David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Needed: A Radical Vision That Brings In Lower and Simpler Taxes for All

    It has been widely remarked that our Chancellor of the Exchequer doesn’t appear to have a vision for the tax system. Does this matter? It assuredly does.

    I have often asked why it is that many small countries are so economically successful. The answer, I think, is that their vulnerability makes it essential to get public policy right.

    They simply have no leeway to indulge in grossly incompetent government. That applies, amongst other things, to the three key fiscal questions: how large the government should be; what it should spend money on; and how it should raise the money to pay for whatever it decides to do.

    My favourite example is Singapore, which could have become a 
basket case. Instead, its economic performance has been marvellous, to the point where it now has a higher per capita GDP than its former colonial master, namely us. This is largely thanks to superbly effective government.

    Getting the economic contribution of government right first demands that the governing party is clear about what the state does best and, relatedly, what it is that only the state can do. Making the tax system work effectively clearly falls into the latter category. That is what makes Mr Hammond’s lack of vision so damaging.

    What should he be aiming to do? You could argue that the tax system should be sufficiently simple that anyone and everyone can readily comprehend it and accordingly be aware of the influence of tax on their after-tax returns from different activities.

    Actually, in my view, in an ideal world, the tax system would be so simple and the tax rate so low that people might as well be ignorant of these details. Other than where the public interest is deemed to lie in restricting the production or consumption of “bads”, such as pollution, or the production of public goods or things that have externalities, the best result is achieved when no economic decisions are determined by the influence of tax. Effectively people can just ignore it.

    Admittedly, in practice, British chancellors are seldom in a position to follow such an agenda. They are usually left scrabbling around to find money from any old source, while simultaneously feeling obliged by political forces to dish out much of it to supposedly deserving causes. The result is plain for all to see – a hotch-potch of a tax system with gross distortions to incentives.

    The way to tackle this issue is to think through in advance what you want to achieve with the tax system and to lay out a plan. When the Chancellor has some available fiscal resources to dispose of, he should then use these to make progress towards the desired goals.

    This is critically important because moving to a rational system of tax always creates losers as well as winners and it is important to be able somehow to buy out or compensate the losers. Last week’s shambles over raising national insurance contributions for the self-employed was a clear example of fiscal policy-making without vision.

    National insurance is a tax by another name. It needs to be integrated with income tax. But getting this right, and avoiding the imposition of heavy losses on groups such as the self-employed and pensioners (who don’t pay national insurance), is a mammoth task.

    I believe that the Chancellor should have as his objective the abolition of national insurance. He should make a start by gradually lowering the standard rate, thereby reducing the gap between the effective overall tax rate paid by the employed and self-employed.

    Admittedly, for the next few years the Chancellor is bound to be absorbed with getting the deficit down and it seems unthinkable that there could at some stage be a different agenda.

    Yet, in the 1980s the public finances moved from huge deficit to significant surplus – before the recession of 1990-92 brought the deficit back with a vengeance. Nigel (now Lord) Lawson, the Chancellor during the key part of the 1980s, knew what to do with the room for manoeuvre that the improving public finances afforded him. He believed in lower taxes and a simpler tax system. That is what he delivered.

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    Indian PM Modi Wins Sweeping Victory in Crucial State

    Here is the opening of this informative report from VOA:

    NEW DELHI — 

    Indian Prime Minister Narendra Modi's Bharatiya Janata Party won a landslide victory in the politically crucial northern state of Uttar Pradesh, giving the Indian leader a huge boost half way through his term.

    The country’s most populous state, where the BJP swept away the ruling regional Samajwadi Party, was the biggest electoral prize of the five states which went to the polls in recent weeks.

    "I give my heartfelt thanks to the people of Uttar Pradesh. This is a historic victory for the BJP; a victory for development and good governance," Modi said.

    Modi personally led his party’s campaign in Uttar Pradesh, promising growth and defending his controversial ban on high value currency notes, which many had feared would alienate poor voters in an impoverished state.

    But in a ringing endorsement of the Indian leader, the BJP won the biggest victory secured by any party in recent decades in the battleground state. According to the Election Commission, it was ahead in more than 320 seats in the 403-member state assembly.

    BJP’s chief strategist in the polls, Amit Shah, attributed the huge win to Modi’s pro-poor policies and the “politics of performance.” Calling it a historic mandate, he said that “The country’s poor people have put their faith in a big way in Mr. Modi.”

    Party workers held raucous celebrations outside the party office in New Delhi and Uttar Pradesh’s capital, Lucknow, setting off fire crackers and dancing.

    Political analysts said the resounding victory in Uttar Pradesh puts the BJP in a commanding position ahead of the 2019 general elections and enhances Modi’s reputation as a strong leader who can make politically risky decisions.

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    Rutte, Wilders Swap Jibes in Debate 36 Hours Before Dutch Vote

    Here is the opening of this topical article from Bloomberg:

    Dutch Prime Minister Mark Rutte and populist Freedom Party leader Geert Wilders questioned each other’s credibility and integrity as they faced off on live national television for the first time in the country’s election campaign, just 36 hours before the polls open.

    The Liberal premier said he will not trust Wilders again after the Freedom Party walked away from supporting Rutte’s first minority cabinet in 2012 amid an economic crisis. “I’m not going to work with such a party again,” Rutte said at the end of the debate in Rotterdam Monday. “Not in a cabinet, and not even relying on you for support outside the government. No, never ever.”

    Wilders accused Rutte of breaking promises he made before the elections in 2012. “Who still believes Rutte? I still see him standing there,” the Freedom Party leader said. “We would get tax cuts, a tougher policy on immigration, we would get 1,000 euros. And what came out of these promises? We had record after record immigration. And taxes only increased.”’

    Three opinion polls Monday showed little change in the overall situation in the final stretch before the election. Two showed Rutte’s Liberals ahead of the anti-Islam, anti-European Union Freedom Party by a margin of three to four seats, with the other showing the two parties in a tie. Rutte has overtaken Wilders in most surveys as polling day approaches.

    No party is set to win more than a fifth of the seats in the 150-member lower house, so a multiparty coalition will be needed. All the other major parties have ruled out working with Wilders.

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    Modi Win Spurs Jump in Indian Stock Futures, Rupee Forwards

    This article by Abhishek Vishnoi for Bloomberg may be of interest to subscribers. Here is a section:

    India’s stock futures and currency forwards jumped after Prime Minister Narendra Modi’s bigger-than-expected win in state elections increased expectations for a continuation of his reform agenda.

    Modi’s Bharatiya Janata Party won 312 seats in the 403- member assembly of Uttar Pradesh, according to the Election Commission of India, up from 47 in 2012. The results of the race in India’s largest state were seen as a litmus test of Modi’s popularity and reforms, including opening up the country to more foreign investment and seeking to introduce a goods and services tax, ahead of general elections in 2019.

    “Though markets expected the BJP to do well in polls, the ultimate result surpassed even the most optimistic assumptions,” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore. “These election results increase the expectation toward further reforms” and will be treated “very positively,” by markets, he said.


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    Intel to Acquire Mobileye

    This press release may be of interest to subscribers. Here is a section:

    “As cars progress from assisted driving to fully autonomous, they are increasingly becoming data centers on wheels. Intel expects that by 2020, autonomous vehicles will generate 4,000 GB of data per day, which plays to Intel’s strengths in high-performance computing and network connectivity. The complexity and computing power of highly and fully autonomous cars creates large-scale opportunities for high-end Intel® Xeon® processors and high-performance EyeQ®4 and EyeQ®5 SoCs, high-performance FPGAs, memory, high-bandwidth connectivity, and computer vision technology.

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    SEC Decision on the proposed Winklevoss bitcoin ETF

    Thanks to a subscriber for this link to the full text of the SEC’s decision to disallow the bitcoin ETF. Here is a key section:

    As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.

    The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated


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    China Should Deal With North Korea

    Here is the opening of this Editorial from Bloomberg:

    Chinese President Xi Jinping seems interested in embracing the role of global steward -- champion of the liberal political and economic order the U.S. administration seems uninterested in promoting. Now is his moment to prove he’s serious.

    China’s erstwhile client North Korea has become an urgent threat to stability -- Xi’s stated top priority -- from one end of Asia to the other. Japan’s military is now on its highest state of alert, after the North’s latest round of missile tests landed in Japanese waters. The first elements of a powerful U.S. missile defense system, known as Terminal High-Altitude Area Defense (THAAD), have landed in South Korea; the system, which China fiercely opposes, could be operational by next month. In Malaysia, meanwhile, North Korean agents allegedly used a banned nerve agent to assassinate dictator Kim Jong Un’s half-brother, who had reportedly been under Chinese protection. Kim’s regime is now holding Malaysians in North Korea hostage, while Malaysia is preventing North Korean diplomats from leaving the country.

    After the assassination, China cut off any further coal imports from North Korea this year. But the impact of the move remains uncertain. And, as a recent United Nations report makes clear, North Korean agents are continuing to use Chinese middlemen to fund the regime’s illicit missile and nuclear programs.

    Wednesday’s proposal from Chinese Foreign Minister Wang Yi for North Korea and the U.S. to back down simultaneously -- the former by halting nuclear and missile tests, the latter by suspending joint military exercises with South Korea-- is constructive. But it’s been raised before and has little chance now: The U.S. has already ruled out any actions that might reward Kim for bad behavior.

    China may have legitimate reasons for not wanting to go further and risk destabilizing the Pyongyang regime. The mainland would bear the brunt of any refugee exodus from the North and faces the unsettling prospect of a unified Korea -- and U.S. troops -- along its border. Chinese leaders may also be right that the U.S. needs to find a way to sit down and negotiate with North Korea, even if talks don’t lead to the elimination of its nuclear arsenal. Left unchecked, the North could within a few years deploy a nuclear-tipped ballistic missile capable of reaching the U.S. mainland. If talks can halt its progress before then, they are worth pursuing.

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    Race to Bottom on Costs May Cause Oil to Choke on Supplies

    Here is the opening of this topical article by Bloomberg:

    Houston hosted two events this week: the nation’s largest energy conference and the town’s famous rodeo. They have more in common than you’d think.

    In both cases, the key for top performers is how efficiently they perform. For cowboys, it means tightly controlling every muscle to stick on a bucking bronco. For energy executives, it means controlling every cost to lower the break-even price and survive what’s been a wild ride on the oil market.

    When companies can lower the price at which they break-even, it means they can approve more projects and produce more oil, keeping dividends safe and investors happy. The risk: By drilling up their share price, they can also end up drilling down the price of oil. Welcome to 2017, the year after a two-year market rout made companies more efficient. At the CERAWeek by IHS Markit conference this week, fears of too much supply were palpable.

    "Everyone is driving break-even prices down," Deborah Byers, head of U.S. oil and gas at consultants Ernst & Young LLP in Houston, said in an interview at the meeting, the largest annual gathering of industry executives in the world. "It isn’t just shale companies; it’s everyone, from deep-water to conventional."

    As the conference was ongoing, those fears took physical form as West Texas Intermediate, the U.S. crude benchmark, plunged 9.1 percent this week, closing below the key $50-a-barrel level for the first time this year. It settled at $48.49 on Friday.

    The slump came as Scott Sheffield, chairman of Pioneer Natural Resources Co., said prices could fall to $40 if OPEC doesn’t extend its existing agreement to cut production. Shale billionaire Harold Hamm, the CEO of Continental Resources Inc., warned undisciplined growth could "kill" the oil market.

    The buzzword was efficiency. In panel discussions and keynote speeches, executive after executive tried to outdo rivals in announcing their low break-even prices. Eldar Saetre, head of the Norwegian oil giant Statoil ASA, told delegates that break even for his company’s next generation of projects had fallen from $70-plus to "well below" $30 a barrel.

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