HMRC, you had one job

It can be frustrating to state the obvious. But, typical to its nature, HMRC has forced me to do just that.

In 2013, the average Briton had to work 150 days into the year to pay their total tax bill. Not until May 30th did UK residents stop working for the Chancellor and started earning for themselves

It’s simple, really. Brits earn the money, and HMRC arranges to have it taken away through a variety of different taxes—VAT, National Insurance, and of course, income tax.

It’s a tough job the HMRC has—to tax and tax some more—but it’s probably safe to say the average earner has the harder job – to supply both the government with the funds it needs to run the country, and the funds she (and potentially her family) need to live on.

So it should be expected, at the very least, that the taxation process be as smooth and simple for the earner as possible; that those 150 days worth of earnings be transferred without fuss…

If only. From The Telegraph:

“Four months ago, HM Revenue & Customs admitted it had collected the wrong amount of tax from more than five million people in the 12 months to April 2014.

Since then, the taxman has sent those affected notification letters explaining how it would claw back or issue refunds for on average £300.

In an email leaked to The Telegraph, a select group of senior HMRC staff and accountants were told “thousands” of mistakes were made.

The recipients were advised to tell taxpayers who questioned their bills “not to repay any underpayment” of tax.

It said anyone who had overpaid tax should not cash any cheques they had received. Anyone who has already cashed a cheque will see the money potentially clawed back if a mistake has been made.”

Mistakes happen, sure. But such levels of incompetence, without any offer of compensation, can only be the work of the public sector.

In almost any exchange between a customer and a private business, over-charges and under-charges play out in the customer’s best interest. If a hotel or restaurant accidentally over-charges you, a refund is surely made (often with sincere apologies and some form of compensation for the trouble). If a grocery store under-charges you for fruit purchased, no letter comes through the post asking you to make up the sum.

But when HMRC makes not one bad calculation, but a series of wrong calculations for millions of customers, the inconvenience falls on the taxpayer, who will have to make up the difference calculated or wait months for her rebate.

Of course, taxation isn’t a voluntary transaction, the taxpayer isn’t considered a customer, and the government’s a monopoly—so blatant incompetency shouldn’t be a surprise at all.

Voters are very ignorant, and that should terrify you

Voters are very ignorant about the basic facts of politics. This is where Americans fall when asked what the US government spends the most on:

Screen Shot 2014-10-09 at 13.20.14And here is how the money is actually spent:

Screen Shot 2014-10-09 at 13.23.00As I’ve often asked before, how can we possibly expect voters to elect the right people if they know so little about the issues at stake? It’s like asking a blind man to be your ship’s navigator.

Governments have vast powers and responsibilities. Their reach is essentially limitless. And the people who decide what they do are hopelessly ill-informed about the world. Forget the Hayekian knowledge problem – the voter ignorance problem means democracies cannot hope to elect decent governments with the priorities and policies that the voters themselves would want if they were well-informed.

Elite rule might have been the answer, but elites are dogmatic, closed-minded ideologues. No, there does not seem to be any group we can rely on to rule. Voter ignorance should make us extremely reluctant to bring the state in to solve some problem we’re having.

And before you tell me that democracy is the worst system we know of, apart from all the others: Are you sure?

The risk tolerant benefit more from entrepreneurship training

Policymaking always utilises a broad brush with which to redraw the lives of individuals. However, though broad, with the right evidence this brush can be narrowed by taking account of the heterogeneity of human behaviour.

Just consider the many and varied schemes designed to support entrepreneurs. Putting aside the debate over whether or not this is the best use of tax revenues, nobody could deny that if we are to spend money on promoting entrepreneurs we should do so in most efficient way.

In “Entrepreneurship Training, Risk Aversion and Other Personality Traits: Evidence from a Random Experiment”, Robert W. Fairlie and William Holleran from the University of California draw on data from Growing America through Entrepreneurship (Project GATE), the largest randomised control experiment on providing entrepreneurship training ever conducted in the United States. Fairlie and Holleran find that:

[I]ndividuals who are more risk tolerant benefit more from entrepreneurship training than individuals who are less risk tolerant. The estimated interaction effects are large: averaging our estimates across the three waves implies that individuals who have a one standard deviation higher level of risk tolerance experience a 2.9 percentage point larger increase in business ownership and a 3.7 percentage point larger increase in the likelihood of starting a business from receiving the treatment than individuals with the lower level of risk tolerance.

This is a useful insight and suggests that we should consider identifying specific groups that may benefit more or less from government programmes to help people start a business. There can be no sure-fire way for spotting the next Zuckerberg, but we can increase the odds. Interestingly, Fairlie and Holleran also find “no evidence that individuals who are more innovative benefit more from entrepreneurship training than individuals who are less innovative.”

As the paper states: “some of the most disadvantaged groups such as at-risk youth and individuals with a criminal background have high levels of risk tolerance, and thus might benefit more for entrepreneurship training than more traditional job training programs.” There might be something in this: John Timpson has found ex-offenders fit in well with his unique entrepreneurial, bottom-up model for running his high street retailer.

As things stand in the UK, we have a remarkably limited understanding whether the schemes used to support entrepreneurship are doing any good. According to Gov.uk, business owners have 278 schemes to choose from. With proper analysis it might turn out that this is the correct number and they are being targeted at exactly the right group in the most efficient way. But I doubt it.

Philip Salter is director of The Entrepreneurs Network.

Why does the son rise?

John Cochrane recently gave a speech where one of the main threads involved talking down the importance of income and wealth inequality. Poverty, and generally not having as much as we would like are bad, he says, but is there anything bad about inequality per se? That is: is there at least one respect in which things would be better if some people who are very well off were made worse off? He argues that there isn’t, or if there is, it is of only trivial importance, and outweighed by all of the costs of actually ‘doing something’ about inequality.

In a response on Bloomberg View, Noah Smith argued that economists should respect people’s actual preferences, and since people show strong preferences against wealth and income inequality, we should respect them. He uses the example of how people prefer to take nothing over free money when they are made offers they perceive as ‘unfair’ in the Ultimatum Game. On top of that, he says, inequality leads to socio-political unrest, which we can all agree is very bad and costly, citing a 1993 paper.

Finally, Tony Yates adds some extra arguments on his blog. He says luck has a big role to play in success, but success can also buy some of the non-luck factors in success (e.g. education), meaning that it can ‘set off path dependence’—according to Yates this can lead to inefficient outcomes by distorting the allocation of talent. He says inequality reduces public good provision (e.g. education). And he says that inequality might make ‘crony capitalism’ more likely.

I’ve written twice about equality before: once saying that Rawlsian-style justice demands inequality of wealth/income in certain very relevant circumstances; another time arguing that Hayekian-style information economics militates towards equality of wealth. There are lots more things to say in this debate, but here I intend to take issue only with one of Yates’ claims: the idea that luck + path-dependence means inequality is passed down through the generations (I can’t see why exactly he thinks this distorts the allocation of talent, but here I’m only questioning the mechanism).

Luck is certainly a huge factor in success. And people do pay big money for better education to try and make sure their kids are more likely to succeed. But does this work? Let’s look at some studies. Random selection into a better school in Beijing has no effect, random selection into a better school in Chicago has close to no effect, random selection into a better Kenyan school has no effect, nor does it in Missouri, nor in New York City. Once you control for student characteristics, Australian private schools didn’t outperform state schools on the 2009 PISA. Conscription into extra education didn’t much affect life outcomes in late 1970s France. The literature is huge and there are many many more examples.

And other literatures point to the same conclusion. For example, we now know that the heritability of intelligence increases through life (to hit around 50-90% in adulthood), while ‘shared environment’—upbringinging, parental inputs and schooling—falls to around zero. This is supported by traditional twin studies, twins reared apart studies, adoption studies, and now whole-genome analysis.

So it should not be surprising that it’s actually really really really really hard to make sure your descendants stay rich with the proceeds of luck. In fact, we know that that’s not why the descendants of the rich often are rich because we have a couple of pretty good experiments showing it! For example:

We track descendants of those eligible to win in Georgia’s Cherokee Land Lottery of 1832, which had nearly universal participation among adult white males. Winners received close to the median level of wealth – a large financial windfall orthogonal to parents’ underlying characteristics that might have also affected their children’s human capital. Although winners had slightly more children than non-winners, they did not send them to school more. Sons of winners have no better adult outcomes (wealth, income, literacy) than the sons of non-winners, and winners’ grandchildren do not have higher literacy or school attendance than non-winners’ grandchildren. This suggests only a limited role for family financial resources in the formation of human capital in the next generations in this environment and a potentially more important role for other factors that persist through family lines.

The same is true for modern lottery winners—the truest example of pure luck in success. And it took only two generations for the descendants of slaves to catch up with the much more advantaged & wealthy free blacks. Basically luck mixed with path dependance explains almost nothing.

Politics: It’s a funny old game

Screen Shot 2014-09-30 at 17.01.47

Is there anything more off-putting to people outside the Westminster Bubble than witnessing the carnival of party conference season? If you don’t support a party, you’ll be as perplexed as an ornithologist at the Manchester derby. Everywhere you turn, discussions rage about the latest transfer news with rumours of the latest Conservative MPs to migrate to Ukip, and tactics discussed in intricate detail about how to defeat the opposition. You’ll even hear chanting: “Five more years!”

The football analogy can only be stretched so far though. While support for football clubs remains as popular as ever, people are becoming less interested in political parties – at least the top three:

“Membership of the three main political parties is at a historic low: less than 1% of the UK electorate is now a member of the Conservative, Labour or Liberal Democrat Party, compared to 3.8% in 1983. Latest estimates suggest that the Conservative Party claimed 134,000 members, the Labour Party 190,000 and the Liberal Democrat Party 44,000.”

And don’t expect this to change any time soon: Less than a third of young people express interest in politics, according to a recent ONS survey. It found that only 31% of 16 to 24-year-olds were fairly or very interested in the subject.

This decrease in interest in established parties and politics is offset by one trend though – a growing interest in small parties:

“[M]embership of smaller, often nationalist parties has risen markedly since the new millennium. In June 2014 membership of the UK Independence Party was around 39,000; in September 2014 membership of the Scottish National Party was around 64,000; in December 2013 membership of the Green Party was around 14,000. Though none of these parties can claim to equal either the Conservatives or Labour in size, their rise nonetheless represents a notable change in the make-up of the UK’s political landscape.”

There is plenty wrong with all major political parties, but there is a lot more wrong with these smaller parties. Ukip represents the worst of Little Englanders and the SNP the worst of Little Scotlanders. The Green Party has a more international outlook, but one in which the entire globe returns to a utopic state of nature; a time where our lives were very nasty, very brutish and all too short.”

In the long run, I don’t think this matters very much. In Britain, our lives – from money to morals – will increasingly become disconnected from political decisions. The next generation is more open to others doing what makes them happy, while Bitcoin and blockchain technology offers the prospect of capital accumulation and exchange without the state. This, in part, might be why so few young people care about politics. But whether or not tolerance and tech trumps politics, we have a few elections between now and then; elections where the result will greatly impact the wealth and happiness of us all.

So what can be done? You don’t necessarily need to rush out and join a political party, but I think we would benefit from smarter, more open-minded people in politics and the policy process. For example, we know immigration is a hot topic, but we should also know that removing all barriers to migration throughout the world is calculated to increase global GDP by between 67% and 147.3%. This isn’t going to happen, but it should be the sort of data to inspire a generation. Perhaps not Steven Woolfe’s generation though; Ukip’s spokesman on migration and financial affairs thinks we should cap net immigration at 50,000 per year.

It might not be rational or feel particularly empowering to vote but occasional elections aren’t the only way of engaging in politics and policy. For example, if you’re a student on a gap year, you could apply to work for the Adam Smith Institute.

The game of politics isn’t always beautiful but the key players influence the result – even if they aren’t sitting in the House of Commons.

Philip Salter is director of The Entrepreneurs Network.