The immorality of taxing the minimum wage
If I might make a modest moral suggestion? One that I'm hesitant to advance: for of course different people have different morals and ethics. That's why we want a free and liberal society, so that we can each live according to our own code of what is indeed moral: as long as everything is among consenting adults and fist swinging stops short of another's nose then chacun a son gout.
However, we already find that we've a major intervention into our economy on such moral grounds: the national minimum wage. I, and most of us here, would argue that we shouldn't have an NMW at all. If the market value of labour isn't high enough (however you calculate "enough") then it is better to compensate for that rather than attempt to fix prices. However, I think most of us would agree that the NMW is here to stay politically. The argument oft presented being that there is some "fair" value of labour, that fair value being apparently £6.08 an hour at present. Or perhaps £7.60 an hour or higher if you listen to the Living Wage folks.
I've a piece in The Telegraph which goes through the numbers and I've done similar here in previous years. The basic point that I'm trying to get across is that people are not properly accounting for the tax system when they discuss these low wages.
The difference between the living wage and the minimum wage is almost exactly, to within pennies per hour, the amount of tax that poor people are charged on their wages. It therefore lies within the power of the government to make the NMW that Living Wage: just stop taxing people who make that NMW. When regarding the NMW itself, we've that argument that it would be immoral for people to earn less for their labour than their £6.08 and hour. In which case, why is it moral that government gets a cut of it to pay for government's expenses? Either £6.08 is the minimum moral amount in which case the State gets none of it or £6.08 is not the minimum moral amount in which case why do we have an NMW?
Which brings us to my modest proposal. The income tax allowance, the national insurance thresholds and the national minimum wage should all the same amount. We should pass a law that says that they must, always, be the same amount. If the minimum wage is £6.08 an hour (and the normal working week 40 hours a week, 52 weeks a year) then one starts to pay income tax and NI at £12,646.40 in annual income and not a penny before. If we want to raise the NMW to £7 an hour then that's fine: but no one then pays tax before £14,560. If some fool Chancellor of the future (and we can bet on having at least one of those) decides that he wants income tax to start at £5,000 then the NMW must, at the same time, fall to £2.40 an hour.
If there is indeed a moral case that there is some minimum permissible price for an hour of someone's time then there is exactly that same moral case against our rulers helping themselves to some of that pittance. This system would make clear and apparent that moral argument. By enshrining it in law we remove any possible wriggle room for the future.
We also encapsulate into law the most obvious and simplest truth about poverty. If you want to increase the incomes of the poor then just stop taxing them so bloody much.
Take care before rushing into government action
I can't decide whether news this weekend, that British ministers are expected to introduce a cap on the amount that individuals pay for care during their lives, is welcome common sense or yet another smash and grab raid by the middle class.
The plan, based on proposals by economist Andrew Dilnot, would be to cap the costs that people in England pay for care at £35,000 over their lifetimes. Pensioners would be expected to insure themselves at that level, then the state would pay any further expenses.
The Adam Smith Institute looked at this idea of sharing the costs of care between the individual and the state back in the 1980s and '90s. There were heartbreaking cases of people whose funds had simply run out, leaving them with nowhere to go. And the cost of providing the residential care of an ageing population was starting to cripple local authorities. In answer to the first problem, many analysts proposed that social care should be provided free under the NHS, just as medical care is. That seemed to us to be a fate well worth avoiding, not least because it would make the second problem even deeper.
We looked instead around the world and found some places that had innovative solutions: that people were expected to provide, or insure for, their own care for a couple of years (around the average time that people tend to spend in residential years), and then the state would pay anything beyond that. The logic was the residential care was becoming uninsurable. With such large rises in longevity, no underwriter knew exactly how long people might spend in care: it was an almost open commitment which no private firm could sign up to. So the idea of an individual/state partnership seemed logical: insure what is insurable, and have the state provide the rest.
Public policy development is all about starting from where you are, and we were (and are) starting from a wonderland in which healthcare is provided free at the point of use, while social care is not. If you can work out whether an elderly person's bath is 'medical' and should be paid for by the state, or 'social' which should be paid for by the individual, you are brainier than I am. And if you can work out how to restrict state spending on care to the people who really need it, ditto. The partnership plan seemed the best of a bad set of options.
But those downsides remain in the policies that will be announced in detail this week. A cap of £35,000 on care spending will certainly make long-term care insurable. So that is a gain. But equally, plenty of people who could afford to pay for their own social care will find themselves being subsidised by taxpayers. The average house price in the UK is £226,887 (even higher in England, where the new policy will apply), and many of those in need of residential care at the end of their lives have already paid off their mortgage.
The argument is that elderly people have to sell their homes to afford their time in care, leaving less or nothing left for their children to inherit. But should taxpayers really be subsidising the care of well-off home owners? Remember that most tax is actually paid by the poor – simply because there are more of them. Should a cleaner in Cleethorpes really pay higher taxes to fund carers for the wealthy of Wokingham?
We are used to the middle and indeed upper classes doing well out of the welfare state, of course. Being moneyed, educated, confident and pushy, they can barge to the front of the queue for medical care, buy homes in the catchment areas of the better schools and bully officials to maximise their benefit entitlements. Does this sound much different? Precisely why should people with large assets not be obliged to sell them to provide for a lifetime need like social care, rather than expecting other people to bail them out?
It may sound harsh in the individual case, but remember the hardship done to others through the higher taxes that are required for it. Taxes that just make the difference between whether a firm succeeds or fails, and whether people keep or lose their jobs. The fact that the hardships caused are more diffused and harder to identify than the evident hardship of those forced to dip into their wealth stockpile does not make them any less real. And don't people save in things like property supposed to be for a 'rainy day' anyway?
The other interesting feature of this proposed policy, we now learn, is that nobody has the faintest idea how the government might pay for it. The cost has been put at £1.7 billion a year. In other words, ministers are committing to an expenditure that is not only massive but will fall, year after year, on future generations who do not even get a vote in the matter because they are as yet under the age of majority or indeed yet unborn. But how the tax will be levied is anyone's guess.
This again is typical of how the middle-class representatives of the middle-class population expand government programmes for their own benefit. Instead of working out how much tax people are willing to bear and then deciding what can be afforded within that budget, our politicians promise expansive benefits from now to eternity: only once we have started to enjoy them do we get the bill. But by then it is impossible, politically, to prize them off their beneficiaries. It's the old public choice problem again: the beneficiaries have a concentrated interest in keeping their benefit, while for taxpayers it is just one extra tax among many. But those many taxes add up.
New at AdamSmith.org: Tax Avoidance, Boon or Bane?
Geoff Cook, CEO of Jersey Capital, defends tax avoidance and argues that we need tax havens.
The recent Times series on tax avoidance has triggered a huge spike in coverage of the tax affairs of the rich and famous.
David Cameron’s condemnation of Jimmy Carr’s tax arrangement as ‘morally wrong’, presumably based on newspaper headlines, was arguably unwise, and may well come back to haunt him as open season is declared by the press on Tory donors tax planning arrangements.
Rather ironically, in the same week he welcomed the news of the introduction of a 75% tax for high earners in France;
“If the French go ahead with a 75% top rate of tax we will roll out the red carpet and welcome more French businesses to Britain and they will pay taxes in Britain and that will pay for our health service, and our schools and everything else.”
A more sure-footed Ed Milliband made the following observations when responding to Cameron’s comments.
"I'm not in favour of tax avoidance obviously, but I don't think it is for politicians to lecture people about morality.
"I think what the politicians need to do is - if the wrong thing is happening - change the law to prevent that tax avoidance happening and I think that is the right course the Government should take.”
However, the mood music of popular opinion can sometimes be irresistible for politicians. The same Ed Milliband last year pronounced that:
“The bankers who took millions while destroying people's savings: greedy, selfish, and immoral; the MPs who fiddled their expenses: greedy, selfish, and immoral; the people who hacked phones at the expense of victims: greedy, selfish and immoral.”
The next Prime Minister's Questions with the two UK leaders could be quite interesting!
Whilst few will have much sympathy with Jimmy Carr, given his TV antics lampooning tax avoidance, Mr Milliband is right. Individual judgement of personal tax affairs is a matter for tax administrations and not the court of public opinion.
The tax avoidance inquisition is right about one thing
The debate over tax avoidance never dies because most people tend to act in their own self-interest. We always search for the most common-sense approach to organising our own finances: We tend to buy things with lower VAT because they cost us less, and we tend to put our savings into a tax-free ISA when the opportunity presents itself. Likewise, with the financial resources to do so, you would tend to seize the chance to avoid tax on a much grander scale à la Carr.
The political classes, from David Cameron to Owen Jones, present tax avoidance as immoral. But then taking advantage of ISAs and VAT distinctions is immoral too, just as stealing a pound rather than stealing a million remains stealing nonetheless, the difference in scale is more to do with opportunities and abilities than intent. If moral equivalence amounts to anything at all, then we would have to demonise the entire population for tax avoidance.
But the real root of the complaint about immorality is that it deprives the government of revenue to do worthy things, like fund hospitals and schools. So dodging £1m is given the moral equivalence of taking it from the sick, children, and particularly sick children. Libertarians can even set aside the retort that these functions may be better served by the private sector. But it’s really the system that allows massive tax avoidance that should shoulder the moral blame, something that both libertarians and socialists could actually agree on.
The extraordinary 12,000 pages of the Tolley's Tax Guide represent decades and decades of heavy-handed discrimination and intervention by government. It ranges from petty differences like X VAT on pasties, and Y on their warm variety, to Labour millionaires acting like corporations. This discrimination is, obviously unequal treatment before the law, and will tend to discriminate against those least able to lobby: against the average family, and the smaller businesses. If ‘fair’ means anything it all, coercive discrimination to either manipulate society or give sops to lobbyists probably isn’t it.
But morality is a slippery thing. Even setting morality to one side, and accepting that tax avoidance does harm, what are the proposed solutions? Every government informs us that they are 'cracking down' on avoidance, with ever-greater resources and powers for Her Majesty's Revenue and Customs. But this solution tends do even more harm than good. Unsurprisingly, the bureaucratic sledgehammer falls heaviest on the easiest, and thus poorest targets. These small businesses without armies of accountants are woefully unprepared to deal with the thousands upon thousands of pages of tax legislation.
The solution is ruthlessly simple, and should satisfy socialists and libertarians alike: Taxes ought to be simplified. That means radically fewer exceptions, fewer loopholes, and fewer distortions. If possible, eradicate them completely. Let’s stop blaming individuals for being human, acting in their own self-interest. Instead, maybe we can agree for once, and end large-scale tax avoidance by ripping up our crony-corporatist tax system.
On the morality of tax avoidance
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.
— Judge Learned Hand, U. S. Court of Appeals, 1935.
A twin track to recovery
There are two actions that might put the UK's finances and its economy into better shape. Unfortunately, neither of these can be done. The first policy would involve hauling down the long-term unfunded entitlements and largely replacing them with self-supporting schemes aided by a measure of transfer payments to the small number unable to fund their own future needs.
The second measure would involve setting loose the creative abilities of the private economy by a big round of tax cuts, both personal and corporate, and the repeal of many of the unnecessary and bureaucratic regulations that hold back enterprise and ambition.
Both would probably work, but neither can be done in this political climate. The electorate would be likely to throw out any government that tried to cancel their future benefits, and would be hostile to tax cuts for business and enterprise at a time when their own living standards were either static or falling.
Since it is unlikely that future generations will pay for those unfunded entitlements, future governments will probably have to borrow more in order to finance them. And since economic growth will not surge forward without cuts in taxes and regulations, the national indebtedness will not diminish in proportion to the total economy.
In an ideal world, think tanks and commentators would work to persuade the public of the advantages of both of these policies, clearing a pathway that politicians could walk upon. In this real world, however, there is little chance of the electorate ever being persuaded to vote for reduced benefits. It is just possible that the public could be shown that they, too, would gain from tax cuts on enterprise, and agree to support it, but only to a limited extent, and with measures far more timid that those needed to generate vigorous growth.
It is far more likely that governments will just muddle along, incurring great unpopularity for trivial cuts to entitlements, and making trivial tax cuts with one hand while increasing taxes elsewhere with the other.
This is a pity, because these twin tracks to recovery could utterly transform Britain, and do it very rapidly, too.
In which I agree with Keynes and Krugman
I'm as surprised as you are at my agreeing with them both but there is a great truth in this statement:
“The boom, not the slump, is the right time for austerity.” So declared John Maynard Keynes 75 years ago, and he was right....
Let us, just for a moment, adopt the Keynesian mindset, agree that the Great Man's works are indeed how the economy should be managed.....even accept that the economy should be managed at all. With that assumed then yes, of course this is true. Blow out the deficit in the slump so as to increase aggregate demand.
Excellent.
But then look at the other side of it: in the boom we should be running not just primary budget surpluses but actual full budget surpluses. No, not just to pay for past or future borrowing, but absolutely to manage, in fact to reduce, that aggregate demand that is excessive in that boom.
This has been managed how often since the immediate post war years? Under Lawson for a couple of years at the end of the 80s boom and under G. Brown for that brief period of time when he was following previous Tory budgets. But Keynes, and Keynesianism, would have had us running budget surpluses all the way from 2000, 2001, to the crash in 2008/9. Again, not so much to reduce the national debt, or to save up room for borrowing in the slump. But to take the top off, the froth off, that boom.
Didn't happen, did it? Even at the top, even the tail end, of the longest boom in modern economic history we were still running budget deficits.
At which point we can point out one of two things: Keyensianism doesn't work given the political system we've got which just won't allow such surpluses to be run: or Keynesianism just won't work with the politicians we've got because they cannot resist spending the cash to buy votes.
Either way, it doesn't work, not because spending in a slump is a terrible idea but because no one will, for any length of time, perform the other half of the necessary equation. Leaving us with the current situation of actually needing the austerity in a slump simply because we don't have the money to do anything else.
Thanks Gordon.
Our long-nailed mandarins are granting privileges to bakers and caravanners
A year ago I attended a seminar on space travel. Some of the libertarians there couldn’t wait to leave socialist earth. Sadly, while space travel is still in its infancy, some of us will have to do with a caravan. Is the government’s volte-face on VAT on caravans good news or bad news? Static caravans will only be taxed at 5% instead of 20%. And the pasty tax has been abandoned altogether. Should we rejoice? Or not?
Governments giving privileges to specific industries or people was very prevalent in the Middle Ages. One of the reasons why the industrial revolution took place is because this sort of preferment went out of the window around the time of the Glorious Revolution. No longer were trade, monopolies and tax privileges in the gift of politicians. Individuals were (at least theoretically) treated equally before the law. The Rule of Law — with laws the same for everyone, predictable, and not at the whim of politicians — was one of the greatest export product the Anglo Saxon world ever produced. The insights and choices of billions of individuals began to steer the economy, instead of the preferences of politicians.
One place where this freedom delivered prosperity was Hong Kong. Its landscape, people, and environment were very much the same as the rest of China. Yet it boomed while China remained static. In Hong Kong, the rule of law was applied equally, not in accordance with the whims of long-nailed mandarins or Confucian officials. Occasionally, this equal treatment needed reiterating: in the 1960s, Hong Kong's Financial Secretary John Cowperthwaite (the man behind the Hong Kong miracle) fended off attempts by industrialists to obtain preferment again and again. Two Cowperthwaite quotes on industries seeking preferment:
“I must confess my distaste for any proposal to use public funds for the support of selected, and thereby, privileged, industrialists, the more particularly if this is to be based on bureaucratic views of what is good and what is bad by way of industrial development”.
“I am afraid that I do not believe that any body of men can have enough knowledge of the past, the present and the future to establish “development priorities” — which presumably means procuring some developments as being good and prohibiting others as being bad”.
Or, to quote a certain Mr A. Smith from K. (who, sadly, is not a special advisor): “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
So the bakers and caravanners have won the day. Good for them: I don’t like taxes being put on anyone. But, really, politicians should stop giving preferential treatment to their friends, and stop punishing those industries of which they don’t approve. Either you charge VAT on everything (allowing for a lower rate), or you don’t charge VAT at all.
Wasn’t this government supposed to fight red tape? Differential VAT rates most certainly add an extra layer of costly bureaucracy upon businesses. An equal sales tax for all goods and services would make clear what the tax is to individuals and dispense with silly side-effects such as having to ascertain whether take-away food is hot or cold to know whether VAT is due; or small people avoiding VAT by buying the largest size at Baby GAP.
But most important of all, equalising VAT would avoid the cringe worthy spectacle of politicians claiming to have bought their sustenance at none-existent pasty outlets. It would be worth it for that reason alone.
Today is Tax Freedom Day 2012
- Tax Freedom Day falls two days later in 2012 as UK re-enters recession
- Austerity measures cut the Cost of Government Day back to 23rd June, seven days earlier than in 2011
The UK's Tax Freedom Day – the day when Britons stop working for the Chancellor and start working for themselves – falls today, 29th of May.
The Adam Smith Institute has calculated that, for 149 days of the year, every penny earned by the average UK resident will be taken by the government in tax. This year’s Tax Freedom Day falls two days later than it did in 2011.*
Tax Freedom Day falls later this year down to a number of factors. The double-dip recession, the VAT increase from last year, our high personal taxes, as well as fuel duty and stealth taxes, all mean that the government is taking a larger share of our hard-earned income. Britain’s tax burden is still too high and tax cuts are desperately needed to boost economic growth.
This year’s corporation tax receipts are a good example of how tax cuts can pay for themselves. There were large increases in tax revenue from onshore corporation tax, coinciding with the government’s cuts to the headline rate of corporation tax. Reductions in the corporation tax rate have brought the government higher revenues as more companies choose to invest in the UK. By stimulating growth and investment, tax cuts really can pay for themselves.
However, our Tax Freedom Day still falls long after the USA’s, on April 17th and Australia’s, on April 4th. Our only comfort is that our tax burden isn’t quite as high as France’s, which will have to wait until July to celebrate its own Tax Freedom Day. With Hollande now in power, that day could get even later in years to come.
Cost of Government Day
Tax Freedom Day only measures the money actually raised by the government in taxes, not the full amount it spends. The government borrows one pound for every four it raises in taxes, so if the full cost of government is considered the Cost of Government day, this would fall on 23rd June.
Last year’s Cost of Government day fell on 30th June, meaning that the government’s austerity measures have reduced the cost of government by 7 days. But, when we take into account the extra two days tax burden, the net effect of George Osborne’s austerity measures is a measly five days net cut in the burden faced by taxpayers. “A lot of work still needs to be done,” says the Institute, “ to bring down government borrowing and the Chancellor must make more tax cuts to allow greater economic growth.”
The ASI's Director, Dr Eamonn Butler, says, "Tax Freedom Day, which the Adam Smith Institute has been calculating for 25 years, is the plainest way to show what the tax burden really is. That is why the Treasury hates it. They of course want to conceal how much tax we pay, which is why they are so keen on stealth taxes."
"But we put in every tax, including stealth taxes – income tax, national insurance, council tax, excise duties, air passenger taxes, fuel and vehicle taxes and all the rest – and show just how long the average person has to work to pay their share of them all. The stark truth is that this burden costs us all 149 days of hard labour every year. That's not how long a rich person has to work – it is the time the average person must labour for the tax collectors."
“In the Middle Ages a serf only had to work four months of the year for the feudal landlord, whereas in modern Britain people have to toil five months for Osborne’s tax gatherers.”
"An increasing number of economists believe that Britain's taxes are too high and are choking off recovery. Some politicians say they need to keep taxes high in order to balance the government's books. But the trouble with governments is that they always spend everything they raise in tax – and then as much more as they can get away with through borrowing. Just as the rest of us have had to cut back, so should the government. The UK economy would be a lot healthier for it." (Here's a video of Eamonn talking about the morality of capitalism.)
Steve Baker, MP for Wycombe, said: "Many congratulations to The Adam Smith Institute for making transparent the cost of government and just how far government lives beyond its means. It's time to ask whether society is well served by such a huge state or whether we wouldn't all be better off with institutions which know their limits.
"A wealth of evidence is currently emerging which suggests we should stop fibrillating and make a near-revolutionary commitment to ending crony capitalism and embracing social cooperation through business."
*TFD was 28th May in 2011, and this year’s date includes the extra day for the leap year. Our yearly estimation of Tax Freedom Day is regularly updated to match the Treasury's most recent figures.
Labour is right: It's time for Plan B
It’s not often that I consider the Labour Party to be right about something, but they’re spot on when they say that the coalition government’s approach to the economy is making the crisis even worse. I believe that we do need to change course and pursue a radically different approach.
Since 2010, when the government came into power, the government has followed Keynesian doctrine almost religiously. Interest rates have been kept at record lows, quantitative easing has been tried time and time again, costly vanity projects such as High Speed 2 have been defended on the grounds that they will ‘create jobs’, borrowing has increased, the debt has increased and taxes have risen. They have even considered 100-year bonds, displaying the same contempt for long-term thinking that Keynes did when he quipped that ‘in the long run, we’re all dead.’
It appears as though the government is determined repeat the mistakes of the past. A financial crisis caused by low interest rates and the artificial expansion of credit is being ‘resolved’ by keeping interest rates low and by encouraging cheap, government guaranteed loans. It’s therefore not surprising that we now find ourselves in a double dip recession.
So what should Plan B entail? If you’re part of the Labour Cabinet, it simply means these policies on steroids. They believe that more deficit financing is needed, although this would inevitably involve higher inflation, higher taxes or more borrowing – or a combination of all three. It is difficult to see how this is a credible alternative.
A truly radical alternative would involve privatising the bank of England and allowing interest rates to be determined by market forces. Meanwhile, competing currencies should be allowed in order to discourage inflation. These two policies would restore sound money to this country, which would allow a stable recovery to take place – not simply the creation of another artificial bubble (which is all it will be when we finally do ‘recover’ from this recession.)
Furthermore, no attempt should be made to ‘create’ growth or employment through increased government spending. Instead, this money should go towards tax breaks to businesses and individuals – to encourage growth in the most productive sectors of the economy rather than the sectors with the most effective lobbyists. Under these conditions, the private sector could thrive and pull us out of this double dip recession. It’s time for the government to abandon failed Keynesian economics and listen to the Austrian school economists who predicted the financial crisis before it happened.