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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 letter to the Archbishop of York

Written by Tim Worstall | Monday 22 July 2013

The Most Reverend & Right Honourable Dr. John Sentamu, Archbishop of York

The Office of the Archbishop of York

Bishopthorpe Palace Bishopthorpe, York YO23 2GE

21 July 2013

Your Grace,

I note from today's Observer that you are concerned about the Living Wage. I write to make a point that I suspect the usual suspects will not make to you. The importance of understanding that the living wage is calculated as a pre-tax number.

We here at the Adam Smith Institute agree that the Joseph Rowntree Foundation is indeed measuring poverty in the correct manner. We derive this from Adam Smith's comments on a linen shirt: it is not a necessity. However, if one lives in a society where being unable to afford a linen shirt means that you are regarded as poor, then in that society, if you cannot afford a linen shirt you are indeed regarded as poor. The JRF numbers are gathered in a similar manner: what do focus groups think people should be able to do in order to be regarded as not poor in this time and place? Add up the costs of those things and we reach that living wage. This is a much better definition of poverty than the more usual reference to some percentage of median income.

However, it is absolutely vital to understand that those numbers are pre-tax. The importance of this is as follows: if it were not for the amount that government takes from such meagre wages then the minimum wage would indeed be, to an acceptable level of accuracy, that living wage.

An example to make this clear. Assume 37.5 hours a week of work for 52 weeks of the year. At that living wage of £7.45 an hour this is a gross weekly income of £279.40 (I round slightly) or £14,527.50 a year. We are all agreed that this is not a large sum.

From this sum the recipient will have to pay employees' national insurance. This starts at £109 per week and is charged at 12%. £20.50 per week in such charges, or £1,063.30 per year.

There is also income tax to pay. This starts at £9,440 this year and is charged at 20%. £1,017.5 in such taxation.

We can see therefore that the net income from the living wage is some £12,446.70 a year. This is not greatly different from the gross income on the minimum wage: £6.19 an hour for 37.5 hours for 52 weeks is £12,070.50. Or if we wish to bring that back to a rate per hour, the difference between the post-tax living wage and the pre-tax minimum wage is some 19 pence per hour.

Unfortunately it does not stop there. There is also employers' national insurance to pay. Some insist that it is actually the employer who carries the burden of this tax. Almost all economists disagree, insisting that it is the employee who does in the form of lower wages. Indeed, we have it on the word of an expert of great eminence, Richard Murphy of Tax Research (who is funded in part of the Joseph Rowntree organisations, just to show his impartiality on this point), that it is indeed the employees who carry the burden of this tax. The calculation is slightly complex, but it's reasonable enough to claim that it is a further 13.8 % of those wages (it isn't, it's 13.8% of the total wages including the employers' NI but let us keep the maths simple) meaning a further £20 to £23 a week deducted from those wages. Or a further £1,196 a year.

If we add all of this together we find that the living wage of £7.45 an hour actually provides a lower post-tax standard of living than the minimum wage of £6.19 an hour free of taxation would provide. That latter would provide £12,070.50 a year to live on. By no means a great sum but still larger than the £11,250.7 that is available from the living wage after the politicians have taken their very much more than tithe.

It is indeed possible to play with these calculations, to make them more accurate. But the same end result will always come out. The current minimum wage, free of income tax and national insurance, would provide a higher standard of living than the proposed living wage under the current taxation system.

It is for this reason that I have been proposing for some years now, in fact ever since the first JRF calculations on the living wage were published, that the personal allowance for both income tax and national insurance be raised to the full time full year minimum wage. This would, at a stroke, raise that minimum wage to a higher standard of living than the proposed living wage. With the advantage that we only have to convince the Chancellor of the Exchequer of the righteousness of this path, not millions of employers across the country.

I look forward to the results of your investigation into low wages and am convinced that you will come to the same conclusion that we have. The shockingly low disposable incomes of the working poor in this country are not the result of any meanness or avarice on the part of employers: it is simply that the government taxes the working poor too much. Given this, that we can convert the minimum wage into something better than the living wage simply by ceasing the political depredations upon the pockets of the populace, I assume that your conclusion will be that the personal allowance, including that for national insurance, should be substantially raised.

After all, it's not really a particularly complex point. If you want people to have more money then tax them less.

yours sincerely,

Tim Worstall

Senior Fellow

Adam Smith Institute

London SW1

 

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If big government doesn't provide more public goods then what's the point of big government?

Written by Tim Worstall | Sunday 21 July 2013

At the heart of the argument about having a government at all is the idea that there are some public goods that would be underprovided in a pure market system. We thus need some communal (and at times, involuntarily communal) organisation to tax so as to provide these public goods to us. At every stage closer to sanity than the anarcho-capitalists we agree with one or other of the classic examples. National defence is better organised through taxation: we tried the market system once and ended up calling itn the Wars of the Roses. Public health, in the true sense of public health like vaccination, is a public good and there's excellent reason to think that taxing everyone to make sure that everyone is vaccinated is a good idea. The reason being that herd immunity that we get from a lare enough portion of the population being vaccinated.

However, that there are good arguments in favour of the existence of government at all does not mean that those same arguments support having any level of government at all. Which brings us to a fascinating paper looking at the relationship between big government and the provision of those public goods:

Theories explaining government size and its consequences are of two varieties. The first portrays government as a provider of public goods and a corrector of externalities. The second associates larger governments with bureaucratic inefficiency and special-interest-group influence. What distinguishes these alternatives is that only in the former is governmental expansion generally associated with an increase in social welfare. In the latter, the link between government size and public goods provision (or social welfare) is negative. We study the empirical significance of these competing claims by examining the relationship between government size and a particular public good, namely environmental quality (notably, air quality measured by SO2 concentrations), for 42 countries over the period 1971–1996. We find that the relationship is negative, even after accounting for the quality of government (quality of bureaucracy and the level of corruption). This result may not prove conclusively that the growth of government has been driven by factors other than concern for the public good, but it creates a presumption against the theory of government size that emphasizes public good provision.

I'm still perfectly willing to agree that there are public goods. And that there are public goods that only government can provide. But as above, this does not mean that this justifies any amount of government. For past a certain size the government turns out to be not very good at provision of those very public goods that are the justification for it in the first place. Quite why we can argue about: my theory would be that when government tries to micromanage inequality say, or concerns itself with the voluntary activities of consenting adults, then it's taking its attention away from what it actually exists to do, provide us communally with those things that cannot be, or only will badly be, supplied by individual action.

I'd thus suggest the Worstall Measurement of government. There are things that must be done, there are things that must be done that only government can do. So let's limit government to only those things that must be done by government: where it is both necessary that they be done and also that the coercion of either the law or taxation is necessary for them to be done. Everything else we'll get on with ourselves: you know, as those free people we are?

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As everyone now seems to agree it's time for Plan Worstall

Written by Tim Worstall | Saturday 20 July 2013

Quite astonishingly we now have both the OECD and the Tax Justice Network in agreement with each other. Cats will lie down with dogs and it is the end of times. What they're agreein on is that the current international corporate taxation system is no longer fit for duty. The system builds upon steps first taken in the 1920s and changes in the way the world works since then have made the basics of the system just not workable.

However, they're both coming up with the wrong solution to this problem. To find the correct solution we need to go back to some basics. Yes, we do need government therefore we do need tax revenue to fund it. While it would be lovely not to have to tax economic value creation we can't raise enough cash for the amount of government we seem to want without doing so. So, great, we need to tax economic activity.

Both the OECD and the TJN seem to think that that must mean that we tax companies. But we know very well that the economic burden of corporate taxation does not fall upon the company: it falls upon some combination of the shareholders and or workers. The only reason we've ever taxed the companies themselves is because they were a convenient place to tax. Now, as the OECD and TJN are stating, they're not a convenient place to tax.

So, why the insistence that we must find a new way to tax companies? For that's not what we want to do at all: we want to tax the economic activity, yes, because we need the money. But why tax inconveniently where we know the real burden doesn't fall? Why not just tax where we do know the real burden falls: on the shareholders and the workers?

At which point I suggest that we simply abolish corporation tax altogether. Tax corporate capital gains and dividends just like income from any other source and be done with it.

Of course, there have also been people who actually know what they're talking about who have looked at this question. The Mirrlees Review for example. But no one's paying any attention to anyone who actually knows about the subject, far better to have baseless speculation from the ill informed like me. At least I assume this passion for the involvement of the ill informed explains why people are talking to the TJN.

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With Jesse Norman as a Tory MP why bother having a Labour Party?

Written by Tim Worstall | Friday 19 July 2013

Jesse Norman weighs in on this thorny question of whether and how much companies should pay in tax.

The issue of taxation is never far from the headlines, and doubly so in times of austerity. So it’s hardly surprising that the likes of Google, Starbucks and Goldman Sachs have come under fire in recent years for under-payment of tax.

Details, schmetails, but Starbucks doesn't make a profit in the UK, even after you add back in those royalties and interest payments. So no tax is possibly due.

For many of these firms, tax is effectively optional. In avoiding it, they are using their size to advantage themselves over purely domestic competitors – as anyone who has tried to compete with Amazon can testify.

That's even worse: in 2012 Amazon made a global loss: what tax is anyone talking about that can be due from a loss making company?

So, again, how much tax should these companies pay? Patently, the law cannot answer that question. But neither can economics. For economics sees companies merely as bundles of contracts, which allocate different financial incentives to shareholders, directors, managers and employees.

Facepalm. Coase on The Theory of the Firm. No, the whole point about the existence of companies is that they are not merely bundles of contracts: if that's all they were they wouldn't exist and we'd have bundles of contracts instead.

But a politician being ill informed and unaware of the finer points of economics is hardly new so why am I complaining? Well, really, it's about this part:

First, the law. The Companies Act 2006 requires directors to promote the success of the company, but with regard to six factors: the likely long-term consequences of a decision; the interests of employees; relationships with suppliers and customers; the firm’s impact on the community and the environment; its reputation for high standards of business conduct; and the need to act fairly between shareholders. The effect is precisely to prevent managements from automatically pleading a duty simply to maximise shareholder value.

Well yes Jesse: but you're a Tory MP, not a Labour one. You're not there to defend the idiocies of the past Labour Government you're there to try to correct them. This part of the CVompanies Act was deliberately brought in to try and appease the more drippingly social democratic parts of the Labour Party. Rather than now stating that this is the aim and purpose of a company you're supposed to be shouting from the rooftops that they got this wrong. The point and aim of a company is the enrichment of its shareholders, nothing else. You should be agitating to get the law changed to reflect reality, not accepting the fantasies of your predecessors: otherwise what's a Tory for if not to be a reactionary?

Alternatively, if we're to have Tory MPs being so drippingly wet what's the reason for the existence of the Labour Party any more? Who would need them?

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Dearie me, oh dearie, dearie, me, do we have to have fools running the country?

Written by Tim Worstall | Thursday 18 July 2013

Sigh:

Backing a report by CentreForum, the think tank, Sir Ian said that “many companies, especially the private equity infrastructure funds, have paid out excessive dividends to their owners”. He advocated the introduction of “some form of dividend control”, whereby “payments of dividends above those assumed by the regulator when setting price limits, would be accompanied by reductions in the tariffs paid by customers”.

No, absolutely not. Sir Ian has clearly forgotten what happens when you place those sorts of detailed restrictions upon regulated companies. They'll inflate their capital base, play around with loan interest, pay the management more: whenever you try to micromanage like this you'll find people gaming your micromanagement.

What we actually want to happen is how we did this regulating of prices immediately after privatisation. We set a target for prices (RPI plus or minus something, depending upon the industry) and then let everyone rip with capitalist glee as they slashed and burned through their overstuffed workforces. Or as I suppose I should put it, increased productivity to the benefit of all. They did indeed make vast profits in doing so. Now if we had just left them alone for all time this would not have been a good solution: but we didn't. We told them that their pricing regulatory structure would be reviewed after some years. And then, that's where we got them. Because we revised the regulated prices to take account of the productivity improvements they'd already made. And quite deliberately made sure that in the next period they lost those excessive profits they'd made in the first.

There's good reason to manage affairs this way as well. Sir Ian doesn't know what an "excessive dividend" is, nor do I. Nor do either of us have a clue as to how to increase the productivity in these companies and thus their profits. So, what we do is set prices (they are natural monopolies after all, we're not going to leave them alone entirely), then let them make as much money as they can for, perhaps, 7 years. They know how to increase their own productivity and so they do and they increase their profits. But we don't let them keep those for all time: we now reset after 7 years and see if they can do it again.

We're giving them the incentive to become more efficient and profitable: but the regulation of how much more grossly, fatcatterly, profitable they become lies in the reset of the regulated prices, not fiddling with dividends and rates of return inside the regulator period. For that fiddling removes the incentive for them to become more efficient, y'see?

We did in fact get the price regulatory process correct the first time around. We didn't set the right numbers, no, not at all: but we did get the process right. Go make as much money as you can for the next regulatory period. And the more you make the tighter the next set of regulations will be. This is the correct mixture of the necessary regulation over monopolists and the drive for greater efficiency.

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I'm afraid that this really does make me laugh

Written by Tim Worstall | Wednesday 17 July 2013

I agree that this shouldn't make me laugh of course. Abortion is such a serious subject that let us simply ignore that this story is about that subject. Instead, let us look at what Texas has just done:

Requirements for wider hallways, janitor closets and back-up generators will likely be the downfall of Amy Hagstrom Miller’s abortion business in Texas. Texas lawmakers last week approved a law requiring that abortion clinics become hospital-like outpatient surgical centers, with detailed rules for how the buildings are designed. Owners of the state’s 36 clinics, including five run by Miller, would need to spend millions of dollars to comply -- adding features such as showers, single-sex locker rooms and special airflow systems -- or either relocate or shut down.

As I say, leave aside the specific subject itself and look at the tactic that has been used. For one can trace through American politics and law making a definite strand of those who insist upon more regulation and those who insist that excessive regulation kills businesses.

We could think of the Americans with Disabilities Act (ADA) for example, something that insists that all public (by which they mean private business premises as well) must be disabled accessible. Which might be just fine but it is also true that there will very definitely be expenses connected with conforming to such regulations. And the businesses that complain about those have been told to just suck it up and stop complaining. Or we might look at the insistence that restaurants must provide calorie counts on the menu. Perhaps that cost is trivial but it is still a cost which the regulators have happily forced upon such businesses. There are, of course, myriads of such regulations and costs.

And what has me giggling here is that the positions are reversed from their general set up. Being against regulations because of the costs to business is, in the US, generally a "right wing" view. As is, to a very large extent, being anti-abortion. Being pro-regulation whatever the cost is a more lefty position, as is being more pro-choice. Here it is, largely, the right imposing those regulations upon something supported by the left: and my, aren't they shouting about it?

It isn't, of course, a principled stand by the righties: not a bit of it, it's a tactic to do down their perceived ideological enemies. But I'm afraid that I do still find it amusing, it's a sort of political ju-jitsu. You like regulations, well, here, have some regulations.

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Would you blame a cockerel for crowing? A bureaucrat for empire building?

Written by Tim Worstall | Tuesday 16 July 2013

This criticism seems entirely misplaced to me: we should no more be blaming Baroness Ashton for this behaviour than we should be for a tree whispering in the wind or a cockerel crowing at dawn:

EU foreign affairs chief Baroness Ashton has been criticised for seeking to "expand her empire" at a time when other EU agencies are having their budgets cut.

This is simply what bureaucracies do: the aim and point of all bureaucrats.

As the late great C. Northcote Parkinson pointed out a bureaucracy does not exist to actualy do anything. There are no tasks by which it can be measured, no metrics that allow us to decide whether they've all been good little diplomats or not. Therefore the only institutional goal of any such bureaucracy will be to increase the inputs available to it. More money allocated in the budget, more staff hired, these become the measures by which it definies its own success. This is how the Royal Navy ends up with more Admirals than ships, more desk bound pen pushers in their £1,000 chairs than soldiers or seamen who do the fighting.

To complain of this behaviour is no more effective than a parp in a thunderstorm. The only way that one can prevent a bureaucracy from doing this is not to have the bureaucracy in the first place.

The European External Action Service, the EU's much-criticised diplomatic corps, already has 141 embassies or delegations across the world.

Now that it has been invented, now that a budget has been allocated, I confidently look forward to the day when it has more ambassadors than there are countries to be an Ambassador to. It will inevitably happen, assuming that it hasn't already.

Parkinson really was correct: the only way to stop the metastatisation of a bureaucracy is to cut it out of the body politic entirely.

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Libertarian film screening of Brazil

Written by Dr Madsen Pirie | Monday 15 July 2013

Tom Stringer has arranged a really fun Saturday morning outing on Saturday August 3rd.  It's a showing of the movie "Brazil" in the Everyman theatre at 96-98 Baker Street.  There's a coffee bar for pre-movie snacks, and a real bar for those who can't wait for their gin and tonic.  Everyone's in for a treat, with most going along to local pubs afterwards for lunch with a pint.

"Brazil is set in a dystopian world in which there is an over-reliance on poorly maintained (and rather whimsical) machines. Brazil's bureaucratic, totalitarian government is reminiscent of the government depicted in George Orwell's Nineteen Eighty-Four, except that it has a buffoonish, slapstick quality and lacks a Big Brother figure."

Sign up quickly for this on the facebook page.  You won't want to miss the movie and the camaraderie of like-minded  fans.

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It must be difficult being Willy Hutton

Written by Tim Worstall | Monday 15 July 2013

Will Hutton presents us with this startling statistic:

Britain is 159th in the world league table that ranks investment as a share of GDP. This is not new. Owners of British companies have long been permitted a feckless lack of responsibility. Smart countries, from the US to Germany, make sure that they insulate their companies as far as they can from the myopia and short-term greed of stock markets. Instead, the British approach to ownership exposes our companies to stock market thinking: shrivelling investment, cutting back on innovation, minimising training and hoarding cash to please their irresponsible, transactional owners.

As usualy in HuttonWorld this means we must have much more investment, a more socially democratic form of investment, more politics and bureaucracy about investment and generally we must buck up and stop being so Anglo Saxon about things. And it is true that on this list the UK is a long way down ther rankings concerning fixed investment as a percentage of GDP.

But do note the general distribution (there are exceptions of course) there. The countries at the top of the list are the places that are poor. They're still trying to build things like a basic road system, a primary education system. We've already done all of those things: thus we need to invest rather less. A second related observation is that of course the richer countries will have lower levels of fixed investment. Firstly for the obvious reason that there's a diminishing marginal return to anything at all. Secondly because the richer nations are, almost by definition, those with very much larger portions of the economy in services, not manufacturing or basic commodities and agriculture. Services famously require less such fixed investment (and correspondingly higher human capital which is not included in Hutton's number).

So we'd expect a rich nation to have lower fixed capital investment as a portion of GDP. That's something (again, with exceptions like Singapore) that we can see by eyeballing the list.

But if we restrict ourselves to those already rich nations we do see that the two most "Anglo Saxon" economies, the UK and US, do have lower portions than the more socially democratic places. Does this mean Hutton wins? No, sadly not. For the economic performance of those various rich countries doesn't vary that much, certainly not in any direct proportion to the variance of the investment as a percentage of GDP number.

The background to this is that we don't in fact care how much is invested: we care what is the return on what is invested. That is, we're interested in output, not input. And if we're getting generally the same sort of output from a lower input this is regarded as a good thing. We're more efficient in the use of our investment than those more socially democratic, politically directed and stakeholder inclusive places that Hutton thinks we should be more like. This is of course a recommendation for the more Anglo Saxon form of capitalism as against the Rhineland that Hutton has spent his life trying to force down our throats.

Which is why it must be so difficult to be Willy Hutton. To set oneself up as the arbiter of how the world should be, only to find that everytime one calls facts into consideration in support of one's basic contention, that the Man in Whitehall knows best, one finds that the facts contradict the contention. That we invest less while getting much the same result is evidence that Anglo Saxon marketism is a better system than others. For we spaff less of our money on investment as a result of having fewer politicians, bureaucrats and stakeholder interests lowering the efficiency with which that investment is deployed.

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How the European Union is shafting the Cambodian farmers

Written by Tim Worstall | Sunday 14 July 2013

Apparently the actions of the European Union mean that scores of thousands of dirt poor Cambodian farmers are being thrown off their land. This could indeed be something that we could become righteously outraged about: despite the fact that the information source is The Guardian.

If you're reading this article with a cup of coffee, you should think twice before adding sugar to your brew. If it's from Cambodia, it may be tainted – not by chemical pesticides or fertiliser, but by human rights abuses. And if you're reading this in the European Union, here's something else you should know: EU trade policy is encouraging these abuses, and the European commission has yet to do anything about it.

Cambodia falls under the Everything But Arms (EBA) tier of the EU's Generalised Scheme of Preferences (GSP), which means that it – like other least-developed countries – can export sugar and a host of other products to the EU duty free. It might seem like a pretty sweet deal in theory, but it has not been so great in practice for many Cambodians. In fact, it's been a disaster. The underlying issue is a fight over land. Cambodia is in the midst of a massive land-grabbing crisis that has seen nearly 2.2m hectares taken from mostly poor farmers and given to private firms as long-term economic land concessions.

In just half of the country where the Cambodian League for the Promotion and Defence of Human Rights (Licadho) works, land-grabbing has affected at least 400,000 Cambodians since 2003. These victims are rarely, if ever, paid appropriate compensation. Sugar is among the worst sectors for land-related human rights abuses, marked by violent evictions, the use of the military against civilians, and attacks and arrests of community activists.

OK, yes, I am righteously outraged. The EU gives trade preferences to Cambodian sugar, these trade preferences lead to evictions and further impoverishment of some of the poorest people in a very poor indeed country.

The question is, what should we do about it? The suggestion in the article is that the EU should refuse those trade preferences for Cambodian sugar until there is evidence from the various NGOs that such abuses have ceased to happen. Hmm, forgive my cynicism but that sounds like a great way to embed the NGO budgets in the Brussels one.

So why not have a truly radical policy? Why don't we just abolish sugar trade preferences for everyone? Including, of course, all those sugar beet farmers within the EU who currently get vastly over the world price for their sugar. And the massive import duties imposed upon cane sugar from elsewhere that allow that sugar beet price to stay high. For if there are no import duties upon cane sugar then there will be no benefit to thowing Cambodians off their land in order to grow sugar that doesn't have to pay those import duties, will there? Cambodian sugar would be worth only the world price and that's not enough to encourage these evictions: clearly not, for the evictions didn't start until the sugar barons could get that vastly higher EU price for the Cambodian sugar.

That is, the whole problem really starts with the way that the EU makes the intra EU price of sugar some multiple of the world price. Remove that distortion and we remove the Cambodian one.

Oddly, that's not a solution that the NGOs suggest: but then I'm already sufficiently cynical to have an idea why.

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