by politicians who know little of tax and who are  already being beguiled by corporate lobbying. Isn’t that worthy of discussion?

Scotland will undoubtedly, and necessarily, take control of its own fiscal policy if it is to develop any sense of economic autonomy.  I am the first to say that it should, and would uphold its right to do this,  within and without the union.  Equally, however, if ever there was a case of a country needing to set out a case for taxation cooperation to help achieve its goal then Scotland  should be the prime example. Clarity on precisely where  its fiscal policy might take it is fundamental if there is to be stability during a period of transition to independence.  Right now no such vision  seems to be on offer.  And that really worries me.

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Adam Smith got the corruption of class, wealth and power sussed

Mon, 08/18/2014 - 14:53

I do rather like this quote from the massively under-read ‘Theory of Moral Sentiments’ by Adam Smith (published 1759) quoted in a comment on this blog today:

This disposition to admire, and almost to worship, the rich and powerful, and to despise or, at least, neglect persons of poor and mean conditions, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.

I think that showed just where Smith was coming from.And please do read it in the context of the time. Whether such admiration of the rich and powerful is now necessary to ‘establish and to maintain the distinction of ranks and the order of society’ is decidedly debatable and I would argue wholly unnecessary.

For the record the quote comes from Part I, Section III, Chapter II entitled ‘Of the origin of ambition, and of the distinction of ranks’.

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The hideousness of right wing economics

Mon, 08/18/2014 - 09:25

There was what  many people might think a hideous article in the Financial Times over the weekend.  It had the title ‘Raising the minimum wage is the wrong way to deal with low pay‘. I have already discussed some aspects of this issue this morning  so I will not do so again here.  What I want to do is highlight the suggestion made in the article that the solution to the problem of low pay is, at least in part,  in the author’s opinion, better education.  However, they went on to say:

We do not have to educate everybody. It would be enough if a portion of the lowest-paid employees gained new skills. These newly proficient workers would gain directly, through higher wages and better employment prospects. But the people left behind would benefit indirectly, too. There would, after all, be fewer of them – and, facing less competition, each would command a higher wage.

This is a deeply telling and troubling paragraph in its own right.

First, note that there is a decision to be made to train some and not others in society. Who is to make that decision, I wonder? Is it to be based on aptitude at a very young age? Are we to then choose who will and will not win in a wage economy soon after infancy? And who will make that decision? Right winders normally say the state should not choose winners and losers and that the market should? What is the agency to be in this case? Will it be ability to pay? Everything else in this logic is about money, after all?

Second, note that the authors assume a neat easy relationship between training and reward. Would they like to tell all new graduates of this link? It is naive in the extreme to think it exists.

But most of all what is repugnant about this thinking is the commodification of us as people that it implies. We are to be treated as mere factors of production fitting into the grand scheme of things in which some will be rewarded well and others not nearly so much. With out fate apparently ordained or chosen for us. There is a natural supremacist argument lurking just below the surface in such claims. They don’t even seek to pretend otherwise, suggesting, quite openly that some should be ‘left behind’.

Down this route is fascism, I think. This is not economics. This is a prescription for social engineering for an apparently pre-destined elite already in existence who will bestow the favour of training on others as they see fit so long as they fit into the ruling decision makers’ scheme of things. I have rarely read something so hideous in a mainstream paper.

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There isn’t an army of low skilled workers in the UK. There are lots of underemployed skilled people

Mon, 08/18/2014 - 09:03

Larry Elliott has a piece on the UK’s productivity in the Guardian this morning and whilst Larry and I may both be members of the Green New Deal group I have to say that I think on this occasion Larry is reaching inappropriate conclusions.

I stress that in saying that I do not think Larry is wrong, per se. He asks conventional questions on productivity and comes to fairly conventional answers. But as is so often the case in economics, it is his assumptions that are awry. This is clearly indicated in his last paragraph where he says:

A new army of low-paid, low-skill workers is depressing the level of average earnings growth across the economy and forcing the Bank to revise down the level of unemployment consistent with stable inflation.

I seriously doubt there is such an army. Yes there are a lot of people willing to take low paid work. It’s also true that those people have, in too many cases, very limited demands made of them. But it’s simply wrong to think that they are  unskilled as a consequence.  A great many of them will be very skilled,  and will be vastly under using those aptitudes  in the work that they are asked to do.

It is true that this may force the Bank to revise down the level of unemployment consistent with stable inflation,  but in my opinion what this really implies is that the wrong question with regard to productivity is being asked.

I think it fair to say that productivity is considered a measure of output, usually measured in in terms of monetary revenue, compared to the value of inputs into an economic process, those two inputs usually being labour and capital.  Implicit, therefore, in this process is a measure of profit,  which will reflect the difference between the value of inputs and outputs.  There is also implicit in this definition an expectation that labour output per unit input should rise as capital is increased; the relative reduction in the cost of labour therefore providing the return to capital.

What Larry makes clear – and what many others are confused by,  including the Bank of England –  is that these relationships are not working as expected.  The relative price of labour is going down  whilst the volume of labour used is increasing  with the result that apparent productivity is falling and returns to capital are at most stable, meaning that more employment is being generated without there being any risk of inflation.  This is an environment  that most economists have never considered a plausible scenario  and for which they have not, as a result, planned.  It is, however, that lack of thinking that explains their confusion.

Firstly, this outcome was obviously foreseeable.  For three decades there have been continual attempts by successive governments to undermine the power of organised labour, to reduce its capacity to enforce its rights, to increase the power of employers to dispense with labour at will, and to reduce overall collective wages.  The result is the current labour market.  It is not one that business apparently wants.  It is most certainly not one that most employees want.  It is clearly one that is disadvantageous to society.  But it is the outcome that some theoretical  politicians and their dogmatic followers wished to create.  Be careful what you wish for might be the message to the very many politicians have been caught up with this neoliberal mantra.

Second,  the outcome is one that economists had not foreseen because none of those who worked on the creation of this idea of the reformed supply-side of the labour market had ever considered the impact of inequality on the outcome that they were seeking to create.  It had not, and still does not,  occur to them that inequality is a factor in economic well-being, and that increases in it have significant impact upon society.

Thirdly, and again, those economists who prescribe this outcome did not presume that the consequence would be the supplier the massive subsidy to business requiring either the governments run deficits to fund a social security system or that taxation be increased on those in higher paid work to  effectively reallocate labour reward to capital  through this process.  That is because those who promote such ideas (and  two of them had an article in the Financial Times this weekend)  do not only argue the lower wages, they also argue for lower education ( extraordinarily)  and at the same time assume that there will be no benefits to support those on such low wages so that people will have no choice but take them.  These are all entirely repugnant assumptions  in modern society.

So,  what is the answer?  In my opinion we  have simply got the definition of productivity wrong.  In the 21st-century, when at long last most people realise that we are living in a world of decidedly finite resources that we have to preserve to the maximum possible degree if we want to protect the interests of future generations  than any economic relationship that is indifferent, with the exception of monetary  reward, to the relationship between labour usage and capital,  including natural resources  has to be fundamentally flawed. In that case a  new relationship has to be defined.

The first assumption in that new relationship is that because labour  is a renewable, but at the same time instantly depleted resource ( because if we do not use it in the present it is gone forever),  then it must be the variable whose use is maximised in the production process.  We have an absolute duty to offer work to all those who want it to the limit of their reasonable availability, but no more:  it is of course a wholly false assumption that all our well-being is dependent upon our economic consumption.

Second,  the idea that capital is homogenous is absurd:  it is not.  Some capital very clearly enhances human well-being almost without limit.  This is, in effect, intellectual property,  which is one of the reasons why I have so many difficulties with  artificial restrictions on its use when so much should be, and is, in fact created by and for the benefit of populations by the governments which represent them but which is restricted in use because of the commercial nuance applied to it in the last stage of development.  We do, very clearly, need to invest in this intellectual capital which will, when properly focused, release the requirement to use the natural resources which have, for so long,  been considered core to the  definition of capital but to  which however, no return can, as a matter of definition, ever be paid and which as a consequence create the wholly destructive concept of rents within society and economies, and which in turn contribute enormously to imbalances created by inequality.

It is only when we rebuild concepts of productivity so that  return to labour, and not capital, are the focus  and when the objective is to minimise the input of nonrenewable capital ( with a resulting minimisation in rents to be paid)  with as much of the intellectual property required to deliver this process being made as freely available as possible  that we will actually get definitions of productivity right. Until we do  conventional economists will remain confused.

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The shrinking UK is a Cowardly State

Mon, 08/18/2014 - 06:26

I was curious to note a couple of adjacent headlines in an email from the FT, received this morning. They looked like this:

Three years ago I wrote The Courageous State in which I described the current state of politics in the UK as The Cowardly State. We had, I argued, governments who ran away from their responsibilities. Now we have headlines making clear that this is what people think the UK is doing.

The confidence of the Scots to challenge for independence is at least in pat based on a lack of confidence in what the UK has to offer and a belief that they can build a better country for themselves.

And the UK so lacks confidence in itself it wants to run away from Europe. What is extraordinary about the whole EU exit lobby is not its positive vision – because it is hard to find one, but its negativity.

All these factors are in their own way measures of the impact of the thinking of the Cowardly State. A great many Scots want what they have always wanted – a more Courageous State. Banks think the UK has lost vision. The EU exit is a sign of politicians without vision only able to sell the idea of a negative narrative.

Why the lack of confidence. I’d have to suggest, in part, you need to read the book to explore that issue. But there are other clues in the morning press. The average gap between the pay of the top earners in FTSE companies and the average pay of their staff has increased to a ratio of 1:143. That, of course, means that in many cases it is very much higher. WPP and Next, both with top earners closely associated with the current government, are vases where the gap is much higher. And as the FT notes in an article this morning, people in the UK have a much better than average perception of what the real income distribution in the UK is than do people in, say, Germany, France and the USA. We know as a result that we are being exploited and that there is an elite that is using the current policy of the government as a mechanism for personal enrichment and that the government is complicit in this process. No wonder there is disenchantment.

What is so odd is that there is no strong countervailing political narrative being offered – barring the Greens – that seeks to embrace this disenchantment. And that too is a reason for people’s negativity and disengagement with the process itself. All of which is deeply depressing for a Monday morning.

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