The problem with wealth taxes is that they don’t actually work very well

The bit of that recent Piketty magnum opus that had economists scratching their heads was his demand for a wealth tax. For it’s a standard commonplace within the subject that you really don’t want to tax capital. Doing so makes the future a great deal poorer than it could be. Just like that old windows tax made the future a lot darker than it needed to be. There’s an opportunity to explain why in some numbers being attributed to the likely effect of Red Ed’s mansion tax:

Mansion tax could wipe an average of 5pc off homes worth more than £2m should Labour win the next general election and make the proposals a reality.

The plans touted by the shadow chancellor, Ed Balls, could mean a 10pc drop for properties valued at £10m or more, and an 8pc fall for homes valued above £5m according to a new report from Savills.

The property group has also estimated a 6pc decline for those homes worth more than £3m.

People who own homes with a price tag above the £2m threshold could see their property value fall 4pc following Mr Balls’ announcement that they will face a monthly levy of £250, a sum which gets progressively larger for more expensive properties.

£250 a month on a £2 million property is 0.15%. This drops the capital value of the asset under discussion by 5% or so. But the sort of wealth tax being demanded by Piketty is 1-2% annually, ten times larger than this tax. Now no, straight line predictions aren’t all that good, there’s changes in elasticity to consider, but it would be reasonable enough to think that a ten times the tax would have ten times the effect as a first stab at a guess.

So, in Piketty’s desired world we’ll be taxing wealth, or capital (they’re rather the same thing) at 1.5% a year and thus the value of that capital, those bonds, stock and shares, that are being taxed will fall 50%. And that’s why wealth taxes don’t work very well. For consider the effect upon investment of a fall of 50% in the value of having made a successful investment.

It’s still just as difficult to come up with a good business idea. It’s still just as difficult to make that idea work, still just as expensive to make it do so. But the payoff from being one of the one in five that do manage to get something real going has just halved. Obviously, fewer people are going to make the effort and take the risks. Meaning that the future will be poorer by the lack of the effects of those new businesses that never were started.

Wealth taxes don’t work very well for the simple reason that they make all our children poorer than they would have been even if they do make our children more equal. It’s not a good bargain, not a good trade off.

Isn’t it EUronic

I actually can’t tell if they’re kidding or not.

From the BBC:

The UK has been told it must pay an extra £1.7bn (2.1bn euros) towards the European Union’s budget because the economy has performed better than expected in recent years.

Replace ‘UK’ with ‘worker’, slot in a different extremely high number, change ‘EU budget’ to ‘UK budget,’ and the system starts to resemble something quite similar to tax law in the UK.

The article continues:

The payment follows new calculations by the EU that determine how much each member state should contribute.

It would add about a fifth to the UK’s annual net contribution of £8.6bn.

A government source said the demand was “not acceptable” while one Tory MP said the UK should simply refuse to pay it.

“UKIP leader Nigel Farage said the UK had been “hammered again” while Labour said it was imperative that the European Commission must reconsider the “backdated bill”.

It appears UK politicians are in complete shock that hard work and serious efforts to pull out of the recession are being threatened by a big, bureaucratic government body that feels it’s entitled to some of those earnings.

This is priceless.

On the issue itself, I agree it’s “not acceptable”, and I dearly hope the UK “simply refuse(s) to pay it.” What a wonderful precedent that would set for next year’s tax season, when hard-working taxpayers (who, according to this year’s stats, will have been working for the Chancellor for 148 days to pay off their obligations), decide that they, too, don’t want to be penalised for working harder and being a bit better-off financially.

Politicians can be slow on the uptake, so I guess there’s no deep surprise that it took them this long to understand the mechanics of ‘hard work = rewards.’ I just hope they whistle the same tune come next tax season.

To Polly the populace are just the milch cows of the State

Polly Toynbee is bemoaning the manner in which UK wages aren’t rising:

On Wednesday Steve Machin, research director at the LSE’s centre for economic performance, laid out to a meeting of economists the collected evidence on the nature of falling pay – and warned that this is beginning to look not like a slow recovery in wages, but a permanent, structural feature of the UK economy. He showed how the group-think of economic forecasters has consistently and wildly over-estimated an expected increase in wages: the OBR forecast for March this year was a wage rise of 4.3%. What happened has been a continuing real fall.

“There has been a startling and unprecedented lack of wage growth as unemployment falls,” Machin says. The “herd mentality” of forecasters is always to expect things to improve, but there is no sign they are right. This begins to look like the new permanent, as flatlining real median pay began back in 2003, long before the crash. Nor, finds Machin, is immigration a cause of falling pay: areas with high or low immigration saw pay fall equally.

Polly does at least pay lip service to the idea of being a Keynesian but I’m sure she would be surprised to find that Keynes would have been fully supportive of all of this happening. If people are unemployed then those people have to be priced back into work: and it was exactly Keynes who pointed out that people get very touchy indeed about falls in nominal wages but will put up with falls in real wages if they’re lightly disguised by a bit of inflation. Further, the Phillips Curve comes out of very much the same sort of thinking. That there’s a trade off between the unemployment rate and the inflation rate. We reach NAIRU (the non-accelerating inflation rate of unemployment) and if unemployment dips below that then inflation will rise. If it’s above it then inflation will fall. And if we’re seeing ever-falling unemployment and no sign of wages rises then we can conclude that NAIRU has fallen: which is absolutely great, for it means fewer people have to be consigned the the scrap heap of unemployment in order to keep inflation at bay in the future. We’ve had a favourable change in the basic structure of the economy.

However, the real shocker to us here is this:

Low pay is not just unjust, it’s crippling the country’s finances.

That’s dangerously close to insisting that the populace are just the milch cows there to pay for the State, the sheep to be shorn of their incomes to pay for public employees. Actually, given that it’s Polly saying it that’s not dangerously close, that’s what she means.

The tax system is the biggest barrier to growth

Outside of academic papers that too rarely see the light of day, most “research” is unremarkable in its optimism about the state of entrepreneurship in the UK. That’s why the RSA’s Growing Pains: How the UK became a nation of “micropreneurs” caught my eye. It paints a stark picture.

The UK, according to the report, has become a nation of micro businesses, while the proportion of high-growth businesses has plummeted: “UK businesses are becoming increasingly micro in size – reducing the overall potential for economic output and future growth, and increasing the economy’s reliance on a relatively small number of larger businesses.”

Since 2000, the proportion of businesses classified as micro (0-9 employees), as a share of all UK businesses has grown from 94.3 per cent of all private sector companies to 95.4%. This represents an additional 1.4 million micro firms and an increase over the same period of 43%.

“At the same time, the proportion of high-growth enterprises has declined sharply, falling by more than a fifth in the majority of regions since 2005.”

Although the number of high-growth firms is expected to rise over the coming years, the report cautions optimism: “performance is expected to remain below 2005 levels in all regions except London”.

So how can we solve the problem? According the entrepreneurs, the tax system (44%) is the biggest barrier to growth – ahead of a lack of bank lending (38%) and the cost of running a business (36%).

Another problem highlighted by the report is that entrepreneurs don’t know what the government is up to:

“Around three-quarters (73%) of small business leaders also say the Government must make it easier for SMEs to access the right information and support for growth. While several of the Government’s recent incentives to support SMEs are designed to address the top-cited barriers, perhaps this information is not reaching the people who need it the most.”

Two polices are put forward in the conclusion to help entrepreneurs. First, “continued reform of the apprenticeship scheme could help micro firms to grow out of this business size category”. Second, “more tax relief like the National Insurance holiday could also pay real dividends.” It would be worth exploring the former in detail (something I plan to work on), but I don’t think another NI holiday goes nearly far enough: Employers’ National Insurance should be scrapped entirely. And no just for small businesses.

Being an entrepreneur is tough. As the report points out, “the majority (55%) of new businesses don’t survive beyond five years.” Scrapping Employers’ NI is the logical place to start.

Philip Salter is director of The Entrepreneurs Network.

Another exercise in rewriting economic history

It is just so fun watching people rearranging the historical deckchairs to make sure that their tribe looks good and that the tribe of their opponents can be portrayed as those nasty, ‘orrible, people over there. And so it is with this latest from Ha Joon Chang:

First, let’s look at the origins of the deficit. Contrary to the Conservative portrayal of it as a spendthrift party, Labour kept the budget in balance averaged over its first six years in office between 1997 and 2002. Between 2003 and 2007 the deficit rose, but at 3.2% of GDP a year it was manageable.

Quite: in those first few years Blair and Brown held to the spending limits that had been suggested by the previous, outgoing, Tory government. On the basis that if anyone thought they were the spendthrift Labour party of old then they wouldn’t get elected. So there was, in there, a period of a public sector surplus. It’s only after the second election that they ripped up that idea of fiscal restraint and became that Labour party of old again. So “balance” over the six years is actually a couple of years of Tory policy then spend, spend, spend.

And a deficit of 3.2% a year might be manageable: except of course it wasn’t, was it? But more importantly it is a grave violation of the precepts of Keynesian economics to be having a deficit of any sort at that point in the economic cycle. If we are to take Keynesian demand management seriously (we don’t, but let us do so arguendo) then yes, there should be fiscal expansion in the slumps. But the counterpart to that is that in the boom there should be restraint: a surplus, not a deficit. This is not to pay off the previous debt, it’s not to create the borrowing room to provide the firepower for that next slump. It’s because demand management means that you temper the booms as well as the busts. Given that the middle part of the Brown/Blair Terror was in fact the tail end of the longest modern peacetime boom then the public accounts should have been healthily in surplus. In order to temper that boom.

Chang is doing an edit to history here, to show that his tribe is better than the other one. Given the circumstances of the time Labour really were sailor-type drunken loons going on a spree with the nation’s chequebook and don’t let anybody tell you different.