The language, or rather political language de jour, is for the canvassing potential members of the next parliament (Parliamentary candidates in the UK) to merge two very different concepts into one, in the public’s mind. Those words are tax evasion andtax avoidance. We (at the theMarketSoul) believe we potentially know why, but the consequences might not yet be clearly understood.
At a recent televised debate attended by potential next Business Secretary representatives (politicians who would be in charge of the Business, Innovation and Skills [BIS] department) from the three major political parties, one of the candidates challenged the audience thus:
“You (tax advisers) know the difference between aggressive tax avoidance on the the one hand and tax planning on the other.” No the question was actually this: “Please raise your hand in the audience if you donot know what aggressive tax avoidance is.” From the podium the verdict came that about half the audience raised their hands. And therein lies the problem: Are you making this a moral question now? Because until someone is able to clearly define and explain how morality and tax planning are linked; we at theMarketSoul cannot help but think: Where next in this one sided ‘supposed’ quasi debate?
It really depends on how you ask the question:
Is taxation moral? Is paying tax moral? What level of taxation is moral? Is being moral, paying your taxes? If you don’t pay taxes, are you immoral?
With apologies to The Smiths; the original version of the song Panic’s lyrics reads something like this:
“Panic on the streets of London / Panic on the streets of Birmingham / I wonder to myself / Could life ever be sane again?”
Or is this the beginning of what we will call ‘Austerity Anarchy’?
As a case study in behavioural economics goes, the last week in March 2012, in the UK must go down as a classic…
What sparked the ‘run on petrol and filling stations’ is not the aim of our analysis, but rather the deeper underlying cultural psychosis affecting Austerity Britain. However, the austerity is not driven by the current revenue expenditure austerity, but rather the culture of Investment Austerity over many decades that has created a supply chain time bomb in the UK.
There is generally a severe lack of investment in any form of storage capacity. Not as a risk management concept, but rather as a pure short sighted cost management issue.
Yes, land capacity is limited on a small (in places patchily overcrowded; especially down in the South East of England) island and the cost of owning a vast storage network must seem prohibitive; yet having so little risk management or rather ‘buffer’ and shock absorption capacity available must be the vast hidden opportunity cost ‘time bomb’ waiting to derail a sustained or sustainable short run upturn in the economy?
Hidden or in the economists parlance ‘Opportunity Cost’ is generally not an item on any policy maker’s agenda, yet in it lies the ‘unintended consequences’ element that so seldom gets factored into the equation. Yet opportunity cost highlights the risk element we have to factor in. And in this sense we use the word RISK in its proper intended format, namely a quantifiable probabilistic evaluation of the downside of a transaction. Yes, threats are more closely aligned to ‘unintended consequences’ and are the issues we can only subjectively be aware of, but cannot quantify with any degree of accuracy.
We pick up from the introductory article by expanding on the issue of MORE Europe, which we did not cover in enough depth.
It is without a shadow of doubt that belonging to an enlarged common market has huge beneficial advantages to all its participants.
However, the question of the Cost / Benefit analysis dynamics is never really explored in more detail. Perhaps it is easier to focus on just one or the other of the two interlinked dynamics, but for it to be a balanced appraisal; we need to focus on the interactions of both COST and BENEFITS.
And when the leaders of Europe cannot tell anymore what the difference is between a COST and a BENEFIT of being in a single currency Eurozone, then what chance do the rest of us have? Is our COST the misplaced belief that leaders will make decisions in our best interest that will BENEFIT us in the long run?
But if the COST is the lesson of Moral Hazard, why have they not learnt yet that working towards an orderly default is better than raiding the futures of millions of current and future taxpayers in Europe. The COST of an uncompetitive and stagnating Europe (which has been brewing and developing for a few decades now), is that we have lost the ‘child like’ curiosity of inventing and innovating our why towards sustainable economic development and growth.
Rather than embrace the opportunity to learn from the younger cultural of the Eastern European and Baltic States integration onto Europe, we are in danger of smothering their youthful exuberance with a bureaucratic Welfare State super-state, with a healthy dose of Welfare and Debt dependency for decades to come.
No-one is saying that the transition will be painless, but it seems that most leaders in Europe have forgotten to keep an eye on both the COST and BENEFIT dynamics. Except for the brave decision made by David Cameron on Friday morning.
Veto the madness and risk what some call isolation, but we here at theMarketSoul call the grasp for our economic sanity.
We can still be part of a common market and then there is still a Common Wealth to leverage, should both the EU and the USA decide to marginalise Britain on the international stage, as some commentators are fearing.
Maybe a true third balancing force and alliance will help us move out of the doldrums of the CRISES of 2008 – 2011 (and quite possibly beyond).
In an article we wrote earlier this year we very clearly called for INNOVATION as an engine of growth in Europe, yet all the politicians and bureaucrats can deliver are bigger EU institutions, hence, more and more people piling into the wagon! Aren’t some of us getting not just tired of pulling the wagon, but frustrated and exhausted too. Are these not some of the ingredients necessary to breed and incubate extremism?
Bigger financial problems?
In another of our earlier articles we mentioned the dangers of Moral Hazard. By not addressing the fundamental problems of big bureaucracy (we are in danger of starting a circular argument here), debt accumulation, regulatory stifling, the ‘EFFICIENCY’ drive will permanently drive INNOVATION (and hence future growth) out of Europe. Let’s face it, if it was not for the expansion of the EU towards the vigour of the Eastern and Baltic states, there would be no growth and opportunity and Europe would not be an attractive place to do business.
Europe’s maturity (and risk averse cultural norms) are now so engrained and an anchor and drag on innovation that attracting Foreign Direct Investment (FDI) (and purchasers of sovereign debt) will come more and more of a challenge in future.
The brave thing to do, in our opinion, was to stand up for a fragmented Europe, as David Cameron was prepared to do, because to be lead blindly down the alley, just to be beaten and bruised by the rest of Europe, would not only be folly, but a disaster for Britain.
Only time will tell, but the Eurozone and sovereign debt crisis has dominated the headlines for long enough, and will continue to do so for some time to come…
It is true. This is not a playground, kinder-garden experience…
As we don’t live a purely Command and Control or 100% Free Market environment we have to constantly adjust our actions and interactions with the market around us based on factors such as:
Jurisdiction and cultural norms
There are many other factors to add to the list above, but we are referring to the behavioural aspects inherent in any market interaction.
One of the greatest challenges facing the political class in the UK at the moment is the Truth or Dare conundrum.
We are specifically referring to the urgent need to cut public sector spending, yet the painful reality that it is:
a) Very difficult and not politically expedient to admit the ‘Truth as seen by any politician’ (see the ‘Forces of Hell’reference uttered by Alistair Darling on trying to speak the truth
b) People cost money (and a lot of money)
c) Efficiency savings are akin to an admission of guilt and proof of mismanagement
Most public sector jobs are not subject to ‘market-forces’ at the best of times, therefore the automatic adjustment mechanism and signal that ‘price’ sends is not a factor in the equation.
What do we mean by this?
In a free market driven environment, price is the single most important signal and measure against which both suppliers and ‘demanders’ (consumers) measure value. In the absence of all other qualitative factors, price has a very important role to play in ‘clearing the mismatch between supply and demand.
So when we experience either a supply or demand shock, as the Credit Quake of 2008 – 2009 has proved; we need to face harsh realities and make serious behavioural changes.
We are still not able to face up to the difficult ‘adjustment phase’ that both ‘deleveraging’ and the new economic reality, post-election 2010 has in store for UK plc.
Many a household across the length and breadth of the UK (and beyond) has had to come to terms with the stark realities of the ‘market mechanism’ and adjusted their behaviours and ‘prices’ to move towards a new economic equilibrium, yet the public sector has not had to face this tough reality.
Maybe because the Public Sector in Britain now accounts for between 52.1% – 53.4% (depending on which economic Think Tank’s research you believe), the crowding out of the private sector and ‘loss of touch’ with the economic reality of market mechanisms has been softened.
However, irrespective of who governs Britain and runs UK plc after the ‘expected’ elections in May 2010, the winner will have to make a few very hard choices:
How to reduce the dependency on and of the Public Sector and bring the percentage that the Public Sector ‘consumes’ of GDP to below 40%
How to ‘financially engineer’ the public debt and bank guarantees the current administration dished out in 2008 – 2009 (Anywhere between £200 – £350 Billion)
Run the country along more traditional market disciplines,
Therefore managing the country along market principles as opposed to a ‘socially engineered’ artificial egalitarian level playing field.
The ‘ladder’ exists for a reason in the true market environment, to help set aspiration and make the system work in order to ensure progress, growth (over the long-term) and advancement.
This all favours innovation as a driver for feeding the need for progress, growth and advancement.
In our next article we will continue our theme of Innovation, with part 6 of the series.
Let’s keep on ‘following the money’ on this occasion