Why we should not be taxing referendum donors

Over Christmas, there has been some controversy over the taxation of donations that were made to the Leave and Remain campaigns. Since most of the reporting has been written by people with very little idea of what is being taxed and why, I thought I’d note the basis of the taxation and why, in the interests of justice, the law should be amended to prevent it.

The UK has an inheritance tax which taxes a deceased person’s estate at a rate of 40%. There is a large nil rate band of £325,000, doubled to £650,000 for a married couple. There are also reliefs for business assets, some family homes and various other things. Inheritance tax is very unpopular but personally I have always thought it is one of our fairer taxes. The main asset it taxes is residential property, which is usually subject to an exemption from capital gains tax for our main residences. Also, an large inheritance is not something we do anything to deserve and it seems fair that the exchequer should get a cut.

Obviously, you should not be able to avoid inheritance tax by giving your money away just before you die. There are rules to prevent this from happening. Also, some people set up trusts for the benefit of their children to avoid some of the tax (although this is much less effective than it used to be). The Chargeable Lifetime Transfer regime is one of the ways that the tax code tries to prevent people avoiding inheritance tax by putting money into a trust. Basically, if you put £100 into certain trusts or other kinds of entity, you have to pay £25 in inheritance tax at the same time. To be clear – this tax charge is a way to prevent people from avoiding inheritance tax. It is not intended to tax gifts and donations to unrelated bodies and there are explicit exemptions for most such donations, including to charities, sports clubs and political parties.

HMRC is demanding that the donors to the Leave and Remain campaigns pay the 25% tax on their donations because it is treating them as Chargeable Lifetime Transfers. In other words, it is saying that the donors should be taxed as if they were trying to avoid inheritance tax (which, obviously, is not what they were trying to do). HMRC is correct that the amounts are due on a strict reading of the law. However, it is now a settled principle of tax law that the literal meaning of legislation is not determinative. What counts is the intention of Parliament. It is clear that when Parliament enacted the rules on donations to the Leave and Remain campaign, it did not intend that some of these donations should be subject to a 25% surtax. The only reason for the tax demands is that no one at the time realised that there was a problem. Admittedly, to put the matter beyond doubt, there should have been an explicit exemption in the European Union Referendum Act 2015. Unfortunately, there wasn’t because the parliamentary draftsman was careless and didn’t put one in.

HMRC has discretion not to pursue tax demands that are inappropriate. However, because of unwarranted criticism about ‘sweetheart deals’ and such like, it has become very cagey about using its discretion. In any case, it’s lawyers may well have decided that without anything explicit to exempt the donations, it should tax them anyway. I don’t think this is about the ‘revenge of the establishment’ (as one of the donors has complained), although the crowing from opponents of Brexit over the issue has certainly not helped put such fears to rest.

Luckily, there is a quick and easy solution to this manifold injustice. An amendment should be made to the Finance Bill currently wending its way through Parliament to put right the omission to the European Union Referendum Act 2015.

In praise of the Remain campaign: Europhiles should accept they gave it their best shot

Originally published at Brexit Central.

In the aftermath of the referendum, two myths have quickly taken root: that David Cameron made a reckless gamble when he called a vote on the EU and that Britain Stronger in Europe was a disunited rabble that fought a dreadful campaign.

These myths are dangerous because they fuel the calls for a second referendum. Europhiles tell themselves that if the vote was a gamble, another throw of the dice might produce a different result. And they imagine that a more focused and positive campaign for Remain could win the day.

Let me address these two myths in turn.

In his Bloomberg speech of January 2013, Mr Cameron promised a renegotiation with Brussels followed by an In/Out referendum. Commentators rushed to tell us that the speech was a reaction to the rise of UKIP and a way to plaster over the cracks in Tory unity. This confused the symptoms of Euroscepticism with the cause.

UKIP’s success reflected widespread anxiety in the country about the EU, while Conservative divisions had been opened by the refusal of successive British Governments to seek consent for the transfers of sovereignty to the EU by the treaties of Maastricht, Nice and Lisbon. Mr Cameron himself had reneged on his ‘cast iron guarantee’ of a referendum on Lisbon.

It’s also been suggested that he intended to drop the referendum pledge in any coalition negotiations with the Liberal Democrats after the 2015 general election. However, an analysis of Mr Cameron’s statements in the run up to the election shows that this is not true. The referendum was a red line for any coalition agreement. In any case, if he’d tried to ditch it, half the Conservative Party would have spontaneously combusted, including myself.

Far from being a short-term fix for his European troubles, Mr Cameron was thinking strategically. He realised that there had to be a reckoning to settle the question of Britain’s EU membership. And it would be far better for Europhiles if this reckoning took place at a time of his choosing and on his terms. The alternative was a referendum down the line under a Brexiteer Conservative leader using all the advantages of Government to ensure a vote for Leave.

Although the Cameron plan was a sound one for Europhiles, events got in the way. The Prime Minister assumed the EU would need a treaty to solve the Euro-crisis rather than kick the can down the road and condemn tens of millions to unemployment. He hoped Britain’s veto would strengthen his negotiating position. He also underestimated the pig-headedness of his fellow heads of Government in February 2016 when they scuppered his efforts to get a deal he could sell to the British people.

But I would argue that the failure of the renegotiation was a mistake by the EU rather than Mr Cameron, whose only error was to misjudge the EU’s capacity for self-harm.

The second myth concerns the referendum campaign itself. Brussels had dealt Europhiles a very weak hand, but I believe they played it as effectively as they could. For all the criticism of Project Fear, Remain had no choice but to ramp up the scare tactics. Europhiles like former Education Secretary Nicky Morgan might wistfully write that they should have fought a more positive campaign.

But, honestly, what was the optimistic message about the EU supposed to be? Lauding the alleged benefits of immigration was never going to work and Remain knew it was essential to keep the European Commission’s ambitions for more integration under wraps. When the EU took credit for peace in Europe or increasing prosperity, the British just chuckled at its lack of self-awareness.

So Project Fear was Remain’s only viable strategy, and if it was to work, it had to be full-on. One advantage for Remain was that it didn’t need to make any predictions about what would happen if it won. Unlike a political party promising the earth at an election, Remain’s warnings would only be tested if they lost, so they could really push the boat out on the doom-mongering. Of course, Leave won and all those predictions are coming home to roost for the likes of the OECD and HM Treasury. However, I doubt either Mr Cameron or even George Osborne are very bothered about that.

That is not to say Matthew Elliott’s fantastic Vote Leave didn’t matter. The point of a political campaign is not really to win the argument. Rather, it must identify its supporters and motivate them to get to the polling station on the big day. Vote Leave did that brilliantly.

The important point is that the referendum was not won because of narrow tactical concerns, mistakes made by Mr Cameron or Britain Stronger in Europe, or even because Leave voters were just protesting and didn’t mean to win. All these erroneous excuses have been made by Europhiles since 23rd June.

Leave triumphed because it is the settled will of the British people that they do not wish their country to be part of the European Union. Given that fact, Remain did as well as they could have done by pushing us so close. David Cameron deserves credit from Europhiles for giving Remain the best possible chance.

The cause of recessions

There’s been a lot of talk about whether or not Brexit will cause a recession. Most commentators seem to imagine that recessions can be avoided if we do the right think. The former British Prime Minister Gordon Brown even turned this delusion into a political slogan: “No more boom and bust”. Of course, particular recessions have particular proximate causes. The subprime crisis was the catalyst that kicked off the great recession of 2008 that we still have not quite got behind us. But that was not why it happened. After all, the sovereign defaults and the LTCM collapse in 1998 didn’t cause a recession. Nor did the dotcom crash of the early noughties. So you need to look a bit deeper to understand why recessions happen and why they cannot be avoided.

Here’s one theory (which I very much doubt has the merit of originality). I call it the theory of crud. Actually, I don’t. But the word I use instead of ‘crud’ isn’t appropriate for a family blog.

When economies are growing, we can get away with quite a lot. If you have an underperforming employee, then firing him or her is probably more trouble than it is worth if your business is still making lots of money. Innovation is risky and there is little point in it if you can make money doing what you’ve always done. This is human nature.

Economic growth will also resist measures that might be expected to stifle it. Government regulation and taxation, as well as high debt levels, are cases in point. A growing economy allows us to feel we can take on more debt than is prudent. It encourages governments to increase public spending so as to look after their clients and stay in power. So they raise taxes, removing money from productive uses in the private sector to unproductive ones in the public sector. Governments also get themselves into debt more than they can afford. Growing economies let them (and us) get away with mortgaging the future.

Over-regulation is even worse. It is essentially a form of taxation whereby money is moved from productive sources into the hands of compliance officers and inspectors who are often, but not always, in the public sector. But regulation is also less obvious that straightforward taxation and can be disguised as a good thing when it purports to improve health and safety, or the environment, or whatever. This makes getting rid of red tape an enormous challenge. When an economy is growing, no one can be bothered. Protectionist policies have similar advantages. Free trade is a hard sell.

And it gets worse. A growing economy lets people make colossal and stupid mistakes without being punished. Utterly insane ideas, like joining Europe’s disparate economies into a single currency, can appear to be working when the damage they do is hidden under economic growth.

Crud is what I call all this taxation, petty rules, overhanging credit and stupidity. It jams the works of the economy like sand in a machine, wearing down the gears and gradually making the whole mechanism less efficient. But when the wheels are turning, they can overcome this resistance. The crud continues to build up, week by week, but while the machine turns, it is worth nobody’s while to do the hard work of clearing it out. Things are obviously much less efficient than they should be, but they still work enough for people to pretend everything is fine.

But eventually, the crud has built up to such a level that it causes serious damage. Important works clog up. Gearwheels crack under the strain of turning through the rubbish around them. The machine judders to a halt. A recession begins. Exactly where and when this happens is essentially random. But a time comes when an economy is simply not functioning well enough to overcome a shock. Only then does the clear-up begin.

That’s what makes recessions so painful. All those decisions that were put off when times were good can no longer be avoided. The shirking employees have to go; the debt must be repaid. Idiocies like the Euro show their true colours. The engine of the economy has to be steam-cleaned at vast expense and discomfort. By the way, the recession we have just had was so deep and prolonged not because of wicked bankers. It was just that long boom from 1990 to 2008 gave us so many opportunities to accumulate crud. Getting things going again with so much junk in the system is extra-hard.

And there is an added danger. A recession can lead people to demand even more regulation and red tape in the ignorant belief that this prevents rather than causes economic reverses. Keynesians cry that we have to shovel even more crud into the system to restart it. Roosevelt’s famous New Deal is now known to have made the depression of the 1930s even worse than it needed to be. And here’s why: the New Deal just showered crud over everyone. Sadly, the only way to get the economy moving again is paying down the debt, tearing up the regulations, slimming down the workforce and keeping markets open for business.

So, in summary, we get recessions because capitalism works. Capitalism generates economic growth. When things are good, human beings have a natural tendency to avert their eyes from future problems. But eventually we just have to roll up our sleeves up and carry out the necessary spring cleaning.

Will Brexit cause a recession? It might turn out to be a catalyst but it won’t be the cause.

Brexit: What on Earth Happened?

People around the world may have heard some surprising tidings from the United Kingdom over the last few weeks. As some international news reporting has painted events here as either a revolt by xenophobic peasants or just complete chaos, I thought it was worth setting down what has really happened and the reasons behind it.

First, some history: back in 1975, the British overwhelmingly endorsed their membership of the European Economic Community or EEC, the predecessor organisation of the European Union (EU). On balance, the British decided that membership of a huge market on their doorstep was worth sacrificing some of their self-rule for. Besides, back in the 1970s, the UK was in a bad way, with widespread labour disputes, high inflation and shaky Government finances.

In 1992, the EEC was turned into the EU by the Maastricht Treaty, which was intended to be the first step towards a federal United States of Europe. The British Prime Minister at the time, John Major, declined to obtain a democratic mandate for this. The previous Prime Minister, Margaret Thatcher, had been deposed a couple of years before when she had effectively threatened to veto the plans for a federal Europe. In the same year, on 16 September 1992, ‘black Wednesday’, the German central bank provoked the markets to devalue the British pound against the will of the British Government, causing it to fall out of the exchange rate mechanism. The combination of Maastricht and black Wednesday turned the majority of the Conservative Party against the EU. These events also destroyed the credibility of Mr Major and his Government, which lost the 1997 election by a landslide.

From 1997 to 2010, Tony Blair’s Labour Party was in government and was determined that the UK would play a full part in the EU. In 2005, in an effort to increase the democratic legitimacy of the EU, a series of countries held referendums on its new constitutional treaty, which was a further step towards a federal Europe. However, when the EU lost the votes in France and the Netherlands, the results were ignored and the constitutional treaty was pushed through anyway with a different name. Both Mr Blair and the new Conservative leader, David Cameron, also promised a referendum on the constitutional treaty but both reneged when it became politically inconvenient to give the people a say. The grand plan to provide the EU with democratic legitimacy ended up destroying its credibility because the people declined to give the answer they were required to.

In 2013, now in government, Mr Cameron again promised a referendum. He said he would renegotiate the UK’s relationship with the EU before the referendum and then ask the people if they wanted to Leave or Remain, based on the new terms. He hinted that, if the negotiation didn’t go his way, he might campaign to Leave. But when his negotiations duly failed to achieve anything of substance in February 2016, he announced he would, after all, campaign to Remain. His credibility as honest broker was instantly destroyed and British voters stopped listening to a word he said. They also got sick of every international bigwig, from President Obama downwards, telling the UK was doomed if it voted to Leave.

On 23 June, we voted 17 million to 15 million to Leave the EU. Everything about the vote was a surprise. No one thought Leave would win. Even after the polls closed, the betting markets implied a 90% chance of a Remain vote. Turnout was 73%, the highest in a national vote for 25 years. In short, more of the British voted to Leave the EU than have ever voted for anything else in our history.

So what happened and what happens next? The Leave vote was a coalition of three disparate groups. The campaign was led by a relatively small group of internationalist libertarians, including Boris Johnson, Michael Gove and Daniel Hannan. They saw the EU as an anti-democratic and corporatist racket that was immune to reform, as the failure of Mr Cameron’s renegotiation had shown. The shock troops for Leave were supporters of Nigel Farage and the UK Independence Party: mainly paleo-conservatives who objected to uncontrolled immigration (the UK must accept unlimited numbers of immigrants from the EU).

The third element of the coalition for Leave was one whose participation nobody could predict in advance. This final group consisted of working class people who nominally supported the Labour Party, but in practice rarely voted at all. Sick and tired of being ignored, and not seeing the benefits of globalisation, they came out to vote on 23 June and delivered the verdict of Brexit.

Now the UK embarks on an exciting journey. We want to continue to trade freely with the EU, but also sign free trade deals with the rest of the world as fast as we can. We’ll still welcome many new immigrants to the UK, but they won’t all have an automatic right to reside here. And the democratic control of farm subsidies, fisheries and taxation (the UK currently can’t even abolish the tax on sanitary towels) will return to Westminster. Of course, plenty of people have valid concerns about the effects of Brexit. And it is to be expected that many individuals will have invested in the status quo of EU membership, especially if the status quo has lasted for over 40 years. That does not make it a good thing. Indeed, institutional inertia and the fear of short-term consequences over long-term benefits are among the most damaging of political motivations.

As for the rest of the EU, it needs to reform quickly to gain democratic legitimacy while also, somehow, undoing the immense damage done by the single currency. Is that possible? Either way, we British wish the EU well. With Brexit, we cease to be a truculent tenant and become a friendly neighbour.