Wednesday, June 23, 2010

Everything Changed Overnight... What to do Now?

By Simon Black

Yesterday in the UK, something happened that has significant implications for us all.

Old western economies are clearly losing their dominance. Particularly in Europe, the costs of broken pension plans and entitlement programs are bankrupting entire economies.

Yet, national governments continue to perversely borrow and consume; politicians have been acting like degenerate gamblers, borrowing money from anyone they could, blowing it all on terrible bets, borrowing more money to make even worse bets, and actually expecting different results.

Something needs to change... and it appears that Britain is the first major western government to face the music. As such, British Chancellor of the Exchequer George Osborne unveiled yesterday what has been touted as 'emergency' budget austerity.

Osborne's budget cuts deep. It hits the elderly, it hits low income workers, it hits single mothers, it hits business owners and investors... it even hits the Queen, who will see her multimillion pound salary frozen for several years.

To give credit where credit is due, Osborne should be commended for looking his nation in the face, speaking about a very grim reality, and being candid about the tough sacrifices that everyone will have to make.

But here's the scary part, and what we need to learn from:

While there was significant talk in Osborne's speech about spending cuts, most line items have yet to be fully determined. What they are absolutely clear about, though, are the tax changes.

Britain's VAT, for example, will increase from 17.5% to 20%. Many personal income tax rates will rise as well, particularly for high income earners. These changes will be phased in gradually... except for one.

Osborne announced that Britain's capital gains tax will increase from 18% to 28% for higher income earners. Yet unlike the other changes which are phased in over time, capital gains tax change occurs IMMEDIATELY.

There is a serious lesson here: governments have the power and willingness to make major changes overnight. With the stroke of a pen, they can impose capital controls, higher taxes, gold forfeiture, confiscation of retirement savings, or anything else they can dream up.

Read the rest here.

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