What we need to do is obvious

This piece could equally well be titled "Interesting things we learn in The Guardian". For we find out that Britain has the longest tax code in the world:

The question is: why does the UK have the longest tax code in the world? The Hong Kong tax code, widely held by tax lawyers to be the most admirably efficient in the world, is 276 pages long. The British tax code, rapidly beginning to look like the most disingenuous in the world, is currently in excess of 17,000 pages. It has more than trebled in size since 1997.

And what was it that happened in 1997? Ah, yes, Gordon Brown.

We also find out something else very interesting:

A couple of tax lawyers eventually told me that a 276-page tax code could generate the same if not more revenue in the UK....

So, umm, given that a 276 page code would both reduce the amount wasted on dodging around the systemn and also provide the same or more revenue (in itself the primary purpose of a tax system), why don't we have a nice bonfire and get ourselves a 276 page tax system? One that might actually be comprehensible to some mere mortal? We can't really see any argument against it.

And if we were to take the Hong Kong example seriously we might want to take two more things from them. One being that there's no with holding in their system. In order to pay your taxes you've actually got to go and pay your taxes, there's no salami slicing of that wedge from each and every paycheque. This physical act of having to hand over the money obviously puts a certain pressure downwards on tax rates as people actually see how much government is costing them. And while we'd never actually reach the second defining feature of the Hong Kong system, their low rates, we would obviously get closer if that pressure were to exist.

Entrepreneurs' Relief is worth defending

Defenders of Entrepreneurs’ Relief are on the back foot. In the corridors of power, rumblings have been heard that this tax relief is under threat. As entrepreneur Guy Mucklow writes in City A.M.:

Originally introduced by Labour seven years ago, the Entrepreneurs’ relief lifetime allowance was doubled by the coalition government to £10m in March 2011. However, according to a report by the National Audit Office in November 2014, the cost of the relief has increased to almost £3bn. Subsequent political scrutiny could put its future in jeopardy.

Entrepreneurs’ Relief offers business owners a lifetime allowance of £10m of gain taxed at the reduced rate of 10% for individual shareholdings of over 5%. Since its introduction in 2008 – when it replaced Taper Relief – the allowance has been raised to £2m, 5m, and finally its current level of £10m.

Its success may well contribute to its downfall. The £3bn has been "lost" because entrepreneurship is flourishing in the UK – partly because successive government have realised how vital entrepreneurs are and therefore offered people tax incentives to take the leap. If the idea is to encourage entrepreneurs, it is short-sighted to bemoan the loss of tax revenue (an inevitable by-product of the policy's success).

In our Manifesto, Tim Hames of the BVCA argued forcefully that we should be extending Entrepreneurs' Relief:

If the Government were to discard the 5% requirement, lure business angels yet further into the start-up scene and eliminate the current cap altogether, it would revolutionise the tax treatment of entrepreneurs in Britain. The howls of anguish from the likes of Berlin, Dublin and Luxembourg would be audible in the Treasury.

Getting rid of the 5% equity requirement should be prioritised in any move pushing for its extension. It may be pushing entrepreneurs to exit their companies or not take on extra funding in case they get diluted below the 5% threshold. Labour may be amenable. Its March 2013 Small Business Taskforce report stated:

Extend entrepreneurs’ relief beyond capital gains to dividends, in order to remove the incentive for entrepreneurs to dispose of their businesses rather than grow them. Reduce the 5% threshold for entrepreneurs’ relief to 1% or below to allow more employees to benefit from investing in the high growth companies they work for.

In contrast, the Liberal Democrats’ 2013 autumn conference, a policy paper entitled Fairer Taxes, Policies for the Reform of Taxation was endorsed by the party. It included the following statement:

We wish to focus Entrepreneurs' Relief to better serve the purpose for which it is intended; incentivising entrepreneurs and start-up business owners, and prevent it from simply being used as a way for wealthy investors to reduce their tax bills. We would therefore increase the shareholding requirement to 25%.

Extending it to 25% would definitely incentivise entrepreneurs to exit their companies early. There is no earthly reason why it should be raised from 5% and every reason why is should be cut. Britain is backing entrepreneurs – now isn't the time to take the foot off the pedal.

One way to narrow the North-South divide

We all know there's a North-South divide, but from a policymakers perspective it’s not clear what – if anything – we should be doing about it. To a significant degree, the relative economic success of London and the South East is due to factors beyond the powers of politicians to rebalance (without simply dragging the country’s capital down). The decline of manufacturing, the rise of London and Cambridge as tech hubs, and the cultural pull of the metropolis cannot be overturned – no matter how much money the government throws at it.

But even though we can't turn the country upside-down, given that most of us would prefer wealth and opportunity to be a little more evenly distributed, we should try to identify instances where we are prejudicing the South at the expense of the North. Here, one thing stands out above all others: the decision to postpone the revaluation of business rates.

As Simon Danczuk MP wrote a few years ago in the Guardian: "The problem is in my constituency – and no doubt many others – some commercial property values have fallen by up to 40 per cent since 2008." For Danczuk’s Rochdale constituency, the FT reported that “a study by Liverpool university showed that if business rates were set using up-to-date property values, shops in Rochdale would experience a 65 per cent fall in rates bills." In contrast, London shops would see a 52 per cent increase.

These costs weigh heavily on the North. Of the top 10 town centres with the greatest percentage of empty shops, seven are in the North East or North West. The Daily Mail reported last year that the North West is suffering from 16.9 per cent empty shop space, versus London’s 7.9 per cent. In Hartlepool, County Durham, 27.3 per cent of stores in the town are up for rent.

Demanding regular revaluations shouldn’t be confused with a call to cut business rates. As has been argued forcefully on this blog, business rates are about the least worst form of taxation: "Repeated taxes on property, that is business rates, have the lowest deadweight costs of any form of tax. The only one that could be better is a proper land value tax." Nevertheless, landlords and the entrepreneurs that want to use the abandoned spaces deserve rates that reflect the value of the land – the first step of a Northern regeneration should be a revaluation.

Philip Salter is director of The Entrepreneurs Network.

These people are crazy you know

We do, of course, believe in free speech around here. However, that also includes the right to point out when one thinks that someone is wrong. Or misguided, or off dancing with the fairies or possibly just even crazy. And so it is with this group, Transforming Finance. They've just released their suggestions for how the financial and banking markets might be improved in the UK. Two of which seem worthy of note. The first being this:

DIVERSITY Ensure the new Competition and Markets Authority investigation into retail banking is tasked to specifically promote greater diversity in the finance sector including more mutuals, local banks, credit unions, peer to peer finance, community finance institutions and opening up the payment system.

We believe that this means more Crystal Methodists should be allowed to run banks. Amusing but possibly not quite what would constitute good public policy. However, this is simply crazed lunacy:

RESPONSIBILITY The UK should immediately sign up to the European Financial Transaction Tax, in order to help reduce some of the unnecessary speculative trading of financial assets. The dominant culture of short termism in financial markets is one of the root causes behind the misallocation of capital, whether it is overvaluation of fossil fuel stocks, periodic asset and property price bubbles or instability caused by high frequency trading. Given the City of London’s dominant position in European markets, participation of the UK in the FTT would make it a more effective global policy and give confidence to other markets such as the US to introduce similar measures. The FTT would also be in the interests of pension investors, as it would mean more attention paid by asset managers to long term prospects of their holdings and reduce costly, often hidden, fees for excessive trading.

The one and only peer reviewed academic paper by your humble author is on this very subject. The desirability or not of the FTT. And one of the points made in that paper is that the incidence of such a transactions tax (as it is with Stamp Duty on share purchases, a finding from the IFS) is upon pensions and pensioners. A transactions tax on investing reduces the returns to investing and thus to lower pensions for pensioners. So our mad gabblers are in fact proposing a tax which would reduce pensions as a way of increasing pensions.

They're mad, crazed or, to be fair about it, simply ignorant.

Zoe gets horribly confused about the difference between charity and taxes

An alternative headline for this would be since when did Zoe Williams become a libertarian? For she's managed to get herself horribly confused over the difference between charity and taxation.

It is impossible to devise good tax policy on the basis that reasonable people don’t want to pay it and have to be either coerced or conned into doing so. .... You cannot collect tax unless you believe in tax; likewise you cannot pay tax gladly unless you love it, not for the useful stuff it might buy but in itself. This is seen as a political impossibility. But why? Tax is no more and no less than an investment in the future.

What is being described there is charity, not tax. And any good libertarian would rub their hands with glee at the idea that we should all be paying only what we voluntarily wish to pay for the good of our souls and of the society at large. And it's also a goodly part of the classical liberal point that if taxation were lower then there would be more charitable giving as we all gladly would alleviate the suffering of our fellows.

Quite how this got published in The Guardian I'm really not sure. For she really is insisting that we should be forking out only that amount that we love to: and let the coercive aspects of the State demanding money from us go hang. At which point, if that really happened, quite a lot of us would have to pack up and go home, job done.

Think of it another way. I'd certainly be happy enough to pay, voluntarily, for, say, food banks which feed the hungry in their time of need. Come to think of it, where I actually live, I do (and the fire and ambulance service in fact). It's the paying for the State professional class that reads The Guardian that I'm not so keen on the State forcing me to do. So, let us bring on Zoe's system forthwith! Tax is only what we will voluntarily pay, as with charity. All we're left with now is the thorny question of what on earth Zoe would do for a living....

The confusion of Will Hutton

We've Will Hutton telling us that we really need to be taxing corporations more. For they're paying less in tax on their profits than they used to and this is what ails our State. Sadly, what has really been shown is Will's confusion in reading GDP figures.

If companies in Britain paid, proportionally, as much tax as they did in the last year of Mrs Thatcher’s prime ministership, the country would be £30bn better off.

Well, no. Moving money from one account to another does not make "the country" better off. It might make the Treasury better off, this is true, at the expense of making investors in companies worse off, but this is not the same as the statement that it will make the country better off. For, as we might all have noticed, living as we do in a place where there are things outside the state, the State and the country are not the same thing. But then we get the more detailed confusion:

Nor is that where the bending of the tax system – and the state – to accommodate companies’ chosen behaviour stops. Over the same years there has been a monumental bidding down of wages as the share of company profits has risen by 6%, in terms of GDP, with wages falling by a commensurate amount.

This is a basic schoolboy error and one that's embarrassing for someone who was a Governor of the LSE to make. GDP is not made up of the wage share plus the profit share. there are more components than that: most notably the taxes paid upon consumption and the taxes paid upon employment. And a couple of us have been pointing out what has actually been happening over these years. The wage share has indeed been falling. But the profit share has not been notably rising. The difference explained by those two tax shares, on consumption and employment, rising. It's is not that the capitalists have been stealing the crusts from the workers' mouths, it is that government has been.

But we will admit that this produced a guffaw:

What is striking about the international system is the variety of tax regimes, wage and profit shares – and the lack of convergence, as the IFS’s exhaustive review of the tax system, led by Nobel Laureate Professor James Mirrlees, pointed out. There is plenty of scope for redesigning our tax system to make it fairer, increase its yield and refashion the bargain between companies and the state if we choose.

That's the Sir James Mirrlees of optimal taxation theory fame? Whose major contribution to taxation theory is that we should not be trying to tax corporations or capital returns, but instead should be taxing rents and consumption? And this is what is called in evidence to underpin the clai9m that corporations should be paying more tax?

It is to laugh, eh?

Wikipedia: Another answer to the tragedy of the commons

The tragedy of the commons is an oft-cited theoretical example by those who advocate government intervention. It postulates that, without regulation and intervention, public goods that everyone has an interest in using will actually not be provided (or at least not efficiently or to an optimal quantity) if contributions are voluntary. The logic is that everyone’s dominant course of action is to essentially just refrain from contributing because, if one contributes and others don’t, then the public good is not provided and their payoff is worse than if they don’t contribute and the public good is not provided. Additionally, if they don’t contribute and the public good is provided, the individual’s payoff is higher than if they do contribute and the public good is provided. In this sense, a society full of rational, self-interested individuals (as this scenario represents it) could actually lead to a harmful or sub-optimal outcome for society in the long run. However, Wikipedia is a prominent, empirical illustration of how the tragedy of the commons does not always hold since the website runs purely on private donations. Periodically, the site’s owners ask for donations to maintain it and keep it running ad-free. They claim that if everyone who read their plea paid £3, then fundraising would be over within an hour – nice in principle but not everyone pays up in practice. Some, inevitably, end up contributing more than others and many don’t contribute monetarily at all.

The following chart lists the percentage of donators corresponding to each reason for donating to Wikipedia, according to Wikipedia.

Conversely, here are the reasons cited for not donating:

Of course, one might argue that the knowledge found on Wikipedia is unreliable. However, a study published in Nature found that Wikipedia “is about as accurate on science as the Encyclopaedia Britannica”. Of course, Encyclopaedia Britannica attempted to refute the study. Access to a vast store of monitored, reviewed information via Wikipedia is an incredible asset to humanity and this asset is made possible entirely through voluntary contributions (whether this be in terms of time spent editing or money contributed) rather than through the coercive dictates that people are so often subject to.

Furthermore, it’s interesting to note that if you were to, hypothetically, replace “donating to Wikipedia” with “tax” in the second bar chart, you might find a lot of people agreeing with the affordability, with unwillingness to pay tax based on principle or their belief that it would not be used properly. Similarly, people may want to contribute time to society rather than pay money to preserve it.

In our rapidly changing world, voluntary contributions to fund public goods may become feasible sooner rather than later.

How are your taxes spent

HM Revenue & Customs recently sent me an annual tax summary for 2013-2014.  This is an interesting document as it shows how my income tax and national insurance contributions were calculated, and how my money was spent by the government. We know that the only certainties in life are death and taxes, but we often treat taxes in abstract and do not think about them in absolute and concrete terms.  This new document provides a detailed monetary breakdown of how my taxes were spent excluding indirect taxes such as VAT and other duties.

A quick calculation of my contribution produced the following percentage breakdown:

Welfare	25%
Health	19%
Education	13%
State pensions	12%
National debt interest	7%
Defence	5%
Criminal justice	4%

85% of my taxes were eaten up by the above categories.  The balance was spent on transport, business and industry, government administration, culture etc. all less than 4% of the total.

I was stunned that welfare payments accounted for 25% of my total tax burden and that national debt interest accounted for 7%, higher than spending on defence at 5%.  It should also be noted that state pensions accounted for over a tenth of my personal contribution.

We all have to individually decide if we are happy with the way our hard earned cash is spent.  As Thomas Sowell said we all need to think what is the fair share of the money that I have earned that you are entitled to.   But what the tax document maeks clear is that if the government is going to successfully reduce the national tax burden on the hard working people and families, then tinkering around the margins is not going to make one iota of a difference.  Besides reducing the level of national debt, the only way forward is to tackle the top four categories that accounted for 69% of my taxes.  This requires political will that may or may not be there.

Is this a fiddle in the Autumn Statement?

As we all know, knowledge is local and dispersed. A corollary of this is that you, the readers collectively, will always know more on any specific subject than one single writer on this side of the software. At which point to ask you a question. We've got the BBC telling us that public spending is going to fall to levels not seen since the 1930s. This does seem unlikely: although if we could get government back to the sort of levels of interference in our lives of the 1930s that would be both nice and an achievement.

The Office for Budget Responsibility (OBR) says spending on public services is heading for an 80-year low.

In its report accompanying the Autumn Statement, it projected that spending by central government on public services was going to fall from 21.2% of gross domestic product (GDP) in 2009-10 to 12.6% in 2019-20.

As a proportion of GDP, that would probably take spending on public services to its lowest since the 1930s.

That report is here.

Note that this isn't public spending as a whole: this is nothing to do with pensions or the welfare state or other transfer payments. This is solely what is spent upon public services, not money shuffled from one citizen to another.

And the question is, how important is that word "central" in that calculation?

For example, just imagine we moved NHS funding from its current system to the Swedish or Danish one? There it is, respectively, the counties and the communes that raise and spend the taxation that pays for the health care systems. That money simply doesn't flow through the national treasury nor the central government (which is why Denmark's standard national income tax rate is 3.76% and the top one 15%). We can all think of reasons why this might be better (local accountability, greater efficiency) and possibly some that it might be worse (postcode lottery!). But it's not obvious that there's either less or more government spending on public services in either system: but there's obviously a huge difference (as much as 10% of GDP) in central government spending.

So, of this reduction in central government spending on public services how much is a reduction in government spending on public services and how much is just the movement from central to some other level of government spending?

We could argue that the Scottish and Welsh NHSs, for example, are covered by the Parliament and the Assembly, therefore aren't any longer central government. There's a change coming in the allocation of business rates. As was these were all collected centrally and then apportioned. The new system will see some being retained locally and spent locally: if that a reduction in central spending but not in public spending? As things become devolved do they fall out of central spending but still remain public spending?

In other words, how much of this reduction is not really a reduction, just changes in the budgets that the spending is coming from?

Over to you: and let there be more light than heat.

Gabriel Zucman's latest very interesting paper

There's much huffing and puffing about the information in that above chart. The capitalist bastards are taking an ever growing share of the economy and something must be done! And then along comes Gabriel Zucman (he's the third of the Parisian economic trio, along with Emmanuel Saez and Thomas Piketty) to try and tell us that this really is a problem and something must be done! Except the evidence that he shows us tells us that it's not the problem that it is usually identified as. Here's his latest paper:

Measuring the costs of tax havens to foreign governments is fraught with difficulties. However, balance of payments data and corporate filings show that US companies are shifting profits to Bermuda, Luxembourg, and similar countries on a large and growing scale. About 20 percent of all US corporate profits are now booked in such havens, a tenfold increase since the 1980s. This profit-shifting is typically done within the letter of the law and thus would be best described as tax avoidance rather than fraud.

There's certainly profit shifting going on but it's not profits being shifted out of the US and into those tax havens, not to any great degree at least. The IRS isn't dumb enough to allow that at any great scale. What is happening is that US based corporations are making larger profits from their foreign activities and then parking them in those tax havens.

Yes, really: the way that US profits as a share of GDP is calculated is that all profits made by US domiciled firms are counted as part of US GDP. So, Glaxo's profits in the US (and the associated underlying economic activity that generates them) are part of US GDP. Apple's profits in the US, and the associated underlying economic activity in the US, are part of US GDP. But, crucially, Apple's profits in Europe, but not the underlying associated economic activity in Europe that generates them, are also part of US GDP. So, if Apple's European profits rise then US GDP rises by the amount of those profits and the capital share, or the associated profit share, of US GDP also rises by the same amount. But, of course, that means that the profit share of US GDP rises: but that's purely an effect of the way that we calculate the numbers. Nothing has flowed from labour to capital in the US economy. The workers aren't getting any less of the portion of their labours.

Simply, foreign profits of US corporations have risen. This means absolutely nothing at all to the US domestic economy in the sense that while, because of the way we measure it, the capital (or profit) shares are rising, there's simply no effect at all on the division of spoils inside the American economy.

Zucman is also showing that this is a significant effect. At least two whole percentage points of GDP.

Of course, Zucman is also telling us that this is terrible and that something must be done! On examination however it seems to be largely of no import at all. So, Apple is increasing its European profits. This is bad because?