Posts Tagged ‘Taxation’

21 Apr

Podcast: another quick observation

Posted by freethinkingeconomist in Economics. Tagged: , .

Dan Roberts and I argued at greater length than is eventually broadcast, about whether the LibDems are introducing too much complexity into the tax system with their 10k proposal.  Dan’s argument was, effectively: doing this makes it a nightmare for journalists, commentators and those putting the manifesto under the spotlight, to work out whether it benefits X or Y.  So who wins from Lib Dem proposals? For many, it is hard to say.

I answer was and remains: that is so not the point! The complexity that matters is that which confronts the people using our tax and benefit system, not the wonks working out its implications.  Of course there is complexity – people are in a myriad of different situations.  If we choose a tax system that maps perfectly to human complexity, our tax system will be horrendous, and we won’t be thanked for it.

What we need is a tax system that is easy for its users, not for those professional wonks who work out the decile-benefit bars (ie. the IFS and the ONS).  I am all in favour of systems that reduce the number of transactions and relationships between the individual and the state. The 10k tax proposal might not improve the circumstances of everyone in the bottom income quintile, at least not seen in a static way (which is how Labour planners can see things; rather than making it more attractive to be in another quintile, of course).  It certainly makes work more attractive.

And I hope it means making it less important that people earning around 10,000 need to learn how a myriad of benefits and credits work.   What strikes people as nuts is that the bottom quintile sends a lot of money to the state, and gets a lot sent back.  Reducing that two-way flow seems unambiguously sensible, so long as not too many people are hurt in the transition.  Worrying about how hard it is to work out from a Westminster thinktank or newsroom who the winners and losers are, is a distant secondary consideration.

12 Apr

Further manifesto reactions

Posted by freethinkingeconomist in Politics. Tagged: , , , .

Stephanie Flanders: there’s nothing new in it.  Everything carefully costed, trying to reinforce the message that they are the safe pair of hands.

The IFS has a note but it mostly reflects on the past 13 years (better public services, worse efficiency, some of that probably unavoidable, the future difficult) in a way that is fairly obvious. They also have a fairly robust attack on Lib Dem Tax Claims that ‘the poor pay the most’.  I think this point of theirs is worth making:

The first key point to note is that benefits and tax credits account for £6,453 of the £11,105 average gross income of the poorest fifth of households. Their original income – in other words, private income from sources such as earnings, private pensions and investments, but not that from benefits and tax credits – was an average of £4,651. So the poorest fifth of households were clearly net beneficiaries from the tax and benefit system, to the tune of £2,151 a year, on average.

Ryan Avent of the Economist wonders how all the promises will be paid for.  Jeremy Warner also asks where the money will come from, adding “What, no money for it? What about that nice Mervyn King at the Bank of England, ready and willing with the printing presses?”  If things get really bad, why not ….

But Bagehot argues that “this manifesto doesn’t strike me as the work of a party that has given up the ghost.”

Ben Chu summarises it beautifully in a way that chimes with mine: “we pledge to micromanage your lives” and gives some splendid examples.

Jonathan Freedland doubts that it is a game changer, but highlights some Blairite moves:

Blairite measures include a return to the asbo agenda, with promises of injunctions for harassed neighbours, and a bid to make every hospital a “Foundation hospital” even though that was precisely the Blairite notion that once so incensed Chancellor Brown. Some will like the idea of successful schools or police forces taking over failing ones

But the public voted for Blair, not Blairism, whatever they thought that was.  Polly, of course, does not think that Blairism is there at all.  Her column is the biggest cheer for this manifesto.  Is everyone reading the same document? Yes – for her, this is a compliment:

“Turn to the back of the document and there are 50 mostly decent things that Labour would do and the Conservatives would not. Dig deeper for details, and there are rich pickings for social democrats”

But for many people those are 50 interfering busybody things that they suspect the government can’t afford.  Freedland is right: no game changer.  Not even if they did 100 mostly decent things …

(update on another issue I can’t be bothered to put in a new post: Krugman has proper doubts about any policy that calls for banks to be allowed to fail.  Like with TonyJackson – see earlier post – a cleaning out of shareholders is more popular)

24 Mar

VAT is not the same as income taxes

Posted by freethinkingeconomist in Economics. Tagged: , , .

One of the many thought provoking ideas put out in Policy Exchange’s latest report is that VAT is really no better than income tax; both simply reduce the value of your income, either by raising the prices of the things you want to buy (VAT), or taking income directly.

To quote directly:

“Suppose a worker earns £100 and pays £20 tax on it, and there is no VAT or other taxes. Then she has £80 to spend, and her £80 goes on goods with a real vale of £80 … Suppose now that income tax is abolished and instead a flat VAT of 25% is imposed.  Then she earns £100 and she uses it to buy goods with a real value of £80 on which a 25% tax is imposed, raising the price from £80 to £100.  So the real value of her consumption is again £80″.

I think this thinking is flawed, because it ignores how income tax is not flat, and has thresholds.  I have structured the problem around how much of an incentive a person has to do some extra work under two regimes: income tax only, or VAT only.   And the tax gained is meant to be the same – no cheating by not making it fiscally neutral.

The thinking is really simple.  I have arranged the thresholds so they roughly resemble ours in the UK. There is single product (“fun”) which is going to either cost $1 or some higher number if the tax chosen is VAT.  All consumption is spent, thereby avoiding the complexities that PX admirably look at in terms of savings/deferred consumption/etc.

In each scenario, a person has a choice whether to work for an extra $5000 or not.   For the Income Tax payer, it is easy to work out the value of working more.  Just take the marginal rate at their current rate of income. For the VAT-only guy, he is considering whether to take $5000, but with a higher price for a unit of FUN*.

As you might expect, the VAT system being flat beats the income tax system, particularly when the incomes are close to thresholds.  If you make incomes very very high, then the two approximate, because the VAT required to raise the same as an income tax tends towards the 40% rate.   If you programme all thresholds to zero, you get the PX thought experiment:

I have graphed how this advantage varies with the income:

but realise that this is a slightly unrealistic way of showing things.  In the real world, there are a range of incomes and work-leisure decisions, but only one VAT rate.   So if you assume you need an average VAT rate of 20%, and then look at individual work incentives, you get a chart like this:

This is more realistic, because the upper-rate earner faces a choice between his 40% tax rate, and the VAT rate required for the whole of society to pay the income tax. So for him the incentive advantage of changing the overall tax rate towards VAT is undoubtedly good (that flat line is around 38% when the VAT presumed to be needed is 20%).  Think it through: if you earned 40k, and the VAT rate for society was 20%, pushing prices up by 20%, you would be able to get $4166 of real goods for your extra $5k of work.  In zero-vat world, you would get $3000 after paying 40% on your marginal income.

If I were really clever, or had the time, I would try to model the entire work/leisure payoff, including benefits and tax credits.  Then you might be modelling an increase in VAT that could be used to fund a lower tapering of benefits/credits.  Since the people at the bottom of the earnings face such high withdrawal rates, I would again argue that the change would greatly improve work incentives.

Now I appreciate that I have been perhaps over-influenced by an OECD finding (June 2009 Economic Outlook) that the worst taxes for growth are corporate taxes, followed by personal income taxes, then consumption taxes, then taxes on immovable property.  I often criticize others for extending results gained during non-deflationary periods into today’s crisis; I agree with Robert Reich today that with corporate profits increasing and labour income stagnant, and big companies not knowing what to do with their cash, it is ‘absurd’ to call for a tax cut for big corporates to boost recovery. So I don’t intend to use this OECD result as ‘proof’ that a rise in VAT is better for the economy – no-one should be citing piles of pre-crisis results as proof of anything right now.

But I am unconvinced that this simple thought experiment proves how VAT is really just a disguised income tax**.  Sometimes the conventional wisdom is correct.

UPDATE:  I have put the scrappy little Excel sheet here, if you want to play with the numbers.

*Note: if total income is 20k, and VAT is 15%, the VAT raised is not 15% of 20k  = 3k.   If it raises the price by 15%, 100/115 fewer units are bought.   To raise £3k from the £20k you need to choose X so that X/(1+X)*20 = 3 ….)

**interestingly, Mark Wadsworth has elsewhere complained that it is a gross margins tax.  I have a radical idea.  Maybe it is a consumption tax.

23 Mar

Speaks volumes about the Spectator

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

What I get in my inBox from them:

How nice of them to help out the good folk at Octopus Investments.  Sounds a bit like squid …

I reiterate a point I will tirelessly make: the absolutely best way of guranteeing a sub 35% result for the Conservatives on polling day will be to carpetbomb the UK with copies of the Spectator.  Any copies.  It shows how narrow and self-interested their world view is.  Sadly, it gives often thoughtful and decent Tories a bad name.

15 Mar

A good reason to equalise CGT and Income Tax rates

Posted by freethinkingeconomist in Economics. Tagged: , .

Owing to my own good fortune, I have some experience of the advantages that the wealthy get, over the poor.  From an email sent to me giving investment advice:

“Consider Capital Gains at 0/18% rather than Income tax at up to 50%”
Oh, you think. – but people getting involved in Capital gains take a risk, don’t they?  Read on:
“Utilise a range of appropriate investment notes to provide potential for tax-efficient returns, without necessarily risking your capital”
How clever.  This is one reason to support Vince’s idea for CGT-income tax equalization – something first introduced by Nigel Lawson (as a favour, someone else could find me the link).   I appreciate that social-justice is not the only criterion for designing tax (see attack on Fabians earlier), but it is a clear and present one here.

5 Jan

Conservatives on the back foot on marriage

Posted by freethinkingeconomist in Politics. Tagged: , , , .

What it is with Tories and marriage?  Why do they think it is so very important to ‘recognise it in the tax system’?* Fraser Nelson is beside himself - not a nice place to be – about Cameron ‘cowering’ in the face of Labour attacks on this policy.

But for all the supposed dodginess of that dossier, its point about the distributional consequence of Tory plans for sharing tax allowances between married couples is blindingly true, and important.  We have very little money to give away.  Darling wants it to go to debt reduction**; Brown to mitigating spending cuts (see FT story).  Subsidies to the already rich should be even lower in the list of priorities.

Can it really encourage marriage? If merging tax thresholds motivated wedding proposals, you’d wonder what sort of marriage would result.  So the tax is all ‘deadweight’ cost. A straight transfer to a favoured, wealthy consitutency.  The sort of thing that gives Tories a bad name.  In a sense, it answers the FT’s point about Cameron needing to give reasons to vote Conservative, which are evaporating in the face of similarly evaporating pledges on this and that.   Here is one: if you are selfish, already well-off, have little need for public services, and like tax cuts, then you will have plenty of reasons to vote Tory.

John Redwood at least sees (some) sense, saying that tax cuts should instead go on matters related to economic production.

UPDATE:  The essential figures on this question can be found on LeftFootForward.  It also quotes Tim Horton saying: “When we last had a married couples allowance under the Tories during the 1980s and 1990s there was actually a drop off in marriage.”  A very good point.

UPDATE 2: And Chris Giles’ piece in the FT is even better.  Amongst about 10 brilliant points, “This is pure conjecture, but I don’t think the elasticity of marriage to a tax break is likely to be very high” is the most cutting.

UPDATE 3:  A last one.  Liberal Bureaucracy explain what Tory tax plans imply about their moral judgments on to your life choices

*Of course, the law used to recognise marriage in other ways that (very) old-style Conservatives would have approved of: by stripping some property rights from women, banning them from certain professions, and so on.  I read Mrs Warren’s Profession over the break, with its theme of women being forced into, ahem, unsavoury jobs because of a lack of alternatives.  It seems that the institutions of the time left (in the words of GBS):

“a Labor market is infested with subsidized wives and daughters willing to work for pocket money on which no independent solitary woman or widow can possibly subsist. The effect is to make marriage compulsory as a woman’s profession: she has to take anything she can get in the way of a husband rather than face penury as a single woman”

I would worry about any attempts to make marriage artificially remunerative

** “The chancellor argued on Monday that revenue from stronger-than-expected growth should be used to cut borrowing”.  I favoured encoding this idea somewhat in A Balancing Act.  No one paid any attention.

9 Dec

The PBR: there’s really not much to say

Posted by freethinkingeconomist in Economics. Tagged: , , , , , , , .

I had planned to spend half of today on the PBR, and then move smoothly onto my opus on Quantitative Easing.  But there is something about tweeting for the left of centre that leaves my brain empty and shattered.  Good for nothing, in other words, apart from a blog.

I struggle to find much to cheer or jeer.  As David Smith says, its like a holding operation. While the FT sees fierce spending cuts, we got little detail about how it will happen: which schools, or how many, or what number of poh-leece, or tanks or benefits or biros.  In that sense, we are still where we were. Chris Cook is right: the debate still hasn’t really begun.

The Public Sector above 100k p/a are going to pay higher pension contributions.   But it is a bit of a right wing myth that there are loads of such people.

In principle, I like the tax on bankers’ bonuses: the enormous profits are almost entirely a result of the state underwriting abnormally cheap liquidity, implicitly insuring risks, and boosting asset markets.  A particularly thick chimp could have made money.  And if this encourages the banks to keep the cash as capital, the rebuilding process is further down the road. Predictable libertarians don’t like it, but tend to fail to see the deeper forces underpinning supposedly free and deserving behaviour.

Unlike Alex on LabourList, I am glad there is no Tobin Tax, for reasons explained on this blog before.

His going after 0.5pc on National Insurance deserved the headlines. Though compared to past impositions during a crisis, it is hardly the hammer blow to job creation that the Conservatives make it out to be.  But what is interesting is how Darling sees the best use for this as a lot of micro-schemes, like training and job guarantees, lower WTC requirements, Bingo Duty, a boiler scrappage scheme . . .

This is where the logic of Labour’s approach differs from that of the Liberal Democrats.  The latter see the need for one big simple message: Fair Taxation.  A 10,000 threshold, and less loopholes for the rich in various ways.   One big, simple, costly message.  Easy to put on one leaflet.  Labour instead seem to think they get more bang for their buck by spreading money between as many different initiatives as possible.  Maybe this is what happens when you are weak and everyone lobbies you 24/7.

Another interesting angle.  Being a GEEK, I looked into where the Treasury thought we could get growth next year.  Remember Slash and Grow, where I queried George Osborne’s optimism about the role of Exports and Investment to get us out of our hole?  Some of it, in terms of timing, may still be valid: they may want to go for it too soon.  But the Treasury is taking pretty much the same line about the sources of growth. They think that household consumption will beetle along at 3%, investment rise from 0 to 4 to 9%, and Exports outgrow imports by 2%. The last bit gets in bold for beating previous records.

Which is why Vince’s scepticism about the growth assumed by Alistair Darling  – and also Osborne – remains the most telling point.

Housekeeping note: I have updated ‘Play with GDP‘ spreadsheet for this new scenario, and also to reflect the way debt is eroded by inflation (why did no-one spot this?), which had given previous debt levels spat out of the sheet a scary high look.

30 Nov

Even better, you can watch it on telly

Posted by freethinkingeconomist in Economics, News Summary. Tagged: , , , , .

I thought Nick and Vince did a really good job launching their tax policy.  The themes of fairness and efficiency were apparent, and they dealt with some awkward questions quite well.

You can watch the whole event here.    In fact, make a note of uk.youtube.com/centreforum for hours and hours of policymaking fun.

I think Nick’s confidence on financial matters is infinitely higher than a year ago: remember that fiasco on state pensions? In fact, it was often he providing the technical details, not Vince, and he looked perfectly comfortable with the most interesting question: the one from Dow Jones about the markets being nervous about a Hung Parliament (22% likelihood).

There was also a rather convenient question about Zac Goldsmith and Non Doms.  The Lib Dems have really gone on the attack over this one, and quite right; there is no excuse for tax avoidance.  If you make the decision to do anything that avoids tax, you are saying “this £X should be paid for by someone else, not me”.  And if you are wealthy, you are saying “someone else poorer than me”.     Not exactly “we’re all in this together”, is it?

PS.  Googling Zac Goldsmith, it’s funny that tax matters are not foremost amongst the searches . . . maybe he has had other things on his mind?  I’m a liberal, sure, but remain unconvinced that this has the makings of a good constituency MP:

*I found the event nerve-wracking – because at the beginning I was asked to occupy a seat at the front, where a bulging leather bag was preventing a perfect 10 of interested looking attendees gazing up at the lectern.  So I shifted the bag (after protesting) and sat down.  About 10 minutes into the event, a tap on my shoulder and a rather annoyed looking Carole Walker of the BBC was pointing out how this was in fact her seat. I hope Carole was mollified by being one of the people called upon to pose a question (from the third row), but if she is reading, please accept my apologies.  It was the wrong call.

14 Oct

VAT – a Truly Great Tax, but Regressive

Posted by freethinkingeconomist in Economics. Tagged: , , , .

. . . to paraphrase the entertaining forthright but not necessarily right Mark Wadsworth.

Across the Internet*, the argument rages about whether VAT is a good idea.  Mark’s view:

“Simple logic tells us that VAT is not a tax on ‘consumption’ (as if that were a bad thing), but either a tax on business turnover or a tax on gross margins (depending on how you argue it).”

My view:

if VAT was removed, prices would not stay where they were – they would fall, as competitive pressures would erode the (very short-lived) high margins that would pertain in the VAT-free world.  Hence the effect of there being VAT on objects is higher consumer prices.  Hence the consumer is paying it.

Now, we have the view of Greg Mankiw, an economist of slightly higher standing than me:

From a strictly economic standpoint, a VAT is great. It is essentially a flat consumption tax, like the so-called FairTax, but implemented in a way to reduce compliance problems. Because it is collected in stages along the chain of production, rather than all at the retail level, tax evasion is more difficult . . . My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.

He doesn’t mention how regressive it is (which doesn’t seem to bother Matthew Parris, who is all for stealthy regressive taxes).  But as a way of collecting money without distortion or hissing, it is hard to beat.  Sadly enough for the poor, who will probably end up paying more than the small number of mansion owners now organising on the pages of Country Life to defeat the idea with bad arguments.

*well, between Mark and I

7 Oct

Tory maths: not so much better than Labour maths after all?

Posted by freethinkingeconomist in Economics, News Summary, Politics. Tagged: , , , , , .

Maybe I went out with my views too early. Tory figures not adding up as much as I thought. I was willing to give high-ish marks to Osborne for austerity honesty – but a closer look at the figures and the accompanying spin call for a re-mark . . . How exactly can increasing the pension age from 65 to 66 do this (from the gullible Telegraph):

The shadow Chancellor believes he can save £13 billion a year by bringing forward the rise, with an extra £130 billion in total being raised by the move.

Steve Webb MP on his blog does the best job of tearing this to bits. The maths is really simple.  10 years’ worth of people retiring (400,000 per year) will forsake £5000 per year of basic state pension.  That is a total saving of £20bn.  Whatever heroic assumptions are meant to turn that into £130bn, I really don’t want to know: it would make me want to sell my gilts and run to the hills.

Bizarrely, one of the best articles about the way QE might be withdrawn is in the Asian Times.

Knowing the Bernanke Fed, it will doubtless do precisely the reverse of what this column recommends, beginning to withdraw liquidity vigorously at an early date, while keeping interest rates at their present abominably low levels for far too long. In that case, the Fed will deserve the hyperinflationary depression it will almost certainly get

This is related to the FSA’s liquidity rules that rather conveniently for the Government demand that banks hold  . . . lots of government IOU’s.  The Adam Smith blog (Butler) doesn’t like it.  Their view that the banks “have to spend £6bn to do this” is nonsense.  They get lower interest payments, yes. But they have lower risk.  Modigliani Miller theorem – it just makes them safer  . . . more boring . . . but not necessarily ‘costing’ more.

I’m not sure what to make of Dillow’s article arguing that Government Spending has saved Capitalism.  Is this not using accounting identities to prove causal relationships? Not my forte, but if G-T had been lower, could not the equation have balanced in all sorts of ways – different X-M, different O, and so on?  It saved all sorts of things – but not necessarily all profits.  In some set ups the profits might have held steady, the exports higher, for example (i’m not saying it would have – just the logic . . .)

Liberal Vision no doubt correctly complain about a President Blair. They forget a very important point: how incredibly annoying this would be for a. Gordon Brown and b. David Cameron.  Imagine the Blair motorcade coming down Downing Street . . . come on, it would be brilliant

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