Sunday, 19 November 2017

Economic Myths: We are too reliant on tax paid by the top one percent of taxpayers.

From The Telegraph:

The tax burden shouldered by Britain's wealthiest has almost trebled since the 1970s, analysis of historic data reveals - further undermining the Conservative's reputation as a "low tax" party.

Daily Telegraph analysis of nearly four decades of tax and income records shows high earners are now responsible for paying a higher proportion of Britain's total income tax bill than they have done under any Labour government. Today the top 1pc of income taxpayers, who earn in excess of £162,000 a year, now pay nearly a third (27pc) of all income tax...

Lord Lamont, who served as Chancellor under the Conservative Government in the early nineties, warned higher taxes could put off wealthy foreigners from coming to the UK.

He said: "We have succeeded in attracting a lot of high-net worth individuals and that should be applauded. [But] It would be wrong to think you can always rely on someone else to pay taxes. Robbing Peter to pay Paul, Paul will always vote for that but it won't always work. I'm not a great fan of ever increasing the personal tax allowance because everyone should pay some tax."

Andrew Brigden, a Conservative MP, warned taxes on the wealthy were at the point where any further increase could threaten their productivity.

He said: Tax should never be a punishment for the wealthy. The higher you raise tax, the less money you get in. I think we have reached that point. If we put the top rate of tax back to 40pc [from 45pc] we would raise more revenue because people would be more encouraged to be productive."

There are a few important things they deliberately overlook:

1. Income tax is only about a quarter of total tax receipts; since the 1970s, income tax (and corporation tax) rates have come down and stealth taxes on earnings (National Insurance and VAT) have steadily gone up. So while the top 1% pay 27% of all income tax in the narrow sense, they pay a smaller share of total taxes (as National Insurance and VAT are regressive taxes). It's the same principle with Domestic Rates v Council Tax.

As explain, if you look at all taxes, the top ten percent of earners pay 27% of all taxes, and they probably receive about 27% of all income. The progressive taxes and regressive taxes seem to average out, and ultimately, the UK tax system is surprisingly flat. It's the same with Council Tax (regressive) and SDLT, IHT and ATED (progressive) - if annualised and expressed as a percentage of the value of the underlying land and buildings, the total tax bill is pretty flat as a percentage.

2. The share of income earned by the top 1% has increased enormously since the 1970s. Even in the mid-1990s, there was an outcry when the boss of the recently privatised British Gas paid himself £475,000 a year.

In 2017, FTSE100 CEO's paid themselves on average ten times that, (not adjusted for inflation), and we're supposed to think this is normal.

So inevitably, the share of income tax paid by the top 1% has increased accordingly.

3. As to "driving talent abroad", what is important here is the territorial principle, a general rule in designing tax systems, that countries should only tax income which arises (or assets situated) within their own borders at source; to do otherwise means that people can save tax by relocating abroad. And if you tax your residents on income they receive from abroad, they are less likely to come here.

IMHO we should be welcoming wealthy foreigners with open arms (and not taxing their remittances from abroad), not because there is anything noble about them, but because they will be spending money here - like tourists, they are good for the balance of trade.

4. Most of those high incomes are simply rent. One person on his or her own (a self employed plumber or mobile hairdresser) can't possibly earn more than £50,000 a year. To earn more than that, you need to be higher up an organisational pyramid (state or private).

Those high incomes do not arise because of any special skill or ongoing hard work (people who set up their own business decades ago are reaping the benefit of hard work they did, or risks they took in the past), or because of people's personal contributions to overall wealth, they are just exploiting privileges created by the way the system is set up (long list, and as a tip-top tax adviser, I'm on it; but my employers are far higher up the list than I am).

Even if everybody earning more than £162,000 were to disappear abroad tomorrow, the size of the economy would barely change. Either others would step into their shoes (and pay the tax), or even better, inequality would be reduced and there would be less need for redistributive taxes in the first place.

5. If you draw the logical conclusion from all this, the best place to start is by scrapping all taxes on earned income (National Insurance, VAT) and increasing the personal allowance to about £50,000* and just taxing rents. That'll be mainly the rental value of land, but until and unless we can actually split these high salaries into 'earned' and 'rent', we'll just have to draw a line somewhere, like at £50,000 a year.

Think about it - if somebody offered you a full-time job involving proper work paying £50,000 with a tax rate of 80%, you'd turn it down, there'd be no point. But if somebody offered to sell you their buy-to-let 'portfolio' for £1, and that 'portfolio' generates £50,000 gross income taxed at 80%, you'd happily accept it. It's only £10,000 extra income, but well worth it for a few hours work a month.

If the choice were between a normal full-time admin job paying £50,000 a year tax free and a job as a university vice-chancellor for £250,000 a year taxed at 80%, you would be largely indifferent; it only needs one person in hundreds of thousands to accept the vice-chancellor job. That's clearly a UK based job, so no danger of all vice-chancellors skipping off to a tax haven.

*6. An alternative proposal - which would admittedly be administratively unworkable - would be to get rid of the concept of the annual personal allowance and have an hourly personal allowance instead, call it £25/hour. So somebody who earns £50,000 for being a non-exec director, involving one board meeting a month would pay income tax on nearly all of it, but a self-employed plumber/hairdresser who does fifty hours a week would pay little or no income tax.

Saturday, 18 November 2017

Ricardo and UK House Prices

David Ricardo's Law of Rent states (as a stylised fact)  that rents are set by the difference in incomes (productivity) by those found at the margin of production and those found within it ie infra-marginal. That difference currently gets capitalised into rental incomes and selling prices.

We know that agglomeration increases productivity, so as London is over twice the size of any other European capital, its no surprise it has the highest incomes.

Furthermore, the margin of production for the UK no longer ends within its borders. It is arguable that due to free movement of people within the EU, it stops there. But to a certain extent, due to globalization, margins extend around the world.

Is it really therefore such a surprise, as some people most definitely are, that prices in the UK, especially London/SE are so high?

Yes we can build, and in the short term prices will fall. But in the long term, margins will simply readjust and we'll be back to square one. 

Above taken from Inequality Matters

Friday, 17 November 2017

Economic Myths: "those who have worked hard all their lives to buy a home"

Sayid David was doing a fine job of playing both ends against the middle, as reported in The Daily Mail:

Mr Javid, a frequent critic of so-called Nimbys, said it was time to deliver 'moral justice' for the young – and warned older people they would not be permitted to stand in the way of a massive house building drive.

"What we need now is a giant leap … I still hear from those who say that there isn't a problem with housing... that affordability is only a problem for millennials that spend too much on nights out and smashed avocados.

"It's nonsense. The people who tell me this – usually baby boomers who have long-since paid off their own mortgage – they are living in a different world. They're not facing up to the reality of modern daily life and have no understanding of the modern market."

He's trying to claw back a few of the under-30 votes for the Tories with a couple of well-aimed blows at the NIMBYs and Boomers while ensuring that his party's major donors find it even easier to get planning permission.

He must know that you can give the land bankers as much planning permission as you like; it will not change their profit maximising level of output one iota - why would it? Even if they did increase output, it would only have a very short term and marginal downwards effect on prices.

But hey, he's a politician.

Here's the Economic Myth:

Lib Dem housing spokesman Wera Hobhouse last night criticised Mr Javid for his attack on baby boomers. She said: "This kind of language is divisive and unnecessarily sets one generation against another. It is patronising to tell those who have worked hard all their lives to buy a home and raise their children that they don't understand the housing market."

This "worked hard all your life" to buy a house is complete and utter bollocks (except for the very few people who bought something that was far too expensive). From the 1950s to the late 1990s, you could (if you wanted) have paid off the mortgage in ten or fifteen years and still been paying less per month than you would have been paying in rent for the same home; after that you are living rent free. All these Homeys have paid considerably less than tenants have.

For sure, there were a couple of nasty years in the mid-1970s when interest rates were very high; but inflation was even higher, so in exchange for two or three years of pain you effectively had half your mortgage eroded by inflation. My mum admitted to me that they paid off the rest of the mortgage they took out in 1964 with petty cash sometime in the mid-1970s. I bought a nice house in 1998 with a 20% deposit and paid off the mortgage in ten years (because that was the longest fixed rate period on offer).

There were another couple of fairly nasty years in the early 1990s as well, but so what, it was still cheaper than renting for nine out of ten mortgage borrowers. We note that these two high interest rate periods followed a house price bust; they took a different approach after the last one and pushed interest rates to zero instead.

It is true that some people with mortgages lose their jobs and struggle, but that is irrelevant, they'd have struggled to pay the rent as well. It's your "Losing your job" bit that causes the pain, not the fact that you chose to save money by buying not renting.

And even if it were true, are the Boomers saying that this is a good thing? That they want the all future generations to suffer as well? If that is a good way of deciding policy, then we would have to start another world war every twenty or so years.

But hey, she's a politician as well.

Thursday, 16 November 2017

Killer Arguments Against Free Trade, Not (1)

PaulC156 left a comment here:

Not sure exactly what you disagree with or how N Korea gets a mention.

I do not argue above for or against free trade but simply refer to historical reality.

Britain absolutely was not remotely free trade until they achieved economic dominance well into its industrialisation period circa 1840's. Prior to that it was the most protectionist of nations. Even then it returned to protectionism in the 1870's! Alexander Hamilton came to typify the US approach to free trade in the 18th C. Protect nascent industries (tariffs, quotas) until they are strong enough to outcompete foreign producers. That policy stood until the second half of the 20thC. 

As for Korea, South Korea is typical ditto Japan and modern day China. Massive state led investments allied with protection was the story for all these countries whilst they were industrialising. Still the case in China. S. Korea only liberalised in the 80's well after its industries were well established.

Ho hum.

1. North Korea is very relevant because it has just about the least free trade in the world, and its economy is pretty much on its arse as a result.

2. I certainly wouldn't hold up British Empire as a model of free trade, pretty much the opposite as far as 'everybody else' was concerned. Ditto USA.

3. As to the ASEAN countries, let's agree for the sake of this argument that they protected they 'nascent industries' until they were ready to compete on a world stage. (With those countries, the distinction between government and private, or between society and economy is pretty blurred - are businesses partly state-owned or do business leaders control the government? If Prussia was an army with a country, South Korea is a vast conglomerate with a country. The ASEAN countries also seem to have a sense of national cohesion that allows this. So to say that 'the government protected its domestic industries' is a bit like saying that 'businesses looked after themselves' which is perfectly acceptable.)

But hey, even so, I'd hardly call the UK a developing country, so the justification simply does not arise.

Tuesday, 14 November 2017

"Free trade case in a nutshell"

Physiocrat on top form.

Monday, 13 November 2017

Please sir, the dog ate my homework.

From The Evening Standard:

A specialist in infectious diseases feared she had lost seven years of invaluable research on tackling Ebola after a prolific burglar raided her home as she treated ill children, a court heard...

Dr Fitzgerald flew out to Sierra Leone in 2014 to spend seven months helping tackle the spread of the virus, and has just finished her PhD on infectious diseases.

Bonus bit for Daily Mail readers:

Describing the moment, on March 28, when she learned of the break-in at her £1.8 million home...

"I live by myself and the idea of someone breaking in and rifling through my belongings was a violation."

Friday, 10 November 2017

"How much of your area is built on?"

Splendid stuff from the BBC.

No point me summarising, posted here for reference. Suffice to say, my local council area (half of which is inside the M25) is 80% farmland and only 8% built on - the local NIMBYs have been putting up a fine resistance to anything since forever.

Thursday, 9 November 2017

"You ain't nothing but a hound dog..."

The lyrics to that song were a model of brevity and simplicity.

Conversely, what makes "Africa" by Toto so enjoyable to listen to is the fact that each second line is so ridiculously long. They must have had a bet going or something. From

I hear the drums echoing tonight
But she hears only whispers of some quiet conversation
She's coming in 12:30 flight
The moonlit wings reflect the stars that guide me towards salvation
I stopped an old man along the way
Hoping to find some old forgotten words or ancient melodies
He turned to me as if to say "Hurry boy, It's waiting there for you"

It's only the second and fourth lines which rhyme, the rest all leave it hanging. Genius.

Just imagine Leiber and Stoller had applied this technique...

You ain't nothing but a hound dog
A member of genus Canis (canines) that forms part of the wolf-like canids, and the most widely abundant carnivore.
You ain't nothing but a hound dog
You and the extant gray wolf are sister taxa, with modern wolves not closely related to the wolves that were first domesticated
You ain't never caught a rabbit
And were the first domesticated species that has been selectively bred over millennia for various behaviours, sensory capabilities and physical attributes

"Three men tackle rogue six-foot emu rampaging through North Lincolnshire"

Spotted by TBH in the Scunthorpe Telegraph:

It took three men to tackle a six-foot emu that has allegedly been rampaging through North Lincolnshire for the past week.

Ted Phillips, owner of Shepherd's Place Farm in Haxey, said that he jumped on top of the ginormous bird this morning (Monday, November 6) after receiving calls about the escaped bird all week.

He had been advised previously not to tackle the bird but took the decision to take it on anyway after hearing that it had taken a trip to Haxey Primary in the Isle of Axholme, because emus can be aggressive.

He said: "It's a game changer when children are involved."

Mr Phillips leaped on top of the bird while two other men held and tied its legs together and a nearby policeman "did the best that he could". They then flagged down a conveniently passing builder's truck and took it back to Mr Phillips's farm.

"We don't know who the emu belongs to," he said...

I love the bit about the "nearby policemen".

Wednesday, 8 November 2017

Excellent work by the ONS

From This Is Money:

Property in the priciest area of England and Wales cost a huge 25 times as much as in the cheapest spot, according to a new interactive map from the Office for National Statistics.

It shows that one square metre of floor space, an area about the size of a red telephone box, costs £19,439 in the salubrious London borough of Kensington and Chelsea. 

However, in the valley region of Blaenau Gwent, South Wales, the same amount of space costs just £777. Use the interactive map below to see how much a square metre of property costs in your local area and how it compares

I'm not clever enough to embed the interactive map, but it seems accurate enough to me. It's too coarse grained for proper LVT or Council Tax revaluations, because it's at local authority level and in many local authorities there is too much of a difference between the most expensive and cheapest areas, but where I live it's pretty much equally expensive all over the council area, so I can use that to illustrate the point.

It says just under £5,000 per sq metre. On that basis, our house should be worth about £650,000, a tad more than we paid for it three years ago. Seeing as typical build costs for a new build are £1,000 per sq metre, that means that the value of my house is 80% location value and 20% bricks and mortar, a percentage we can apply to the rental value to arrive at the location element/site premium.

All of which puts paid to the KLN that working out the site premium is difficult.
Via Josh Ryan-Collins:

Which sort of illustrates the point that as land and buildings are such a huge proportion of national wealth, there is no point having a general wealth tax, you might as well just tax land (secured on the land and the buildings thereon). Seeing as you can apply a much higher rate to immobile land than 'mobile' (or easily hidden 'wealth'), that means overall you can raise more money more efficiently by exempting all other forms of wealth. There's also the point that most other wealth is used to generate income, and that income is taxed, so most other wealth is already taxed, albeit indirectly.

Which neatly deals with another KLN, and the squealing from the lefties for a general 'wealth tax'.