An extremely strange argument from Nick Cohen
I both know and like Nick Cohen but it's also necessary to call out this extremely strange argument he made in The Observer. He seems to think that "climate change deniers" have won the war and that therefore all is doomed. When, actually, here in the UK at least, the government has already put in place the mainstream scientific remedy for the perils of climate change. We've actually already solved the problem:
If global warming is not new, it is urgent: a subject that should never be far from our thoughts. Yet within 24 hours of the American association's warning the British government's budget confirmed that it no longer wanted to fight it. David Cameron, who once promised that if you voted blue you would go green, now appoints Owen Paterson, a man who is not just ignorant of environmental science but proud of his ignorance, as his environment secretary. George Osborne, who once promised that his Treasury would be "at the heart of this historic fight against climate change", now gives billions in tax concessions to the oil and gas industry, cuts the funds for onshore wind farms and strips the Green Investment Bank of the ability to borrow and lend All of which is a long way of saying that the global warming deniers have won. And please, can I have no emails from bed-wetting kidults blubbing that you can't call us "global warming deniers " because "denier" makes us sound like "Holocaust deniers", and that means you are comparing us to Nazis? The evidence for man-made global warming is as final as the evidence of Auschwitz. No other word will do.
To take my standard position here: let's assume that the IPCC is correct and see where that assumption takes us. That assumption takes us to the standard economics of how to deal with an externality. Some version of either cap and trade or a Pigou Tax will solve the entire problem for us. And we even have things like the Stern Review (or, giving us slightly different numbers for a variety of reasons, the work of Richard Tol and William Nordhaus) telling us how much that carbon tax should be: $80 per tonne CO2-e.
So, if the climate change deniers, whoever they are, have won we should see that there's no cap and trade program and no carbon tax. But if we look up at the world that we actually inhabit, what is it that we do see? We see that the EU has a cap and trade programme. Emissions are limited, exactly as the standard economics of the problem tell us they should be. Here in the UK we also have a carbon tax: in power generation it's been done in the rather silly manner of a floor to the price for a carbon emissions permit but while this is inefficient it does do the job. We have raised taxes on petrol (the fuel duty escalator) by twice what that Stern calculation would tell us we ought to. We have Air Passenger Duty which is again above that Stern calculation. In fact, when you add up all of the various green taxes we already pay on emissions we find that we're considerably over the amount that Stern said would be the optimal Pigou Tax to solve the problem.
No, really: I get some very odd looks when I try to explain this to people but it is actually true. If we accept the IPCC, then again accept the Stern Review, we have already put in place all of the policies necessary to solve climate change as a problem according to both the IPCC and the Stern Review findings.
And I simply cannot work out at all how this is supposed to be a victory for climate change deniers.
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'.
How much does Will Hutton actually know about pensions?
Yes, it's a Monday morning so we've the weekend's Will Hutton column to pick through if we so with. And I have to say that it's a real doozy. We might hope for just a little better than this from someone who wants to tell us all how we should live our own lives, how the country should be run. He wants to talk about the new pension rules:
Meanwhile, insurance companies will lose a great part of the £11bn inflow they have been using to support long-term investment. To date, that has been invested in company and government bonds. But with more energy, imagination and drive, it could have been a rich source of long-term capital for British infrastructure projects – had the instruments been developed in which the insurance companies could have invested. Even as it was, the government has managed to coax the companies into coming up with £5bn a year on infrastructure over the next five years. But now an important source of the funding – annuity inflows – will evaporate.
The annuity inflows were not a large part of the financing of this market. For in one of his acts of financial repression (yes, that is the technical term for it) Gordon Brown insisted that annuioties should be largely funded by gilts. The pension funds which built up over the years, yes, these could be and are invested in some micture of bonds and equities and infrastucture projects and so on. But it's the very switch from those funds into hte annuities that reduces the amount available for such investments. But that pales beside this ludicrous misunderstanding:
But it is not "their money" and we all live in a society whose members' decisions profoundly affect each other. Mr Webb, I assume, would not make this remark about individuals being free, as neighbours, to play offensively loud music, or free not to bin their household rubbish or free to refuse to school their children. Being free to binge your lifetime savings, which taxpayers have helped create, falls into the same category. Every citizen in these island pays higher taxes than they otherwise would to compensate for the lack of tax coming from tax-sheltered pensions. The contributions to build up personal pension funds are allowable against tax and the funds, once acquired, pay no capital gains tax and no income tax on dividends. Up to 40% of the value of any pension fund is thus created through the construction of a watertight tax-free zone. We should care if the resulting money is spent on a Lamborghini: a chunk of the car belongs by right to taxpayers.
Sigh. The tax benefits that pensions savings get is not actually a waiving of tax. It is only tax deferral. It is true that you do not pay tax on the money you put into your pension fund. But it is also true that you do pay tax on any pension that results from that saving. And it's absolutely true that if you cash out your pension to the extent that you can afford a Lamborghini then you'll be paying at least the higher rate on most of that cash. Quite possibly the 45 p rate on some of it too.
That I pay tax upon my money in 2015 rather than in 1985 gives the taxpayers no claim over my car now, does it?
It's not just that assumption he's making there, that if you don't get taxed then taxpayers own part of you and your possessions. It's that he simply doesn't seem to be aware that pensions taxation is all about deferral, not the simple non-taxation of the income at all. And as I say, these are the people we're supposed to get our ideas from about how to run the country?
This is rather the point of student loans though
Hugh Muir gets all upset about what is happening over student loans. The repayment numbers are sinking through the floor so what's the point of the new system. And furthermore:
There is simple economics here; too many graduates chasing too few jobs in a labour market slimmed down by government austerity measures. Many who have taken out the loans can't find jobs, so they don't pay; but those who do find employment are paid so little in an over-supplied market that they don't reach the threshold at which they have to pay.
All of which is rather missing that this is part of the point of having people paying directly for their university educations.
We want them to think about whether spending three years of their life and also £27,000 is a good thing for them to be doing, And the more people realise that perhaps it isn't then the happier all should be.
Don't forget that the total cost of the system as a whole hasn't changed very much. All that is different is who is getting the sticker shock. And that's actually what we want to be happening: is a university education a good deal for those who go and get one? It's is now those who are thinking about getting one who face the prices: they can thus work out for themselves whether it's a good idea.
The answer is that sciences at a good place definitely are (assuming you finish) and arts and ologies at bad places almost certainly aren't. And the only way that anyone's ever going to be able to make a decision like this is by seeing the costs which they can compare to the benefits.
Which is, of course, why the system was changed in the first place.
As Ms. May is finding out overbearing law can be expensive
It's a fairly standard observation that most things and actions have both costs and benefits. Paying unemployment pay for a longer period alleviates poverty but also raises long term unemployment. Dealing with climate change might make the future better but at the cost of making the present worse. In terms of laws about secrecy, privacy and so on we normally look at the costs as being the curtailment of civil liberty and the benefit as being greater security from the terrorists and the like. But as Theresa May has just found out the costs can also be economic:
Theresa May summoned the internet giant Yahoo for an urgent meeting on Thursday to raise security concerns after the company announced plans to move to Dublin where it is beyond the reach of Britain's surveillance laws. By making the Irish capital rather than London the centre of its European, Middle East and Africa operations, Yahoo cannot be forced to hand over information demanded by Scotland Yard and the intelligence agencies through "warrants" issued under Britain's controversial anti-terror laws. Yahoo has had longstanding concerns about securing the privacy of its hundreds of millions of users – anxieties that have been heightened in recent months by revelations from the whistleblower Edward Snowden.
Perhaps rather than Ms. May summoning Yahoo (and excuse me, but is that actually the correct word there? Does a British Minister really have the power to command the arrival of a private citizen in the Ministerial offices? Rather than politely request?) the rest of the government should be summoning Ms. May to ask why she's pushing legislation so repressive that firms are fleeing the country. Becausetheterrorists is a reasonable enough answer to why we have spies at all but keeping them corralled enough that people still wish to do business in our fair land seems a reasonable enough thought, doesn't it?
Why get rich?
You might have seen this chart, which shows different professions' household income during childhood vs their income now:
A lot of people have focused on the fact that artists' incomes 'fall' more than any other group. It reminded me of this quote from the American Founding Father John Adams:
I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.
Osborne's Surprise
The most exciting part of George Osborne's fifth budget came as a total surprise. This was the complete overhaul of the pensions system, and it achieved two of the Adam Smith Institute's long-term objectives: simplification combined with tax reduction.
The previous rules, complicated and cumbersome, arose from the Treasury's lack of trust in people's ability to manage their own affairs competently. The Treasury tried to micro-manage how pension pots should be drawn upon. They limited the amount that could be taken in cash, and capped the amount that could be drawn in annual income to a small amount, with a punitive 55% tax on anything in excess.
The Treasury's concerns were twofold. They didn't want high earners to use pension pots to circumvent income tax, and they didn't want people drawing so much that they had insufficient left to support them and might become a burden on the state. People were compelled at one stage to buy an annuity, despite the poor value these have represented.
Osborne's bold budget has introduced the revolutionary idea that people are better at judging their own interests than Treasury officials are. At a stroke he has given them the choice of how much to draw and when to draw it, and abolished the 55% rate. Anything they do withdraw will be taxed at their marginal rate. Significantly, the Chancellor pointed out that those on his side of the House know that lower tax rates can sometimes bring increased revenue, and he expects it will happen in this case.
Saving for retirement has suddenly been made more attractive, and since much of this saving is in equities, it means more investment will be available to create and sustain jobs and to boost growth. It also means that fewer people will choose to be dependent on the state in their old age.
The Chancellor has expressed his confidence that people will behave responsibly and with due regard for their own interest. Bravo. It is an admirable sentiment and one that should be adopted in other Departments. The ASI will be encouraging them to do so in the months ahead.
I find myself agreeing with Richard Murphy
I think I'm going to need to take a little lie down. I find myself in agreement with Richard Murphy on something. Even that it's only partial agreement is disturbing. He says:
I have read a lot about what fairness is of late. I have come to the conclusion that there is no objective answer to that. Whatever one person thinks is fair is, apparently, acceptable to at least someone, somewhere. That is why it comes to fairness majority opinions matter. On the welfare cap I have no doubt the majority will consider what is being proposed to be profoundly unfair if they realise just who is affected.
As to the definition of fairness, yes, he's correct: for this is the point of Adam Smith's linen shirt. That you cannot afford one does not make you poor. But if you live in a society where not being able to afford a linen shirt marks you as being poor then yes, in that society you are poor. So, what we all, collectively, think of as being fair is indeed what is fair in our society. And that is a malleable thing. We used to, vilely, think that it was just fine to hang people for stealing a loaf of bread to take but just one example from our past.
However, I disagree entirely with the idea that people are going to think that the benefits cap is indeed unfair. It is, after all, set at around median household income and we do, most of us, think of the welfare system as a safety net and not something that should provide a better than average lifestyle.
But we can go further than this. It was most amusing watching the reactions to the initial part of the benefits cap, the limitation on the amount of housing benefit that anyone could claim. The number was announced as being £400 and everyone exploded in outrage. What? You can't rent a rabbit hutch on that amount per month! The next turn of the news cycle brought the clarification that this wasn't a monthly limit, this was a weekly one. At which point the outrage exploded again: what, you mean people have been getting more than £20k a year, tax free, in subsidy for their rents? But, but, that's more than I earn!
We British have alwasy prided outselves on our sense of fair play: possibly in error. And we do indeed have ideas about what is fair within our own society and the definition of what is fair should properly be judged on what we collectively think is so. But recent experience tells me that the idea of a benefits cap is something that most of us will describe as fair. Simply because most of us do think that the welfare system is a safety net, nor either something that should provide a substantial lifestyle nor an exercise in social and economic re-engineering.
Pensions: Chancellor has taken the first step on a long road to reform
A truly great observation by Don Boudreaux
We like Don Boudreaux on this blog, we do. And this is a good example of why we do for Don has teased out, elicited, this observation:
Perhaps you’ve made this connection before, but reading all your posts about the minimum wage and global warming this morning, I was struck by the paradox in the proposed remedies for these two problems by politicians. The first problem is income inequality, and the remedy is to set minimum contract terms. The second problem is externalities from carbon protection, and the remedy is to tax output levels. In both cases, the solution is to raise firm costs. The assumption driving the policy prescription for a Pigovian tax on carbon is the idea that higher costs will spur innovation in ways of reducing carbon output. Of course, that private firms subjected to higher costs will innovate in ways to reduce those costs is precisely the problem with minimum wage legislation, as you point out. This is an obvious point, but my mind never made the connection before.
Yes, I know, people get fidgety when I extoll the virtues of the carbon tax around here. And an entirely different set of people don't like us pointing out that of course a rise in the minimum wage is going to have unemployment effects. They might be small, they might be large, depends upon the rise, but they will be there.
But what Boudreaux's done here is to make the connection to the two policies so obvious.
We want a carbon tax (OK, those of who do want a carbon tax want one because) if does indeed make clear to people the costs of emissions. This clarity, this rise in price, will lead, at least we hope it will, to people reducing their emissions. This is what Osborne and Cameron believe with having a minimum carbon price, this is what Ed Miliband believed about his own earlier plans and it's what the EU and Ed Davey believe about the whole idea of emissions permits and people having to pay for them. Raise the price and people will economise.
But exactly and precisely this logic must prevail with the minimum wage. Raise the price of labour and people will economise on the use of labour. It cannot be any other way, can it? And what really grates is the way in which some will insist on the logic being correct for emissions but flatly reject that it can be true for labour.