Saving London’s financial center

From The Economist:

But the City can compete successfully with other financial centres only if Britain has the right policies on regulation, tax and immigration. On regulation, there is an understandable fear that an outsized financial-services industry means an outsized risk for taxpayers. The proposals from Britain’s Vickers Commission go a long way to deal with this, dividing a tightly regulated domestic banking system (the bit that puts taxpayers at risk) from a more freewheeling international market for global capital. By contrast, the thrust of many of the proposals coming out of Brussels looks harmful. Some, such as the financial-transactions tax, can be blocked by a British veto. The rest are subject to majority vote, and Mr Cameron’s stand-off with his European partners last month—supposedly to protect the City, but really to avoid having to sell a more integrated Europe to Tory Eurosceptics—has now given London’s rivals the excuse to hamstring the City.

The British government’s own policies on tax and immigration are also doing a lot of damage. The 50% tax rate, introduced by the previous Labour government in 2010, brings in little money and has made London the most taxed out of ten financial centres for high net-worth individuals. The present generation of financial bosses, who live in and like London, may tolerate it for a while, but younger ones are feeling the pull of Switzerland, Hong Kong or Dubai. As for immigration policy, the best way to win Asian business is to lure the young Asian financiers to London. Tight limits on talented immigrants damage the City’s prospects—and indeed the prospects of every bit of British business.

Allan Meltzer vs. Keynesians

Allan Meltzer offers four reasons why Keynesian economics via the Obama stimulus has failed:

First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later.

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Second, most of the government spending programs redistribute income from workers to the unemployed… Permanent tax reduction generates more expansion than increased government spending of the same dollars.

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Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs?

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Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama’s latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay those costs?

Meltzer concludes:

Clearly, a more effective economic policy would aim at restoring the long-term growth rate by reducing uncertainty and restoring investor and consumer confidence. Here are four proposals to help get us there:

First, Congress and the administration should agree on a 10-year program of government spending cuts to reduce the deficit. The Ryan and Simpson-Bowles budget proposals are a constructive start. (Note to Republican presidential candidates: Permanent tax reduction can only be achieved by reducing government spending.)

Second, reduce corporate tax rates and expense capital investment by closing loopholes.

Third, announce a five-year moratorium on new regulations.

Fourth, adopt an enforceable 0%-2% inflation target to allay fears of future high inflation.

Now that the Keynesian euphoria has again faded, perhaps this administration—or more likely the next—will recognize the reasons for the failure and stop asking for more of the same.

I post this for a two reasons. First, Meltzer is an accomplished economist and deserves to be read, just as Krugman or Stiglitz. Second, and more important, since the collapse of the financial sector and the resulting recession, people have taken an interest in the economics of stimuli. Here Keynes is a clear winner. There are no invisible hand economists in recessions. Or at least, there are no invisible hand politicians in recessions. There is always the urge to do something; to not be seen doing nothing. Since Keynesian economics offers a clear idea of what to do – more stimulus to increase aggregate demand in the short term until normal economic activities can return to pre-recession levels – everyone appears to be a Keynesian. But there are those like Meltzer who are not Keynesian. Next time you hear someone – Joe Biden? – say that “all economists agree,” you will know that they all do not. Keynesianism is a theory, and not the final or even most accepted view.

Rick Perry’s Sample Flat Tax Return Form

As posted on his website.

 

Say what you like about Rick Perry or a flat tax, but one advantage is the simplicity of the form. Gone will be the parasitic tax lawyers. Gone will be the special interest deductions muscled into the tax code to aid the wealthy and powerful. Gone will be significant corruption and cronyism within our government.

But good luck selling it politically, Rick.

Grover Answers

The Taxpayer Protection Pledge is a one-sentence written commitment by members of the House and Senate to their constituents that they will oppose and vote against any and all efforts to increase total taxes. No net tax increase. Tax reform — reducing tax credits, deductions and/or exemptions in return for reducing marginal tax rates so that the change is not a net tax hike — is not only consistent with the pledge but was the original and continuing purpose of the Taxpayer Protection Pledge.

The best defense I’ve read of Norquist’s Pledge. Although I’m not a fan of the plan – too rigid, and politicians should be making ZERO inviolable pledges to special interest groups – he does make a valid point. Unless its arm is painfully twisted behind its back, Congress does seem incapable of fiscal responsibility. That being said, unless the recent attempts at balancing our ledgers are the start of larger things to come – addressing entitlements – the pledge won’t do much.

Balanced Approach = Tax Increases

Keith Hennessey examines President Obama’s “‘balanced’ misdirection.”

I draw the following conclusions about the President’s new proposal:

• The President is not, as he claims “proposing real, serious cuts in spending.” His proposals would result in a tiny net reduction in spending: -$86 B over 10 years. Almost all of the spending cuts for which he wants to claim credit have already been enacted or accounted for. Almost all the new spending cuts he proposes would be used to offset higher spending in his Jobs bill proposal and for more Medicare spending on doctors.

• The President is proposing about $1.5 T in higher taxes over ten years, offset by about $250 B of tax relief, for a net tax increase of almost $1.3 T.

• Almost all of the President’s new proposed deficit reduction comes from tax increases.