Sunday, 13 October 2013

Help to Buy won't Help, says Labour Land Campaign

In his Financial Times article (10 October 2013 “Buyers beware of Britain’s absurd property trap”) Martin Wolf exposes the real reason for the Government’s Help to Buy Scheme – to stimulate land speculation in the UK and give land owners even more unearned income as the next property bubble grows and grows at the expense of the economy. 

Land values are created by our collective demand for public and private services and production; it is our taxes, our investments and our consumption that create land value. Because we have monopoly ownership of land in the UK (70% of land is owned by less than 1% of the population) we have monopoly ownership of land wealth. The poorest taxpaying commercial and residential tenants are subsidising the richest land owners.

Carol Wilcox, Secretary of the Labour Land Campaign, says:
"The mythical housing ladder is unattainable to a growing number of households and the UK’s tax system sustains this economic injustice and actually encourages land speculation. This is now so hideous that blocks of apartments are being built in London that have already been sold to overseas speculators before completion.

"We don’t need a government that fuels land price rises through subsidies which make homes even more unaffordable to a growing number to buy or rent. We need a courageous and imaginative government that tackles our tax system by shifting taxes off earned incomes and on to unearned incomes that the owners of our land and other natural resources take as theirs. By taxing the annual rental value of all land at its optimum permitted use value, the government will capture wealth that the whole of society creates to be reinvested in our public services."
 For more details visit

Wednesday, 9 October 2013

What's wrong with Help to Buy?

The flagship announcement from Conservative Party conference was the bringing forward of stage two of the Help to Buy scheme. To encourage mortgage lending by the banks, the government will guarantee 15% of the loan value.

RBS, Lloyds and HSBC are among the banks that have signed up to the scheme and today announced 95% mortgages - something that had largely withered post-crash as banks (understandably) became more cautious in their lending.

Home ownership has been a central plank of the Conservative narrative for over 30 years now - but this government has been the first post-war which has overseen a decline in home ownership. Home ownership peaked at 72% of households, but it has now dropped to 65%. The Daily Telegraph described it as "a national crisis".

Leaving aside the Telegraph's attack of the vapours, I'd argue there's a lot wrong with Help to Buy - including:

It doesn't help those in the most housing need
The real national crisis is not the nature of housing occupancy, but the rising homelessness, chronic housing waiting lists, and the soaring cost of private rent - exacerbating the cost of living crisis. The number of households living in temporary accomodation has risen 10% in the last year. These households need social housing (preferably council housing).

It won't build the houses we need
While stage one of Help to Buy (began in April 2013) applied only for new build homes, stage two applies to existing housing stock. Last year, the number of homes built in the UK was the lowest on record since the 1920s. But the scale of house building required to meet housing need, cannot be driven by the mortgage market.

It will increase house prices - making home ownership even more unaffordable
House prices are rising due to constrained supply. Increasing the availability of credit to borrow to buy housing can only push up house prices (increased competition for the same number of units). This will make home ownership even more unaffordable. As wage increases remain stagnant, the average house
price has risen to 6.74 times the average wage. For comparison it was only 4.21 in 2000, but reached 7.23 in 2007 at the peak of the housing boom - and we know what happened then.

It helps private landlords more than aspiring homeowners
Help to Buy is available to buy-to-let landlords. Capital rich and in no housing need, it is hard to make a case for a government subsidy for buy-to-let - though of course the Tories did it in the 1980s too. Buy to let mortgages are already subsidised through the tax system as mortgage interest is tax deductible. Help to Buy is therefore a further taxpayer subsidy to the rich. The return of 95% mortgages still means an  deposit of over £12,000 is required on the average house price - not inconsiderable (according to the MoneyMood survey, the average household is saving just £42 a month).

It will push up private rents
The cost of private rents have outstripped wage rises in recent years. If house prices are inflated and more homes become buy-to-let investments (see above two points), the most likely outcome is that rents will rise as well - increasing the risk of those renting falling into arrears or debt, while pushing them further away from the stated goal of home ownership.

It's a crap economic stimulus
We have argued that there is a strong case for public borrowing for growth, but what Osborne's Help to Buy scheme does is land the public with potential liabilities, with nothing to show for it. If these loans default, then either tax rises or public services are cut to ensure the banks don't take the hit.

It could cause another crash
While Ed Balls has been among those calling the recently more positive economic growth figures "the wrong sort of recovery" - something we have also alluded to, twice - Help to Buy could tip that 'wrong sort of recovery' into another crash. Increasing debt levels when wages are stagnant and the labour market far from stable (not to mention any risks from global instability), increases risk and the government could end up with considerable liabilities if defaults rise.

In short, Help to Buy does nothing to solve the UK crisis in housing affordability (of whatever tenure), may actually make it worse, and comes with not inconsiderable risks to the wider economy - and the Prime Economics website thinks the EU may even rule the scheme to be 'illegal state aid'.

This is a government with no housing policy, only a mortgage policy ... and a pretty crap one at that.

Thursday, 3 October 2013

Google and ExxonMobil run rings around outdated tax laws

Prem Sikka

Tax avoidance shows no sign of abating. Google, the company with the slogan “Don’t be evil", is at it again. The company has been named and shamed by the UK House of Commons' Public Accounts Committee, but that has not persuaded directors to change their ways.

According to information filed with the US Securities and Exchange Commission (SEC), the Google group of companies generated global revenues of US$50.175 billion last year. Some US$4.872 billion (nearly £3.25 billion) of revenues came from the UK.

Google explains these revenues are “based on the billing addresses of our customers for the Google segment and the ship-to-addresses of our customers for the Mobile segment”. But this does not mean the revenues are necessarily booked in the UK, which acts as a marketing mechanism for its Ireland operations. As the Public Accounts Committee heard, through careful attention to detail, a large part of the revenues is booked in Ireland.

Despite the US data, Google’s UK operations reported a revenues of just £506m in 2012, some way short of the figure reported to the SEC. This gave rise to a UK profit of £36.2 million and a corporate tax bill of £11.2 million.

Google’s Irish arm reported revenues of €15.5 billion (£13 billion), of which €11 billion is wiped out by “administrative expenses”. The Irish operations reported a profit of €154m (£131m) in 2012, but paid just €17m (£14.5m) in tax.

Google uses complex corporate structures. Royalty payments, masquerading as administrative expenses, are a key part of the profit shifting strategies. For example, its intellectual property is held in Bermuda, which does not levy corporate taxes. Various subsidiaries pay royalty fees which result in tax deductible expenses in Ireland and elsewhere, but tax-free income in Bermuda.

Google’s SEC filing shows the company had foreign income before taxes of just over US$8 billion for 2012. Most of the income from foreign operations was recorded by an Irish subsidiary. The foreign tax paid/payable was US$358m, equivalent to a rate of 4.43%. The accounts received the customary clean bill of health from auditors Ernst & Young.

Another company using complex corporate structures and intergroup transactions to avoid taxes is ExxonMobil. Its Spanish subsidiary operated for a while from the same address as its auditors PricewaterhouseCoopers. The Spanish company apparently had one employee on an annual salary of €55,000, but it reported net profits of €9.9 billion for the period 2009 to 2011. The key to this was a strategy designed to take advantage of Spanish laws for attracting foreign investment. The company shuffled the payment of dividends and avoided taxes in the US elsewhere.

We can all ask companies to honour their promises of ethical and responsible conduct, but such calls have little effect. All over the world tax authorities are overwhelmed by the tide of avoidance and lack the financial and political resources to investigate giant corporations.

Yes, they can be more aggressive and governments can move to deprive tax dodging companies of any public contracts. But such efforts need to be accompanied by a fundamental reform of the way corporate profits are taxed. The current system is over a hundred years old and is fundamentally flawed.

For example, Google, ExxonMobil and other companies may have hundreds of subsidiaries, but they are unified entities with a common board of directors, common share ownership and a common strategy that directs their operations. The companies publish consolidated financial statements for the group as a whole, which recognise that transactions within the group of companies, do not add any economic value. These transactions have zero effect on their consolidated profits.

Yet the tax treatment is entirely different. For tax purposes Google and ExxonMobil are not treated as a single entity. Instead they are treated as hundreds of separate entities. This encourages them to play royalty and other games and shift profits through artificial transactions and arbitrage the global tax systems.

So the obvious solution is to treat multinational corporations as single unified entities. Their global profit, with some modifications, needs to be allocated to various countries on the basis of employee, sales, assets or other key determinants of profits and taxed at the appropriate rates.

Such a system already operates within some federal states, most notably the United States, Canada, Switzerland and Argentina. It prevents companies from artificially locating domestic profits to internal tax havens. Thus, a company trading in California cannot easily avoid taxes on its local profits by claiming that it is a located in Delaware, which offers minimal taxes on varieties of corporate income.

The above reforms do not necessarily need international agreement and can be implemented unilaterally by any government. It has considerable similarities with the Common Consolidated Corporate Tax Base proposed by the European Union.

The EU’s plan could make a serious dent in tax avoidance, but is opposed by the corporate dominated Organisation for Economic Co-operation and development (OECD). The OECD’s preference is to tweak the current system, which cannot address the fault lines.

Without a fundamental reform companies like Google and ExxonMobil will continue to deprive national governments of much needed revenues.

Tuesday, 1 October 2013

Why - and how - Labour should pledge to renationalise Royal Mail

Yesterday, Labour's shadow Business Secretary Chuka Umunna - tipped as a possible future leader by some - announced that Labour would keep Royal Mail in private ownership if, as is likely, the Tory-led government pushes through privatisation before 2015.

Writing for the Huffington Post, Umunna argued:
"I have been very clear that we are not in a position to pledge to renationalise the Royal Mail if we get into government in 2015. I do not know how much Royal Mail shares will be trading at in May 2015, so I do not know how much it would cost to renationalise. No credible future Business Secretary would therefore make such a pledge"
What struck me was how woefully unaware Umunna seems of Britain's long history of nationalisations. But, first some good news to be read into Umunna's otherwise depressing statement: if Labour won't nationalise because of cost, then rail renationalisation is on the cards - since the franchises can be brought back under public control as they expire, cost-free. Come on Maria Eagle, you can do it!

But I digress. Labour has of course already said it will stick to the Tory spending plans that it criticises as being flawed, and therefore Mr Umunna is unable to make spending commitments, unless funded by some other cut (like Trident perhaps?).

But still, governments have rarely used current expenditure accounts for nationalisations. Even the colossal shovelling of public money at the banking system in 2008/09 was done through an arcane stand-alone Bank of England fund.

The largest swathe of nationalisations occurred under Clement Attlee's 1945 government, and included coal, steel, electricity, gas, electricity, railways, road haulage - alongside a massive expansion of publically-owned social security, public health, education and housing.

Now you might say, 'that's all well and good, but Labour will come to office in 2015 with a very different inheritance. Didn't you hear Liam Byrne? There's no money left!'. To which the reply is 'I never listen to Liam Byrne. Why on earth would anyone? But I see your point, Attlee only took office after six years of war, with the country's infrastructure and labour force decimated, and with a national debt nearly four times what it is today. But I just think maybe today's Labour could manage one relatively small renationalisation...'

Attlee's government also reduced the national debt during its term in office. 'But how?' you ask, 'when they must have spent billions on all those nationalisations'. Attlee's government largely exchanged shares for Treasury bonds - sustainable low cost funding of the purchase of assets that often generated revenue in return (Royal Mail made a profit of £430m last year) or were steered in the public interest to underpin economic growth and to meet social need ('meet social need' aka 'predistribution'). Another question Mr Umunna should be asking is why would any government wanting to reduce the debt, sell off a steady income stream?

But of course saying now that if the Tories privatise Royal Mail, Labour will renationalise will drive away the vultures circling over Royal Mail. Who would pay for shares now, knowing they'll be exchanged in less than 18 months. Labour committing itself now to renationalisation in 2015 could scupper the move entirely.

All is not lost if Labour waits. The inevitable result of Labour committing itself to renationalisation next year would be to reduce the share price of a privatised Royal Mail. Look at the impact of Ed Miliband's modest price freeze announcement for energy companies. This would make even a cash buyback considerably cheaper.

The Attlee government did something very simple, it told the electorate what it would do - boldly - and it won a landslide. Until it finally announced some policies at its conference last week, today's Labour was barely ahead in the polls, against a deeply unpopular government. It went from being level to four points ahead before, to 8 to 11 points ahead after the announcement to freeze energy prices and repeal the bedroom tax.

There's a lesson there. One is that, if Labour wants to look 'credible' it shouldn't oppose privatisation only until it happens. That's rather like being a vegetarian between meals.

UPDATE (05/10/13): It is now estimated that Royal Mail will be valued at around £3 billion for the sell-off. Chuka Umunna has described this as "on the cheap", stating that two of Royal Mail's sites in London are alone worth £1.5 billion - and that these sites are at risk of being sold off once the shares are sold to private investors.
Such asset-stripping is common in privatisation - and occurred following the privatisations of the railways and of the water boards. If such asset-stripping occurs, then Labour should renationalise in 2015 by compensating shareholders on the basis of the valuation of the company at time of privatisation, minus the value of any assets sold off. If they can privatise on the cheap, we can renationalise on the cheap!