The Pin Factory Blog

George Osborne's speech on tax yesterday, which he delivered at Policy Exchange, was structured around Adam Smith's four principles of taxation: efficiency, certainty, transparency and fairness.

On efficiency, Osborne said we needed to cut corporation tax in order to compete globally. On certainty, he said a Conservative government would think through tax policy properly, with an eye on the unintended consequences. So no more announcing a government policy (like the capital gains tax reforms, say, or the tax on non-domiciled residents) only to have to U-turn a few months later. On transparency, Osborne said he would not implement stealth taxes and would seek to simplify the tax system. On fairness, he repeated his pledge to abolish stamp duty on houses under £250,000 for first-time buyers and raise the inheritance tax threshold to £1 million.

All of which is welcome, sensible stuff. The overall message of the speech was: we want to cut taxes, and we will when we can – but politics means we can’t promise spending cuts, and the economic forecast means we can't be too radical about cutting taxes. From an electoral perspective, Osborne's probably got it right.

Of course, in the long term the best way of making the tax system efficient, certain, transparent and fair would be to implement a flat tax. How about aiming for the following by 2020: a personal allowance of £20,000, with a 20 percent flat tax on all personal income (whether from wages or capital gains, or whatever) above that. Abolish corporation tax and inheritance tax altogether – in fact, get rid of all the other taxes levied by central government. Then make local government self-financing with locally set (and thus competitive) property and sales taxes.

What could be more efficient, certain, transparent and fair than that?

Madsen sets out on his own site what should be the agenda for the second half of this coalition government.  In a speech to York University Conservatives he lists a programme that might reasonably be implemented by the coalition. It's radical stuff, starting with combining income tax and National insurance and moving on to allowing profit-making free schools and privatized universities, with a dash for gas along the way, and the removal of the cap on skilled immigration:

The first half has been dominated by the need to rescue the nation’s finances from the disastrous black hole into which Gordon Brown and his Labour government had sucked them.  The second half should stress essential reforms and a pro-growth agenda.  I set out a programme that might just fall within the range of what the coalition might be able to put through.

You can read the whole thing here (and it's quite short).

As if the first day back at school wasn’t bad enough, children starting secondary school in England this week will be the first to be legally required to stay in education until they are 17. Next year, the mandatory school leaving age will rise again to 18 for next year's secondary school starters, with the aim of getting more young people into further education.

And while those filtering through the school gates in Scotland can look forward to leaving the clutches of the education system at 16, they may now find themselves restricted from enjoying a drink in the confines of their own home until they are 21. Under new proposals, under 21s in Scotland will be barred from buying alcohol from supermarkets and off-licenses in order to stem the binge-drinking epidemic sweeping the nation.

The state would argue that these measures will prevent youngsters from falling into a life of booze-fuelled crime – a noble aim. But, why is it simply not enough to advertise the benefits of staying in school or the dangers of alcohol and leave young adults to choose? Indeed, the moves appear to be symptomatic of a wider belief that young people do not have the capacity to make informed and sensible choices. It is these young people that are then chastised for lacking personal responsibility. If the state wants young people to shoulder their responsibilities then it stands to reason that they must be given the chance to learn to exercise them. And that includes making decisions that might not necessarily be in their best interests and learning from them.

And, another thought (or three). First, if schools were forced to compete to attract pupils (as they would do under proposals to adopt a model of school choice in the UK) maybe they would do more to try to keep them there? Second, blaming cheap supermarket booze for our social ills ignores the deeper cultural issues that make British drinkers more susceptible to drinking too much. Countries with far less restrictive attitudes to alcohol tend to have fewer problems with youth alcohol abuse. Third, perhaps legislators need to consider that it is the existence of the welfare state that has promoted low levels of aspiration and personal responsibility among young people leading both to school dropouts and the existence of a binge-drinking culture?

According to Sir Paul Ennals, chief executive of the National Children's Bureau, England's education system is in danger of making pupils unhappy by pursuing exam success at all costs. His gripe is with the potential of certain schemes, such as school breakfast clubs and initiatives to make school meals healthier, being dropped as part of the package of cuts to public spending.

His criticism does make sense. If school budgets are cut, there will be less room around the edges to do the warm and fluffy things that could indeed making students happier. However, Sir Paul Ennals’ conclusion is largely inadequate. Rather than calling on government not to cut various schemes, this issue has to be seen in the larger perspectives of deficit and reform.

All sectors of public sector activity need to be cut. Although some items of spending have better claims to being saved than others (arts vs. cancer sufferers is a no-brainer), there should be no sacred cows. Education has areas in which savings can be made. In tough times most parents prioritise reading and counting over breakfast clubs and healthy meals.

Beyond the unpleasantness of cuts, reforms should continue to be the focus of Gove and all that he surveys. To put it bluntly, state schools need to function as any service industry, responding to the will of its customers. In the case of schooling, the customers are the parents. Despite the extension of academies and the hesitant free schools agenda, their local supermarket is still more accountable than their local state school.

The more government steps back from education, the more room there will be for the side orders that lead to a more balanced education. This could be along the lines of Anthony Seldon’s happiness philosophy or something else entirely. On the whole Independent schools manage to have a more balanced approach to educating children than state schools, so there is no reason why a voucher-based deregulated state system couldn’t compete, if that’s what parents want.

An American colleague sent me a recent speech by Governor Christie, New Jersey's new, conservative governor.

"By the time we got here," he say, "of the approximately $29 billion budget there was only $14 billion left. Of the $14 billion, $8 billion could not be touched because of contracts with public worker unions, because of bond covenants, and because of commitments we made accepting stimulus money. So we had to find a way to save $2.3 billion in a $6 billion pool of money. When I went into the treasurer's off in the first two weeks of my term, there was no happy meetings. They presented me with 378 possible freezes and lapses to be able to balance the budget. I accepted 375 of them."

Tough measures indeed, but necessary. Because nearly all US states have a balanced-budget provision. They have to balance their books, and there is little scope for fudging. That is why, just this week, Virginia – with a falling population and hard-hit by the credit crunch – has voted for spending cuts that would shrink spending to 2006 levels. Virginia legislators added plenty of spending when times were good: now they have to scale back again, and are trying to do so without cutting essential services.

A balanced-budget rule is something UK politicians should aspire to as well. All too often, government expenditure rises in the good times, but when there is a downturn we are told that it cannot be cut without damaging public services. Phooey. Governments just need to do what every family and business has been doing – identify the priorities, keep on with them, but cut out some of the inessentials. Spending has risen 50% under this government – but are our public services now 50% better? Hardly. We could lose all that spending without noticing the difference.

The incoming government will no doubt try to buy itself some time with public-sector wage and budget freezes. But that is no long-term solution. We need to re-think and prioritise what government actually does. And adopt a balanced-budget rule, so that the government sector's coat is cut according to the wealth-creating sector's cloth.

Ed Balls plans to give parents and pupils a list of legal rights, with guaranteed standards, and the right to challenge schools through an ombudsman, and in the courts, if the provision of this 'bill of rights' is not met.

This shows everything that's wrong in schools - and public services generally. They are centrally planned and uniform, and unless you have lots of money, customers (in this case, parents) cannot escape and go elsewhere. In competitive businesses, providers have to focus on customers and serving their needs. In monopoly state services, there is no need to bother. So as the complaints mount, ministers send out one central directive, then another – Stalin-style. None of it does much good, and the complaints continue. So then they move to give customers 'voice' – saying they are guaranteed this standard, that standard, this right and that right, and can have a say in how things are run.

This has never worked. Most parents, patients, and public service users do not want to sit on a governing board or have to bother with constant public meetings and elections (I sat on a school board for four years, and became an elector for my local hospital, and I must say that both were a complete waste of time). Public service users certainly don't want to be bothered complaining to an ombudsman or spend the nervous energy going to court if their treatment is poor. They just want a decent service. In a competitive sector, like supermarkets or filling stations, they can just take their custom elsewhere. They don't need to sit on the board of Tesco or Asda – they just go elsewhere, and that sends a vital signal to the providers about what customers actually want. Exit is far stronger, and easier, than voice.

It really does give the impression of beleaguered government strategists pushing phantom armies across the map. In a statement that shows the system's complete contempt for customers, school heads have said it will be a 'whingers charter'. Well, we need more people to whinge at bad service. But we also need to give them the power to go somewhere else. That is why a Swedish-style state-money-follows-the- child voucher system, which the Tories are considering, looks so attractive.

Dr Butler's book The Rotten State of Britain is now in paperback.

If your best mates clubbed together and gave you £103,000 when you needed it, you'd remember it, wouldn't you? Remarkable, then, that UK Work and Pensions Secretary Peter Hain didn't. He's accused of not registering seventeen donations towards his campaign for the Deputy Leadership of the Labour Party, totaling this amount. His forgetfulness is all the more astonishing when you consider that his campaign far outspent those of his rivals. So this was a large wodge of cash that public standards watchdogs weren't told about. Even Tony Blair, with his £500,000 salary from J P Morgan, his book deals and the rest couldn't simply miss £103,000.

Until Peter Hain went into Parliament, I always though him honourable. I opposed many of his views - and his abrasive ways of promoting them - but you can disagree with people and still think them principled. Politics of course forces people to compromise on their principles, so I've less respect for party politicians - but that's still no reason to accuse them of being crooked.

No, what's going on here is more subtle, and even more worrying. It's not that Peter Hain is a single rotten apple that can be ejected from the barrel and all will be well. No, they're all at it. Millionaire supporters funnel funds to the Labour Party through third parties who don't even know about it: half of Peter Hain's missing thousands is routed through some supposed think-tank; donors are attracted by the suggestion, however faint, that there might be a peerage in the pipeline.

What's wrong is that people in politics, both politicians and perhaps even more so their staff, think that they are above the rules. That their mission is more important than some tedious bit of book-keeping. That they can shuffle large sums around and nobody will notice. That how they raise and spend their cash is of little concern to the public.

Unfortunately, we live in an age of transparency, where every move that political folk make can come under the media spotlight. It means they have to be completely straight in how they conduct their business. The legislation to clean up party funding has been in place since 2000. It's truly alarming that so many politicians think it shouldn't apply to them.

Our latest publication – A Beginner’s Guide to Liberty, edited by Richard Wellings – is now available to buy and download from the publications section. This is a project I’m very proud of. It’s a short book, only about 100 paperback pages in total, but it provides an extremely good introduction to some of the most important ideas in political and economic theory. The guide consists of the following ten chapters, all of which are jargon-free and written in clear, simple language:

• The importance of liberty by JC Lester
• How markets work by Eamonn Butler
• Free Trade by Daniel Griswold
• Taxation and government spending by Daniel J. Mitchell
• Property rights by Karol Boudreaux
• Why government fails by Peter J. Boettke & Douglas B. Rogers
• Sex, drugs and liberty by John Meadowcroft
• Welfare without the state by Kristian Niemietz
• Banking, inflation and recessions by Anthony J. Evans
• The role of government by Stephen Davies

The original idea behind this book was to produce an easy-to-read guide to the things people need to know about free markets and individual liberty, and I really think that A Beginner’s Guide to Liberty fulfils that ambition. Enormous credit must go to Richard Wellings for this – he has assembled an exceptional team of authors, and done a great job editing the book into a cohesive whole. His remit was to produce something that was accessible to sixth-formers but interesting for everyone, and I’d say he has succeeded.

Our main ambition is that this book is read as widely as possible, so we are making it available to download for free. However, please also consider buying a hard copy – whether for yourself, or a friend or relative who would benefit from reading it! You can buy them directly from us for £10, including postage and packaging, and in doing so make a small contribution towards our future work.

Yesterday the Chancellor announced the great idea of withdrawing child allowances from those who shouldn't need them. It’s such a great idea that, desperate for money as he is, he has deferred it to 2013.

To avoid the expense of means testing, he plans to give all mothers child allowances, as now, but then ask “households with a higher rate taxpayer” to own up to taking the money on their tax returns. Then the Revenue will add the allowances to the tax bill. Give the mother the money and then take it back from the richest member of the household who may, of course, be a lodger.

But “households” don’t do tax returns, individuals do. So, whose tax return does it go on if the mother has little or no income? And suppose the mother forgets to tell the higher rate taxpayer that she’s had the money? Or he forgets?

The tax advantage of not being married, or in a formal partnership, will increase sharply. Didn’t David Cameron make a big fuss about promoting marriage? This does the opposite.

Finally, the bureaucracy in administering all this will increase sharply.

Osborne has made this change in a ham-fisted way that will remove most of the good that comes from it, and missed an opportunity for better reforms. Even Gordon Brown wouldn't have dreamt up an approach as silly.

Property is, for the majority of citizens, the single biggest investment made in a lifetime. Most people’s portfolios are far less diversified when you factor in the fraction that is dominated by house price movements. Indeed, many who would consider their wealth relatively ‘safe’ from fluctuations in market prices by keeping the majority in cash are far more dependent on economic circumstance than they realise, owing to the large investment they have made in bricks and mortar.

‘Sophisticated’ investors can hedge most investments through futures markets in the particular investment, but housing is unique in having a futures market that is ‘index-based’, i.e. you can hedge risk for the market movements as a whole, but not for your particular area or property. Property is inherently heterogeneous, and just as derivatives instruments have blossomed and specialised in other areas over the last decade, housing derivatives should do the same. Everyone has to buy a house, so why not allow people to hedge against the particular risk they are taking in doing so.

Credit goes to Robert Shiller for the popularisation of this idea, and interesting research (drawing from techniques of the biomedical sciences of all things) has been done into the nature of heterogeneous derivative instruments. I think that the broad argument for widespread involvement in such markets is worth restating though.

I would argue that recent events highlight the need for such a facility in the housing market. When house prices plunged in 2008, UK citizens where clearly horrified at the amount of their net worth that was evaporating after years rising in an overheated housing market. As a result, consumer spending dropped and recession deepened.

This wasn’t the first overheated housing market, and it surely won’t be the last; loose monetary policy seems to be a speciality of this generation of central bankers. I think this only strengthens the case for a hedging facility in housing. If people had less to lose from a drop in house prices, the economy would be more robust and efficient as a whole.

The argument for a more sophisticated futures market in house prices is even more convincing in the UK, where the proportion of buyers to renters is much higher and house prices in general are higher.

There is a need for this market, and clear profit opportunity for firms involved. I’ll keep harping on until more notice is taken.