Where is this "austerity" you speak of?
"What austerity?" asks the super-sound UK economic commentator Liam Halligan in the Telegraph. GDP is down to be sure (6.2% below its pre-crisis peak), and we members of the public are indeed tightening our belts. Not so government. It's belt-tightening amounts to just 2.7% "cuts" over six years. That's after previous Chancellor/PM Gordon Brown expanded government spending by half, from 35% to 50% of GDP. Some "austerity" from our politicians!
The present government aimed to reduce its annual deficit to zero by 2015. In the wake of disappointing growth figures, that has now been expanded to 2018. Will it even be achieved? Most of the "cuts" were end-loaded, so the real complaints haven't even started yet.
Meanwhile, annual borrowing continues to add to the national debt. Even if that 2018 balanced-budget target is achieved, says Halligan, it still means that the national debt in 2017/18, at around £1.7 trillion, will be three times that in 2008. And the interest payments on that expanded debt all have to be met. It is money we could have used on something more useful, had we not been so profligate in the boom years.
Only virtual money-printing on a record scale has saved the government. How nice it is to have the monopoly on money, so you can just mint it to pay off your debts. But then your money loses its value, and lenders stop bailing you out again because they know they will be conned.
Investment, meanwhile, the one thing that might pull the UK out of its doldrums, has dried up. Private sector investment was just 1.2% of GDP in 2012, down from 5.8% in 2007. Businesses are sitting on cash, or paying off their debts, rather than risking money on an uncertain future.
As for the government, its "cuts" have fallen mostly on capital expenditure, nearly halved from £47bn in 2008/09 to just £27bn in 2014/15. That is the easy way to reduce your overspending – you don't have to fire anyone, or raise taxes too much, you just let the potholes get a bit bigger. But it does not tackle government's bloated spending appetite, nor lay down capital for tomorrow.
And now the IMF are joining the pleas to go steady on "austerity". As I said: "What austerity?"
Universal credit and the poor
Today Britain gets a new welfare system. Well, one tiny part of Britain near Manchester, focused around a single job centre. It is the new Universal Credit system, the brainchild of Welfare Secretary Iain Duncan Smith, who has been thinking about such moves for over a decade.
Britain's welfare system is a patchwork quilt of benefits of different kinds, going to different people, with different qualification rules and different tax implications. Benefits have sprung up under successive governments, all determined to show their credentials in terms of helping 'poor families', often with scant regard for what is already there or what the effects might be. The result is this patchwork quilt – which is altogether too cosy in some places but full of holes in others.
The idea of Universal Credit is to shoehorn around 54 different benefits into just one. Proponents reckon that will be a lot easier all round – easier for claimants to understand, easier for the authorities to administer, and cheaper for taxpayers. Critics argue that there will be losers, and that some people will be unable to cope with the new system. Mind you, whenever you move from an irrational hotchpotch of policies to a more rational one, there will be losers. There will be well-deserving winners too, though you won't hear any objections from them, so every such change is greeted with plenty of outrage and little support. Politicians have to get used to that.
And sure, the new system basically gives people cash rather than spoon-feeding them with cash benefits here and practical benefits there, and some people may find that hard to manage. Most won't, though, and we can deal (and should) with the exceptions separately.
Critics also argue that the computer system behind the new benefit is over-complex and unreliable. That's probably a fair point, if previous government IT projects are anything to go by. Remember the NHS IT project? For what it cost not to deliver a joined-up NHS, we could have given all 1.4 million NHS workers nineteen web-enabled laptops, plus a spare for them to forget and leave on the train.
This tiny roll-out of Universal credit reflects something that PM Ted Heath tried to achieve back in the 1970s with Family Income Supplement and which the Nobel economist Milton Friedman proposed in his 1962 Capitalism And Freedom - that is, a negative income tax. Above the line, you pay tax, below the line, you get cash. Simples! And probably very efficient and effective. We will see.
The small businessmen bamboozled by the tax campaigners
Regular readers will know that I enjoy making fun of certain of the tax campaigners. And some of it is just fun, pointing out their bloopers. But there do come to be times when I get rather angry at the lies and obfuscations they peddle which bamboozle the good people of this country. Take for example this little story:
Supported by Stephen Fry, Margaret Hodge and Charlie Higson, independent booksellers Frances and Keith Smith delivered a petition calling on David Cameron to take "decisive action [to] make Amazon pay its fair share of UK corporation tax" to Downing Street on 24 April. Over 150,000 people have joined the Smiths' campaign, which they launched last December, saying that "we pay our taxes and so should [Amazon] – please take a stand with us and tell Amazon to pay their fair share".
There's an awful lot of effort that's gone into that. Effort which would have been better directed elsewhere. At least if it had been directed at changing nappies the babies would have been happier: here the effort is entirely wasted.
"Times are tough and getting tougher," the Smiths write in their petition. "We face unrelenting pressure from huge online retailers undercutting prices, in particular Amazon, and it's pushing businesses like ours to the brink. But what's even worse is that Amazon, despite making sales of £3.3 BILLION in the UK last year, does not pay any UK corporation tax on the profits from those sales. In my book, that is not a level playing field and leaves independent retailers like us struggling to compete just because we do the right thing."
There are several points that could be made. One being that selling to Brits from Luxembourg is not tax dodging, it's exactly what the EU intends the Single Market should be. A, umm, single market across 27 countries. A second might be that even if we start to whine about UK warehouses, tax is still not due here. Our double taxation treaty with Luxembourg means that such warehouses do not lead to tax being due. And that's from 1968 or so when Wilson ruled: it's also a standard part of all double taxation treaties and for good reason.
(For example, the metals trade uses warehouses in Rotterdam as the point at which a contract is concluded. The cut flowers business warehouses in a small village near Schipol. Should Holland get all the tax from the world's metals and flower businesses? Or should everyone be taxed where they really are, not the warehouses?)
But there's much worse than this. We've had the Margaret Hodges screeching that we're talking about immoral, not illegal. The TJN and other fools similarly scream about how awful it is that people can do business without paying tax. And it is precisely all of this activism that leads these gentle booksellers to spend their year collecting signatures. To absolutely no avail whatsoever.
For in the year they are complaining about, last year, 2012, Amazon did not make a profit. A $39 million loss in fact according to their accounts. It's simply not true that "tax dodging" by Amazon is leading to the crucifixtion of the independent book shop. That's a lie that's been foisted upon people by the obfuscations of the campaigners.
In fact, if we were to use the favoured "unitary taxation" model that the likes of the TJN are now pushing Amazon would be due a refund, or at least a discount off any future taxes. And how the heck will that help bookstores?
Which is where we come to the major problem that angers me. The lies that are told by the campaigners lead to people wasting their time. There just isn't any tax that Amazon owes anyway. Worse, the Prime Minister of the UK doesn't have any ability to make them pay any anyway, that's all been handed over to the EU. Vast effort wasted on a petition that cannot do anything, about tax which doesn't even exist, delivered to the wrong person. Doesn't that make you angry, that the self-appointed should dissimulate so that the citizenry are that befuddled?
The national debt is rising. Who will pay the bill?
George Osborne will derive little comfort from today's deficit figures, which show the public sector net borrowing requirement down only £0.3bn between the 2011/12 and 2012/13 financial years, after accounting for one-off effects. This puts borrowing at £120.6bn, after last year's £121bn, and ahead of 2014/15's projected £120bn. Total debt stands at £1.19 trillion, or 75.4 per cent of GDP, the ONS says up from £1.10 trillion, or 71.8 per cent of GDP a year before.
A tired – but apparently necessary, given public misconceptions, fuelled by confusions over the debt/deficit distinction from politicians of all strips – point, is that this shows just how much the debt is still going up despite the Treasury's Plan A. I wouldn't draw from this that austerity is not happening – some budgets are being cut very quickly, and overall spending is expected to fall a significant 2.7 per cent between 2010/11 and 2017/18. But debt is rising very quickly.
The revelation of the spreadsheet errors in Reinhart & Rogoff's influential paper (which said national debts above 90 per cent of GDP could slow growth) means we may have less reason to fear high debt. But we may still have concerns about the redistributive effects of government debt, at least if we've read recently-departed Nobel laureate James Buchanan's work on public finance. Governments borrow to use resources without depriving the taxpayer. But these resources have to come from somewhere (assume full employment or a central bank meeting a nominal target).
Those who buy the gilts, or T-bills, or bunds, pony up the resources now, in return for a better investment opportunity than was available elsewhere. But assuming that households do not act as infinite dynasties, valuing future generations equally to themselves and therefore assuming households do not save now to pay for the inevitable future taxes (i.e. Ricardian Equivalence does not hold) – then future generations will shoulder the burden.
On the one hand, future generations are likely to be much richer than us. This is a trend that has gone on for at least 250 years in the UK, and for shorter periods elsewhere. In some countries it has gone in reverse (spectacularly in Argentina). But on the whole, we can expect future generations to be richer than us. So why shouldn't they shoulder the burden, given their broader shoulders?
This argument is fairly convincing, but it only goes so far. No one would suggest it would be fair to redistribute infinitely toward users of state-provided services and towards bond-buyers, away from future generations. After all, given the secular decline in growth we've seen since the Second World War, they may not be as much more prosperous than us than we are over our parents. As ever in numerical issues, the question may be one of finding the right balance.
Link the personal allowance to inflation
The above chart shows the level of the personal income allowance from 1979 to the present day. The blue line is the nominal level. It seems that chancellors have only ever increased or maintained the current level, and with good reason, given the unimaginable political backlash of decreasing it. But the red line is the real level of the personal allowance, when adjusted for inflation. This tells a different story. Although there has been a general trend for it to increase, there have been many occasions when it has actually decreased, harming the poorest, hard-working families the most. In this way, chancellors have been able to deliver real tax increases, purely through waiting for inflation to have its effects.
In order to stop the abuses of this Inflation Tax, the level of the personal allowance should be linked to inflation. That way, chancellors would only ever politically be able to increase or maintain the real personal allowance.
Secondly, the ASI has long advocated that the working poor be taken out of tax altogether. Thus, the green line shows the level of the national minimum wage since it was started in 1998, assuming a 42.7 hour week (the UK average), for 52 weeks. Even the recent acceleration of the real personal allowance therefore falls far short of taking minimum wage workers out of income tax altogether. To take the working poor out of tax, the personal allowance must not only be indexed to inflation, but raised above this level too.
Talk o' gin an' beer
London's pubs may soon be protected from demolition or conversion after Boris Johnson agreed to list them as 'community assets'. What this means is that any pub which is so listed becomes considerably more difficult to sell. A selling pub landlord will be required to:
- notify their local authority;
- wait for the local authority to notify any “interested parties;” and
- “if local groups are interested in buying the asset they (will) have 6 months to prepare a bid to buy it before the asset can be sold,”
…helped along by government-funded “pre-feasibility grants of up to £10,000 and feasibility grants of up to £100,000” drawn from a £30 million social slush fund.
The Daily Mail reports that “every week 25 pubs close,” with the attendant loss of thousands of jobs, “never to reopen, victims of... cheap supermarket booze, heavy duty on beer and the smoking ban.”
Supposedly, listing “helps to see off the property developers who are the main reason pubs go down.” But are they?
Industry publications further point out that taxation on alcohol is “eight times greater” than in France, which combined with increased input costs “of barley, malt, glass, aluminium and energy” squeezes margins such that “the major UK brewers have seen profits plummet by almost 80 per cent.” Changing tastes and squeezed budgets have contributed to beer sales falling to their lowest levels since the Great Depression.
Many pubs are now more valuable for the land on which they sit than the pints they pull, resulting in their being “demolished or converted to other uses such as residential and retail services which radically alter community spaces and change the tone of the high street.”
This is no bad thing. The father of Austrian economics, Carl Menger, wrote that “if, as a result of a change of tastes, the need for tobacco should disappear completely,” there would be no doubt that tobacco would lose its utility entirely and the services of tobacconists, importers, traders, pipe-makers, tobacco-farmers, and “the specialised labour services of so many people who are employed” in the trade would “cease to be goods.”
This should not mean permanent destitution for those involved. A free market can redeploy its resources towards more profitable purposes. “Many tools and machines used in the manufacture of tobacco products,” Menger wrote, can be “placed in causal connection with other human needs even after the disappearance of tobacco.”
As in many other occasions in life, where goes tobacco, so goes beer. Times, and tastes, have changed. [ ] Yesteryear's East End labourers are now hipsters and carb-conscious yuppies, and City types are more likely to hit the gym at lunchtime than ‘roll down the pub’.
The problem is exacerbated by the smoking ban, the high burden of business rates, VAT and excise taxes, and falling household incomes. Additionally, in the midst of a housing crisis, the human need for housing is considerably more pressing than the human need for drinking in connection with the land on which “our” pubs have been built. One should not therefore be surprised that pubs have become increasingly valuable as property, rather than business, assets.
This is not to say that the Austrian approach is entirely fatalistic on the issue. We can, and should, announce “last call” on government intervention in this sector of the economy – freeing pub business from regulation so it becomes more competitive and liberalising the housing market will reduce the cost to society of both entertainment and places to live, while not interfering one whit with the property rights of pub owners. Listing pubs as “community assets,” however, achieves virtually nothing.
The blinding obviousness of raising the personal allowance for income tax
Madsen tells us why we should be supporting raising the personal allowance. Essentially, it's obvious, moral and fair: not something you can say about most issues related to taxation. But there's another reason that we should do this: one that should make the left love us even more for pointing out. It's all contained here in this little chart:
Agreed, that doesn't tell anyone very much as it's not labelled. But what it is is the personal allowance for income tax expressed as a percentage of average wages. Sadly, we had to rely upon government figures to create this so it's obviously not quite right. Pre-1966 it's mean wages, after median and 1967 doesn't appear to exist anywhere in the records. We didn't run it all the way back to the beginning of income tax either. The £60 a year tax free limit in 1799 would be around £68,000 or so now meaning that only the top 1% would have to pay income tax. Even I think that government can beneficially spend slightly more money than that would raise.
The point of this exercise though is to show that the ASI's insistence that the personal allowance should rise strongly is not some modern abberation. We are in fact, possibly for the only time ever, being profoundly conservative. What has happened since WWII is that successive Chancellors (of both parties please note) have used fiscal drag to pull ever more people into the income tax net. Wages tend to, over time even if not each year, rise faster than inflation. So, if you only raise allowances in line with general inflation not nominal wage rises more people will end up paying income tax. Of course, you can increase this effect by not raising the personal allowance at all as G. Brown did at least once.
The current work of the Coalition (as Madsen points out, prompted by the Lib Dems) to significantly raise the personal allowance is a good start. But a good start is not enough: what we really want to get back to is those halcyon days celebrated by Ken Loach's "The Spirit of 45". You know, that time so praised by Polly when we all came together to create the New Jeruslalem. That time when you only entered the income tax system when you were earning more than 50% of average wages.
Given that average wages are currently in the mid £20 thousands per year this would mean that the personal allowance should be some £12,500 a year or so. Which is, amazingly, the number that we already shout that it should be.
The point of this little piece being that this is not a radical departure from prevailing norms at all. It's actually a return to the socialist taxation policies of Major Attlee: and obviously there's not a leftist in the country who would think returning to the policies of those days would be a bad idea.
Yes, I know, there will be a certain cognitive dissonance at the idea that the ASI (and possibly even worse, one T. Worstall) is recommending the post-war policies of the Labour Party. But yes, let us be properly socialist about taxation in one respect: let's stop taxing the poor so damn much.
My thanks to the commenter who calls himself Surreptitious Evil as it was he that did all the hard work of digging out the figures and setting up Excel.
Let's have a United States of Britain
The UK should become a federation of states, hugely increasing the power of local compared to central government, thus allowing the individual more control over his life. Also, it would allow more differentiation across the country, meaning a variety of policies could be tested in all areas of the public sector. The most successful could then be imitated, meaning progress for the nation as a whole.
I envisage a division of the country by region, such as the South-West, the East Midlands, and so on. Wales, Northern Ireland and Scotland would each be a state, as could the Channel Islands and the Isle of Man. Territories further overseas might also become states, or they could retain their current status. States should have independence similar to Swiss cantons, with their own government and parliament.
Such a rearrangement of the country would, of course, be a huge change. But that is not an argument against it. Indeed, we could use the opportunity to at least debate some fundamental questions concerning the structure of the state: for example, the power of the monarchy, and the lack of a codified constitution. A more plausible objection is that local governments already have sufficient powers. But they have limited power over taxes - “England’s local government finance system is one of the most centralised in the world” – and laws.
Most of local governments' funding comes from central government grants, This means that councils have less incentive to spend responsibly, as they don't have to answer to the people they get most of their funding from – the nation's taxpayers. Thus, councils often spend money unnecessarily as the tax year nears its end, to ensure they don't have their budget cut for the next year. If local councillors had to face, on a daily basis, the source of most of their income, they would be more inclined to spend it wisely.
Local control over laws would be another important aspect of such a change. If the population of one region wants to legalise drugs, why should it be held back by the rest of the country? As a state, London, say, could go ahead with some drug legalisation. Then, if and when its policies proved successful, other states which had doubted drug legalisation's benefits could follow.
Curbs on migration are curbs on our freedom
Recently, Kier Martland produced an article in The Libertarian attacking Sam Bowman's take on immigration, suggesting an alternative libertarian view on the issue – using Hoppe to back up the position. I think this view is entirely mistaken. Indeed, Anthony Gregory and Walter Block take apart Hoppe's position here and Block again here.
The position taken by Hoppe is that nobody should be able to make a claim on the state without 100% consent from those paying for it, including for goods such as roads. The issue is that the state does exist, so long as there is government we should seek to ensure a policy of least damage done. By having high costs or even bans to hire migrants, the state would be taking away people's right to freely associate and make contracts. Further, by increasing the cost of labour, and doing other such damage to the economy as described in Bowman's article, restrictions on immigration do damage to the taxpayer. Hoppe's “second best” position simply doesn't hold true.
If one group in society objects to immigration, that does not mean migration is wrong because they pay a small percentage of the cost (even though, again, immigrants are a net positive for the tax collector). Indeed, the same argument would hold true for economic nationalists or greens who wished for only local goods to be sold in the economy. By importing foreign products, one would be initiating trespass on the roads by transporting goods unwanted by third parties. The same could be said of any good transported that an individual disapproved of, whether alcohol, meat products or any other “vice”. Similarly, Christian Scientists or others who disapprove of modern medicine might insist that taxpayer roads not be used for transporting any related materials. The position is ridiculous, you cannot support absolute rights to reject immigration whilst not supporting the same absolute right to reject other goods and services people might disapprove of.
By suggesting an increase in government control of migration, both Martland and Hoppe are going the wrong way on this issue – it is not about defending the taxpayer. Increasing the scope of the state, and the cost to taxation in policing it, as the Hoppeans propose, is damaging. What about those who pay taxes that DO want immigrants to use government services such as roads? Are their rights lesser than those who are for government restriction? Even if the costs and size of government are larger to be more restrictive? Should they be forced to fund border forces in this way? The Hoppean position on immigration is illogical; you do not reduce the scope of the state by increasing it and the number of tasks it undertakes. We should be looking at ways to limit the damage and cost of government now, and not sit in ivory towers trying to fudge a philosophical position that takes away the right of free association.
A breathtakingly silly piece of journalism
The Guardian has published many silly pieces in its time, as have other papers, but today it published a piece by Lynsey Hanley that must rank as one of the most breathtakingly silly of all time. The article claims that raising the income tax threshold to £10,000 patronizes the low-paid. Moreover it "disenfranchises 3 million people":
More fundamentally, it suggests that people on low wages are effectively earning pin money, not "proper" money that requires being taxed, and therefore that the low-waged aren't full citizens. The article goes on to say that if people don't pay towards public resources, they lose their perceived entitlement to them.
Where to start? First of all, low-paid people pay a great deal in taxation, especially in VAT, and many of them pay taxes on alcohol, tobacco and petrol, plus dozens of other unseen taxes. The £10,000 threshold only exempts them from income tax, which is quite reasonable when you realize it is below the minimum wage. If people are not earning the minimum, it makes no sense to take some of their money away from them. They still pay the other taxes. Secondly, if paying no income tax makes you lose your "perceived entitlement" to public resources, doesn't paying less tax than someone else give you less entitlement to them?
Lynsey Hanley claims that "a fundamental component of citizenship, however, is paying towards the ongoing work of building and maintaining resources for everyone to use." In her disoriented world people on pensions, or disabled people supported by the state would not appear to be full citizens. I disagree.
In her world "Tax cuts are always a sop, no matter who you're giving them to." Again, I beg to differ. When the state takes less of our money it isn't "giving" us anything, certainly not a sop, because the money does not belong to the state. She wants the poor to pay taxes to make them full citizens. "To tax only the rich, or the better off, is madness. It's disenfranchisement by any other name," she says. No it isn't. It is taking money to support public resources from those who can afford it rather than from those who cannot. The rich should pay the taxes for the same reason that gangster Willie Sutton robbed banks, "because that's where the money is." I like it when we succeed, by lowering top tax rates, in having the rich contribute a greater share of total taxation. That's what should happen.
I wonder how many of the low-paid would agree with her that they should be paying more income tax? I suspect you could count them all on the one finger they would use to indicate their opinion.