Soft drinks tax slippery slope
With reports of 1,200 unnecessary deaths in a single NHS trust – some in the most cruel and inhumane circumstances – you might think that the clinicians trades unions might be keeping their heads down. But no. The umbrella organisation for medial practitioner groups is now calling for a tax on fizzy drinks. To combat obesity, they say.
To micro-manage our lives, more like. The average person gets about 2% of their calories from fizzy drinks, so even if a tax did make people drink less, it would have no noticeable effect on the weight of the nation.
Sure, some people drink a lot more sugary stuff. Will a tax dissuade them? International studies show that to make a measurable difference, the tax would have to be very large. People have strong favourites when it comes to food and drink, and they don't switch easily. A small tax would change nothing, and would just be a stealth tax. A large tax, the international studies show, simply prompts people to switch to other sugary drinks that are not taxed.
There are of course already non-sugary and low-calorie drinks on the shelves. If people don't buy them, that is their choice. Better labelling and better education might help people make more informed decisions, but we should not be trying to micro-manipulate peoples lives and choices.
You can imagine the bureaucracy of it. You would have to set up a quango to work out which drinks are 'sugary' enough to be taxed. Shopkeepers would need to account for the tax on some drinks but not others. If the tax is to fund diet education (as campaigners intend), then the Revenue has to separate it, the government has to set up yet other bureaucracies to spend it and monitor the spending, and so on. The money would buy nothing except more civil servants.
And as our report The Wages of Sin Taxes notes, a tax on soft drinks hits poor families the hardest. Groceries, food and drink, is a much larger part of their budget. But it would not make a scrap of difference to the middle-class campaigners, and NHS clinicians on indexed-linked pensions, who are advocating it.
Campaigners claim, of course, that children are most affected by sugary drinks as they consume more of them than adults. Well, if we really wanted to improve the lives of our children, we might pay off the national debt that saddles each of them with a £17,600 bill to pay off.
Denmark introduced a 'fat tax' a year ago but it was so unpopular that they scrapped it. It was meant to hit things like crisps and chips, but actually was applied to meat, yoghourt, even gourmet cheeses. German supermarkets did a roaring trade as Danes shopped abroad to escape the tax. Specialist businesses selling meat or cheese were badly hit.
There is a big difference between disapproving of how people run their lives and trying to run their lives for them. If I believe that someone is harming themselves, I will certainly tell them, explain why, and argue that they should change their ways. But if they want to live that way, I have no right to stop them.
And yet we listen patiently while political campaigners – and 'experts' who know nothing about economics – try to impose their own lifestyle standards on everyone else. It's soda today, what's it going to be tomorrow? Chocolate? Cake? Cheese? Bread? Milk? Spare us, please, to get on with our own lives.
The 10p rate is a flawed tax cut, but a tax cut nonetheless
Robert Halfon MP’s campaign to reintroduce the 10p tax now appears to have been a success. After David Cameron’s hint that it would be introduced in the next budget and Ed Miliband’s announcement today that Labour would reintroduce it after the election, it seems inevitable that it will be a part of the next budget.
Many in the free market movement have expressed their dismay at this. The CPS’s Ryan Bourne has argued convincingly that it would be better to raise the personal allowance more instead of introducing a new band of tax, primarily on the grounds of simplicity.
I agree with him, but I am still pleased that the government is going for the 10p rate. Where I differ is that I do not see the reforms as being a case of either/or. The personal allowance will be raised to £10,000 – as I argued in my paper Just Rewards last year, it should be pegged to at least the minimum wage level – but it seems unlikely to be raised beyond that.
George Osborne is unlikely to see a raise beyond £10k as being worth the reduction in revenue – raising the personal allowance was a Lib Dem policy before the election, and it would be hard for the Conservatives to claim special credit for raising it even further. This proposal essentially allows the Conservatives to claim credit for something – taxing low-income earners less – that they should have been for all along. The effect is basically the same.
I am not really convinced that the addition of another tax band will be significantly complicating. The length of Tolley’s Tax Guide, a rough but useful guide to tax code complexity, has doubled since 1997 – not because there are extra bands (you could fit a hundred different bands on a single page) but because of the number of special exemptions and loopholes created by government to favour certain groups over others. This, it seems to me, is the real meat in the tax simplification sandwich.
I would love to see a “simple tax” proposal to scrap all the complications in income tax but preserve two different tax rates, so that the argument over tax simplification former was not bound up in the (quite different) argument over whether we should have a single band of tax or not. (Incidentally, if you’re a tax expert and you might be interested in writing this, get in touch.)
It is hard to object in principle to the idea that taxing a billionaire causes less harm to him than taxing a hospital porter at the same rate does to the porter. Indeed, anyone who believes in a tax free personal allowance and a single flat rate of tax, in effect, is acknowledging that principle as well. This isn’t to say that the practical arguments for a single rate of tax – the incentive effects and the political impetus for lower taxes created by putting all taxpayers onto the same band – aren’t very strong, just that there are good arguments in the other direction, too.
There are good arguments against the 10p rate, but most are based on an assumption that the alternative would be a further rise to the personal allowance, rather than the status quo. Alas, because of the politics, I think it’s 10p or nothing. That’s why I’ll support it – it’s a flawed tax cut, but it’s a tax cut nonetheless.
The inheritance tax of loss
The Health Secretary Jeremy Hunt plans that, from 2017, anyone with assets, including their home, worth more than £123,000 will be liable for the first £75,000 of their social care costs. They will also pay accommodation expenses of up to £12,000 a year. This, he says, will prevent people having to sell their homes when they need to move into residential care, which can be very expensive.
Meanwhile the Chancellor of the Exchequer, George Osborne, will say that the level at which inheritance tax becomes payable on estates will be frozen at £325,000 instead of being raised to £1m as the Conservatives had pledged before the election.
The care funding plans will benefit perhaps a fifth of the UK's pensioners: at present, people with much lower levels of assets are liable for their own care costs.
But then the money has to come from somewhere. Why should younger people, many of them starting out in life and trying to provide for their families on modest incomes, face higher taxes to support those who already own their homes?
After all, people in the UK see their homes as a form of saving. And it has been a much more reliable form of saving than having your money in the bank, where it is whittled down fast by inflation – inflation caused, of course, by the bad monetary policy of the authorities.
Governments have actually encouraged this form of saving too. Many of those benefiting from Jeremy Hunt's plans will have enjoyed tax relief on their mortgage interest payments for many years under the old MIRAS scheme. When they cashed in and moved up the property ladder, they would not pay the 28%-40% capital gains tax rates that have been levied on other kinds of assets like shares and bonds. Planning restrictions have ensured that house prices have kept on going. And so on.
If governments have encouraged people to save in their homes in these ways – using taxpayers' cash to fund the process – it is remarkable that they now maintain that people should not be expiated to cash in those assets when they need to. Yes, if you have to move into a residential care home it is a difficult time, but if you have saved in your home for a rainy day, it is a bit much to expect taxpayers then to hand you a very expensive umbrella so you can pass the home on to your kids.
...Who will then end up paying more inheritance tax on that asset – a 40% tax which breaks up capital (just at the time when we need capital to invest in economic recovery) and which encourages people to juggle their assets so as to avoid the tax. So big is the loss from this that the tax – though a nice earner for the government – has probably produced negative returns for the economy for the 100+ years of its history.
Why we really should cut employers national insurance
We've talked a lot around here about how the working poor should be lifted up entirely out of the income tax system. Get that personal allowance up to something like the full year, full time, minimum wage. And of course, national insurance would have to start at that point as well.
There's one bit that has been a little contentious though. I've argued that employers' national insurance must only start at that level too. The come back has been that, well, since employers pay that then why should they get a tax reduction when we want to increase the take home incomes of the working poor? Which is to ignore the whole idea of tax incidence. That employers hand over the money isn't in doubt. It's whether the workers' wages fall to account for it which is.
Fortunately we have an interesting paper to shine light on this question:
The choice between these alternatives hinges upon our views on who actually bears the tax burden. In the case of employer social contributions, they can be borne by firms (reducing their after-tax profits), they can be 'shifted backwards' to employees (reducing net wages of their workforce) or 'shifted forward' to consumers (increasing the price level of their products).
Yes, that is what we want to know. Who really pays these taxes?
The economic effects of social contributions are sensitive to both moderators representing basic economic institutions (which can be summarised in three 'models’: namely Anglo-Saxon, Continental-Mediterranean and Nordic) and the tax wedge definition – in particular, the inclusion of indirect taxes. Moreover, the impact of taxes on wages differs in the short as well as the long-term. In our preferred specification, the elasticity of wages to taxes is -0.70 in the default option, i.e. a non-Nordic economy in the long run. Therefore, workers bear 70% of taxes.
So, 70% of employers' national insurance is really paid by the workers in the form of lower wages.
Something which should give those living wage campaigners food for thought. If we now include employers' NI as well as income tax and employees NI then simply raising the personal allowance (to all three) to the full year, full time, minimum wage would give workers a larger post tax income than the living wage would.
All of which really makes me wonder why they don't in fact campaign for this. They are, after all, trying to make the working poor better off aren't they?
Article: Blame bailouts for huge budget deficits
Among Keynesian economists there is a resilient opinion on how the current large budget deficits shouldn’t be thought of as a serious problem to the economy, since they are ultimately a result of a depressed economy. Here's Paul Krugman:
“It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand. The deficit will come down as the economy recovers: Revenue will rise while some categories of spending, such as unemployment benefits, will fall.”
Disregard for a moment the key issue regarding this type of opinion - which is that in a depression a government is supposed to run large deficits in order to jump-start a recovery. Let's for now focus only on the argument that a deficit is a result of a depressed economy. What Krugman and the like have in mind when they make this claim is the following; because of the crisis and the credit crunch many businesses fail and consequentially unemployment rises. This creates pressures on the budget deficit, since revenues fall as many businesses are bankrupt and are not paying taxes (on both profits and employee taxes), and on the other hand many new unemployed put pressure on the expenditure side, as the government has to pay out more unemployment benefits.
This is all true. All the combined effects of the credit crunch will almost always result in an increased budget deficit. But they will never be so big to make the deficit rise above 10% of GDP as it did in the UK, Ireland or Spain (to mention only a few). Something else was at hand here.
This 'something else' was large government bailouts of fallen banks.
More tangle for the tax thicket
A Taxpayers’ Alliance report released today finds that the government has raised taxes 299 times since May 2010, and only cut taxes 119 times.
I’m not surprised about the direction of changes to the tax code, but the sheer number of tax increases is really quite amazing. Eight years ago, George Osborne said he was in favour of “simpler and flatter taxes”. I’m not sure what happened to that.
It’s staggering to see how many of the new taxes have been designed to shape people’s behaviour. Almost everyone in British politics assumes that they have the right to impose ‘good behaviour’ on the great unwashed. As a result, we get rises in alcohol and tobacco duties, and this week’s proposals for a tax on sugary drinks. This is very muddled – pleasure is entirely subjective. One man’s binge drinking is another man’s pleasant Saturday night out.
One of the big appeal of flat taxes is not that they eliminate the different bands of income tax, but that they get rid of the thousands and thousands of pages of exemptions and special rates that complicate the system, pervert incentives by encouraging inefficient economic activity, and create deadweight losses in the shape of high costs of complying with complex tax codes.
You could, theoretically, have a ‘sort-of-flat-tax’ that kept two bands and a tax-free personal allowance, but got rid of every special tax and special exemption, with the savings going towards a raising of the personal allowance. That might be more feasible than a true flat tax with a single tax rate, but would still have most of those advantages. Unfortunately it looks as if we’re going the other way.
Why corporations avoid tax
When you calculate the depressing effect of company taxes on incentives and economic growth, you can see why businesses resent them – and indeed do their best to avoid them. The point was brought home to me when I re-read Why Freedom Works by Sir Ernest Benn (1875-1954), a successful publisher (and uncle of the Labour politician, Tony Benn).
One trouble with corporate taxes is that companies that make a profit see themselves taxed, while companies that make a loss have to bear it. Benn imagines three companies, each with a capital of – let's make the numbers easy – £100m. Two make a 10% profit of £10m, the other makes a 10% loss of £10m.
It is the 10% profits that politicians look at when thinking about the impact of corporate taxes. It seems a juicy enough return to be taxed. But just a moment: in reality, the £300m invested by the three companies actually produces total profits of just £20m – a rate of return of just 6.66%. Taxing this rate of return seems rather meaner.
And it gets worse. The net profit of the three companies is actually just £10m (£10m+£10m-£10m = £10m). So in fact the £300m capital has produced a net return of only £10m – just 3.33%. Taxing that looks positively perverse. After all, business does not guarantee anyone a job or a return for life. There are ups and downs, profits and losses all to be borne. If entrepreneurs figure they are likely to succeed just two-thirds of the time – which is optimistic – their successes will need to earn enormous profits for them to carry a tax burden like that and still have some reward left for their efforts.
Yet the entrepreneurs who stumped up the £300m capital for these three businesses actually get rather less than the £10m in total profit. By the time they have lost half their income to income tax and national insurance, their net return is £5m (£10m after tax)+£5 (£10m after tax)-£10m (untaxed), which is a total of...er, nothing. It makes you wonder why anybody does it, really.
So maybe it is not so surprising that entrepreneurial companies try to avoid the UK's corporate taxes. Or, which is easier, elect to move abroad and trade somewhere else.
Why we shouldn't have a Robin Hood Tax ourselves
You will no doubt have seen the news that a number of the eurozone countries have decided that they will have a Robin Hood, or financial transactions, tax. Given that the continentals are getting one we've obviously got the cries from the campaigners that obviously we must too. Sure, they've been saying all along that we should: and I've been saying all along that we shouldn't. And I'm now using the introduction of the tax to insist that we still shouldn't have one.
But I am even more correct than usual at this point. The very fact that they are getting this tax means that we really shouldn't have one now.
The basic case for the tax is that it will shrink finance, reduce price volatility and also at the same time raise a huge sum of tax money. The basic case against it is that it will shrink finance, raise price volatility and won't raise a bean: indeed, it will shrink the economy so much that total tax revenues will fall. You can read the detailed arguments here.
Of course, you could just say, well they would say that, wouldn't they? Those in favour are still in favour, those against are against.
But let us all be properly honest here. None of us actually knows what the effects of this tax are going to be. Oh, we can predict, we can work from theory, look at the effects of other such taxes. But no one has actually tried this particular experiment as yet. So there's uncertainty about everyone's predictions. And what is it that we do when we're uncertain? Well, if we can, we conduct an experiment.
And very fortunately, we have this experiment being conducted for us. All we have to do is observe it. Those eurozone nations will be in the tax and we and others will not. We should therefore be able to test and see whose predictions are in fact correct.
Most of the effects will be very difficult to measure. Will it shrink GDP? Well, what would it be without the tax? What would revenues be with a larger GDP but without the direct ones from the tax? We're well into Bastiat territory and trying to measure the unseen. But there is one that should be easily measurable: price volatility.
Those in favour of the tax say that "excessive" trading increases price volatility. The tax will reduce the amount of trading and thus volatility. Those against the tax say that reducing liquidity will increase price volatility. Thus the tax will increase volatility. And since we will have some markets which have the tax, others which do not, we should be able to see which holds: an increase or decrease in price volatility? Do, please, recall that this was the original argument in favour of the tax, to reduce said volatility.
We obviously need time to do this study, we need a few years' data. Which is why we really don't want to have such a tax ourselves as yet. We need to remain the control. So that we can actually find out whether the tax is a good idea or not.
In essence, that the continentals are going to have an FTT is exactly the reason why we shouldn't have one, not yet at least.
Tax: wake up and smell the competition
Just when you think it's safe to return to David Cameron, he bites you in the leg. That is what UK business leaders are thinking right now, after his warning to international companies to 'Wake up and smell the coffee' – a phrase that is supposed to remind us of Starbucks, the fact that they manage to pay very little tax in Britain, and how unpopular that is.
Well…corporation tax. Even Starbucks pays plenty of other taxes: business rates, value added tax, employer's national insurance, and all the income tax that is stopped out of their workers' salaries – though I've probably missed out import tariffs and a dozen others.
But Mr Cameron can't have it both ways. You cannot say you favour tax competition and then complain when you lose out from it. Nor that you believe in being part of an open Europe, for that matter. Companies are perfectly entitled to base themselves anywhere they like in the EU, and operate in any other part. If Britain's taxes are too high, they will simply base themselves somewhere else.
High taxes are forcing big companies out of Britain and small companies out of business. That point was made to me yesterday by a small-business friend who now says that he is doing two-thirds of his business online or out of offshore companies. The reason? The likes of Amazon, now selling not just books but all kinds of goods and indeed now services too, have an instant 40% tax advantage due to their foreign domicile. High-Street shops, with all their overheads and then their local and national government taxes, cannot compete with that.
This trend can only accelerate as more and more business is done online, through companies that hardly have any real domicile at all. People might complain about them not paying UK taxes, but they still buy their products, because they are so much cheaper. Mary Portas will not save the High Street, nor will trying to pursue international companies for any loose change that HMRC can screw out of them. But turning Britain into a tax haven might just do it.
It's time to wake up and smell the competition. The UK needs to make itself so attractive in terms of taxation and regulation that businesses actually start elbowing each other to move their operations here. Then we might see some recovery and stop whining about tax avoidance.
The EU's tariffs are daylight robbery
One attractive aspect of an EU exit would be the exit of the Common External Tariff. As Daniel Hannan has pointed out, the Single Market is more like a customs union than a free trade bloc. All goods coming into Britain from outside the EU are subject to tariffs, designed to protect European industries from cheaper competition.
Unlike VAT, which isn’t levied on essentials (although I’m not sure I like the idea that beer and wine aren’t essentials), the tariffs are highest on things like food and clothes. (Courtesy of the WTO, here is a list of goods affected by the Common External Tariff.)
There’s a 16% tax on bananas from outside the EU, a 17% tax on trainers, 12% on stoned fruit like peaches and plums, and 12% on shirts, suits, coats and school uniforms. Cars are taxed at 9.7%. Twine and string get a 9.2% hit. Knitted gloves carry an 8.8% tariff whereas non-knitted gloves are hit by 7.6%. You name it, they tax it.
The loser is the consumer. On its own, the European cucumber industry (protected by a 12.8% tariff) might not be very influential, but any threat to a tariff causes businesses and their lobbyists to circle the wagons.
The 'bra wars' ended with European consumers paying more for Chinese underwear – not because Big Brassiere is unbeatable, but because related industries recognised that, individually, they would fall, and marshalled their political representatives into action.
The most perverse part is that if we got rid of all these tariffs, many, if not most, producers would be better off too. They are consumers as well as producers, and tariffs make the inputs they use (like steel – 2.7%) more expensive. But they face exactly the same collective action problems as consumers at large do.
The old public choice problem holds: free-riding is more costly for members of small interest groups than for members of big ones. Ostracism from trade associations, and so on, is much easier (and more harmful) for firms that don’t go along with the lobbying. Unfortunately, there aren’t many people who will ostracise their fellow consumers for failing to renew their subscription to the Adam Smith Institute.
The public choice problem in politics is often overstated. Most of the people who march against austerity really do think the cuts are bad. Most of the people who want to keep out immigrants really do think that they’ll cost them jobs. And, no doubt, most people who support tariffs really do think that protecting native industries is a good idea.
But voters are not as aware of the Common External Tariff as they are of many other issues. It isn’t clear what the ‘left-wing’ position on taxing cheap clothes from China ought to be, nor the 'conservative' position on exposing native industries to the free market. It’s hard to escape the impression that the Tariff really is an example of businesses hijacking democracy. The External Tariff represents one of the biggest swindles of modern times: a collective theft from consumers by politically powerful producers.
