It's ridiculous to limit Airbnb as London is doing
It appears that the jobsworths have been able to limit Airbnb in London. This is not sensible:
Starting next year, the online service will automatically prevent hosts in London from letting their homes for more than 90 nights a year, unless they have the required “change-of use” planning permission from their local authority.
The reason for this is simply that Britian has too many people who enjoy saying "you'venotgottherightformforthisandIwon'tgiveyoupermissionanyway". Presumably for no other reason than that some people like saying that.
The effect of this is a $400 million loss in wealth to us Brits:
Airbnb will miss out on more than $400m worth of bookings in London this year as it enforces its new 90-night limit for hosts there, according to data that underpins the growing cost of regulatory compliance for the high-profile Silicon Valley start-up.
You might not think that renting out spare rooms, even for 91 days a year, is a method of creating wealth. But you would be wrong to think that way.
The definition of wealth creation is when we move something, some asset, from a lower value use to a higher value one. We've not abstracted anything more from the environment, not had to break into a sweat, not actually worked - and yet there it is, more value that can be enjoyed by human beings.
We're richer by the box room being rented out here, yea even unto 364 days a year. And we miss out on those riches, are poorer than we need be, by the bureaucrats demanding those forms and pencil filling.
But then that's rather the basis of the entire property planning business in the UK, isn't it? Don't allow anyone to build where people would actually like to use a building and most certainly don't allow people to add value by coming up with new things to do with a building.
And we are indeed all the poorer for it. As before, time to abolish the Town and Country Planning Act and all successors.
The Adam Smith Institute on Tax in 2017
Even after nearly seven years of austerity, state spending as a proportion of GDP sits at 43.2%. If we’re going to have a state anywhere near this size we need to minimise the destruction caused by the taxes we raise to fund it.
As Sam Bowman said on Monday "not all taxes are created equal". The starting point for all tax reform is that taxes change behaviour. Simply put, if you put a tax on something you should expect to see less of it. This basic insight is why we tax 'bad stuff' like booze, fags, and pollution. It's also why we should be concerned about taxes on 'good things' like saving, work, and selling your house.
Now our tax system raises revenue in about fifteen different ways. And some ways are much worse than others. In particular transaction taxes and taxes on savings are especially harmful to growth.
Nearly all taxes harm the economy, but our vision is a tax code which does as little harm as possible. To make that a reality, we'll be putting forward radical but realistic revenue-neutral reforms that will boost growth, boost competitiveness and boost wages for ordinary workers.
To that end, here are three reforms we'll be pushing in 2017.
1. Abolish all taxes on savings and investment
As it stands, our tax system punishes long-term investment and rewards short-term consumption. It’s a truism that people save to finance 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. It was this finding that led Stanford Economist Kenneth Judd to conclude that the optimal tax rate on capital is zero.
If we fixed this bug in our tax system and moved to a system that taxed consumption at the same rate regardless of when it takes place we could substantially boost growth or more. Nobel Prize winning Economist Robert Lucas estimated that this could boost long run GDP by 7%. That’s 7% extra to average incomes EVERY YEAR, just for tweaking how we collect taxes. As he points out, that’s better than eliminating the business cycle and every single product market monopoly. This would boost the income not just of wealthy savers but ordinary workers too, as capital investment boosts productivity makes labour more valuable.
Simply abolishing all capital taxes would blow up the deficit, and raising the revenue by simply raising a flat(ish, see point 3.) consumption tax like VAT would simply shift the burden to the poor. So how do we do it? To start with, we should tweak income tax to create a unlimited exemption for savings and investment. Think of it as an ISA on steroids. This would remove the savings penalty on those most able to increase their savings.
Next, we should abolish our complex corporation tax and switch to a simple Destination-based Business Cash Flow Tax. There’s three parts to this. First, it would tax all sales made in the UK just like VAT. Second, it would have an unlimited exemption for capital investment guaranteeing that future consumption wouldn’t be hit. Third, it would fully exempt all wages from tax making it progressive (counteracting Employer NICs that fall heaviest on low and middle earners). To get rid of the other smaller capital taxes like capital gains tax, we should simply raise the DBCFT.
These two simple (but radical) changes would boost growth while keeping our tax system progressive.
2. Abolish Stamp Duty
It’s not hard to find someone opposed to Stamp Duty. Few things unite Owen Jones, The Taxpayers’ Alliance and Kirstie Allsopp but Stamp Duty’s awfulness is one of them. The case against it is simple. It punishes people for moving and locks home-owners into properties they don’t want to stay in, while kicking away the housing ladder for first time buyers. To top it off, it doesn’t even raise that much (just 2% of total revenue). Let’s scrap it altogether.
3. Fixing VAT
VAT exemptions are the most inefficient form of welfare out there. It might seem compassionate to give a single dad on benefits a discounted tax rate when he buys his daughter a pair of £10 shoes from Matalan, but the VAT exemption also gives a discounted tax rate to a mum on a six-figure salary in finance buying her little boy a £200 pair of Baby Chanel shoes at Harrods. We have a welfare system that gives a single dad on benefits £2 and a high-flying banker twenty times as much. Surely there’s a better way?
There is. The IFS estimated that by scrapping VAT exemptions and zero-ratings we could raise £24bn. Since then, we’ve seen VAT rise to 20%, growth of around 14%, and inflation of around 21%, so it’d be even higher now. We could target that extra revenue at the poorest, make them better off than they are now and still raise an extra £3bn to pay down the deficit.
What we're doing in 2017
In 2017, we'll be continuing our media advocacy for these reforms, trying to reach as broad an audience as possible. Over the year, we plan to publish reports on all three proposals, summarising the state of economic research on each and setting out in detail our plans to fix the tax system. We'll also be putting on a range of lectures and panels, both in the ASI office and at Conservative Party Conference, forcing these ideas onto the agenda of policymakers.
If you were starting from scratch your tax code would look very, very different to what we have today in Britain. Our tax code has evolved over the years as a series of compromises, fudges and bad jokes. Adam Smith famously said "There's a lot of ruin in a nation" and it's certainly true when it comes to Britain's tax code. In 2017, let's do something about that.
More silliness on executive pay
It’s an open secret in think tank land that the period between Christmas and New Year is a great time to get news coverage even if your publication is, ah, a little thin.
One example of this was a sloppy study by Change Britain about the gains from leaving the Customs Union and Single Market, which I critiqued here.
Another was a paper by the Chartered Financial Analyst Society which claimed to show that there was no link between executive pay and firm performance over the past ten years – so high executive pay is wasteful. It did this by comparing the rise in executive pay over the last ten years (82%) with the rise to returns to investors over the same period (1%).
Since 80% is higher than 1%, it’s obvious that paying executives more hasn’t improved firm performance, right?
Um, no.
First of all, the total pot of CEO pay is much, much smaller (in total, £525 million per year on average across the study period) than the total pot of returns to shareholders – dividends alone were about £75 billion last year. So increasing CEO pay by 80% – £420 million – and dividends alone by 1% – £750 million – means shareholders are better off, even though the percentage rise has been much smaller.
Nobody thinks there’s a mechanical relationship between paying CEOs more and getting better performance for the firm. We think that CEOs matter an increasing amount to their firms (and we have empirical evidence that supports that view), in the same way that computers and the internet do.
Would you be impressed with a paper that showed that IT spending had risen by 100%, but firm performance had only risen by 1%, and claimed that this showed that computers are actually a waste of money? No, me neither. What would have happened to that firm if it hadn’t spend money on computers while its rivals had?
And of course a lot of CEOs’ jobs, especially during and after the Great Recession, are not about maximising short-term profits but firefighting, keeping the firm afloat, retooling for a changing economy. Again, looking at returns on capital misses this.
There’s such a lot of drivel around CEO pay, and it goes mostly unquestioned when it’s released during quiet times of the year.
Incidentally: it’s “Fat Cat Wednesday” today, the day when a lot of people are surprised that big multinational companies pay their Chief Executives as much as 140 of their rank-and-file employees. (Which is a bit like wondering why Apple cares more about its CEO Tim Cook than the staff of the Apple Store at Stratford shopping centre.)
It's a quiet time of year, so it gets coverage. But, apart from pointing at large salaries and saying that they just must be unfair, there's really not much to it.
Just what's wrong with the sugar tax
The idea of a sugar tax has once again raised its ugly head, in the wake of a new study by Public Health England. This study reveals that before the average British child even gets to school they've consumed over half of their guideline daily allowance of sugar. And according to Government research, over a fifth of children start primary school obese—a third of children end up leaving it that way.
So why then, shouldn't we stand behind Jamie Oliver, who has accused ministers of “letting down younger people”, and call for further change? The Government is already planning on implementing a tax on sugary drinks from April next year. But this complex, messy measure has side-effects the government has not considered.
Being a consumption tax, it will hit the poorest the hardest (as all consumption taxes do). The poorest 10% of UK households pay over 20% of their incomes on VAT and duties, over double the average. The introduction of a sugar tax will mostly affect the poor, changing the habits of the wealthy very little.
The Office of Budgetary Responsibility has said that the costs of the tax will go “entirely onto the price paid by consumers”, following the usual economic laws of tax incidence. And since fruit and milk-based drinks are excluded from the levy, some of the sugariest drinks, like a Costa Chai Latte, or a Starbucks white Chocolate Mocha (each containing over 18 teaspoons of sugar) get ignored.
Even if it did include all drinks, sugar comes in physical form too. The Institute for Fiscal Studies has said that it is highly likely that people will simply switch to buying other products—all untaxed—to get their fix of sugar. Given that only 17% of our sugar consumption comes from drinks, it seems more likely that the aforementioned levels of sugar consumption are not primarily drinks, but yoghurt, cereal and confectionery. An effective sugar tax would apply to all excessively sugary goods and not just drinks.
As if the proposed tax wasn’t poorly designed enough, it actually taxes a set of drinks per litre rather than by grams of sugar: once over the threshold, the sweetest drinks face the same levy as those just over. It's obvious how this might discourage lower sugar sweet drinks.
There is no clear example of a sugar tax cutting sugar consumption anywhere in the world, even though such a tax has been tried in Mexico and France already. Here the taxes have had almost no effect on calorific consumption, and consequently no impact on obesity levels.
Ultimately, these arguments may be moot points. Yes, the tax is illogical. No, it hasn't worked around the world, but in any case high calorie soft drinks consumption is falling. Last March soft drink consumption fell to a 30-year low in the US, and over here sales fell 17% 2007-2014. Perhaps, you will agree then that this fiscal gimmick by George Osborne should go the way of many of his other headline-grabbing tax gimmicks - into the dustbin of history.
The Adam Smith Institute in 2017
An awful lot is up for grabs in 2017. Brexit is going to be such a big change in British politics that we'll have to reconsider nearly everything we do. Big multinationals are thinking about moving to Dublin or Frankfurt? OK, let’s think about cutting taxes so they have a reason to stay. London rents are too expensive to attract talented Indian software engineers? OK, what can we do about planning?
Donald Trump’s election victory is going to embolden economic nationalists around the world, especially if it takes some time for the real cost of his policies to become clear. I’m less pessimistic about Trump than some people, but when the President of the United States says things like “China has been taking out massive amounts of money & wealth from the U.S. in totally one-sided trade”, it’s not good news for Smithian liberals.
The world is in a process of extreme flux. Whether that flux ends well or badly is up for grabs. We at the Adam Smith Institute tend to think of times like this as opportunities to change things for the better. When the big debates are about trade versus autarky, individualism versus collectivism, and bottom-up versus top-down ways of solving social problems, we think the real world is on our side, and if we do things right we can win.
Over the next two weeks, we’ll be writing about the areas where we’re going to be focusing our efforts in 2017, outlining what we've got planned. Among these focuses are:
- Free market urbanism. The UK needs free market planning and transport policies that allow lots more houses to be built where the demand actually is, of the kind that people actually want to live in and around, supported by infrastructure of the sort that people actually want and are willing to pay for. We believe in dense, beautiful, booming cities surrounded by green, open communities for families who prefer suburban life – all within the reach of people on normal incomes. In 2017 we’ll show how the market and bottom-up planning laws can get us these things, and try to promote policies that overcome the political obstacles to them.
- Pro-growth tax reform. Not all taxes are created equal. Some can be much more harmful than others because of the effect they have on economic activity. Those worst taxes are ones on capital, like corporation tax, capital gains tax and taxes on saved income, and taxes on transactions, like stamp duty. Growth matters a lot, and boosting it even by little amounts really can add up – by some measures, fixing our tax system could raise GDP by 7% or more. To put that in perspective, Nobel economist Robert Lucas reckons that scrapping all taxes on capital could make us even better off than eliminating the business cycle and all market monopolies. Our vision is a tax code that does as little harm to economic growth as possible, and in 2017 we’ll be outlining how to fix Britain’s tax system so that we stop taxing growth.
- Robust capitalism. We can pretend that nobody has any complaints about global capitalism, or we can be realistic and try to change the fact that they do. The global liberal order took a beating in 2016, and defending it will mean tackling the biggest obstacles to people’s satisfaction with their lives in places ‘left behind’. That means promoting a capitalism that works for people across the country and across society: devolving powers over spending and regulation to city regions so less prosperous parts of the country can gain a competitive advantage; replacing the welfare system with a simple, pro-work Negative Income Tax so that people have the flexibility to reskill as technology changes the job market; and designing an immigration system that brings us the best and brightest talent from around the world without creating native resentment.
- Liberal solutions to everyday problems. What does a free market think tank have to say to people who rarely think about politics, but who are affected by it all the same? This year we will be making a conscious, concerted effort to break out of the Westminster bubble – break out of the politics bubble, really – and talk about how to solve some of the problems that affect people across the country. The biggest among these is how to make childcare less expensive, so women have more freedom to return to work after having children and parents have an easier time raising their families. We’re going to be pushing ahead to get the rules banning safe standing football stadiums lifted, so ticket prices can fall, and we’ll be making the case for a liberal approach to the nighttime economy so that people can have an better and cheaper time when they go out in the evenings.
- Entrepreneurship policy that works. Way too much of the government’s policy to support entrepreneurs ends up being a boondoggle for “grantrepreneurs” rather than the real innovators. Our work on entrepreneurship, through our sister think tank the Entrepreneurs’ Network, is about cutting through the PR guff and letting entrepreneurs speak for themselves to government, and focusing on the policies that really promote business innovation: simpler regulations, lower taxes, and openness to the rest of the world.
- A united, global Brexit. Brexit is going to dominate British politics and it’s crucial that there are voices in favour of free trade with the EU and the rest of the world, and a liberal approach to migration that nonetheless maintains control over Britain’s borders. We’ll be working with other groups, left and right, Leave and Remain, to promote a liberal Brexit that the whole country can support, and gets Britain her sovereignty and the freedom to trade with the world while preserving deep economic ties with our neighbours in Europe.
- Techno-optimism and harm reduction. We’re nothing if not optimistic at the ASI, and a lot of that comes from our confidence in the ability of technology to solve many of our problems. We seem to be on the cusp of enormous steps forward in technology – from driverless cars and drones to the blockchain, 3D printing and machine learning – that promise to change our lives for the better, if we let them. And in the field of harm reduction, our Sinnovation paper made the case that e-cigarettes, already saving millions of people from the diseases caused by smoking, are just the beginning of technology’s answer to the costs of having fun – hangover-free booze and other reduced risk tobacco products are on the way too, but only if we let them. It’s our job to make sure we do.
On top of all this, we’ll be continuing our work on financial stability and monetary reform, led by work by our senior fellows Prof Kevin Dowd and Prof Anthony J Evans, and on public service reform that brings choice and competition to the NHS and education sectors.
We’re about giving people control over their own lives. We want an open, prosperous Britain, where solutions to people’s problems come from markets, not the state. We make our case on the basis of the facts, not dogma, because we want to persuade others and not just preach to the choir. These are radical ideas, for sure – but there’s never been a better time to think big.
Announcing our Young Writer on Liberty Competition
The Adam Smith Institute invites under-21s to enter our annual 'Young Writer on Liberty' competition.
This year’s theme is: New technologies - opportunities, challenges and obstacles.
This is not a typical essay contest. Instead, entrants should submit three pieces in the style of ASI blog posts. Each post should highlight a different aspect or area of policy where new technology will change the established order, whether for better or worse, and discuss the implications this might have for policy. Some examples might be how biometric technology can change the UK’s border policy, or how driverless cars might change the face of Britain’s cities. As ever, please remember that we are interested in entries that show an understanding of the benefits of free markets and individual liberty.
We are looking for entrants who can think creatively and express themselves clearly and succinctly. As such, winning entries will be thought-provoking, well-argued, and suitably researched.
Prizes: There are categories for the Under-18s and the 18-21s, with a winner and a runner-up in each.
The winner of the Under-18 category will receive £150 prize money and a box of liberty-themed books. They will also have their articles published on the Adam Smith Institute blog.
The winner of the 18-21 category will receive 2 weeks work experience at the Adam Smith Institute, £150 prize money, a box of liberty-themed books, and have their work published on the ASI blog.
Runners-up in each category will also receive a box of books, and have an article of their choice featured on the website.
How to enter: You should send your three articles via email to schools@adamsmith.org
The deadline for entries is 11.59pm on Tuesday, March 7th. Applicants must be 21 or under on this date.
If you have any questions or queries, please contact samd@adamsmith.org.
We look forward to reading your entries!
Do we really need to explain supply and demand again?
Sadly, apparently, yes we do, we need to explain supply, demand and the role of prices once again:
Rail passengers facing further misery from strikes have described fare increases effective from today as a “kick in the teeth” after it emerged some are paying 43 per cent more for season tickets than they did seven years ago.
The average fare increase of 2.3 per cent across Britain came into effect this morning, though Virgin Trains East Coast has imposed a 4.9 per cent average increase on its services, the highest of any operator.
It is the biggest fare increase since January 2014, despite overcrowding and cancellations getting worse year on year.
One campaign group warned that passengers are being “priced off the railways” by fare increases that have far outstripped wage rises in recent years.
The problem there is the use of the word "despite" - it should be "because".
And to give that basic lesson in supply and demand and the interaction with prices. It is simple enough for demand for something to rise above the possible supply of it. Similarly, demand can fall below the available supply. We call these shortages and gluts. Which is what brings price into it. Prices are the method of rationing such things. As prices rise fewer people desire whatever it is and thus the pressure upon supply is loosened. As prices fall more desire and so that extra supply is snapped up.
Prices move more when either supply and or demand are inelastic (obviously, because elasticity is just the amount that prices move in relation to a supply or demand change) and less when elastic.
The provision of train services is inelastic. At the times that people actually want to travel those iron roads are full. We can't add more carriages because of the lengths of station platforms as well. We can go off an build new railways, yes, or get the signalling better or.....but these all take time. Supply of new capacity is this "chunky" rather than fine grained and as such is inelastic.
Given that this is so then if, as and when demand increases then prices should rise and rise strongly. That is, prices are going up not despite overcrowding but because of overcrowding. What is more they should be too.
Roughly speaking fares pay for the operation of the railways these days even if not for the capital projects to expand capacity. The difference between British railways and continental ones being, roughly, that passengers here receive no taxpayer subsidy while they do there. And why should the general taxpayer be paying for someones' preferred method of travel?
That the capital costs of expansion are indeed still subsidised from the general revenue rather tells us that fares should rise again, if not again again. For there is no good reason why those who travel upon the railways should not pay the full costs, operating and capital, of travelling upon the railways.
Fares are going up because overcrowding, not despite. And overcrowding will cease if they go up again, either to limit demand or to pay for the expansion of supply.
This supply and demand stuff, the changes in prices, it all really does work. About time that people grasped it, no?
We're really very amazed at how this works
It's really very impressive when the government manages to do both these things at the same time:
The government faces a huge cross-party revolt next week over controversial reforms of higher education that would make it easier for new colleges to award degrees, become universities and make profits from teaching students.
Labour, the Liberal Democrats and crossbench peers in the House of Lords have joined forces in an attempt to scupper what they believe is an attempt at full-scale “marketisation” of the sector – a move they say would lower standards and damage the UK’s reputation for running many of the best universities in the world.
The peers – and university leaders – also say the reforms would destroy the cherished autonomy of UK universities and allow political interference by ministers into how they are run, teach courses and conduct research.
The government is to allow a rather more free market approach. A college might become a university, a college which charges students for the education they receive and then makes a profit or not based upon the results. This is done without the government allocating money to them, funding them with grants nor, actually, having much to do with them at all.
This is then going to lead to the government having more say over how universities work?
We are impressed. We're just not sure what it is that we are impressed about. The nefarity of the plans or the misunderstandings of the Lords.
As to the basic concept we think it's great, of course. Why shouldn't people be able to offer to educate? And why shouldn't people be allowed to choose to be educated? The only problem we can possibly think of is that the new universities won't have much space for the critical studies bods and nor will the students be so indoctrinated.....ah, yes, we see the problem now, having spent two generations marching through the institutions it would be galling to find that they were replaced without you, wouldn't it?
The NHS should be fit for us, not us for it
This is a small, note small, reminder of what Hayek was warning us about:
The NHS is being put under intolerable strain by "selfish" partygoers getting "blotto", the head of the health service has warned.
Simon Stevens said the NHS was being treated as the “National Hangover Service” as international research found Britain has one of the worst records for binge drinking, drug taking and sexually transmitted diseases.
The NHS chief executive said services already under heavy pressure were being compromised by those hell bent on hard living.
Not that government provision of health care would immediately turn us into a Soviet state. But that it was indeed going to be a pace or two along that path.
For look what the message is here. We British are not worthy of that National Health Service which government, in its munificence, provides for us. We get ill from the wrong things, we must change our ways so that we can be worthy of the Wonder of the World that it is.
It might be that some form of collective health care provision is a good idea. We can argue about the benefits of government provision, of monopoly, of Stalinist management and so on. But let's lay out what it is that we should really be getting from any such system.
Here's us, the people. We pay a portion of our incomes into this scheme, whatever it is, for health care. That system should thus be treating us of the diseases to which we are subject. That is, the system has to be worthy of us, not we of it.
And if it turns out that we're clap ridden dopehead drunks then that's what the health system we pay for should be treating. Simply because we're paying for a health care system to treat us, not one to offer what some mythically perfect population might theoretically deserve.
Which is where Hayek's point comes in again and where government provision rather fails. Hayek told us that we would be told to buck up and live as the planners think we ought to if they got that control and the very lack of choice means that we don't have the opportunity, by our actions, to change what is provided. Unlike a market system which really does reflect consumer desires because it has to.
The very fact that the NHS is complaining about what actually ails us Brits is what is wrong with the NHS.
Corporations should not donate to charity at all
It's amusing to find both a factual misstatement and a logical one in the same piece in The Times:
Britain is a rich nation that does not give away as much of its money as it should.
The measure of should is of course something of a movable feast. But the fact is that Britain is indeed a rich nation - and it's also one of the most charitable on the planet. We hesitate to state that the forced removal from our wallets of 0.7% of everything to spend upon Ethiopia's Spice Girls is charity but that is how some see it. And the truth is that we have this highest in the world ODA as well as also retaining that older habit of doing it ourselves without government as the intermediary.
Another way to put this is that forced extraction of foreign aid has not yet crowded out the more personal charitable giving. So unless our definition of "should" here is "vastly more than everyone else" it's not really true that we don't do enough.
We also get the logical error:
The real philanthropic failure, in fact, is corporate. Of the donations of more than £1 million in 2014, less than a quarter came from corporations. Only 23 per cent of FTSE companies donate 1 per cent of their pre-tax profits to charity. The whole of corporate giving, at £2.5 billion per annum, is only just more than the amount given by rich individuals. It is a quarter of the amount raised in tiny increments by the British public. This is a feeble effort.
No, that is £2.5 billion too much. A corporation is an artificial person constituted for one single purpose, to make money for the owners. Once it has done so it is up to those owners what they do with it. And while we might indeed gain an agreement among the hundreds of thousands who have a part of Unilever that selling soap to make a profit is a good idea we are not going to gain similar agreement that donating to the donkeys, the RNLI, or whichever NGO employs the Chairman's idiot niece this year, is deserving.
Thus the money should flow back to said owners, the shareholders, for them to do as they wish with it. Not be allocated in a manner which makes the managers (aka employees) feel good.
Quite apart from anything else corporate charitable donations are the spending of other peoples' money on other people. Which is to truly fail Milton Friedman's test of the four ways in which money can be spent. As PJ O'Rourke almost pointed out this is how we get that spending upon Ethiopia's Spice Girls.