Why we oppose taxing capital

Last week, I set out the ASI's position on tax policy in 2017. In making the case for scrapping all taxes on capital, I mentioned that existing tax rates and reasonable interest rates imply massive taxes on future consumption.

"Taxes on interest income, capital gains, inheritance and corporate profits all effectively tax future consumption higher than current consumption, incentivising short-termism. And this future consumption tax goes up every year you forgo instant gratification. A few months back, I did the maths. Assuming a 5% interest rate and the European Commission’s estimate for the Marginal Effective Tax Rate on capital (47%), you’re effectively paying 97% extra in tax for waiting 30 years and a whopping 147% if you leave it another 10 years."

I think it's worth expanding on this point, but the mechanism isn't exactly clear. Why does a 47% tax on capital imply a 147% tax rate 40 years down the line? It's worth going back to basics.

People prefer to have things now rather than later. Market interest rates reveal how strong that preference is. If the market rate of interest is 5% (high for today but not by historical standards) then it means £100 of consumption today is worth £162.29 of consumption in ten years time.

Should I spend now or save for tomorrow? Capital taxes distort that choice. Let's pretend we have a flat 20% income tax with no deductions or exemptions. If you get paid £125, you'll pay £25 in tax and then you can choose to save or spend the rest of the money. If you saved £50 and the market interest rate was 5% you would end up with £81.44. But you'd have to pay 20% of your interest income each year in tax. Leaving you with £74.01.

It's the equivalent of the interest rate falling from 5% to 4%. That might not make much of a difference over 10 years. That's just £7.43 extra in tax, effectively a 10% additional tax on consumption. Not huge, not small either, but not huge.

However, as Einstein probably never actually said "compound interest is the most powerful force in the world". The difference between a bank account paying out 4% and one paying 5% becomes much larger over 30 years (4% = £162.17, 5% = £216). That's a difference of £53.93, or to put it more generally you'd be almost a 1/3 richer with an account paying 5%. To put it another way, a flat income tax of 20% implies an extra 33% tax on consumption in 30 years time. The longer you wait to bigger the extra tax you must pay is.

But we don't have a flat tax of 20%. We have an income tax with a top rate of 45%, a corporation tax of 20%, capital gains tax of 20% (not to mention inheritance tax). We also have some tax exempt savings vehicles like ISAs but they have a maximum limit so those most able to increase savings are still taxed.

To figure out how high the extra taxes on future consumption are we need to know the marginal effective tax rate (METR) on capital. Unfortunately that's rather tricky to work out. The best estimate I could find is from 2000 and by the European Commission, they reckon the UK's METR is 47%. Things have changed since then - income tax and capital gains tax is higher, while corporation tax has fallen, so buyer beware. But, an METR of 47% means a consumption tax of 97% in 30 years time. And if you waited another 10 years that tax would rise to 147% (even Jeremy Corbyn's bonkers maximum salary cap only implies a 100% rate).

Tax rates of 97% and above are absurd. Yet, rates like these are the status quo for those who defer gratification and make productive investments. This isn't just bad for those rich enough to max out their ISA limit, it's bad for ordinary workers as their wages stagnate due to chronic under-investment.

The tax code should be neutral between the frugal and the spendthrift. In 2017 we'll be pushing for tax reforms that fix this imbalance.

Internet drugs means it's high time to change our laws

A recent BBC story about buying drugs online ended up showing just how far we still have to go to sort out our drug laws, which look increasingly impractical and out of date.

The BBC investigated the ease with which illegal drugs can be bought online, and delivered to your doorstep by buying MDMA on the Dark Web - the encrypted network that anyone can access anonymously by downloading the “Tor Browser” to their computer.

Reportedly millions of pounds of drugs are purchased online every day on the Dark Web, where because of Internet traffic being sent through a worldwide volunteer network of over seven thousand relays, a user’s location and usage is completely anonymous.

The BBC contacted the Royal Mail, who duly replied that it “does not knowingly carry any illegal items in its network” (as it would). But the same BBC journalists spoke to delivery staff who reported that they “definitely handled suspect packages” but that “there was nothing that they could do”.

And this is the issue. How can the Government ever possibly hope to enforce the prohibition of many substances, when to millions across the Globe, they are just a few clicks away? One might argue that the Government should search suspect packages, but then you are treading a fine line between supposedly acting in the public’s best interest, and straight up violating their privacy.

Besides, surely the sheer volume of post that is shifted everyday would render such a measure totally impractical?

The Home Office has recently announced that it will be spending £1.9 million to boost their understanding around how crime networks “adapt and diversify” using technology. But rather than simply throw money about the problem, should we not seek to take a more holistic approach rather than one that will continue to see public safety compromised?

Each time someone buys illegal drugs on the dark web, the money that they spend goes into the hands of criminals. Often filling the coffers of organized crime networks that get up to some very dastardly deeds indeed. Were the Government to decide to liberalize Drug laws, not only would money fall into the pockets of legitimate law abiding people, but a revenue stream could be created through taxation.

Further, the substances bought would be regulated, to reduce harm to drug users as presently, occasionally drugs are made up of more than just what dealers say.
If technology now means that users can buy illegal substances more easily than ever anyways, why bother trying to enforce such strict prohibition?

Law liberalization, and subsequent regulation would make streets, homes and individuals safer, at no cost to the taxpayer. And the BBC have made obvious the already obvious fact that in the modern world, prohibiting drugs is harder, and will continue to be harder than ever.

There's no need to change trade agreements to achieve this

More of the usual in The Guardian. Radial calls to change the world without having the first clue of how it works right now:

Progressives must not cede discussion of the world economy either to the liberal globalizationism promulgated by Thomas Friedman and Mark Zuckerberg or the pseudo-protectionism associated with Trump and Le Pen. While the former accepts the current slide of the western working class as inevitable, the latter proposes only arbitrary and authoritarian countermeasures.

Instead, we need to push for a new architecture of international trade, investment and technology transfer that puts worker representatives at the decision-making table. Moving forward, international trade deals – in principle a good thing – must bring wages in cheaper-labor countries into closer alignment with those of their developed-world trading partners.

That last being, of course, exactly what trade deals do right now. If we, for example, sign a trade deal that opens the UK to more Bangladeshi garment imports then the income of Bangladesh goes up. As does the income of Bangladeshis, exactly the point that is being argued for.

If you buy one t-shirt made by those in some sweatshop in Dhaka, those earning 5,000 taka a month (£54 apparently) then those wages rise by some infinitessimal fraction. And if you buy two by two such and if millions of us buy all our clothing from such places then economic growth observably happens.

As it has been these past years as we have been buying more from Bangladeshi sweatshops - the country has been growing at between 5 and 7% for most of the past couple of decades in fact.

Sure, we'd all like that growth to be faster - thus Madsen of this parish's insistence that we should all buy goods made by poor people in poor countries. Because this aids them in getting richer.

And thus why we should indeed have more trade deals, even just the one announcing unilateral free trade. In order that the poor may become richer as billions have been doing these decades.

But we don't need such trade deals to consider low wages rates - we just need to be doing more trade and those low wage rates will, over time, disappear. Because, you know, economic growth?

Labor flexibility beats unemployment: a closer look at the labor market in Denmark

Despite Bernie Sanders’ efforts to identify Denmark with some sort of democratic socialist utopia where a highly-interventionist government regulates all the nooks and crannies of the economy, it is well known nowadays that the success of this Scandinavian country is closely linked to its high degree of economic freedom. We just need to look at the latest Index of Economic Freedom, published every year by the Heritage Foundation, to state the obvious: Denmark ranks in the top 15 worldwide.

When looking more closely, Denmark excels at two specific economic indicators: business freedom and labor freedom. Business freedom measures the impact of government regulation on businesses. This indicator places Denmark at the top of the ranking, only behind Hong Kong. As for labor freedom, which examines the legal framework that regulates the labor market in a country, Denmark finds itself in the top 6. The strong correlation between labor freedom and low unemployment rates seems to explain why Denmark has one of the lowest unemployment rates in the EU. In the following lines, I aim to explore the specific characteristics that make the Danish labor market an example to follow in many ways.  

Wage Formation in the Danish Market

Wage formation in the Danish labor market is undertaken at two levels: sectoral and enterprise levels. At the sectoral level, unions representing both employers and employees negotiate wage increases as well as other benefits. However, it should be noted that, at the sectoral level, only minimum wages are agreed upon. Actual wages are negotiated at the company level and are, in most cases, higher than the sectorial minimum wages agreed on the collective bargaining. As stated by Eurofound,

Wages negotiated on enterprise level are usually higher than the minimum gross wage settled through collective bargaining. Even starting salaries are often higher than the minimum. Half of all newly employed in the private sector receive a starting salary that is considerably higher (18% or more) than the required minimum of the collective agreement […] actual wage increases are determined at company level and it is probably only few employees that are paid the minimum wage.

In fact, negotiations at the enterprise level have gained importance over the last decades as revealed by the percentage of employees covered by the standard-wage system as opposed to the minimum-wage system, which moved from 34% in 1989 to only 16% in 1994, remaining at that level ever since. Under the increasingly less relevant standard-wage system, salaries are negotiated at the sectoral level and individual companies are not allowed to modify the sectorial agreements. In contrast, the minimum-wage system described above, which is predominant nowadays, allows companies to use the sectorial agreement just as a reference to set their wages, the company being the epicenter of this wage-formation process.

What is the role of the Danish government in this process? None. The government does not interfere in the way wages are determined. This becomes obvious by the fact that there is no legislation that establishes a minimum wage on a national level.

Flexibility + Security = Flexicurity

The Danish labor market is based on the concept of “flexicurity”. This concept, firstly coined by the former Prime Minister of Denmark Poul Oluf Nyrup Rasmussen, refers to the two main characteristics of the Danish labor market: flexibility and security.

In terms of flexibility, firing costs are minimal. For instance, a white-collar worker that was unfairly dismissed today would receive a compensation of maximum four months of salary after working for 10 years in the company. This flexibility is reflected in the fact that 25% of private sector workers change jobs every year. Moreover, employers are incentivized to hire through very low social security contributions, which do not exceed 2% of the employee’s gross salary.

The second pillar of the system is security. Employment security is given priority over job security, meaning that the focus is placed on preventing employees from being away from the labor market for long periods of time rather than shielding them in their current positions. This is achieved by combining flexibility with considerable unemployment benefits (usually 90% of the last salary during a maximum of 4 years) and effective policies aimed at relocating the unemployed.  These benefits are, in turn, accompanied by sanctions in case the job seeker refuses to accept a job offer.

Labor Flexibility Beats Unemployment

A well-functioning and efficient labor market is, no doubt, one of the ingredients that account for Denmark’s economic prosperity. It is certainly responsible for the low unemployment rates that the country has enjoyed over the last decades. The Danish experience should open the eyes of those European governments that refuse to undertake reforms that liberalize their labor markets. The evidence is clear: labor flexibility results in lower unemployment. Will the Danish example be followed by those countries badly hit by the plague of unemployment? Spain partially liberalized its labor market four years ago, and the reform seems to be yielding positive results. Who will be the next?

The terrible problem of food waste

This does seem like a problem which we should do something about really, doesn't it?

Household food waste reduction targets under the Courtauld Commitment 3 (CC3) – a voluntary agreement aimed at improving resource efficiency and reducing waste within the UK grocery sector – have been missed, despite £100M of business savings being delivered by reducing food waste elsewhere in the supply chain over three-year period, results released today (January 10) have shown.

Targets have been missed - voluntary targets at that - heavens to Betsy, alert the media!

The Waste Resources & Action Programme (WRAP) is described as a charity. Oh yes?

The majority of WRAP’s income from charitable activities in 2015/16 was in the form of grants. Grant income from central government reduced to £14.8m from £19.6m following the expected reductions in the Defra programme. Following the 2015 Spending Review the Defra programme has been confirmed at £12m for 2016/17 and is expected to continue thereafter with funding in the range of £9m – £10m per annum. Funding from other UK governments was £9.2m compared to £13.2m in 2014/15.

They are civil servants by any reasonable definition therefore.

And why is it that targets have been missed? 

It was attributed to a combination of factors, including UK population growth, falling food prices and increased personal earnings. These have reduced the pressures for people to avoid wasting food, claimed WRAP.

A richer populace spends less time conserving something getting cheaper. A result so shocking that you could slap us down with a wet haddock over that. Who knew that people consume fewer potato peelings as they get better off?

So, clearly, we do have a problem here and one that we should do something about. Our minds turn to the immediate cessation of grants, the redundancy of all of the people and the organisation itself and, just be to be on the safe side, to be sure, the ploughing of the land where WRAP once stood with that salt we're not allowed to eat any more.

After all, we don't want to be extreme about this, only to produce a sensible solution to an obvious problem.

Book Review: Progress by Johan Norberg

Whenever I tell people that I cycle to work each morning I am met with furrowed brows and scrunched mouths. “Isn’t that a bit dangerous?” People ask me, before reminding me of the poor man who was recently crushed beneath an articulated lorry. Well, actually no, it isn’t. Too often we form judgements based on memorable events rather than common ones. So the headlines telling us of tragedies on two wheels give us the impression that when setting out to cycle in London, you are putting your life on the line.

The same can be said of almost any other unfortunate event. It is undeniable that people around the world are for the most part, merchants of misery, always ready to remind us that Brexit will be a disaster, or that global warming will be the death of us all.

Which is why reading Economist Johan Norberg’s latest book Progress was such a joy. He draws attention to the fact that pessimism across the globe is widespread - from the chairman of the joint chiefs of staff testifying before Congress that “the world is a more dangerous place than it has ever been”, to Pope Francis claiming that globalisation has condemned many people to starve. Then he gives us ten good reasons, in ten good chapters why this sentiment is wrong.

Norberg zooms you through food, sanitation, life expectancy, poverty, violence, the environment, literacy, freedom and then equality before rounding things up with a chapter named “the next generation” in which he asserts that “the future is in our hands”. Along the way, you are bombarded with facts, figures and pleasantly surprised by the occasional graph, so that by the end you scratch your head and question just how on earth it could be possible that so many despair so much.

Occasionally the book reads a little staccato like, and on at times the speed at which the facts are hurtled your way can feel somewhat swamping. But overall it is hard to come away from the book feeling anything other than optimistic.

This all gives me the impression that this could have been a very long book, and I am glad that Norberg did not make it so. Not because what he wrote was in any way boring or irrelevant –it was the exact opposite. But because Norberg’s ten chapters are the literary equivalent of the miniskirt – long enough to cover what needs to be covered, but still short enough to keep things interesting. They’re full of things great for throwing into a conversation. His anecdote about his great-great-great-great Grandfather shows just how far we have come in such a short period of time. More people have been lifted out of poverty in the last 25 years than have been in the last 25,000 years.

All the time, Norberg gives credit to globalisation and the rise of free markets, and rightfully points out that as humans have become freer, they have become more prosperous. Defying prevailing thought about how Globalisation has been bad for the environment, he shows how it has been anything but by using many examples, one being how more efficient agricultural technology might mean that we have reached “peak farmland” and how as a result by the year 2100 a plot of land the size of France may be returned to nature.

Progress is a thought provoking book. It is well worth a read.

The Entrepreneurs Network in 2017

The Entrepreneurs Network, which sits within the Adam Smith Institute, works in three ways in support of one aim: to make Britain the best place in the world to start and grow a business.

First, we are the voice of entrepreneurs in the political process. We have a strong and growing network of thousands of entrepreneurs, from which we can find out how the laws and regulations of the land impact their ability to start, run and grow successful businesses.

We fuse this practical knowledge with the latest research to lobby for specific changes to law. We are critical when governments are getting it wrong (e.g. the sclerotic visa system, historically poor planning policy, regulatory creep etc.), but supportive when they get it right (e.g. the introduction SEIS and EIS, smart crowdfunding regulation, the Northern Powerhouse initiative etc.). In 2017, we will explore these and other issues impacting entrepreneurs through the All Party Parliamentary Group for Entrepreneurship.

Second, we help explain what is happening in Westminster and how it will impact entrepreneurs’ businesses. What’s the point of the government launching a new tax break if Britain’s business owners don’t know about it? And when a new regulation is going to burden businesses, we help explain its potential impact. Where appropriate, we even partner with the government – for example, with the Department for International Trade on their Exporting is Great strategy – but we will never take government money because doing so would undermine our independence.

Third, we are very much a do-tank (to steal a phrase from Madsen). Whether it's the Leap 100, a select group of some of the UK’s most exciting, high-growth companies, or projects like the Female Founders Forum, we are increasingly helping entrepreneurs in a practical way. In 2017, we have a new project that will help connect the founders of Britain's leading companies with the next generation of entrepreneurs – particularly the most talented young entrepreneurs who wouldn’t otherwise have access to our remarkable network of business owners and experts. For those familiar with the Adam Smith Institute, it will be like The Next Generation for entrepreneurs.

We will do much else besides – including our annual Parliamentary Snapshot that polls MPs on their knowledge of policies impacting entrepreneurs – and Regional Roundtables, which get us out of London for events up and down the country. It will be a busy year!

The latest terror to befall society - exercise inequality

As we all know social practices and idiocies, but we repeat ourselves, start over there and cross the Pond with a perhaps decade long delay. We should thus gird ourselves for the latest of these, the terrors of exercise inequality. 

Early on weekday mornings, I often find myself panting and sweating beside strangers in a dark room. Riding stationary bicycles with nightclub music blaring in my ears isn’t my idea of fun. But I turned to Flywheel’s spinning classes after the YMCA next to my office shut down, and now I’m hooked.

The draws for me are the ruthless efficiency of 45 minutes of grinding interval work and the fitness returns — running is a lot easier since I started spinning. The studio is also just a short walk from my house.

Lately, though, I’ve been questioning my reliance on this luxury studio, and wondering what exclusive gyms like Flywheel and SoulCycle mean for America’s epidemic of physical inactivity.

We are told that the poor take less exercise than the rich. Without any adjustment being made for the higher probability of manual labour among the poor of course. Those upper middle classes seem not to realise that some do still earn with the sweat of their bodies, not just their brains.

Then we have the laments about how the poor don't have as much access to leafy parks as the rich - entirely true, richer areas do tend to be better provided with such. Rather because richer people move to such areas but still.

And then the insistence that this is an inequality that should not stand. Why, to join one of these gyms might cost $100 a week (yes, we know, Veblen Good or what?) and the poor are just left with no parks and only the dangerous streets to cycle upon.

At which point we might note what it is that the privileged are actually exercising upon. A stationary bike in a room. A stationary bike costing some $130 these days when not on sale. And we're really pretty certain that the boom box for the music is a pocket money sort of cost these days.

No, it isn't true that the poor are left gaining their only exercise possibilities in dodging rent collectors. Thus this idea of exercise inequality is one of those American imports we can probably do without. But sadly, we'll get it anyway, won't we?

In Defence of Uber (again)

This morning’s Tube Strike brought chaos to the Capital, and people are (understandably) unhappy. A colleague at work took over two hours for a commute that usually takes just 20 minutes, and a friend ended up walking all the way from Paddington to Canary Wharf in the rain. Looking out the window as I write, the traffic hasn’t abated much and London has brought a new definition to the word sluggish.

In response, mobile taxi app Uber, renowned for its efficient and cheap service, has hiked its prices for a ride. Over four times the normal rate in fact. People flocked to social media to vent their despair, describing Uber’s behaviour as both “disgusting” and “disgraceful”.

But what such cross commuters fail to recognise is that Uber is actually doing us a favour. By using the surge pricing model that is responsible for the high fares, Uber are able to send an economic message to drivers, to lure them into London so that there is no shortage. Further, the higher prices ensure that the service isn’t completely inundated with requests to drivers, so that some drivers are likely to be available to those who are willing to pay.

This may not sound comforting though. One may well think that in hiking its fares, Uber is simply giving speed and efficiency to the wealthy, with no regard for the poor, who might be condemned to trudge the pavements of London. This may seem so, but what it also means is that the service is available for those who have an emergency on their hands. What’s £45 if it means you can make your job interview? What does £50 matter when you have a crucially important business meeting to get to, or have to rush your dog to the vet? Those who deem their punctuality sufficiently important (and who see Uber as sufficiently speedy) are able to get their ride. This would not be the case if such apparently “disgusting” and “disgraceful” behaviours were banned.

So rather than jab fingers at Uber, as businessman Roger Charteris did, tweeting “@Uber you are cashing in on people’s misery”, we should stand by them and their decision to raise prices, and defend their acting in their self-interest.