The problem with inheritance tax

Now that inheritance tax is back in play in this election season perhaps time to think about the basic problem with it:

The Tories suffered a blow on Sunday when the Institute for Fiscal Studies warned that a pledge to raise the inheritance tax threshold on family homes to £1m would disproportionately benefit richer people.

As David Cameron tried to reset the faltering Tory campaign by declaring that he was championing the “Conservative dream”, the IFS described the inheritance tax pledge as “rather odd” special treatment for homeowners.

Leave aside the specific details of this or that pledge and consider the very basics.

We're told, as with Rawls and the veil of ignorance, that it's simply wrong for the members of the lucky sperm club to inherit gazillions. Further, that inheritance tax doesn't actually have any effects upon incentives: it cannot, as the people who face the incentives are by definition dead at this point. The argument then becomes, in some quarters, only about how much to tax inheritances. Should it be at 100% or should the kiddies get some pocket money perhaps?

We exaggerate, but only a little. There really is a consensus that inheritance taxes are not distorting and thus are "good taxes" in a manner that income and or capital taxes are not.

And we're really not sure about that. For we do think that while logic is all very well it is necessary sometimes to look at what people actually do. This idea of revealed preferences: forget what people should do, what we want them to do, what they say the will do or that they believe and look at what they actually do to divine their thought processes. And the truth there is that just about everyone will do their utmost to avoid (and many to evade) paying inheritance taxes upon their estate, even when they really are dead and gone. We must therefore conclude that this is, despite the logic and the ideas of fairness, something that really does motivate people. And if that is true then such taxation cannot in fact be non-distorting.

This is something that was rather missed by Thomas Piketty. He talks, extensively, of the bourgeois historical novels and their tangled tales of who gets what from which estate. To bemoan the manner in which this stratifies society which might be fair enough. But he misses the point that these were the best sellers of their day and the attention paid by the bourgeois writers and readers back in history shows that who gets what from which estate was important to them. As the stampede to keep today's inheritances out of the taxman's hands show it all is today.

Economic Nonsense: 47. The state should pay for university education because it benefits society

University education benefits society in several ways.  A skilled, university-educated workforce can boost economic growth and make society richer than it would have been without them.  Less well-off and less well-educated people benefit from this, just as a rising tide lifts all boats.

The experience of going through university generally produces people who are not only educated in their chosen subjects, but who have been exposed to more cultural influences in the process.  Many people would think a society to be a better one if it contained significant numbers of educated and cultured people.  It provides more opportunities for intellectual stimulation and self-development.

All of this is true to some degree, and benefits society as a whole, but there is little doubt that by far the greatest value of a university education accrues to the person who undertakes it.  There is firstly the personal fulfilment that comes from attaining more of one's potential, but there are more material rewards as well.

Possession of a university degree in the UK increases one's employability.  For those in the workforce, aged 18-65, employment among graduates is 87%, as opposed to 70% for non-graduates.  Median salary is higher, too, with graduates on average earning £9,000 more per year than their non-graduate counterparts.  Over a working life this could top £400,000 of extra salary attributable to the degree.  

This constitutes an overwhelming advantage accruing to the individual who undertakes a university degree.  While there are undoubted benefits to society, those gained by the individual are high and measurable.  They make the loans undertaken to finance university, perhaps £36,000 for a 3-year degree, a very good investment indeed.

When people suggest the state should pay for this, they mean taxpayers should.  It seems strange that a person not equipped to benefit from university, someone who leaves school at 16 to become a bricklayer, for example, should be called upon to pay higher taxes so that someone else, already endowed with more academic and intellectual ability, should benefit from what amounts to a ticket to a higher salary for life.  

Some would call this unfair, and suggest that those who gain the most from university education should finance most of its costs.

Lies, damned lies, and electioneering statistics: privatising the NHS

Now the election campaign is in full swing, there has been a sharp rise in questionable statistics used in public discourse. This is distressing, as there is a risk people vote on the basis of misinformation. It seems that by using the same bogus assertions repeatedly, politicians of all stripes are able to eventually change the ‘facts’. The debate around the NHS has been the most dishonest. “Reverse the tide of privatisation in our NHS”

There has NOT been a tide of privatisation in our NHS. Privatisation if the process of transferring ownership of an organisation from government to the private sector. No shares have been issued in the NHS, nor distributed as vouchers to citizens. The NHS remains publically owned and funded, resources have grown in terms of real cash and people, and services are free at the point of the use. They must still provide services to all, whilst a ‘privatised’ company could choose to only serve those who pay.

Outsourcing isn’t privatisation, and is slowing

The government has encouraged competitive tendering of services, and outsourcing has increased, but only from 4.4% under Labour to under 6% with the Coalition. The rate of outsourcing has actually slowed under the Coalition. Regardless, outsourcing isn’t privatisation, maintains free at the point of use access, and can result in better services.

What about Hinchingbrooke Hospital?

Hinchingbrooke Hospital is the closest example to privatisation, as it is now run (though not owned) by a private company. The tender process for the hospital happened in October 2009, under Labour, further exposing their hypocrisy. Regardless, its core assets are publicly owned, and it still delivers NHS services free at the point of use.

An honest debate would consider alternative models that would improve services 

As an aside, it’s worth noting that Hinchingbrooke has gone from one of the worst ranked hospitals, on the verge of shutdown, to one of the best for patient happiness and waiting times.

A proper discourse on health care would focus on ways to improve the quality. We should examine the merits of private (profit and non-profit) providers, rather than being blocked by ideological labelling. We should explore how alternative models that don’t reply on as much government management, like in Germany or Singapore, could deliver better services for all.

Memo to the EU: markets work, capisce?

We've another of those stunning misunderstandings from Brussels about how this economy thing works. It's not so much the European Union itself, it's the mindset of the people that actually make the rules within it that matters. They've not got the idea that markets really do actually work. They've decided to set the fees that debit and credit cards can charge:

Consumers face cuts to the air miles, cash bonuses and other rewards they collect from credit cards because of a law passed in Brussels last month.

Capital One, one of Britain's biggest card providers, has become the first firm to scrap the perks following new EU restrictions on the profits it can make.

In a statement the company said its cards, which paid customers up to 5p for every £1 spent, were "no longer sustainable".

If you look at the fees in isolation then you might well think, hey, they're making a lot, stop them! But to look at the fees in isolation is to be more than a bit of an idiot because markets really do work.

So, there's those fees. And then those consumers who think they're a bit high and would like to claw back some of that money get to do so. Because competition to gain those high fees means that card issuers start to offer cash back, air miles, discounts, freebies and other goodies. And what selection of freebies, discounts and other goodies people value most will influence their choice of card. Thus consumers get what they value most.

And now we fix the fees, to what in isolation might be regarded as "fair" and all those consumers then lose all of those compensating benefits. Because the people making these rules have looked at this in isolation, without noting that markets really do work and that card holders are already being compensated, in the manner they value most, for those seemingly high fees.

As we say, to look at such things in isolation is to be more than just a bit of an idiot.

Note that the profits that a card company can make are not being regulated. What is being regulated is the revenues one can have: and limiting the revenues that can be made also, inevitably, reduces the revenue that is rebated, leaving profits quite possibly unchanged. No overall benefit to consumers therefore but the tax leeches regulators feel they've achieved something.

This isn't, despite the well known views of at least one of us here, a complaint about the European Union. It's a complaint about the tax leeches regulators failing to understand that markets already achieve, without intervention, the things that the tax leeches regulators think that only they can bring about. The answer to which is, of course, more markets and fewer tax leeches.

Economic Nonsense: 46. Profit is a sign of exploitation

No.  Profit is the reward for investment.  An investor defers gratification and uses their money instead to try to make more money later.  Profit is the compensation he or she receives for doing this.  Part of it takes account of risk, the risk that the investment might not pay off or that the investor might lose the money they put up.  Part of the profit is reward for taking that risk.

The notion of profit as exploitation derives from a mistake made by Karl Marx.  He supposed that value resides in objects, rather than in the mind of the beholder.  Because he thought it resides in objects, he asked how it got there, and answered that value represents the labour it takes to make something.  A price charged above the value of that labour represents "surplus value," and is exploiting the workers who make the object.  Hence comes the notion of profit as exploitation.

In fact people value things differently, which is why they trade.  An object's value to me might represent the other uses I might have made of the money, had I not expended it in producing the object.  If someone values it more than that they will pay a price that includes a profit for me.  Far from being a sign of exploitation, profit serves a valuable human purpose in motivating people to produce goods and services that are of value to their fellow human beings.  It directs us to serve the needs of others in seeking a return for ourselves.  The butcher, the brewer and the baker might seek their own reward in terms of the profit they make, but in doing so they provide others with meat, ale and bread.

Profit is legitimate, and sends signals to others.  If some areas of production show high profits, others are motivated to enter that field themselves and bring extra production onto the market.  The competition with other producers will generally act to restrain or reduce the high profits.

Nationalising the trains won't solve this problem

It's something of a puzzle why the idea of nationalising the train system again is so popular. The complaint seems to be that ticket pries are high, if we nationalise then ticket prices won't be so high. Apologies for referring to Richard Murphy again but he has laid out that fallacious argument for us:

The Tories want to regulate rail fares.

Almost all rail companies are already state subsidised.

Rail rolling stock leasing is a tax arrangement for the finance industry.

The farce of rail privatisation continues when the state run East Coast route proved that state ownership works best.

And yet only the Greens are stating the obvious, which is that the answer to these state interventions in an industry that should never be in private hands is nationalisation.

I really think the time for rail nationalisation has come.

It is true that ticket prices are high as compared with other European countries. It is also true that there are subsidies. But this does not then go on to mean that nationalisation will reduce train fares. Because the reason that train fares are high is the result of a deliberate and specific political decision. That British train travellers should pay more of the cost of their journeys than do travellers in other European countries.

This is not a function of who owns or who operates those railways. It is, as we say, a function of a deliberate political decision. That there's going to be some mixture of general tax subsidy to railways, plus some measure of income from travellers, is an accepted fact by all. At some point we need to decide what the split between those two is. Should that retired accountant in Norfolk have to pay the full cost of his travels around the country to campaign, should the general taxpayer be subsidising him to do so and if so, to what extent?

The general outcome of this decision is that, here in the UK, we expect those doing the travelling to pay more of the cost of their travelling than other European countries conclude. This is not, as above, an outcome of how the industry is structured, owned nor run. It's simply that we have decided that non-train travellers should be subsidising train travellers less than others conclude.

You can, of course, make other arguments for nationalisation. But this specific one doesn't work. Because train tickets are not priced as they are because there are private operators. But priced as they are because we've decided on less subsidy. And that subsidy could be increased (not that we would argue that it should be) without nationalisation, just as that subsidy could remain the same with nationalisation (not that we would recommend that either).

This is an argument about the correct level of subsidy, not one about who owns or operates. Thus changing who owns or operates changes nothing about the subsidy nor ticket prices.

There's choice and then there's force. Only one is good.

We can't say that we're against paternity leave here as the current UK rules on such stem directly from the writings of one of us here on this very blog. We can however say that we're very much in favour of choice as a basic feature of the society we live in and against compulsion. Which is what makes this piece in The Guardian so concerning:

Force men to take paternity leave. It will make the world a better place

It should be said that the article itself never does say force. That's rather the invention of the Guardian subs there. Although we should also point out that many of the things that paternity leave are said to promote that are lauded remain, hmm, unproven, shall we say.

However, this is a nice example of what differentiates us classical liberals from the more modern form of liberal. We're all for the world becoming a better place. Except we insist that it is the exercise of choice by consenting adults which makes the world a better place. Not the imposition of behaviour upon people that does so.

So, we're entirely happy with the idea that new fathers take time off with their child. With whatever domestic arrangements anyone wants to make over such matters, including such interesting rarities as the stay at home Dad. You wish to, great, have at it!

What we're not happy with and resolutely oppose is any idea that such behaviour must be imposed upon any individual.

After all, no one does insist that a new mother must take all of the maternity leave to which she is entitled, do they? That goose and gander thing does rather come into play here......

Are EU scared?

One of the greatest fallacies of the Scottish independence referendum was that Scotland was being offered “independence”. Yes, we would have been independent in many respects. But the undisputed plan was to immediately begin re-acceding to the European Union. 

Whatever this meant - from fulfilling requirements to become a member again to no longer being one of the big players (usually meaning France, Germany and the UK) with a greater say than the other nations - we certainly weren’t going to be independent. 

It was not only concerning to witness it seldom questioned by Scottish people that we would be rejoining the EU - despite expecting an in/out EU referendum as part of the UK - but it is concerning, too, that the majority of pro-EU politicians don’t want to reform it or even to achieve a better deal for Britain.

What is more, there is a lot of scaremongering going on as fans of the European project say we couldn’t survive without many of our decisions being taken in Strasbourg. 

A new report authored by Ewen Stewart, Stuart Coster and Brian Monteith seeks to dispel the myths about the UK’s survival without the EU and explains why a Brexit would not bring economic isolation to the UK as scaremongering claims by politicians suggest.

The paper has five arguments to show why often-repeated political claims are intimidating the British electorate into shutting their minds to the possibility of change and preventing a rational debate taking place:

1. In reality, the EU is more dependent on being able to export to our significant market than we are on selling to the European Single Market.

2. There is a real threat to UK employment, influence and broader prosperity if we do decide to remain an EU member.

3. Our future economic well-being depends instead on gaining access and selling to the faster-expanding markets that lie beyond the EU.

4. Employment growth would be even stronger if Britain was free to adopt bilateral arrangements of its own, outside membership of the EU.

5. A growing percentage of cross-border issues and regulatory requirements are determined now by bodies at the global level.

A lot of research is looked into about the UK's performance in comparison to that of the European Union. And the conclusion reached is that British jobs are not dependent on the EU and so this is no reason to leave. Jobs would in fact be gained by leaving the EU.

The UK has performed much more strongly over the last 6 and 12 year time horizons that EU averages while 14 out of our 20 fastest growing markets are with non-EU nations.

We have global links with the Americas, Asia and Africa, as well as the Commonwealth, meaning it is perfectly possible that the UK could have good trading relationships with not just our European neighbours but the rest of the world by enabling trade policy to be determined at home.

The political stability of the UK, the English language and the rule of law coupled with secure property rights and a population that is by far and away the most diverse in Europe mean we will always continue to benefit from global growth.

If the Scottish independence referendum is anything to go by - scaremongering a population about change can make the positive arguments shine and usually backfires. Hopefully it does.

Yes, it is election season but still, this won't do

Sadly, we're in an election season, which means that we have those who would rule us displaying their ignorance of the universe we inhabit in pursuit of our votes. Guido has already picked up on this from Natalie Bennett of the Green Party: As newsrooms across the land stop what they are doing to read the Green Party’s response to Labour’s non-dom announcement, it is worth picking Natalie Bennett up on this:

“The last four decades have seen wealth accumulate at the top of society while those at the bottom struggle to get by.”

Now hold on just a darn prosperity-spreading cotton-picking second. Over the last four decades the world poverty rate – people living on a dollar a day or less – has plummetted. ..... in 1970 almost 30% of the globe was impoverished. 40 years later that number is as low as 5%

Or, as that graph above shows, it is actually the poor who have benefited from that globalisation over those decades. As Branko Milanovic explains here:

The top 1% of the global income distribution has seen its real income (adjusted for inflation) rise by more than 60% over those two decades.

What is far less known is that an even greater increase in incomes was realized by those parts of the global income distribution that now lie around the median. They achieved an 80% real increase in incomes.

It is there — between the 50th and 60th percentile of global income distribution, which in 2008 included people with annual after-tax per capita incomes between 1,200 and 1,800 international dollars — that we find some 200 million Chinese and 90 million Indians, as well as about 30 million each in Indonesia, Brazil, Egypt and Mexico. These 400 million people are among the biggest gainers in the global income distribution.

The real surprise is that those in the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40% and almost 70%. (The only exception is the poorest 5% of the population, whose real incomes have remained about the same.)

This is, of course, why we here at the Adam Smith Institute support this globalisation, free market sorta stuff. We desire that the poor become richer, this socio-economic system makes the poor richer. Why wouldn't we support it?

More to the point, why would anyone oppose it? For, amazingly in human history, this is the only socio-economic system that does actually achieve this task.

Economic Nonsense: 45. Unbridled capitalism brought about the Great Depression

In the popular account the stock market went wild in the late 1920s, with people gambling recklessly on stocks and shares, often with money they didn't have.  Shares could only go up, they thought, but they were wrong.  The market crashed, people went broke, investors jumped off high buildings, and without investment GDP plunged and the Great Depression came about.  If it were true it might be a major indictment of unbridled capitalism, but it isn't.

People did overstretch recklessly, assuming the market could only rise, helped by easy money from the Federal Reserve Bank, and the Great Crash came in 1929.  It wiped out many investors, but it did not lead to the Great Depression.  That came later as a direct result of bad policy decisions.  Had those decisions not been made, the stock market crash might have instigated a cyclical downturn and corrected itself after a year or two.

The Federal Reserve Bank, observing that people had bought shares with easy credit, decided to tighten credit and restrict the money supply.  This is what you do not do in a recession, when struggling companies need credit to keep going and companies that see opportunities ahead need money to invest in expansion.  It was a disastrous mistake.

The folly was compounded by protectionist policies.  The Smoot-Hawley Tariff of 1930 shut out most foreign goods to boost home-produced goods in the name of protecting American jobs.  Its effect was catastrophic.  It sparked a beggar my neighbour trade war as other countries responded with tit-for-tat measures.  Unable to sell goods in America, they stopped buying American goods.  International trade plunged and much of the world sank into recession. 

There were other contributing factors.  Banking regulation had been clumsy and restrictive, and left American banks unable to play their part in promoting investment and expansion.  Income taxes were massively hiked in 1932, just when tax cuts could have helped.

Unbridled capitalism did not cause the Great Depression, incompetent government did.  It is another piece of economic nonsense that President Roosevelt's New Deal government activism helped America's recovery from the Great Depression.  It didn't.