There’s a serious problem with this living wage idea

The Living Wage Commission has pronounced: yes, it would be an exceedingly good idea if everyone got the living wage. Bit difficult to think of them saying anything else really, eh?

When this was all first announced, the existence of the Commission and the preparing of this report, I took the time to write to the Archbishop. To make my usual point that the difference between this desired living wage and the current minimum wage is entirely the income tax and national insurance that we, heinously, try to charge to the working poor. Clearly not much note was taken of this point for in the report they note that:

Savings and additional revenue An analysis of the impact of the fiscal impact and public sector cost of extending coverage of the Living Wage provided by Landman Economics for the Living Wage Commission shows that universal coverage of the Living Wage would result in a net increase in revenue to the Treasury of £4.2 billion. This is shown in Figure 3 and is made up of an additional £2.8 billion in increased tax and National Insurance receipts, together with a decrease in in-work benefit and tax credit spending of £1.4 billion.

It’s not just that they’ve ignored the point it’s that they positively revel in it. They really are saying that it’s a good idea that we should raise the incomes of the poor so that they can pay more in tax. Completely missing the point that what we actually desire is that the poor have more money after tax, more money to consume with, meaning that we should be attempting to reduce the tax bill on those working poor.

This isn’t just an economic point this has crossed over into being a moral one. They’re glorying in the idea of taking more money out of the pockets of the poor: this is simply an inexcusable moral stance.

The BNP Paribas $9bn. and International Financial Regulation

Over the weekend BNP Paribas accepted a US $8.9bn. fine for breaking US sanctions on Sudan, Iran and Cuba and concealing that from US authorities.  One question arising is whether the US authorities are using regulation to gain competitive advantage over foreign banks.  This was a French bank that broke no French or EU law and dealt directly with non-US sovereign countries.  Why should the US be allowed unilaterally to impose US regulations?

The technical reasons are that BNP Paribas relies on the US dollar for global trading and that they concealed their dealings from the US authorities, i.e. the sin was the concealment.  Of course, revelation of the deals would have got them into the same hot water.

Supposing all this had been in sterling in the days that the pound was the global trading currency.  Had the French then infringed some British law, would we have been able, successfully, to remove a ton of money from their vaults?  The thought is ridiculous.

The reality is that the US is using regulation to gain competitive advantage for their banks.  EU financial services have to comply with regulation in their own member states, additional EU regulation AND US regulation wherever in the world they may be trading.  US financial services have only to comply with US regulation unless they are trading in the EU.

The US authorities seem to be fining non-US banks more often and by larger amounts than US banks.  That raises the suspicion that the US authorities are partisan but it may, of course, be that US banks are simply more virtuous.

The US authorities using the extra muscle of the US unfairly is only the smaller part of my point.  The global regulatory authorities are not in competition trying to attract more companies to come under their jurisdiction by lighter touch regulation.  This kind of Darwinian evolution may apply to corporate tax rates where company HQs can, and do, move to lighter tax zones.  The regulatory authorities are trying to bring more and more companies under their control. Financial regulation is not shrinking due to competition between regulatory authorities, quite the reverse.  It is growing because of competition between jurisdictions trying to enmesh more companies in their tentacles.

Those who are against excessive regulation should not attack just the number of regulations from any one authority but attack the number of authorities seeking the regulate their business.  The fewer authorities, the better.

Of course we should have a more progressive tax system

The Guardian is getting very het up about the fact that we don’t seem to have a very progressive tax system:

These last two charts suggest that while redistribution of income does happen, it’s mainly due to receipt of benefits by the poor instead of progressive taxation.

There’s a reason why we don’t have a more progressive system too. Which is that there’s a limit to how much you can tax incomes and capital returns before you manage to completely cease all economic growth (or, in the extreme, all economic activity). Which means that if you then still want to stuff ever more gelt and pilf into the maw of the State then you’ve got to tax consumption, sins and other things, those consumption taxes inevitably being regressive taxes.

And we’re around and about at those limits of income and capital taxation. The Treasury certainly believes we are: they’ve said that income tax at 45% (plus employers’ NI etc) is the peak of the Laffer Curve, capital gains tax at 28% is similarly at that peak.

At which point we find that we thoroughly agree with The Guardian: we too believe that the UK tax system should be made more progressive. And given that we cannot increase taxes on incomes any further and that consumption taxes are regressive, this means that the only way to do so is to reduce the income taxes on the poor. So, as we’ve said around here before, the personal allowance for both income tax and NI (yes, employees’ and employers’) should be raised to, at the very minimum, the equivalent of the full time full year minimum wage. Or around £12,500 at present.

This would make The Guardian happy as it would make the tax system more progressive. It would also mean having to shrink the size of the State which would make us doubly happy. What’s not to like?

Is the UK too equal or too unequal?

Screen Shot 2014-07-02 at 10.54.25

Whether the UK is too unequal or too equal is not something that actually has a certain answer. Sure, we can posit that some of the things we do to reduce inequality might make us all poorer (and some of the things we do do) but what is the “right” amount of inequality is something that’s up to the moral precepts of each observer.

However, what we can do is make sure that we understand how much inequality there actually is. That figure above comes from here. My thanks to Christie Malry for pointing it out. And yes, of course the ONS is telling us the truth here. It might well be that you think that the original inequality in the UK is unfair, something that should be changed. That the top 20% have 15 times the income of the bottom 20%. But do note that things are indeed done to change this. So much so that the final inequality, after all taxes and benefits are accounted for, is only 4 to 1. It’s even possible to think that this is still too high but everyone should be able to agree that it’s very different from 15:1.

Malry has named my repeated insistence that this difference matters “Worstall’s Fallacy”. We can’t make decisions on whether we should be doing more about something unless we look at the effects upon whatever it is of what we’re already doing. We need to know how much we’re already changing income inequality before we can demand that more (or less) be done. The same is true of wealth inequality, people living under the poverty line, even the concept of the Living Wage (where the only difference between that Living Wage and the current minimum wage is the amount that we shamefully tax off those earning low wages). We muct look at the current end result before deciding upon any future action. BTW, the TUC did a very similar exercise a couple of years back but looking at the top and bottom 10%s rather than quntiles. Inequality of market income dropped from 30:1 to 6:1 in their results.

We already do a great deal to reduce income inequality in the UK. And the only way we can possibly decide upon what to do next is by acknowledging that fact and discussing whether, after all of the taxes and benefits, we have too much or too little income inequality.

The EU’s purpose may depend on tariffs

What does business want from the European Union? One answer is that of the Confederation of British industry, in its report Our Global Future, which I came across recently. That answer is that business wants to remain in – but ideally, in a reformed EU.

One reform they would like is open trade. The UK is well placed to trade with developing countries, but the high tariff (and non-tariff) external barriers that we sign up to as EU members make this nigh-impossible. Also, the CBI wants the single market to be completed. At present there is a single market in most goods (though often it is very much harder to export to other EU countries than it should be under the rules). But we are still waiting for a single market in financial services, in which the UK has a particular strength.

Will the CBI get the reforms they want? Unlikely. There are just too many vested interests wanting to prevent the UK’s financial sector from getting in to their markets. And if the EU were to drop its barriers against foreign trade, why would anyone want to remain an EU member? They could quit and still get the free trade benefits. The EU would have no members left, except the ones living on its subsidies.

People dream of other scenarios. A Norway solution where, as an EFTA member, it enjoys access to the EU market. The downside is that it also pays a contribution to the EU despite getting no say over how its rules are made. But then the UK gets no say in how its export markets in the US, China and elsewhere set their rules either. The Switzerland arrangement has been mooted. It has negotiated scores of bilateral trade deals with the EU. But it is a very complicated set of arrangements. Another model is Turkey, part of a customs union with the EU. But again, it faces non-tariff barriers and has no say in things.

Sadly the EU cannot grant any such arrangement to anyone – otherwise the whole membership, led by the UK, would be queuing up to demand the same concessions. So I remain skeptical that the EU can be reformed in any meaningful way. Of course, if you believe it has a mission in promoting ever-closer political and cultural union, it still has a purpose. But economically, it can only stick together if it keeps its trade barriers high. That is not good for the EU, nor the world.