'Fair' taxation

In the United States, Britain and France - in particular - there is a debate about 'fair' taxation which is on the verge of reaching crisis proportions. In all three countries, there is deep concern about the need for economic growth to lead the economy out of recession. Growth comes from investment. A minority of the population directly contribute to investment by putting their savings and some of their income into shares and bonds that provide funds for commerce and industry; and a diminishing proportion of the population make indirect investments in shares and bonds through collective savings funds such as voluntary pensions schemes and insurance reserves. The inept extension of taxation of pension funds by Gordon Brown in the UK [combined with the disastrous ineptitude of the actuaries] has devastated the value of pensions, and thus has destroyed public confidence in the merit of saving through such funds, which have a much lower take-up than in previous decades. A compulsory state scheme will not correct this situation: it will merely produce pension 'pots' that are so small that they will have no impact on the growing disaster of pensioner poverty.

Investment by richer individuals has always been essential for economic growth to occur in any free society. In centrally planned authoritarian states, much of investment is wasted because a small cohort of bureaucrats cannot have the sensitivity to economic possibilities, and to adverse trends in productivity and the desirableness of products, that a wide range of personal investors can achieve. The optimisation of investment is only achieved by personal decision. There is now a hugely powerful intellectually-led movement to increase taxation of the rich - and thus to reduce the quantum and the selectivity of investment - on the idiotic ground that higher and higher taxation of the relatively 'rich' is intrinsically 'fair' and therefore appropriate. Some advocates of such taxation regard widening and intensifying the ruinous taxation as the most important cause in politics. The Obama Democrats in the USA and the Liberal Democrats in Britain and the Socialists who have quickly become querulous with their new president in France are all devotees of the doctrine that the investable funds should be grabbed from the relatively 'rich' and disbursed as immediate spending-power to the relatively 'poor'. This is an intensification of the ruinous policies that have helped to bring their economies into a condition of low growth and high 'welfare' spending. As long as this nonsense is prevalent, real economic capability will be destroyed and the potential of the economies to give their people real welfare will continue to decline.

There is also a socially divisive component to this issue. Class conflict is being promoted, with the classes defined in terms of tax-bands applied to incomes or to assets. People who do not declare earnings large enough to be required to pay tax on them are to be more explicitly defined as 'disadvantaged' or 'deprived' and [according the British Liberal Democrats] 'the rich' who earn more that £50,000 a year are to be taxed to transfer money to the 'deprived'; and then their assets will be valued and subjected to a further levy. If that levy is met from income their income will doubly have been diminished: their consumption and their potential to invest will be reduced - both inflicting direct damage on the economy; and if the levy is met by asset sales, leading to a mass sell-of of a range of assets [both material and financial assets] their prices will fall with further detriment to the economy. To this idiocy the same politicians are adding the notion that young people should be able to enter the housing markets by having the deposits on their houses secured by their parents' and grandparents' 'pension pots'. The funds that people hold in their pension funds are vastly reduced by the crass policies of the past two decades; and now they are being challenged to risk the loss of those funds altogether - and to face old-age poverty - if they take up the new scheme. If they decline to do so, there will be serious discord in families: if they do comply, they will be constrained in how much pension they can draw by the contractual form of the guarantee; and if there is another house-price slump they may loose their pension assets when the property is repossessed. Even if the housing market holds up, it is obscure as to how many years the guarantee [and therefore the restriction on the pension fund] will be maintained. None of this looks like constructive social engineering: it would be crude exploitation of the relatively-thrifty, leading to massive destruction of accumulated wealth.

Mastering Markets

Media commentators, and the tame Economists who provide them with sound-bites, continue to talk of 'the markets' as independent entities that have the power to undermine national economies and even multinational agencies in their endeavours to stabilise the prices of currencies [against each other] and national debt [quoted in an external currency: e.g. US bonds priced in the Yen or the Euro]. A market is merely a social structure. The dealers in markets are companies that are registered [and taxed] under the laws of specific countries, so the implicit assumption that they somehow exist as agents over which states have no control is a silly outcome from economic theory. Market participants are susceptible to government control at work, no less than they are subject to regulation when they drive home in their cars. If governments opt not to control the behaviour of marketeers, or use arcane and ineffectual methodologies that are concordant with Economists' theorising, any resulting detriment is their responsibility.

Back in the simple world that existed before the Big Bang of 1986, banks [which were then recognisable as a specific group of trading businesses] were subject to the corset. Just as a material corset pinches in the waistline of a person who is embarrassed by obesity, so the banking corset limited the extent to which each bank could expand its business. Banks were told the limits, and they obeyed: sort of, for a time. But then the Bank of England, as the regulator, allowed the rule to be 'bent': the Bank turned a blind eye to window dressing. The banks were required to demonstrate that they were keeping to the rules on one date each month; which allowed them to manage the timing of loans and repayments so that they went significantly about the permitted level for most of the month. It was by making and all-but-breaking such rules as the corset that old-style regulation became discredited. But if the rules and the methodologies had been imposed effectively they need never have become discredited. The supposedly gentlemanly banks of the pre-big-bang era slid around the rules: and their successors have continued to do so.

The present situation in both global finance and in domestic stock markets requires control. History shows that market players ignore rules that are not enforced, and try to manipulate rules and principles that are enforced; so we should be prepared now to treat market participants with firmness - and no exceptions - if rules or precepts are broken.Then new, simple rules can be made and new precepts for the conduct of market operatives can b established.

Within share markets, rules should specify that only registered owners of shares could ever vote on those shares: and company secretaries [or equivalents] should be required to certify compliance [with draconian penalties for breaches].  A corset can be applied to movements in the valuation of shares, such that sales and all other types of transfers of shares are frozen after the price has moved up or down by more than 1% in a day, or 2% in any three-day period. The period of the freeze would then be announced by the regulator, and would not be less than the time necessary for the buyers to pay for the last shares sold and register their new ownership. Exactly similar rules could apply to sales of state bonds and other financial instruments. Derivatives, swaps and other gambling slips that are created and traded as 'hedging' instruments should be subject to gambling tax of at least 10%, and subjected to gambling laws and the regulation of the Gambling Commission. The Commission could establish its own corset on the creation of each class of betting instrument.

Market participants and their conduct can be controlled - and should be controlled. The control need not be complex: just the opposite. The best control would be simple control, and breaches of both the rules and the principles must be punished by both financial levies and penal servitude.