Tuesday, 19 February 2013

A Mansion Tax is fairer than Income Tax


February 18th 2013

Ed Miliband is right to look at shifting tax off incomes and on to unearned income by paying for the reintroduction of a 10p tax rate through a fairer property tax on high value homes. A home has two elements that make up its value – the building and the land it is located on. The land value is created by the whole of society not by any property owner and it is unfair that as land values rise because of public and private investments – paid for by us all as tax payers and as consumers - it is only owners of land that receive a financial windfall whereas tenants and other non property owners get nothing.

The Labour Land Campaign reminds people that the “asset rich, income poor widow“ being trundled out by some objecting to Ed Miliband’s proposal applies only to a very small group of people, and there are ways of getting around the problem, such as letting them roll up the tax payments until they dispose of the property. “Asset rich income poor” people have to pay for their gas, electricity, council tax etc today, why should those who can afford to upkeep a £2 million or more property be subsidised by those who live in modest homes, a large proportion of whom are tenants or living with family or friends.

Heather Wetzel, Chair of the Labour Land Campaign, says “Ed Miliband could do even better by reforming all property taxes and abolish business rates and council tax and replace them with an annual Land Value Tax being applied to all land according to its optimum permitted use. Such a tax would result in those homes, commercial buildings and idle development sites being used to provide more affordable homes and business premises instead of being held out of use by land speculators.

Land investors do not invest in anything; they actually speculate that land values will increase providing them with an unearned income that has been created by the whole of society. When tax payers from across the UK paid for the London Underground’s Jubilee line extension, it has been estimated that the extension cost £3.5 billion to build and land values rose by over £13 billion around the new stations because of the economic benefit the extension brought to those areas. Tax payers paid but land owners received a huge windfall that should have been collected and reinvested in public services throughout the country.”

If the London to Birmingham/Manchester and Leeds high speed railway (HS2) were funded in the same way then many local rail improvements including CrossRail 2 (Hackney to Chelsea) could be sustainably funded.

For more details contact Steven Clarke at steven.clarke@labourland.org, or visit www.labourland.org.

Monday, 18 February 2013

Big UK tax avoiders will easily get round new government policy

Prem Sikka

The UK government has finally responded to public anger about organised tax avoidance. The key policy is that from April 2013, potential suppliers to central government for contracts of £2m or more will have to declare whether they indulged in tax avoidance. Those with a history of indulgence in aggressive tax avoidance schemes during the previous 10 years, as evidenced by negative tax tribunal decisions and court cases, could be barred from contracts. Their existing contracts could also be terminated. The policy is high on gimmicks and empty gestures, and short on substance.

The proposed policy only applies to bidders for central government contracts. Thus tax avoiders can continue to make profits from local government, government agencies and other government-funded organisations – including universities, hospitals, schools and public bodies. Banks, railway companies, gas, electricity, water, steel, biotechnology, motor vehicle and arms companies receive taxpayer-funded loans, guarantees and subsidies, but their addiction to tax avoidance will not be touched by the proposed policy.

The policy will apply to one bidder, or a company, at a time and not to all members of a group of companies even though they will share the profits. Thus, one subsidiary in a group can secure a government contract by claiming to be clean, while other affiliates and subsidiaries can continue to rob the public purse through tax avoidance. There is nothing to prevent a company from forming another subsidiary for the sole purpose of bidding for a contract while continuing with nefarious practices elsewhere.

Starbucks, Google, Amazon, Microsoft and others can continue to route transactions through offshore subsidiaries and suck out profits through loans, royalties and management fee programmes and thus reduce their taxable profits in the UK. Such strategies are not covered by the government policy and these companies can continue to receive taxpayer-funded contracts.

The policy will not apply to the tax avoidance industry, consisting of accountants, lawyers and finance experts devising new dodges. Earlier this week, a US court declared that an avoidance scheme jointly developed and marketed by UK-based Barclays Bank and accountancy firm KPMG was unlawful. The scheme, codenamed Stars – or Structured Trust Advantaged Repackaged Securities – enabled its participants to manufacture artificial tax credits on loans. This scheme was sold to the US-based Bank of New York Mellon (BNYM). The US tax authorities launched a test case and a court rejected BNYM's claim for tax credits of $900m. The presiding judge said that that avoidance scheme "was an elaborate series of pre-arranged steps designed as a subterfuge for generating, monetising and transferring the value of foreign tax credits among the Stars participants" (page 25). It "lacked economic substance" (page 53) and was a "sham" transaction (page 54). Whether equivalent schemes have been used by UK corporations is not yet known.

The above case highlights a number of issues. The UK-based organisations causing havoc in the US, Africa, Asia and elsewhere will not be restrained. They can still secure taxpayer-funded contracts in the UK. Now suppose that the Bank of New York Mellon scheme was applied by Barclays Bank to its own affairs and declared to be unlawful by a UK court. If so, possibly Barclays may be deterred from bidding for a central government contract, but there will be no penalties for KPMG as accountancy firms are not covered by the proposed rules.

The recent inquiry by the public accounts committee into the operations of PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young noted that the firms are the centre of a global tax avoidance industry. Even though a US court has declared one of these schemes to be unlawful, the UK government does not investigate them, close them, or recover legal costs of fighting the schemes devised by them. No accountancy firm has ever been disciplined by any professional accountancy body for peddling avoidance schemes, even when they have been shown to be unlawful. The firms continue to act as advisers to government departments, make profits from taxpayers through private finance initiative, information technology and consultancy contracts. There is clearly no business like accountancy business.

The proposed government policy will not work. It expects corporations who can construct opaque corporate structures and sham transactions to come clean. That will not happen. In addition, a government loth to invest in public regulation will not have the sufficient manpower to police any self-certifications by big business.

An effective policy should prevent tax avoiders and their advisers from making any profit from taxpayers. It should apply to all the players in the tax avoidance industry, regardless of whether their schemes are peddled at home or abroad.

This article first appeared on Guardian Comment is Free

Wednesday, 13 February 2013

Barclays and the sack race

Yesterday, Barclays announced it had made profits of £246 million in 2012, or just over £700,000 per day (or £8.14 every second of every hour of every day of every week of the year).

This was however down on 2011's looting when the bank made profits of £5.9 billion.However, when adjusted to remove fines over Libor rigging, PPI mis-selling and other scandals that have ravaged the bank, then its 2012 profits (on an adjusted basis) were £7.05 billion (or £224 per second).

The bank also announced a bonus pool of £1.85 billion (down 11% from 2011). The fall in profits and in bonuses though still large, excessive and exploitative are not enough.

So despite announcing these untold riches to be shared between shareholders and directors and other high fliers, the bank also announced that 3,700 staff will be made redundant - split roughly evenly between the retail business and the investment bank.

When I met with Jean-Luc Melenchon, the French Left Party leader, at the end of last year, he told me that one of his one his policy proposals was that no company should be able to make redundancies as long as it was profitable. After all, why should a company making profits be allowed to sack the workforce that produced those profits - simply to try to make higher profits for shareholders?

In the case of Barclays, their 2012 bonus pool of £1.85bn  would be enough to give each sacked worker £500,000 - more than enough to cover their wages. Barclays unadjusted profit of £246m would pay for 3,700 staff on average salaries of £66,000.

Now you might argue that such rules would be inflexible, especially in the case of a company that is trying to restructure - in the case of Barclays to restructure away from investment banking, and closing its tax avoidance unit, under considerable public scrutiny.

However, while voluntary redundancies could still be requested, what Melenchon's proposals would mean is that even when restructuring a company should offer alternative posts with re-training if necessary.

In fact Melenchon's proposals could be part of a modern full employment strategy, and would be a good way of preventing rising unemployment - something the OBR predicts we will see this year.

Tuesday, 12 February 2013

Britain needs a pay rise

The PCS union today launched a new report 'Britain needs a pay rise' looking at the effect of falling wages on the UK economy.

The report shows that UK workers (public and private sector) are collectively losing £50 billion a year since austerity pay policies were introduced from 2008.

As today's inflation figures show RPI inflation at 3.3%, this looks set to continue and worsen - as the average pay settlement has been 1.5% over the last year.

The report notes that since the onset of recession in 2008 the real value of wages has fallen by 7% (£50 billion a year). During the same period there has been a real terms drop in consumer demand of 5%.

This is not a coincidence - freezing or capping wages sucks demand out of the economy. It also forces more workers on to tax credits, housing benefit and other welfare payments costing the government more.

For public sector workers in general, and civil servants in particular, there are lots more facts specific to them in the report - including comparators with the private sector. In the public sector, where all increases are capped at 1% this year (for many for the second year after a two year pay freeze), pay policy will cut £7 billion a year until 2015 (at least).

Whatever sector you work in, the report highlights the necessity for workers' wages to improve for any recovery to take hold.

Launching the report today, PCS general secretary Mark Serwotka said:
"Almost everyone can now see that austerity is not working. The chancellor George Osborne is borrowing more for failure, we are on the verge of a triple dip recession, food banks are on the rise and pay day loan sharks are preying on the vulnerable.

"We believe the government's pay policy, built on the lie that hardworking civil servants are paid too much, is having a seriously damaging effect on the whole economy.

"Instead of burying their heads in the sand and hoping for the best, ministers can and should act now to put money into people's pockets and back into our economy."

Read the report

Monday, 11 February 2013

UK banking reform bill won’t curb reckless risk-taking

Prem Sikka

Some four and-a-half years after the banking crisis that has resulted in massive public debt and a deep austerity program, the UK government has finally unveiled its Financial Services (Banking Reform) Bill . The Bill is going through parliament and is expected to become law by the end of the year.

The legislation will require UK banks to insulate everyday banking activities associated with savings, deposits and loans from more volatile investment or speculative activities, by introducing a ringfence around the deposits of individuals and businesses. Thus two subsidiaries under the same parent company are envisaged. This separation is advocated because investment banking indulged in excessive risk-taking and accelerated the banking crisis.

Bear Stearns, Lehman Brothers and Northern Rock are often held out as exemplars of this reckless risk-taking. Prior to its demise, Northern Rock had a leverage ratio (the relationship between total assets and shareholder funds) of 50 while Bear Stearns and Lehman had leverage ratios of 33 and 30 respectively, thus making them highly vulnerable to small declines in the value of their assets.

For five years before its collapse, Bear Stearns generated almost all of its income from speculative activities. About 80% of Lehman’s income came from speculative activities. Other banks also indulged in an orgy of speculation and, by December 2007, the global face value of derivatives stood at $1148 trillion, compared to a global GDP of only $65 trillion. No one can consistently pick winners and, when their financial fortunes turned, it set off a domino effect.

Many counter parties to complex financial instruments were in danger of defaulting on their obligations and thus threatened the collapse of whole system. The UK government bailed out the system with loans and guarantees of nearly £1 trillion.

Critics claim that ringfencing will increase administration costs and capital ratios, leading to reductions in the amount of credit in the economy and thus investment and jobs. The Bill is based on the premise that, in the next banking crisis, the government would rescue the retail side, but would probably let the investment side sink. This threat may discipline banks and spare taxpayers the expense of bailing out the entire system. The ultimate sanction is that if banks do not ringfence satisfactorily by 2019, then the regulator can formally split their operations.

The Bill sounds good, but is unlikely to be effective. It does not impose any personal costs for reckless risk-taking. Ringfencing is not the same thing as a legally enforced separation (two independent entities operating retail and investment banking). The Bill does not say what precisely is to be ringfenced as savings can be placed in many exotic securities.

Derivatives have been described by the US investment guru Warren Buffett as “financial weapons of mass destruction”, but the government has yielded to the banking lobby and will permit banks to locate “simple” derivative products — whatever “simple” means — within their retail banking operations.

What if funds flow from a ringfenced entity to non-ringfenced entity via a foreign subsidiary or affiliate in a place where there is no such separation? Would this be a breach of the ringfence? The Bill does not provide any examples of what a breach of ringfencing looks like, though the Treasury will have powers to prohibit unspecified types of transactions.

The lack of precision will fuel uncertainty and encourage banks to play creative games in deciding which side of the ringfence some assets and liabilities are to be shifted. The regulator is expected to negotiate the details with the banking industry.

Ringfencing will neither hermetically seal investment banking nor prevent its contagious effects from spreading. For its speculative activities, investment banks will continue to raise finance from retail banks, pension funds, insurance companies and others. They will still have the benefit of limited liability.

In the event of losses or a crash, investment banks will be able to dump their losses on to the providers of finance and thus infect the whole financial system, and will inevitably force governments to bail out the system again. The only remedy is to ensure that investment banking is accompanied by unlimited liability: investment banks are free to speculate as long as their owners can personally absorb the losses.

Investment banks may entice corporate executives to provide funds with promises of huge returns, which might boost their performance-related pay, but can land stakeholders with huge losses. Therefore, the Bill should have required that prior to transacting with investment banks, organisations should seek permission from their own stakeholders.

This would have prevented innocent bystanders from becoming the victims of speculators. Perhaps effective reforms will come after the next banking crash.

This article first appeared on the Australian site The Conversation