Higher tax rates mean less social mobility

Don't believe me, believe the empirical academic research! When economists finish their PhDs and are looking for a job they produce a job market paper. Given the incentives here, these tend to be particular impressive pieces of work, whether in method, data, estimation or topic, and this from Mario Alloza at UCL (his website)  is no exception.

The paper (pdf) looks at changes in tax policy in the US and a representative sample of households between 1967 and 1996 and finds that a 1¢ in the $ rise in marginal tax rates leads to a 0.5%-1.3% decline in the probability of someone's changing income decile. For example, moving from being in the bottom 10% to being in the 10% who earn more than the bottom tenth, but less than everyone else.

According to Alloza's data, this effect is particularly significant at the bottom of the distribution—i.e. for the poorest people—and comes because taxes affect work incentives. When taxes are higher, that reduces the benefits to badly-off people from working harder and more and changing their prospects.

He says that we his result should make us more cautious of raising taxes to reduce inequality, because it will reduce opportunity and social mobility:

These empirical results have important implications for the design of fiscal policy. Tax reforms that reduce marginal rates are more likely to increase equality of opportunity (as measured by the degree of income mobility). This is because an attenuation of the distortionary effects of taxes in the labour market would make households more likely to take advantage of economic opportunities and move up in the income distribution. Therefore, fiscal policies that aim to reduce inequality should weight the trade-off in households’ welfare induced by the effect on income mobility.

Indeed, given all the costs of caring about inequality, and the very meagre benefits we gain from ameliorating it, perhaps we shouldn't care about it at all.

Ten initiatives to help young people: 9. No National Insurance for under 25s on minimum wage

Government has committed itself to raising the income tax threshold to the level of the minimum wage and indexing it there so that it will automatically rise to match any increases in the minimum wage.  The Adam Smith Institute has urged this for many years, largely on the grounds that if people are on wages that are reckoned to be the minimum, the state should not be taking money from them in taxation. There is one further thing that the government could do in this respect, however.  People on minimum wage are still liable to pay National Insurance, which has a threshold lower than that for income tax.  Since young people feature prominently among those on minimum wages, this hits them hard, taking money from those already struggling to get by on minimum wage.

It would help those young people if it were government policy to make the two thresholds the same for the under 25s.  That is, the NI threshold for them would rise to the minimum wage level, so that when government achieves its aim to equate the tax threshold with the minimum wage, those under 25 on minimum wage will pay neither income tax or National Insurance.

In large measure the whole system of National Insurance is an anachronistic anomaly.  Although originally conceived as an actual social insurance, it has long since ceased to be so.  There is no fund, and it operates like income tax on a pay-as-you-go system, with today's payments being used to meet the needs of today's beneficiaries.  The case for integrating NI into income tax is strong, but before then there is as a stronger case for calculating liabilities on the same basis as for income tax, with the same thresholds and exemptions.  If government feared how people would react when they saw how much tax they were paying in reality, they could run it as an "employment tax" running alongside income tax.

As a first step in that preferred direction, they should now have the NI threshold equated with income tax for the under 25s.  The further alignment of the two can be done later in systematic stages.  But the help given to low-paid young people would be immediate and effective.

Ronald Coase on how to solve the housing problem

Via Paul Walker, an interesting piece discussing how to apply the insights of Ronald Coase to sorting out the British housing problem:

As Pennington explains, Coase rejects this model. For him the costs are reciprocal – there are two sides each of whom is potentially imposing costs on the other. One wants to build houses, the other to preserve space. To the extent that one side gets its way the other suffers a loss. What we actually have is not an externality or pollution but a conflict over how to use land.

For Coase the solution was to assign a property right to one of the two sides and then allow a process of bargaining to take place. If the first group have the right then those who do not want development would have to pay them not to do it. If the second, then the developers (and ultimately the buyers) have to pay for the right to develop. Crucially it does not matter which of these two we go for: in either case we will end up with the outcome that maximises total welfare so long as the bargaining process itself is not too costly.

We have no doubt this would work and that should be good enough as a solution. However, while it would work we're really not convinced that it is the correct solution. For what it is saying is that those who wish to prevent building upon land that they do not own have some form of right to say or insist so. That's why they might be due some compensation from those who do build. And we rather reject that basic contention.

Property ownership does mean that one should be able to dispose of the property as one wishes. Consistent with this is that other people do not have the right to impose their views upon you of how you should dispose of that property. Thus we're uncomfortable with the idea of creating a right which can then be subject to such Coasean bargaining.

Far better, we think, to return to our basic idea. Simply blow up the Town and Country Planning Acts in their entirety. Yesterday, for preference.

There are times we despair over human intelligence

So our intrepid traveler goes off to Cuba, just to see what it's like. And he notes that no one has any money, everyone's dirt poor. And there's not really much of anything to buy with the money that people don't have. Also, the food is, to be polite, not great, tasting old and stale and frankly, there's better Cuban food at Miami airport. And there's a shortage of toilet paper and you'll really never find soap. And the best part of the trip was:

Is it true there’s no advertisements anywhere?

Yup! This was the coolest part. An entire week and a half of not being sold to by huge corporations. The only ads we saw were the aforementioned Socialist propaganda billboards on the side of the road.

The absence of those huge corporations being why you can't wipe your bottom, nor wash your hands afterwards, nor even get fresh and decent food to put in the other end. Nor, of course, the jobs, production or money to purchase that cornucopia of things that huge corporations produce.

Billboards reading "everything is for more socialism" are much cooler than anyone actually having anything.

We console ourselves with the idea that intelligent life might one day arise on this planet. Perhaps.

So how does this work then?

The European Union has announced that there will be, must be, lots more recycling. As we've said for many years now, we're all in favour of recycling that makes a profit. Profit being, of course, the value added by undertaking an activity. We've also been saying, for those same years, that recycling that makes a loss isn't a good idea as what's the point of destroying value, of making everyone poorer? But the EU likes targets and targets there will be and that's that then. But we're still hugely interested in how they're going to pull this particular trick off:

Europe’s throwaway society will come to an end by 2030 under a wide-ranging set of proposals by the European Commission to create what it calls a circular economy.

The plans include lots of recycling to get maximum value out of every raw material, redesigning to make sure what one buys does not become obsolete in a few years; and better design to make goods easy to repair.

It will also set tough targets for countries, including Ireland, to vastly reduce the amount of waste sent to landfills and touch every aspect of life, from fertilisers to food, and cars to washing machines and phones.

The new targets are slated to save consumers and producers billions of euro a year, create jobs and products, and make a real contribution towards protecting the environment and fighting climate change.

Other reports suggest that the plans will create 2 million jobs. And that's the bit we don't understand.

Jobs are, obviously, a cost of doing something. People want to get paid for doing them: and there's only us consumers around to pay them, whether through prices or taxes. So, the plan will mean that we must pay the wages of 2 million more people and yet it's going to save us money?

How does that work?

That's quite apart from the gross stupidity of this:

Changes in the design of products like phones, which contain tiny amounts of valuable but scarce minerals, should also improve Europe’s competitiveness in the battle with China and other countries for a share of these precious products.

The rare earths, which is what they're really talking about, are being given away these days at well under production cost. And global resources of them will last to some point near the heat death of the universe at current consumption rates. We're not even in a battle with China about them either. The whole idea is simply divorced from any form of reality.

Controversial = ill-suited for public discussion?

As we know, free speech has come under renewed attack recently, with calls from an influential portion of Britain’s student population for our universities to retract their provision of an effective platform for wide, open public debate. Renowned critic of Islam Mariam Namazie’s recent experience at Goldsmiths is yet another demonstration of this phenomenon, as her speech was severely disrupted by the university Islamic society (ISOC). An attempt at fair warning was offered by the society beforehand, however, in an email to the ASH society (Atheist, Secularist, Humanist) who hosted the event:

 As an Islamic society, we feel extremely uncomfortable by the fact that you have invited Maryam Namazie. As you very well probably know, she is renowned for being Islamophobic, and very controversial.

Just a few examples of her Islamophobic statements, she labelled the niqab- a religious symbol for Muslim women, “a flag for far-right Islamism”. Also, she went onto tweet, they are ”body bags” for women. That is just 2 examples of how mindless she is, and presents her lack of understanding and knowledge about Islam. I could go on for a while if you would like further examples.

We feel having her present, will be a violation to our safe space, a policy which Goldsmiths SU adheres to strictly, and my society feels that all she will do is incite hatred and bigotry, at a very sensitive time for Muslims in the light of a huge rise in Islamophobic attacks.

For this reason, we advise you to reconsider your event tomorrow. We will otherwise, take this to the Students Union, and present our case there. I however, out of courtesy, felt it would be better to speak to you first.

What I’d like to point out about this message is that it attempts to obscure what are genuinely worrying sentiments with simply mislead ones.

The writer notes that, at a time so sensitive for Muslims, it may not be prudent to have a speaker who actively criticises many of their beliefs and customs. I think there are issues with this perspective. Namazie’s criticism is largely intellectual and unlikely to lead to discriminatory outbursts – especially when you consider that her audience is constituted of young, liberal thinkers and not violent hooligans.

However, this point is relatively unimportant: consider that the writer says that Namazie is ‘very controversial’. The presumptuous nature of these words – the implicit identification of controversy with being inappropriate for public discusion – is what I find positively terrifying.

There is also the argument made that Namazie’s presence would ‘violate’ the ISOC’s safe space. Isn’t the point about spaces that there are lots of them and that they are separate? In what possible sense can it be claimed that their space has been encroached on – unless the ISOC would have their ‘safe space’ as the entire university and thus demand that any dissent be reserved for off campus.

Of course, that the ISOC eventually resorted to forcefully blocking Namazie’s attempt at generating discourse is disgraceful. But the assumptions evident in this email highlight another, more troubling issue: that in some areas of our student body, free speech is not being challenged on an intellectual basis, but forgotten and neglected without second thought.

This is why we support a carbon tax of course

Every time we mention climate change around here we get rather a lot of stick. People insisting that it's not happening, it's just a front to impose the Forward to the Middle Ages movement on us all and so on. And it's even possible that those things are true. However, that's not actually how we look at it. There's a sufficient head of political steam under this process now that we know that people are going to do something about it. Our energy is thus concentrated on trying to make sure that people don't do stupid things about it:

One of Britain’s dozen remaining coal-fired power plants is to be converted to burn wood pellets shipped in from North America, after the European Commission approved a £1bn subsidy contract for the project. RWE's Lynemouth power station in Northumberland is due to close by the end of this year under environmental rules, but will now be resurrected as a biomass plant following EU state aid approval for the consumer-funded subsidies. The 420 megawatt plant, which produces enough electricity to power 450,000 homes, could be up and running again within 18 months, subject to a final investment decision early next year, RWE said.

Shipping a million or more tonnes a year of low energy density wood pellets across the North Atlantic in the name of lower emissions just isn't sensible. In fact, it's stupid. But this is the sort of thing that happens when no one does in fact impose the correct solution to climate change if any solution is in fact needed. That correct solution being the carbon tax which we have been shouting about for this past decade.

The subsidy to this adventure will come in the form of the feed in tariff, at £105 per MWhr. That's more than the subsidy to either wind power or solar for goodness sake. And they don't even have to build the power station to get it, just convert already sunk capital.

This is not, in fact, just stupid, it's insane. And it's exactly the sort of uselessness that a carbon tax would stop. Stick the social cost of carbon into the price system and allow the market to work out what is the cheapest manner to provide the energy that people desire at that price. Rather than politicians and bureaucrats spraying our money around on things that patently are insane.

Ten initiatives to help young people: 8. Help with work-elated transport costs

The cost of travel to and from work falls particularly hard on young people because it often constitutes a higher proportion of their wages than it does for more established people.  The cost can run into thousands of pounds a year,.  Although young people (16-25) with railcards can qualify for one-third reductions on travel, these are only for off-peak travel, which is no use to people travelling to and from work at peak hours. It would help many young people if the cost of journeying to and from work were treated as a legitimate business expense and could be deducted from taxable income.  The proposal is that for those under 25, the ones who qualify for a young person's railcard, they would be allowed the cost of their commuting to and from work as a tax-deductible expense.  This would, of course, mean that the Treasury would receive less tax money from them.  But there would be gains, too, in that it would make work more attractive and would result in more young people in work and off benefits.  Furthermore, the increased spending power this would give some young people would increase the other taxes they paid to HMRC.

Someone in London starting out on perhaps £13,000 a year might currently spend almost £2,500 on an annual season ticket for London's Underground zones 1-6.  If this were tax deductible, it would take them below the threshold and out of income tax altogether.  Given the government's current commitment to raising the starting threshold of income tax to the level of the minimum wage, this would be of help to even more people in the future.

What is true for travel to and from work in London is true for other cities, albeit often on a smaller scale.  Living in city centres tends to be more expensive than living on the outskirts.  Young people are caught between the high rents of central accommodation and the high travel costs incurred by living further out.  Although yearly season tickets can reduce the cost somewhat, many young people simply cannot afford the capital outlay it would take to buy one, and have to settle for monthly or even weekly tickets.  Making commuting costs tax-deductible for people aged under 25 would be of immediate and practical help.

If you don't believe us will you believe Paul Krugman?

We've been repeating ourselves recently in shouting that the entire house price nonsense is simply a result of the restrictions on who may build what and where. The answer being to loosen or abolish those restrictions and the problems will go away. We have also been told that we're just thinking too simplistically. So, instead, how about President Obama's Chair of the Council of Economic Advisers and the Nobel Laureate Paul Krugman?

And this is part of a broader national story. As Jason Furman, the chairman of the White House Council of Economic Advisers, recently pointed out, national housing prices have risen much faster than construction costs since the 1990s, and land-use restrictions are the most likely culprit. Yes, this is an issue on which you don’t have to be a conservative to believe that we have too much regulation.

Here in the UK housing prices have been rising much faster than building costs. We've got the same problem with the same cause: land-use restrictions.

The answer is, as we've been saying and as is said there, relax or abolish those land-use restrictions.

Abolish the Town and Country Planning Act 1947 and successors.

Sense at last on the net migration cap

Few issues divide opinion as much as the net migration cap. The vast majority of the public think immigration is far too high. A small minority – myself included – is more liberal on the issue. Which is why I was encouraged to hear that George Osborne has, risking the wrath of the home secretary, indicated that foreign students will be excluded from official migration figures. It’s entirely possible, of course, that this is no more than a knee-jerk reaction to the news last week that net migration hit a new high of 336,000 in the 12 months to June. The news undermines both the Tories’ unachievable aim of reducing net migration to the low tens of thousands, and ministers’ increasingly fierce rhetoric on the subject.

But education is one of this country’s great success stories. Every year, thousands of students come here to study. Yet the government has made it difficult for them to enter, expensive to stay while studying, and virtually impossible to remain in the UK when their courses are finished, even though, as the Chancellor has pointed out, the British public is far more concerned with “permanent” migrants.

Migration Observatory research in 2011 found that only 29 per cent of the public included students among the groups that they think about when they think about immigrants, far less than the other major groups (asylum applicants, workers and family migrants). Of the students who arrived in 2006, only 17 per cent remained in the UK in 2011, and only 32 per cent of people want student numbers reduced. They’re right: we should encourage the best and brightest students to stay in Britain after graduating. We have a significant comparative advantage in higher education and if we fail to retain the best talent, we are wasting our excellent educational resources.

The government’s adherence to its crude migration target is clouding the debate on the costs and benefits of immigration, and threatening the UK’s reputation as an open, competitive economy. Excluding students from the cap would mitigate some of the harm caused by the arbitrary cap to British business – which has presented them from hiring the best programmers, engineers and scientists from around the world. It is often thought that only large corporations, especially within the financial sectors, recruit non-EU migrants. This is far from the truth: companies of all sizes and sectors benefit from employing non-EU migrant staff.

The government’s policies on immigration aren’t working. But excluding students from the net migration cap is a step in the right direction.