Blog Review 941

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Something to celebrate: only 415 days to go!

And why not celebrate by sending unused shirts to.....

And for the future, could we all try to remember this simple political maxim?

So, did Bastiat actually say this or not? And if he did, where?

What to celebrate for Earth Day? How about capitalism?

This really isn't how to attract hard working foreigners to our shores.

And finally, why you shouldn't trust online polls.

Taxation and the budget

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Taxation is bad; the new budget reminds us of that important truth. Taxation takes their property from people and uses it for purposes other than those they might have chosen themselves. That this is done with state power makes it legal, but does not justify it morally. When two wolves outvote a sheep over the dinner menu, it may be democratic, but that does not make it right.

Taxation involves confiscation and coercion. We should not hide that unpleasant truth. Most of us tolerate taxation in return for the essential services it funds. In an ideal world our defence and judiciary might be funded by voluntary contributions, but in this real world essential services rely on tax revenues.

Taxation should inflict minimal damage on the economy. It should cost a fraction to collect of what it yields. It should come from income streams, taking a little for the public purse when money changes hands in earnings or sales. Taxes on capital are invidious because there is no income stream from which to take them, and they are also stupid because the capital would otherwise generate future income streams of profits, wages and sales.

Taxation should be transparent and predictable, and should fall on people who can pay it. The Adam Smith Institute has long campaigned to have low earners lifted out of income tax altogether, since they have insufficient money to pay it. The fact that they receive tax credits underlies this absurdity.

The new budget raises the top tax rate to 50 percent on high earners. It also increases taxes on their pension contributions, and removes their personal allowance threshold, imposing an effective tax rate of well over 60 percent. The Treasury blithely puts down over £7bn of anticipated revenue from this, but it will not yield that because most high earners will not pay it. At those levels it is worth employing accountants to shelter income. The Treasury will close some loopholes and the accountants will open more.

Some high achievers will go abroad, preferring the more benign tax climate of Switzerland to one which forcibly takes from them nearly two-thirds of what their talents and energies earn them. With them will go the jobs they create and sustain.

If the money taken by government actually provided good things, taxation might be easier to accept, but much of it is wasted, spent in useless ways on worthless projects. The new budget is very bad. It appeals to low sentiments of envy, and seeks its justification in an egalitarian ideology that has no place in the real world. The only comfort in it is that this is the last gasp of a dying government.

As a matter of fat...

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altWe’ve all sat in our seats on an aircraft before take off with the seat next to us empty. First we start hoping that no one sits there, then we hope that if someone must fill the space it’s not an excessive talker, or a noisy child, then our hope is vanquished. Down the aisle comes a 300lb lumbering hippo that is going to attempt to squeeze itself into the empty seat and in the process marry itself to you as well.  Into the seat they go and then the fountain of fat bursts forth and they spread themselves over you, enveloping your space and ensuring the next hours of your life are going to be excruciatingly uncomfortable. Why should we pay for this?

Airlines though are listening to the bulk of their customers, rather than their bulkier customers. United Airlines announced that it was seeking to charge obese passengers the cost of a second seat and Ryanair have revealed that over 30,000 voted in favour of charging overweight people a ‘fat tax’ when they fly. Those of the larger persuasion have to realise that space on an aircraft is at a premium and that paying for one seat when they comfortably fill two is sufficient for airlines to lose money whilst also causing discomfort to those next to them.

As the numbers of obese people steadily climbs airlines can no longer afford to treat them as single persons, while fair in principle the costs that they incur far outweighs the price they pay. Perhaps these extra costs will be a wake up call and change their eating behaviour. Or perhaps these costs will spark an entrepreneur into starting up Heavyweight Airlines or some similar named organization. The overweight though have to realise that, “obesity is always and everywhere an overeating phenomenon” and that they are no longer in the same weight class as the rest of us meagre morsels. (Apologies to Mr Friedman)

Blog Review 940

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How can we use fewer resources? You know, this walking more lightly upon the earth thing? How about just make the economy grow faster?

There's a certain disconnect between what journalists write about matters economic and what economists write about matters economic. Yes, even at the FT.

Netsmith does wonder though, whether alternative history as written by economists will catch on.

No wonder there is still controversy about what to do about finance: there's still controversy about what happened.

Good grief, a politician with interesting and admirable ideas.

It matters what the law says, not what was the original intention. And the unions aren't helping.

And finally, it appears that menu costs aren't really menu costs.

 

The biggest budget deficit ever

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£175,000,000,000. That's how much extra debt Darling proposes to load onto us this year, in the biggest Budget deficit ever.

Brown accused the Tories of unfunded tax cuts in the argument over reform of inheritance tax. But their doubtfully-funded proposals amounted to £2 billion. What about £175 billion of unfunded spending - over a quarter of all government expenditure?

Worse, Darling proposes a further £173 billion deficit next year. And that's assuming that we come out of recession before Christmas; if not, the deficit will probably be more than £200 billion.

Nor is this a short-term problem caused by the recession.

The recession has exposed a long-term problem that had been hidden by the previous boom. As I said yesterday, Brown presided over an enormous increase in government spending (to little discernable benefit), which even the huge tax receipts from the City and the property industry during the boom were not enough to fund.

And what does Darling propose doing to get us out of this problem? Nothing.

The proposed 50% tax rate for the rich (more on that shortly) serves no purpose other than Brown's political manoeuvres. Even on the Treasury's optimistic assumptions it will raise only £1.8 billion per year, a trivial 1% of the deficit.

No, the only thing he can do is fiddle with the figures. By increasing his estimate of long-term growth, claiming that he expects the economy to grow by 3.25% per year after next year, Darling was able to say that the public accounts would eventually be brought back into line. But that growth level looks unrealistic; in 2002, Gordon Brown's estimate of long-term growth was just 1.75%. Have things really got so much better now?

So we are faced with deficits for the foreseeable future. Over the next five years the government plans to borrow more than £700 billion. Anyone who intends to stay in the UK after that is going to have to pay for this folly.

Correction Mr. Darling: countries cannot inflate their way out of recession

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Somewhere in the hour-long spectacle that was today’s Budget Statement, Alistair Darling made a very interesting claim: “This Government, and others, have learnt from the historic economic mistakes of the interwar period, that countries cannot deflate their way out of recession."

This is a fascinating statement for two reasons. Firstly, because history proves no such thing. In fact, I can think of very few, if any, examples where actively deflating the economy has been attempted. By comparison, inflation has been the stock response by governments across the globe for three quarters of a century, and the results have included the Winter of Discontent and Japan’s “Lost Decade".

As for the inter-war period itself, a salutary lesson is provided by comparing the not-so-great depression of 1921-3 (Remember that one?) with the far longer and deeper Great Depression of 1929-1941. The economist Murray N Rothbard strongly argues that the crucial difference was that President Coolidge allowed the economy to rationalise itself and re-establish equilibrium pricing, whereas Presidents Hoover and Franklin Roosevelt sought to re-inflate the economy.

The second reason that it is a fascinating statement is that the opposition does not appear to be saying otherwise. David Cameron may have worked for the previous Tory administration, but there is no sign of him adopting its fiscal and monetary policies; nor is George Osborne a budding Geoffrey Howe. The Liberal Democrats’ Vince Cable publically advocates Keynesian economics. There is, in fact, no debate at all about whether “Quantitative Easing" and “Fiscal Stimuli" are the correct policies to follow – at least, not in Westminster.

And this demonstrates more powerfully than anything else the stifling consensus that seems to have settled on parliament. For an opposition to look emasculated in the face of a booming economy is understandable: it is hard to convince the revellers that the party cannot last. But as the UK suffers its worst recession since the War, one would have thought that somebody in opposition would suggest that the fault lay with the basic economic model underpinning Labour’s 12 years in office.

If so, one would be naïve.

Until the pips squeak

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It has taken a while, but the Labour Party has reverted to type. In putting the top rate of tax up to 50% for those earning in excess of £150,000 gross from next April, Brown and Darling have decided to turn the clock back to the 70s; going a fair way to undoing the brave work of Thatcher and Lawson.

As wrongheaded as such a socialist policy would be, this budget is not about the redistribution of money from rich to poor, but from private entrepreneurs to the public sector. Even in a deflationary period the size and cost of government is continuing to grow. If they can’t cut the cost of government now, how can we trust them to do so in the future?

Hiking up the top rate of tax is of course a massive disincentive for those earning over £150,000 gross to stay in the country. Although we are unlikely to see a massive exodus of people (after all many have already left), it is entirely likely that enough will leave to ensure that this policy will result in less money in the pockets of this improvident government than they would otherwise have got. Also, in times such as these, the government more than ever needs to back off and give wealth creators the room to set this country on the path to recovery: this government needs reminding that wealth is not created, but destroyed in the corridors of Westminster.

This certainly leaves the Conservatives in an interesting position. They will want to focus on government debt for now, but if in power there will be pressure for them to once again undo this tax hike on the highest earners and at least start the task tackling the most bloated government departments. Only time will tell if they have the leadership to do this.