The Scottish independence debate just got interesting

The Scottish independence debate just got interesting. Not over the future of North Sea oil or nuclear submarine bases, but on the dull matter of monetary policy.

In September, Scotland holds a referendum on whether to remain part of the United Kingdom or go solo. So far, many people just assumed that a 'Yes' vote would be crazy. Scotland already has devolved government, with its own Parliament in Edinburgh deciding matters such as health, education and welfare policy. Scotland has more than its share of MPs in the UK Parliament in London, who even get to vote on exclusively English matters. It also enjoys a higher share of UK public spending. Devolved powers and English subsidies...seems like paradise.

The polls reflected the strength of this 'No' case – but things are narrowing. The Scottish nationalist leader Alex Salmond is a wily politician. His party won a majority in the Scottish Parliament despite an electoral system designed to keep them out. He tells Scots not to throw away their one chance of doing something extraordinary. He affirms Scotland's proven ability to run its own affairs. And he makes the point that an independent Scotland would never have to endure a Conservative government ever again.

By contrast the 'No' campaign looks unambitious and condescending, suggesting that Scots aren't up to governing themselves. And the Conservatives, mostly pro-union, have such a polluted brand in Scotland that they kept quiet rather than adding weight to the 'No' lobby.

Brave, then, for Conservative Chancellor of the Exchequer to enter the fray, saying that an independent Scotland would not be allowed to keep the pound sterling. Nonsense of course: only draconian laws preventing cross-border sterling business could stop that. And with so much cross-border trade, forcing Scotland into a new currency helps neither country – though that is what Osborne is trying to imply.

The reality is that the Scots could use the pound (or for that matter the dollar, euro or yen) but would have no say in the currency's management. But Osborne insists that the Bank of England would set interest rates and create money according to the needs England, Wales and Northern Ireland – not some foreign country called Scotland. Again, that is over-egging it: with so much cross-border trade, the Bank would have to take account of conditions in Scotland when setting its policy.

So the Scots would be like Ecuador, Panama or El Salvador, who use the dollar but who have no voice in US Federal Reserve policy. And just as they have no hope of the Fed bailing them out in a crisis, Scotland cannot expect any Bank bailouts either. That sounds bleak until you remember that Panama's banks are some of the world's soundest. They have to have big reserves precisely because there are no bailouts. So that might even make Scottish banks more attractive in these uncertain times.

Up to a point. The Scottish banks, or government, would still have to create a financial buffer big enough to ensure that Scotland's financial sector can keep standing without Bank of England support. It is a big ask: the Royal Bank of Scotland alone would need billions of new capital to let go of the Bank of England. Where does the money come from? The worry is that Scotland's huge financial sector would up sticks and head south, where it could still cling to nurse. And that anyone left behind would have to offer investors sky-high interest rates to reflect their risky go-it-along policy – which they would in turn have to pass on to borrowers, like people with mortgages.

The wily Salmond will have some answer, of course. The pity is that we have not had this rather critical debate until now. It would certainly have made the whole campaign a lot more interesting.

Does the NYT actually read its own editorials?

The New York Times is complaining bitterly that the workers at the VW plant in Tennessee didn't do what the NYT think that the auto workers should have done. That is, they voted not to have a union to represent them:

The “I am satisfied with my pay” rationale for voting no is also problematic. Why are VW workers in Chattanooga satisfied with making less than unionized Volkswagen workers in some other countries? Do they work less or contribute less to bottom line? Are they less skilled or less reliable?

By voting no, workers in Chattanooga very likely not only limited their own pay raises, but probably those of their relatives, friends and neighbors. That’s because the higher pay that generally results from collective bargaining at a major employer tends to influence the pay scales at nearby employers, even if those other workplaces are not unionized.

Please note that I've not edited or elided here: these really are the two paragraphs as they first laid them out. And it's things like this that make me wonder whether the people who write these editorials ever bother to read them. For they've used two entirely contradictory arguments about what explains wage rates, one after the other.

That first argument is that workers in different places should be paid according to the productivity of their labour. Doesn't matter what local wage rates are, if you're adding $x to the value of a car then your wage should be $y.

The second argument is very different: it is stating that if local wages are higher in general then your wages, in that locality, will be higher. If car workers in Tennessee are being paid more money then the people who flip hamburgers in Tennessee will also be paid more. Not that there will be any change in the value the flippers are adding, no change in their productivity, just that because local wages are higher then all local wages will be higher.

And that's why those two views conflict. Either wages are determined by productivity, not location, or they're determined by location not productivity. Trying to claim both in the same piece is just a bit much for me.

As it happens it is the second argument that is correct. Wages are determined by the best available alternative job for that skill set in that location. Someone able to make cars productively somewhere there are no cars to make won't get a carmakers' wage. But if carmarkers' wages are high then yes, given that being a carmaker is an alternative to flipping burgers then where there are high carmakers' wages then burger flippers' wages might well rise. Location, not productivity, is the key.

What makes it all so annoying is that one of the very best explanations of all of this is by Paul Krugman. Who is, perceptive readers will note, the economic columnist writer for, umm, the New York Times. You think they'd give a shout out down the corridor or  something when composing these editorials, wouldn't you?

On why the Club of Rome was wrong

I think we all recall the Club of Rome report that came out in the early 1970s? That all minerals were going to run out imminently and that therefore by today we'd all be dead?

I've recently found out that it all depended upon an assumption which was questionable to be polite about it. That assumption being that mineral resources were around ten times mineral reserves. Thus we can look at the official numbers for reserves, work out how much is used each year and thus work out when the resources will run out. Add in a bit of growth in consumption and we get to scarily close, in historical terms, numbers for when we are all savages plundering the decayed remnants of our civilisation.

The problem is that this assumption is untrue. Not just a bit off, wildly inaccurate even, but just plain flat out wrong. For there is aboslutely no relationship at all between mineral reserves (the working stock of current mines, largely speaking) and mineral resources (again largely speaking, where we know we could go and open new mines). Simply nothing at all: for metals like germanium, gallium, tellurium, there are no reserves at all, certainly no resources and yet there's vast amounts of these metals lying around all over the place. For the first two we throw away many hundreds of times current snnual usage in minerals that we already process, we just don't bother to extract them. For others like, say, potassium for fertilizers reserves are some 50 odd years while resources are 13,000. To claim a 10:1 ratio is just nonsense.

But it is nonsense that leads to the desired conclusion. For financial reasons reserves are rarely more than 30-50 years' worth of production. So claim that resources are ten times this, add in some growth in consumption and you will always come to the conclusion that there's not that long before we all die AIEEEEE! Thus the conclusion reached by the Club of Rome is something that is baked into their assumptions, not a reflection of anything about the real world that the rest of us inhabit.

There's more though! While reading through these reports to work out what they were really saying I came across this paper, A Comparison of the Limits To Growth With Thirty Years of Reality. Essentially it's a defence of the fact that nothing the Club of Rome predicted actually happened but just you wait, it's about to. And in this paper I came across this delightful point:

First, it is assumed here that metals and minerals will not substitute for bulk energy sources such as fossil fuels.

What? But, but, that's what renewables are! We substitute silicon, gallium, a bit of germanium (other designs use cadmium and tellurium etc) for the fossil fuels we would use to generate electricty by making those metals into solar cells. Wind turbines are using aluminium and rare earth metals to do much the same thing. The entire point of this Great Green Gambit is that we're using metals to substitute for fossil fuels.

The first report got the availability of minerals and metals wrong, howlingly wrong, and that is what would lead to disaster. This second report agrees that metals are easier to find than that but then goes onto state that we won't actually use them and therefore diaster will follow.

Both reports are, therefore, wrong. Unfortunately, the people who rule our world tend to believe the reports.

So how's this Bolivarian Chavismo working out then?

It has to be said that this Bolivarian Chavismo, socialism with a Venezuelan face, really isn't working out all that well. A few months back we had the absolutely absurd story that people were using high tech gadetry like smartphone apps just to work out which shop had toilet paper in stock. Things are going downhill from there:

At least three airlines have grounded flights to and from Venezuela so far this year, in part because the nation's government owed the carriers $3.3 billion in foreign exchange they need to pay operating costs. ........Carmakers are also in trouble. Toyota Motor Corp. is halting production in Venezuela, while Ford Motor Co. is reducing output. A mere 722 vehicles were sold in a country of almost 29 million people last month. Trade group Cavenez reckons this amounts to an 87 percent drop in sales in one year. Ford’s chief financial officer, Robert Shanks, understated the problem when he told Bloomberg last week that “price controls and a very limited and uneven supply of foreign currency to support production, have affected output adversely.” So adversely that Chrysler, Ford and General Motors produced no vehicles in Venezuela last month. Business isn't much better for newspapers. In the last six months 12 papers have shut and more than a dozen might cease publication if the government doesn’t sell the newspapers enough foreign exchange to pay for imported paper. .......A greenback in the black market now goes for 84.2 bolivars, or 13 times the official rate. ......With the highest inflation on earth, rampant violence, declining oil output and a hobbled private sector, Venezuela seems instead to be on a sustainable path to economic ruin.

I'm not sure that anyone would have the chutzpah to claim that that is all a mark of success.

The basic problem was an old one that confronts socialists. Desiring to reduce inequality might be something that I'm not very concerned with but it's a legitimate view to hold. Desiring to improve the position of the poor is one that I do agree with. But either of these things cannot be done by screwing with the market. For doing that is going to, inevitably, lead to the results above.

As I mentioned a couple of days back if you institute price controls then if you set them high, over the market clearing price, then you'll get a surfeit of whatever it is that you've just controlled the price of. If you set it below that market clearing price then you'll suffer a dearth. And if you set it at the market clearing price then why on earth are you bothering to control prices?

There is just no way out of this problem.

Unless, of course, you don't screw with the market as your method of increasing the incomes of the poor or of reducing inequality. And the most obvious method of doing that is to tax and then redistribute that money to said poor. Obviously this can be overdone but it is indeed what every country currently does do and they all manage to keep airlines flying, toilet paper on the shelves and the exchange rate within sight of the official numbers.

That, according to what they said at least, they wanted to move Venezuela a little in the direction of Sweden's icy social democracy isn't something we should condemn them for. For being complete fools about how they went about doing so perhaps is.

The annuities market

The Financial Confusion Authority (FCA) has just spent a year, and a massive amount of our money, discovering that some annuities are better value for money than others. Fancy that!  Some brands of corn flakes are better value than others too.  Some brands of corn flakes are more trustworthy than others and the same applies to annuity providers.  Consumers consider it good use of their money to pay a premium for security.  And who is the FCA to tell them that they shouldn’t?  According to the FCA, differing annuity payments means the market is “disorderly”.

They now intend to spend a further year considering what to do about it, i.e. interfere further in the market and thereby raise the total costs for all buyers of annuities.  Yes, of course financial markets need regulation, as do all markets, but the excessively detailed interventions we have witnessed since Gordon Brown gave us the Financial Standards Authority have eroded the very value for money these regulators were set up to achieve.

Regulators were created to bring about fair, competitive markets and then step away leaving choice to consumers.  Of course this means that the necessary information should be provided, be it the weight of a packet of potatoes or the amount of the annual annuity. The consumer is not helped by information being excessive or over-complex.  The regulator should be able to specify the key facts to be provided by annuity sellers in two days, not 12 months.

The primary mission of any organisation is to survive and, better, to grow.  The FCA is no exception.  The reality, as has been shown before (“I dreamed a dream of the FCA” 29 April 2013 and other ASI blogs and publications) is that the FCA is unnecessary.  The little it achieves could be handled by the Financial Ombudsman Service and Office of Fair Trading.

They key lesson from these two years of FCA self-promotion is that it is struggling to justify its existence.

In which I fully support Natalie Bennett of the Green Party of England and Wales

I should, I suppose, support Natalie Bennett of the Green Party of England and Wales, given that I publicly supported her at the time of her election. But I do have a feeling that this support she's about to get from me will not be quite so welcome.

She's come out in an official party document demanding that everyone who rejects the science of climate change be fired from government: apparently elected or unelected.

Ms Bennett said: "We need the whole government behind this. This is an emergency situation we're facing now. We need to take action. We need everyone signed up behind that." Pressed on the issue, she agreed that even the chief veterinary officer should be removed if he didn't sign up to the view on climate change also taken by the Green Party. A policy document released by the party said: "Get rid of any cabinet ministers or senior governmental advisors who refuse to accept the scientific consensus on climate change or who won't take the risks to the UK seriously." Ms Bennett added: "It's an insult to flood victims that we have an Environment Secretary (Owen Paterson) who is a denier of the reality of climate change and we also can't have anyone in the cabinet who is denying the realities that we're facing with climate change." She said her party took the consensus view shared by many other organisation including the Intergovernmental Panel on Climate Change.

This is, of course, a betrayal of all that is holy about democracy and so we'll not be having with that. However, let us just put that to one side for a moment and think through, properly, what is the accepted science of climate change.

We can start with the SRES: these are the economic assumptions that go in at the beginning of the process. How many people will there be, at what level of wealth, using what technologies: these estimates produce the emissions numbers that then do into the climate models from which everything else is derived. We have four families of such scenarios and they run A1, A2, B1, B2. A largely stands for a capitalist economy red in tooth and claw, B for something more akin to a caring sharing social democracy. 1 means a more globalised economy than the one we have now, 2 means a more balkanised one, one more autarkic than at present.

In terms of human flourishing, the wealth of people in the future (and do recall that wealth is not simply more things or more consumerism, it is an expansion of the possibilities available to people),  then as we would expect the capitalist bit produces better results. But what's even more interesting is that a more globalised result produces better results than a more autarkic one. In fact, even in terms of emissions the globalised (whether capitalist or social democratic) families produce fewer emissions than the autarkic ones. Thus we can see that the science of climate change insists that we must increase, not decrease, globalisation.

This is not, to put it mildly, something that Ms. Bennett believes nor the Green Party of England and Wales. But under this stricture proposed by those very people we will simply have to fire from government everyone who opposes greater globalisation. Sad but there it is, we do have a planet to save after all.

We can go further as well. As My Lord Stern has pointed out (and as have eminences like Richard Tol, William Nordhaus, Greg Mankiw and, in fact, just about every economist who has bothered to look at the issue) the correct solution to the results that come from the IPCC is a carbon tax. Of some $80 per tonne CO2-e in fact according to Stern. And it's well known that UK emissions are around 500 million tonnes. And also that we already pay some swingeing amount of such Pigou Taxes: the fuel duty escalator alone now makes petrol a good 15p per litre more expensive than it should be under such a tax regime. And there are other such taxes that we pay, so much so that we are already, we lucky people here in the UK, paying a carbon tax sufficient to meet Lord Stern's target (which is, it should be noted, rather higher than what all the other economists recommend: we're not stinting ourselves in our approach to climate change).

We don't quite pay it on all the right things as yet, this is true, but the total amount being paid is about right. We just need to shift some of the taxation off some products and on to others. Less on petrol and more on cowshit for example.

That is, according to the standard and accepted science of climate change we here in the UK have already done damn near everything we need to do to beat it.

This, in turn, means that we now have to fire everyone who disagrees with this application of that accepted science. Which means we get to fire Ed Davey for suggesting more windmills for example. We don't need any other schemes, plans, subsidies, technological boosts nor regulations. As Stern and all the others state once we've got that appropriate carbon tax in place then we're done, problem solved. We just then sit back and allow the market to churn through the various options now that we've corrected the price system for externalities.

All of which I think is rather wonderful. Given that the Green Party is very much against globalisation then their demand is that no member of the party can ever be employed in a senior political or civil service role. For globalisation is a cure as the settled science of climate change insists. Indeed, it's one of the basic assumptions that go into the original models. And we also get to fire everyone who comes up with any scheme for regulation or subsidy, given that these are all contra-indicated by the accepted solution of the carbon tax. And finally, do note that we're already paying enough in green taxes, we've only got to tweak, in a minor manner, what we're paying them on in order to have completely solved the problem. And, as Ms. Bennett states, we now have to go and fire absolutely everyone who disagrees.

Which, given that I seem to be the only person who has actually read all of this guff, understood the implications of it and managed to piece it together makes me Prime Minister, doesn't it? Or Grand High Panjandrum or something? I seem to have convinced Matt Ridley of this over the years so perhaps he could handle the Lords for my new government.

So when do I get to meet the Queen?

Scottish rates aren't fair

Marcus Buist argues that Scottish business rates distort economic activity by reducing incentives to improve properties and due to the lengthy gaps between revaluations and proposes abolishing the system, considering a number of alternatives.

Introduction

Although the UK as a whole is at last escaping recession, there is great regional disparity in the growth figures. Scotland has performed relatively well through all of this, but despite strong growth in some sectors the recovery remains uncertain.  It is clear that the current level of poundage in Scotland, though no higher than the level in England, has forced many firms to close, and hampered the ability of many other firms to save or to invest in restructuring the supply side of their business. A large number of empty commercial properties have become involved in a rates trap, whereby the revenue gain from returning them to the commercial market would be less than the amount they currently earn from any long term lease they may be under while sitting empty. The scheduled 5.6% rates increase from the first of April 2013, will exacerbate the problem, imposing an effectively arbitrary burden on private firms. Although the Scottish Government has determined to delay any reappraisal of business rates until 2017, it is vital that proper consideration is given to which reforms, if any, should be implemented. The substantive area for debate, however, remains the structure of local government finance.

Property taxation as a whole is essentially a Medieval and Victorian solution to the problem of local government finance, and is perhaps no longer appropriate given the increased demands on public spending and the changed business environment.  Additionally, it is unclear whether devolving powers over the level of taxation to local government would encourage fiscal responsibility or instead permit a short term binge of ‘tax and spend’ that would go unpunished at the ballot box. While local accountability and local control are at the heart of our philosophy, this principle is secondary to our desire for low taxation as a means of maximising personal freedom.  It is impossible to argue, from a truly liberal perspective, that semi-local socialist fiefdoms should be allowed to impose whatever burden they chose on taxpayers, or that this form of local control should trump control by the most local of all agents: the individual themselves.

Why Abolish Non-Domestic Rates?

The desolation of the Scottish high street is a social as well as economic tragedy.  Like council tax, business rates are levied on the basis of property value and not income. As a result, falls in consumer spending and profitability have no impact on the tax status of commercial properties. As town centre businesses operate the most valuable properties in proportion to their incomes, their share of the burden of rates is disproportionally great. The price of maintaining a presence inside towns and cities can become discouragingly high, leading to closures of ordinarily profitably stores. This exodus from the central business district further reduces the appeal of surviving businesses, leading almost inevitably to further closures and further unemployment. It is unsurprising that a sense of ennui and malaise should set in amongst local residents experiencing this process.

Property taxation requires regular revaluations of commercial property in order to accurately assess a fair tax bill. These valuations, however, are costly in both political and financial terms and so are routinely postponed.  Consequently, long term shifts in business activity and property value go unnoticed by the assessors, further distorting the link between ability to pay and the actual rates payment. A similar problem has emerged with the council tax system, which bases its charges on the domestic property market of 1991. The subsequent boom in property asset values was uneven across the country, though particular pronounced in the south east of England, London and Aberdeen. Homes in these cities are charged on the basis of valuations they have long since superseded. Businesses and homes located in beyond the areas that most immediately benefited from the credit bubble might well wonder why the tax system should deny them a competitive advantage through lower rates bills.

The retail letting market in Scotland has moved in the direction of long term leases to chain stores. These leases are often high value, and thus represent a sustainable means of paying the rates. As consumer demand falls however, and firms seek to consolidate their business, many of these stores will be closed even while the lease is maintained. The high level of poundage prevents long term rental agencies from returning their empty properties to the market at lower rental values. The present system encourages these landlords to keep existing leases in place in order to raise sufficient sums to pay rates, even if that property remains vacant. These leases remain unbroken as rental agencies are unable to find new customers for their properties, as prospective business are both unable and unwilling to pay the overhead cost of rates.  The business demand for property in recession is all too often depressed bellow the fixed costs of rates, and as with all interference with natural market pricing, business rates suppress the latent urge to regenerate empty properties. While there are reliefs offered to reduce the rates trap, these have been recently curbed from a 50% reduction to a new regime whereby firms are liable for a full 90% of the charge.  CBI Scotland have rightly labelled this “a tax on distress” as it hampers the efforts of new enterprises to regenerate business areas that been made vacant.

Property taxes are out of step with modern business environments. Large profits may be made in industries with a lower rateable incidence than less profitable businesses that are still dependent operating out of rateable properties. The total effect of NDR skews the market and places a regressive burden on many key industries. This economic distortion not only blunts growth, but harms the social fabric by penalising small and traditional businesses. While the promotion of low taxation is vital for the creation of jobs and wealth, market distortions created through an uneven tax base and a complex system of reliefs are not to be welcomed.  As the current system of reliefs is complex; the administrative cost to business in determining which reliefs are available is considerable. In addition, taxpayers are required to fund the administrative cost to the Scottish Government and unitary authorities. When spoken to, few council workers in either finance or business rates departments seemed to understand even the basic outline of how business rates are collected; a finding which confirms the present inadequacies in the structure of local government finance. Equally, the tax advantage for charities damages the ability of for-profit business to compete on the high-street. This can lead to high-streets being stripped of all shops bar those who operate with charitable status. The current patchwork of reliefs distorts the market by favouring certain industries for political reasons. The Renewable Energy Relief, for instance, encourages the construction of inefficient forms of renewable power at the expense of potentially cheaper alternatives. This relief benefits the already wealthy over smaller businesses, which are less able to afford entry into the renewables market. The cost of multiple reliefs comes at the expense of lower marginal rates of poundage which would be of benefit to a greater number of businesses. While the Scottish Government may wish to boast that the reliefs programme is more generous than equivalent schemes in England, this claim has to be balanced against the reality that this political gesture comes with the opportunity cost of fairer taxes for everyone.

Conversely, any desire for reform must be measured against the political and financial cost of restructuring the tax system. Tax simplification can easily be labelled a tax increase by political opponents, as in the case of the “pasty tax” and the “granny tax” following the 2012 budget. The desire for reform of the operation of reliefs must be measured against considerations that rural areas and selected small businesses benefit from targeted reliefs, and that challenging these business perks, if handled indelicately, could be politically difficult. Many of these businesses are vital community hubs; closure of these businesses due to higher rates bills would have considerable social implications.  Any reforms would have to be piloted with considerable care in order to ensure that they carry public opinion with them. The political dimensions of reform will most palatable if marketed as a means of saving jobs and high streets from continued decline, emphasising the positive role for economic freedom in revitalising Scotland’s excluded towns. Policy implementers face a further dilemma, as once there is common agreement on the need to abolish rates, the issue of with what should they be replaced emerges. As no option offers an immediate panacea for growth and revenue, the decision as to which policy option should be selected is difficult indeed.

The Next Steps Forward: Options for reform

The rates system is unfair, and illiberal. Non-domestic rates should be replaced with an alternative form of business taxation based on income, land value or total sales. These alternatives could potentially use existing information such as VAT returns or corporation tax receipts to calculate the local tax due. This should ideally save additional administration costs that would be necessitated by taxing business on some new basis.  It might be possible to abolish business rates altogether if a proportional increase was made to the headline rate of corporation tax or significant cuts were made to public spending. This could further save on administration costs and the dilemma of double taxation of income. Unfortunately, this model would eliminate the possibility of local control and accountability.

Abolition with an Increase in Corporation Tax:

Such a model provides the greatest administrative savings for both private and public sectors. Moreover, the corporate tax model is more responsive to market forces than business rates. Resultantly, businesses would be more able to absorb economic shocks, while providing a proportionally fairer rate of tax for the high street. Conversely, increases in headline rates of corporation tax may discourage business investment in Scotland, putting certain Scottish businesses at a competitive disadvantage when compared to other EU and UK companies. Further, this option jars with the present localism agenda, taking little account of regional variations or preferences. Regrettably, tax avoidance by major firms might well discredit this form of taxation, as small and medium sized enterprises perceive themselves to be paying an unfair proportion of the overall tax take. The greatest concern by far remains that firms might relocate elsewhere or decline to invest further in any Scottish centres of industry. Scotland’s market share of UK wide FDI employment has risen in recent years to 16% of the UK total, with 30% of this investment directed at manufacturing. Scotland is therefore highly dependent of foreign direct investment; any shift in investment behaviour away from manufacturing in Scotland would be harmful Scottish employment and prestige. It might be possible abolish rates outright without raising taxes, but only if the Scottish Government or 32 local authorities were prepared to find £2.252 billion in savings, which would cover the tax take for 2011-12. While public spending at national and local levels remains wasteful, this reduction in would still be a considerable undertaking. There is currently little appetite in Scotland for further reductions in public expenditure, beyond the still popular reductions in welfare spending being pursued at Westminster. This option is equally impractical and sadly must be dismissed at the present time.

Business Income Tax

BIT shares in many of the advantages of the previous option; however, it could additionally be altered in line with local decision making. Despite these advantages, intelligent solutions would have to be found to avoid the problems of double taxation of the same income at national and local level. Furthermore, taxes levied on profits are relatively easy to avoid and evade. Tax avoidance not only robs government of revenue, but is unfair to businesses that pay the intended amount. BIT could prove to be distortionary, favouring large companies who are more readily able to advantage of loopholes in tax policy. As a local tax however, it would remove the need for raising the marginal level of nationwide taxes. Further, it might induce a culture shift in local authorities, as they are weaned off dependency on block grants. Central grants encourage a statist mind set, by creating a political pressure for ever more spending that seems, at least to local electors, to be ‘free’. When councils are required to raise their own revenues, incentives emerge to be efficient with their resources in order to tax their residents less.

Land Value Tax

Although LVT is essentially a property tax, it is levied on the value of the site, and not the capital value of the property built over it. Consequently, the tax penalty for improvements is removed.  Taxes, when levied on income, naturally discourage productive enterprise; a land value tax by contrast punishes economic inactivity. Beyond the economic impact of such a reform, there may also be a resulting change in values. The philosophical underpinnings of LVT are largely conservative, valuing hard work and individual enterprise in the tax code. Though it can be postulated that the tax system should be morally neutral, these are undoubtedly positive behaviours that are essential for the functioning of a truly liberal society. As this is reform would represent a tax reduction and not a direct subsidy, its moral favouritism partly justified.  The practical points of implementation however, may prove more difficult. It is incoherent to imagine how the value of a site can be considered as being distinct from the improvements made around it; in essence all property taxes have to factor in the capital value of the property being taxed. It would be absurd to assert that the values of sites in commercial city areas are worth equivalent sums to sites in deprived or rural areas. Therefore, implicit in LVT is a further burden on prosperous or commercially viable business sites which are necessarily more valuable. Certain industries, such as agriculture are land intensive, and might be rendered unviable by this shift in taxation. Nor is it clear that once taken out of productive use these sites would be returned to economic activity. Such pressure on rural areas could result in land having to be sold for development, harming green belt or rural areas. It is doubtful whether LVT would aid town centre regeneration, as non-domestic rates already penalise the owners of vacant properties, containing congruent incentives to maximise profit over the value of property. It is the long term lease arrangements in combination with high fiscal overheads that prevents the return to commercial use, and these problems could not be ameliorated by this selected model of taxation. Indeed, as property taxes as a whole discourage landowners from letting properties to new owners as the rental income is often lower than fixed sum they pay in rates; this problem may well be aggravated by a land value tax. Moreover, the policy would require routine revaluations which are politically treacherous. Without these revaluations however, accurate taxation of land would be impossible. LVT would prove a politically and economically disruptive policy that suffers too many of the faults of NDR to be worth the cost of reform.

Local Sales Tax

A local sales tax could be modelled on, and take advantage of the existing system for calculating and collecting VAT. It should therefore have only a minimal impact in terms of business administration costs.  VAT contains effective anti-avoidance measures, by compensating businesses for tax already paid. As such, businesses have an incentive declare their full liability. By comparing LST returns against VAT returns, local finance departments could be relatively certain that they were being paid the full sum due. Unlike VAT, it would be possible to operate LST without repaying firms for the tax already paid, reducing further any manipulation of the tax system by predator firms. The standard VAT exemptions could broadly be maintained, including the threshold for payment, this would effectively act as an allowance for small and rural businesses. Sales taxes do not penalise either work or capital accumulation, having the advantage of being the most economically efficient method of raising revenue. In the long run, this will provide for higher growth rates and employment. As income and capital taxes reduce the ability of companies to restructure their production, they greatly slow the ability of an economy to recover from an economic recession. Unlike taxes on business, sales taxes are more readily noticed by the public; as a consequence this option best supports local accountability.

Why Localism?

Devolving power over local government finances is usually met with only lukewarm support. In Scotland, prominent business groups, such as the CBI have opposed it as a measure of reform. As with the community charge, there is a risk that centre-left authorities, of which there are many in Scotland, raise spending in the run up to the introduction of the new tax. The resulting tax levied on businesses would be unexpectedly high, with the political fallout damaging the central rather than local government. This could result in the whole package of reforms being abandoned, with damaging consequences for Scotland’s high street. If voters do not change their vote according to the actual policies of their council, then the devolutionist agenda will have failed to provide the keystone of accountability. These problems could potentially be resolved by introducing a nationwide cap on the level of poundage. Rate capping is an established policy in Scotland, having been applied to domestic rates through-out the 1980s. This would prevent local authorities from raising their charges above a certain amount; ensuring individuals would be protected from irresponsible behaviour by certain authorities. A further measure of mandatory spending restraint during the transition period may also be necessary in order to avoid opportunist increases in taxation justified by higher spending.

By contrast, there is also great opportunity for certain local authorities to pursue measures to increase our freedom from taxation, as councils compete to attract businesses to their area. Not only would tax policy be changed, but additionally the other policies of local authorities towards businesses and consumers. Transport and parking present major problems for town centre shoppers, often these difficulties are the result of a local decision that was made regardless of the impact it might have on the business community. With greater financial dependence on these same businesses, it will be in the interests of ever council to ensure that local enterprises continue to flourish. Simultaneously, the dependence on central authority will be reduced. With the reduction in financial powers over local authorities, these bodies will be free to innovate with new methods of providing public services. Scotland lags far behind Europe and the UK in the structure of its public bodies, freedom to change will at least provide a certain impetus to reform in the interests of higher quality.

The pooling of resources nationwide is a palpably unfair policy. The popularity of localism must be that money raised in one area should be spent in that same area. Major cities such as Edinburgh and Aberdeen, and rural authorities such as Perth and Kinross lose millions of pounds in revenue to both the Scottish Government and to spendthrift neighbours. This is partly concealed in the official figures which show revenue collected by local authorities gross with any public utility revenues they may collect from other authorities. This method of calculating the tax take by local authority is used for Fife; South Lanarkshire; Highland; Renfrewshire; Falkirk; and West Dunbartonshire. In the case of South Lanarkshire, when revenues are collected net of public undertakings, an almost balanced account is revealed to include a shortfall of £153 for the financial year  2011/12 rising to £165 million in 2012/13. This is a deficit that must be paid for by the hard-pressed rate payers in other authorities. While this generous donation is coerced from other councils, net recipient authorities will make little attempt to be prudent with their spending. When this fact is fully known, residents cheated of revenues by nationwide pooling of resources will recognise the need for powers and resources to be devolved.

Final thoughts

It seems clear that the best interests of Scotland demand reform of business rates. That power should be devolved is a vital part of the process of transforming the culture of Scottish political life; centred on the principle that power should be held closest to the people that it affects. Local authorities have endured decades in which there has been an erosion of their powers and responsibilities. It is no coincidence that as the size and impotence of local government has grown they have seemed ever more distant and less able to govern. Restoring the place of local government in Scotland is predicated on greater financial independence and freedom to respond to diverse local social and business environments. It may be possible to avoid the pain of a new tax if business rates are retained but with significant alterations to their structure. If property taxation is to be implemented, it must be coordinated with real market conditions and values rather than the results of long redundant revaluation reports. Moreover, any system of reliefs must be considerate of the impact that such policies have in disrupting the overall market. The renewables subsidy, which offers discounts of up to 100% off rates, must be discarded, and many other rates amalgamated so as to offer a clearer picture of how much firms really owe. Yet ultimately, this patchwork solution to local government finance will never be as satisfactory as the abolition of rates. Of the replacement options, a local sales tax is preferable to any local corporation tax. Sales taxes carry less of a fiscal deadweight to private enterprise, and are therefore more likely to promote the values that are necessary for success. Moreover, a sales tax linked to VAT returns will be more likely to reduce avoidance, ensuring both a more equitable environment for firms that do pay the amount due and maximum returns for the community.  The level of sales tax would be held down by the Scottish Government nationally, which would ensure investors and foreign business could be guaranteed a reasonable tax climate, while also allowing prudent authorities to do yet more to protect town centre shops. Scotland’s towns and small cities have for too long been held back by the heavy burden of business taxes, tax freedom will allow for local renewal and a release of Scotland’s enterprising and creative potential. It is in this spirit that I consider reform of rates an urgent national priority.

How Scotland could flourish by unilaterally keeping the pound

Between 1716 and 1844, Scotland had one of the world’s most stable and robust banking systems. It had no central bank, no lender of last resort, and no bank bailouts. When banks did fail, it was shareholders who were liable for paying back depositors, not taxpayers. Scottish GDP per capita was less than half of England’s in 1750; by the end of the era in 1845 it was nearly the same. Now that George Osborne has ruled out a currency union if Scotland votes for independence, the Scots have an opportunity to return to this system more seamlessly than any other place in the world could.

As I said to the press this week, there’s nothing really stopping Scotland from continuing to use the pound unilaterally. (Unless the remaining UK introduced strict foreign exchange controls, which would be absolutely crazy.)

What the Chancellor's announcement actually means is that the Bank of England (BoE) would no longer consider Scottish interests when it determines monetary policy and that illiquid Scottish banks would no longer be able to use the BoE as a Lender of Last Resort.

I’m not sure that the first point really matters at all. Scotland’s five million people can’t have much of an influence over the BoE’s policy for the UK’s 63 million people as it is. And, frankly, I’m not sure the BoE knows what it’s doing well enough for it to matter whether it cares about you or not.

The second point is the interesting bit. George Selgin has pointed to research by the Federal Reserve Bank of Atlanta about the Latin American countries that unilaterally use the dollar. Because these countries – Panama, Ecuador and El Salvador – lack a Lender of Last Resort, their banking systems have had to be far more prudent and cautious than most of their neighbours.

Panama, which has used the US Dollar for one hundred years, is the most useful example because it is a relatively rich and stable country. A recent IMF report said that:

By not having a central bank, Panama lacks both a traditional lender of last resort and a mechanism to mitigate systemic liquidity shortages. The authorities emphasized that these features had contributed to the strength and resilience of the system, which relies on banks holding high levels of liquidity beyond the prudential requirement of 30 percent of short-term deposits.

Panama also lacks any bank reserve requirement rules or deposit insurance. Despite or, more likely, because of these factors, the World Economic Forum’s Global Competitiveness Report ranks Panama seventh in the world for the soundness of its banks.

I suspect that there would also be another upside. Following Walter Bagehot, central banks are only supposed to lend to illiquid banks, not insolvent ones. Yet since the start of the Eurozone crisis the ECB has clearly made significant bond purchases to prop up both insolvent banks and insolvent governments. This may have been a lesser evil than letting them collapse altogether, but it’s hard to say that this kind of moral hazard is not present.

So, given that some countries do survive and even flourish without a central bank, how would Scotland do it?

The basic mechanics, I think, would be this: in a hangover from the old free banking period, Scottish banks currently issue their own banknotes. After independence, they could continue issuing their own notes that entitle the bearer to GBP on demand. BoE pounds, in other words, would be the 'base money' that Scottish banks use to back their own private currencies, in the same way gold was used during the last Scottish free banking era.

A banknote from a Scottish bank would be, in effect, a promissory note redeemable on demand in BoE-issued pound sterling. (Scottish notes are already promissory notes, but issuance is closely regulated by the BoE.) Of course, there should be nothing stopping banks from issuing notes redeemable in something else, like US Dollars, gold, Bitcoins, or Tesco Clubcard points. Scottish banks would have to arrange private clearing houses, as they did in the last free banking era, to provide loans to illiquid banks, or they could follow Panama in simply maintaining very high reserves.

No bank would have monopoly privileges: any ‘bank’ could issue notes and it would be up to the market to decide whether to accept them as money or not. As Selgin explains here, banks free to issue their own notes will set their reserve ratios according to people's demand for money, stabilising nominal spending.

With respect to other regulations, I quote Selgin again:

It is, in any event, desirable that there be no Scottish public authority capable of bailing out insolvent banks and of thereby introducing a moral hazard. Deposit insurance should be resisted for the same reason. Foreign banks should be admitted, by way of branches rather than subsidiaries, and should enjoy the same rights as Scottish banks. (Of course the major "Scottish" banks are themselves no longer really Scottish anyway.) Finally, re-establishing some form of extended liability (though not necessarily unlimited liability) wouldn't be a bad idea.

We take no position on Scottish independence — it is up to Scottish voters to decide. And while a return to free banking in Scotland may seem fanciful, this week’s announcement makes it much more likely. Keeping the pound and treating it as the ‘specie’ on which banks can base their notes would make the transition virtually seamless for the average Scot, while giving them a banking system that is unrivalled anywhere in the world for being stable, open, and free.

Price fixing doesn't work Part XVII

Thailand is finding out, in a most painful manner, what happens to those who try to fix prices:

Thailand, once the world’s biggest exporter, is short of funds to help growers under Prime Minister Yingluck Shinawatra’s 2011 program to buy the crop at above-market rates. After the government built record stockpiles big enough to meet about a third of global import demand, exports and prices have dropped, farmers aren’t being paid, and the program is the target of anti-corruption probes. Political unrest may contribute to slower growth in Southeast Asia’s second-largest economy.

In order to curry favour with the rice farmers who compose a substantial part of the electorate prices were fixed and fixed high. The inevitable thus happens, magically more is produced than anyone wants to consume and here at least it is looking like the government will go bust over it. "Produced" is of course a flexible word: there are long running reports of rice being smuggled over the Burmese border to take advantage of those high Thai prices.

This really should not be a surprise to anyone. For prices are information, they're information about how many people want to consume how much of what and similarly about who is willing to produce. Changing the prices will change those desires and thus kick the system out of sync.

And it really is always the same: Thai rice, the world's supply of tin back in the 70s, the EU food mountains and wine lakes, Red Ed's idea to subsidise wind and solar power prices. If you set the price high then there will be a glut on the market that someone, somewhere, is going to have to buy at those high prices in order to maintain those high prices. That is, as we all know, the poor bloody taxpayer. If you set the price too low as with Venezuelan toilet paper or Red Ed's idea to freeze power prices then the good in question becomes in dearth. More people want to consume it than there is supply for them to consume.

And if, of course, you manage to set prices where supply does indeed meet demand then why the heck are you wasting your time setting prices? The market will achieve that for you without your lifting a finger.

The error really does come from failing to realise that prices are not something for us to manipulate, they're information that we need to process.

On the rise of the robots

I'm astonished to find yet another person getting this wrong. Martin Wolf:

Fourth, we will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person’s life. In this way, the potential for a more enjoyable life might become a reality. The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects.

This is all about what happens when the robots steal all our jobs. And everyone, just everyone, is arguing that when they do then the capitalists will have all the money. For they, of course, own the robots. Thus we should tax the snot out of capital and the capitalists and the world will be a better place. It all sounds a bit Marxist to me to be honest, this idea that there is some class of capitalists that we must tax.

There are several reasons why I don't think this is going to happen:

1) My favourite economics paper. Looking at who benefits from Schumpeterian innovation, that's the same thing as the technological change we're considering here. The answer is that we the consumers get 97% of it and the entrepreneurs get 3%. Now why should we, getting 97% of the increased living standard from technological change, then want to tax the snot out of those people bringing it to us and only getting 3% of that new value created?

2) Does anyone at all really believe that the robots are all going to end up being owned by one class of people? In this age of open source stuff? Is this what's happening with 3D printing? Of course it damn well isn't: people are pottering about in sheds with these technologies. As soon as we do have robots that make robots (the necessary stage for them to take all our jobs) there will be designs for such robots that you can make at home. We'll all be robot owners and why would we want to tax the snot out of ourselves?

3) The assumption is that capital will become more productive in a robot world. That's why we'll have to tax the snot out of capital. And capital will indeed become more productive: which is why its value will fall. Yes, you read that right. When something becomes more productive this is equivalent to stating that we've made more of it. Thus more productive capital means we have more capital and the price of something that becomes in greater supply falls, not rises.

4) The last time we mechanised a significant area of life was probably farming back in the 1920s and 30s. Agriculture become significantly more productive. What happened to the price of land? Yup, it sank like a stone and the farmers have been on the public teat ever since.

Vast numbers of cheap robots would lead to our lives improving immeasurably: so why is everyone running around insisting that it will then be necessary to tax the snot out of the capitalists?