Labour's broadband plans - there's a reason we don't do tax hypothecation

It can be somewhat depressing to continue to make the same point for a decade and more but that’s where we find ourselves with this latest little plan from the Labour Party. Hypothecation of tax revenue is simply a bad idea. But they’re trying it again:

A Labour government would nationalise Britain’s broadband network and offer free internet access to every household and business in the country, the party will say today.

That idea contains its own foolishness of course. We are not, to put this mildly, in a state of technological certainty over broadband. It’s still a developing technology that is. We’d rather like to have market competition therefore, the one thing that any nationalisation and free provision is going to kill stone dead.

We do all, after all, recall how wondrous the GPO was at extending coverage and advancing technology back in those pre-privatisation days?

But more than that there’s this:

Mr McDonnell told The Times that a new Labour government would make a priority of establishing the new state-owned entity, British Broadband.

The running costs, estimated at £230 million a year, would be funded from a new tax on multinational companies. They would be charged a percentage of their profits, according to a calculation of what proportion of the assets, staff and turnover was located in Britain, he said.

Hypothecation is the idea that this tax, raised on this activity over here, will be spent upon this, different and unrelated, activity over there. It’s an idea that is more than just foolish. For what is the connection between the profits of companies and the costs of broadband?

Say we have a horrible recession - apply your own odds of that with McDonnell in office - and thus corporate profits drop substantially. Does that mean we wish to spend less on broadband? Say that the glory days of the 1970s return and the profits made in the economy fall below even the costs of depreciation, as they did. Does that mean we wish to spend nothing on broadband?

Equally, say that the Indian subsidiary of a company that also trades in the UK - this tax is to be on global profits allocated proportionately to Britain - profits from that swiftly growing economy. Why does this mean that we in Britain should righteously put more of our own GDP into building broadband?

Which is the problem with hypothecation. Whatever the formula used there simply is no connection, whatsoever, between the amount that can or should be raised in tax over here and what should, or could, be spent on this other activity over there. Which is why it has been, for centuries now, a basic rule of fiscal policy that we don’t do hypothecation of taxes. We don’t even reserve national insurance to pay for the welfare state it is meant to fund.

Yes, of course the nationalisation of broadband is a bad idea, it’s election season. But the method of paying for it is even worse.

Nye Bevan fathered the National Health Service

Aneurin Bevan was born on November 15th, 1897. As Health Minister in the 1945 postwar Atlee Labour government, he was instrumental in founding and shaping Britain’s National Health Service.

He was born in Tredegar, a Welsh town where 90% of the population relied on the coal mines for their income. He left school at 13 and worked as a miner in his teens, involving himself in union politics. At the age of 32 he was elected as MOP for Ebbw Vale, a safe Labour seat. He was a firebrand, overcoming a boyhood stammer to become an eloquent orator, and made passionate speeches against Lloyd George and Winston Churchill. He was expelled from the Labour Party at one stage for sharing platforms and publications with the Communist Party.

He was highly critical of Churchill’s wartime government, saying he would have preferred a class war to a world war. He said of the 1945 postwar election:

“We enter this campaign at this general election, not merely to get rid of the Tory majority. We want the complete political extinction of the Tory Party, and twenty-five years of Labour Government."

When Labour won, he was appointed Minister of Health and set about creating a totally tax-funded healthcare system. He faced opponents within his own party and from the medical profession, and had to make concessions such as allowing doctors to keep their private practices. He famously said that to get the deal through, "I stuffed their mouths with gold." The Act was passed in 1946, nationalizing over 2,500 hospitals within the UK.

Following the party’s defeat in 1951, Bevan’s influence declined, though he led a group of hard-left MPs called ‘Bevanites.’ He was beaten by Hugh Gaitskell for the Labour leadership when Atlee quit, though he later served briefly as deputy leader. He remained controversial, saying:

“No attempts at ethical or social seduction, can eradicate from my heart a deep burning hatred for the Tory Party that inflicted those bitter experiences on me. So far as I am concerned they are lower than vermin.”

The Tories responded by forming ‘vermin clubs’ and proudly wearing furry vermin badges. His colleague, Herbert Morrison, said the speech “had done much more to make the Tories work and vote than Conservative Central Office could have done.” It was reckoned to have cost Labour more than two million votes.

Bevan was part of a government that was ruinous for Britain. Central planning and nationalization simply didn’t work, whatever socialist theory might say. No other country has copied Britain’s National Health Service, which still faces crises every year. Bevan’s legacy is thus one of failure. It might have been well-intentioned failure, but it was ideologically driven rather than experienced based. History shows us that when you ignore the real world in order to construct fantasy worlds, that real world has a habit of coming back to clobber you.

But we've already got something that scares capitalism - markets

Aditya Chakrabortty is once again showing the perils of getting your economics reporting from a modern history graduate. The contention is that the existence of communism - OK, socialism attempting to build communism - led to capitalism being ameliorated. Given the absence of a socialism that works we need something else to scare capitalism.

The task of politics today is to scare the capitalists as much as communism did

In more detail:

The very presence of a powerful rival ideology frightened capitalists into sharing their returns with workers and the rest of the society, in higher wages, more welfare spending and greater public investment. By sending tanks into Prague in 1968, Leonid Brezhnev may have crushed the dream of “socialism with a human face”; but he and other Soviet general secretaries forced capitalism to become less inhumane. Conversely, the collapse of communism between 1989 and 1991 has left capitalism unchallenged and untempered – and increasingly unviable. The challenge of our time, whether in the UK’s general election or next year’s US presidential contest, is to build a political movement that can restrain a system spinning madly out of control.

What’s missing here is that we’ve already got the very thing to scare the bejabbers out of the capitalists - markets and their competition.

As William Nordhaus noted (here) it is competition which leads to 97% or so of the value created by entrepreneurs going to consumers, not entrepreneurs. As Karl Marx noted it is competition among capitalists for the profits to be made by employing labour which raises wages.

We’re perfectly willing to agree with the first contention, that we desire something to ameliorate capitalism. We do insist though that people have a little look around the world so they can understand that we’ve already got it. Markets.

The makings of Americans

The historian Frederick Jackson Turner was born on November 14th, 1861. At the age of 32 he published one of the most seminal papers of American history, “The Significance of the Frontier in American History.” It argued that the country’s Westward expansion had produced a culture and identity that was distinctive and different from that of Europe and the East coast.

Dealing with the challenges and hazards of the frontier, those of taming the wilderness, produced a new breed of American, one characterized by a rugged readiness to cope. It produced, said Turner, the can-do spirit that characterized the American spirit. As each generation of pioneers moved Westward, they relinquished the baggage of European culture and its ideas and institutions, and developed new practices shaped by their new environment. The frontier produced the characteristics recognized as distinctively American, the spirit of initiative, of informality, of a vibrant democracy, and even of crudeness and violence.

Turner’s frontier thesis was hugely influential. It has come in for a share of criticism, of course, but there is a strong feeling that persists that he had put his finger on something significant. Later historian have traced the development of political innovations such as the ballot initiative and the recall petition as ones that arose in the West as the frontier moved across the continent. It is the American West, not the East, that has given rise to the cultural and character differences that separate Americans from Europeans.

It is significant that in the wills left by American settlers, the lists of the books in their libraries are roughly 90 percent about self-help and improvement. Even today, the New York Times best seller list of non-fiction works feature far more self-help and improvement books that their European counterparts. “How to Win Friends and Influence People,” and “How I made $1 million in real estate,” are typical.

Since there is no longer a frontier there to be tamed, or a wilderness to be faced, some commentators have suggested that the character-forming influences they represented have gone, and that Americans will gradually become less “American.” Others have suggested that if humans do set off to explore and settle other planets, then space will represent a new frontier to be faced with courage and resolution. Science fiction writers have long clambered aboard this bandwagon. “Space - the final frontier,” is a theme common to many of them.

Some would argue that a settled and more civilized life is preferable to the rough ruggedness of a frontier culture, but there is a case for suggesting that humans as a species solve problems, and there will always be a need for the problem-solving mentality because humanity will always face problems. Frederick Jackson Turner was undoubtedly in the latter group.

We're already seeing the effects of minimum wage rises

That, at some point, high minimum wages cause job losses is both obvious and generally held to be true. The question, always, is when? And the truth of the matter is that we’re already seeing those losses at current levels of the UK minimum wage:

Young people and part time workers are bearing the brunt of the UK jobs slowdown,

The minimum wage is, obviously, enough, most bringing upon those with low wages. Who get lower wages than others? The young and part timers. So, who would we see losing out from a minimum wage that is “too high”? The young and part time workers.

From the ONS:

The number of part-time workers fell by 164,000 to 8.54 million in Quarter 3 2019, while the number of full-time workers increased by 106,000 to 24.21 million.

It’s not the same people either:

The decline in part-time workers was driven by women (down 106,000 in the quarter) and the increase in full-time employment by men (up by 93,000 in the quarter).

Thus, if we’re seeing the young and part time losing out to the older and full time then what might we conclude? That the minimum wage is already too high.

Death and Taxes

It was on November 13th, 1789, that Benjamin Franklin wrote in a letter to Jean-Baptiste Leroy a phrase that has reverberated ever since:

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

The thought had been expressed by two earlier writers. Daniel Defoe in “The Political History of the Devil” (1726) had said “Things as certain as death and taxes, can be more firmly believ’d,” and even earlier in Christopher Bullock’s “The Cobbler of Preston” (1716) appears the line, “Tis impossible to be sure of any thing but Death and Taxes.”

However, time and chance have awarded the honour of authorship to Franklin, and there is no suggestion that he plagiarized those who expressed the sentiment earlier. It reverberates because everyone thinks it encapsulates two truths. Everybody dies. It might not always be true in future, but it has been thus far. It is also true that the essential services of government have to be financed, and it has nearly always been the case that this has been achieved by levies on some of those for whom these services are provided.

Adam Smith proposed four canons of taxation. First was equity, meaning that it should be levied on people proportionate to their ability to pay. Second was certainty, in that it should be fixed and known in advance. Third was that it should be charged at a time when it is convenient to pay it, and fourth was that it should not be over-costly to collect compared with its yield.

People have suggested other canons, of which I think simplicity has much going for it, and I myself would add that no tax should be levied whose damage to the economy is disproportionate to its yield.

Franklin was right about death and taxes, but he had them in the wrong order. Taxes nearly always come before death, with the exception of Inheritance Tax, sometimes called the death tax, which comes after death, not before it. Many oppose the death tax because it is almost always levied on funds that have already been taxed. Avoidance of double taxation is desirable, but it is by no means always followed. Earnings on which income tax has been paid are usually taxed again when they are spent, either on VAT, or on alcohol or tobacco duty, or on insurance or airline flights.

Corporation tax is charged on the earnings of companies before profits are distributed to investors, then those dividends are taxed again on the recipients as income tax. The rule to be aimed at is that the state should receive its cut once.

Other ways of financing government have been tried, but they usually put costs indirectly onto individuals. The sale of monopolies by Stuart monarchs was unpopular because it put up the prices of things such as salt and soap. More recently, the auctioning of bandwidth to raise revenue has made calls and content more expensive for consumers.

One of the strangest taxes has been the National Lottery. It is very largely paid by poor people, and much of it is spent on the pleasures of rich people who patronize operas and art galleries. And it is entirely voluntary. Yet of all taxes it is probably the least unpopular.

To make our ritual living wage point to John Sentamu

We’ve spent more than a decade making this one same point each year. If we wish the poor to have more money we should stop taxing their incomes. Some people, like John Sentamu, still haven’t grasped this simple point:

Today, the Living Wage Foundation announced that the living wage has increased to £9.30 an hour UK-wide and £10.75 in London, to reflect higher living costs in the capital. If the living wage were paid, that would be hundreds of pounds a month back in the lowest-paid workers’ pockets.

Employers are bound by law to pay a notional minimum wage, but that’s not the same as the living wage. The living wage takes into account actual expenditure. Enlightened employers know this and I’m pleased to say there are now almost 6,000 accredited living wage employers that have chosen to pay all their workers a decent day’s pay for a decent day’s work. These companies also report significant business benefits, with higher levels of morale and lower levels of absenteeism.

It is well over a decade since we first pointed this out. Sure, the numbers change each year but the underlying basics don’t.

Assuming a 37.5 hour week that “real living wage” is £348.75 a week. Upon which employee national insurance, at 12% above the threshold, will be paid of £21.93. Income tax of 20% is charged on the amount over £12,500. This takes £2,267.36 off that £18,135 annual income.

Someone paid the “national living wage” gets £16,009.50 for the same hours.

As we’ve been pointing out if you insist that it is just and righteous that the working poor get more then the correct answer is to raise the income tax and national insurance allowances.thresholds to whatever it is that you’re defining as the minimum righteous and just wage.

If we didn’t tax the national living wage then those working poor would be gaining more income than if all were paid the real living wage. Because we’d not be charging the cost of government to those poor.

Which is why we’ve been arguing for more than this past decade that whatever the minimum wage should be that should also be starting point for taxation being levied. We even had some effect on this point. The current £12,500 allowance for income tax is a direct result of our making this case back when the minimum wage was that amount per year.

For, as all too few understand, we’re pro-poor around here. So, if you want to increase the incomes of the working poor then stop taxing them so damn much.

1989 and the march to integration

The fall of the Berlin Wall in November 1989 was a victory for liberal values over socialist ones. As the Institute of Economic Affairs’ Kristian Niemietz points out, East Germany was a huge socialist experiment. Western socialists argued that Russia, being largely rural and backward, was never a promising ground for socialism, which explained why its brand of socialism seemed so far from the ideal. East Germany, however, despite the wartime damage, was an industrial state with technological know-how and an educated middle class—a much better proving-ground.

During the Cold War it was very hard to see what was actually going on behind the Wall. Western experts pointed out that the official statistics emerging from the East could not be trusted. Despite ‘record grain harvests’ there were still famines (often because the distribution system was so hopeless that what grain there was simply rotted in the field). And if we believed Romania’s year-on-year tractor production figures, they would have had to have started with negative tractor production. When the Wall fell, the dire and dismal nature of life behind it became all too apparent.

The ripping down of the Iron Curtain revealed something else too. It showed just how strong the national affiliations that the Second World War had disrupted. Germans rushed to reunite; while Czechoslovakia and Yugoslavia, countries created by forcing others together, started to fragment again. This mostly happened peacefully: no force was necessary, again illustrating the strength of national ties and the fragility of coerced confederation. 

The French, under President Mitterand, were alarmed at the speed of the changes, especially Germany’s rush to reunify. And the economic strain of millions of East Germans heading West was a problem for Germany too. To defuse matters, Kohl agreed to an inter-governmental conference on European currency integration, and then on deeper political integration. By 1993 the Treaty of the European Union propelled member states towards the EMU, common foreign and security policy, cooperation in justice. The requirement for unanimity on such measures gave way to Qualified Majority Voting, with opt-outs for those, like Denmark, who could not keep up. The ‘project’ of ever closer union thus took a huge leap forward.

There was pressure to expand the union as well as deepen it. France and other member states were doubtful about admitting a group of economically backward Eastern countries. But those countries looked to the West, not to Russia, for their salvation and were in general internationalist, even siding with Britain and America in conflicts. The UK, for its part, wanted to bring in the Eastern countries, and others like Malta and Cyprus, as a way of diluting the planned political and monetary union that it felt no part of (the UK also worried that it would end up bankrolling many of the resulting policies). There was a moral case, too, for supporting near neighbours, many of whom, like the Baltics, were very European in character even after forty years of Soviet socialism.

It is interesting how, thirty years on from 1989, the political structure of Europe is still shaped by the events in Berlin. The EU remains firmly integrationist—an integration that the UK (mostly) continues to struggle against. National identities have restored themselves back from the artificial boundaries drawn up by the Allied powers, and nationalism has become stronger in many places. The case against socialism still has to be made, over and over, just as it always had. After all, anyone under 40 is unlikely to remember the Berlin Wall and the horrors behind it—socialism holds no terror for them—while the socialists over 40, who should know better, continue to blame other factors for the failure of their ideology, whether in Russia, East Germany, or now in Venezuela. The world is better without the obscenity that was the Berlin Wall; but the world’s liberals still have a vast job to do.

Voting for Norway's king

On November 12th, 1905 (continued into November 13th), a referendum was held in Norway to decide whether the country should invite a foreign prince to become its king, or should become a republic. The background was that the Storting, the 169-member supreme legislature of Norway, had approved a dissolution of the union with Sweden. King Oscar II of Sweden renounced his position as monarch of Norway, and refused to allow a Swedish prince to become King of Norway.

The Storting asked Prince Carl, the second son of Denmark's Crown Prince, if he would assume the Norwegian throne. The prince accepted on condition that a referendum be first held to assure him that a majority of the population wanted this. He was a good choice, widely liked and, as a Scandinavian, would mesh with Norway's culture and understand its language. Furthermore, he already had a two-year-old son, Alexander, to continue the succession.

The November 12th referendum put one simple question to the people of Norway:

“Do you agree with the Storting's authorization to the government to invite Prince Carl of Denmark to become King of Norway?”

There was a large turnout of 75.3%, with 78.9% voting in favour, and 21.1% against. Parliament therefore chose Prince Carl to be King, and its Speaker sent him a telegram to make the formal offer. The prince accepted and moved with his family to Oslo. He immediately took the name Haakon, and gave his son the name Olav, to link the new royal family to the Norwegian kings of old. In June of the following year the coronation took place in Nidaros Cathedral in Trondheim.

It was a wise move on Norway's part. Looking at the various systems of government in different parts of the world, it seems to be the constitutional monarchies that provide the best guarantees of civil liberties. They tend to have an independent judiciary, a free press, free speech and access to legal redress. On the whole they respect property rights and uphold the rule of law.  

The monarch is usually head of the armed forces, the judiciary, and sometimes the church, thereby denying these positions to ambitious people who might otherwise exercise the power these posts could entail. The justification for an hereditary monarchy is that it works in practice, and is nearly always very popular with the people. It gives countries a non-factional head of state, rather than someone from a political party. It gives countries a symbol of their national identity that is non-divisive, an institution around which the whole nation can unite, regardless of differing political views.

To a revolutionary motivated by a desire to have society conform to some rational plan, a constitutional monarchy seems archaic and messy, a throwback to the Middle Ages and earlier. In practice, though, the constitutional monarchies have evolved to keep pace with the developing views of their peoples, and given them a firm anchor of national identity to support them in changing and sometimes turbulent times. The institution has lasted because it has staying power, and the Norwegians were wise to vote for it.

Yet economic freedom is different from political freedom

The Guardian hosts something of a moan about the two reports which attempt to measure economic freedom around the world.

Two of the “freest economies” in the world are on fire. According to indexes of “economic freedom” published annually separately by two conservative thinktanks – the Heritage Foundation and the Fraser Institute – Hong Kong has been number one in the rankings for more than 20 years. Chile is ranked first in Latin America by both indexes, which also place it above Germany and Sweden in the global league table.

....

The rage may be better explained by other rankings: Chile places in the top 25 for economic freedom – and also for income inequality. If Hong Kong were a country, it would be in the world’s top 10 most unequal. Observers often use the word neoliberalism to describe the policies behind this inequality. The term can seem vague, but the ideas behind the economic freedom index help to bring it into focus.

All rankings hold visions of utopia within them. The ideal world described by these indexes is one where property rights and security of contract are the highest values, inflation is the chief enemy of liberty, capital flight is a human right and democratic elections may work actively against the maintenance of economic freedom.

Well, yes, in a manner. Economic freedom and political such don’t map over each other exactly. They are measurements of different things - height and width are not always correlated either.

The underlying complaint is really that such indices argue against voting to take everything off one group and give it to the other - you know, that democratic control of the economy.

Except that’s not what they do argue in the slightest. Looking at the Fraser and Heritage indices gives us a quite different conclusion. It’s true that Chile and Hong Kong are up there in the top 20. But then so are Sweden, Norway, Denmark, Iceland and Finland. The Scandinavian social democracies are up there that is.

It is possible to have that greater equality if that’s what you want. But it matters how you do it. None of the countries that attempt to have detailed government management of the economy make it into the upper reaches of that listing. Places which run with that free market capitalism do. The equality bit then being achieved by taxing that system.

We aren’t that worried by equality or inequality. We also argue that whatever inequality exists today is simply not of any comparable form to that of yesteryear. But if you are worried about it the lesson to draw here is that achieving the equality is a bolt on extra to an efficient and free economy. It’s not something to be achieved by trying to limit or direct that initial creation of human wealth.

In fact, when one burrows down into those numbers the finding is that the Scandis are rather more free market and capitalist than we are - they tax more too.

The whine here is the complaint that the indices show that the directed economy doesn’t work. Which is actually a useful thing to point out as it doesn’t.