It sounds like we've the possibility of a deal here

These new figures do need to be taken with a pinch of salt, of course. But even so there does arise the possibility of an interesting deal:

Kevin Farnsworth, a senior lecturer in social policy at the University of York, has spent the best part of a decade studying corporate welfare – delving through Whitehall spreadsheets and others, and poring over Companies House filings. He’s just produced what is, as far as I know, the first ever comprehensive audit of the British corporate welfare state.

The figures, to be published in a forthcoming report, are astonishing. Farnsworth takes the financial year 2011-12 and tots up the subsidies and grants paid directly to businesses. They amount to over £14bn – that is, almost three times the £5bn paid out that year in income-based jobseeker’s allowance.

Add to that the corporate tax benefits, the value of the cheap credit made available to banks and other business, the insurance schemes run by the government to protect exporters, the marketing for British business laid on by Vince Cable’s ministry, the public procurement from the private sector … Farnsworth calculates that direct corporate welfare costs British taxpayers just shy of £85bn a year.

No, let's not try to pry into the accuracy of those numbers for a moment. Let us, for the sake of argument, take them to be true. And let us add one more piece of data. Corporation tax revenues run around £40 billion a year or so. So, if we are to believe these new figures it would appear that we've the possibility of a very promising agreement here. From our side the simple abolishment of corporation tax and also the abolishment of all that corporate welfare sounds like a great idea. And clearly those who believe that number for corporate welfare should also leap at such a deal. The Exchequer would be, by those numbers, near £40 billion a year better off.

The only problem with this deal is that those who claim to believe those corporate welfare numbers simply wouldn't take it. Meaning that they might not believe in them quite as much as they say they do.

Why does the son rise?

John Cochrane recently gave a speech where one of the main threads involved talking down the importance of income and wealth inequality. Poverty, and generally not having as much as we would like are bad, he says, but is there anything bad about inequality per se? That is: is there at least one respect in which things would be better if some people who are very well off were made worse off? He argues that there isn't, or if there is, it is of only trivial importance, and outweighed by all of the costs of actually 'doing something' about inequality.

In a response on Bloomberg View, Noah Smith argued that economists should respect people's actual preferences, and since people show strong preferences against wealth and income inequality, we should respect them. He uses the example of how people prefer to take nothing over free money when they are made offers they perceive as 'unfair' in the Ultimatum Game. On top of that, he says, inequality leads to socio-political unrest, which we can all agree is very bad and costly, citing a 1993 paper.

Finally, Tony Yates adds some extra arguments on his blog. He says luck has a big role to play in success, but success can also buy some of the non-luck factors in success (e.g. education), meaning that it can 'set off path dependence'—according to Yates this can lead to inefficient outcomes by distorting the allocation of talent. He says inequality reduces public good provision (e.g. education—although I'm not sure that is really a public good). And he says that inequality might make 'crony capitalism' more likely.

I've written twice about equality before: once saying that Rawlsian-style justice demands inequality of wealth/income in certain very relevant circumstances; another time arguing that Hayekian-style information economics militates towards equality of wealth. There are lots more things to say in this debate, but here I intend to take issue only with one of Yates' claims: the idea that luck + path-dependence means inequality is passed down through the generations (I can't see why exactly he thinks this distorts the allocation of talent, but here I'm only questioning the mechanism).

Luck is certainly a huge factor in success. And people do pay big money for better education to try and make sure their kids are more likely to succeed. But does this work? Let's look at some studies. Random selection into a better school in Beijing has no effect, random selection into a better school in Chicago has close to no effect, random selection into a better Kenyan school has no effect, nor does it in Missouri, nor in New York City. Once you control for student characteristics, Australian private schools didn't outperform state schools on the 2009 PISA. Conscription into extra education didn't much affect life outcomes in late 1970s France. In 1950s England, going to an elite school made no difference to a youth's job market outcomes. The literature is huge and there are many many more examples.

And other literatures point to the same conclusion. For example, we now know that the heritability of intelligence increases through life (to hit around 50-90% in adulthood), while 'shared environment'—upbringinging, parental inputs and schooling—falls to around zero. This is supported by traditional twin studies, twins reared apart studies, adoption studies, and now whole-genome analysis.

So it should not be surprising that it's actually really really really really hard to make sure your descendants stay rich with the proceeds of luck. In fact, we know that that's not why the descendants of the rich often are rich because we have a couple of pretty good experiments showing it! For example:

We track descendants of those eligible to win in Georgia’s Cherokee Land Lottery of 1832, which had nearly universal participation among adult white males. Winners received close to the median level of wealth – a large financial windfall orthogonal to parents’ underlying characteristics that might have also affected their children’s human capital. Although winners had slightly more children than non-winners, they did not send them to school more. Sons of winners have no better adult outcomes (wealth, income, literacy) than the sons of non-winners, and winners’ grandchildren do not have higher literacy or school attendance than non-winners’ grandchildren. This suggests only a limited role for family financial resources in the formation of human capital in the next generations in this environment and a potentially more important role for other factors that persist through family lines.

The same is true for modern lottery winners—the truest example of pure luck in success. And it took only two generations for the descendants of slaves to catch up with the much more advantaged & wealthy free blacks. Whether rich parents split an inheritance between eighteen kids or one, their grandkids are equally rich. Basically luck mixed with path dependance explains almost nothing.

UKIP is on the right track to beat low pay

Certain policies proposed by UKIP this morning remind us how far away the party platform is from a classically liberal agenda. However.

In the kick-off to their party conference, UKIP has also announced that its general election manifesto will raise the personal allowance threshold by £3,500 pounds:

At its party conference, which has begun, UKIP will also promise to raise to £13,500 the amount people can earn before paying any income tax.

In a plan to win the "blue-collar vote", Nigel Farage's party will pledge to fund the changes by leaving the EU and cutting UK foreign aid by 85%.”

(At present, the) 40p rate is payable on income from £41,866 to £150,000, with the "additional rate" of 45% paid on anything over £150,000.

“Under UKIP's plans, everyone earning between about £44,000 and £55,000 would pay income tax at 35p. Those earning more will pay 40p, with the additional rate scrapped. “

Despite other policy failings, UKIP's commitment to raising personal allowance surpasses the coalition's and should be heavily applauded.

This is the first policy of 'party conference season’ that properly addresses the root of the cost-of-living crisis and provides a simple, effective solution to relieve the tax burden on low-income earners.

For years, the Adam Smith Institute has illustrated the pointlessness in taxing workers out of a living wage, to then compensate their low income with government handouts and benefits. The Labour party’s recent pledge to raise the minimum wage to £8 an hour threatens to put more young, unskilled workers out of jobs, while still taking away a substantial potion of income from anyone who happens to benefit from the small pay raise.

A hike in minimum wage is a symbolic gesture at best, that continues to tax away - or destroy - low-earner incomes. A raise in the personal allowance threshold, however, gets more money into the pockets of those earners, creating no dangerous side effects in the jobs market.

With both the Liberal-Democrat and Conservative Party Conferences ahead of us, we can only hope both party leaders will continue to embrace an increase in personal allowance and match UKIP’s threshold; or maybe even one-up them. (National Insurance cuts, anyone?)

We'll take good policy from anyone who wants to offer it

As we regularly point out here, at the ASI we're not party political. But we do propose policies that we think would be good to political parties. As such it's nice when someone, anyone (we're not proud!) decides that implementing a policy we've been recommending would be a good idea. So it is with the announcement that the LibDems are going to have a £12,500 a year personal tax allowance in their manifesto:

The Liberal Democrats have pledged to raise the income tax personal allowance to at least £12,500, in manifesto plans announced on Thursday.

The party has also signalled it would seek to increase the amount people can earn before paying National Insurance.

Danny Alexander, the chief secretary to the Treasury, said the allowance would rise by the end of the next parliament. The move would cut income tax for 30 million workers and save the typical basic rate taxpayer £400 a year, the party claimed. It would also benefit more than six million pensioners.

The ASI has for years argued that the personal allowance should be much higher. But we started to point out, a few years ago when the Living Wage movement first started out, that it's simply ridiculous that people earning the minimum wage face income tax. The entire point of the minimum wage is that this is a minimum politically or socially acceptable amount that people should earn (whether you believe there should be a minimum wage is another matter). That at the margin government then nicks 40% of it in various taxes is just not on. so we've been saying that, even if people don't like our flat tax plan (£15k personal allowance and a flat rate income tax above that) can we all at least agree that the personal tax allowance should be that full time, full year, minimum wage?

The reason that Danny Alexander is saying £12,500 a year as the allowance is because that's what that minimum wage was a couple of years ago when he was first asked about the suggestion.

We would go further though (we always go further) and insist that it should rise to the current minimum wage, whatever that is in any year. And also that the NI contribution limits (yes, for both employers' and employees') need to rise to that same level. For we do still have that simple problem. If the minimum wage is the irreducible minimum that it is just and righteous that someone receives for their labour then it's just not on that government dip its sticky fingers into it.

And it's also worth pointing out that doing this will immediately make the minimum wage above the Living Wage. For we don't actually have a low wage problem in the UK: we have tax poverty.

Thomas Piketty ignores government capital

Thomas Piketty’s core argument in Capital in the Twenty-First Century is that the return on capital is (likely to be) greater than GDP growth and therefore those with capital will gain an ever greater share of wealth increasing inequality. This is not true in an individual sense or societally. Gilts returning 4% over an 80 year lifetime, paying 45% income tax, assuming RPI of ~3% and inheritance tax on two transfers would reduce a £100m fortune by 92% in real terms. There are almost no historic fortunes. Crassus was supposedly the wealthiest man to ever live. The de Medici fortune, assuming a zero real return, would be worth about $23bn today. But in practice individual great fortunes have struggled to earn even a zero real return, even without destruction, let alone Piketty's assumed 5% real return, which would have seen them dwarf Bill Gates' paltry billions.

Piketty argues income is increasingly taken by the productive: As he shows on page 200 of his book capital’s share of national income has fallen about 40% from 1850 to 2010 despite a substantial real savings ratio. Piketty argues the productive avoid taxes making inequality greater. According to the ONS the top 10% of income earners pay 39 times more income tax than the average of the other 90%.

Redistribution is materially greater than increased taxes and capital’s falling share of income would suggest. Capital and the entrepreneur have created almost all of the growth in income. The hairdresser has not changed his productivity but has seen his real income grow. The farm workers who produce vastly more than 200 years ago, only do so because of the inventions and innovations of capitalists and entrepreneurs. While he drives a combine harvester he has not improved his skills, capitalists and entrepreneurs taught him how to use their inventions and better processes. Workers work ever fewer less strenuous hours, retiring earlier and nevertheless receive an ever increasing real income.

Piketty argues that the private capital to income ratio has grown materially to about 6, that its distribution is very skewed and government’s capital is zero, all as evidence of the inexorability of ever greater inequality. However, government has vast wealth in the form of the net present value of the tax flows they receive (and expect to receive in the future) to which he ascribes no value. But these flows are worth about 40x national income.

Even if he is correct about private wealth, the overall wealth of society is quite evenly distributed—the government’s 40 is increasingly devoted to welfare (and might usefully be imagined as de facto belonging to those who expect to receive it in the form of welfare and state provision of goods), redistributing from those who earned it to the rest of society. The capital value of transfers to a hypothetical individual who chooses to never work and relies entirely on the state is likely to be in the region of £1.5m.

How to raise wages: cut corporation tax

We'd all like to see wages rise: that is the point of this economy thing, after all, that the average life of the average bloke just keeps getting better and better. So, how might we go about doing this lovely thing? Well, some interesting research from the US as to the effects of eliminating (or, if not, at least lowering) the corporation tax rate:

We adopt a dynamic stochastic occupational choice model with heterogeneous agents and evaluate the impact of a potential reduction in the corporate income tax on employment. We show that a reduction in corporate income tax leads to moderate job creation. In the extreme case, the elimination of the corporate income tax would reduce the non-employed population by 5.4 percent. In the model, a reduction in the corporate income tax creates jobs through two channels, one from new entry firms and one from existing firms changing their form of legal organization. In particular, the latter accounts for 85.7 percent of the new jobs created.

This is not, we should note, about patent boxes, about freeing foreign income from UK taxation or any of that sort of stuff. This is the effect simply of lowering the rate upon profits made inside the UK. Jobs created would go up and, given that the closer we get to full employment the higher wages rise, wages will indeed then go up.

This finding is simply the mirror image of the standard point that capital and corporate taxes have higher deadweight costs than most other forms of taxation. Any tax means that some economic activity doesn't take place but different taxes destroy, for the same revenue raised, different amounts of economic activity. We would therefore, for whatever amount of revenue we want to raise, prefer to destroy the least amount of economic activity. Which means lowering corporation tax, as above, even if that means higher taxes on consumption or property to still collect the same revenue.

Sometimes it's the little things that matter in tax systems

A little story that helps to explain why the Greek economy is in the depths that it is:

But as happens so often in Greece, the bureaucrats had other plans. In a country where you are viewed favorably when you spend money but are considered a criminal when you make it, starting a business is a nightmare. The demands are outrageous, and include a requirement that the business pay taxes in advance equal to 50 percent of estimated profit in the first two years. And the taxes are collected even if the business suffers a loss.

I recall something similar from time in California: you must put up a bond for the amount of sales tax that you will be collecting in the future. Plus a fee for the privilege of opening a business in that great state.

This just isn't a sensible manner in which to be running a tax system. Yes, of course, tax must be collected for there are things that we really do need government to do (even if not as many as they attempt to do). And it's probably a good idea to have certain measures in the tax law to make sure that people don't dodge said righteously due taxes. But to add to the capital requirements for starting a business in this manner is simply ludicrous. It's a difficult enough, and expensive enough, enterprise at the best of times. Rather better, therefore, to leave the possibility of avoidance there in the process of leaving some room for a business to even start.

Our own dear HMRC seems to have cottoned on to this point: it's no secret at all that many new firms bolster working capital by delaying PAYE tax payments to the Treasury. It's not exactly desirable in the scheme of things but when looked at in the round better that such companies survive their growth pangs than that HMG gets its money on the nail.

Well of course we should reform inheritance tax

Another report into inheritance tax and another observation that it doesn't actually do what it says upon the tin:

People with estates worth many millions are able to avoid the brunt of inheritance tax through complex schemes, including moving the cash offshore or investing in agricultural land and small business shares. Those avenues are closed to "moderately well–off" people whose only assets are their home and pension, Mr Johnson said.

It's just about possible to see that the great plutocratic fortunes should be broken up every generation or so to prevent the fossilisation of society: if that's something you tend to worry about which we don't very much. But to have a taxation system which attempts to do this and then doesn't is obviously entirely dysfunctional.

Our current system manages to tax the small capital of the bourgeois while leaving those plutocrats untouched. We therefore really rather do want to change that taxation system.

This is not, I hasten to add, the official ASI line here, rather being a personal musing. But I take it as a given that we don't actually want to tax the petit and haute bourgeois accumulations of capital. Far from it, we'd much prefer to see modest estates cascade down the generations. For reasonable amounts do provide freedom and liberty. In that currently fashionable phrase, enough to do anything but not enough to do nothing. It's also, even if you do worry about the plutocrats, not how much money is left that is the problem but how much money is received. Someone leaving a few billions to be spread among thousands is very different from a few hundreds of millions being left to just one.

So I would muse that we might want to move to a system something like the following. It is the receipt of an inheritance which is taxable, not the leaving of one. Further, there's a substantial lifetime exemption from having to pay tax on receiving one or many. Several millions perhaps: that need to still do something amount.

Alternatively, of course, we could just move the entire taxation system over to being a consumption tax. In that manner we don't actually mind who has what amount of capital nor where it came from. We just tax people when they spend with the capital or the income from it. and given that that's the general trhust of the Mirrlees Report there's good academic backing for the plan.

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The Negative Income Tax and Basic Income are pretty much the same thing

I’ve been talking about the Negative Income Tax lately, and equating it with the idea of a Basic Income. I think most of the policies’ respective advocates would deny that they’re the same policy. In this post I’m going to outline why that’s incorrect and I’m happy to say that they’re basically the same thing. For the uninitiated, a Negative Income Tax is a form of welfare that replaces most existing welfare schemes with a single payment that supplements the income of the unemployed and low-paid. The payment is withdrawn as your earnings increase, ideally at a gradual enough rate that increasing your earnings (and hence reducing leisure time) is always worthwhile.

An example: a £5,000 basic payment at a 50% marginal withdrawal rate (this means that for every additional pound earned, the worker will receive 50p less in NIT payments). Someone with an income of zero would receive an NIT payment of £5,000, or just under £100/week. If they took a job that paid £5,000/year, they would receive a top-up of £2,500/year; that paid £7,500, a top-up of £1,250/year. Once they reached £10,000/year, they would receive nothing in NIT.

This idea was supported by Milton Friedman, among others, and has a reasonably strong pedigree on the right. Even libertarians who object to income redistribution in principle usually concede that a Negative Income Tax is the least bad form of welfare, because it is administratively simple and perverts incentives less than most welfare schemes. It is particularly appealing to many liberals and libertarians because it is unpaternalistic.

A Basic Income, on the other hand, is usually conceived as a flat payment to everybody irrespective of circumstance. This leads to a very big problem: assuming it replaces most forms of welfare as an NIT does, a basic income high enough for unemployed workers to subsist on would simply not be affordable to pay to everyone. A policy that ideally would be designed to help the poor ends up being a very expensive subsidy to people who do not need extra money.

Advocates of the Basic Income recognize this, and their solution is typically to use the tax system to ‘claw back’ the payment from relatively high earners. So everyone gets the money, but it is withdrawn according to earnings.

In practice, that’s more or less the same as a Negative Income Tax – the only difference is whether the withdrawal takes place at the ‘front’ of the payment (as with the NIT), or the ‘end’ (as with the Basic Income). Strange as it may seem, the policies advocated by Milton Friedman and the Green Party are the same in all but the technical detail.

But even if there is a surprising amount of agreement in terms of the kind of welfare we’d like to see, the detail may be more difficult to agree on. How much should a ‘basic income’ be? When should it begin to be withdrawn, and at what rate?

Questions like this are, I think, likely to be where what breaks up this (unholy?) alliance. But maybe not. Traditional policies like the minimum wage probably do more harm than good, and, rightfully, the question of how to improve the lives of the low paid does not seem to be going away. It will take compromise, but in the Negative Income Tax / Basic Income, we may have an answer.

Art museums are simply too expensive, sell everything and close them down

This is based on a recent piece in the NYT which I cannot now find so apologies both for the repeat and also for the possible garbling of the argument. But art is simply to valuable to be hanging in museums these days. We should sell the lot off and close them all down.

Take, for example, the mythical Vermeer, "Girl who has lost her ears let alone her pearl earring". This is worth, in these days of Russian oligarchs, $100 million. It is also hanging in a public museum in London, owned by some arm of the State.

So, how much does it cost for people to look at this picture? A reasonable discount rate might be 5%. That's what we could get if we flogged the piece and stuck the money into a stock market fund concentrating on yield. Maybe 3% for FTSE as a whole. But with 5% that means that not selling it costs us £5 million a year.  Or £13,700 a day, which if museums are open for 10 hours a day means £1,370 an hour. A period of time in which this one picture might have, what, 10 people look at it? Thus, the cost to us of this one picture hanging in a gallery in London is £137 per viewer.

At which point we have to ask whether this is worth it. And we've a method of working that out to. Do we think that we could charge those 10 people an hour £137 each to be able to view the painting? No, clearly and obviously, we do not. Therefore the costs to us as a whole of our possession and display of this painting are less than the benefits that come from our owning and displaying this painting. Having costs higher than benefits is also known as destroying value, something which is properly known as "making us all poorer".

We should therefore sell off all such art and close down the museums.

If those who purchase it then wish to show it to the public all well and good. But they'll be doing that on their dime, not our.