There is no such thing as pensions tax relief

Once again we’ve the sight of a politician not grasping reality when planning a raid on other peoples’ money:

Ms Reeves said: “It cannot be right that those on high incomes paying 40 per cent tax only have to save £600 to generate £1,000-worth of pension savings, while those on middle and low incomes have to save £800 to generate the same amount.”

“Replacing tax relief with matched contributions, or a system that was even more progressive, offering higher relief to those on lower incomes than those on higher incomes, should be explored.

“At present, the pensions tax relief rewards those who already have the highest savings and can most afford to save.

“This seems to be a very inefficient use of the £20bn spent on pensions tax relief and is in urgent need of attention.”

There is no such thing as pensions tax relief. There is however something that is pensions tax deferral.

Tax relief would be that you do not pay tax on money put into a pension and also do not pay tax on the pension when it is received. You are relieved from taxes that is. This is not what happens. Instead, you do not pay tax on the money put into a pension: but you do pay the normal income tax on the pension once it arrives. This is not tax relief: this is tax deferral.

Two points flow from this. The first is that we’ve actually got to call this what it is: it’s delaying what tax is paid, not abolishing it. The second is that the costs of this are nothing like what the claim is. Because we do indeed collect income tax upon pensions. And whatever that amount is must be offset against whatever amount anyone wants to claim is deferred. The net amount could go either way, we simply don’t know.

Incomes in retirement are usually lower than during a working life and so the tax collected might be less than that deferred as a result of lower tax rates. Or, perhaps, the investment pot has grown so that the income tax collected in the, say, 20 years of retirement is greater than the tax deferral granted in the 40 years of working. We simply do not know the answer there (maybe someone does, but we do not). But until we do know that we cannot have any clue at all about whether tax deferral actually leads to a loss of Treasury revenue or not. It will affect the timing, obviously, but the amount?

What is being done here is to look only at the cost of the deferral upon revenue and to ignore the income that results from said deferral. And if this is the way that we’re going to discuss public policy then God Help Us All.

Are benefits a subsidy to workers or employers? Yes

There’s an interesting claim out there that benefits are just a subsidy to low wage employers. They can get away with paying low wages because we taxpayers then top that up. Alternatively, we might think of benefits as being subsidies to those people who, for whatever reason, have incomes lower than we think they ought to be. There’s an answer to which of these is true, that answer being: yes.

Jeremy Warner is one this subject here:

Much the same process is evident today in the growth of Britain’s low-wage, low-productivity economy. There is little incentive for employers to improve their productivity, and therefore their wage levels, when labour is subsidised to the degree it now is from general taxation.

By the by, the tax credit system – enormously expanded and enhanced under Gordon Brown – has created a kind of client state of those partially or entirely dependent on the government for their way of life. It has locked in votes as well as disrupted the normal market process by which the general standard of living is raised.

We would make a slightly different point. Whether benefits subsidises the employer or the employee depends upon which benefit. More specifically, a benefit that is paid because of low income, regardless of whether someone is in or out of work, is a subsidy to the recipient. And it’s also an anti-subsidy to the potential employer. It raises the reservation wage (the amount that must be offered to get someone to come into work). However, a benefit that is paid conditional upon being in work will end up as being a subsidy to that employer: for it lowers again that reservation wage.

Here in the UK we really only have one major work conditional benefit, working tax credits. Those really are a subsidy to low wage employers. The impact of the rest of the benefit system is to raise wages.

The interesting out come of this is that if you want wages for the low paid to rise then you should almost certainly be arguing for the abolition of working tax credits. Not that this would increase the incomes of the poor but it would stop that subsidy of low wage employers.

America’s only socialist opposes Americans trading with socialists

Bernie Sanders running for President was always going to provide some amusement. But we didn’t think it was going to come quite so soon after America’s only declared socialist in Congress made his announcement.

Sanders is against eh idea that America should sign the trade deals that Obama is urging that America does. And as Tyler Cowen has pointed out the country most likely to benefit from said trade deals is the at least nominally (and very poor, there’s a connection there) socialist country of Vietnam. It’s thus possible to note that:

Note his position the the US needs to “fundamentally change our trade policies, so that corporations don’t shut down in this country and move to China or Vietnam or other low-wage countries.”

Yes, the socialist candidate for US president is talking about keeping American jobs from migrating to the “socialist” countries of China and Vietnam.

Politics: it’s a rum manner of trying to run the world, isn’t it?

We would also like to note that this blog post was created on International Workers Day, May 1.

Comparing apples to apples: NHS still ranks below average

Most healthcare reporting is deeply biased. From blogs to papers to policy, most people have strong preferences for different kinds of healthcare systems that they believe to be ‘the best’, often based on what they view the role of the state to be. Obviously some beliefs are grounded in more facts and stats than others, but given how complicated healthcare systems are, it’s possible to come up with all different kinds of conclusions that appear, at least on the surface, like they’re grounded in fact.

Compare, for example, The Commonwealth Fund 2014 report to the 2014 European Health Consumer Index: two studies that compare international healthcare systems. Both published within one year of each other, The Commonwealth Fund ranked the NHS the best healthcare system out of 11 countries, while the EHCI threw it down the list, ranking it 14th after all your obvious competitors, including The Netherlands, Switzerland, Germany, but also after your less obvious contenders, like Portugal.

Both reports appear to be thoroughly researched and have lots of numbers to back them up. So who do you believe? Well, if you favour single-payer health systems, you’re probably going favour the Commonwealth Fund’s report, which inherently favours centralised systems. (For example: out-of-pocket costs and insurer rejection of full cost reimbursement were considered a black mark against a healthcare system, regardless of access to treatment.) If you rank results higher than the principles around who delivers healthcare or who makes a profit, you’re probably going to favour the EHCI’s report, that gives more weight to things like waiting lists.

I personally give more credit to the EHCI report because my primary concern when it comes to healthcare systems is patient outcomes. That’s my bias.

Which is why the OECD’s healthcare efficiency reports are so important. The OECD’s stance is that “there is no “one-size-fits-all” approach to reforming health care systems. Policymakers should aim for coherence in policy settings by adopting best practices from the many different health care systems that exist in the OECD and tailor them to suit actual circumstances.” So while the OECD does make some comparisons of countries across the board, it also intentionally group countries together based on different kinds of healthcare systems in order to compare like with like.

Specifically, they break countries down into six groups to compare the efficiencies of similar healthcare institutions to each other, in an attempt to identify where the most improvement can be made within specific systems:

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The UK falls into Group 6, which is characterised as:

Mostly public insurance. Health care is mainly provided by a heavily regulated public system, with strict gate-keeping, little decentralisation and a tight spending limit imposed via the budget process

Seven countries fall into this category: Hungary, Ireland, Italy, New Zealand, Norway, Poland, and the UK. The OECD uses nifty radar charts (click on links) to illustrate how each country compares to both the OECD average as well as Group 6’s average in different areas including efficiency and quality, amenable mortality, prices, resources, consumption, financing and policy. The final chart ranks each country’s to measure its comparative efficiency. The results:

High DEA Score: Norway, Italy
Above Average: Poland
Average: New Zealand
Below Average: UK
Low: Hungary, Ireland

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The OECD’s analysis: “The quantity and quality of health care services (in the UK) remain lower than the OECD average while compensation levels are higher. Reinforcing competitive pressures on providers could help mitigate price pressures, e.g. by increasing user choice further and reforming compensation systems.”

On Tuesday I noted that the UK is one of the OECD countries that could do the most to improve its efficiency in public healthcare spending . But breaking that down even further, the UK doesn’t come close to topping the charts in its own group.

Perhaps the UK should be looking to make improvements to resemble Norway, which tops the ranks for public health services. Or maybe it should be looking towards other categories that focus on social insurance systems. Either way, it’s time for the UK to start looking beyond the NHS.

UK poverty is rising we’re told: they’re wrong

We’re told today that poverty is rising in the UK. Apparently the baby eaters have decided to push into destitution yet ever more of the inhabitants of this sceptered isle. On the grounds, presumably, that they just hate poor people. This is not in fact true and this report doesn’t show anything like that happening either:

Poverty in the UK is increasing after two years of heavy welfare cuts have helped to push hundreds of thousands of people below the breadline, according to an independent study of the coalition government’s record.

Although middle-earners saw incomes rise marginally after 2013, policies including the bedroom tax and below-inflation benefits rises have reduced incomes for the poorest, pitching an estimated 760,000 into poverty since the last official figures were produced, according to the New Policy Institute (NPI) thinktank.

The report itself can be found here. The reason the statement is incorrect is because they haven’t looked at poverty at all. There is, by any historical or global standard of measurement, no poverty in the UK today. There is, of course, inequality, and this is what they are measuring. That number of people are, by their calculations, now getting under 60% of median income. That is, they are looking at relative poverty, not poverty.

Which is, of course, why inequality was renamed relative poverty (and the relative almost always immediately dropped) so that the terminally aggrieved would have something to complain about still. After all, how can you go on shouting about the horrors that capitalism afflicts on the poor when capitalism has abolished poverty?

Change the definition and carry on shouting, obviously.