Ed Miliband proposes double taxation of incomes
This is a woefully bad policy proposal from Ed Miliband:
The Labour leader pledged to cut tuition fees from £9,000 a year to £6,000 from September 2016.
It will apply to students mid-way through their courses, meaning a student in their first year of university today will pay less in their third and fourth years.
The programme will be funded by a £2.9 billion raid on middle class pensioners, and by making graduates earning over £42,000 pay a higher rate of interest on their loans.
We've struggled for a number of decades to encourage people to save for their own old age. The current debates are surrounded by plaintive cries of how we're going to pay for all of that care that the elderly are going to need in the future. So then someone proposes to reduce the amount people save for the future by taxing it more?
Come along now, it's not April 1st yet.
Pensions experts have criticised proposals from the Labour leader Ed Miliband to cut the tax-free amount Britons can contribute to their pensions in order to fund a reduction in tuition fees to £6,000 a year.
Mr Miliband said that he would cut the lifetime limit on tax-free pension savings from £1.25m to £1m, and reduce the tax-free sum saved per year from £40,000 to £30,000 a year, if he wins the general election.
For savers earning more than £150,000 a year, Mr Miliband proposed cutting the pension tax relief from 45pc, the same rate they would pay on earnings, down to the basic income tax rate of 20pc. The Labour leader said these measures would raise £2.7bn to fund the pledge on tuition fees.
But the real problem is not that it's a deeply stupid idea. It's that it's a deeply unfair one.
There is in fact no such thing as "tax relief" upon pensions savings. What there is is "tax deferral". Your pension contributions come from your gross income, before tax. Your investment gains within the pensions wrapper are tax free at the time they are made. But the income you derive from your pension pot pays income tax just like any other income. You do not therefore get "relief" from the taxation, you get deferral of it.
Which is, of course, why that tax "relief" has to be at whatever the marginal income tax rate on income is. Because, and yes this is obviously so, those who do manage to save up to that limit are going to be enjoying pensions that pay one or other of the higher rates of tax. But they will have had that "relief" only at the standard rate.
They are, therefore, paying income tax twice on that same income, once when earned and saved for a pension and again when drawn down as a pension.
It's deeply stupid to dissuade people from saving for their own old ages. But it's grossly unfair to insist that the same income pays income tax twice.
All of us here have our own ideas about party politics but as an organisation we are not, and resolutely so, party political. But of the ideas thought up to gain support at this coming election for one or other political party we'd award this our coveted "worst we've seen yet" prize. Admittedly, we've not yet read the Green Manifesto but seriously, double income tax for those who save for their own pensions?
Absurd.
The amazingly stupid way the government subsidises renewables
We've been complaining about this for a number of years now. In fact, we've been complaining about it ever since Ed Miliband lit upon this policy. The manner in which the government subsidises renewable energy projects is, quite frankly, insane:
Two offshore and 15 onshore wind farms have won subsidy contracts in the Government’s first competitive green energy auction, significantly undercutting the prices that have been handed to other projects.The results of the auction suggest consumers may be paying hundreds of millions of pounds a year too much on their energy bills because ministers previously allocated subsidies without competition, providing much higher returns to investors, critics said.
More generous subsidy schemes should now be reined in and excess subsidies clawed back, they added.
In total on Thursday ministers gave the go-ahead to 27 green energy projects, with estimated lifetime subsidy costs totalling £4bn.
Energy companies were forced to bid against each other in “reverse auctions” with the cheapest proposed projects in each category being awarded subsidies.
There's part of the insanity. For a decade and more they have not been insisting upon competitive bids. Instead, they've drawn up standards for certain technologies and then agreed a level of subsidy. That's madness.
But sadly, it gets worse. They are offering different levels of subsidy for different technologies. As we've long said that's where it tips over into insanity.
Start from where the government actually is: climate change is happening, we're causing it and we've got to do something about it. That something obviously being reducing emissions by having renewable power supplies. So, what's the best way of doing this? A series of committees deciding who gets to be the lucky recipient of a cheque? Different amounts of subsidy for different ways of achieving the same aim, reducing emissions by x tonnes?
No, of course not. The correct way to do it is to set just the one price (perhaps a subsidy, perhaps a carbon tax) and then see which technology can best achieve that goal, that reduction in emissions. If, for example, solar can meet the target better than wind then wind should have no subsidy and solar all of it. If onshore wind is better than offshore then no subsidy to offshore, all to onshore.
For we don't in fact want to have just competition among providers of one technology. We want to have competition among all providers of all potential technologies so as to find out which one solves the problem best.
Whatever one thinks about climate change itself the way that the government has been splashing around our money is simply mad. Yes, under both Labour and the Coalition.
A libertarian solution to the welfare state we’re in
The welfare state we’re in
With this swathe of seemingly radical reform taking place one would expect spending by the Department for Work and Pensions to soon reverse from the relentless upward trends seen under Labour. Sadly, this will not be the case with spending set to increase by an average of £4.29 billion per annum over the course of this Parliament comparing on marginally better than £4.43 billion per annum increase during Labour’s time in office. According to ONS data unemployment has also only fallen from 2.51 million to 2.49 million since the coalition came to power and growth remains stagnant.
The damaging effects of long-term welfare dependency are well documented by writers such as James Bartholomew and Charles Murray. Welfare to work programmes such the various New Deals created by Labour were marginally successful at pushing some of the long-term unemployed into work, but only at great cost by subsidising jobs for a fixed period, and often pushing individuals into inappropriate jobs leading to their inevitable return to benefits. More state intervention is clearly not the solution.
Academics and politicians alike at present seem unable to develop an alternative model for the provision of welfare that brings down public spending (and ultimately debt and taxation) but that also avoids these damaging effects, helps to restore growth.
A libertarian solution?
I would like to therefore propose that reducing unemployment and improving the economy will require less, not more state intervention through a number of radical reforms:
1. Time limits on out of work benefits
The introduction of the ‘The Personal Responsibility and Work Opportunity Reconciliation Act of 1996’ in the United States was designed in the words of Bill Clinton to ‘end welfare as we know it’, and it did. It ended welfare as an entitlement programme, limited federal benefits to a maximum of 2 years continuous claim, and a life-time maximum claim of 5 years. ‘Aid to Families with Dependent Children’ was replaced by the time-limited ‘Temporary Aid to Needy Families’. The law also discouraged out-of-wedlock births and encouraged the enforcement of child support to re-emphasise the central role of the family in the provision of welfare. The result, continuous drops in unemployment and massive drops on the funding required for benefits.
2. Turn benefits back into Unemployment Insurance, a genuine insurance scheme
Many people fail to realise that ‘National Insurance’ is named such because that is what it was intended to be, a genuine insurance scheme supported by the Government Actuary’s Department that would provide support to those who had paid into the scheme should they suffer an accident, sickness or unemployment. 1970’s Labour ensured that this came to an end with a move towards universal benefits, but a radical reversal would prevent the thousands of young people from going straight from school or college onto benefits: they would simply not be eligible until they had paid a sufficient amount into the scheme.
3. Abolish means testing, but also all taxes on savings
Even Gordon Brown and New Labour realised that a certain amount of wealth was the best security should the worst happen, and this led to their mean-testing approach called ‘Asset-based welfare’ to ensure that state support was limited to those who have failed the provide for a rainy day. Unfortunately this led moral hazard and the perverse incentive not to save should the worst happen.
Means testing should be done away with! When it comes to savings the state should do more (or is that do less. Although the introduction of ISAs has seen the state surrender some of its power to steal our hard-earned money, cash ISA limits are barely nudging up by c. £100 a year. There is even less incentive to keep money in current accounts depriving the recovering banks of much needed liquidity and capital. So, why not kill two birds with one stone and abolish all tax on savings? Should unemployment hit individuals are less likely to require support if they have 6 months’ salary stored away earning them 2 – 4% without the taxman stealing a large chunk.
4. Abolish in-work benefits and use the money to continue to increase the tax-free allowance
There’s little doubt that coalitions most successful policy to support those on the fringes of the UK labour market is to increase the tax-free allowance, thus increasingly taking the working poor out of tax altogether. However, even with Universal Credit many will still see the government take with one hand from their pay packet just to return slightly less back to them in the form of in-work benefits. Why not abolish all in-work benefits including child benefit (why not kill this sacred cow/horse once and for all?) and use the billions saved in transfers and administration costs to go even further with the tax-free allowance.
A full-time worker on the minimum wage will have a gross take-home pay of about £11,900. Why not increase the tax-free allowance to £12,000 so they keep every penny? With costing we could probably go even further and increase this to £15,000 benefiting even more of the working population.
Conclusion
Ever since the Poor Law Report of 1834 the problems of welfare dependency have been well documented. Ultimately individuals cannot be given a choice about work, but by rolling back the state to encourage higher earnings, savings and the family to provide an alternative welfare support structure we could finally begin to reduce dependency and the spiralling cost of welfare.
The Coalition's welfare reforms are too timid, says economist Peter Hill. Welfare-to-work schemes have failed, and adding more state intervention will only compound the problems. What is needed is a reform package that time limits out of work benefits, turns benefits into a genuine unemployment insurance scheme, and more.
Zero hours contracts, mini-jobs, they're both ways of solving the same problem
Outrage in all the usual quarters as the number of zero hours contracts is reported to have expanded again: Nearly 700,000 people are on zero-hours contracts in their main job - a rise of more than 100,000 on a year ago - according to new official figures.
The rise is likely to trigger renewed debate over the widespread use of contracts that offer no guarantee of hours and only those benefits guaranteed by law, such as holiday pay.
Part of this increase is simply that ONS is getting better at counting these jobs, part is a genuine expansion. But there's a terrible confusion in those same quarters about what this all means:
Let’s not be sour. The bounceback in jobs during the current recovery has been staggering – exceeding all predictions. During the depths of the slump too, although things were dreadful, the UK shed far fewer posts than any of the macroeconomic models suggested. Whereas in the past there had been something close to a one-for-one proportional relation between lost jobs and lost output, for every three percentage points of GDP that disappeared after 2008, only 1% of jobs went up in smoke.
But let’s not be blinkered either. If there is reason to be cheerful in the quantity of jobs in a famously flexible labour market, there is reason to be fearful when it comes to the quality. Underemployment, perma-temping and the recasting of low-grade staffers as “self-employed” hires shorn of all rights were striking features of working life in the recession, and all trends that have been stubbornly slow to reverse in the recovery. That much is reaffirmed every month when the official labour market statistics appear. Nothing, however, sums up the pall of insecurity that has befallen so much of the workforce like zero-hours contracts.
What's missing in there is the word "because". We did not have the usual rise in unemployment as GDP fell "because" we had more people on these zero hour contracts. The same is true of Germany, where they have "mini-jobs". And the opposite is true of places like France where they don't have this sort of labour market flexibility.
It should be obvious that the bottom end of the labour market is going to be pretty insecure and badly paid. That's why it's the bottom end of the labour market. And there's two things we can do about it.
We can ban low pay and job insecurity. Other countries do do that and we could too. The result would be that we have more unemployment, as those places that do ban such things have.
We could simply accept that the bottom end of the labour market is going to be badly paid and insecure and have lower unemployment as a result.
It is, clearly, a choice. But those are the binary options. We cannot insist on better pay and more security and also have those 3 or 4% of the workforce working. That's just not one of the options available to us. Those jobs that are being done simply aren't worth very much. Therefore people won't pay very much to get them done. Whether that cost is in the actual wages or in the overhead of having to provide security. Low paid and insecure employment or unemployment: which will you pick?
And we should note something else as well. When given the choice for themselves hundreds of thousands do choose those zero hours contracts, those mini-jobs, instead of unemployment. Meaning, to the people who are doing them, that they prefer that option. And we really shouldn't go around banning something that people are, by the choice they themselves make, preferring, should we?
Economic Nonsense: 15. Protection of domestic industries will safeguard jobs
Sometimes when jobs are threatened by cheap imports there are calls for government to step in and safeguard those jobs by subsidies, tariffs or import quotas. The aim is to make the domestic goods artificially cheaper by subsidy, or to make the imported goods more expensive by taxing them. Some domestic jobs can be retained, at least temporarily, by this tactic. But the more expensive domestic goods will not be able to compete on world markets outside the country. They will find their foreign market share diminishes as people opt for the cheaper ones. Where subsidies are used, domestic taxpayers are made poorer; where tariffs are used domestic customers lose access to cheaper goods. In both cases they are paying to support the industry concerned.
Some years ago in the UK the Lancashire textile industry was protected in this way. It might have prolonged its decline, but it did not stop it. Mass-produced low-cost textiles were being made more cheaply by foreign competitors. Eventually the UK textile industry moved to high added value luxury and designer products that sold at a premium in both domestic and foreign markets. Some UK textile products have become world-beaters, without the need for subsidies or tariffs to protect the jobs they sustain.
The advent of the World Trade Organisation (WTO), which succeeded the General Agreement on Tariffs and Trade (GATT), outlaws most of this kind of protection by multilateral agreement. This means that calls to protect domestic jobs by such means now fall upon deaf ears. The government has signed pledges not to engage in such practices, in return for the agreement of its trading partners to refrain similarly.
There are still grey areas, though, with Boeing and Airbus each alleging that the other receives indirect government support. It is generally true that when governments all try to protect domestic jobs at the expense of foreign ones, everybody loses. The world found this to its cost in the era of the Great Depression.
Why we shouldn't clamp down on zero-hour contracts
The Office for National Statistics has revealed that 697,000 people (about 2.26% of employees) are on zero-hours contracts in their main job, up more than 100,000 on a year ago. Such contracts make life uncertain for the employees concerned, who may not know from week to week, or even from day to day, whether they have paying work. Some 33% of those on zero-hours contracts say they would like to work more. So should we be clamping down on zero-hours contracts? No, we should not.
First, it is absolutely correct that zero-hours contracts have become far more common in the last two or three years. They hovered at about 0.5% for most of the period since 2000. They rose in use quite slowly between 2005 and 2012, then shot up to just under 2% in 2013 and to that 2.26% figure in 2014.
However, the unemployment rate has also come down in the last two or three years as well. In 2011 it stood at over 8%. Now it is less than 6%, and seemingly headed steadily down. Even though zero-hours contracts represent only a very small part of the labour force, it seems reasonable to argue that the two trends are related. The economic outlook is brighter, but is still uncertain; businesses remain unsure about the future, unsure about their markets, unsure of how much they should invest, unsure of how many workers they can justify taking on. A bust-up in the eurozone, for example, or a general election that delivers an unfavourable or unworkable government. might change the outlook completely for many UK businesses. So the only way that they can rationally expand their production, and be ready if things really do boom, it so cut their employment risk. Hence zero-hours contracts.
Remember too that even though the ONS talks about people's 'main' job, they might not be the only income earners in a household. The same is true of those on the minimum wage: many of them will be secondary earners. In fact, 34% of those on zero-hours contracts are aged 16-24 and half of those are in full time education. To them, a minimum wage job or a zero-hours contract, while frustrating, is not a disaster, and the extra income, however low or intermittent, is welcome.
Critics – you know who – say that the government has allowed a 'low-pay culture' to go 'unchecked'. So what would be their solution? Ban zero-hours contracts? Raise the minimum wage yet further? The inevitable result would be that employers would no longer be willing to take the risk of employing so many people. And first to go would be young people, with fewer skills and less understanding of workplace culture than more experienced employees, and secondary earners, often women. There would be fewer 'starter' jobs through which young and unskilled people could gain experience, more young people trapped in benefits, and a rise in unemployment more generally.
What will do in zero-hours contracts, of course, is continuing economic growth. As unemployment falls, businesses will find it harder to attract employees, and workers and potential workers can become more choosy about the jobs they take. Zero-hours contracts will once again become a very small part of the employment market. Growth, employment, greater security. Job done, and not a politician in sight.
Better to reverse QE than raise interest rates
That is, of course, a chart of the American, rather than UK, money supply. But much the same has happened to our own money supply under the same QE program. And it's also telling us that it would be better to reverse QE than it would be to raise interest rates. So the idea that that debt could just be cancelled doesn't fly we're afraid. We all know that at some point we're going to have decent economic growth again, unemployment will fall to a minimum (that frictional unemployment that reflects people changing jobs, not involuntary unemployment) and that then inflation will start to rise again. We all also know, because Milton Friedman told us so, that inflation is always a monetary phenomenon. And, finally, we all also know that base money creation is more inflationary than credit creation: or boosting M1 leads to more inflation than the same boosting of M4 would cause.
It's putting those all together that tells us that we should reverse QE. Think through the future: so, we get out of this liquidity trap, this zero lower bound. The velocity of money returns to something like normal. At which point we've got two choices as to how to reduce the accompanying inflation. One is to raise interest rates, the standard response. But that works on M4, it slows credit creation. We could also reduce that money supply by reducing M1: reversing QE. And as above, we think that shrinking M1 would have more effect on reducing inflation than reducing M4 would.
Another way of saying the same thing is that the amount we'd have to raise interest rates to choke off inflation will be higher if we don't reverse QE than if we do. And this will be true for decades to come as we gradually get back to the right sort of relationship in size between M1 and M4. Or, not reversing QE means that we have to accept more economic pain to reduce inflation than if we reverse QE. For decades.
Which rather puts the kibosh on that idea so trendy over on hte left. Which is that as one part of the government owns the debt of the government we could just cancel that debt and reduce the debt burden. But doing that permanently increases that base money supply and thus permanently increases the interest rates we'll need to slay inflation in the future.
So, reverse QE before raising interest rates.
Economic Nonsense: 14. Government can create jobs by spending
Government can certainly create the appearance of new jobs by spending. The minister can be televised proudly cutting the tape to open a government-funded business employing 100 people. The problem is that government has to take that money from the private sector in order to do so. It can do so by taxation, inflation or borrowing, and the effect is to give the private sector less money to spend. That, in turn, means lower demand for its goods and services, less economic activity and fewer transactions. The net result is that jobs are lost in the private sector as a result. Part of the political problem is that the government-funded jobs can be seen, with ministers taking credit. The private job losses take place quietly, without people realizing that they are the result of government activity.
There has been much discussion in academic circles as to whether the publicly-funded jobs gained are more or fewer than the private sector jobs lost, but there is a respectable literature to suggest that they are fewer, and that 100 jobs created with public money will result in more than 100 jobs disappearing or not happening in the private sector.
Another part of the problem is that government-funded jobs are created in accord with political rather than economic priorities. The projects sanctioned are those that find favour with ministers, rather than those created to meet demand. They can be done to court electoral popularity rather than to satisfy economic needs. Jobs funded by public money often need public money to sustain them afterwards, and risk disappearing if public subsidy is withdrawn at some stage in the future. Governments are notoriously bad at "picking winners" to support with public funds; it is not their own money they are putting at risk, so they are less likely to do cautious and full accounting. Private investors tend to be more hard-headed since they stand to incur any losses that come about.
Logical Fallacies: 13. Petito principii
https://www.youtube.com/watch?v=k6etd8_ebOA
Madsen's latest video on logical fallacies examines the 'petito principii'.
You can pre-order the new edition of Dr. Madsen Pirie's How to Win Every Argument here
This is vile, a stain upon our society
There are those who think that we here at the ASI are simply concerned with economics, or the economy. This is not so: we are really about liberty and freedom, it's just that we apply those concepts to matters economic as well as to sexual, legal and all the other realms of life. At which point we draw attention to this, something that is entirely vile, a stain upon our society:
But what sort of rule of law allows an innocent person to be locked up for many years and then denied any compensation for their wrongful imprisonment?
Outside the summit jamboree, for which a ticket would cost you £1,750, were some people who could have given the delegates a slightly less rosy picture of Britain’s supposed superiority. They included those who had been wrongly convicted but who have been denied any redress under the ruling introduced last year, which virtually says that it is not enough to be innocent – in most cases you have to find the real culprit of the crime for which you were convicted before you can be compensated.
Among those challenging the new regulation is Victor Nealon, a former postman, who was convicted of attempted rape in 1996. He served 17 years, 10 years longer than his recommended tariff, because he continued to protest his innocence. In 2013, after fresh DNA evidence taken from the clothes of the victim pointed to “an unknown male” as responsible for the crime, Nealon was freed with just £46 in his pocket to try to rebuild his life. The Ministry of Justice now declines to compensate him because, under the new rules, his innocence has to be proved “beyond reasonable doubt”.
Another man who feels equally bemused by this is Barry George, whose conviction for the murder of Jill Dando in 1999 was quashed in 2007. The police file on who was the real murderer in this case remains open, but George has never received compensation for his time behind bars.
These rules started to change back in 2006. About which was said this:
CHARLES CLARKE’S announcement that he is limiting the compensation available to those wrongfully imprisoned has been met with the hoots of derision it deserves. What is more important to work out is why the Home Secretary made such a lunatic decision in the first place. The proffered reason, to save £5 million a year, is simply beyond satire. The Government, in its infinite wisdom, annually disposes of about £500 billion of the nation’s production: denying those innocents unjustly banged up will save some 0.001 per cent of public expenditure. Just to provide some context, the £5 million saving is less than the £5.7 million spent in 2003 on subsidising the swill bins at the Houses of Parliament. No, it can’t be about the money. The mark of a liberal society is that more care and attention is paid to those innocents wrongly found guilty, than to the guilty who escape justice. Any criminal justice system designed and run by fallible human beings will make mistakes. The important thing is how we react when a miscarriage of justice occurs. Shamefully, under the Home Secretary’s proposals those who find their guilty verdict overturned at their first appeal will have no right to compensation. For others compensation will be capped at £500,000. But let’s remember this. It takes from 20 months to two years to get a first appeal against a conviction heard: long enough for those convicted to lose careers and jobs, marriages and houses. Yes, there always will be those who unjustly enjoy Her Majesty’s hospitality, and whatever compensation we offer in a monetary form will not be enough to fill the gap of years of liberty denied, lives wasted, opportunities lost and families sundered. But do we really expect those afflicted by the mistakes of the state apparatus simply to shrug and smile it off as just one of life’s unfortunate things? Can the Home Secretary not see that it is our solemn duty to those wrongfully convicted that we both apologise and make amends as best we can? ... Whatever the motivations for this decision they do not change the fact that it is a disgrace. Just as mother always said: you make a mistake, you apologise, make what amends you can and promise not to do it again. When the State makes a mistake and steals someone’s liberty it is indeed our duty, to compensate those wronged. Whether the Home Secretary is ignorant of this moral fact, or simply wishes to ignore it for other reasons, it is appalling. Shame on you, Mr Clarke, shame on you.
We have not changed our view. This is a vileness that must be eradicated from Britain.