A better way
If you tax investment, you tend to get less of it. And because workers rely on invested capital to produce the goods and services we consume everyday, falls in investment inevitably lead to falls in wages. In fact, economic theory tells us that because investment is so responsive to changes in tax rates, workers would be better off if we abolished taxes on capital investment (like corporation tax) entirely and instead raised taxes on consumption to compensate for lost revenue. Top economists, such as Greg Mankiw, Bob Lucas, and Marty Feldstein believe that we could boost long-run wages by almost 10% if we made these changes.
Defenders of taxing capital (such as Thomas Piketty) typically argue that the models used to advocate for abolishing capital taxes are overly simple or make unrealistic assumptions. That can’t be said for a new paper by Kotlikoff, Benzell and LaGarda that simulates the effect of the US adopting Congressman Paul Ryan’s ‘Better Way’ tax plan.
Ryan’s tax reform proposal replaces the U.S. federal corporate income tax with a 20 percent business cashflow tax (BCFT), which allows firms to write-off all investments and wages against their bills, but at the same time ends the deductibility of net interest payments. It also includes a border-adjustment mechanism that exempts net exports (exports minus imports) from business tax receipts. Put simply, it transforms the corporate income tax into a VAT style tax on domestic consumption (levied on firms) with a payroll tax cut. As Kotlikoff et al points out, this would effectively lower the marginal tax rate on capital to zero.
Typically, models assessing the effect of switching from capital to consumption taxes make a number of restrictive simplifying assumptions, such as infinitely-lived agents, homogenous skill levels and zero trade. Kotlikoff, Benzell, and LaGarda take a different approach.
Their model assesses the effect on 17 different regions, taking into account realistic estimates of life expectancy; demographic change; migration flows; a separate energy sector; government transfer programs; and international corporate tax rates. It is the most comprehensive attempt to model the effect of fundamental tax reform I’ve ever seen.
They find that compared to the status quo, in the first ten years of the reform:
- The US Capital Stock would increase by 25 per cent
- Pre-tax wages would increase by 6 per cent
- US GDP would be nearly 8 per cent higher – an 0.8% boost to GDP growth for the first decade of the reform
They also model what would happen if other countries match the US’s tax rates. They find that:
- GDP would still be about 5% higher, but not as high as if other countries didn’t try to compete with the US with. lower tax rates
- Interestingly, because Americans own a significant proportion of overseas assets, lower overseas tax rates will lead to increased asset incomes in turn boosting income tax receipts and allowing for extra income tax cuts.
One of the more bizarre findings of the paper is that in the long-run (2100) GDP would be lower under the Ryan plan. But, this shouldn’t be seen as a negative. In fact, Kotlikoff, Benzell and LaGarda point out that the lower GDP result is driven by higher wage rates leading people to work slightly shorter hours and spend more time on leisure. In other words, people are still better off.
Kotlikoff, Benzell and LaGarda’s results are even more powerful when you consider they do not consider two of the biggest arguments for switching to business cashflow tax. First, they don’t consider the possibility that the reform will make overseas tax avoidance harder and make collecting taxes from IP intensive tech firms easier. Second, they don’t consider the effect of ending the debt-equity bias, which many top economists believe would make financial crises less frequent.
Paul Ryan’s been forced to drop major aspects of his tax reform plan in order to keep the Senate and Trump administration on side. Instead, Ryan will go for straightforward corporate tax rate cuts and shorter capital allowances, an improvement to the status quo, but sub-optimal when he could be take advantage of what Nobel Laureate Bob Lucas once called “the largest genuinely free lunch I have seen in 25 years in this business”.
In the UK our corporation tax set-up isn’t quite as bad as in the US, but it’s far from perfect. We may have a low statutory rate but the effective rate (i.e. the one people actually pay) is still high. That’s because we have some of the least generous capital allowances in the world. We should pick up the baton that Ryan dropped and fix our broken corporate tax system.
So let us have that conversation about automation and gender
Suzanne Moore insists that we must discuss the gender implications of automation:
Surely there can be no discussion of neoliberalism, austerity and automation that leaves out gender.
So let us consider the gender implications of automation - it has been the most women liberating, pro-feminist, process of the past few centuries. It is near entirely responsible for the economic equality of women that we all enjoy today. Compared to any time in the past whatever remains of gender inequality is a mere rump, a triviality - perhaps one we should still work on but by comparison it's tiny.
Brave and bold words, yes, but also true in two manners. The first is what Hans Roslin and Ha Joon Chang call the "washing machine," a grab all term for the automation of household tasks. As we've noted before we think these numbers might be a little overcooked but at least one estimate has the time taken to run a household, internally in unpaid labour, falling from 60 hours a week a century ago to 15 now. Roombas, vacuum cleaners instead of carpet beaters, washing machines, microwaves, gas stoves instead of wood or coal that must be blacked and on and on. The largest change in working hours over this past century has been the fall in female unpaid hours inside the household.
We automated much of that household work.
The second largest, and it is only the second largest as leisure time has risen for both sexes over this period of time, change in working hours has been the rise of women into the paid, market, world of work. 250 years back when the world was animal or human muscle powered there was a natural, even if unfair if you like, advantage that men enjoyed. Muscles were what was being hired, men had more of them, men got the work and the higher wages for having more of what was being hired. In more technical jargon men were more productive at the tasks of the day.
We've automated that now, there are very few of us indeed who make our living by sheer grunt, that thing where men have that advantage. Thus that discrimination has, pace whatever rump you'd like to complain about, disappeared.
Domestic automation has led to women having the time to be economically equal, automation of the world of market production has given them the means to be so.
So Huzzah! for the interaction of automation and gender then.
And that's before we even start talking about the Spinning Jenny. As Brad Delong has pointed out to one of us, any women you meet in literature before about 1600 are occupied with spinning thread near constantly, from Penelope (perhaps more weaving there) in the Odyssey onwards. By Jane Austen's time it simply isn't something mentioned, it has been automated. Homespun just isn't a thing any more.
Automation liberated women - let's have some more of it to liberate us all, eh?
Another attempt at rampant illogic over health inequality
This does not bode well for the standards by which the NHS, or any other part of the health care system for that matter, might be managed. For those who would run it seem capable of the most glaring illogic. We have further findings, perhaps mining of the figures, over inequality of lifespan over the economic spectrum:
The health department data shows that in key areas the gap has widened since 2010 after narrowing over the previous decade. Seven years ago life expectancy for men in England’s most deprived areas was 9.1 years less than for those in the richest areas. By 2015 the figure had risen to 9.2 years. The equivalent gap for poor women also grew over that time, from 6.8 years to 7.1 years. The stark statistics are contained in the health department’s annual report, published this summer.
They have been seized on by David Buck, a senior fellow at the King’s Fund health thinktank and a leading expert in public health and health inequalities. Buck told the Observer: “These are shocking figures. It’s shocking that we live in a developed country where inequalities in health are so wide and are getting worse.
Buck's findings, in detail, are here. Note what is being talked about, the figure being highlighted. It's life expectancy at birth. And no one at all is in fact measuring how long the lives of those born today will be. What is being measured is what's the average age of death of those born in or around 1940? OK, we can widen that time a bit if we like, say 1930 to 1950. Because this is indeed how we do it. We look at the average age of death of the generation just died and then say we think that's what the lifespan at the generation just being born is going to be.
It's important that we do understand how this statistic is being produced - just like we need to understand the detail of every statistic to understand what it is actually telling us.
Some other information Buck points us to but doesn't particularly highlight might be useful here:
Looking at all the evidence, it does appear that there has been a flattening off of the fall in mortality rates since 2011, which is not consistent with the trend in falling rates seen in the 10 years up to 2011.
But there is no evidence to suggest that the long term downward trend has reversed (in other words that rates are increasing).
Well, which do we want to worry about, absolute levels or inequality? Further:
The increase in mortality rates in 2015 was not limited to England alone. It was seen across Europe on a comparable scale. The six biggest countries in the European Union (France, Germany, Italy, Poland, Spain, UK), all saw a fall in their life expectancies for both sexes.
Compared with 2014, in 2015 female life expectancy at birth fell in 23 of the 28 countries in the EU and male life expectancy at birth fell in 16 EU countries.
Something obviously happened in that single year of 2015 and it most certainly wasn't related to any domestic UK policy, was it? And do note again that this doesn't in fact tell us anything at all about expected lifespans of those born this year, it tells us something about who died in that year. One suspected culprit being a particularly nasty 'flu epidemic. And we're really most unsure that one of those is going to happen in 2094, aren't we?
We've got to understand a statistic and its composition before we try to make decisions based upon it. And given what's happening here that doesn't bode well for attempts to manage matters, does it?
Well done, they've missed the largest working change of the past century
We would not normally look to Julie Bindell quoting Bea Campbell for enlightenment but this is a remarkable glossing over of reality even by their standards:
When it comes to household chores, women’s time cleaning up children’s’ poo and vomit is not so much undervalued as dismissed altogether. But men who stay at home to look after kids, or turn up at the school gates, are seen as selfless gods. These days, after decades of feminism, men do more chores and childcare – but not much more, and still far less than women. According to research by the feminist writer Beatrix Campbell, over the past three decades, the time that men dedicated to childcare rose at a rate of about 30 seconds per day, per year. Their contribution to housework rose at a rate of one minute per day, per year.
This is to entirely miss the greatest change in work over the past century. What both Ha Joon Chang and Hans Roslin referred to as the "washing machine," the stand in for all domestic labour saving technology.
When we look at how working hours have changed the one that people concentrate upon is the rise of female participation in paid, market, work outside the household. Male such has fallen, male unpaid work inside the household has also fallen. But by far the largest change has been the fall in female, unpaid, household work.
One estimate that we've seen, quite possibly a little overcooked, says that over the past century the time required to run a household has fallen from 60 hours a week to 15. The childcare part is of course a little different as yes, mothers do still tend to be the primary childcarers, something we don't consider all that odd in a viviparous species.
That is, the biggest change a century of mature capitalism hath wrought in working habits has been to alleviate the drudgery of that traditionally female work. Yet near every vocal feminist we know of declares loudly that capitalism must be overthrown in the name of liberating women. Odd that. Haven't they noticed that this past century has been that very liberation?
Sometimes we do wonder what people use in place of logic
The news is that NHS waiting lists are up, to their highest for a decade:
About 4m people were waiting for National Health Service treatment at the end of June — the highest figure for almost a decade — according to the latest official data.
This is, apparently and according to one distinguished academic, proof of the iniquities of the Tories and of austerity:
It was bankers who created the Crisis. It wasn’t Labour. It wasn’t excess spending. If either had been true it would not have started elsewhere and been global. Excessive banking practices, deliberate deception and a far too relaxed attitude to regulation, based on neoliberal thinking, was what created the Crash.
Discussion on the anniversary has noted all too often how banking has recovered and is now robust and ready for the next downturn, which few now deny is on its way. I agree with the latter, I am not sure banking is that much stronger (time will tell) and like many I remain quite appropriately aggrieved at banks’ and bankers’ near risk free recovery.
But what has been too little noticed is the effect. The lost wages. The growing inequality. The creation of insecurity for most people as the price of strengthened bank balance sheets.
And NHS waiting lists: the sign that the state has shrunk under a wholly unnecessary policy of austerity that has let the neoliberals win and cost us all, dearly.
Umm, yes. Note that the complaint is that NHS waiting lists are now as high as they were near a decade ago, that's actually in Dec 2007. That's before the crash, in fact that's still when Brown was shovelling ever more into every public service he could find.
Logic therefore tells us that this intervening decade of Tories, of austerity, of the slaughter of everything social democracy holds holy, has in fact reduced NHS waiting lists.
We'd love to know where they buy their logical arguments really. We can spot a business opportunity there in competing with their current supplier.
An udder shambles no more
According to the Humane Society, 2.6 million cows and 10 million pigs are slaughtered each year in the UK. Any culture of common decency must demand reasonable standards of welfare for these animals.
Michael Gove, the environment secretary, has introduced mandatory CCTV in all slaughterhouses where live animals are present. Veterinarians from the Food Standards Agency would also be given unrestricted access to footage of any areas of a slaughterhouse that livestock could be in. Any breaches may result in slaughterhouses receiving a welfare enforcement notice, suspension of staff licenses or even a criminal investigation.
Being the first in the world to implement laws protecting animals (Act to Prevent the Cruel and Improper Treatment of Cattle) the U.K. has a pretty good history of supporting animal welfare. However, especially in light of recent events - such as the case involving Owen Nichol who was filmed attacking cow and calves - there is far more to be done. Between 2009 and 2017, Animal Aid secretly filmed thirteen randomly chosen UK slaughterhouses and twelve were found to be breaking animal welfare laws. Nonetheless, according to the Food Standards Agency 50.7% of red meat slaughterhouses and 29.6% of white meat slaughterhouses in England and Wales do not yet have some form of CCTV in use for animal welfare purposes. That is 50.7% and 29.6% of slaughterhouses too many.
Not only is this reform a constructive step toward pragmatic progress on animal welfare, but this would pave the way for the U.K. to be an example for other nations to follow. Gove emphasised this, claiming that “as we prepare to leave the EU, these measures provide a further demonstration to consumers around the world that our food is produced to the very highest standards”.
The reassurance of adequate animal welfare may be advantageous for British farmers looking to export internationally. Overseas supermarkets and high-spending consumers will be assured that British animals will have been treated with the highest possible standards. The mark of quality as we open up new markets could bring in vital new revenue. With Brexit looming and new trade deals with developed markets like the United States being talked up, having a comparative advantage to drive home in a new market will be key.
Support for this particular measure is, importantly, widespread. In June 2014, a YouGov poll found that 76 per cent of those asked said the government should make CCTV mandatory for slaughterhouses. You need not be a social justice warrior, militant vegan, or career campaigner to appreciate and want to bolster decent animal welfare standards. It is hoped that this will be a precedent for further progress on standards of animal care, as well as hygiene and safety standards. Britain's animals deserve to have the best possible treatment throughout their lives and consumers deserve to know they are receiving it.
Migration and that North/South death rate difference
We've another of those terrifying facts detailing the gross inequality of the UK:
The effect of this economic dereliction is far deeper than simply a clunky rail service, however. This week, researchers from the University of Manchester and the University of York warned that the rate of premature death in people under 45 was falling in the south, but stagnating in the north. In 2015, the number of premature deaths of people aged 35 to 44 was 50% higher in the north than the south. Since 2008, the regional death gap has widened alarmingly, bucking a decades-long trend. Life expectancy is already lower in the north; now, if you don’t live in the south, your chances of dying young have increased.
As with all the other studies and claims about regional inequality the bit that no one is taking account of is migration. Bournemouth, for example, regularly appears near the top of longevity lists. That it is, to some extent, a retirement town, where people move in their 60s, is the explanation. People who are already in their 60s quite naturally have a longer expected lifespan than those who have already died at this age.
Similarly with the Appallachia story in the US. The region is depopulating. Those who leave are the young and educated, exactly those we expect to have the longer lifespans. We do not claim this is all of it, only that it is some of it - even if overall rates of drug death, suicide, alcoholism, don't change at all, if that portion of the population least prone to them leaves then the recorded rate in an area will rise.
British internal migration is not so extreme perhaps but it does happen rather more than in most other European countries. And as the ONS tells us the internal migrants are more likely to be North to South, young, healthy and male. Each of those things, men more than women, the young more than the old, healthy more than unhealthy.
At which point we do again insist that this is some part of what is causing that divergence of death rates. And also we insist that we're not going to pay much attention to figures presented which don't at least attempt to quantify the extent to which the recorded numbers are simply a product of such migration patterns.
Balearic Islands score an own goal
Another day, another counter-productive economic measure brought in by a left-wing government.
This time it’s in the Balearic Islands, where a coalition of socialist parties has announced plans to cap the number of beds available for tourists and are introducing serious penalties to those using sites like AirBnB without a license (including fines of up to €40,000 for the individual listing and €400,000 for the company holding the advert).
This isn’t a tourist tax; they’ve had a tourist tax since 2016. That tax is quite modest, with a maximum charge of €2 a room per night for the most expensive classification (applicable to hotel chains and individuals using gig economy listings). No, this is a full licensing system for both the formal and informal tourism sector.
Given that UK visitor numbers rose throughout the economic downturn, and have continued to go up through recovery and during the recent period of stagnant purchasing power - even after the introduction of their tourist tax - you would be right in thinking that British tourist numbers to Spain and the Balearics are pretty inelastic. If you were a left-wing government looking to raise revenue to provide services you would think you would be pretty enthusiastic about a source of income that seems guaranteed.
Indeed the evidence for tourist taxes is pretty positive for those that want to control numbers. When Malaysia introduced one they found the tax was paid where the burden really should fall: by tourists (89% in the short run and 74% in the long run) with the revenues raised being quite predictable.
The reason that these taxes are quite a good idea isn’t purely because they can raise money but because they also correct externalities. Tourists can often come with externalities, like alcohol fuelled crime and anti-social behaviour, congestion and pollution. It makes sense to charge for costs incurred.
But no. Instead the Balearic Islands’ government will hit the supply side. No new licenses will be issued from this year for at least twelve months, with almost 70% of the beds on the isle of Mallorca and over half in large chain hotels. The aim being to reduce the number of beds listed in the islands by 120,000.
It will hit all manner of Mallorcans and Minorcans. It will hurt those now forced to apply for licences to list their spare rooms online or risk exorbitant fines. It will force restaurants and bars to adapt to reduced revenue from lower tourist numbers. And it will curtail innovation as large established hotel chains seize control of bed licences. Not to mention, of course, that a reduced number of beds will lead to a reduced revenue take from their tourist tax.
The Balearic Islands have fared better than the Spanish mainland during the long recession the country has endured but the number of businesses there has only this year risen above its 2008 peak. Its citizens are looking for a way to profit from the huge interest in visiting its sunny shores and it’s reasonable to suggest that a tourist tax may help distribute the proceeds of visitors quite equitably.
Instead of being reasonable and increasing taxes to fund programmes that the government wants to run, while letting the economy and incomes of its people grow, the socialists want to plan. Who would have guessed?
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Thanks to Ananya Chowdhury, an intern at the Adam Smith Institute this week, for the help with the research!
The Bank of England’s incredible stress tests
The Bank of England’s 2016 stress tests are literally incredible. Of the seven big financial institutions covered in the exercise, only one (RBS) failed and that only by a narrow margin.
So what is wrong with the stress tests? Well, one problem is that the Bank used book values instead of market values. It should have used market values (for reasons explained here) and if one uses market values instead of book values, then four of the biggest five banks fail the test.
Another problem is the existence of a lot of hidden leverage associated with positions that do not appear on banks’ balance sheets, such as derivatives positions. The result is that no one can tell from banks’ published financial statements how leveraged the banks really are.
But perhaps the biggest problem is inadequate accounting standards. The weaknesses of IFRS accounting standards have been well-documented: they include the overvaluation of retained earnings, asset values and profits; and inadequate provisions for expected losses. To quote a recent letter in the Financial Times:
better forecasts and better weatherproofing both depend on a deeper problem being resolved: the poor quality of the numbers we are relying on to tell us what banks’ capital actually is. Is the stated “capital” in fact capable of absorbing lending or trading losses that inevitably come in a downturn?
At the heart of the crisis would appear to sit faulty accounts and unreliable audits. In the EU alone, between September 2008 and the end of 2010, more than 300 banks went cap in hand to governments for support—in the form of capital injections, asset relief, liquidity aid or debt guarantees. Few banks [had been] identified as having insufficient capital [prior to September 2008].
All of these banks had previously been signed off as capital adequate by their regulators. That is some regulatory failure.
Nor is it just reported asset values that are the problem. If retained earnings or profits are inflated – and the IFRS rules give bank management give plenty of scope and incentive to game these figures – then inappropriate distributions of dividends and bonuses will be made, which will have the effect of secretly depleting bank capital and inflating reported capital figures – and once again, you cannot tell from the reported figures what the true situation actually is. Indeed, one cannot even tell from the reported figures whether a bank is even solvent.
For more details, see my longer article here.
The thing about that Google diversity memo was that his science was right
Watching the firestorm over that Google diversity memo and flap has been illuminating for it would appear that large parts of the world are unable to comprehend fairly simple ideas. Or perhaps it's that large portions of people simply do not wish to comprehend. Owen Jones denouncing it all as sexism for example, but he's by far from the only culprit.
The important point here being that that memo did get the basic science right. As scientists in the field point out here, as is exhaustively discussed here and as even The Guardian was willing to print 12 years back.
Across the populations of men and women there are differences in the propensity for, interest in, certain jobs - even, certain interests in life in general. This tells us absolutely nothing useful about any individual as individual variation is far greater than this difference in general propensity. In very loose terms here the claim is that any individual man or woman, or any other variation, may or may not have the talents and interests that lead to being a good engineer. We would also expect to find more such among men than among women. And that's it really. This is also the result of the best science we've got at the moment so it would be worthwhile to understand it as we consider the world out there.
The implication of this is that people who hire for a certain specific talent may well find that their available hiring pool skews one way or the other on gender. That would, not unnaturally, lead to a skew in the workforce.
It's entirely true that it doesn't have to be this way. People can always, if they really want to, hire on strict 50/50 gender grounds although we would point out that in most places this is illegal, it's discrimination upon the grounds of gender.
However, we would go on and point out that all of this is also true of the gender pay gap itself. This exists not because men and women doing the same job are differently paid, but because there's a certain self-selection into different jobs. That gender pay gap is only going to disappear when all jobs, at all levels, are done by a gender balanced workforce. This is a point we've made many a time before.
And that's the really important point about this, why it's so important to understand the science rather than rail about it. At least some of this disparity of outcome - we would claim much of it but that's not necessary for the argument to work - is coming from self-selection, not the imposition of discrimination from the outside. Or, as we might put it, the outcome is a result of people deciding how they'd like to live their own lives.
And why are we complaining about that?