As the EU obviously knows, one should never let a crisis go to waste

The method of not wasting a crisis is well known. Declare that something must be done, that something quite possibly unrelated but something you wanted to do anyway. Thus it is with tax laws and the Paradise Papers:

Pierre Moscovici, the European commissioner for economic and financial affairs, blamed the inability of countries to agree on a common set of corporate rules for the “aggressive” tax planning policies of some companies.

He said a tax avoidance scandal exposed in the Paradise Papers last week could have been avoided had member states adopted the commission’s proposals, including a common consolidated corporate tax base (CCCTB) which Ireland strongly opposes. Yesterday, Mr Moscovici set out a new timeframe which called for agreement to be reached by the end of next year — two years early.

We are all terribly surprised, aren't we? As is being pointed out, this isn't really about offshore at all:

“Commissioner Moscovici’s comments regarding the causal link between a lack of common corporate tax practices across the EU and the recently exposed tax optimisation schemes as outlined in the Paradise Papers don’t stack up. None of the jurisdictions referenced in the Paradise Papers are members of the EU, and are not subject to the rules governing the union.”

What this is really about is the distaste, hatred even, of the tax collectors for tax competition. All of the rest of us, of course, should be in favour of the competition. For we do all agree that monopolies are a bad thing for us out here, don't we? So it is if all governments shake the same amount out of our wallets - that denies us the right of exit. Leaving and paying nothing being one of the most obvious methods of reducing the demands being made.

We actively desire tax competition therefore, not these attempts to abolish it.

A major problem with Keynesian economics is political - in fact, politicians

Steve Horowitz has a good piece detailing one of the basic problems with Keynesian economics. In a formal sense we can say that this is the addition of public choice economics which makes it not work in the real world. For the incentives faced by politicians are that they're only likely to do half of the idea, not all of it.

Keynesian economics changed all this by constructing an intellectual justification for viewing the federal budget as a tool for managing the economy rather than a constraint under which politicians operate.  Keynesianism argued that in recessions budget deficits could stimulate aggregate demand and lead to recovery, while in good times surpluses would both prevent excessive growth and pay back the debt.

This idea, known as “functional finance,” looks good on the blackboard but has a fatal flaw.

...

We must ask: Under the incentives built into our political institutions, is functional finance in the politicians’ self-interest?

Buchanan and Wagner say no.  Politicians love deficits because spending on their constituents gets them votes but raising taxes costs them votes.  Politicians are always vote-seekers, so those incentives and disincentives hold whether the economy is in a recession or a period of high growth.  Surpluses in growth periods are incompatible with those incentives.

That fixing the roof while the sun is shining that Keynes talked of never really does seem to happen.

Our own favourite example of this comes from Polly Toynbee. Certainly, that's not where we're going to go look for economic advice but as a measure of the political wind she's pretty good. It's instructive to read her pieces from the 2005 to 2007 period at the Guardian's archive. She notes the flood of money coming in from the taxation of a booming economy And uses that flood as the justification for setting up vast new redistributive programmes to beat child poverty (really, inequality) and so on.

Without noting that a budget surplus at the peak of this country's longest and largest peace time boom in modern history really might be a very idea indeed. A time to be paying down that national debt, not increasing it as G. Brown continued to do.

As Horowitz says, whatever else we might think about Keynesian economics the exigencies of politics mean that we don't actually follow those rules anyway - thus, sadly, it doesn't work over the long term.

No more cash for the NHS now, please Mr Hammond

We all know that the NHS will need more of our money but maybe not yet.  It should eliminate the huge sums it wastes first.  NHS England makes bold claims that it will improve productivity but is a bit short on the specifics. “Productivity” is usually defined as the ratio of output to the means of producing that output. There are two problems in using that measure for the NHS.  In the first place, there is no aggregate single number for NHS output.   Would using the operating theatre for two hip replacements rather than one tumour removal be more or less productive? 

Secondly, its does not distinguish “good costs” (directly increasing patient welfare) from “bad” (waste). The £20bn. 2010 productivity target[1] was largely to be delivered by restraining nurses’ wages.  We all know the negative consequences of that. The 2015 King’s Fund Report adds: “focusing on the monetary value of the [productivity] challenge risks missing the real essence of the task facing the NHS, which is about getting better value from the NHS budget. This means maximising the outcomes produced by the activities the NHS carries out, while minimising their costs. Framing the debate in terms of efficiency and costs also risks losing the opportunity to engage clinical staff in the challenge of changing the way in which care is delivered.”

In short “productivity” in the NHS context is a bogus word used to show good intent and justify demands for more expenditure.  The layers of supervisory hierarchies form one example.  Legal costs and the time nurses and junior doctors spend on their (outmoded) computer terminals rather than attend to patients are others. Eliminating waste immediately provides time and money for better patient outcomes.  Eliminating waste should be the target, not productivity.  Waste not, want not.

The King’s Fund uses a number of indicators of performance, as distinct from productivity, and this month’s Quarterly Monitoring Report makes grim reading.  Performance is down and going to get worse. Naturally this will stoke public, media and political outcry. Simon Stevens, CEO of NHS England, is wringing his hands and citing decreasing performance to justify more funding.

The Chancellor should call it like it is: if the NHS does not eliminate the waste when it really needs the money, it will certainly not do so if HM Treasury removes the need to do so.  He should tell Mr Stevens to focus on eliminating waste first and only when that is done, will funding follow.  Physicians heal yourselves.

Just as importantly, the public must be brought on board.  At present, the government is seen as the villain withholding the resources the NHS deserves.  The Tory government’s austerity programme is cruel, uncaring and unbalanced.  The public needs to be told just how much the NHS is wasting, not the dribs and drabs that are reported but the whole picture.  It could easily be 10% of the total and that would transform NHS funding but we do not know.  The NHS will not publish the total as to do so would undermine its demands.

By saying “no” the Chancellor can shift the focus.  He can insist on a fully quantified list of areas of waste in the NHS and Department of Health, drawing from the claims made in recent years by academics, practitioners and the Care Quality Commission. Performance and cost data by treatment category for the best and worst Trust outcomes should be analysed.  Some Trusts will be better at some things and worse at others.  Most of this data already exists within the Department of Health.  The NAO should audit the conclusions.

It would be wrong to leave a wholly negative impression.  Some substantive reductions in waste have been achieved.  For example, the 2015 Kings Fund Report noted some successes:

A different and more positive picture emerges when changes in how specific areas of care are provided are analysed:

• Increases in generic prescribing rates – up from 20 per cent in 1976 to 84 per cent in 2013 – have saved the NHS around £7.1 billion and allowed more than 490 million more items to be prescribed to patients.
• Reductions between 1998/9 and 2013/14 in the time patients spend in hospital have enabled more patients to be treated and avoided the need to provide 10,000 extra hospital beds.
• Increases in day surgery rates over the same period have generated savings of around £2 billion and enabled 1.3 million more elective patients to be treated.

Once most of the waste has been dealt with, then the Chancellor should indeed be more generous but we need to see a complete shift of focus first.

[1] QIPP 1 Quality, Innovation Productivity, Prevention initiative to generate productivity gains to the value of £20bn from 2010/11 to 2014/15 but “productivity gains” here means cost savings.

Fancy that - drug addicts have worse health than the general population

It's quite amazing what modern science can tell us these days. The Lancet has just surprised with the news that drug addicts have worse general health outcomes than society in general:

Britain’s most socially excluded groups are 10 times more likely to die early than the general population, according to analysis showing inequality is more pronounced than is documented. Its lead author said the disparity exposed “something toxic in our society”.

The findings, published in the Lancet and described as the most comprehensive assessment conducted into levels of mortality inequality, reveal women in socially excluded groups are 12 times more likely to die than other women of the same age, while men are eight times more likely.

Well, that's how it is being presented. That this is all about inequality, social exclusion and if we just equalised cash incomes some (or perhaps a lot) more then such social evils would disappear. Except this is to make the Michael Marmot mistake, to note economic inequality and some set of ills and assume that it's the inequality causing said ills.

The actual paper tells us a little more:

 Inclusion health focuses on people in extremely poor health due to poverty, marginalisation, and multimorbidity. We aimed to review morbidity and mortality data on four overlapping populations who experience considerable social exclusion: homeless populations, individuals with substance use disorders, sex workers, and imprisoned individuals.

Mortality here is when people die, morbidity is why. That proper definition of homelessness, rough sleeping, finds that near all are either highly transient or suffering from one or more substance disorders or mental health problems. The low end of prostitution is rather well known for being engaged in to feed a drug habit. The prisons are full of those there for (and still engaging in) drug habits. We're not really studying four discrete populations here at all.

But leave that aside and think of what they're really saying. Those who inject anything from brick dust through rat poison to synthetic opioids along with their heroin have worse health outcomes than the general population? Sex work is a dangerous occupation? OK, we'll accept those contentions.  But this is caused by economic inequality, social exclusion? Rather, than, perhaps the injection of rat poison mixed with brick dust? 

Note also that very economic inequality being complained of. At least two of our four groups are poor because of their behaviour - both prison and junkies' wages are notoriously low. That is, both the ill health and the inequality are being caused by the activities, not inequality itself producing either the actions nor the health outcomes.

But then this is modern science of a kind, isn't it? Deliberately and specifically ignoring a most important part of the scientific method, which is that we're actually trying to work out causality, it isn't enough to note correlation and then blame all on the fashionable phlogiston of the day.   

You know, The Lancet?

Amazingly, government often isn't very good at doing things

We're quite onside with the idea that there really are things which must be done by government. We're also entirely happy with the thought that there are things which government should encourage, incentivise, aid markets in doing and so on. We do though think that it's important to distinguish here. Between those things which must be directly done and those things which need to be encouraged, could be done better with a bit of intervention and so on.

For example, a decent vaccination campaign will produce "herd immunity." Those who cannot be vaccinated will still be protected as the diseases have no corner of the population in which to hide. Thus we're all in favour of government having a role in making sure that vaccination takes place, that herd immunity is achieved. We could, as the NHS does, simply get government to pay for vaccinating all children. We could also, as in much of the US, simply provide an incentive. Children can only go into the public school system, that one that has already been charged for through taxes, if they are vaccinated. Either works and so we're fine with either.

However, there is that set of things - a rather larger set than most suspect - where government might direct, encourage, foster, but should not be doing. Say, space rockets:

A new research paper by Edgar Zapata, who works at Kennedy Space Center, looks closely at the finances of SpaceX and NASA.

...

Zapata estimates that SpaceX launches cost NASA around $89,000 per kilogram of cargo delivered to the space station. There's no telling what precisely would have come from a cargo spacecraft developed by NASA, but Zapata estimates that it would be $272,000 per kg.

For future commercial crew missions sending astronauts into space, Zapata estimates that it will cost $405 million for a SpaceX Dragon crew deployment of 4 and $654 million for a Boeing Starliner, which is scheduled for its first flight in 2019. That sounds like a lot, and it is, but Zapata estimates that its only 37 to 39 percent of what it would have cost the government.

This is not something limited to rockets of course. We've no doubt at all that there is a government role in both health care and education. But perhaps it should be limited to making sure that it exists, providing a financing method for it, rather than actually being the producer of the services? Or train sets or generating plants or water pipes or....well you get the idea.

A currently fashionable and most pernicious idea is that if there should, righteously, be a role for government then that should be that government is the actual provider and manager of production. Something which we're sure is indeed true at times and mostly not given the areas to which people try to apply this argument.

Vox Populi is in the comments sections not the newspaper articles

We had a little go at the Fawcett Society over their gender pay gap calculation yesterday. What we think is rather fun about this issue is the extreme difference between what the two major left wing broadsheets (not that one of them appears on paper any more) say about the issue and what their readers insist upon telling them about it.

In The Guardian and The Independent there are pieces decrying how dreadfully the patriarchy oppresses women through the gender pay gap. In the comment sections below each there is near no one who is willing to accept even the basic diagnosis. Instead we've, from near all of those readers who could be bothered to give their view, repeated statements of the basic truths here.

There is no pay gap even if there is an earnings gap. To pay men and women unequally for the same job is illegal, the differences in earnings coming from different decisions about how to live life, what to do for an income and how much devotion to attend to that career. That is, the readers have got the point here, even if the newspapers themselves have not.

Yes, we will take some of the credit here for we have been banging on about this for a decade now. And Kate Andrews (who was with us) is indeed mentioned as being mentioned as a source to counter the misinformation.

That the people aren't being taken in by the agitprop we find cheering.

We might also extend this principle a little bit. Near none of the reporting The Guardian has done on the Paradise Papers even has a comments section for people to correct the articles themselves. We assume this is because even the editors know that such sections would just fill up with questions about why it's so appalling that others use offshore but just fine and dandy that the Guardian Media Group and Scott Trust Ltd do themselves.

The Fawcett Society really must start getting this right about the gender pay gap

Yet another report from the Fawcett Society on the iniquities of the gender pay gap. Yet another year in which they get the calculation wrong. This is now half a decade at least since they were told they're getting it wrong and yet still they continue to do so. The reason they do this is obvious, their method bigs up the problem they wish to complain about, doing it correctly does not. So, what is a campaigning group to do, eh? 

 Progress has stalled on closing the gender pay gap, which now stands at 14.1% according to the Office for National Statistics, with no movement on the figure in the last three years.

No, the ONS does not say that. The Fawcett mistake is explained here, in their press release.

To calculate the gender pay gap the Fawcett Society uses the ONS mean average full-time pay gap of 14.1%. Others often cite the median average which currently stands at 9.1% for full time workers, and has decreased by only 0.4 percentage points in the last five years.

As we've pointed out before the ONS, the Statistics Authority, both are insistent that we must use the median, not the mean. The reason being that our system of measurement is bounded at the bottom, we don't count negative incomes (which do exist, ask any bankrupt) but there is no upper bound to pay. Thus the median is a much better guide to the average experience.

Our then Kate Andrews made this point as well.

So far of course this is angels on pinheads stuff. Except, of course, that such public ineptitude should be pointed to. Then, after that, we do need to point to something much more important. Which is that, once we start with the right number, a gender pay gap of 9.6%, we find that it's not actually due to gender at all.

As we've explained elsewhere it's to do with primary childcare arrangements. Fathers earn more than non-fathers, mothers less than non-mothers. Mix and match the by how much of both of those with the relevant portions of the population and we have a complete and total explanation for that observed 9.6% gap. As other research has shown - familial roles are all we need to describe the observed reality.

We can, of course we can, still complain about this, campaign to change it. But if the cause is that mothers tend to be the primary childcarer then any action to change matters needs to change the manner in which parents parent, shouting about employers isn't going to make much difference, is it?  

And so the protectionists gather

We've not been shy about our support for a system of unilateral free trade. Others want to insist upon protecting British jobs and all that. They're wrong, of course, the steel industry being a useful example:

British jobs would be put at risk by government plans not to match the EU’s tough stance on dumped imports after Brexit, the steel industry has warned.

If, even if, some foreign government subsidises the production of steel then that cheap steel is a gift to us. For, we get cheap steel, which is excellent. But even then the protectionists go further in their demands:

At the root of the concern is the so-called “lesser duty rule”, which limits punitive tariffs on dumped products to the duty needed to redress the injury to domestic producers — rather than the subsidy enjoyed by the manufacturers. This is to prevent the system from being abused by protectionist interests.

Even when the duty levels are set at the damage done they're still complaining. Thus their complaint cannot really be about the damage done to their own interests, can it? It must be that they can see a method of raising tariffs further, to produce a positive benefit, not just the absence of the negative one.

But, of course, it gets worse. Steel is an intermediate good, an input into other processes. And we know what happens, from the American experience, when we try to raise that price:

 200,000 Americans lost their jobs to higher steel prices during 2002.
These lost jobs represent approximately $4 billion in lost wages from
February to November 2002.3
• One out of four (50,000) of these job losses occurred in the metal
manufacturing, machinery and equipment and transportation equipment and
parts sectors.
• Job losses escalated steadily over 2002, peaking in November (at 202,000
jobs), and slightly declining to 197,000 jobs in December.4
• More American workers lost their jobs in 2002 to higher steel prices than
the total number employed by the U.S. steel industry itself (187,500
Americans were employed by U.S. steel producers in December 2002).

We really cannot see anything at all to recommend trade tariffs.

Full expensing: the best idea in politics you've never heard of

What’s the best idea in politics that nobody’s ever heard of? I think it’s what’s called “full expensing”, a tweak to the corporation tax rules that could eliminate a lot of the damage that tax does. It’s obscure in Britain, but new evidence is beginning to show that it might just be the single best tax reform the government could do to raise productivity and growth.

Basically, “full expensing” means letting businesses deduct the cost of any investment they do from their corporation tax bills straight away. At the moment, for ongoing expenses like pens and paper, you can do that already. But for longer-term expenses, like investments in a new building or in new machinery, you can only deduct a small fraction of the cost of investment each year over the accounting lifespan of that investment. 

The problem is that this means that, in fact, businesses don’t actually get back the full cost of the investment. £100 today is worth more than £100 in ten years because of inflation and the things (like other investment) you could have done with the money in the mean time. The longer the write-off time, the less of the cost of the investment you can write off.

As the Tax Foundation’s excellent Kyle Pomerleau explains here, between 2008 and 2013 the UK reduced the value of deductions for machinery and property – from 87.5 percent to 84 percent for machinery, and from 59.2 percent to zero for industrial buildings. As Kyle says, “This means that corporations cannot write off the cost of investing in buildings over time at all!” (Kyle points out that this blunted the economic effects of the reductions in the headline corporation tax rate under the coalition.)

You may be able to see why this matters quite a lot. If we allowed businesses to deduct their investments from their tax bills immediately, we’d effectively be allowing them to deduct the full cost of those investments.

Now for the evidence. If our theory tells us what might happen, what does our evidence tell us what actually did happen? Two new papers, one from the US and one from the UK, suggest that full expensing could have very big positive economic effects.

The first, from Eric Ohrn, looks at states that adopted an full expensing policy temporarily in 2002 and 2008. It uses what’s called a ‘difference-in-differences’ technique which controls for the fact that states did not adopt these policies randomly – states starting from a lower level may have been more likely to adopt this sort of policy, for example.

Ohrn’s results are staggeringly large. Full expensing increased investment by 17.5% and grew wages by 2.5%. Five years after the full expensing window had been available, states that adopted it had 7.7% higher employment levels than comparable states that did not adopt it, and 10.5% higher production output (which means lower prices too, though not necessarily concentrated in that state).

This is such a large result that it sounds unbelievable. But it’s consistent with a paper from last year that looked at UK evidence too, from the introduction of a policy that allowed small- and medium-sized firms to write off more of their investments in plant and machinery early on – not full expensing, but closer than before (40% in the first year instead of 25%). A change in what allowed a firm to count as an SME gives the paper a quasi-experimental event, where they can look at firms that did not qualify one year and did the next, and compare them to firms whose status did not change.

Access to more generous capital allowances increased investment by 11% (2.1%–2.6% percentage points). That’s roughly consistent with the other paper (where the policy was more generous), and still shows a large effect. Both seem to suggest a high elasticity of investment, where every extra pound raised causes much less investment to take place.

Finally, Estonia's system of full expensing has helped to give it the most competitive tax system in the developed world, even though its headline rate of 20% is higher than many other's, including the UK's. In the four years after introducing full expensing in 2000, along with other reforms to its corporation tax, investment growth was 39 percentage points higher there than in its Baltic neighbours.

Full expensing sounds technical and obscure, and is unlikely to win votes on the doorstep. It is not the sort of policy to win headlines. But its effects seem like they could be very large, and could deliver the sort of jobs and wages boost that would be popular. For a government that seems desperate to boost investment, especially investment in machinery-intensive sectors like manufacturing, it could be one of the few policy silver bullets it has left.

Is VAT to blame for the productivity puzzle?

Yesterday the Office for Tax Simplification’s released its long-awaited review of Value Added Taxation. VAT raises about £120bn each year and in general is one of the least economically harmful taxes because it taxes consumption not investment. But the UK’s VAT is one of the world’s least efficient. In fact, in the OECD only Turkey and Greece (!) have less efficient VATs.

Source: OECD, Consumption Tax Trends 2016

I’ve commented before on the stupidity of the lower/zero rating of food and children’s clothes on this blog. Readers are probably aware of the famous Jaffa Cake case, but did you know that while potato crisps are taxed at the full rate, tortilla chips and prawn crackers are zero-rated? Alas, any brave politician determined to fix this distortion, would be mocked for proposing a ‘Doritos Tax’.

But it’s not just zero-rating where Britain falls behind. In an attempt to spare small-business owners the administrative burden of claiming and paying back VAT, we set the threshold for VAT registration rather high. In fact, we set it much higher than our European counterparts. If you report a turnover of £85,000 a year then you must register for VAT, incurring a tax bill of £17,000 minus any VAT reclaimed on inputs. As most businesses near the threshold are sole-proprietorships, where their inputs are low and most value-added comes from their own work, they are unlikely to be able to claim back much.

The result is a situation not too dissimilar to the problems caused under the slab system for Stamp Duty. Earning one extra pound can lead to a massive tax bill. As a result there is an overwhelming incentive for firms approaching the threshold to refuse work, under-report turnover or even take extra long holidays . This is seen in the data with firms massively bunching around the threshold.

Source: OTS, Review of Value Added Taxation

Paul Morton, tax director of the Office for Tax Simplification jokes “We hear that cruise ships are full of people staying below the VAT threshold.” We often worry about the effects of marginal tax rates approaching 50% sapping an entrepreneur's incentive to produce, imagine what a marginal tax rate of 1,700,000% on the next pound you earn does!

This is a serious problem. When we worry about a complex tax system, we are not worrying about the need for HMRC and KPMG having to hire extra accountants, rather we are concerned that it is leading people to behave in ways that will destroy productive economic activity.

This bunching effect is significant enough that it may help explain why Britain’s productivity levels are so stubbornly low. It probably isn’t the main factor, but it’s increasingly becoming clear that low productivity levels are not down to simply one thing. It’s not just people in the North being unable to move to productive work in the South because of eye-watering rents or underinvestment in productive machinery because of inadequate capital allowances. It’s all of those things combined.

There’s a further problem. Companies below the threshold often compete with firms registered for VAT. For instance, most Uber drivers turnover under £85,000 which means your average Uber ride is almost VAT-free (you pay VAT on Uber’s cut). If a competitor that employed its drivers directly entered the market, it would be forced to pay VAT in full on each journey. So, the VAT registration threshold might not simply discourage productive activity, it may also lead to inefficient corporate structures.

So what to do? I think the case for reducing the VAT registration threshold is overwhelming. If we brought level closer to the EU minimum threshold of €10,000, it would solve the bunching problem and raise around £2bn for the Treasury in the process. It would mean that more small businesses will have to bear the admin of registering for and paying VAT, but the harms can be mitigated. First, most will use the VAT Flat Rate Scheme which eliminates the need to claim and register every purchase and instead estimates a flat rate on your total turnover based on the industry you are in. So for instance a corner shop owner with lots of input costs will pay a flat 4% rate, while an IT consultant with few input costs will pay 14.5%. Second, we could use the additional £2bn in revenue to cushion the effect of the tax rise by raising the national insurance thresholds.

VAT is one of the least-bad ways to raise revenue. In theory. In practice the UK's VAT falls far short of the ideal. Fixing VAT would boost productivity, efficiency and give us the revenue to cut other more harmful taxes.