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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

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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I'm afraid that the latest ONS statistics on health inequality are simply wrong

Written by Tim Worstall | Sunday 16 March 2014

This is a point that I've made before here and it's no doubt one that I'll have to make again. The ONS statistics on health care inequality, deprivation and lifespans are simply wrong. Yes, I'm certain that they've been accurately collected, that the usual skill and excellence has been used in their presentation. And yet they are indeed wrong for they are not a representation of what it is that they are purporting to be measuring.

 

Children growing up in the richest areas of Britain can expect to live a full, active life for as much as 20 years longer than their counterparts in the poorest neighbourhoods, an official analysis shows. A generation of young people living in the most deprived areas are likely to see their health effectively broken 15 years before they even reach pension age, it warns. Those from more well-off backgrounds are forecast not only to live longer overall but to enjoy good health for a much larger proportion of their lives. Although it has long been recognised that there is gap between rich and poor in terms of life expectancy, the divide is more than twice as wide when viewed through health expectations. According to the Office for National Statistics, men from the most deprived 10 per cent of the population have an average life expectancy of just 73.4 years, compared with 82.7 years on average for those in the least deprived 10 per cent – a gap of more than nine years.

The full report is available here.

There are two major and two minor problems with the approach being used here. The first major one is that no one at all is measuring the lifespans of those born into or growing up in any area. What is being measured is the age at death of people in a particular area. And, as you might have noted from your own lives there's not all that many of us who actually die in the area of our birth or childhood. Certainly not at the level of detail that these figures use: the information is collected from 30,000 or so areas, or some 2,000 people in each. I would lay pretty good odds that the vast majority of this country moves more than a couple of streets over their lifetimes. Which means that we might well be measuring something interesting: perhaps the way in which the rich, those with likely longer lifespans as we know, move into less deprived areas over their lifetime as they, well, as they become rich.

This leads onto our second major problem: the way that these figures are interpreted is that it is the inequality and deprivation which leads to the health and lifespan inequality. But we know absolutely that while this could be, probably is, true in part, we also know absolutely that it is not true in whole. For health inequality will also lead to wealth and income inequality. That poor sod permanently laid off sick at the age of 40 just isn't going to become one of the financial grandees of the country living in a pile in some undeprived area. So some part (an unknown part) of the inequality that we note will have a reverse causation to the one being assumed. Even assuming that inequality (to say nothing of deprivation) causes lifespan inequality, we also know that health inequality will cause income inequality.

One minor problem is the level at which this information is collected. When we're looking at groups of 2,000 people we really are looking in much too much detail. You'd only need a decently sized old agers home in such a district to rather sway the figures. I can point you to a couple of streets in the centre of Bath with an age profile wildly higher than that of the town or the SW in total. Because they happen to be the couple of streets where a long running (and very good indeed) charity run sheltered accomodation for old folks of the town. And this then brings us on to our second minor problem. The poverty rate (a useful synonym for the deprivation rate) is lower for the old these days than it is for the general population. Thus we would expect an area with lots of old folks to have a lower deprivation rate than one without.

These figures will, as with the earlier ones from the Marmot Report, end up being used to argue that deprivation and inequality kill therefore we must have more redistribution. You can hear the pencils being sharpened for the compsing of the tirades already. But this simply isn't what the figures are telling us because they simply are not measuring what it is assumed that they are.

No one at all is measuring the life spans of people born and or brought up in different locations. They are measuring the age at death of people in those areas, an entirely and completely different thing.

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Some political ideas are simply stupid

Written by Tim Worstall | Saturday 15 March 2014

Sad to have to say it but some of the ideas that come from our current political class are just so stupid that they should have remained unuttered. Like this one that's just come from the green wing of the Lib Dems:

Liberal Democrats want to ban all conventional cars by 2040 and allow only electric and ultra-low emission vehicles on the roads. Every diesel and petrol car would be scrapped by then or earlier if there are enough technological advances. The extraordinary policy, contained in the Lib Dems’ ‘green manifesto’ launched this week, has the backing of senior figures including party president Tim Farron.

Let us start from the idea that the IPCC is correct, climate change is a problem that we need to do something about. Let us also, arguendo, agree that Lord Stern was correct as to what we should now do about matters. Excellent, what we should do is have a carbon tax equal to the social cost of the damage that emissions will do. And, here in the UK, we do indeed have a tax that performs that function for us. The fuel duty escalator was specifically brought in to "meet our Rio commitments" and it is now higher than that $80 a tonne CO2-e that Stern insisted that the tax should be. So, by the very arguments that have been used to persuade us that something must be done we are already doing that something.

Further, Stern (and all other economists) insist that this sole interference into the price system is all that we should do: and they also all make it very clear indeed that near random bureaucratic interference into that  price system fixing is going to be welfare destroying.

For here's what we're trying to do. We want to prevent people doing what causes more damage in the future than that thing produces benefits in the present. And we also want people to carry on doing things that produce greater benefits now than damage in that future. Because this is the method by which we maximise utility over time. Which is what the carbon tax achieves. People are priced out of doing things with greater costs than benefits while still enjoying those actions which produce greater benefit than cost.

Then along comes some nitwit who says that even though the use of petrol engines will produce greater benefits than costs we must still ban them. This must be the action that is being proposed here: if technology has advanced enough in 25 years time that non-petrol engines will provide greater utility than petrol ones then we will all naturally switch. If, on the other hand technology has not so advanced then the banning will be an obvious reduction in utility.

And that is why this is such a stupid proposal. If technology advances sufficiently then the ban is unnecessary. If it does not then the ban is simply making people poorer, that being the same statement as reducing utility.

What makes the proposal monstrously stupid is that we've already done everything we were supposed to do to beat climate change from fossil fuel powered vehicles. We've already got that carbon tax at over and above the social cost of emissions. Anyone who doesn't realise that just hasn't been paying attention to all that we're being told about climate change. And people who haven't been paying attention really shouldn't be proposing political policy, should they?

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No, let's not expand the remit of the Low Pay Commission

Written by Tim Worstall | Friday 14 March 2014

Fundamental reform of the minimum wage is needed to keep the system that was introduced 15 years ago up to speed with the changing world of work, according to one of the policy’s key architects. Professor Sir George Bain helped formulate the scheme to tackle poor wages as founding chairman of the Low Pay Commission, the independent body which recommends pay levels to government. But he now wants the body to take on a wider remit, with greater powers. Prof Bain has worked with the Resolution Foundation think tank towards today’s(Thurs)) release of More Than A Minimum, a review of the minimum wage which recommends new ways to keep the commission relevant, now and into the future. Prof Bain said: “When I helped set the UK’s first minimum wage in 1999, it felt like an embattled experiment. Now the policy has the support of all parties and a powerful academic consensus shows it has raised wages without costing jobs.”

No, let's not do this. Quite apart from anything else that final sentence is blatantly wrong. The Low Pay Commission itself has pointed out that the level of the minimum wage of some years ago probably caused 30,000 job losses.

It simply isn't true that a minimum wage does not cause job losses: what matters is the rate of the wage and the significance of those losses. A minimum wage at £1 an hour would have no job losses because no one at all gets paid that rate. One at £15 an hour would have horrendous job losses. So no, I really don't think we want to have a quango cooked up and expanded by someone willing to deny the most basic point about the area under discussion.

But there's another much more important point here about bureaucracy. It's possible that the Low Pay Commission is indeed irrelevant. At which point we should abolish it of course, not attempt to expand its remit so as to give it something to do. And anyone looking at whether the LPC should expand, contract or continue should have had as part of their field of consideration the null hypothesis. Which isn't something that's going to come from the bloke whose baby it is.

This is all, I'm afraid, straight C. Northcoate Parkinson. We must constantly be on guard against bureaucracy being simply a bureaucracy: existing so as to gain budget and powers. And, I would very gently suggest, we should therefore assume at the beginning of all such evaluation exercises as this one, that the correct response is elimination. Only if extremely strong reasons for continued existence can be found should continuance be allowed. Sometimes this will be fairly easy: Royal Navy? Yup. At others times similarly so. Arts Council? Abolish, simples. But as I say, when the conclusion is that the remit should expand so as to make a bureaucracy more relevant then this is, of course, equivalent to stating that it currently has no relevance. Thus abolish.

If we're not brutal in this manner then we'll never get rid of any of them.

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The NHS is meant to be for patients, not staff

Written by Sam Bowman | Thursday 13 March 2014

Jeremy Hunt has annoyed people today by refusing to give NHS workers a blanket 1% pay rise on top of the incremental pay rise they were already supposed getting. That’s hardly a surprise: the NHS is a religion, and Hunt’s decision is the equivalent of giving the finger to the Pope. But he’s got a point.

According to the BBC’s Nick Triggle, “all NHS staff will be getting at least a 1% pay rise. Just over half receive incremental pay rises each year - determined by their length of service and performance. Those whose incremental increase is less will have their pay rise made up to 1%, but many will get more. Last year, the average incremental pay rise was 3.5%.”

In other words, today’s announcement means that NHS staff won’t be getting an additional 1% pay rise over their existing agreed pay increases. That’s a real terms drop, but lots of the coverage I’ve seen has suggested that this means that nurses won’t be getting any rise at all.

Remember that real private sector wages have fallen every year since 2010. Public sector workers already have greater job security than private sector workers, so it's difficult to see why they should be regarded as being automatically entitled to pay rises that most private sector workers aren’t getting.

Obviously, there’s no ex-ante reason NHS staff should get a pay rise. The point of the NHS is to provide care for patients, not to provide welfare to NHS staff. Since the NHS's budget is limited, a pay rise to staff means foregone spending elsewhere.

It’s worth noting that, at least according to the government, this pay rise would be equivalent to 6,000 nurses. Now, I don’t know how the NHS should spend its money – it may well be the case that NHS patients are better served by additional staff or more investment in medical equipment than they would be by this wage increase. Maybe a pay rise is the best way to improve patients’ outcomes, maybe not.

I’m left wondering why NHS pay should be a political issue at all. In the end, this story just underlines the need for devolution of pay bargaining to NHS trusts. National pay bargaining makes little sense given differing labour markets and patient needs across the country. In other words, a pay rise that makes sense for patients in Suffolk may not make sense for patients in Sunderland. We don’t want Whitehall to determine supplies of medical equipment or the allocation of labour hours between staff. Why should pay negotiations be any different?

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