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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

Report: Smoking, plain packaging, and public health

Written by Julian Morris | Monday 24 March 2014

Executive Summary. Full report here.

Smoking is one of the leading preventable causes of death in the world. In most wealthy countries, smoking has been declining for decades.

Public health experts and anti-smoking groups have for many years advocated for restrictions on the marketing of tobacco products in general and cigarettes in particular. In response, governments in wealthy countries have banned most or all advertising, and many have banned sponsorship and other explicit forms of marketing of cigarettes.

Many public health advocates say these restrictions do not go far enough and have called for the elimination of brand identifiers such as logos and colours on cigarette packs. Some experimental evidence suggested that such plain packs would encourage smokers to perceive cigarettes less favorably, which might lead them to quit.

However, this optimism was tempered by evidence that even restrictions on advertising have had at best a small influence on the decline in smoking (most of the decline can be traced to a better understanding of the risks of smoking, in large part a result of public information campaigns, and taxes on cigarettes).

In 2011, Australia’s government introduced legislation mandating that cigarettes be sold in “plain packages” (i.e., without brand logos and colours). The legislation came into effect in late 2012. (Australia had already banned practically all tobacco advertising and other forms of marketing. In 2006, it had introduced a requirement that cigarette packs display graphic health warnings on a substantial proportion of their surface area.)

Some studies (such as a survey carried out when plain packaging was being introduced, an analysis of calls to a smoking cessation hotline, and a survey of outdoor smoking habits) suggest that plain packaging has indeed, made cigarettes less desirable to smokers and has increased thoughts of quitting.

However, an online survey of smokers carried out in two phases, the first a month before and the second six to eight weeks after the introduction of the plain packaging rules, suggest that the impact of the rules on quitting tendencies is probably small. Moreover, many smokers engaged in defensive behaviors such as covering up health warnings, and did not report changing brands or a significant increased tendency to quit. This finding was corroborated by another survey that found that in the year to July 2013 the proportion of smokers in Australia had not declined since the introduction of plain packaging.

A study looking at discarded packs and other data suggests that consumption of cigarettes in the year to July 2013 remained at the same level as in 2012, but found that the proportion of illicit cigarettes had increased substantially. This is corroborated by the most recent Annual Report of Australia’s Customs and Border Protection Service, which indicates that the number of illicit cigarettes entering Australia has indeed risen dramatically in the past three years.

The discarded pack study concluded that contraband—much of which is in the form of finished cigarettes that are not legally sold anywhere in the world, known as “illicit whites”—now accounts for more than half of illegal sales and about 7.5% of all sales. Part of the blame for the increased availability of illicit whites lies with a 25% increase in excise tax on tobacco introduced in 2010. But, since most of the increase in their market share occurred in the past 18 months, part of the blame almost certainly rests with the plain packaging rules.

The wide availability of illicit whites in Australia means it is highly likely that adolescents now have greater access to cigarettes than previously—and at lower prices. Moreover, these “illicit whites” have no health warnings. Given the contribution of plain packaging in Australia to the rise of the illicit white, it seems reasonable to conclude that it has been counterproductive.

While motivated by the best of intentions, plain packaging’s effects appear to have been less than desirable. Other countries contemplating the introduction of plain packaging would be well advised to postpone any decision until its effects in Australia are better understood.

Download this report.

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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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This is rather the point of student loans though

Written by Tim Worstall | Sunday 23 March 2014

Hugh Muir gets all upset about what is happening over student loans. The repayment numbers are sinking through the floor so what's the point of the new system. And furthermore:

There is simple economics here; too many graduates chasing too few jobs in a labour market slimmed down by government austerity measures. Many who have taken out the loans can't find jobs, so they don't pay; but those who do find employment are paid so little in an over-supplied market that they don't reach the threshold at which they have to pay.

All of which is rather missing that this is part of the point of having people paying directly for their university educations.

We want them to think about whether spending three years of their life and also £27,000 is a good thing for them to be doing, And the more people realise that perhaps it isn't then the happier all should be.

Don't forget that the total cost of the system as a whole hasn't changed very much. All that is different is who is getting the sticker shock. And that's actually what we want to be happening: is a university education a good deal for those who go and get one? It's is now those who are thinking about getting one who face the prices: they can thus work out for themselves whether it's a good idea.

The answer is that sciences at a good place definitely are (assuming you finish) and arts and ologies at bad places almost certainly aren't. And the only way that anyone's ever going to be able to make a decision like this is by seeing the costs which they can compare to the benefits.

Which is, of course, why the system was changed in the first place.

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As Ms. May is finding out overbearing law can be expensive

Written by Tim Worstall | Saturday 22 March 2014

It's a fairly standard observation that most things and actions have both costs and benefits. Paying unemployment pay for a longer period alleviates poverty but also raises long term unemployment.  Dealing with climate change might make the future better but at the cost of making the present worse. In terms of laws about secrecy, privacy and so on we normally look at the costs as being the curtailment of civil liberty and the benefit as being greater security from the terrorists and the like. But as Theresa May has just found out the costs can also be economic:

Theresa May summoned the internet giant Yahoo for an urgent meeting on Thursday to raise security concerns after the company announced plans to move to Dublin where it is beyond the reach of Britain's surveillance laws. By making the Irish capital rather than London the centre of its European, Middle East and Africa operations, Yahoo cannot be forced to hand over information demanded by Scotland Yard and the intelligence agencies through "warrants" issued under Britain's controversial anti-terror laws. Yahoo has had longstanding concerns about securing the privacy of its hundreds of millions of users – anxieties that have been heightened in recent months by revelations from the whistleblower Edward Snowden.

Perhaps rather than Ms. May summoning Yahoo (and excuse me, but is that actually the correct word there? Does a British Minister really have the power to command the arrival of a private citizen in the Ministerial offices? Rather than politely request?) the rest of the government should be summoning Ms. May to ask why she's pushing legislation so repressive that firms are fleeing the country. Becausetheterrorists is a reasonable enough answer to why we have spies at all but keeping them corralled enough that people still wish to do business in our fair land seems a reasonable enough thought, doesn't it?

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Why get rich?

Written by Sam Bowman | Friday 21 March 2014

You might have seen this chart, which shows different professions' household income during childhood vs their income now:

A lot of people have focused on the fact that artists' incomes 'fall' more than any other group. It reminded me of this quote from the American Founding Father John Adams:

I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.

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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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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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