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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

A truly great observation by Don Boudreaux

Written by Tim Worstall | Thursday 20 March 2014

We like Don Boudreaux on this blog, we do. And this is a good example of why we do for Don has teased out, elicited, this observation:

Perhaps you’ve made this connection before, but reading all your posts about the minimum wage and global warming this morning, I was struck by the paradox in the proposed remedies for these two problems by politicians. The first problem is income inequality, and the remedy is to set minimum contract terms. The second problem is externalities from carbon protection, and the remedy is to tax output levels. In both cases, the solution is to raise firm costs. The assumption driving the policy prescription for a Pigovian tax on carbon is the idea that higher costs will spur innovation in ways of reducing carbon output. Of course, that private firms subjected to higher costs will innovate in ways to reduce those costs is precisely the problem with minimum wage legislation, as you point out. This is an obvious point, but my mind never made the connection before.

Yes, I know, people get fidgety when I extoll the virtues of the carbon tax around here. And an entirely different set of people don't like us pointing out that of course a rise in the minimum wage is going to have unemployment effects. They might be small, they might be large, depends upon the rise, but they will be there.

But what Boudreaux's done here is to make the connection to the two policies so obvious.

We want a carbon tax (OK, those of who do want a carbon tax want one because) if does indeed make clear to people the costs of emissions. This clarity, this rise in price, will lead, at least we hope it will, to people reducing their emissions. This is what Osborne and Cameron believe with having a minimum carbon price, this is what Ed Miliband believed about his own earlier plans and it's what the EU and Ed Davey believe about the whole idea of emissions permits and people having to pay for them. Raise the price and people will economise.

But exactly and precisely this logic must prevail with the minimum wage. Raise the price of labour and people will economise on the use of labour. It cannot be any other way, can it? And what really grates is the way in which some will insist on the logic being correct for emissions but flatly reject that it can be true for labour.

 

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Adam Smith Institute Budget Reaction: Well, that was boring

Written by ASI Staff | Wednesday 19 March 2014

Commenting on the 2014 Budget: 

“Well, that was boring. The total tax and spending changes barely scratch the surface at around £2bn/year in each direction – that’s a tiny 0.3% of the £732bn the government is expected to spend this year. The exception may be the pensions announcements, which may prove to be very significant in the years to come.

“Much of the budget was gimmicky: inheritance tax exemptions for emergency services personnel who die in the line of duty must only affect a handful of people and giving LIBOR fines to Help For Heroes continues to be one of the most bizarre revenue hypothecations of modern times. Even the much-heralded ‘welfare cap’ can be easily undone by any Parliament that wishes to in future, so cannot count as more than a political stunt.

“If there is cause for optimism it is in the economic data released today, which shows that the labour market is rebounding strongly (even if productivity still leaves a lot to be desired), and the language used by the Chancellor. At last the government is speaking in dynamic terms, recognizing in rhetoric at least that lower tax rates can produce higher revenues. Mr Osborne is talking the talk on taxes, but he doesn’t have much time left to walk the walk.” 

– Sam Bowman, Research Director, Adam Smith Institute

Pensions

“At last Britain's private pension savers will be treated like responsible adults. The rule has long been that, apart from a proportion that can be taken as a lump sum on retirement, pensioners have had to convert their retirement pot into an annuity, paying them a lifetime income. But as lifetimes have lengthened and financial uncertainty has abounded, annuity rates have fallen, leaving savers much worse off then they expected.

“From April 2015, retirees will be able to access their pension savings pretty much as they wish. Instead of being hit by a 55% tax if they took out 'too much', ordinary rates of tax will apply. So it all becomes much easier. You build up a pension pot while you work; on retirement, you can take 25% of that tax-free (a provision designed to help people with moving costs and other changes on retirement); then you can decide whether you will buy an annuity, draw down the pot at a set rate, or withdraw the whole sum, facing tax only at the prevailing marginal rate.

“Most people are perfectly capable of managing their retirement income and do not want to fall back on the state anyway. The new rules recognise that. On the rare occasions when governments treat us like adults, they should be encouraged.”

– Eamonn Butler, Director, Adam Smith Institute

Personal Allowance & National Insurance

“As anticipated, the income tax personal allowance has been raised to £10,500. That’s good, and will help nearly all workers, but the Chancellor missed the opportunity to tackle the National Insurance threshold, which is much lower than the personal allowance and affects low paid part-time workers who may not benefit from the personal allowance rise at all.

“A part-time worker earning £10,500 will pay no income tax, it is true, but they will still face a National Insurance bill for £330 a year. National Insurance is the great elephant in the room in British tax policy: although administered separately, it goes into exactly the same revenue pot as income tax. It desperately needs reform if the working poor are to be given the tax break that almost everyone agrees they need.

“Still, the rise to the personal allowance is better than nothing, and the government is right to pursue tax cuts for lower earners.”

– Sam Bowman

Childcare

“The government is right to recognise that childcare costs are becoming increasingly unaffordable throughout the UK: at £106.38 per week, the cost of 25 hours of childcare is unaffordable for many families.

“Ofsted regulations around childcare, such as stringent qualification requirements and low mandatory child-to-staff ratios, are some of the harshest in Europe, and have caused prices to skyrocket.

“These regulations have real consequences for the consumer: the UK ranks as the second highest spender in Europe on childcare services and parents are spending a staggering 28% on childcare in out-of-pocket costs.

“Unfortunately, the government’s proposals do nothing to address these supply-side factors, and will probably just perpetuate the vicious cycle of high costs. Families would benefit far more from deregulating the childcare sector than from increasing the childcare subsidies, which fund a highly distorted and expensive market.”

- Kate Andrews, Communications Manager and Research Associate, Adam Smith Institute 

Missed opportunities

“The most obvious missed opportunity was the lack of any additional cut to Corporation Tax. Adam Smith Institute research has found that nearly 60% of the Corporation Tax comes out of workers’ wages, with the rest acting as a harmful tax on capital. The Chancellor could have boosted wages and stimulated the economy by cutting Corporation Tax even more, killing two birds with one stone.

“A change to the Bank of England’s remit. Inflation targeting has unequivocally failed, giving us the worst recession and slowest recovery in living memory. If the Bank were tasked with targeting Nominal GDP instead, as many prominent economists are now suggesting, the macroeconomy would likely improve immediately and remain stable during future supply shocks such as the 2008 Financial Crisis.” – Sam Bowman

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@adamsmith.org /07584 778 207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.

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At last Britain's private pension savers will be treated like responsible adults

Written by Dr. Eamonn Butler | Wednesday 19 March 2014

At last Britain's private pension savers will be treated like responsible adults. The rule has long been that, apart from a proportion that can be taken as a lump sum on retirement, pensioners have had to convert their retirement pot into an annuity, paying them a lifetime income. The idea was to ensure that people do indeed have a lifetime income from their (tax-aided) retirement savings, and do not just spend it all at once and then fall on welfare. But as lifetimes have lengthened and financial uncertainty has abounded, annuity rates have fallen, leaving savers much worse off then they expected.

Indeed, pensioners used to be trapped into the annuity rates that happened to prevail on the day they retired, which for some was a disaster if rates had plummeted for some reason. But the current government has already eased that problem by saying that people do not have to convert to an annuity until age 75. And there were rules allowing retirees to 'draw down' some of their pension pot each year, giving them an annual 'income' without having to take out an annuity.

Now, Chancellor George Osborne is giving them greater flexibility still. From April 2015, retirees will be able to access their pension savings pretty much as they wish. Instead of being hit by a 55% tax if they took out 'too much', ordinary rates of tax will apply. So it all becomes much easier. You build up a pension pot while you work; on retirement, you can take 25% of that tax-free (a provision designed to help people with moving costs and other changes on retirement); then you can decide whether you will buy an annuity, draw down the pot at a set rate, or withdraw the whole sum, facing tax only at the prevailing marginal rate.

People of course will need advice on which of these options will be best for them, and the government is making the insurance industry stump up the cost of that. Which does not seem so unfair – it is reasonable that product providers should tell you how best to use their products.

Pensions cause problems for libertarians. Why should a particular form of saving be given special tax treatment, and then hedged around by all sorts of complicated rules, they quite reasonably say. The trouble is that when you have a welfare system, you inevitably are sucked into some such arrangements.

It's not that pensions have a 'favourable tax treatment' exactly. The original concept was that if you were not taking part of your annual income but were 'deferring' taking it until you retired, then it was unreasonable to charge you income tax on the income you had not yet drawn. It would be taxed only when you retired. But then you needed rules to prevent people just spending all this untaxed cash on retirement, then presenting themselves as a charge on welfare – so-called 'double dipping'. And hence the mire of rules.

Most people, though, are perfectly capable of managing their retirement income and do not want to fall back on the state anyway. The new rules recognise that. On the rare occasions when governments treat us like adults, they should be encouraged.

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I wouldn't say I was surprised by HMRC and the 40p tax rate

Written by Tim Worstall | Wednesday 19 March 2014

HMRC is putting forward what might to many sound like a very strange argument. That the 40p tax rate makes people work harder:

Pushing people into the 40p rate will make them work harder to recover the money they have lost to the taxman, an official report has found.

The thing is, they could well be right.

Taxation of incomes affects the desire to work in two ways, the income and substitution effects. One is that we have some idea of how much we want to get into our hot and sticky little paws and we'll do sufficient work to gain that much. If tax rates rise then we'll work more to get that amount. We do know that this applies to most of us some of the time and is indeed a feature of the real world (studies of piece workers like cab drivers confirm that many do indeed have a daily target for earnings which when reached means they go home). The other is that at some point we look at the amount of work we have to do to gain extra income and instead shout blast this for a game of soldiers and we wander off to go fishing instead. Here a rise in tax rates will lead to a reduction in working hours and more leisure. We also know that this applies to most of us at least some of the time.

So, the effect of a rise in tax rates upon working hours is a little complex. It depends upon the individual decisions of us all and in aggregate we can see that at some point the blast this effect will outweigh the desire for a certain income. It is the interplay of these two that gives us our famed Laffer Curve.

Which is why I can't say that I'm all that surprised at HMRC saying that the income effect is greater than the substitution one at the 40p tax rate. For this is the same HMRC that also said that the substitution effect dominated the income one at a tax rate of 50p. Which is why that top rate was lowered to 45p. A 40p rate is thus below the peak of our Laffer Curve and that's exactly where we would expect income to predominate over substitution. For that's how we've initially calculated our curve in the first place.

Of course, there's nothing at all that says that we should in fact be taxing at the peak of the curve. We can have other goals in mind, for example the freedom and liberty of people deciding how to spend their own damn money instead of handing it over to the cage of monkeys in Westminster. But all of that's a rather different point. That people might well work harder at a 40p tax rate is the flip side of our knowing that they don't at a 50p one.

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Seven things we'd like to see in Budget 2014 (but probably won't)

Written by Sam Bowman | Tuesday 18 March 2014

Here are seven things we'd like to see at this year's budget:

1. Personal allowance and employee National Insurance thresholds should be merged and set at the NMW level (approx. £13,000/year after the NMW is raised to £6.50/hour). The government should legislate to keep the tax & NI thresholds at at least at the NMW level. It is crucial that the National Insurance contributions threshold be raised as well as the income tax threshold.

2. The corporation tax cut planned for 2015 should be brought forward by a year (to 20% this year), with a commitment reduce it further by 2.5% per annum for the next three years to 12.5%. In the long-run it should be abolished altogether as it is a stealth tax on income (workers’ wages bear approximately 60% of the tax) and a distortionary tax on capital.

3. The Chancellor should go forward with plans to merge Income Tax and National Insurance. Employers’ National Insurance Contributions should be included on workers’ wage slips to highlight that this is a stealth tax on wages.

4. Help to Buy should be wound down ahead of schedule to reduce house prices in London and the South East. To create jobs and encourage construction the Chancellor should endorse radical planning reform that would allow more houses to be built.

5. Subsidies (“financial relief”) to energy intensive industries should be ended with the money saved paying for a broad reduction in green energy taxes to reduce consumers’ energy bills.

6. The ring-fence of NHS spending should be abolished. If savings can be made in the education, policing and welfare budgets, they can be made in the healthcare budget as well.

7. The Bank of England’s mandate should be revised, with the Bank instructed to target the level of nominal spending (nominal GDP) in the economy along a predetermined trend. This would reduce inflation in boom periods and prevent deep recessions by stabilising aggregate demand.

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Something of a blunder from Oxfam here

Written by Tim Worstall | Tuesday 18 March 2014

They have a new little reportette out. Their instructions to George Osborne on what to do in the Budget. And it contains something of a howler. I've been chatting to them this morning about it and still haven't managed to get them to see what they've done wrong here.

The scale of Britain's growing inequality is revealed today by a report from a leading charity showing that the country's five richest families now own more wealth than the poorest 20% of the population.

This is true of course. But it's absolutely nothing at all to do with increasing inequality. It's also nothing at all to do with the calculations that they use:

In a report, a Tale of Two Britains, Oxfam said the poorest 20% in the UK had wealth totalling £28.1bn – an average of £2,230 each. The latest rich list from Forbes magazine showed that the five top UK entries – the family of the Duke of Westminster, David and Simon Reuben, the Hinduja brothers, the Cadogan family, and Sports Direct retail boss Mike Ashley – between them had property, savings and other assets worth £28.2bn.

They got their numbers on the wealth owned by the poor from an IFS report. Which was actually about income inequality, not wealth. And they've then managed to overlook something really quite important.

If you've no debt and a £10 note then you, yes just you on your lonesome, has more wealth that the bottom 20% of British society in its entirety.

For it's possible to have negative wealth, d'ye see? In fact, negative wealth is a normal part of every life cycle. That newly minted graduate carrying student loans? Highly likely to have negative wealth. You've just splashed out on a new car on HP? The moment you drive it off the forecourt the depreciation means the debt is greater than the value of the asset: if you've no home equity then this could be enough to make your wealth negative. You can have a very nice income, hundreds of thousands a year even, and carry debt higher than the value of your assets. Sadly it's not true that all of us will have an income of hundreds of thousands a year but except for a lucky few it's almost certain that we will at some point have negative wealth.

Given the lifecycle of wealth it's entirely normal, possibly even entirely desirable, that the bottom 20% of the population in wealth terms will have negative wealth.

So Oxfam is actually correct in their assertion here. But entirely wrong in the method by which they've reached it.

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Letter to The Times: Justifications for HS2 have failed to convince

Written by ASI Staff | Monday 17 March 2014

Dr Madsen Pirie and Dr Eamonn Butler, President and Director of the Adam Smith Institute, co-signed a letter to the Times, calling for "a comprehensive review of the UK’s transport priorities, and where, if at all, HS2 fits with this.

"Sir, There are few more iconic images of the recent storms and the flooding which devastated so many thousands of lives than the Great Western Line at Dawlish collapsing into the sea, cutting off the main rail route to the South West of England.

"This underlines the stark choice in determining priorities for investment in Britain’s transport network — between investment in increasing resilience, developing regional transport connections and relieving the plight of the thousands forced to stand on trains each day, or ploughing ahead with a London-centric high-speed line with a dreadful business case which connects just four cities.

"Successive justifications for HS2 have failed to convince, so its supporters are asserting that the West Coast Mainline is full to capacity and HS2 is needed to relieve it. Yet Network Rail’s latest figures show that intercity trains are running at just 52 per cent full into Euston station at peak times, and that Euston is one of London’s least busy termini.

"With the Treasury predicting that HS2 will cost £73 billion — £1,500 for each adult in Britain — as well as causing huge environmental damage, it is clear that the time has come for a comprehensive review of the UK’s transport priorities, and where, if at all, HS2 fits with this."

Hilary Wharf, HS2 Action Alliance; 
Baroness Bakewell; 
Natalie Bennett, Green Party; 
Sir Keith Bright, ex London Regional Transport; 
Dr Eamonn Butler, Adam Smith Institute
Nigel Farage, UKIP; 
Sir Christopher Foster, Network Rail; 
Jonathan Isaby, TaxPayers’ Alliance; 
Denise Jeffery, Wakefield Council; 
India Knight; 
Ruth Lea, Arbuthnot Banking Group; 
Dr Madsen Pirie, Adam Smith Institute
Mary Portas; 
John Prideaux, Intercity and British Rail; 
Roger Salmon, ex Rail Franchising; 
Alexei Sayle; 
Chris Stokes; ex Strategic Rail Authority; 
Martin Tett, Bucks County Council; 
Sir Andrew Watson, CPRE Warks; 
Sir Barney White-Spunner, Countryside Alliance; 
Baroness Wilkins; 
Paul Wilkinson, The Wildlife Trust

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Think piece: Bitcoin and the English legal system, Part II

Written by Blog Editor | Monday 17 March 2014

Commercial lawyer and ASI Fellow Preston J. Byrne continues to explain why, despite the cries of his inner libertarian, more government involvement in Bitcoin would be a step forward for the cryptocurrency-cum-payment-system, rather than its end.

I should begin by thanking the numerous individuals who privately provided feedback on my proposition that cryptoledgers need law, and therefore the state.

I am pleased to report that the proposition was overwhelmingly opposed, with a few exceptions.

My position, however, remains unchanged. To set the scene for later discussions, I will provide the primary objections and my responses in outline.

Read the whole thing here.

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Press release: Who pays corporation tax?

Written by Blog Editor | Monday 17 March 2014

  1. Nearly 60% of Corporation Tax comes from workers’ wages, making the tax a regressive and stealthy form of income tax
  2. Most of the remaining burden of the Tax comes from capital owners, an economically inefficient way of levying revenues
  3. The government should cut Corporation Tax more quickly to increase workers’ real wages and raise the level of investment in Britain

Almost 60% of the Corporation Tax burden falls on workers’ wages, a new report by the Adam Smith Institute has found. The report, released ahead of this week's Budget, reviews existing academic studies into the incidence of the Tax and recommends that the government reduce or abolish it.

The report, ‘Who Pays Corporation Tax’, authored by the Institute’s Head of Policy Ben Southwood, proposes that the government significantly reduce, or abolish the corporation tax to reduce the burden on workers, and that it accounts for the lost revenue through either cutting spending or, if necessary, raising the money through more efficient means, such as property, income or consumption taxes.

According to the report, the Corporation Tax’s burden is split between workers— it reduces their pay without appearing on their pay slips—and capital, distorting decisions therefore reducing investment, UK growth and future living standards.

Though economists argue about the exact way in which the tax is initially and eventually split between capital and labour, all agree that the burden is shared primarily between the two.

Ahead of the Budget on Wednesday, the report’s findings should embolden the government to accelerate its corporation tax cuts to increase workers’ real wages and the level of investment.

Ben Southwood, author of the report and Head of Policy at the Adam Smith Institute, said:

"Tax avoidance scandals are often presented as if they were a struggle between the common man and the man—but economists know this is far from the truth. Corporation tax is partially paid by workers through lower wages, and the remaining chunk, though paid by capital owners, is likely to come out of investment, hitting growth and future living standards.

"If it can be done without introducing new distortions, we should definitely abolish corporation tax and get the revenue from a more effective tool with fewer side-costs."

Eamonn Butler, Director of the Adam Smith Institute, added: "In his Budget this week the Chancellor may announce a modest cut to Corporation Tax. He should go much further: cutting the Corporation Tax significantly will put more money in workers' pockets and boost the economy by stimulating investment. We need to grow our way back to prosperity by cutting back the state. The Corporation Tax should be the first tax to go."

The key findings of the report include:

  1. While most of the substantive details are hotly disputed, the best studies of corporation tax find that in an open economy, workers bear a significant part of the burden of the tax, along with owners of capital. In a closed economy—like the world as a whole—the burden falls mainly on capital owners.
  2. Though results have been contested, the average empirical result puts the burden on workers at 57.6%. Averaging theoretical studies is much more difficult, mainly because each study gives such a wide range of results over such varying sets of circumstances.
  3. Nearly all economists agree that taxes on capital are highly distortionary, and thus unattractive as means of raising revenue. Owners of capital do tend to be wealthier than non-owners, but capital taxes are far from the best way of redistributing wealth.
  4. Transparency is a virtue of a tax system, and many workers are unaware that their wages are lowered by corporation tax.
  5. In the presence of an extremely complex regulatory and legal regime like the UK’s, the costs of corporation taxes become even higher by distorting key decisions like choices between debt and equity.
  6. The interaction between corporate income taxes and corporate gains taxes may complicate the question, necessitating reforming both in order to properly reform one.

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@adamsmith.org / 07980 627940. The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.

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Adam Smith tells us about the private financing of science

Written by Tim Worstall | Monday 17 March 2014

The New York Times has one of those very New York Times pieces about the funding of science. They note that the usual cast of billionaires are upping their spending upon scientific research. The problem with this is that, according to the New York Times at least, this means that people get to fund the sort of research they like to fund rather than fund research that meets the approval of the sort of people who run government and the New York Times.

Imagine that, people being able to do what they wish with their own money and without the wise council of the NYT? Horrors, eh?

They do note that the initial effect of the influx of money is good. Then they start to worry about the following:

The issues are considered social as well as intellectual, and so, in their own grant-making decisions, federal agencies strive to ensure that their money does not flow just to established stars at elite institutions. They consider gender and race, income and geography.

That's actually an excellent example of why we should welcome this private funding of science. For as Adam Smith pointed out:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.

Which means that we want to get the most and the best science done for our cash regardless of gender, race, income or geography. And then there's an even larger mistake:

The official reticence about private science may reflect, in part, a fear that conservatives will try to use it to further a small-government agenda. Indeed, some of the donors themselves worry that too much focus on private giving could diminish public support for federal science. “It’s always been a major worry,” said Robert W. Conn, president of the Kavli Foundation, which has committed nearly a quarter of a billion dollars to science and is part of the private effort to increase financing for basic research. “Philanthropy is no substitute for government funding. You can’t say that loud enough.”

But it is exactly a substitute. For the basic problem here is that scientific research, or at least the results from it, is a public good. It's non-rivalrous and non-excludeable meaning that it's very difficult indeed to make a profit from it. Thus there will be too little private investment in this sphere. This is the argument in favour of government funding of science, that scientific results are a public good. But if we can gain private finance, despite the public good problem, then we've solved that public good problem, haven't we? And therefore private funding, to the extent that it happens, is indeed entirely and actually a substitute for government funding.

To the extent that science is getting private funding this is indeed the perfect argument in favour of cutting public funding. And given the increased efficiency coming from not having to worry about race and gender perhaps cutting by more than is donated.

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