Taxes: best when broad

Here at the ASI we like taxes to be as predictable, as flat, as broad-based and as non-distortionary as possible—not to mention as low as possible. Until we've convinced everyone that we don't really need the government for most of the things it does now, we're going to need to raise revenue somehow. We want to do this in a way that reduces social welfare (and the economic activity that produces the goods to consume that produces the individual welfare that we sum to get social welfare) as little as possible.

Now we may sometimes need to use 'Pigovian' taxes—ones that discourage certain activities because they have negative outcomes on others—but most choices do not have substantial externalities. And in a society where property rights are clear and extensive, most substantial externalities will be priced in. For example, when roads are owned, their owners charge what we might call 'congestion charges': lots of problems arise only when some crucial good is un-owned and thus un-priced.

But generally we're just picking up revenue somewhere to pursue some government activity we view as worth the costs. Any non-Pigovian tax is going to reduce economic activity and welfare, but some more than others. For example, taxing investment into capital disincentivises most the activities which bring us greater productivity and wealth in the future. By contrast, if we could magically know, and tax, each individual's innate ability we wouldn't distort any decisions at all—because no decisions could change their tax liability.

The upshot of all of this is that broad-based consumption taxes are the best method of raising tax we can actually do. A 20% (or higher) tax on any good at any time leaves us as free to decide between options as no taxes, even though we have less in total to go round. By contrast any tax on capital or savings biases us in favour of current consumption over future consumption (and an income tax is partly a tax on savings).

The IFS tells us that scrapping all UK VAT exemptions would have raised £26-28bn in 2010-11 (since which we have grown substantially in real and nominal terms). In their view we could compensate everyone fully and still have £3bn left over.

A new job market paper from Bibek Adhikari at Tulane University in New Orleans takes this result further. Because VATs are usually implemented country wide, Adhikari builds 'synthetic controls'—essentially imaginary countries made up of weighted bits of other countries that didn't implement VATs—to properly test the effect of large-scale consumption taxation.

He finds that switching to consumption taxation leads to more capital invested per worker and higher total factor productivity (a measure of how good we are at using inputs), thereby raising output per head. In his words:

Five years after the reform, TFP of the treated group is 9.9 percent higher compared to the synthetic group and at its highest, the TFP of the treated group is 11.6 percent higher than the synthetic group.

So the ASI was right then!

Ten initiatives to help young people: 7. Charter cities

London acts like a magnet, drawing enterprise, industry and talent to its orbit, and leaving other cities, especially in the North, with fewer jobs and opportunities.  The proposed "Northern Powerhouse" is designed to redress this situation to some extent.  Young people below the age of 25 find it particularly difficult outside London because of a shortage of starter jobs.   A further initiative would be to allow selected Northern cities to opt for "Charter City" status, under which they would acquire a series of powers to determine locally things that are otherwise decided nationally.  This would include business rates and a raft of regulations.  Start-ups would be made easier, with specific measures to reduce the costs of starting businesses and the time it took to do so.  

The idea would be to attract investment and jobs, and to create new opportunities for local residents and those who chose to move there.  Young people would benefit from this along with the rest of the population, but there could be specific measures under the "Charter City" status targeted at the under 25s in particular.  They could be exempted from Council Tax.  They could be given assistance with accommodation.  Firms that took on people aged under 25 could be rewarded for doing so by lower rates and taxes.  Planning and zoning regulations could be eased for them.

The proposal for "Charter Cities" borrows something from the Enterprise Zones of a generation ago, but would in addition learn from some of their shortcomings and improve upon the original idea.  Much could be learned from a study of how successful cities abroad manage to make themselves attractive to new businesses and to draw in investment.  For the most part this consists not of handouts and subsidies, but of government, both local and national, removing some of the burdens it imposes on business, and lowering the barriers they must cross to establish themselves.

Germany's "bonfire of restrictions" post World War II led to the German economic miracle, and Hong Kong's famously liberal approach to businesses led to an explosion of wealth and opportunity.  The "Charter Cities" would aim to capture some of that approach and achieve some of that success.  Governments, local and national, would have to think long-term, postponing some of the revenues they could achieve in the present for the prospect of much greater revenues in the future, and the expansion of businesses generated by the measures would provide young people with the prospect of advancement.

Something to remember about COP21

Jeremy Warner is probably right about the outcome of COP21 here, that great gabfest to talk about climate change:

Ever clearer is that the debate on climate change is essentially over. Whether just a modern day delusion or not, virtually all political leaders now buy into the idea of man-made warming, and most of them seem willing to do something about it.

The question, as always, is what should be done. We have long taken the above view: the truth or not of climate change is not the important point. Politics is about what people believe, not the truth. Thus we've been advocating a carbon tax on the grounds that we know they're going to do something so we might as well tell everyone to do what will cure the problem, if it exists, at least cost. Usefully, it's also what every economist looking at the problem has also said, from Stern through Nordhaus to Tol.

However, there's an implication of that:

Much fiercer carbon taxes are coming, driving huge change not just in energy consumption and production, but in all the myriad industries that depend on hydro-carbons, from plastics to automotive, metal bashing and even many service activities, which can be surprisingly energy intensive.

That's actually not true, not here in the UK at least. Because we largely already have a carbon tax. It's not distributed correctly, this is true (too much on petrol, not enough on farming) but overall we're already coughing up about the "correct" amount as calculated by Stern (and more than Nordhaus or Tol would suggest for today). The combination of the fuel duty escalator, the EU's cap and trade, the minimum carbon price and so on, while they're not quite exactly the way it should all be done, do have roughly the right effect and size. According to Stern's numbers the UK should be paying something like £30 billion a year in carbon tax given the roughly 500 million tonnes CO2 a year. We're already paying that much when you tot everything up so we're done.

Yes, it's entirely true that some other people might have a lot of work to do to meet whatever is agreed in Paris. But as far as the UK is concerned we're done, we've already put the correct and recommended policies into place. We've nothing else that we need to do except perhaps a little tinkering here and there. There's most certainly no justification for significant rises in the general tax level, whatever COP21 agrees. Not that that's what we'll be told of course....

There's a very slight problem with asteroid mining

Much excitement as the US decides that it's just fine if people go space mining. Which is interesting of course, for the UN rules say that while you're entirely free to go mining you're not to do it for a profit, it must be "for the benefit of all". Which slightly puts a damper on things. But there's another problem which the new US rules don't address: it's still not possible to own a deposit or resource up there. You are, now, under the new US rules, which the rest of the world doesn't recognise, allowed to explore, find and mine something, for that potential profit. But as soon as you start doing that then anyone else who can get there is entirely allowed to go mine that same deposit. That puts another damper on the economics of the adventure. However, as we've said around here before there's a rather more basic problem with the idea:

If that proposal is too large to take seriously, your horizons may have become too Earth-bound. The would-be asteroid miner Planetary Resources launched back in 2010. Its investors include Larry Page and Eric Schmidt of Google, whose bet on driverless cars sounded pretty silly a few years ago as well. While space mining remains a moonshot, with vast challenges for its pioneers, the potential rewards are stellar. One estimate suggests a single asteroid could contain more platinum than has ever been mined on Earth.

Mining asteroids to provide materials to build something in space sounds like a great idea given the cost of getting mass into space. Very early American houses were built, sometimes, of brick carried as ballast across the Atlantic: it didn't take long for people to realise that digging up some American clay and baking it was a more sensible idea. So it will be up there, use the resources there, not carry everything with us.

However, those starry eyed at the idea of those vast resources of platinum. What is the Earth bound price of platinum going to be if we double the amount that humanity has to play with? Somewhat lower than it currently is would be our prediction. And the elasticity of demand is, with respect to price, quite low for this metal. Meaning that a large increase in supply will lead to a very large decrease in price.

Again as we've said before, finding a bit of platinum up there would allow it to be sold down here for a high price, but a bit wouldn't cover the fixed costs of going. And finding a lot would depress the price possibly sufficiently that finding a lot wouldn't cover the price of going.

Doesn't mean we shouldn't go, doesn't mean we shouldn't go mining, but our slide rule tells us that mining for precious metals ain't gonna be the way to pay for it all. Rather an interesting twist on Adam Smith's diamonds and water paradox really: the truly valuable thing up there is likely to be the water that humans desperately need and is currently in very short supply.

Good luck with that Jeremy, good luck with that

It's not unusual to find people arguing that the State should be given near fascist (in some cases, actually fascist) powers over the economy: but only if the right people are in charge. The right people being defined as those who would use those oppressive powers in only the manner that those proposing the powers desire. The usual answer to this is that that's not quite how democracy works. If you don't want your enemies (ideological or actual) to have such powers as the electoral cycle turns then you're really no business arguing that your folks would do just fine with them. Shuffling all the Social Justice Warriors off into the Bedlam they need to recover is admittedly appealing. Yet we do not recommend such precisely because such powers might be used against us, those who froth at the mouth over the joys of free markets and voluntary cooperation, in the fullness of that time and variance of who the public elects. Better that none have such powers, eh?

At which point we have this rather plaintive cry from Jeremy Warner (or perhaps the subeditor who wrote his headline), someone we usually rather agree with:

If the state must meddle, it should do it better

Given the pedigree of those who do go into politics and other forms of "public service" that meddling never will get better. The answer is therefore as we have long suggested. Yes, there really are things which need to be done and which only the State can do. Said State should limit itself to only those things covered by that intersection and refrain from doing things which can be done by the State but do not have to be done, and also avoiding those things which do need to be done but which will not be well done by the State.

Limiting government to what it must do seems suitable given the limited skills and talents of those who govern us.

Marianna Mazzucato, wrong again as so often

Marianna Mazzucato is the right sort of writer for The Guardian: as the Daily Mash puts it, that newspaper is wrong about everything, always. So, here she is telling us that it's very important indeed that government spend lots of lovely money on the area that Professor Mazzucato thinks important:

Growth is determined by strategic spending on areas that increase productivity, which in the UK is still below the OECD average. This includes investing in training, education, research and development, and state-of-the-art infrastructure. So while there has been a boost to some infrastructure spending, the lack of vision on what kind of economy we need for sustainable long-term growth means there has been little discussion about the direction of growth.

Growth is most certainly produced by investment spending, this is entirely correct. But as Matt Ridley has pointed out, it does rather depend upon who does that spending:

In 2003, the Organization for Economic Cooperation and Development published a paper on the “sources of economic growth in OECD countries” between 1971 and 1998 and found, to its surprise, that whereas privately funded research and development stimulated economic growth, publicly funded research had no economic impact whatsoever. None. This earthshaking result has never been challenged or debunked. It is so inconvenient to the argument that science needs public funding that it is ignored.

There's not much of a case left for government spending on such things after that, is there? Which leaves Professor Mazzucato's argument where it always has been, a justification for the EU to determine what is researched via research money funneled through the EU. Which is why, in our opinion, the EU funded her research in the first place.

The terror of the tampon tax

Following the Autumn Statement on Wednesday, women all over Britain have been in uproar. Why? Because George Osborne has decided to direct the £15 million pounds the treasury receives from the tampon tax into women’s charities and services. As an article in The Guardian says here:

Women will now fund services that protect them from violence perpetrated almost entirely by men. Hey, men, not only do you not have to pay for violence that you inflict on women, but when we get raped, abused or brutalised, we won’t cost the state anything either! What message is that sending other than violence against women is some kind of “women’s issue”? It’s not. It’s largely a male issue.

And The Independent has chimed in, too:

Since the Tory government has failed women in so many ways, it makes undeniable sense for it to help us to help ourselves. Give a woman a tampon and she’ll use it for free; teach a woman to pay tampon tax and she won’t even cost anything extra to the state when she gets raped, attacked or laid off at work.

So if you’re a woman escaping from an abusive relationship in the Chancellor’s Britain, you can now pay for your own counselling through the redistribution of an unfair tax on your sanitary products. Isn’t that just perfect? It has a beautiful circularity, kind of like the menstrual cycle itself.

However, this view is misguided. The government cannot get rid of the tax completely due to EU laws, so they’re going to receive an income from it, no matter how much various women dislike that fact. Isn’t it therefore a good thing Osborne is at least diverting it into something that the women who pay the tax will directly benefit from? Would these groups rather the government used the money to bomb Syria? Reduce the bank levy? Cut taxes on top earners? Probably not.

From 2010-2015 the Tories spent £40 million on support services and charities aiming to help women who have suffered from domestic violence or abuse. This clearly shows that yesterday’s policy announcement is nothing new: taxpayer’s money has always been going towards helping women's organisations. The difference is, women can now be safe in the knowledge that their £1.50 of tampon tax money per year is at least being spent on a cause they agree with.

Stop complaining about this decision, there’s no bloody point.

Ten initiatives to help young people: 6. A youth mental help body

A significant number of young people face mental health problems.  It might be bullying at school or at work, or sometimes difficulties encountered by discrimination.  Often it is depression, depression they find it difficult to cope with on their own.  Many face problems with their physical appearance, finding it difficult or impossible to conform to idealized notions of what they think they ought to look like.  This leaves them feeling inadequate and unhappy, which in turn can lead to mental problems. The NHS does not do well with the mental problems faced by young people.  Sometimes and in some places it does well, but on average it fails to meet an adequate standard of care in this area.  Too many young people feel they are facing their problems alone and cannot cope.  Some attempt suicide, some tragically succeed.  

It is perhaps time to recognize that young people have special mental health needs, and that these are different in some ways than those faced by the general adult population.  Young people have little experience of life, are only just coming to terms with who they are, and can feel isolated, helpless and confused.  This suggests the need for an independent body to which they can turn for specialist help.  Some youngsters find the NHS remote and intimidating, unable to offer the intimate and personal help that is often needed.  This is perhaps because the NHS tries to use its limited resources to best effect, trying to save lives where it can.  Some critics say it is under-resourced on mental health in general, never mind young people's mental health.  What the NHS spends on one thing cannot also be spent on another.

To prevent youth mental health losing out to more strident claims on resources, a separate body is needed, independent of the NHS, but with its services available free at the point of need.  Financed partly by the taxpayer, and party from the sponsorship of businesses and private benefactors, the body would be the natural one to turn to when young people needed help.  Advertising would help make its services widely known just as happens with the Samaritans.  With a name such as "Support," it could readily establish a brand identity such that young people would know whom to turn to when they found their problems more than they could face alone. It could provide expertly trained staff with experience of youth problems, people who would listen sympathetically and at a personal level.  It would not solve all the mental health problems faced by young people, but it could contribute to a significant improvement in the lives of many of them.

What a strange way to tax corporations

We've found over the years that Sir Simon Jenkins is generally sound on the subject of civil liberties. But he's a great deal less assured when it comes to the subject of economics. A pity, because he has decided to tell us all how corporations should be taxed: clearly within the purview of the economic way of thinking. He tells us that:

The answer is clear. Companies should pay corporation tax on the basis not of their headquarters or research base or place of origin.

They should pay on the proportionate spread of their sales. Likewise, individuals should pay tax to the country where they live or whose citizenship they enjoy – as is the case with most Americans.

That companies should pay on the basis of their sales is one of those Chesterton's Fence problems. Why doesn't the system work that way already? Because it has been considered and rejected, that's why. Such a system would mean that the company that made on single overseas sale would then need to file a full corporate tax return according to the rules of that country. This is not something that is likely to increase trade among small companies. And that's why the system is as it is.

It's entirely possible that it's not quite right in detail, but the current system operates on the basis that if you've a permanent establishment in a tax jurisdiction then you do indeed file a local return. And a permanent establishment, while it's not perfect, is used as a proxy for the corporation being a large enough actor in that local economy that it should be filing a tax return in it.

A business that one of us was once involved in once made a single sale of $6,500 gross value into India. The only sale into that country in a decade of operation. No sensible tax system is going to demand an Indian tax return on that basis, is it?

Sir Simon's suggestion also flies into the very face of the basic underlying rules of the European Union's Single Market. All companies are equal, from whichever jurisdiction, and may sell from any one EU country into any and all others.

Finally, look at the underlying idea. People buy things because they make them better off, by their own lights. The point and purpose of having an economy at all is to maximise this, to maximise peoples' opportunity to maximise their utility. We thus say, well, you, Mr. Johnny Foreigner, you have just made some of the residents of our country better off. Hmm, we'll have to fine you some tax for having done that you know.

Just not a sensible logical basis for taxation, is it?

Why Osborne should be applauded for his business rate devolution proposal

One of the biggest surprise announcements from today’s Autumn Statement – aside from the Chancellor’s spectacular U-turn on tax credits – was the decision to hand local councils full control of business rates. But it was a welcome one, too: devolving rates should deter excessive spending and stimulate competition between councils, while encouraging local government to be more responsive to business needs. When the Chancellor first mentioned devolution during his Conference speech in October, over 60 per cent of IoD members came out in favour of the policy. The devil is in the detail of course, but at face value it’s hard to see a downside to the policy. Some have pointed to the potential for geographic disparities, but those rural communities likely to have the smallest rates receipts are predominantly run by fiscally responsible Tory councils.

Others suggest that local mayors will succumb to the temptation to hike rates (currently, the uniform business rate is set at 49.3 per cent of a non-domestic property’s free-market rental in England and 48.2 per cent in Wales) to raise revenues without the consent of the local landowners. The assumption – or hope – is that accountability to their local electorate will help them resist.

But while business rates have long been criticised by businesses (and any cut welcomed), it is important to note that it’s not occupiers that end up shouldering the financial burden but landowners. So the notion than business rates cuts, as a result of devolution, could bring business into an area is a misconception: business rates cuts lead to rent rises in almost exact proportion.

And business leaders will need to be better engaged with local government to ensure councils are fiscally responsible. For example, city-wide mayors will be given the power to levy a business rates premium for local infrastructure projects, and as such businesses will need to make sure their views are properly voiced through their Local Enterprise Partnership.

From now on, it looks like businesses are going to get the local government they deserve.