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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

I feel all dirty somehow, seeing who it is that I'm in bed with

Written by Tim Worstall | Thursday 10 April 2014

There are times when who supports an idea that you support means that you've got to reconsider your support for that idea. At the risk of Godwinning, that Adolf liked dogs is not a reason to either like or beat up dogs. But his support for anti-smoking is a reason to look askance at certain of the anti-smoking zealots. For his views on this were that smoking deprived the State of that valuable resource of men fit to fight and there's very definitely more than a whiff among today's zealots of people not being allowed to do things they wish to do because of the cost to the State of their doing so.

Which is what makes me cringe slightly over my support for the idea of a basic citizens' income. It's the sort of thing that The Guardian seems to be supporting:

The society our politicians are shaping is defined by the idea of "something for something". What would happen if, instead, we were given something for nothing? A new campaign for a "citizen's income" asks exactly that. Replacing the costly, complex benefits system, a citizen's income is an unconditional payment granted to every individual as a right of citizenship. It's not a high figure – barely enough to survive on alone, and below the minimum wage – but it is designed to prevent all of us from falling into poverty traps. Compellingly, it removes the stigma from state support. There is no difference between a student, a person managing life with a disability, a pensioner and someone struggling to find stable employment if we all share the same basic starting point.

Further supporters can be found here and here. That I support an idea supported by the Leader of the Green Party, by a professor from SAOS, by the usual list of concerned Europeans, yes, this does give me pause for thought. Given that all are usually staggeringly wrong about everything am I wrong to be supporting this idea?

And, having re-examined the idea I come to the conclusion that I'm not wrong in supporting it after all. For one very simple reason.

Their support is all about justice, equity, redefining the relationship between work and leisure and yadda yadda down the list of progressively desirable goals. My support is grounded in that good old idea of economic efficiency, you know, that thing that progressives never actually bother to consider.

My starting point is that whatever else happens in this world there is going to continue to be some version of the welfare state. People are going to continue to be taxed in order to provide handouts to that mixture of the incompetent, unlucky and lazy that make up the current list of recipients. There simply isn't going to be a Randian revolution where the entire idea gets chucked onto the ideological scrapheap. Given this I'd prefer to have a welfare state that was economically efficient. And the greatest inefficiency (quite apart from the incompetence with which the money is actually doled out) is the way in which benefit withdrawal rates and the taxes charged to the lowly paid lead to vast marginal tax rates on those lowly paid earning a little more money.

There are millions who face marginal rates of 60% and up, still hundreds of thousands looking at 80% and even some unfortunates with marginal rates over 100%. And yes, I do indeed believe in the Laffer Curve argument, it's just that I believe that it applies to all of us, not just the highly paid. Who in heck would bother to work another 10 hours a week if their disposable income would fall (something seriously possible in our current system)?

So, it's for this reason that I support the cbi. Simply because it would be staggeringly better than the current monstrosity of a welfare state that we have.

Which means that I'll just have to hold my nose and put up with those who also support the idea I suppose. I mean, seriously, me agreeing with a prof from SAOS? Did anyone think that a universe with such a distortion in it could continue to exist?

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How much does Will Hutton actually know about pensions?

Written by Tim Worstall | Monday 24 March 2014

Yes, it's a Monday morning so we've the weekend's Will Hutton column to pick through if we so with. And I have to say that it's a real doozy. We might hope for just a little better than this from someone who wants to tell us all how we should live our own lives, how the country should be run. He wants to talk about the new pension rules:

Meanwhile, insurance companies will lose a great part of the £11bn inflow they have been using to support long-term investment. To date, that has been invested in company and government bonds. But with more energy, imagination and drive, it could have been a rich source of long-term capital for British infrastructure projects – had the instruments been developed in which the insurance companies could have invested. Even as it was, the government has managed to coax the companies into coming up with £5bn a year on infrastructure over the next five years. But now an important source of the funding – annuity inflows – will evaporate.

The annuity inflows were not a large part of the financing of this market. For in one of his acts of financial repression (yes, that is the technical term for it) Gordon Brown insisted that annuioties should be largely funded by gilts. The pension funds which built up over the years, yes, these could be and are invested in some micture of bonds and equities and infrastucture projects and so on. But it's the very switch from those funds into hte annuities that reduces the amount available for such investments. But that pales beside this ludicrous misunderstanding:

But it is not "their money" and we all live in a society whose members' decisions profoundly affect each other. Mr Webb, I assume, would not make this remark about individuals being free, as neighbours, to play offensively loud music, or free not to bin their household rubbish or free to refuse to school their children. Being free to binge your lifetime savings, which taxpayers have helped create, falls into the same category. Every citizen in these island pays higher taxes than they otherwise would to compensate for the lack of tax coming from tax-sheltered pensions. The contributions to build up personal pension funds are allowable against tax and the funds, once acquired, pay no capital gains tax and no income tax on dividends. Up to 40% of the value of any pension fund is thus created through the construction of a watertight tax-free zone. We should care if the resulting money is spent on a Lamborghini: a chunk of the car belongs by right to taxpayers.

Sigh. The tax benefits that pensions savings get is not actually a waiving of tax. It is only tax deferral. It is true that you do not pay tax on the money you put into your pension fund. But it is also true that you do pay tax on any pension that results from that saving. And it's absolutely true that if you cash out your pension to the extent that you can afford a Lamborghini then you'll be paying at least the higher rate on most of that cash. Quite possibly the 45 p rate on some of it too.

That I pay tax upon my money in 2015 rather than in 1985 gives the taxpayers no claim over my car now, does it?

It's not just that assumption he's making there, that if you don't get taxed then taxpayers own part of you and your possessions. It's that he simply doesn't seem to be aware that pensions taxation is all about deferral, not the simple non-taxation of the income at all. And as I say, these are the people we're supposed to get our ideas from about how to run the country?

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Osborne's Surprise

Written by Dr. Madsen Pirie | Friday 21 March 2014

The most exciting part of George Osborne's fifth budget came as a total surprise.  This was the complete overhaul of the pensions system, and it achieved two of the Adam Smith Institute's long-term objectives: simplification combined with tax reduction. 

The previous rules, complicated and cumbersome, arose from the Treasury's lack of trust in people's ability to manage their own affairs competently.  The Treasury tried to micro-manage how pension pots should be drawn upon.  They limited the amount that could be taken in cash, and capped the amount that could be drawn in annual income to a small amount, with a punitive 55% tax on anything in excess. 

The Treasury's concerns were twofold.  They didn't want high earners to use pension pots to circumvent income tax, and they didn't want people drawing so much that they had insufficient left to support them and might become a burden on the state.  People were compelled at one stage to buy an annuity, despite the poor value these have represented.

Osborne's bold budget has introduced the revolutionary idea that people are better at judging their own interests than Treasury officials are.  At a stroke he has given them the choice of how much to draw and when to draw it, and abolished the 55% rate.  Anything they do withdraw will be taxed at their marginal rate.  Significantly, the Chancellor pointed out that those on his side of the House know that lower tax rates can sometimes bring increased revenue, and he expects it will happen in this case.

Saving for retirement has suddenly been made more attractive, and since much of this saving is in equities, it means more investment will be available to create and sustain jobs and to boost growth.  It also means that fewer people will choose to be dependent on the state in their old age.

The Chancellor has expressed his confidence that people will behave responsibly and with due regard for their own interest.  Bravo.  It is an admirable sentiment and one that should be adopted in other Departments.  The ASI will be encouraging them to do so in the months ahead.

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I find myself agreeing with Richard Murphy

Written by Tim Worstall | Friday 21 March 2014

I think I'm going to need to take a little lie down. I find myself in agreement with Richard Murphy on something. Even that it's only partial agreement is disturbing. He says:

I have read a lot about what fairness is of late. I have come to the conclusion that there is no objective answer to that. Whatever one person thinks is fair is, apparently, acceptable to at least someone, somewhere. That is why it comes to fairness majority opinions matter. On the welfare cap I have no doubt the majority will consider what is being proposed to be profoundly unfair if they realise just who is affected.

As to the definition of fairness, yes, he's correct: for this is the point of Adam Smith's linen shirt. That you cannot afford one does not make you poor. But if you live in a society where not being able to afford a linen shirt marks you as being poor then yes, in that society you are poor. So, what we all, collectively, think of as being fair is indeed what is fair in our society. And that is a malleable thing. We used to, vilely, think that it was just fine to hang people for stealing a loaf of bread to take but just one example from our past.

However, I disagree entirely with the idea that people are going to think that the benefits cap is indeed unfair. It is, after all, set at around median household income and we do, most of us, think of the welfare system as a safety net and not something that should provide a better than average lifestyle.

But we can go further than this. It was most amusing watching the reactions to the initial part of the benefits cap, the limitation on the amount of housing benefit that anyone could claim. The number was announced as being £400 and everyone exploded in outrage. What? You can't rent a rabbit hutch on that amount per month! The next turn of the news cycle brought the clarification that this wasn't a monthly limit, this was a weekly one. At which point the outrage exploded again: what, you mean people have been getting more than £20k a year, tax free, in subsidy for their rents? But, but, that's more than I earn!

We British have alwasy prided outselves on our sense of fair play: possibly in error. And we do indeed have ideas about what is fair within our own society and the definition of what is fair should properly be judged on what we collectively think is so. But recent experience tells me that the idea of a benefits cap is something that most of us will describe as fair. Simply because most of us do think that the welfare system is a safety net, nor either something that should provide a substantial lifestyle nor an exercise in social and economic re-engineering.

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Pensions: Chancellor has taken the first step on a long road to reform

Written by Dr Eamonn Butler | Thursday 20 March 2014

The Chancellor's Budget decision to treat pension savers as responsible adults and let them choose how to spend or invest their own pension pots on retirement – instead of being forced to convert them into annuities (or follow hugely complicated drawdown rules) – is surely welcome. But our pension system is such a mess that there is a lot more work to do.

On private pensions, for example, we need to stop fretting about 'tax relief'. The use of the phrase 'tax relief' suggests that somehow the great taxpaying public is subsidising pension savers, and it has been used to make the case that upper-rate taxpayers should not get upper-rate relief on their contributions. This is a complete misconception. When the rules were introduced decades ago, the principle was clear. If you actually drew your income, you paid tax on it. But if you did not draw your income at the time, but 'deferred' taking it until you retired, it was thought fair that you should only pay tax on it then. So it's not a subsidy – simply deferring the tax until the income is actually enjoyed.

Second, the contribution rules must be much simpler. Right now, how much you can contribute to a pension fund depends on your age and status. And thanks to Gordon Brown, there are limits on how much you can have in your pension pot before you start getting clobbered with a huge tax. The argument is that the special tax treatment is there just to make sure that pension savers have enough to live on, without having to fall back on welfare – not to help millionaires build up millions more in pensions pots. But in fact it is just a way of the Treasury saving money – money it regards as its own, rather than belonging to taxpayers like you and me. Scrap the lot and forget it.

Third, Gordon Brown (again) effectively killed off workplace pensions by over-regulating them. Sure, you need some regulation to make sure that company pension plans are well managed, but Before Brown the UK had more private pension savings than the rest of the EU put together. Now, workplace pensions are almost non-existent. The new 'people's pension' arrangement is an attempt to re-build that. Too little too late – and just another layer of rules and complexity on an already densely-stratified set of regulations.

Then there are state pensions. Current (tax) contributions go straight out to current beneficiaries. It's a pure Ponzi scheme – you just have to hope that some even bigger mug will be willing to pay in when you get to the drawing-out stage. If private-sector rules applied, Iain Duncan Smith and George Osborne would be in the slammer. When the system was introduced, the government was supposed to build up a proper fund to pay out future pensions, but (like America's too) it was never more than a fig-leaf for the fraud.

It's tough, but at some point we need to move to properly funded personal pension accounts, as Chile did in the 1980s (with many other countries following suit). Oblige people to earmark some of their earnings for pensions, by all means – but let them put it into an account that they control, rather than the Treasury black hole. Few young people today think they will ever get a meaningful pension from the state, and they are right. Again, maybe the Chancellor should do the right thing, and trust the people.

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There's nothing neoliberal about work for the dole

Written by Tim Worstall | Wednesday 29 January 2014

OK, so this story comes from Australia where they might be far enough away not to be quite up to speed with things. But the idea that people should work for the dole is not in fact some appalling apparition leaping from the fevered imaginations of neoloberals. It's not, in fact, even a liberal idea. It's an entirely social democratic one: you know, soft left sorta thing?

A favourite policy of talkback callers everywhere, work for the dole is also an idolised measure for the right side of politics where old-fashioned conservative selfishness dovetails nicely with the extremist economic demands of economic neoliberalism. The idea is that to receive the sub-poverty-level subsistence Centrelink payment of $250 week, dole recipients will be mandated into forced labour or deprived of subsistence completely. Currently mooted are plans for the unemployed to be mandated to pick up rubbish in the not-for-profit sector or work in aged care homes as maintenance workers.

Ah, no. Here is the impeccably social democratic and soft left M'Lord Layard on the subject from 15 years ago or so:

This long-term unemployment is a huge economic waste. For people who have been out of work for a long time become very unattractive to employers and easily get excluded from the world of work. So it often happens that employers feel a shortage of labour even when there are many people long-term unemployed, with the result that inflation rises even in the presence of mass unemployment. Thus a major objective must be to reduce or eliminate the long-term unemployment caused by welfare dependency. There are two possible approaches – “stick” and “carrot”. The evidence suggests that much the best approach is a combination of the two. This combined approach is now being used increasingly in Britain, Denmark, the Netherlands and of course in the U.S. for single mothers on welfare. In consequence in these countries there have been dramatic falls in unemployment consistent with a given level of vacancies – which in most other countries continues to rise.

The argument is extremely simple. People who are long term unemployed drop out of the labour force entirely. This is both a waste of their lives and also of the things that they could be producing for the rest of us. We therefore want policies which keep the long term unemployed in that labour force: even up to and including make work programs while they collect their unemployment pay. For this does indeed keep them connected with the world of work and aids in preventing that dual waste of their lives and out money.

This is absolutely nothing at all to do with being right wing, conservative, neoliberal or even liberal. It's an entirely social democratic analysis of the problem and an entirely social democratic solution.

It may also be a good one, might also be a bad one but that's an entirely different matter. The blame or the plaudits, whichever way around it should be, should indeed go to those who proposed it. Similarly, if it's a good idea than praise its introduction whoever does it and if a bad one condemn it.

Peronally I'm convinced by the argument and the evidence and in the absence of my preferred solution (a return of capitalism red in tooth and claw that would raise the growth level and thus reduce unemployment) support the idea that work for welfare is a good idea. Even if it did come from my old economics professor....

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Apparently I'm a hyper-neoliberal

Written by Tim Worstall | Monday 06 January 2014

It rather surprised me, last week, that I was described by an American magazine editor as a "hyper-neoliberal". I'm really not quite sure what that means but I assume it's because I agree with points like this:

PLAN A The government subsidizes the incomes of low-wage workers. These subsidies are financed by increasing taxes on middle- and upper-income Americans.

PLAN B The government again subsidizes the incomes of low-wage workers. But under this plan, the subsidies are financed by taxing those companies that hire low-wage workers.

This is Greg Mankiw discussing the difference between raising the incomes of the working poor through some form of public payment (ie, tax credits, the EITC, whatever) and a rise in the minimum wage.

To be sure, the minimum wage isn’t exactly a system of taxes and subsidies. But its effects are much the same as those of Plan B. Unskilled workers earn more, and the businesses that hire them pay more. The main difference between the minimum wage and Plan B is that, under a minimum wage, the extra compensation is paid directly from the business to the worker, rather than indirectly via the government.

And for me this is the clinching point:

First, fairness: If we decide as a nation that we want to augment the income of low-wage workers, it seems only right that we all share that responsibility. Plan A does that. By contrast, Plan B concentrates the cost of the wage subsidy on a small subset of businesses and their customers. There is no good reason this group has a special obligation to help those in need.

I've said this a number of times before and it still remains true. There is indeed the market price of whatever it is, in this case low skilled labour. And it's entirely possible that we, as a society, communally, decide that we don't like that price. Say we think that the price of cigarettes is "too low" (leave aside how we determine too low or too high here). We tax them and that tax benefits us all in that all of us share in the public goods financed by that tax.

We might also decide that the price of low skilled labour is too low. We desire it to be higher. Precisely because it is all of us making that decision (again, leave aside concerns about majoritarian tyranny here) therefore it should and must be all of us dipping into our pockets to pay for it. We should no more insist that investors in the sort of business that employs low wage workers pays that extra wage that we desire than we should insist that smokers, or tobacco companies, get that extra tax raised as we fix that too low price of ciggies.

They're societal interventions thus it must be society that pays or collects on them.

Whether we should have a wages top up, or taxes on ciggies, is entirely another argument. This logic, assuming that we're going to have them, still stands. Societal decisions need to be paid for by society, not by some subset who can be stuck with the costs of our desires.

In this analysis I am joined, as above, by Greg Manikiw, ex-head of the Council of Economic Advisors, economic advisor to Mitt Romney (about as wet a Republican candidate as we've seen in many a decade) and also by the UK's only thinking Marxist, Chris Dillow.

And for thinking this way I am called a "hyper-neoliberal" by an American magazine editor. I still don't quite know what that phrase means but I think it's more a commentary on the political inclinations of the US journalistic caste than it is about me or the real world.

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This strange allegation that Britain isn't eating

Written by Tim Worstall | Tuesday 24 December 2013

I'm afraid that this campaign and poster, "Britain Isn't Eating", confuses me greatly.

In a striking billboard advert that says ‘Britain Isn’t Eating’, the charity Church Action on Poverty uses the famous image from the Conservatives’ 1979 election poster, ‘Labour Isn’t Working’. The highly political charity poster features the same long line of people used to illustrate dole queues under Jim Callaghan’s ailing government, but this time places them outside a food bank.

OK, more people are using food banks than before. And what, pray, is wrong with that?

For the launch of the Britain Isn’t Eating campaign, Church Action on Poverty said on its website: ‘The explosion in food poverty and the use of food banks is a national disgrace. It undermines the UK’s commitment to ensuring all its citizens have access to food – one of the most basic human rights.’

Umm, but, aren't food banks providing food to people? Aren't people thereby being provided with one of the most basic human rights, access to food?

I'm perfectly willing to agree that in a country, by historical or global standards, as rich as the UK is today that we can make sure that all have access to a basic and nutritious diet. The thing is, I'm very confused by the people who are part of the system providing this, those food banks, insisting that their own existence proves that this isn't being done. For there's absolutely nothing at all that insists that such provision should be met by government. Or benefits, or pay, wages, jobs or anything else of that type. The insistence is that food should be available and that it is available through the charity of our fellow citizens is not some scandal that blots our society. Quite the contrary, it is a wonderful signifier that we do indeed still care for our fellow man.

Something that at this time of the year is a rather appropriate thing to be reminded of perhaps?

It claims ‘the single most common reason for people to need food aid is that their benefits have been changed, delayed or stopped’.

Government is incompetent and we the citizenry step into the breach. This is somehow a bad thing?

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There really is a Laffer Curve you know

Written by Tim Worstall | Thursday 05 December 2013

That there really is a Laffer Curve is obvious: tax rates of 0 and 100% raise no revenue, revenue is raised at points in between. The precise shape of the curve is of course a matter for more debate. But as the Spectator has just pointed out, and as should be general knowledge but sadly isn't, the people who face the highest tax rates in this country are the working poor. Which is, of course, entirely ludicrous.

So the same low-paid job will be worth far, far more to a Romanian than a Brit on benefits. That explains why so many foreign workers are happier, keener, more likely to apply – they actually get to keep all of the extra money they earn, while Brits have to sacrifice up to 84 per cent of it. Again, who’d be all zip-a-dee-doo-dah turning up at work when you keep just 16p in every pound you earn? Certainly not me. So there is nothing lazy about Brits. The problem lies not with our people, but an still-unreformed welfare system. Iain Duncan Smith’s revolutionary Universal Credit would lower the top rate of effective tax to 65 per cent – still too high, but a vast improvement. When it’s up an running, the Chancellor should say in every budget what this top rate would be, and aim to lower it to 40 per cent. The top rates of tax in this country are not paid by millionaires. They’re paid by the millions who are caught in a welfare trap. That’s why the Romanians spot such an opportunity here. And that’s why IDS’s Universal Credit cannot come fast enough.

Universal benefit will be better, yes, but not sufficient to take us down to more sensible levels of the discouragement of work.

The first part is that we've got to, as we here at the ASI have been saying for years now, take those working poor entirely out of the income and NI tax systems. I prefer a tax allowance (which would include both types of NI) pegged to the minimum wage. Madsen has proposed a higher, £15,000 a year allowance. My proposal is based on the political resonance of tying those two numbers together of course, not on the economics.

That is, as far as I can see, the only thing that will get that combined tax and benefit rate down to something more reasonable, like that 40%. And if we want to drive it down again we'd have to become very radical indeed, move to a citizens' basic income. Here's £7,000 a year or so for each and every adult, untaxed, and that's it. That's the welfare state in its entirety. That would drive that tax and benefit rate down to zero and I think people would be very surprised indeed at the sort of change in behaviour that sort of supply side change would create. Rather than an increase in leisure I would expect a huge increase in hours worked actually.

But the real point is that if we do want to free the working poor from tax rates that we consider entirely unacceptable for the richer among us then those are the sorts of changes we're going to have to start making.

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Both China and the UK are less unequal than many think

Written by Tim Worstall | Monday 02 December 2013

I've long been of the view that inequality is overstated in the UK. For the very simple reason that we measure it by incomes and not by consumption. But of course, if you really are worried about inequality it must be inequality of consumption that you are worried about. And I've also long thought that UK inequality is likely to be much more overstated than the inequality of most other European countries. For our economy is dominated by London in a manner that no other European country is dominated by just the one city. The mechanism here is of course that London property prices are hugely higher than they are elsewhere in the country. And so are London salaries: but that second gets recorded as inequality of income when that first means that that is pretty much evened out by the equality of consumption of housing possible for that greater sum.

Sadly I've not seen any research that details this for the UK. But here's a nice paper that worries away at the same problem for China. Yes, China is unequal, more so than the UK or US. But they look at the variability of housing prices across the country and then take that into account when comparing the variability of incomes. And quite a bit changes:

The overstated inequality if using nominal income data is not as great if inequality is measured with the Gini index (in Figure 2, both the Theil and the Gini have been scaled to equal 1 for real inequality at provincial level). Nevertheless, not deflating for spatial cost of living differences still causes an upward bias in the Gini coefficient of 15-16%. Taking an average of the results for the two inequality measures, in round figures approximately one-quarter of apparent spatial inequality in China disappears once account is taken of cost of living differences, where these are just coming from house prices.

If, as they surmise could be true, the differences in housing prices represent a general change in non-tradeable goods prices then the reduction in the Gini measure of inequality would be greater.

Which brings me back to the UK. We do have high inequality in the UK as compared with other European countries. But I'm convinced that some of this is the effect of the much higher incomes available in London. And those higher incomes are rather offset by the higher costs of living in London: meaning that consumption inequality is a great deal lower than everyone thinks it is.

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