Meaningful freedom has always
implied responsibility.

At 13:00 today, I attended a busy Westminster Hall debate on Equitable Life secured by Nicola Blackwood MP, to which the minister, Mark Hoban MP, responded.

Nicola covered the situation incisively. Many of us made an exception to sign the Equitable Life pledge during the campaign and we do expect it to be fulfilled. Many older people are living in poverty as a result of Equitable Life’s failure. Many concerns have been expressed to MPs since the election. We have inherited a scandalous legacy from Labour and EMAG members have lost faith in government as a result.

I must dash to my next meeting, so I will post a link to this debate as soon as it is available on Hansard.

Update: the full debate, which I recommend, may be found here. In particular, from the Minister’s response:

I remind hon. Members that no final decisions have yet been made on many of the important issues associated with the scheme. I want the decisions to be in the best interests of policyholders and taxpayers, and I encourage EMAG and others to be involved so that we can move the process on and find a resolution, for which policyholders have waited for many years.

I will give more details on our approach and the next steps in the process when Sir John Chadwick’s final report is published, but I can confidently say that we are moving towards our objective of resolving the issue. We are now reaching a crucial stage in the story of the Equitable Life payment scheme. What happens in the coming months will be decisive in laying out how the scheme operates and the quantum of payments that will be made to policyholders. I encourage all MPs to engage in the debate. This is certainly an issue that we must get right.

Concerned constituents — including basic rate taxpayers, pensioners and private residential landlords — have written to me about the Government’s proposed changes to Capital Gains Tax (CGT). In this post, I will set out details of the tax, the proposal, the arguments and my position.

I conclude that the way to raise CGT revenues is to reduce the rate, ideally to under 10%.

CGT and the proposals

Via HMRC, “Capital Gains Tax is a tax on the profit or gain you make when you sell or ‘dispose of’ an asset.”  Presently, there is an Annual Exempt Amount of £10,100 for each individual and £5,050 for most trustees. One pays tax on the excess over that amount at a flat rate of 18%.

There are a number of reliefs, including, for example, Entrepreneur’s Relief:

If you qualify for Entrepreneurs’ Relief, the amount of qualifying gains liable to Capital Gains Tax is reduced by four-ninths, resulting in an effective rate of 10 per cent on all qualifying gains up to £1 million. Claims can be made on more than one occasion up to a £1 million lifetime limit.

The Coalition Agreement says (emphasis mine):

We will increase the personal allowance for income tax to help lower and middle income earners. We will announce in the first Budget a substantial increase in the personal allowance from April 2011, with the benefits focused on those with lower and middle incomes. This will be funded with the money that would have been used to pay for the increase in employee National Insurance thresholds proposed by the Conservative Party, as well as revenues from increases in Capital Gains Tax rates for non-business assets as described below. The increase in employer National Insurance thresholds proposed by the Conservatives will go ahead in order to stop the planned jobs tax.

and

We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.

That is, the Coalition plans to transfer wealth from those making non-business capital gains to those on low and middle incomes.

The arguments

At The Telegraph, Ian Cowie says:

Investors with substantial portfolios of property and/or shares who have not protected them in tax shelters – such as trusts, individual savings accounts (ISAs) or pensions – face the daunting possibility that HM Revenue (HMRC) may grab half their gains.

This could destroy many people’s plans to use buy-to-let portfolios or shares accumulated over long periods of time to fund retirement.

At ConservativeHome, Philip Booth, Editorial and Programme Director of the Institute of Economic Affairs, argues that the Conservatives have made a big mistake in accepting Lib Dem proposals for Capital Gains Tax. He says that CGT is seriously misconceived, that it raises little revenue and that it can do much economic harm.

In particular, Booth argues that CGT is a double tax:

But the really pernicious aspect of CGT is that it is generally a double tax. We think of capital gains enriching somebody as if they arise like manna from heaven – and therefore are worthy of being taxed. But investments are valued for the income they produce. The values of investments fluctuate up and down, but investments only go up in value in a sustained way when investors expect them to be more profitable in the long term. Those profits, of course, will be taxed when they are earned.

Furthermore:

It is beginning to dawn on people that one of the reasons for the financial crash was the foolish over-taxation of equity finance that exists in nearly every developed country. It gives incentives to companies to load themselves with debt and create complex financial engineering instruments. It may not have been the main cause of the crash but the instinctive dislike that governments have for “profits” and the way they treat profits in the tax system needs to be reformed. The coalition wishes to move in the opposite direction.

He concludes:

As it is, this proposal to increase capital gains tax is deeply flawed. It is a kick in the teeth for savers; it is a kick in the teeth for those who cannot afford to avoid it; and it is a kick in the teeth for companies that do not load themselves with debt. The effects on the private rented market could be most regrettable. Why anybody should want to bias the tax system further in favour of debt financing in the wake of the financial crash is a mystery to me and why anybody should want to tax savings and investment yet further, as we recover from the lowest savings ratio in history, is completely baffling.

The Adam Smith Institute, has produced a report, which (emphasis mine):

reviews international evidence on the effect of capital gains tax rises on government revenues, finding that tax rises tend to decrease revenues while tax cuts tend to increase them. It suggests that aligning CGT rates with income tax, as the UK government has proposed, would significantly hit revenues and worsen the deficit, as well as discouraging much needed investment. It also refutes the idea that CGT is primarily a tax on the rich, suggesting instead that CGT hikes will hit ordinary families and – in particular – retirees. Finally, the report describes the idea that people can easily shift income to capital gains and thus avoid taxes as a theory in search of some evidence, pointing to numerous countries with high income taxes and low capital gains taxes where this does not seem to be problem.

The report includes an illuminating chart which shows that, in the United States, “every time the capital gains tax has been cut, capital gains tax revenues have risen. Every time the capital gains tax has been raised, capital gains tax revenues have fallen.”

Capital gains realisations and tax rates

The revenue-maximising rate discovered by a study reported in that paper was 9.69%.

The Adam Smith Institute paper concludes:

What then is the correct policy response at the current time? It is clear that the proposal to align Capital Gains Tax with income tax rates, increasing it from 18 percent up to 20, 40 0r 50 percent is inappropriate. It fails to distinguish as it should between short-term speculative gains and long-term asset appreciation. There should be such a distinction, as there is in the US, where gains realized within a year are taxed as income, and longer-term gains are taxed for most people at 15 percent.

The UK could respond similarly, taxing one-year gains at income tax rates, but keeping the 18 percent rate for longer-term appreciation. If the aim were to maximize revenue, that might be achieved by cutting the 18 percent rate to 10 percent. For maximum economic benefit a taper could be introduced to phase it out to zero for assets held for 5 years or more. Either of these policies would be far less damaging than the current proposal.

In his diary, John Redwood MP argues similarly. After suggesting that gains in under one year should be taxed as income, he writes:

I therefore suggest that longer term gains should be taxed at lower rates. If you taxed 2 year gains at 30% and three year gains at 20%, higher rates than the current one, you could tax gains of four years or more at 10%. This should increase the total revenues from CGT by the second year, and offer a stimulus to longer term investment. I would myself go further and offer no capital gains after five years, to send a strong signal to the world’s investors that the UK is back in business as a favourable location.

I have been swamped with support for these suggestions, both from around the country and from Conservative MPs. It would send a strange signal if a Lib/Con government decided to more than double the CGT rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good.

My position

Increasing the tax free allowance for low and middle income earners is an entirely laudable aspiration. I would go further than the LibDem proposal of a £10,000 allowance. It should be possible to buy a modest home, raise a small family and provide comprehensively for their needs without paying income tax at all. The threshold necessary to realise that aspiration is, of course, unrealistic today.

So, how to pay for increases in the income tax allowance? Increases in the rate of CGT can be expected to reduce CGT revenues. CGT is a voluntary tax: it can be avoided by retaining assets. Moreover, something called the Laffer Curve means that beyond a certain point for every tax, increasing its rate reduces revenue because people adjust their behaviour.

Increasing CGT rates would not pay for an increase in income tax allowances: quite the reverse.

If we wish to maximise CGT revenues, then we should learn from the United States’ experience and lower CGT to around 10%, tapering it out altogether for assets held for over five years.

The Coalition Government plans “generous exemptions for entrepreneurial business activities”, but entrepreneurship is the act of bearing uncertainty, so all investment in capital to fund future expenditure is entrepreneurial. Any increase in Capital Gains Tax is a discouragement to entrepreneurship and self-reliance.

There are also arguments to be made about the injustice of sudden changes in taxation and the manner in which they are implemented, but that is a task for another day.

In summary, I am opposed to raising Capital Gains Tax rates because:

• It would reduce CGT revenues.
• It would hit ordinary families and retirees.
• It would discourage self-reliance and personal entrepreneurship.
• It would encourage employment, not entrepreneurship, which we desperately need.
• It would discourage capital formation, which is the essence of rising living standards for ordinary workers.

In a rational world of moderate government spending, we would simplify all taxes and level income tax down towards a new, lower rate of CGT while increasing tax free allowances.

Labour, tragically, has ruled out that option.

See also

My review of Roger Koppl’s Big Players and the Economic Theory of Expectations:

Big Players are privileged actors who disrupt markets. A Big Player has three defining characteristics. He is big in the sense that his actions influence the market under study. He is insensitive to the discipline of profit and loss. He is arbitrary in the sense that his actions depend on discretion rather than any set of rules. Big Players have power and use it.

David Cameron has said that the era of big government has run its course. The foreword to our manifesto sets out the rotten state of Britain (see also Butler) and the change we offer: from big government to big society.

What then is the history of big government? How did it come about? Has it run its course? Why has big government failed? All this prompted me to read again, but carefully this time, Martin Van Creveld’s The Rise and Decline of the State.

Van Creveld argues that government and state are emphatically not the same. He explains that the government “is a person or group which makes peace, wages war, enacts laws, exercises justice, raises revenue, determines the currency and looks after internal security on behalf of society as a whole, all the while attempting to provide a focus for people’s loyalty and, perhaps, a modicum of welfare as well”. On the other hand, he writes, the state is merely one form of government which may be considered neither eternal nor self evident.

The book’s range is astonishing. Van Creveld begins with prehistoric forms of society before charting the rise of the state, the state as an instrument, the state as an ideal, the spread of the state and, more recently, the decline of the state. Tribes without rulers, chiefdoms, city-states and empires all reached their limits. The monarchs triumphed against church, empire, nobility and towns. Bureaucracies were created which provided infrastructure, monopolised violence and, in short, delivered Leviathan. The state was idealised and used to discipline the people. Money was conquered and total war discovered. The state spread across the world. Major war waned, partly due to the impossibility of total war in the nuclear age. State welfare went into retreat. Technology spread internationally. Finally, the people withdrew their faith in the state.
Read more

Via PharmaTimes | EU to probe pharma over “false pandemic”, this deserves a longer post:

The WHO’s “false pandemic” flu campaign is “one of the greatest medicine scandals of the century,” according to Dr Wolfgang Wodarg, chairman the PACE Health Committee, who introduced the parliamentary motion. “The definition of an alarming pandemic must not be under the influence of drug-sellers,” he adds.

Is this really the best way to secure public health?

A friend recently sent me this celebrated letter on the absurdity of bureaucracy. If you have not seen it, enjoy:

Rt Hon David Miliband MP
Secretary of State.
Department for Environment, Food and Rural Affairs (DEFRA),
Nobel House
17 Smith Square
London
SW1P 3JR

16 July 2009

Dear Secretary of State,

My friend, who is in farming at the moment, recently received a cheque for £3,000 from the Rural Payments Agency for not rearing pigs.. I would now like to join the “not rearing pigs” business.

In your opinion, what is the best kind of farm not to rear pigs on, and which is the best breed of pigs not to rear? I want to be sure I approach this endeavour in keeping with all government policies, as dictated by the EU under the Common Agricultural Policy.

I would prefer not to rear bacon pigs, but if this is not the type you want not rearing, I will just as gladly not rear porkers. Are there any advantages in not rearing rare breeds such as Saddlebacks or Gloucester Old Spots, or are there too many people already not rearing these?

As I see it, the hardest part of this programme will be keeping an accurate record of how many pigs I haven’t reared. Are there any Government or Local Authority courses on this?

My friend is very satisfied with this business. He has been rearing pigs for forty years or so, and the best he ever made on them was £1,422 in 1968. That is – until this year, when he received a cheque for not rearing any.

If I get £3,000 for not rearing 50 pigs, will I get £6,000 for not rearing 100? I plan to operate on a small scale at first, holding myself down to about 4,000 pigs not raised, which will mean about £240,000 for the first year. As I become more expert in not rearing pigs, I plan to be more ambitious, perhaps increasing to, say, 40,000 pigs not reared in my second year, for which I should expect about £2.4 million from your department. Incidentally, I wonder if I would be eligible to receive tradable carbon credits for all these pigs not producing harmful and polluting methane gases?

Another point: These pigs that I plan not to rear will not eat 2,000 tonnes of cereals. I understand that you also pay farmers for not growing crops. Will I qualify for payments for not growing cereals to not feed the pigs I don’t rear?

I am also considering the “not milking cows” business, so please send any information you have on that too. Please could you also include the current Defra advice on set aside fields? Can this be done on an e-commerce basis with virtual fields (of which I seem to have several thousand hectares)?

In view of the above you will realise that I will be totally unemployed, and will therefore qualify for unemployment benefits. I shall of course be voting for your party at the next general election.

Yours faithfully,

Nigel Johnson-Hill

Further reading

• Mises, Bureaucracy (PDF, buy at Amazon)

From bella gerens, an excellent explanation and defence of libertarianism:

The truth is that advocates of freedom are found all over the political spectrum, but the only true libertarians are the ones who advocate it at all times in all circumstances, from the bedroom to the wallet – who believe that ‘freedom from’ is the only state of being consistent with the dignity and majesty of humankind.

‘Freedom from’ is the most important part of that ideology. Freedom from coercion. Freedom from interference. Freedom from oppression.

‘Freedom to’ is where the misunderstandings enter. People on the right think libertarians are advocating freedom to burgle, rob, rape, murder – because they read ‘freedom’ to mean ‘freedom to do whatever you please.’

People on the left think libertarians are advocating exploitation, pollution, callousness, and the primacy of making (and keeping) money above all else – because they read ‘freedom’ to mean ‘freedom to do whatever you please.’

And both sides think libertarians consider the laws we have prohibiting these activities to be a restriction on freedom.

When will they realise that they don’t understand?

It is now undeniable that a century or so of managerialism — of thinking the state knows best and is entitled to trespass on your private property for your own good and for that of your fellows — has succeeded in creating a segment of society within which anything goes and from which it is increasingly hard to escape: a segment populated by libertines who torment themselves and others despite a state which tries desperately to care for them at vast expense, an expense it forces on everyone, including those of meagre means.

Of course, the approach has now also succeeded in ruining us all, though not all have yet realised it, while delivering a state with tremendous power over our lives, and virtually every aspect of our lives too. Consider:

The state now looms far larger in many parts of Britain than it did in former Soviet satellite states such as Hungary and Slovakia as they emerged from communism in the 1990s, when state spending accounted for about 60% of their economies.

The question now is not how state power should be used to save us, but how state power can be gracefully dismantled so that we can save ourselves and one another from a system which plainly does not work.

What should now follow is a social system of mutual cooperation based on private property and the rule of law. Whether such a system comes to pass is up to us.

The statutory body “The Committee on Climate Change” has announced:

Cutting gross UK aviation emissions in 2050 to 2005 levels together with 90% emissions cuts in other sectors would achieve the required economy wide 80% emissions reduction which has been committed to by the UK under the Climate Change Act.

Yesterday, I learned there is an agile sports car in development which will achieve 75 mpg: very impressive, but cutting emissions by 90% means a target of about 300 mpg. In the meantime, this is what people want, Nissan’s new supercar, the GT-R, spotted on the way home amongst Subaru rally cars for the road:

We should note the presumption by the CCC that it is for government to plan society.

Meanwhile, it turns out there are plenty of peer-reviewed papers which contradict global warming alarmism. I read recently an article which asked “What will it take for the mainstream media to report reasonably on global warming?” I suggest the answer is a more serious “danger to the community” story, one which indicates where planned societies lead.

Via Selling illegal DVDs not illegal because of blunder – Telegraph:

People who sell DVDs and videos illegally, including pornography to children, cannot be prosecuted because of a legislative blunder dating back 25 years, it has emerged.

…

The blunder centres on the 1984 Video Recordings Act which the then British Tory Government should have notified with the European Commission but failed to do so.

…

The technicality means the act is unenforceable and urgent action is now under way to notify Europe and re-enact the legislation.

I am amazed that coverage of this Whitehall farce does not ask the obvious question: how did it come to this, that our legislature cannot make a law in our own land without notifying an overseas power, and an unelected one at that?

In the meantime, how is it possible that reenactment will take three months? Should we not recall Parliament, pass the Act again and then debate how Parliament and the British system of government has come to this sorry state?

Via Treasury announces ‘bonfire of quangos’ to save taxpayer millions – Times Online :

Liam Byrne, the Chief Secretary to the Treasury, has written to Whitehall departments demanding an urgent review of all quangos to assess which can be abolished, merged with other bodies or taken back directly into their ministries. A number of quangos appear to have overlapping remits, including some covering skills, law and order, environment and transport. “The Ministry of Justice alone has 200 quangos,” said a Treasury spokesman.

This would be a good time to read the slim book Bureaucracy. The book is online here and my review is here.

The Policy Exchange has advised the next government that it must be prepared to make radical and immediate cuts to spending plans or face a serious risk of a full-scale sovereign debt crisis. In a new paper, it has also shown that only a third of the impending surge in government spending can be traced back to measures intended to combat the recession, with the rest going on increased budgets for ballooning government departments.

via UK ‘needs emergency Budget’ – Telegraph. The Policy Exchange report is here:

Government spending is growing far more quickly than in other countries, and faster than in previous recessions, think tank Policy Exchange today warns. A new report finds that the surge in spending is not being driven by the recession.

At most, 6% of the increased spending is going on public works, and just over a third is due to the rising cost of social security or debt. Instead of “investment”, most of the increase is due to a decision to spend more on consumption.

“A decision to spend more on consumption” — that is, borrowing to fund present expenditure: plainly unsustainable.