If only Steve Hilton knew what he was talking about

It’s not looking good for the idea that Steve Hilton is well informed, is it?

My meeting with Luiz was arranged by Citizens UK, the brilliant community organisers who have been such a powerful force in campaigning for a living wage. But my real conversion to this cause was brought about years previously by an unlikely protagonist: Polly Toynbee.

Gaining your information from that source is never going to work out well, is it?

And yet he does get close, only to reject the correct solution:

Some might say that the minimum wage was deliberately set so low that it wouldn’t affect business very much. An increase to the living wage would be a completely different proposition. It is to counter this argument that in my book, More Human, I advocate what I describe as “business-friendly living wage” that requires companies to pay a living wage but cuts their employers’ national insurance by roughly the same amount to neutralise the overall impact. But to be honest, this is letting businesses off the hook. There are plenty that could perfectly well afford to pay the living wage. It’s a choice.

The actual answer is to, as we have been saying here for near a decade now, reduce the amount of tax charged to those on low incomes. We will have more on this later in the week but seriously, what is so difficult to understand about the following? If you want the working poor to have more cash then just stop taxing them so damn much.

Well of course companies dictate corporate tax rates

How else does anyone think this happens? The point being not that the head of the CBI phones George up and dictates what the corporate tax rate would be (not that George would give much mind to the CBI anyway), but that the rate of tax that can be charged depends upon the reaction to it of those the tax is being levied upon. All of which makes the vapours that people are having over this comment somewhat mysterious:

The UK’s tax policy is effectively dictated by companies and not ministers, according to a leading barrister and adviser to the treasury on its recent “Google tax”.

Philip Baker QC said policymakers and tax experts had learned over recent decades that the mobility of companies and jobs meant there was “no question [countries] have to be competitive to survive”. As a consequence, governments had to provide the tax policies that international corporations wanted.

So, why do we not have 100% income tax rates on pay over £7.00 an hour? Because we know that just about everyone would bugger off out of the country making being the politicians running it really no fun at all. why don’t we have VAT at 100% on everything? Because that storm for the ferries would be just the same as most fled such an extortionate tax regime. If, of course, we didn’t all just ignore it and deal in cash.

so, why do we have a reasonably reasonable corporate tax system and rate? Because it’s easy enough for a company to leave the country and go and try to make a profit elsewhere. Therefore their mobility really does tax our ability, dictate to the government, to tax them.

There’s really nothing mysterious about this at all. We all realise that a restaurant where they ceremonially spat on the soup at each and every table would get very little customs (not none as there’s nowt so strange as folk) for we would be dictating our rejection of the practice by staying away.

Why would anyone think that taxation would be different?

Six thoughts about the tax credit cuts

  1. Working tax credits are a good idea in principle. Low pay is a big problem, and shifting the welfare system away from being a safety net towards topping up the incomes of low-skilled people who are in work is probably the right approach.
  2. It doesn’t make sense to both tax people and pay them benefits. Cutting income tax and, especially, raising the National Insurance threshold on low-income workers is less complicated than making them apply for tax credits, and probably would incentivise work by getting rid of the tax credit withdrawal ‘tax’, without removing their incentive to join the work force (as ditching tax credits alone might do).
  3. That isn’t what’s happening here, though. These cuts are meant to reduce the deficit, so they won’t be offset entirely by tax cuts. That might disincentivise work (reducing people’s incentive to enter the work force) and will clearly make some poor people worse off.
  4. Lowering the child tax credits threshold and increasing the withdrawal rate would be one of the least harmful ways to cut tax credits, because these are not tied to work and because they are paid to couples earning up to £41,000/year, which is quite high.
  5. Housing benefit and pensions would probably be better things to cut. The £26bn housing benefit bill could be reduced significantly by reforming planning to allow more houses to be built. Abolishing the pensions triple-lock and increasing pensions in line with inflation only would produce major year-on-year savings – this year, the £92 billion pensions budget would be essentially frozen.
  6. Deregulations that cut the cost of living would offset some of these cuts. Housing and, for people with children, childcare are the biggest costs for people on low incomes, and payments for childcare in particular are built in to the tax credits system. The UK has some of the harshest regulations in Europe on both of these things, driving up costs. If the government made it easier for the private sector to build more houses and relaxed regulations about staff:child ratios in crèches for children, the cost of living for poor people would fall significantly.

Yes, this is our fault

While this is indeed our fault we’re not going to apologise for it. The this being the insistence that we do not want to harmonise tax codes, tax rates or the corporate tax system across jurisdictions. The OECD, the G7, the EU and every other assemblage of our governors is trying to get to a system that taxes corporations “fairly”. And we would very much prefer to have competition in such matters. As one whining about our stance says, we have indeed said:

In this context there should be no mistaking the fact that those who propose tax competition are the ones who are seeking to exercise control. Time and again right wing think tanks have said things like this by Dan Mitchell of the US based Center for Freedom and Prosperity[i], writing on this occasion for the UK based Adam Smith Institute:

Tax competition exists when people can reduce tax burdens by shifting capital and/or labour from high-tax jurisdictions to low-tax jurisdictions. This migration disciplines profligate governments and rewards nations that lower tax rates and engage in pro-growth tax reform.

The emphasis is mine, and appropriate. Think tanks like those Mitchell works for go out of their way to defend tax havens. And what they are really saying is that tax havens should be able to use their laws to undermine the tax laws of other states by inducing the relocation of economic activity to low tax jurisdictions. This is what tax competition means, and this is what the UK is subscribing to.

We stand by this and we stand by it, the insistence on the benefits of competition, for two reasons.

The first is the entirely uncontroversial idea that tax rates can be too high. Where the good of raising the revenue to perform the (sure, we think these necessary functions are rather fewer than many others do but we’re fine with the idea that there’s some necessary functions of government) necessary functions of government fails to outweigh the harms done by the raising of that revenue. It’s only competition between jurisdictions that is going to beat down rates to where less harm is done. Just as competition between suppliers of other goods and services beats down the price charged for them.

The second reason is a little more subtle: there are some taxes that are “bad” taxes, in the sense that they have higher costs in economic activity foregone for the revenue raised. That is, they have higher deadweight costs. Again, competition among jurisdictions is required to shift revenue raising from such bad taxes to ones that are less bad. The standard hierarchy here being that corporate and capital taxes are bad, income such less so and consumption and land taxes even less. It’s worth noting that those higher deadweight costs apply to taxes on those factors which are more mobile: that’s what actually causes those higher deadweight costs. Thus we want lower or no taxation of highly mobile factors of production (for the mobility leads to a greater elasticity of supply) and higher taxation of immobile and inelastic ones.

Again, competition between jurisdictions is what will provide this outcome for us. For the taxers will note that as they try to tax those mobile factors more highly, they’ll get less revenue as it hightails it over the jurisdiction’s boundaries.

The complaint about all of this is that by having competition then the taxing authorities cannot tax as they would wish. Yes, correct, that’s the point: we want the taxing authorities to be taxing efficiently, not as they wish, and it’s competition that will cause this. Thus we are in favour of competition and not of harmonisation.

Quite right, we should abolish stamp duty on shares

As ever when there’s a budget in the offing we’ve people making suggestions about what should be in said budget. Some of these suggestions are even sensible, as is this one arguing that we should abolish stamp duty on shares:

“Abolishing the tax would lead to an immediate 7.7pc, or £133bn, increase in the value of listed companies on the LSE’s main market on the day of abolition,” he wrote. “It would incentivise saving for the future, removing a £402m a year burden from UK pension schemes and reduce the tax liability by up to £18,000 from the average UK family’s savings.”

A previous academic look into the subject is here.

The important thing to understand is the incidence of this tax. Certainly, it’s the people buying and selling shares that appear to pay the tax itself. But after everything has flowed through the economy who is it that actually bears the economic cost of its existence? One answer is as above, pension funds. The end result is that pensions are lower than they would be in the absence of this tax. And, given that we tax privilege pensions in the first place it seems most odd to have another tax which then reduces them.

The other group who lose out is the workers in the country in general. As is noted above share prices would rise in the absence of the tax. This is equal and equivalent to making capital cheaper for companies. Cheaper capital will mean more capital being employed. And it’s the addition of capital to labour that increases productivity, the average productivity of labour being what determines the average wages in the economy. Thus more expensive capital lowers average wages.

A tax which both lowers pensions and also wages in general doesn’t seem to have a lot going for it. So, yes, we agree, abolish stamp duty on shares.