Tom Clougherty: Government must say no to Financial Transaction Tax

Tom Clougherty is executive director of the Adam Smith Institute, whose latestreport ‘Hanging London out to dry: The impact of an EU Financial Transaction Tax’is published today.

Legend has it that Nero played the fiddle while Rome burned. It’s rather less poetic, I know, but G20 politicians are doing much the same thing by discussing a Financial Transaction Tax while the eurozone teeters on the edge of collapse.

Yes, Greece is racing towards a disorderly default. Yes, Italy, home to the world’s eighth-largest economy, might be next. And yes, this could all add up to the greatest economic crash since 1929. But no, let’s not do anything sensible about that; let’s just see if we can squeeze a bit more cash out of bankers. This, effectively, is the mindset of Europe’s political leaders.

But even if there weren’t more important things to be thinking about, the Financial Transaction Tax would still be a harebrained idea. Its rationale is as follows: you put a small, proportional tax on share, bond and derivatives trades, and in so doing you discourage short-term transactions in favour of longer-term ones. This reduces speculation and volatility, advocates argue, and raises significant revenue to boot. If only things were so simple.

Tom Clougherty: In defence of tax havens

Tom Clougherty is executive director of the Adam Smith Institute.

Taxing secret Swiss bank accounts held by British citizens is an easy win, and a helpful contribution to reducing the budget deficit, right?

Well, perhaps. But I find it hard to muster much enthusiasm for the agreement announced by the Treasury today. In reality, this is just one part of a concerted and ongoing effort by big, high-tax governments around the world to clamp down on international tax competition – a process by which other governments use low effective tax rates to attract capital and business activity to their country.

Put simply, the fiscal incontinents of the Western World – with the help of the EU and the OECD – are doing their best to form a politicians’ cartel, and rig tax rates internationally.

Tom Clougherty: Ed Balls’ suggestion of a temporary VAT cut is pure politics - and bad economics

Tom Clougherty is executive director of the Adam Smith Institute.

The Adam Smith Institute is well known for advocating lower taxes to encourage economic growth. So perhaps you’d expect me to be happy that Ed Balls had come around to my way of thinking, and proposed a tax cut to stimulate the economy. Well, you’d be wrong. Ed Balls’ suggestion of a temporary VAT cut is pure politics, and bad economics to boot.

First of all, it is very unlikely that a policy of temporary tax cuts coupled with higher spending would do anything whatsoever to boost confidence or stimulate the economy. People aren’t fools – they know that you can’t just borrow more, spend more, and raise less without it coming back to bite you. People would see Balls’ reckless fiscal policy for what it is – a threat to economic stability – and batten down the hatches accordingly.

They’d probably be right to do so. Despite all the talk about deficit reduction, the government will still borrow in excess of £120bn this year. As such, any policy decisions that would increase the deficit further risk precipitating a sharp, sudden rise in interest rates, as gilt investors lose confidence in the government’s ability to meet its funding obligations. That could push millions of Britons into financial distress, and conceivably trigger a fresh banking crisis as people start to default. Such a scenario is a far bigger threat to the economy than the lax consumer spending Ed Balls is worried about.

Tom Clougherty: Happy Tax Freedom Day 2011!

Tom Clougherty is executive director of the Adam Smith Institute.

Congratulations, Britons! Today isn’t just a bank holiday, it’s also Tax Freedom Day, the notional day in the year when you’ve collectively earned enough money to pay the country’s annual tax bill, and can start earning for yourselves. So light up the barbeque, pop open the champagne, and celebrate this all-too-brief departure from the road to serfdom. And enjoy while it lasts, because – as usual – there’s less happy news to come…

The first dark cloud is that Tax Freedom Day is coming later this year than it did in 2010. Then, we had to work for the taxman for 146 days. This year, it’s 149. The main reason for the change is that VAT has gone up, and now takes 29 days to pay rather than just 25.

The second dark cloud, this one looming menacingly on the horizon, is that Tax Freedom Day only takes account of the money raised by the government in taxes. No allowance is made for the money government borrows. But if we did have to fully fund our 2011 expenditure through taxes, Tax Freedom Day would not come until July 1. In other words, we’d have to work a full six months for the taxman in order to support government spending.

Tom Clougherty: Britain needs a pro-growth agenda - and it's not the same thing as an industrial policy

Tom Clougherty is executive director of the Adam Smith Institute.

David Cameron’s conference speech was a missed opportunity. He should have used it as an opportunity to move beyond the furore over child benefit and the grim talk about cuts, and lay out a positive, pro-growth agenda for the Coalition Government. Instead, we got more talk about the Big Society – an interesting and important issue, to be sure, but not one that gets to the heart of our immediate problem: how do we get the British economy moving again?

The funny thing is that a pro-growth agenda – a programme designed to boost the private sector, to create sustainable new jobs, and to drive an economic recovery – is a necessary counterpoint to so many other things the government wants to do. Take welfare reform. It is admirable that the Government is addressing the perverse incentives against work that riddle the current system, and it is great that the energy and expertise of independent organisations is to be harnessed to get people back into employment. But how successful can these reforms be if new jobs are not being created, and the economy continues to stagnate?

The same is true of the Coalition’s flagship policy – to eliminate the deficit by 2015-16. If you look at the numbers in the emergency budget, which are due to be fleshed out in the Comprehensive Spending Review tomorrow, there is just no way that the Government’s spending cuts will balance the books on their own. Without economic growth and correspondingly higher tax revenues, the Government won’t even get close to its target.

So where should they start? The tax system is the obvious place, and here at least there have been some positive moves. George Osborne’s pledge to progressively cut the headline rate of corporation tax, so that the UK has the lowest rate in the G7 and the fifth lowest in the G20, is an impressive one that should help Britain attract more investment and discourage footloose multinationals from fleeing to more business-friendly jurisdictions.

But cutting corporation tax is not the be-all and end-all of pro-growth policy.

Tom Clougherty: DFID must harness enterprise to defeat global poverty

Tom Clougherty is Research Director of the Globalisation Institute.

The Department of International Development is a body with a noble aim: “eliminating global poverty”. Sadly, DFID has not been an unqualified success. It remains wedded to outdated and discredited ideas about development such as believing that pouring money into government budgets in poor countries will work – often referred to as the “big push” approach to development.

But if long experience has taught us anything it is that this approach does not work. In the last 40 years Africa received roughly $400 billion in foreign aid, but its citizens got poorer. But however disappointing this is, it should not lead to us to abandon international development. There are things that work, things that have been proven to lift people out of poverty. Microfinance is one of them.

Microfinance, broadly speaking, is the provision of financial services to the poor. What distinguishes it from the traditional provision of financial services, apart from the small sums of money involved, is that credit is advanced on the basis of reputation rather than collateral. Since many developing countries lack formal systems of property rights the poor are generally unable to provide collateral – this means that microfinance is the only way for them to access credit. And credit is an essential component of the successful market economy.

Microfinance was pioneered by the Grameen Bank of Bangladesh, which was founded by Professor Muhammad Yunus – winner of the 2006 Nobel Peace Prize. Their method remains central to microfinance today. Money is advanced to small groups, with each group member agreeing to be financially responsible for the others. Group members monitor each other at regular meetings, and social pressure is created to fill the role traditionally filled by collateral. The scheme has been very successful. Studies have shown that during an eight-year period, among the poorest in Bangladesh with no credit available to them, only 4% of people pulled themselves above the poverty line. But among those receiving credit from Grameen the figure rose to almost 50%.

The reason microfinance is so much more successful than traditional forms of development aid is that it is based on the philosophy of the hand-up rather than the handout. It isn’t a top down solution to poverty, it is a bottom-up approach that empowers the poor, harnessing their aspirations and abilities and giving them the opportunity to help themselves – often by starting small businesses and learning to make a profit, providing for their families and often creating employment for others.

Microfinance doesn’t see the world’s poorest people as cases for pity and charity, but rather as consumers and potential clients. It identifies the services the poor want and need and endeavours to provide them. This means that microfinance is always adapting and evolving to meet new challenges – no longer just giving loans, but also leasing agricultural equipment and offering affordable insurance. Increasingly it seems that what the poor really want is access to the same financial services that we all take for granted.

It is often said that microfinance fails to tackle the fundamental causes of poverty in poor countries, that it does nothing to promote good governance or the formalisation of property rights. But this critique is misguided. Microfinance empowers people and makes them wealthier. Over time this creates a growing middle-class that is much harder for governments to ignore and exploit than a great mass of poor people. Furthermore, top-down formalisation of property rights is often prohibitively expensive and fraught with difficulties. But microfinance can help accelerate the organic development of property rights – as it makes people richer the pressure from below to formalise property rights increases and the cost of doing so becomes more realistic.

If there is a problem with microfinance it’s that it doesn’t yet reach enough people. Global demand for microfinance is estimated at between 400 and 500 million households – but only 30 million have access to it. While donor money can help microfinance institutions expand it will only ever be a partial solution. The best way for these institutions to meet the demands of their market is to diversify their operations and become profitable. This is not an outlandish idea: research has already shown that 63 of the world’s top microfinance institutions have an average rate of return of 2.5% of total assets, even after adjusting for inflation and taking out subsidies.

The British government also has a role to play. The Globalisation Institute criticised DFID throughout 2005 – the UN’s year of microfinance – for not paying enough attention to the subject. Even now their approach remains little more than a token gesture – few of their programme partnership agreements even refer to microfinance, and none are with organisations focused on the subject. Microfinance institutions complain that they are left out of these agreements, with DFID preferring to support “big name” development agencies instead. This has to change. Enterprise-based solutions to poverty like this may not sound as dramatic as the “big push” solutions currently favoured by the government but, out on the ground, they really are making the difference between poverty and prosperity.