TAX JUSTICE - WHERE IS THE TRICKLE DOWN?

Nice place for a holiday - But where's the dosh from?

It always used to be said that having a concentration of very wealthy people in a society gave that society added benefits because these people spent their money in that society and therefore created demand and therefore income for other less fortunate souls who perhaps were not as wealthy. The doctrine of self interest was supposed to benefit everyone, at least to some degree. Now the scrutiny on this hypothesis has increased. The revenue raising pressures on governments are immense and where before they did not seem to be too enthusiastic about chasing very rich people for tax because sources of government revenue were fairly stable and indeed slightly increasing, now governments are waking up to the fact that groups of very rich people do not pay much if any tax at least not in proportion to their wealth. There is no problem in being rich , there is a problem when the tax bill for such people is lowered artificially by use of very clever devices which the rest of society is not in the same position to profit from. Yes we would all love to pay less tax, but the tax bills of some of the wealthiest people do not hang together in terms of many of the benefits they gain from our society.

The extent of this problem has been revealed on an international basis by the Tax Justice Network. according to that Network;

"Assets held offshore, beyond the reach of effective taxation, are equal to about a third of total global assets. Over half of all world trade passes through tax havens. Developing countries lose revenues far greater than annual aid flows. We estimate the amount of funds held offshore by individuals is about $11.5 trillion – with a resulting annual loss of tax revenue on the income from these assets of about 250 billion dollars. This is five times what the World Bank estimated in 2002 was needed to address the UN Millennium Development Goal of halving world poverty by 2015."

There is an argument that if taxes on richer people were lower they would pay more -- the  laffer curve -- but I am not sure. My daughter's friend's father is a tax consultant for one of the big 4 and his role is to ensure that rich people in a certain part of the UK pay little or no tax -- that is his role. not assisting industry to grow, not helping small companies, not advising charities but minimising tax bills. Not sure that I personally would get much satisfaction from that but each to his own I suppose.

The use of tax havens is an issue -- It is understood that the UK is linked\responsible for 14 of them. Where does that lead us? Into more offshore shenanigans and because these off shore places are tax havens -- what type of funds do they attract and from whom? Their very secretive nature does not bode well for transparency and indeed can be a cloak for criminality. 

We are supposed to be in this together but I am not sure now. The trickle down effect has always been exaggerated particularly when there appears to be a torrent of resources flowing out of our countries offshore which could make a significant difference to bridging our deficit and improving our society.Perhaps it is time to build a dam?

Please view:

http://www.taxjustice.net/cms/front_content.php?idcat=2

http://www.taxresearch.org.uk/Blog/

OUTSOURCING - DO WE NEED TO BE PART OF IT?

Outsourcing - Do you recognise these benefits?

An article in this week's Spectator puts a very interesting spin on the outsourcing debate. The article argues that the real evil is not capitalism or state ownership but a lack of competition. The real problem is when a monopoly public service is awarded to a private sector provider then that provider will exploit it ruthlessly for its own gain. The Spectator argues that the existing public service provider should be allowed to bid. I agree with the latter point. In  a competitive environment the existing public service provider, if part of a bidding process, will be able to carry out reforms which would never have been possible under the previous regime. I have seen this with my own eyes, when I was heavily involved in this process in Local Government.

The competitive nature of outsourcing works better when there is a multitude of potential effective service providers who can bid for the work and the work is put into contract parcels of sufficient magnitude to attract at least 3 bids for each parcel of work. The parcels of work which form the contract to go out for tender should be related to the size of the market and the number of potential alternative effective providers in it. If there are 4 medium sized contractors it is little use putting out a huge single contract as this will be unlikely to attract these medium sized bidders. As a sense check, the in-house team, should be allowed to bid for the work, providing the process is a level playing field. Rigorous tender examination should iron out any service issues. I distinctly remember from my own tender evaluation of a grounds maintenance bid, that it was obvious that one contractor has assumed that a single barrel mower would cut the grass of 4 fields. The assessment of this would have meant that this mower would have needed to be working continuously for 24 hours to get this particular job done. This was impossible and the mower would have probably broken down. The related bid was technically unrealistic and was later disallowed from the process.

According to this week's Economist -- some £80bn of work from central and local government has been farmed out to the private sector through outsourcing and this is predicted to rise to £140bn ( an increase of some 75%) by 2015. The public sector will look very different by then if this outsourcing trend is allowed to continue. Tighter public sector budgets will advance this agenda and local authorities and central government are drawn to it by the greater economies of scale for this provision and supposedly better management. The latter not always being the case of course, in the light of this week's hearings of the Public Accounts Committee on G4s.

In reality the Economist reports that there are pressures to choose the cheapest option rather than securing the best quality for the service. These pressures should be resisted because if they are not then quality related pressures only surface later on in the contract's life.

For all the hand wringing about G4s this week  -- the outsourcing bandwagon will still roll on. The challenge facing in-house providers is how do they need to change to compete and in any tendering process, will they be allowed to put in bids as well as the private sector, albeit with a changed structure,management and strategy. Will they be able in some way, to secure their place in this potential £140bn market?

OUTSOURCING ON TRIAL -- CAN IT EVER WORK?

The Acceptable Face of Outsourcing?

Outsourcing of a service or a function by the strategic management of a body is usually undertaken for a mixture of the following reasons -- though the list is not exhaustive;

1. The existing service\function appears to cost more to deliver than it currently costs to deliver by comparable benchmarked organisations.
2. The existing service\function does not deliver the desired quantity and quality service outputs in comparison to other benchmarked organisations
3. The existing service\function delivers the desired quality outputs but at a higher cost than it is currently delivered by comparable benchmarked organisations.
4. The existing service\function delivers poor quality outputs at a relatively high cost compared with other benchmarked organisations.
5. The culture of the internal service\function provider is inflexible and resistant to change.
6. The internal service\function wants to change and re-configure itself but there is no internal funding for it to do so - hence an external option is required.
7. Strategic management believes that the private sector provider will be inherently more efficient and creative than the in-house provider based on an ideological commitment.
8. An external provider convinces strategic management that it can do offer a better service at a more reasonable cost than the in-house provider.
9.The internal provider's effectiveness has become so diminished by cuts and redundancies that the outsourcing option is the only real opportunity for service continuity.
10. The in-house team wishes to spin away from the public sector and set up a mutual or some sort of other structure where they can become more incentivised to deliver better services at a more reasonable cost.

Points 6 and 10 are closely related to each other. Primarily the service provider is chiefly looking to reduce cots\increase revenues through outsourcing. Cost saving in reality is the main aim - there is an expectation (hope?) that service quality will be maintained. The latter point is the real challenge of the outsourcing agenda. Can we put up with the reduction in quality for the cost savings which may be achieved at the instigation of the contract. Many of these savings are illusory, because sometimes quality levels fall so low that remedial work has to be brought in to push quality levels back up. In the G4s scenario this involved bringing in the army.

But is it just the fault of the outsourcing organisation? Do the people who do the analysis on these contracts take it seriously enough in vigorously challenging the ideas and assumptions being put before them?  Do they wish to believe that outsourcing will be better when in fact there isn't that much evidence that it will.

The problems of outsourcing should not deflect from the fact that internal service and business functions should always strive to improve their own performance in straitened times -- This may involve partnering, mutuality,profit and cost sharing but not necessarily outsourcing the whole service\function.

We need to improve with the help of others but there is no need to cede total service\function control to a third party under outsourcing. We should be trying to solve our own performance problems and not passing those problems on to other organisations which are frequently less able to cope than we would be if we only had a bit of targeted support.

HOW THE LIBOR RATE FIXERS CAN HELP THE BIG SOCIETY

Bob Diamond - Gone but not forgotten?

What do we do when others are not looking? Do we please others or please ourselves? These issues are at the root of the LIBOR rate fixing scandal. Traders whose remuneration is largely based on profitable market performance are in a quandary when the market does not move in the way they would desire to maximise returns for their firm and themselves.The pressures to maintain high returns are immense both for their company's reputation and their own. Private benefit takes a front seat in these assessments and the benefit of society as a whole takes a back seat. As long as the bonus pool does not diminish in value then surely that is okay?

There appear to have been 2 types of collusion. The first type was as described above and was based on boosting traders' profits (greed?). The second type of rigging started with the onset of the credit crunch in 2007. Here the LIBOR rate was set artificially lower than it should have been, Possibly to help stimulate the economy? Bob Diamond in his evidence to the parliamentary committee alluded to having had conversations with the Bank of England about this very way forward. George Osborne was not slow to blame the then Labour Government for having its fingers in a manipulative process of LIBOR for economic ends.Is there such an approach as a moral rigging of the interest rate? It will be difficult to argue that this was done for personal gain although it definitely did distort the market rate of interest. Class actions will be more difficult to fight on this issue because bad things were being done to do good? Although if you are a pensioner on a fixed income and the interest rate on your life savings had been kept lower than it should have been you may be looking for a pay back.

If one believes in the free market philosophy of economics then the intentional distortion of the  competitive market by individuals and\or governments should be avoided or at the very least minimised. Intervention with a moral purpose to improve markets for the benefit of society (as described above) can be argued for -- though some economists would even disagree with that option. Intervention to rig a particular market to benefit a particular grouping and no-one else in society is a different matter altogether. Most economists would disagree with this latter action because it would have such potentially harmful effects on the  performance of the economy with consequential negative effects on the majority of people and other economic agents like firms.

Who are the best people to try and get to the truth of what happened? -- Is it a parliamentary committee? The MP's are well meaning enough but their questioning of key people appearing before them is often un-co-ordinated and unfocused. Shall we therefore have a public enquiry in front of a judge? The standard of forensic questioning will be higher --people will be caught out -- but the prospect of any prosecutions is minimal and there will be a list of recommendations which at best will only be partially followed through - ~One thing is for sure -- the lawyers will be much richer than they were before. The public purse will be greatly the poorer and the level of satisfaction in society at the outcome will not be significantly improved, if at all.

What about the police investigating something which is clearly a fraud? -- Possible criminal proceedings could send some wrongdoers to jail? Is that really likely though? Probably not. If this were America, a civil class action might be taken against Barclay's -- this could have greater prospects of success over the pond than in the UK. The Americans take this sort of thing much more seriously than we do. In the UK, any plaintiffs would need to demonstrate they had suffered losses as a direct result of these interest rate manipulations. Perhaps a class action might happen in the UK but frankly I doubt it.

We will just probably wring our hands in despair and then the fuss will die down?

More regulation will not work unless hearts and minds in the City are changed as well  -- This will be a difficult task but it is worth a try. LIBOR is used to set the price of trillions of dollars worth of financial instruments worldwide. It now needs to be estimated by an independent body and not the British Bankers association. Any finance staff who admit to and\or are found guilty of dishonest\illegal practises in the City, should have a share of their bonus pools donated to charity. The worse the misdemeanour, the higher the charitable donation.

This would be a great way of the City, helping the Big Society and would be far more popular than just taxing bankers and other finance staff more, to punish them for their peccadilloes. It could be deomonstrated that these bonus shares would be going to the part of society that would need them the most. Now that would be really radical!!!

CYBER CRIME -- HOW SERIOUSLY SHOULD WE TAKE IT?

What would you do if you couldn't get access?

A couple of weeks ago, my e-mail account was hacked and I was surprised at how unhappy and threatened I felt. It was hacked on a a Sunday afternoon from Japan. They really should have better things to do with their time. I quickly found out and took evasive action by changing my password and a log in image that was only visible to me. However there were some problems -- A program was posted in my yahoo account which sent strange malicious e-mails to my contacts. I had to inform them of course -- I did have some confidential information in my accounts which I have since altered - More fool me. So I was a victim -- but things could have been worse.

We perhaps over rely on the digital world and there are many unsavoury people who will exploit that fact, without any regard for us. What is to be done? The number of cyber attacks in the world, to try and obtain key commercial\political\military information and\or to reduce the capacity of nation states, companies and individuals to function, is increasing rapidly. In 2011 it was estimated that the UK suffered 44m such attacks, the US 240m , Russia 128m and China 46m. These attacks can be instigated by twisted computer geeks, nation states, extremist political\religious groups and professional international criminals. Not a shot needs to be fired nor a rocket launched. Societies can be brought to their knees by some malicious and very clever\hidden computer code. More than 30% of the world's population is linked to the inter web and this is growing -- so the target audience gets bigger. According to Symantec , the public sector (Including the military) receives 25% of all targeted e-mail attacks closely followed by manufacturing (15%) and finance (13%).

According to the Cabinet Office, Cyber crime costs the UK some £27bn a year, broken down as follows;

Scareware -- £30m

Data loss to third parties -- £1bn

Direct on-line theft - £1.3bn

On line fraud -- £1.4bn

Identity theft - £1.7bn

Extortion - £2.2bn

Tax fraud- £2.2bn

Industrial espionage - £7.6bn

IP Theft -- £9.2bn

Scareware comprises several classes of scam software of limited or no benefit, that are sold to consumers via certain unethical marketing practices. A tactic frequently employed by criminals involves convincing users that a virus has infected their computer, then suggesting that they download (and pay for) fake anti virus software to remove it. Heard that one before?

We are always aware of high level cyber crime -- stuxnet trying to delay the Iranian centrifuges for their nuclear programme but the lower level stuff is more boring but just as dangerous. A hacker can try and find a contact or contacts within your organisation from Facebook or Linked In. He then sends them an official looking e-mail with a message\file they might recognise. All it takes is for one of the targets to open the mesaage and click on the attached file and they are  in  -- your firewall has been avoided and the programme can do all sorts of things -- record your key strokes. watch you computer screens,relay back any conversations you might have,get hold of your sensitive identity information - A virus can replicate itself and spread through your  computer and your network -- Some, like trojan horses, can lay dormant for a long while -- worms will not need a click on a file they will do their dirty work anyway. All these elements need to be watched. If you receive communications from third parties you do not know with funny files please delete the e-mail and do not open the files.

A common type of attack which often happens is a denial of service attack -- Target networks are flooded with artificially high levels of traffic and normal users just cannot access the systems - This happened in Estonia in 2007 - Russia was a prime susect for that particualr escapade. This is usually practiced when it is the intention to bring down a specific country or company as a result of someone's malevolence?

How seriously do we take things? Well accoriding to Microsoft, the most common systems passwords people use are:

Password,12346,12345678, qwerty, letmein, abc123,dragon and monkey.

These are hardly challenging to crack are they? Microsoft advise that you should not use dictionary words or repeated character sequences. Though why dragon and monkey are so popular I do not know.

None of this is any use if a hacker manages to get through to the central list of all user passwords.

The main message - a quote from Hill Steeet Blues, if anyone remembers that programme is " Be careful out there."