The poverty we can relieve

The Joseph Rowntree Foundation (JRF) has a new report out today that takes a look at living costs for the poor and the cost of achieving a 'socially acceptable standard of living' in modern Britain. The report continues their excellent approach to poverty measurement, which looks at the cost of a basket of goods that most people would consider necessary to have a decent standard of living.

This approach is very reasonable, and does a good job of contextualising domestic poverty without being led to the sort of absurdities of straightforward relative poverty measures, which, for example, "improve" every time someone wealthy goes bankrupt or leaves the country. The JRF’s method is quite a neat combination of the best elements of relative and absolute measures of poverty.

It's important to remember that poor people in the UK are still very rich by global standards. But that's not to say that their problems aren't still important and worth trying to solve by allowing more wealth to be created. There are some things we can do to help people in poor countries, such as removing barriers to trade and migration, which would also be good for poor people in the UK, but that shouldn’t stop us caring about relatively less poor people in the UK.

The JRF is right to highlight the fact that rises to the cost of living hit the poorest the hardest. I think it's probably a mistake, however, for anyone to assume that benefits cuts are the main causes of the living standards squeeze for the poor. They might be a factor in declining or stagnating incomes (not as much as the overall economic climate, though), but they don't explain why the cost of living is rising so rapidly.

Paradoxically, things like 'affordable housing' requirements can actually end up hurting people in need of affordable housing. They disincentivise higher-end developments and cause the demand for those homes to be pent-up in the existing housing stock – so, in other words, instead of building new houses for the rich, existing affordable homes are converted to accommodate them, reducing available units for people who need cheaper homes. Liberalizing the planning system so that supply can meet demand would do a lot to reduce the cost of living for the poor.

I also think it's crazy and inhumane that we tax minimum wage workers so much. A full time worker on NMW earning just under £13,000 a year will have to pay more than £1,300 of that in tax. That's a scandal.

And of course a lot of the problems facing people on low incomes are due to the overall economic climate. If Mark Carney really does implement a nominal GDP target, the resulting economic recovery and job creation will mitigate some of the worst problems facing people at the bottom of British society.

Osborne plans to scrap benefits for wealthy pensioners—he should be scrapping the pensioners themselves

Don’t jump to conclusions: I’m not advocating a purge of the elderly. Rather, what I’m saying is that the government should get rid of its concept of a pensioner, and all the benefits which go with that. There should be no division of law-abiding adults into "working-age" and "pensioners": they should have exactly the same rights.

Of course, "pensioner" just means someone who is receiving a pension. The state definition of a pensioner as a person over a certain age completely ignores the huge variation amongst individuals. ‘Pensioner’ conjures up an image of a frail old person in need of help. While it’s clear that some pensioners are dependent on others, many are not, and it’s illogical to treat them all the same based on an arbitrary definition. One area of difference is employment: some 70-year-olds, say, are much more able and willing to work than others. If a 70-year-old is able to work, why should she be treated differently to a 30-year-old working man? And if a 30-year-old is unable to work why should she be treated differently to a disabled 70-year-old? One’s age does not itself indicate one’s need for state assistance.

A response to this would be to say that the elderly are more likely to be dismissed from their job, due to age discrimination. But I believe such dismissal or ‘compulsory retirement’ should be completely up to the employer: it is their right to employ whoever they want. Also, calling it compulsory retirement is misleading – the dismissed employee is free to take up another job. I think employers should be much freer to fire employees of any age. This would make companies more willing to take a risk in hiring people, as they could be fired if they were not suitable.

The state also ignores the varieties in wealth amongst pensioners. Only now are ministers moving to scrap benefits such as free TV licences and winter fuel allowances for wealthy pensioners. To me it seems crazy to have been handing out these benefits at all: the whole point of redistribution is to take from the wealthy and give to the poor. Taxing the wealthy and then subsidising their TV licences and bus travel is simply a waste of money. At least Osborne and co. are finally moving in the right direction.

The main justification for the benefits of state pension age (at least for poorer pensioners) is that pensioners’ lower income means they cannot afford to pay for as many goods and services as a working person can. But this lack of money is partially caused by the whole scheme. Subsidising bus fares and TV licences costs money, paid for by taxes. If people were taxed less, they would have more money, and would be able to save to pay for these things themselves, if they so desired. Also, over time, a smaller state would lead to easier business, more wealth, and cheaper goods, further easing people’s dependence on the state.

The other injustice the government causes through its ‘pensioner’ classification is the state pension, paid for by National Insurance. This is another example of the state being unwilling to leave the individual to make their own choices. If I want a pension I should be left to sort it out for myself directly through a provider or my employer. If a company requires that its employees pay into a pension pot, that is fine—if I don’t want to contribute to the pension, I can choose not to take the job. But to force me to put my own hard-earned money into a pension, with the promise of greater reward in the future, is simple coercion.

Finally, the name ‘National Insurance’ is deceptive. It is income tax by another name (around 8.5% for the average wage).  It is used to pay for more than the state pension: for example, it also funds Maternity Allowance. It is yet another example of how the government takes our money dishonestly: ministers can raise National Insurance contributions and say that income tax has stayed the same.

The government’s pension age should be scrapped, and all the pensioner-benefits with it. Currently, people are taxed heavily only to be given benefits back later in life, when it would be more efficient to leave people to provide for themselves. The state pension scheme is coercive, and National Insurance is a deceptive tax which should be abolished.

Yes indeedy, tax cuts do grow the economy

An interesting new paper looks at the effects of tax cuts on the UK economy. The finding won't surprise you and me but it's interesting to wave at others:

This paper estimates the effects of tax changes on the U.K. economy. Identification is achieved by isolating the ‘exogenous’ tax policy shocks in the post-war U.K. economy using a narrative strategy as in Romer and Romer (2010). The resulting tax changes are shown to be unforecastable on the basis of past macroeconomic data. I find that a 1 per cent cut in taxes stimulates GDP by 0.6 per cent on impact and by 2.5 per cent over three years. These findings are remarkably similar to the corresponding estimates for the United States.

This is another piece of evidence to illuminate our basic problem over the size of government and the taxation necessary to pay for it.

We know very well that some government spending is just great: both in what it achieves for us and also in the economic growth it produces. I'd certainly argue that a decent court and legal system is worth the money spent on it.

However, we also know very well that all and every taxation has deadweight effects: there's some economic activity that simply doesn't happen as a result of the imposition of the tax. Thus, if we want to maximise GDP we should be spending money only up to the level where the growth produced is greater than the growth not happening as a result of the taxation.

As it happens, of course, maximisation of GDP is not our goal. Maximising the utility of the population is meaning that all those things like leisure which detract from GDP are just fine. Indeed, those things like leisure are very much part of the point of the whole game: we want everyone to be as happy as it is possible to be without bursting from the joy of it all rather than everyone to be as rich in material goods as possible. That happiness to be determined by the lights of the individual concerned of course.

But even if we restrict ourselves to talking only of that small part of political economy which is indeed about GDP growth this paper does provide us with an interesting metric.

There is some part of the government's spending that is, nominally at least, about increasing GDP. The sort of stuff that Vince Cable's department does for example, all those various investment funds, the Green Investment Bank and so on. What this paper gives us is an interesting metric to use in measuring their performance. Say, just imagine, that all of this aid to business costs £15 billion a year. I use this number just to make the maths easy for that's 1% of GDP near enough. We now know that raising this much in tax costs us 0.6% of GDP in the short term and 2.5% in the medium term. We'd therefore very much like not to be raising this amount in tax: unless, that is, the spending of it produces a greater than 2.5% rise in GDP.

OK, hands up everyone who thinks that government "support" for business and development increases GDP by 2.5%?

Quite, time to close it all down and get the growth without bothering to do the taxing and spending, isn't it?

Tax Freedom Day has finally arrived

As of June 2024, this is out of date. Please refer to Tax Freedom Day 2024 for the updated statistics.

Tax Freedom Day—the day when the average UK resident finishes paying George Osborne and begins putting money in her own pocket—is finally upon us.

After 150 days of sending all our money to the Treasury, we can earn for ourselves over the rest of the year.

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 150 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.”

Steve Baker, Conservative MP and member of the executive of the 1922 committee, adds: “Many congratulations to the Adam Smith Institute for once again revealing the shocking truth about taxes and overspending. This doomsday machine of deficit spending, debt and currency debasement will eventually blow up and there is no kindness in pretending otherwise. Politicians who are serious about the prosperity of our country and the wellbeing of the poorest within it should take note.”

For more information see our press release or our Tax Freedom Day page.

Why we really do want to abolish corporation tax reason 672

You'll have noted that there's a certain amount of shouting going on at present about the corporation tax. And while there is much of that shouting going on very little of it seems to be well informed. For the truth is that we should solve this "problem" just by abolishing corporation tax itself. Around here we've been through the arguments many a time and I've been known to bore people to tears on the point. But it is still true that we want to get rid of it. The most basic reason being that companies simply don't pay it anyway: all taxes mean the wallet of some live human being gets lighter. As a company isn't a live human being (no, legal personality is not the same as being a natural person) therefore it's not the company bearing the burden of the tax. We've rehearsed this part of the argument a number of times.

There's another supporting argument mentioned here though. Corporation tax is a dreadfully inefficient tax. For that reason alone we'd rather like to get rid of it and have something more efficient.

All taxes have deadweight costs (sorry, almost all of them do which we'll come to). The simple existence of the tax sticks an oar into market pricing and thus causes some people not to do what they would have done in the absence of the tax. Sometimes we desire this, of course: taxes on pollution say are meant to reduce the amount of pollution. But on making profits and incomes and things like that we don't want to reduce the activity. In this sense corporation tax, to put it politely, sucks. How much though?

"The domestic distortions that the corporate income tax induces are large compared with the revenues that the tax generates," the Congressional Budget Office wrote in a 2005 report. It found that for every dollar raised by corporate taxation, the cost due to distortions was between 24 and 65 cents.

An entirely horrendous number I hope you'll agree. And if we look over here we can see that the OECD agrees. Corporation tax is very much more distorting than other forms of taxation. We thus should get rid of corporate taxation and replace it with something less damaging, something less distortionary and with lower deadweight costs. Like, for example, repetitive taxes on immovable property (or Land Value Taxation perhaps) which is one of the very few taxes which has negative deadweight costs. For you can't avoid it thus there's no distortions and the weight of the tax is likely to lead to more efficient use of the available land.

It's true that this issue of corporate taxation has been brought into public view as a result of various lefty agitrots and NGOs. Which is fine: free speech for all n'all that. But now that the issue is being talked about we, the sensible few, should coopt that public mood.

Now that everyone is talking about corporation tax let's do something sensible about corporation tax. Let's abolish corporation tax.

Why Ireland and developing countries should have a low corporate tax rate

As you know there's much ventilating going on about corporate tax rates about the place. Special venom is reserved for Ireland's low rate and various development charities are turning the air blue with complaints about taxes in the developing countries. The thing is though, a small and open economy like Ireland should have a low corporation tax rate: and developing countries should probably have one of zero.

The reason is that thing called tax incidence. Companies don't pay corporation tax: it's some combination of the shareholders and the workers who do. This is not a point in argument: the only argument is about what the portions are, not the fact that the burden falls upon these two groups. We also know what it is that influences which group: it's how large the economy is in relation to the world economy and how open it is to capital movement. The smaller and more mobile, the more the workers get it in the neck.

The mechanism is simple enough. It's pretty much straight from Adam Smith in fact. There's an average rate of return to capital: a jurisdiction that taxes that return to capital will have a return lower than that global average. So, some domestic capital will flow out seeking the higher foreign returns, some foreign capital will not flow in for the lower domestic ones. There's thus less capital employed in the economy. Adding capital to labour is what drives up the productivity of labour: the average wages in a country are determined by the average productivity in that economy. So, tax companies, get less capital employed, wages are lower than they otherwise would be. The workers are bearing part of the burden.

As I say, the smaller the economy and the more open it is then the more of that burden is upon the workers. And in a wonderful result back in 1980 Joe Stiglitz showed that the burden upon the workers can actually be more than 100%. That is, the workers lose more in wages than the government gets in tax.

Ireland's a small economy, 3.5 million people or so and as it's in the EU has about as close to perfect capital mobility as it is possible to get. Thus it ought to have a lower corporation tax rate than larger economies. And it does, so that's just fine then. Attempts to push it up (as various EU types are currently muttering) would simply lower wages in that country.

And the effect is even greater in developing economies. By definition they're small economies: that's why we call them developing because they haven't developed a large economy yet. And the current rows about tax rates in them are all about foreign investment: so obviously we're talking about mobile capital here. And it's entirely possible that for some (actually, for the smallest, it's certain) that the burden on the workers' wages is more than 100% of the tax being raised. All of which makes Christian Aid's wafflings about tax avoidance and evasion very interesting indeed. Given that it is the workers, those poorest of the poor, who are bearing the burden of corporation tax in such places then a charity committed to improving the condition of the poorest of the poor would be arguing for zero coroporation tax rates in such places.

Unless, of course, they were simply ignorant of the basics about tax incidence. But that couldn't be possible, could it? No one who is ignorant of a subject would be campaigning on it, would they?

The debt and deficit cost of political policies

UK Conservative Party Co-Chairman Grant Shapps MP has started "deficit alerts" on his Twitter account whenever a Labour politician appears on television to demand more spending on this or that. Here is a sample:

@grantshapps: "Deficit Alert! Ed Balls calls for £16.5bn more borrowing "this year" on #Murnaghan - same old Labour answer would mean soaring interest rates."

I am glad that politicians should be so focused on the debt and deficit implications of public policy. But we need to make it systematic.

As ASI Fellow Miles Saltiel has pointed out in the past, the UK's official national debt – about £1trn but who's counting? (precious few in Westminster, that's for sure) – is about one-sixth of the government's total liabilities. Most of those commitments are 'below the line', unseen. They include the cost of nuclear decommissioning, of Network Rail's debts, of future pension obligations, plus future commitments on healthcare, education and (more recently) social care and childcare.

The trouble is that politicians propose measures without any review of their cost, other than the cost in the current year. The full financial impact – next year, the year after and the year after that in perpetuity (since government spending programmes are almost never abandoned) – is never expressed.

I propose that whenever any measure is introduced into Parliament, the Office for Budget Responsibility should audit its future financial burden. New health treatments? Fine, but the Bill has to include the price tag of what it will cost in the decades ahead and an analysis of what that will do to the national debt and interest rates. Better social care? School leaving age raised to 18? Green technology subsidies? All fine if we choose them, but we must be told the long-term price.

Of course, knowing the future cost of their measures would not stop politicians from introducing things that look small but have a big future impact on the budget. But it would at least provoke a healthy national debt about what is and is not affordable. 

Tax Freedom Day is on the 30th of May

As of June 2024, this is out of date. Please refer to Tax Freedom Day 2024 for the updated statistics.

I can't wait. Tax Freedom Day is just three weeks away. Add up all the taxes paid by people in the UK – income tax, national insurance, VAT, fuel duty, taxes on alcohol and tobacco, council tax and all the rest. Then work out how long it takes us to earn enough to pay for all these taxes. Then you find that in 2013 the average UK citizen will be forced to hand over to the government everything they earn between New Year's Day and 30th May!

That's five months of the year working for the government, and only seven months of the year working for ourselves. Things don't seem to have moved on much from the feudal system, where the oppressed vassals were expected to work three days a week for the benefit of their lord. We have to work about the same for the benefit of the Chancellor.

The Adam Smith Institute has calculated Tax Freedom Day going back to the mid-1960s, and has published the figures annually since 1992. When England won the World Cup back in 1996, Tax Freedom Day fell on 2 May. That is a whole four weeks earlier than it will be this year. Another four weeks of indentured service to the state.

If you think that's bad, it gets worse. Governments spend everything they raise in taxes from us – and then borrow as much more as they can get away with. The trouble is that is it we taxpayers, or our children, who will have to pay back that debt. When you work out the total – what we call Cost of Government Day – we don't start enjoying the fruits ofour own labour until 13 July!

When people joke that they spend as much time working for the tax collector as they do working for themselves, they are spot on. They work slightly less than half their time to pay taxes, but slightly more in order to bail out the government's over-spending as well.

And it is no joke. High tax and government borrowing drains resources from productive uses, chokes off people's entrepreneurial spirit and reduces UK competitiveness. It really is time, Chancellor, to move Tax Freedom Day a lot earlier.

Apple's taxdodging ways

Apple's played a clever game in getting around some of the US corporate tax rules:

Apple Inc. (AAPL) avoided as much as $9.2 billion in taxes by financing part of a $55 billion stock buyback with debt rather than offshore cash that would have been billed by the U.S. government, Moody’s Investment Services estimates.

That's pretty good really. A $17 billion bond offering has saved them $9 billion in tax.

As background, US companies don't pay US corporate income tax on their foreign profits that they leave in foreign. It's complex but this is the basic outcome. Apple's got some $100 billion in such profits parked offshore and the shareholders, who do after all really own this money, would like some of it. The problem is that the US corporate income tax is 35%, those offshore profits have only paid perhaps 3 or 4% in tax so far, so 30 odd % will be demanded by the taxman if they're taken back into the US to be sent out as a dividend. So, instead, Apple borrows money in the US and pays that out as a dividend.

Hurrah!

Which brings us to the usual complaint but, well, companies should pay tax on their profits. So why am I cheering someone avoiding doing that? The answer there being tax incidence. It never is a company that bears the economic burden of a tax: it's some combination of shareholders, customers and or the workers. In general with corporation tax we say it's split between the workers and the shareholders. The workers get lower wages: because taxing returns to capital means less capital is employed in that economy. It's capital plus labour that raises productivity, raised productivity raises wages. The shareholders because, obviously, the dividends, the profits, are the return to capital and these are being taxed.

So given that we're not actually taxing the companies why is it that we send the tax bill to the company? Simply because it is convenient to do so. There is no economic reason at all to tax company profits. It's just that they're a nice big pile of money that we can tax, without having to go around all of the investors and workers and collect their little bits.

Which is why I applaud Apple's plan. It's becoming increasingly clear (as Google, Facebook, Vodafone, Boots and so on are showing) that companies are no longer a convenient place to go collect the tax money. They're just too good at not being the patsies and coughing up the cash. Given that the only reason we do tax companies is convenience, if it's no longer convenient then perhaps we should stop doing it?

Simply abolish corporation tax altogether. Make income taxes on dividends and other returns from investment the same as they are from any other source of income. There, job done.

And hundreds of thousands of accountants and lawyers will have to go do something productive for a living. Shame, eh?

Why we do rather like tax competition

You'll have noted the current screams from the left side of the aisle about the terrors and inequities of "tax competition". They're squealing as a pig does when it sees the swill bucket being taken away. For the obvious reasons that Dan Mitchell points out here:

But we do know that simple economic theory tells us that monopolists are more likely to raise prices than firms in competitive markets. Likewise, governments are more likely to raise tax rates if they think taxpayers don’t have escape options. And we also know that the proponents of higher tax rates, such as the statist bureaucrats at the Paris-based OECD, are also the biggest opponents of tax competition. The OECD even complained in one of its reports that tax competition “may hamper the application of progressive tax rates.”

Progressive taxes aren't all that much of a bugbear for us here at the ASI. Our income tax proposal has a large personal allowance in it for example, meaning that the average tax rate continues to rise as income does, asymptotically aproaching the flat marginal rate. This is indeed a progressive tax system and as we're recommending one of those we're obviously not against a progressive tax system. There is also Willy Sutton's point, that you tax the rich because that's where the money is.

However, Mitchell's making a slightly different point. Imagine that you don't like the taxes that are being imposed upon you. No, go on, just imagine. You as an individual voter don't actually have much influence over this. Which is why that option of exit is so important. The ability to simply say "The hell with you lot" and leave. We should note that there are very definitely some campaigners who insist that that exit route should be closed off. As, largely, it already is for US citizens. They can leave the US, certainly, but find it very difficult indeed to escape the clutches of the IRS.

Mitchell's also making a very good Smithian point there. It is indeed true that once businessmen have gathered together for that conspiracy against the public then it is indeed competition from alternative suppliers that is said public's only method of beating the conspiracy. And so it is with government: we can only preserve a modicum of freedom (and a modest portion of our wallet) if we are indeed free to choose among competing providers of those governmental services.

Which is what much of the conspiracy among governments is all about: seeking to deny us that exit, that protection from their monopoliy.