Ten initiatives to help young people: 9. No National Insurance for under 25s on minimum wage

Government has committed itself to raising the income tax threshold to the level of the minimum wage and indexing it there so that it will automatically rise to match any increases in the minimum wage.  The Adam Smith Institute has urged this for many years, largely on the grounds that if people are on wages that are reckoned to be the minimum, the state should not be taking money from them in taxation. There is one further thing that the government could do in this respect, however.  People on minimum wage are still liable to pay National Insurance, which has a threshold lower than that for income tax.  Since young people feature prominently among those on minimum wages, this hits them hard, taking money from those already struggling to get by on minimum wage.

It would help those young people if it were government policy to make the two thresholds the same for the under 25s.  That is, the NI threshold for them would rise to the minimum wage level, so that when government achieves its aim to equate the tax threshold with the minimum wage, those under 25 on minimum wage will pay neither income tax or National Insurance.

In large measure the whole system of National Insurance is an anachronistic anomaly.  Although originally conceived as an actual social insurance, it has long since ceased to be so.  There is no fund, and it operates like income tax on a pay-as-you-go system, with today's payments being used to meet the needs of today's beneficiaries.  The case for integrating NI into income tax is strong, but before then there is as a stronger case for calculating liabilities on the same basis as for income tax, with the same thresholds and exemptions.  If government feared how people would react when they saw how much tax they were paying in reality, they could run it as an "employment tax" running alongside income tax.

As a first step in that preferred direction, they should now have the NI threshold equated with income tax for the under 25s.  The further alignment of the two can be done later in systematic stages.  But the help given to low-paid young people would be immediate and effective.

The terror of the tampon tax

Following the Autumn Statement on Wednesday, women all over Britain have been in uproar. Why? Because George Osborne has decided to direct the £15 million pounds the treasury receives from the tampon tax into women’s charities and services. As an article in The Guardian says here:

Women will now fund services that protect them from violence perpetrated almost entirely by men. Hey, men, not only do you not have to pay for violence that you inflict on women, but when we get raped, abused or brutalised, we won’t cost the state anything either! What message is that sending other than violence against women is some kind of “women’s issue”? It’s not. It’s largely a male issue.

And The Independent has chimed in, too:

Since the Tory government has failed women in so many ways, it makes undeniable sense for it to help us to help ourselves. Give a woman a tampon and she’ll use it for free; teach a woman to pay tampon tax and she won’t even cost anything extra to the state when she gets raped, attacked or laid off at work.

So if you’re a woman escaping from an abusive relationship in the Chancellor’s Britain, you can now pay for your own counselling through the redistribution of an unfair tax on your sanitary products. Isn’t that just perfect? It has a beautiful circularity, kind of like the menstrual cycle itself.

However, this view is misguided. The government cannot get rid of the tax completely due to EU laws, so they’re going to receive an income from it, no matter how much various women dislike that fact. Isn’t it therefore a good thing Osborne is at least diverting it into something that the women who pay the tax will directly benefit from? Would these groups rather the government used the money to bomb Syria? Reduce the bank levy? Cut taxes on top earners? Probably not.

From 2010-2015 the Tories spent £40 million on support services and charities aiming to help women who have suffered from domestic violence or abuse. This clearly shows that yesterday’s policy announcement is nothing new: taxpayer’s money has always been going towards helping women's organisations. The difference is, women can now be safe in the knowledge that their £1.50 of tampon tax money per year is at least being spent on a cause they agree with.

Stop complaining about this decision, there’s no bloody point.

What a strange way to tax corporations

We've found over the years that Sir Simon Jenkins is generally sound on the subject of civil liberties. But he's a great deal less assured when it comes to the subject of economics. A pity, because he has decided to tell us all how corporations should be taxed: clearly within the purview of the economic way of thinking. He tells us that:

The answer is clear. Companies should pay corporation tax on the basis not of their headquarters or research base or place of origin.

They should pay on the proportionate spread of their sales. Likewise, individuals should pay tax to the country where they live or whose citizenship they enjoy – as is the case with most Americans.

That companies should pay on the basis of their sales is one of those Chesterton's Fence problems. Why doesn't the system work that way already? Because it has been considered and rejected, that's why. Such a system would mean that the company that made on single overseas sale would then need to file a full corporate tax return according to the rules of that country. This is not something that is likely to increase trade among small companies. And that's why the system is as it is.

It's entirely possible that it's not quite right in detail, but the current system operates on the basis that if you've a permanent establishment in a tax jurisdiction then you do indeed file a local return. And a permanent establishment, while it's not perfect, is used as a proxy for the corporation being a large enough actor in that local economy that it should be filing a tax return in it.

A business that one of us was once involved in once made a single sale of $6,500 gross value into India. The only sale into that country in a decade of operation. No sensible tax system is going to demand an Indian tax return on that basis, is it?

Sir Simon's suggestion also flies into the very face of the basic underlying rules of the European Union's Single Market. All companies are equal, from whichever jurisdiction, and may sell from any one EU country into any and all others.

Finally, look at the underlying idea. People buy things because they make them better off, by their own lights. The point and purpose of having an economy at all is to maximise this, to maximise peoples' opportunity to maximise their utility. We thus say, well, you, Mr. Johnny Foreigner, you have just made some of the residents of our country better off. Hmm, we'll have to fine you some tax for having done that you know.

Just not a sensible logical basis for taxation, is it?

Ten initiatives to help young people: 4. Personal service jobs tax deductible

Let down by the inadequacies of our education system, some young people leave school without any meaningful qualifications, and find it hard to obtain unemployment.  Meanwhile, many successful men and women in work find it difficult to balance the needs of a working life with domestic chores such as looking after children, keeping gardens tidy, and doing odd jobs around the house.  The domestic commitments make them less focused and less productive. The two could be matched, given appropriate incentives.  Young people with scant qualifications could work as nannies, au pairs, handymen, gardeners and, if they were put through their driving test, as chauffeurs.  Taking into account minimum wage and National Insurance, however, the cost of employing people in personal service would be beyond the means of many working people.

Given people to help with personal services, successful men and women could have more of their time to do work, and raise their productivity and their contribution to the nation's economy.  Government could facilitate this by making it a tax-deductible business expense for people to employ young people under the age of 25 in personal services such as those listed above.

The gains would be immense to both sides.  Freed from the hassle of domestic chores, the business people would gain time to concentrate more on their work.  The young people would gain employment, and would acquire skills and experience to render them more employable in the future.  They would have the habits, experience and discipline of work, and would enhance their CVs with good references.  Furthermore, they would have the examples of successful businessmen and women as role models, encouraging them to raise their own sights.  

There would be on-the-job training, with their employers coaching them in the requirements for acting as chauffeurs, gardeners, handymen, nannies, household assistants and the like.  It could be a requirement for tax deductibility that the employers would agree to train their employees in this manner.

There would, of course, be a tax cost to the Treasury if such employment were made tax-deductible.  But it would be offset by huge gains in employment, with fewer young people out of work, and fewer of them entering adult life without marketable skills.  Fewer of them would be dependent on state support in future.  The gains resulting from this would outweigh the costs.

It's what you believe that ain't so that's the problem

An American writes in The Guardian:

When an American talks about a “welfare state”, they’re talking about scattered programmes such as food stamps, tiny cash benefits and milk and formula vouchers for infants and pregnant women, which together provide a fraction of the benefits a British citizen is entitled to.

This is not in fact so. As that little chart shows. It comes from Lane Kenworthy, one of the better researchers into inequality and poverty in the US. The definition of the chart is:

Figure 6. Tenth-percentile household income Posttransfer-posttax household income. The incomes are adjusted for household size and then rescaled to reflect a three-person household, adjusted for inflation, and converted to US dollars using purchasing power parities. “k” = thousand. “Asl” is Australia; “Aus” is Austria. The lines are loess curves. Data sources: Luxembourg Income Study; OECD.

And his comment upon it:

OUR POOR AREN’T ESPECIALLY WELL-OFF America’s affluence doesn’t trickle down to everyone in a straightforward fashion. As figure 6 shows, the income of US households on the lower part of the income ladder is below that of their counterparts in many comparator nations.

Below that in many countries and as the chart shows, above that here in the UK. The point being that America provides a standard of living to its poor very much the same as those provided by the supposedly much more generous European countries. All are managing something between $10k a year and $30k and the US is slap bang in the middle.

All of which brings to mind Mark Twain's aphorism, that it's not what you don't know that's the problem, it's what you believe that ain't so that is. The US does have a welfare state and it produces much the same result as those of other countries.

However, there is one major difference. Which is that the US is a much more unequal country, even after the influence of that tax and benefit system. And we, being the pure utilitarians that we are, think that's fine, that's great even. For we do run with the idea that a certain minimum is going to be provided to those who cannot provide for themselves. We might argue about how that is done but we're fine with the basic set up. But once that is achieved we want the greatest good of the greatest number. And that means that once that minimum is in place then we want everyone above it to be able to thrive as much as possible.

Which is exactly what the American system provides of course: and is the explanation for that greater inequality. Because they only worry about providing that minimum, and not the inequality itself, then they tax the rest of society less, allowing it to thrive more. Sounds like a plan to us.

Aye, well, there's the rub, isn't it?

An interesting point made in a letter to The Observer:

At the risk of prompting incredulity and ire in equal measure in these days of a “low welfare, low tax, high wage” economy, I, for one, would not be opposed to higher taxation if I were able to feel that the revenues thereby accumulated would result in improved public services and in the amelioration of the increasing inequality that blights our society.

We would all be willing to pay more if what we received were better matched to our desires, if what we received increased our utility more than the cost to us in cash. However, the problem is that government has already exceeded its ability to work this magic for us.

There are undoubtedly things that both must be done and which only government can do. Thus the herding of us into the taxation net to pay for the national defense (of whatever size that may be, however organised), a criminal justice system (of whatever size and however organised) and so on through that list of things that must and can only be done by government is fair enough. We are, after all, around here minarchists, not anarcho-capitalists.

However, when marginal tax revenue is earmarked to pay for train sets to the Midlands, train sets that don't even pass their own cost benefit analysis, or barrages in that gaping chasm between Wales and England (although that is to be paid for by gouging us through our energy bills, not our tax ones), or an expansion of that outdoor relief for the dimmer scions of the upper middle classes that is Official Development Aid, it's not entirely obvious that, at this stage, more government is in fact worth the extra money we must pay for it.

The question then becomes, well, how can we increase our utility by deploying our cash, our accumulated effort, in a better manner? And the answer is that if government cannot manage it, as it cannot at this size, then we should be shifting more of our spending to market based methods, not filtering it through the preferences of the political class.

For example, if someone, like our letter writer, feels that inequality is too high and that he should be paying something to reduce it then the answer is in his own hands. Take some of the money he has and give it to a poor person. Inequality is thus reduced without the politicians splurging the cash on train sets, recreations of Offa's Dyke or gap years for Johannes and Jocasta.

The answer is thus in our own hands, not that of the tax system. For we cannot in fact, given who ends up in politics and deciding how that extra tax revenue is spent, make sure that more tax is indeed spent on what we desire it to be spent upon. Thus don't give them the money, deploy it instead as you would wish.

Of course, it is possible that someone, somewhere, has some clever plan to being the spendthrifts to heel in which case answers on a postcard to one G. Osborne, 11, Downing Street please. It's just that no one ever has cooked up such a plan, not in all the recorded history we have available to us for study. Thus we reach that tentative conclusion that it's simply not possible, although we're willing to entertain potential solutions. Just as we are for those flying jet packs we were all promised. But we do fear that it's something, like the jet pack, beyond the laws of reasonable physics and human nature.

Free Market Welfare: The case for a Negative Income Tax

The government should replace tax credits, Jobseeker’s Allowance, the Universal Credit, and most other major welfare payments with a single Negative Income Tax, according to a new report from the Adam Smith Institute, Free Market Welfare: The case for a Negative Income Tax. This Negative Income Tax (NIT) would act as a minimum income guarantee for all British citizens and be tapered away as people’s earnings rise through work. Britain’s existing welfare programmes are costly to administer, complicated to navigate, and designed for a postwar-style labour market that no longer exists, the paper argues.

Under a Negative Income Tax, if a citizen earns nothing then the automatic NIT payment will be their entire income. As the individual earns more through work, the payment is gradually withdrawn until the citizen begins paying tax. The payment scheme is structured so that the claimant is always better off working more hours or taking higher wages than in their current position. These payments would be automatic for workers within the PAYE system.

The report says that the biggest welfare challenge future governments are likely to face is chronic in-work poverty, as globalisation and technological change lead to lower productivity and pay growth for some bottom and middle earners. This means that Britain’s current welfare system is outmoded and must be restructured to support low-wage workers throughout sustained periods of low-paid work, not just when they are out of employment altogether.

Systems like tax credits and the Universal Credit aim towards this goal, but are still too complex. Instead of a complicated web of different payments, the government should make just one, the report’s author Michael Story argues. Recipients would decide themselves how to spend their benefit, and as they earn more in wages, the benefit would be withdrawn at a rate that guarantees work always pays.

A simpler welfare mechanism like the Negative Income Tax could be integrated into the tax system, allowing the government to shut down the Department for Work and Pensions, take many of its 34,000 staff off the payrolls and save up to £6bn in administration costs.

To read the full press release, click here.

The Coils of HMRC

To portray the same agony, a modern sculptor would depict Laocoön wrapped in the coils of the tax man.  There is no escape.  HMRC does not do email.  Letters go unanswered for months and one has to wait 45 minutes on the phone before being cut off. The harassed foot soldiers who deal with us are not to blame: their generals creating these labyrinthine coils are.  In a May 2010 speech to the CBI, the Chancellor promised radical tax simplification, saying “The tax system has become hugely complex over the last thirteen years. Since 1997, the tax legislation handbook has more than doubled in length. It is now over 11,000 pages long.”

One can question whether the length of the handbook, or the size of annual Finance Acts, accurately depicts tax complexity but there is no question that both have grown hugely since the 1980s and the Chancellors are mostly to blame.  Tolley’s Annual Tax Guide, at nearly 900 pages, has grown rather than shrunk under this Chancellor’s regime. Up to 1992, Finance Acts averaged below 200 pages.  They then doubled in length.  But rather than exercise any restraint, Osborne’s record is even worse: 668 pages in 2014.  2015 was curtailed for the election but he still produced 352 in March and a further 210 pages in July.

The Office for Tax Simplification was set up in 2010 and is now being made permanent. It has published over 30 reports and made 402 recommendations, starting with abolishing 43 tax reliefs – nice for the Treasury, not so nice for those losing out.  But these are tinkering round the edges.

Rather like the government seeking to engage in more wars with fewer soldiers, the Chancellor has simultaneously cut personnel numbers in HMRC – hence the lousy taxpayer service.

To give, briefly, a worm’s eye view, the forms they sent were completed and returned in early August.  Just before the 31st October cut-off, they were sent back on the grounds of being the wrong forms.  No mention of what the right forms might be.  Several hours of holding my phone next to my ear later, I was informed as to the correct forms.  The file note on that had not been passed on.  

Apparently, if the 31st October deadline was now missed, I would be fined as the original submission “did not count”.  Not to worry: I would win my appeal but I had to be fined first in order to appeal.

The new forms, far more complex than the old, appear to have arisen from HMRC’s new but heavy-handed anti-anti-avoidance rituals.  They have no sense of proportion: my few quid does not need pages and pages of questions.  I can prove my income, where it came from and that one piece of paper would have all the information needed to compute my tax.  The point of the 31st October deadline is that the computation is their job, not mine.  If we were talking large sums, it might another matter.

The same civil service mentality applies money laundering legislation to this village church’s flower fund.  Coils within coils.

Please, George Osborne, give us the radical tax simplification you promised.

Rather waving the bloody shroud, isn't it?

Whenever the budget of a bureaucracy is cut (and cuts here means "less than an acceptable rate of growth") then the cuts will be implemented in the most useful and obviously visible service that that bureaucracy is supposed to provide. This is not a new observation and we have no intention of trying to claim credit for it. The reason is twofold. The first is the obvious one that if some mild brake is applied to, say, the council's leisure budget then reducing library opening hours, or ceasing to purchase new books, gets the local paper (and MP) nicely roused to shout about it. Curtailing the supply of choccie bikkies at council meetings just wouldn't create the same public outrage.

The second is that of course that a bureaucracy's reason for existence is to be a bureaucracy. What service, if any, it emits is the least important thing about it. Most certainly less important than the continued existence of meetings at which there may or may not be choccie bikkies.

This is all we need to know to explain this story:

The Labour-run Newcastle Under Lyme Borough Council has told grieving relatives that no one can be buried in any of their eight cemeteries for three weeks, blaming funding cuts.

Sticking the bodies of the recently departed into holes in the ground is not a difficult nor expensive endeavour. This is precisely why we delegate the task to the local municipality. But if there is to be even the whiff of a cut to the overall budget it is those bloody shrouds that will be waived to the distress of the relatives of the departed. Cause the maximum pain: to fail to do so would be to betray all bureaucracies everywhere.

It is true that said council is currently advertising for a fitness trainer. But we do think that's rather the long way around of trying to reduce the pressure on the space in the graveyards.

Quick, someone tell Jeremy Corbyn about national insurance

In economics, as in medicine, we usually find out that things are connected. The shin bone is indeed connected to the knee bone and insurance benefits are closely connected to having paid insurance premiums. Sadly, in politics this essential interconnectedness of things is often missed. It could, of course, be some aspect of the political mindset that causes this but we think that it's essentially the ignorance of the political classes about the world they would rule. An example is this idea from Corbyn:

“I want our policy review to tackle this in a really serious way and consider opening up statutory maternity and paternity pay to the self-employed, so all newborn children can get the same level of care from their parents.

“Labour created the welfare state as an expression of a caring society but all too often that safety net is not there for self-employed people. It must be.”

The self-employed pay a radically different rate of national insurance than the employed. And they thus get rather different benefits from the social insurance schemes that we have. Thus such an "opening up" should lead to NI charges to the self-employed rising: a policy we think will be rather less popular than Corbyn might think.

We do however wonder what's going to happen when someone breaks it to Jezza that the self-employed don't get unemployment benefit either....