Capital Flows and Asset Markets
Capital Flows and Asset Markets


What would a modern FDR manifesto look like?

Much of my analysis on bonds highlights that the traditional centre of politics has lost its appeal, and voters are craving change, which has led to rising vote shares for extreme left and right with parties, or the takeover by traditional parties by extremist elements. I have expressed a wish for a modern day FDR who could forge a new political consensus and centre. This may seem like wishful thinking, but many of the policy planks are in place, just waiting for a generational politician like FDR, Reagan or Thatcher to promote.

In essence there are two policy areas needed - one to raise wages, or to increase the share of GDP going to labour. And the second is pay for it - which involves taxation. I will write this from a UK perspective, but broadly speaking the ideas generalise.

Increasing Labour Share

  1. Abandon the WTO and free trade policies - tariffs to promotes wages and tax collection

This has largely occurred anyway, but to explicitly state that trade policy will be enacted to the benefits of workers, or domestic corporates that agree to rising wages would be a clear FDR-style policy. Currently tariffs are applied to “strategic competitors” like China. I believe that tariffs should also be applied to any nation that is undercutting wages (Japan and its weak yen policy) or undercutting taxes (Ireland and its corporate tax policy). This is necessary to incentivise good behaviour.

  1. Harmonise tax rates for Labour and Capital

Current tax system encourages income to be recognised as capital, distorting much of the system. Income sources should face a single tax rate.

  1. Tie immigration to house prices.

When house prices are high relative to income, immigration should be heavily curtailed, and when house prices are low, higher levels of immigration should be welcomed. High housing and rental costs reduce workers real wages.

  1. Central bank should target asset inflation

Central bank policy should more closely align with asset prices, aiming to keep house income ratios relatively low. In almost all cases, this would lead to a stronger currencies, and rising real wages.

  1. Governments should mandate above inflation increases in the minimum wage for the next ten years

Give workers the comfort of knowing that any wage increases are not one off, but over a longer period. Businesses would be incentivised to train or automate, also boosting wages and productivity.

Paying For It

  1. Full commitment to the OECD Pillar 2 taxation policies.

The OECD has been working on a digital tax regime that collects tax from digital giants and then redistributes according to activity, Pillar 2 reform. A commitment by the US, with political pressure on hold outs like Ireland

  1. Require companies over a certain revenue threshold to operate as an independent subsidiary within the UK.

Many multinationals run two sets of accounts, one for tax purposes, and one for profit purposes. As a UK based subsidiary, transparency on actually profitability would increase. Royalty payments to offshore subsidiaries to be curtailed.

  1. Business taxation should be regressive

Larger businesses should pay higher tax than smaller business. Starbucks pays less tax in the UK than a locally run coffee chain. Tax policy should not be a competitive advantage. Companies found to use tax as a competitive policy should face administrative restrictions.

  1. Antitrust should move from consumer first to small business first

Does this M&A harm the interest of small business? Currently trustbusters look at whether prices to end consumers rise or not. With businesses like Google or Amazon, where consumers not paying higher prices, there is no antitrust issues. But for small businesses, avoiding using large tech companies is almost impossible, and pay higher rates because of it. Lina Khan head of the FTC made her name with this paper on Amazon. Moving more revenue from large firms to small firms will make tax collection more likely.

  1. Limit tax deductibility of interest payments

Interest payments encourage private equity and other owners to load up subsidiary companies to pay dividend, and erode the tax base. Perhaps when government debt to GDP is above 50%, interest can no longer be used as an expense.

  1. Increase funding to HMRC (IRS in the US).

Generally, tax collecting agencies have seen funding fall. The return on investment of hiring people at tax agencies has approached 1000 to 1.

  1. Ban the use of non-tax paying companies.

Companies that use tax minimisation and avoidance schemes such as Apple, should be banned from use at government organisations until they have normalised tax payments. In the case of no viable option existing, i.e. the entire industry use tax minimisation strategies, the case for UK funded competitors arise. That is, non-tax payment should be cause for a business to be banned from operating in the UK.

  1. Reform Council Tax

Currently very expensive homes in the UK (such as in Westminster council) charge a fixed amount for all homes of the value of £320,000. Reform of this system could leave homes up to £1,000,000 paying the same council tax, while adding huge revenue to the government, and encouraging the efficient allocation of property in the capital.

Broadly, speaking both the right wing and left wing of UK politics have inched towards these policies in some cases, but have not represented as a coherent strategy to boost the fortune of wage earners. In the hands of a skilled politician, this manifesto could be an election winner in my view.

While is offers many benefits to workers, it also offers some sizable benefits to UK business. Protection from undercutting via tax haven regimes. The potential of government subsidies to build businesses to replace tax avoiding companies. The aim would be to level the playing field between small business and multinationals. Some may argue it might tank asset markets - I would say it will merely restrain them as rising wages will have a tremendous boost to growth.

Most of these policies seem workable, but only with an overwhelming electoral mandate could they be implemented. That is, just as FDR did with his New Deal, it would need to be communicated to voters before implementation. As we have seen in Argentina, voters can back change, and even radical change when the end result is effectively communicated.

Capital Flows and Asset Markets
Capital Flows and Asset Markets
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