Some 2014 budget nasties

The ASI has already given its response to the budget. We should also remember that the UK's fiscal position is basically unsustainable even if economic growth is sustainable - and I find that extremely hard to believe. The UK economy needs massive fiscal consolidation, supply side reform and sweeping tax cuts if it is going to prosper.

Moving away from those macro-type issues, there are some very troubling aspects to the 2014 budget that it seems worthwhile highlighting, if only to remind us of the madness that is UK public policy. You won't read much about these in the popular press, which is more concerned with bingo and beer.

Changes to annuities regulations will increase tax take in the short to medium-term

As this article points out, pensioners taking a lump-sum payment will still face very large tax charges which will make a tidy sum for HM Treasury

In the longer term, changes to pensions are being funded by higher taxes on contributions

The Chancellor has reduced the relief on higher rate income tax for pensions contributions. Osborne has reduced the cap on tax-free life-time savings from £1.5m to £1.25m. Sounds like a lot of savings, but given the current rate of inflation, this will probably be about average by the time a lot of current workers retire. Anyone breaching this cap will face a 55% tax charge, which promises to raise about £5bn for the Treasury. I won't spell out the long-term economic effects these sorts of raids on saving have on the UK's economic growth prospects, but people need to start recognising that we cannot have sustainable, real economic growth without savings.

HMRC has been giving sweeping new powers

As if the (much-ignored, but hugely significant) General Anti-Abuse Rule (GAAR) of 2013 hasn't given HMRC enough. Essentially, the GAAR grants HMRC the discretion to determine, retrospectively, what is 'reasonable' practice, which, as Jamie Whyte points out strikes at the Rule of Law. Less seriously, but dangerous from an investment perspective, is that it creates huge uncertainty in the UK's tax position.
HMRC has received a £1bn increase to its budget and powers to confiscate funds directly from individual's bank accounts. This is hugely worrying from a civil liberty perspective, but we should also bear in mind that reducing the level of tax avoidance (which is, or ought to be, legal behaviour) simply represents tacit increases in taxation, which already stands at very high levels.

Changes to the rules on LLPs have been pushed through

The changes, outlined here, threaten to have potentially serious tax consequences for LLPs. This is in spite of a request by the House of Lords that they be delayed because of the uncertain impact of the new measures.

New rules on SDLT are very problematic

The Chancellor has signally failed to change SDLT despite the huge 'fiscal drag' and distortions to the property market it creates. As property prices rise, this will increase - no wonder the Government is extending its 'Right to Buy' scheme! As this article points out: "In the 2012 Budget, Osborne announced that homes worth more than £2m would face a stamp duty rate of 7 per cent.

Osborne said: “We are expanding the new tax we introduced to stop people avoiding stamp duty by owning homes through a company. We will expand the tax on residential properties worth over £2m to those worth more than £500,000."

This is a smoke-screen, however, as individuals were using this to avoid IHT on properties, and not SDLT. The reliefs available for landlords are very difficult to obtain, and essentially these changes will result in higher tax charges on landlords, thereby increasing rents and reducing availability, in a rental market which is already unaffordable to many and is plunging those on middling incomes into 'housing poverty'. 

Adam Smith Institute Budget Reaction: Well, that was boring

Commenting on the 2014 Budget: 

“Well, that was boring. The total tax and spending changes barely scratch the surface at around £2bn/year in each direction – that’s a tiny 0.3% of the £732bn the government is expected to spend this year. The exception may be the pensions announcements, which may prove to be very significant in the years to come.

“Much of the budget was gimmicky: inheritance tax exemptions for emergency services personnel who die in the line of duty must only affect a handful of people and giving LIBOR fines to Help For Heroes continues to be one of the most bizarre revenue hypothecations of modern times. Even the much-heralded ‘welfare cap’ can be easily undone by any Parliament that wishes to in future, so cannot count as more than a political stunt.

“If there is cause for optimism it is in the economic data released today, which shows that the labour market is rebounding strongly (even if productivity still leaves a lot to be desired), and the language used by the Chancellor. At last the government is speaking in dynamic terms, recognizing in rhetoric at least that lower tax rates can produce higher revenues. Mr Osborne is talking the talk on taxes, but he doesn’t have much time left to walk the walk.” 

– Sam Bowman, Research Director, Adam Smith Institute

Pensions

“At last Britain's private pension savers will be treated like responsible adults. The rule has long been that, apart from a proportion that can be taken as a lump sum on retirement, pensioners have had to convert their retirement pot into an annuity, paying them a lifetime income. But as lifetimes have lengthened and financial uncertainty has abounded, annuity rates have fallen, leaving savers much worse off then they expected.

“From April 2015, retirees will be able to access their pension savings pretty much as they wish. Instead of being hit by a 55% tax if they took out 'too much', ordinary rates of tax will apply. So it all becomes much easier. You build up a pension pot while you work; on retirement, you can take 25% of that tax-free (a provision designed to help people with moving costs and other changes on retirement); then you can decide whether you will buy an annuity, draw down the pot at a set rate, or withdraw the whole sum, facing tax only at the prevailing marginal rate.

“Most people are perfectly capable of managing their retirement income and do not want to fall back on the state anyway. The new rules recognise that. On the rare occasions when governments treat us like adults, they should be encouraged.”

– Eamonn Butler, Director, Adam Smith Institute

Personal Allowance & National Insurance

“As anticipated, the income tax personal allowance has been raised to £10,500. That’s good, and will help nearly all workers, but the Chancellor missed the opportunity to tackle the National Insurance threshold, which is much lower than the personal allowance and affects low paid part-time workers who may not benefit from the personal allowance rise at all.

“A part-time worker earning £10,500 will pay no income tax, it is true, but they will still face a National Insurance bill for £330 a year. National Insurance is the great elephant in the room in British tax policy: although administered separately, it goes into exactly the same revenue pot as income tax. It desperately needs reform if the working poor are to be given the tax break that almost everyone agrees they need.

“Still, the rise to the personal allowance is better than nothing, and the government is right to pursue tax cuts for lower earners.”

– Sam Bowman

Childcare

“The government is right to recognise that childcare costs are becoming increasingly unaffordable throughout the UK: at £106.38 per week, the cost of 25 hours of childcare is unaffordable for many families.

“Ofsted regulations around childcare, such as stringent qualification requirements and low mandatory child-to-staff ratios, are some of the harshest in Europe, and have caused prices to skyrocket.

“These regulations have real consequences for the consumer: the UK ranks as the second highest spender in Europe on childcare services and parents are spending a staggering 28% on childcare in out-of-pocket costs.

“Unfortunately, the government’s proposals do nothing to address these supply-side factors, and will probably just perpetuate the vicious cycle of high costs. Families would benefit far more from deregulating the childcare sector than from increasing the childcare subsidies, which fund a highly distorted and expensive market.”

- Kate Andrews, Communications Manager and Research Associate, Adam Smith Institute 

Missed opportunities

“The most obvious missed opportunity was the lack of any additional cut to Corporation Tax. Adam Smith Institute research has found that nearly 60% of the Corporation Tax comes out of workers’ wages, with the rest acting as a harmful tax on capital. The Chancellor could have boosted wages and stimulated the economy by cutting Corporation Tax even more, killing two birds with one stone.

“A change to the Bank of England’s remit. Inflation targeting has unequivocally failed, giving us the worst recession and slowest recovery in living memory. If the Bank were tasked with targeting Nominal GDP instead, as many prominent economists are now suggesting, the macroeconomy would likely improve immediately and remain stable during future supply shocks such as the 2008 Financial Crisis.” – Sam Bowman

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@old.adamsmith.org /07584 778 207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.

I wouldn't say I was surprised by HMRC and the 40p tax rate

HMRC is putting forward what might to many sound like a very strange argument. That the 40p tax rate makes people work harder:

Pushing people into the 40p rate will make them work harder to recover the money they have lost to the taxman, an official report has found.

The thing is, they could well be right.

Taxation of incomes affects the desire to work in two ways, the income and substitution effects. One is that we have some idea of how much we want to get into our hot and sticky little paws and we'll do sufficient work to gain that much. If tax rates rise then we'll work more to get that amount. We do know that this applies to most of us some of the time and is indeed a feature of the real world (studies of piece workers like cab drivers confirm that many do indeed have a daily target for earnings which when reached means they go home). The other is that at some point we look at the amount of work we have to do to gain extra income and instead shout blast this for a game of soldiers and we wander off to go fishing instead. Here a rise in tax rates will lead to a reduction in working hours and more leisure. We also know that this applies to most of us at least some of the time.

So, the effect of a rise in tax rates upon working hours is a little complex. It depends upon the individual decisions of us all and in aggregate we can see that at some point the blast this effect will outweigh the desire for a certain income. It is the interplay of these two that gives us our famed Laffer Curve.

Which is why I can't say that I'm all that surprised at HMRC saying that the income effect is greater than the substitution one at the 40p tax rate. For this is the same HMRC that also said that the substitution effect dominated the income one at a tax rate of 50p. Which is why that top rate was lowered to 45p. A 40p rate is thus below the peak of our Laffer Curve and that's exactly where we would expect income to predominate over substitution. For that's how we've initially calculated our curve in the first place.

Of course, there's nothing at all that says that we should in fact be taxing at the peak of the curve. We can have other goals in mind, for example the freedom and liberty of people deciding how to spend their own damn money instead of handing it over to the cage of monkeys in Westminster. But all of that's a rather different point. That people might well work harder at a 40p tax rate is the flip side of our knowing that they don't at a 50p one.

Seven things we'd like to see in Budget 2014 (but probably won't)

Here are seven things we'd like to see at this year's budget:

1. Personal allowance and employee National Insurance thresholds should be merged and set at the NMW level (approx. £13,000/year after the NMW is raised to £6.50/hour). The government should legislate to keep the tax & NI thresholds at at least at the NMW level. It is crucial that the National Insurance contributions threshold be raised as well as the income tax threshold.

2. The corporation tax cut planned for 2015 should be brought forward by a year (to 20% this year), with a commitment reduce it further by 2.5% per annum for the next three years to 12.5%. In the long-run it should be abolished altogether as it is a stealth tax on income (workers’ wages bear approximately 60% of the tax) and a distortionary tax on capital.

3. The Chancellor should go forward with plans to merge Income Tax and National Insurance. Employers’ National Insurance Contributions should be included on workers’ wage slips to highlight that this is a stealth tax on wages.

4. Help to Buy should be wound down ahead of schedule to reduce house prices in London and the South East. To create jobs and encourage construction the Chancellor should endorse radical planning reform that would allow more houses to be built.

5. Subsidies (“financial relief”) to energy intensive industries should be ended with the money saved paying for a broad reduction in green energy taxes to reduce consumers’ energy bills.

6. The ring-fence of NHS spending should be abolished. If savings can be made in the education, policing and welfare budgets, they can be made in the healthcare budget as well.

7. The Bank of England’s mandate should be revised, with the Bank instructed to target the level of nominal spending (nominal GDP) in the economy along a predetermined trend. This would reduce inflation in boom periods and prevent deep recessions by stabilising aggregate demand.

Press release: Who pays corporation tax?

1. Nearly 60% of Corporation Tax comes from workers’ wages, making the tax a regressive and stealthy form of income tax
2. Most of the remaining burden of the Tax comes from capital owners, an economically inefficient way of levying revenues
3. The government should cut Corporation Tax more quickly to increase workers’ real wages and raise the level of investment in Britain

Almost 60% of the Corporation Tax burden falls on workers’ wages, a new report by the Adam Smith Institute has found. The report, released ahead of this week's Budget, reviews existing academic studies into the incidence of the Tax and recommends that the government reduce or abolish it.

The report, ‘Who Pays Corporation Tax’, authored by the Institute’s Head of Policy Ben Southwood, proposes that the government significantly reduce, or abolish the corporation tax to reduce the burden on workers, and that it accounts for the lost revenue through either cutting spending or, if necessary, raising the money through more efficient means, such as property, income or consumption taxes.

According to the report, the Corporation Tax’s burden is split between workers— it reduces their pay without appearing on their pay slips—and capital, distorting decisions therefore reducing investment, UK growth and future living standards.

Though economists argue about the exact way in which the tax is initially and eventually split between capital and labour, all agree that the burden is shared primarily between the two.

Ahead of the Budget on Wednesday, the report’s findings should embolden the government to accelerate its corporation tax cuts to increase workers’ real wages and the level of investment.

Ben Southwood, author of the report and Head of Policy at the Adam Smith Institute, said:

"Tax avoidance scandals are often presented as if they were a struggle between the common man and the man—but economists know this is far from the truth. Corporation tax is partially paid by workers through lower wages, and the remaining chunk, though paid by capital owners, is likely to come out of investment, hitting growth and future living standards.

"If it can be done without introducing new distortions, we should definitely abolish corporation tax and get the revenue from a more effective tool with fewer side-costs."

Eamonn Butler, Director of the Adam Smith Institute, added: "In his Budget this week the Chancellor may announce a modest cut to Corporation Tax. He should go much further: cutting the Corporation Tax significantly will put more money in workers' pockets and boost the economy by stimulating investment. We need to grow our way back to prosperity by cutting back the state. The Corporation Tax should be the first tax to go."

The key findings of the report include:

1. While most of the substantive details are hotly disputed, the best studies of corporation tax find that in an open economy, workers bear a significant part of the burden of the tax, along with owners of capital. In a closed economy—like the world as a whole—the burden falls mainly on capital owners.
2. Though results have been contested, the average empirical result puts the burden on workers at 57.6%. Averaging theoretical studies is much more difficult, mainly because each study gives such a wide range of results over such varying sets of circumstances.
3. Nearly all economists agree that taxes on capital are highly distortionary, and thus unattractive as means of raising revenue. Owners of capital do tend to be wealthier than non-owners, but capital taxes are far from the best way of redistributing wealth.
4. Transparency is a virtue of a tax system, and many workers are unaware that their wages are lowered by corporation tax.
5. In the presence of an extremely complex regulatory and legal regime like the UK’s, the costs of corporation taxes become even higher by distorting key decisions like choices between debt and equity.
6. The interaction between corporate income taxes and corporate gains taxes may complicate the question, necessitating reforming both in order to properly reform one.

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@old.adamsmith.org / 07980 627940. The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.

No, I won't make the obvious joke about Ed Balls' latest idea but it's ____s

This latest idea from Mr. Yvette Cooper rather fails I'm afraid:

People earning more than £150,000 would get only 20 per cent tax relief on pension contributions, instead of the 45 per cent they receive now. Ed Balls, the shadow chancellor, will set out plans to pay for its Compulsory Jobs Guarantee, the centrepiece of the party’s welfare plans. Every young person jobless for more than 12 months will be given a “starter job” which they will have to take or lose benefits.

Leave aside, for a moment, what the money is to be spent upon. I've no real objection to the idea that it should be welfare and work, not welfare and no work. Look instead at what the tax proposal is.

To tax people who are saving for their old age. And there really is a problem in this, for we don't actually not tax people who save for their old age. What we do is delay the tax that must be paid by people saving for their old age.

We do this by not taxing them on the money that they put into their pension pots. And then we tax them on the pensions they receive when they retire. At, it should be noted, entirely the normal income tax rates.

So, what is being suggested now is that people should be taxed on the money they put into their pensions: and then be taxed again, in the normal manner, on the money they get paid in pensions in decades to come. This is, and I'm afraid that I am indeed the first to point this out, double taxation of the most wincingly bad kind. Because, unlikely though it may seem, we rather like people saving for their old age.

The Guardian puts a different spin on the same story:

Ed Balls, the shadow chancellor, will say on Monday that Labour will move to end the plight of "young people stuck on the dole" when he says that the party's compulsory jobs guarantee, to be funded by a tax on bankers' bonuses, will last the whole parliament.

These are the bonuses that the European Union has just slashed to the bone and which are, including national insurance, already taxed at rates of 60% or so?

That's going to raise a lot of money then, isn't it?

Immoral double taxation or a pittance in revenue raising. This hasn't been thought through as yet, has it?

It's the usual piggies squealing about business rates

There's a lot of squealing going on about the system of business rates at present, most of it coming from the usual little pigs. The oinks are actually loud enough and coordinated enough to be considered a campaign to get the basics of the system changed. Which would be a bad idea given that rates are actually one of the better parts of our current taxation system:

Business rates are not fit for purpose and need a complete overhaul, MPs say in a report on Tuesday. Joining a chorus of critics, they call for the Government review into the future of business rates to be extended to consider whether retail taxes should be based on sales rather than the rateable value of a property. The MPs want the review, set up by Chancellor George Osborne, to look at the merits of giving retail its own business taxation system.

The first and most obvious point to be made is that we don't want to give any segment of business its own taxation system. We want all business to be competing upon exactly the same level playing field. For the obvious reason that we want not just new businesses to open, but also people to cross the boundaries of the various sectors as technology and incentives change. We certainly don't want people either being confined by their tax treatment to one sector, nor are we all that keen on people arbitraging across parts of the tax system.

But as to rates being one of the good parts of the tax system: they're a tax on using expensively located property. That is, they're akin to a land value tax (not entirely, but close) and are thus among the least distortionary taxes possible. This is, we should note, a Good Thing.

The real background to this is that those currently operating physical retail stores find their lunches being eaten by those who retail online. They want to pull some of the load off those physical locations and onto the drab warehouses round the back of town that we increasingly get our goods from. And you might think that that's fair: they're both doing retail after all, so why not tax equality?

But that's to misunderstand what is happening with the online retail revolution. We have found that we can , now, with better logistics and the internet itself, serve peoples' retail desires while using rather less of an expensive input: that high value retail space. This is a technological change that makes us all richer: for it frees up ever more of that high value urban property to be used for other things. Offices perhaps, burger bars or, if anyone's willing to get the planning system right, rather more of those houses and flats that we're all told we've such a short supply of.

We want to tax scarce things: precisely because it makes people more efficient in their use of that scarcity. Which is why, as I say, business rates are a rather good part of the tax system. And we shouldn't change it just because those getting the mucky end of the current stick are whining about it.

On the rise of the robots

I'm astonished to find yet another person getting this wrong. Martin Wolf:

Fourth, we will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person’s life. In this way, the potential for a more enjoyable life might become a reality. The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects.

This is all about what happens when the robots steal all our jobs. And everyone, just everyone, is arguing that when they do then the capitalists will have all the money. For they, of course, own the robots. Thus we should tax the snot out of capital and the capitalists and the world will be a better place. It all sounds a bit Marxist to me to be honest, this idea that there is some class of capitalists that we must tax.

There are several reasons why I don't think this is going to happen:

1) My favourite economics paper. Looking at who benefits from Schumpeterian innovation, that's the same thing as the technological change we're considering here. The answer is that we the consumers get 97% of it and the entrepreneurs get 3%. Now why should we, getting 97% of the increased living standard from technological change, then want to tax the snot out of those people bringing it to us and only getting 3% of that new value created?

2) Does anyone at all really believe that the robots are all going to end up being owned by one class of people? In this age of open source stuff? Is this what's happening with 3D printing? Of course it damn well isn't: people are pottering about in sheds with these technologies. As soon as we do have robots that make robots (the necessary stage for them to take all our jobs) there will be designs for such robots that you can make at home. We'll all be robot owners and why would we want to tax the snot out of ourselves?

3) The assumption is that capital will become more productive in a robot world. That's why we'll have to tax the snot out of capital. And capital will indeed become more productive: which is why its value will fall. Yes, you read that right. When something becomes more productive this is equivalent to stating that we've made more of it. Thus more productive capital means we have more capital and the price of something that becomes in greater supply falls, not rises.

4) The last time we mechanised a significant area of life was probably farming back in the 1920s and 30s. Agriculture become significantly more productive. What happened to the price of land? Yup, it sank like a stone and the farmers have been on the public teat ever since.

Vast numbers of cheap robots would lead to our lives improving immeasurably: so why is everyone running around insisting that it will then be necessary to tax the snot out of the capitalists?

Why this insistence that things that need to be collectively done must be centrally done?

I find this an intensely irritating argument:

Government reaction to the floods in Somerset brings into sharp focus a central conundrum for any rightwing, neoliberal administration. It is the battle of populism versus ideology. An emergency on this scale requires them to behave, quite simply, like socialists. It requires a well co-ordinated, firm, top-down response, and the spending of tax revenue to alleviate misery, on the strict basis of need rather than worthiness.

The irritation comes from the British Left's standard response to anything, which is that whatever it is must be organised centrally.

I think we're all prepared to agree that managing the drainage boards of an area that is below the high tide line is something that is going to have to be done communally. But why on earth must it be done centrally? Under the control of a man whose only formative working experience was as a housing charity worker? What special skills does he bring to the questions of how or not parts of Somerset should be drained? Or, if we're honest, the 11,000 or so people who work for this centralised organisation?

For there is indeed another method of communal action. Local and voluntary action, even local and forced action. Just thinking off the top of my head the people who live in the areas likely to flood might band together (and use the law to make sure there's no free riders) and create, ooooh, I dunno, drainage boards or summat. They all pay in a bit each year, call them just to be ambitious drainage rates, and then those boards can hire a few people to dredge the rivers, man the pumping stations and all that. We might also expect the locals to clear the ditches on their own land, those boards being responsible only for the larger efforts necessary.

And now to the big reveal: this was of course the way that the Somerset Levels were managed for centuries since their first draining and it's only since the service was centralised under the Environment Agency that it's been a complete cock up.

As I say I find this an intensely irritating argument that the British Left keep coming back to again and again. That anything that must be done collectively must also be done centrally, in a "top-down manner". When in fact a very large number of things that do indeed need to be done collectively are better done on a local basis, more bottom up than top down.

You know, by people who might actually know what they're doing? With the added attraction that since they actually live in hte affected areas they might also care about what gets done?

Equality: as cheap as 50p?

Peter Oborne argues that Ed Balls' pledge to raise the 45p top tax rate back up to 50p is a good idea. While the extremely high marginal rates (top main rate 83%, plus a 15% surcharge for "unearned income") of the 1960s and '70s might have been driven by "socialist envy", George Osborne's dropping the rate from 50p to 45p in was "profoundly shaming and offensive", Oborne contends. This is because, echoing Stanley Baldwin and his brand of Toryism, the conservatives should represent the whole country, not the rich or any other factional interest.

Apparently the Coalition has "devoted a great deal of effort to lowering the living standards of the poor", and this move to "make the rich richer" is inappropriate when the poor are getting poorer. I contend this by arguing that inequality is down to 90s levels under chancellor Osborne, while the worst-off in society are the only group to actually see their living standards improve the since the recession hit. And the (ugly, unpleasant, and regrettable) attitudes that have emerged towards benefits claimants are probably driving government rhetoric in that area, rather than vice versa.

In general, it annoys me when a columnist writes something apparently trading on what everyone just knows. Sometimes the common view is incorrect. Funnily enough, politics is the area where people err most profoundly and with the most regularity. And I would argue that Oborne is trading on falsehoods in his piece; would it still be a coherent argument if it started with the factual premise that inequality in the UK fell back below its 1997-8 low in 2011-12, 0.34 measured by the GINI coefficient? That the top 10% of earners endured the biggest blow to their incomes since the onset of the recession? And that the bottom 10% by income were the only one to see a rise in living standards taking inflation into account? I don't think so.

The IFS reports I link above predict that by 2015-16 inequality will rise back to roughly its pre-recession level, so perhaps Oborne could refocus his attack on the future inequality Osborne possibly has a hand in. But in all likelihood there is probably little the government can do about inequality over the long-term, caused as it is by very fundamental trends and robust as it is to institutions even such as the USSR's. Most of the extra inequality since the 60s and 70s has come from couples engaging in much more assortative mating. And very long-term trends are mainly dominated by heritability of social class—those with Norman surnames are 28% more likely than a random sample of similar others to get an Oxford place.