8 April 2016

In defence of David Cameron and the free movement of capital


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At spin doctor school they will teach the How Not to Defend David Cameron’s Tax Affairs module for years to come. How could it be possible for a leader who has not broken the law, and whose family has not broken the law, to find himself in such a perilous position? What were they thinking when they put their man out there with five different explanations in four days of his father’s appearance in the Panama Papers? With under eleven weeks to go until the in-out EU referendum, reserves of public trust in the Prime Minister, that the Remain campaign will need to draw on, have probably been depleted.

For a precise explanation of how the response to this tax row was screwed up we will need to wait for the publication of the memoirs of those involved (which at this rate could come sooner than anticipated.) What remains unclear is whether the Prime Minister was given adequate advice and declined to take it – perhaps because he (rightly) found the focus on his father distasteful – or whether he was badly advised and on that basis decided against getting all the facts out there at once. Certainly, a long-standing Cameron weakness has been his conviction that his closest team is brilliant beyond doubt, when in truth only under the long ago departed Andy Coulson and later under Lynton Crosby in the 2015 election campaign has it functioned effectively and efficiently.

Whatever the explanation for this week’s shambles, it left a vacuum for the Tory party’s opponents and into that vacuum in recent days has flowed misunderstanding, envy and idiocy on an epic scale. Some Labour MPs – particularly on the Corbynite flat earth left, but a few others who should know better too – have in their attacks displayed an extraordinary and terrifying ignorance of law and economics. The Cameron family trust (which doesn’t seem to have performed very well anyway) is entirely legal.

Tax avoidance, which many of us practice when we put money in an ISA rather than account subject to tax, is emphatically not the same as tax evasion, which means evading taxes you are legally obliged to pay. In addition, hundreds of thousands of Britons have ordinary investments in trusts that may involve off-shore activities. The income that flows back into the UK and any capital gain is subject to UK tax, which the Camerons paid. In their case the tax that has been avoided – not evaded – is tax in Panama. The Panamanians don’t want it. They deliberately keep their taxes right down to attract investors and trusts.

But aren’t there some dodgy money-launderers and foreign despots using the same techniques as the Camerons used? Yes. But there are some dodgy people operating inside the UK too. Does that mean we should we all close our bank accounts here and cease trading for fear of taint by association? The implication is that the Camerons shouldn’t have a legal – entirely legal – trust because some bad people from shady countries use similar vehicles as the end point for their ill-gotten gains. It makes no sense.

It is hard then to avoid the conclusion that the only reason the Camerons (who have handled the media response poorly) are under attack is because they are very wealthy and by most people’s definitions rich. Add in the hilarious spectacle of moralising by certain newspaper groups that have used off-shore vehicles themselves in their dealings, and you are left with a week in the UK that might have been scripted by Victorian genius Anthony Trollope. It has been sanctimonious, envious Britain at its worst.

I say this as someone who recognises that capitalism has a problem, in that if it either operates as a racket benefitting a small elite, or is perceived wrongly to benefit only a few, then it could lead to the election of political leaders who will try to re-run the failed anti-market experiments of the past expecting a different result. But the free movement of capital and cross border investment – fuelled by deregulation and technology – has had overwhelmingly positive effects.

A significant part of that is down to a defining British reform. That was the abolition of exchange controls by the Thatcher administration in 1979. It was the work of Chancellor Geoffrey Howe at the urging of Nigel Lawson and it is possibly the single most important reform of the entire Thatcher era, in that it opened the way to a torrent of investment abroad and to a flow of foreign investment in the UK. It was derided as dangerous at the time although it quickly became such an obvious success that it was copied by many (although not all) governments around the world. Even the French copied it.

Mobile money has been a boon to the UK, from what we can take on holiday to companies coming here to create jobs. In 2014, the UK attracted a record number of 887 projects. That was up 11% on 2013. From the US, the UK attracted 29% of all its European projects. The lead over the rest of the Europe is enormous and in 2014 the total stock of Foreign Direct Investment in Britain went through the £1 trillion mark. Encouraging money to flow across borders enables capital to be matched with innovation and investment opportunities which creates employment, wealth and tax revenue for governments that can then be spent on services voters say we want.

This progress is now all taken for granted to such an extent that a gentleman in the audience in the BBC’s Question Time discussion programme can this week suggest the reintroduction of exchange controls and many people in the audience and on the panel nod approvingly. It would be mad to adopt his suggestion, unless we all want to be a lot poorer.

In essence, between 1947 and 1979 the UK government operated strict controls on money leaving and arriving in the country. There was a whole department employing more than 700 people devoted to this effort. Do people really want to reintroduce it and return to having  limits (it was £50) on how much they can take abroad on holiday? Pre-1979, business investments abroad and from abroad in the UK of any meaningful size needed to be negotiated with the government.

Yes, of course the largely free flow of capital across the West comes with downsides. What doesn’t? The vulgarity and shamelessness of some of the super-rich who have flooded into London at times makes one wish for the introduction of laws by Parliament controlling taste and banning gold super-cars and £25,000 handbags. The tax system might also need to be redesigned to deal properly with the online behemoths who have such an advantage over smaller retailers who live among us. But these are still minor irritants compared to the alternative of closed markets and capital controls. Even the observation that some British communities have suffered (and they have) from the painful process of deindustrialisation and reinvention that has come with open markets misses the point. Imagine how much worse our economic position would have been and will be in the future without foreign investment and capital flows in both directions.

Here the modern generation of Conservative leaders are to blame in one immensely important respect, in that they seem reluctant to make the case from first principles for mobile capital and openness to investment flows, probably out of fear that it will sound as though they are identifying themselves with big companies and rich people. This has proved to be an expensive mistake, especially when they joined in the moralising against the (legal) tax arrangements of individuals and companies, leaving them open to charges of hypocrisy when their own such arrangements are revealed.

Where does all this leave those of us who believe that open markets are the engines of prosperity and growth? It leaves pro-market types with a lot of work to do. Once again it is clear that arguments about economic freedom it was thought had been settled beyond doubt decades ago need to be made anew and won again.

Iain Martin is Editor of CapX