THE NEW PRIME MINISTER – THE ACID TEST

What a spectacle! Two former colleagues, erstwhile members of Boris Johnson’s discredited cabinet, now vying with each other for the top job. Collegial unanimity of purpose has given way to visceral rivalry – gloves off and no holds barred! I watched their opening confrontation in which point-scoring took precedence over serious policy presentation.

We may assume they both aim (i) to help people by easing the cost-of-living crisis; and (ii) to steer the UK economy towards growth and prosperity. All fairly obvious, even facile. Yet it was the cabinet of which both contenders were senior members that (i) presided over the creation of that cost-of-living crisis; and (ii) drove the economy into the trough of stagnant growth and waste of resources where it has lain for a decade. In short, they failed every test of a real policy-makers’ mettle.  Are we to assume that Rishi Sunak and Liz Truss have undergone damascene conversions and now miraculously see the light that eluded the entire Conservative-led Parliament for so many years?

What I would tell them

If either of them were desperate enough to seek my advice I would tell them, first and foremost, to resist the temptation to discredit the other contender’s ideas, and focus on setting out your own stall – plainly and truthfully so that it makes sense to every listener. Sincerity and credibility will outweigh technical sophistication. I would advise them not to trot out catch-phrases such as “small government”, “low taxes”, “free trade” and “market economy” – those are aspirational principles, not policies. They may have instant appeal, but people need to be told why they are as good as they sound.

Take “small government”: to put some flesh on the bone it always helps to apply homespun common sense – for example, ask yourself: how big does government need to be anyway? Instinctively we know that once it becomes self-generating it’s already far too big: when civil service recruitment levels are the subject of targets rather than any explicable need, we’re sunk. And don’t fall for the inevitable challenge: “well, in that case what measures would you use?” You don’t need a measure when you know, in your bones, that self-interest has triumphed over objective need. You are in charge; now act!

Your role-model is the excellent Leslie Chapman, whose book “Your Disobedient Servant” described his review of the economics of running government departments. In every office he visited he asked one question: “I want to know what everybody is doing at this very minute.” Most of the inefficiencies he encountered arose simply because the entire civil service panoply was committed to “doing things” – from cutting grass to providing senior staff with executive dining rooms – tasks that would be done more cost-effectively (if they needed to be done at all) by private contractors. He even discovered an army depot that stored enough mule shoes to re-fight the Crimean War, keeping them in a heated shed. Small wonder he was able to cut costs by more than 30 per cent.

His simple conclusion was that government spending is inherently beyond any meaningful economic calculation – there is no profit-and-loss reckoning; no competition. Instead there is built-in immunity from personal consequences, plus the inertia of established consensus, known as “the Departmental View”.

What about the principle of keeping taxes low?

Taxes are needed to pay for government, and the smaller it is the lower the taxes needed to pay for it. But this simple statement masks a hidden trap: if taxes pay for government, and government (i)determines tax targets (ie who or what is to be taxed) and (ii) sets the tax levels (rates of tax), we are confronted by a perplexing “conflict of interest” – a short step to system-abuse that either favours (through exemptions or low rates) a particular group or sector; or uses the law as a political weapon to stigmatise unpopular choices (alcohol, high cholesterol food).

What we call our tax “system” is in fact a miscellany of unprincipled thievery; a hotchpotch of self-contradictory, half-mended loopholes in rules that only a madman might have dreamed up in the first place. The exchequer’s desperate thesis is simple: “if it can be taxed, tax it – consequences be damned!”

Concept of “taxable capacity”

Neither of the PM hopefuls has demonstrated even a basic grasp of “taxable capacity” as the legitimate target for raising revenue. When, for example, new infrastructure such as a rail-link adds tens of thousands of pounds to the value of every property along the route, why not replace indiscriminate council tax with a site-value levy that recoups for taxpayers the cost of building that rail-link? The entire community benefits from the rail-link,  and that benefit is reflected in enhanced property values, just begging to be taxed – legitimately.  Site-value rating paid for much of the high-speed infrastructure in Hong Kong, if you are seeking a role-model. 

And businesses? The taxable capacity of a business – any business – may be derived from the excess of its outputs over its inputs. Its outputs are its total sales revenues; and its inputs are what it has “bought in” (outputs of its suppliers). That difference is the value the business has added by its activities, and that is its taxable capacity. Add it up for all businesses, and you have the nation’s “gross domestic product” – not the agglomeration of tripe that passes for GDP today.

Forgive me if I’ve told you this story, but it’s still highly relevant to our theme. In 1980 I received an “Author’s Award” from the University of Hartford for my accountancy articles. While there, I was approached by another award-winner, Chairman of the House Ways & Means Committee, the Hon. Al Ullman, whose “Tax Restructuring Bill” was then undergoing its passage through Congress; and its purpose was to introduce Value Added Tax as a USA Federal impost. The UK having by then experienced VAT for seven years, he sought my opinion on it.

I told him that (i) VAT has nothing whatever to do with value added, its title being a misnomer designed to obfuscate its true nature, which is an unprincipled sales tax that simply increases prices; (ii) its incidence is indiscriminate, and it therefore causes the most pain to those least able to afford it; (iii) it’s easy to collect and will therefore remain on the statute book indefinitely - but, as with all taxes, the basic rate will increase insidiously (for example, it was introduced in the UK in 1973 at 10 per cent and has since doubled to 20 per cent); and (iv) in short, it penalises ordinary commercial activity and is therefore one of the most pernicious and least principled taxes ever invented.

Ullman then invited me to explain my views to his think-tank in Washington, which I duly did. Following that he withdrew his Bill and America was spared that ghastly tax – but it was too late to save Al Ullman who, in the eyes of Americans, was tainted by his lengthy association with VAT and lost his seat the following year.

Serious tax reform

If our PM contenders are serious about tax reform they will (i) reverse the recent increase in the rate of national insurance (NI) charges; and (ii) ditch the planned increase in corporation tax from 19 to 25 percent. Although the increase in NI has been “earmarked” to pay for higher post-pandemic NHS healthcare costs, we all know that’s rubbish. In truth, its name is yet another lie:

NI has nothing to do with insurance (try claiming compensation for your year on the waiting list!), but is, like PAYE, an unadulterated tax on employing people, and finds its way into the general revenue pot with other taxes.

Tax, by its nature, always diminishes the base that it targets (the “window tax” imposed over 300 years ago caused thousands of windows to be bricked in), and taxes on the fundamental factors of production, such as taxes on employing people; or business rates and stamp duty; inheritance tax; or taxes on government-created price inflation such as capital gains tax – are by and large the most damaging.

Corporation tax is another of the chancellor’s beloved revenue-raisers because it sounds like something inflicted on big business rather than flesh-and-blood folk. In fact even the smallest companies are liable to pay corporation tax at the full rate on all their profits: size and profit levels don’t come into it. Directors and shareholders of small companies are usually the same people and corporation tax therefore affects them personally – especially as they are also liable for income tax on the salaries they draw as employees. Even the smallest business depends on a decent level of post-dividend profit to plough back as the seed-corn for reinvestment - how else will it preserve its capital base of depreciating assets? Its corporation tax liabilities must ultimately be passed on in its prices and this can certainly affect its commercial viability.

Free trade? Mendacity and deception are the order of the day

And free trade? I have not heard either of the current aspirants speaking clearly on a subject so crucial for a small island with limited natural resources. Plenty of hot air on trade “deals” with Australia, USA, Canada, India, Europe etc, but not once has unilateral free trade been mentioned. This would mean the complete abandonment of tariffs, subsidies and the panoply of protectionist devices – all of which cause the most hurt to the citizens of the country that imposes them. How much of the current price hikes are due to tariff and regulatory warfare? No one talks about that. This issue is exacerbated by confusing economics with ethics and morality. No single country is able to exhibit the standards of cleanliness, health, food hygiene, civil freedoms and environmental welfare that are applied by all their trading partners. But so what? Provided that our citizenry is reasonably well-informed, people will make up their own minds, and government will be spared the impossible task of using trade protectionism as a vote-wooing gesture – always a self-defeating and futile exercise.

Maybe you don’t like cod fishcakes, but it matters to many of us that after last week’s imposition of a 35 per cent tariff on white fish from Russia and Belarus, as part of the current wave of sanctions, we shall not find them on the menu anyway. Governments impose laws designed to win elections, and to hell with the lives of trawlermen, small shopkeepers, restaurateurs and their families.

Do you trust the state to make moral judgements on your behalf? Paid for by your taxes?    

Welfare – or work!

And finally – let’s hear some truth about “workfare versus welfare”. I’m not going to pontificate yet again, but this morning’s breakfast news featured the tale of a mother having to struggle because our cash-strapped state is having to call in her overdue loan repayments and universal credit overpayments on which she depends, all relics of the Covid handout frenzy. The added twist is that she isn’t the only sufferer – she has to feed her four children. Not a flicker from anyone on the TV panel about her own responsibility in this saga. The unspoken assumption is that feeding and clothing her offspring is – naturally – the duty of the state. Which means taxpayers. You and me.

Both Truss and Sunak claim they are forthright radical thinkers and know what this wretched country needs to get back on track. But have you heard one word admitting that the cabinet’s lockdown policy was an unmitigated economic and health (mental and physical) disaster and will never be used again? Or that a dozen years of quantitative easing - limitless, unbacked money-printing that contributed hugely to the surge in price inflation - will not be repeated? Ever? Now that’s the acid test of who should lead.