Osborne scraps the worst tax in Britain – the ASI's reaction to the Autumn Statement

Here are our comments on today's Autumn Statement: Stamp duty:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

The old stamp duty slab system was one of the worst taxes Britain had, and we welcome the Chancellor's radicalism in abolishing it, rather than simply tinkering around the edges.

According to the best economic research, raising £1 through stamp duty imposes £2-£5 of cost on the economy. Though it will still, as a transactions tax, cost the economy heavily, the reform will reduce the economic cost substantially. This is a tax cut for the squeezed middle that will make a big difference to a lot of people's lives. Politically, it could be a game-changer.

Business rates:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

A cap on business rate rises is welcome but the rates system itself needs more fundamental reform. The longer rates take to be revalued, the more distortionary the system is, penalising firms located in areas that have done badly since the last valuation. The longer the gap between rates revaluations, the greater the penalty for businesses in poorer areas and the effective subsidy for businesses in richer ones. Ideally the government should move towards a system of constantly rolling rates revaluations. If Zoopla can judge land values accurately on a rolling basis, so can HM Treasury.

Road infrastructure:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

Infrastructure investment, especially into congested roads, is bound to pass a cost-benefit analysis. The problem is that we had to wait this long. If private firms could build roads, funded by tolls, then we'd likely have all of these roads already. As well as providing funds for investment, and making sure the investment goes to the most in-demand areas, pricing roads also means they get used more efficiently.

Pensions: 55% tax, tax-free inherited ISA

Director of the Adam Smith Institute, Dr Eamonn Butler, said:

The Chancellor is right to kill off the iniquitous 55% tax on inherited pensions, as well as the tax on inherited ISAs. If people have saved for their retirement but die before exhausting their nest-egg, it should go straight to their dependents, not to the Chancellor.

NHS Spending:

Communications Manager at the Adam Smith Institute, Kate Andrews, said:

The Conservatives, along with the opposition parties, are playing politics with the NHS budget. Everyone is vying to be seen as the 'party of the NHS' but no one is willing to have a serious conversation about the reforms that could make the NHS financially viable for the next ten years, let alone for future generations; like charging small fees for non-emergency visits.

It's been estimated that the NHS could fall into a budget crisis as early as 2015, which could result in cuts to core staff, longer patient waiting lists, and a deterioration in the quality of health care. While the extra £2 billion per year proposed by Osborne today will offsets short-term worries, it merely kicks the can down the road for a little while longer. Serious proposals to address the spending and demand that comes with free care ‘at the point of use’ could not come soon enough.

Personal Allowance rise:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

The Adam Smith Institute has called for the personal allowance to be raised to the full-time minimum wage rate for over a decade and it is welcome to see the government move in this direction. But the National Insurance Contributions threshold has been left untouched, which costs full-time minimum wage workers £667.68 a year. To really help low-income workers the Chancellor should make raising the National Insurance threshold one of his top priorities.

Capital gains tax on property for foreigners:

Head of Research at the Adam Smith Institute, Ben Southwood, said:

Capital gains taxes are some of the worst ones on the statute book, making society poorer by reducing the efficiency of investment and its total amount, but if we have to have them then everyone should pay them.

This is not just because of fairness, but because it causes massive distortions when different groups face different tax rates. In this case it's likely to both lead to excessive foreign ownership of property—both by favouring foreigners over natives in property taxes and by favouring property over other assets for foreigners.

Masters degree loans:

Director of The Entrepreneurs Network, Philip Salter, said:

By extending Entrepreneurs’ Relief and R&D tax credits George Osborne is backing Britain’s entrepreneurs. However, the government’s intervention in the postgraduate student loan market risks crowding out private sector solutions. Banks already provide Professional and Career Development Loans, and entrepreneurial companies like Future Finance, StudentFunder and Prodigy Finance are responding to the demand for loans for postgraduate studies. We are on the verge of the equivalent of the funding revolution we are seeing in SME finance but this intervention risks stymieing it.

The deficit:

Deputy Director of the Adam Smith Institute, Sam Bowman, said:

The deficit is still enormous and much higher than anybody expected at the beginning of this Parliament. We are borrowing £100bn this year, both because planned cuts to the welfare budget have not taken place and because the growth we have had has not translated into much extra tax revenue. But as high as this is, the Chancellor’s plans to reduce the deficit still seem credible – financial markets are lending to the country at unprecedentedly cheap levels and once productivity eventually does start to recover, things should begin to look considerably better.

Notes to editors:

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@old.adamsmith.org / 07584 778207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Gabriel Zucman's latest very interesting paper

There's much huffing and puffing about the information in that above chart. The capitalist bastards are taking an ever growing share of the economy and something must be done! And then along comes Gabriel Zucman (he's the third of the Parisian economic trio, along with Emmanuel Saez and Thomas Piketty) to try and tell us that this really is a problem and something must be done! Except the evidence that he shows us tells us that it's not the problem that it is usually identified as. Here's his latest paper:

Measuring the costs of tax havens to foreign governments is fraught with difficulties. However, balance of payments data and corporate filings show that US companies are shifting profits to Bermuda, Luxembourg, and similar countries on a large and growing scale. About 20 percent of all US corporate profits are now booked in such havens, a tenfold increase since the 1980s. This profit-shifting is typically done within the letter of the law and thus would be best described as tax avoidance rather than fraud.

There's certainly profit shifting going on but it's not profits being shifted out of the US and into those tax havens, not to any great degree at least. The IRS isn't dumb enough to allow that at any great scale. What is happening is that US based corporations are making larger profits from their foreign activities and then parking them in those tax havens.

Yes, really: the way that US profits as a share of GDP is calculated is that all profits made by US domiciled firms are counted as part of US GDP. So, Glaxo's profits in the US (and the associated underlying economic activity that generates them) are part of US GDP. Apple's profits in the US, and the associated underlying economic activity in the US, are part of US GDP. But, crucially, Apple's profits in Europe, but not the underlying associated economic activity in Europe that generates them, are also part of US GDP. So, if Apple's European profits rise then US GDP rises by the amount of those profits and the capital share, or the associated profit share, of US GDP also rises by the same amount. But, of course, that means that the profit share of US GDP rises: but that's purely an effect of the way that we calculate the numbers. Nothing has flowed from labour to capital in the US economy. The workers aren't getting any less of the portion of their labours.

Simply, foreign profits of US corporations have risen. This means absolutely nothing at all to the US domestic economy in the sense that while, because of the way we measure it, the capital (or profit) shares are rising, there's simply no effect at all on the division of spoils inside the American economy.

Zucman is also showing that this is a significant effect. At least two whole percentage points of GDP.

Of course, Zucman is also telling us that this is terrible and that something must be done! On examination however it seems to be largely of no import at all. So, Apple is increasing its European profits. This is bad because?

A solution to the reclining airplane seat dilemma

Anybody who has to fly home for Christmas will know the reclining seat dilemma. It's kind of annoying if the person in front of you reclines their seat and usually forces you to do the same. (Which puts the person behind you into a tight spot and forces them to recline too, and so on.) Josh Barro, invoking the great economist Ronald Coase, suggests paying the person in front not to recline, but Virginia Postrel disagrees:

This solution, however, is highly unrealistic. It waves away the central theme running throughout Coase’s work: the problem of transaction costs. Making and enforcing contracts, Coase emphasized, isn’t free. And when it comes to airline seats, it’s a lot more costly than Barro admits.

In theory, I could have offered the guy in front of me money to sit up, but even assuming that my fractured Italian had been up to conducting the negotiations and that he wouldn’t have gotten nasty in response to my overtures, how would I have enforced the deal? It’s not a simple problem, and certainly not a cost-free one. Suggesting that as long as property rights are well-defined, you can simply make a deal misunderstands what Coase was all about. He was obsessed with transaction costs. They explain why we have institutions (including firms), not just individual bargains.

It's also kind of embarrassing to do this, because some eccentrics think 'commodifying' parts of everyday life is a bad thing. Postrel's solution is a little more elegant. Divide the plane down the middle, with seats on the left able to recline and seats on the right fixed in position. If it turns out that people prefer one side to the other, charge more for that and less for the other. It's so simple it might just work.

Well, isn't this an early Christmas present?

We here at the ASI have been arguing for many years now that the most absurd part of our income tax system is that people working part time on the minimum wage are inside the income tax system. We've been arguing it so loudly that something is about to happen:

None of the four main UK parties are proposing a tax cut package that would predominantly benefit low earners, the Resolution Foundation thinktank said on Monday.

A report analysing the impact of the main tax cuts being proposed by the Conservatives, Labour, the Liberal Democrats and the UK Independence party (Ukip) said they would not benefit nearly 5m low-paid employees who do not pay income tax.

Although it found the Labour and Lib Dem proposals were less regressive than the Conservative and Ukip ones, it said that the poorest 50% of households would only get a quarter of the overall benefits even under the fairer plans. The foundation said a more progressive approach would be to raise the national insurance threshold and to lift the work allowance within universal credit. Even though the government is running a deficit of nearly £100bn, all the main parties will be proposing tax cuts in their election manifestoes.

The Conservaties and the Lib Dems both want to raise the basic rate income tax threshold to £12,500. The Conservatives also want to lift the higher rate threshold to £50,000. Labour wants to introduce a 10p tax band. And Ukip wants to raise the basic rate threshold to £13,500, and to introduce a new 35p tax band for those earning between £47,000 and £61,000.

Three of those four proposals to raise that personal allowance come from us here. No, not directly (in one case, yes directly) necessarily but we can point to the Lib Dem we convinced and the path of the proposal through that party. And of course the Tories are just following on. Hurrah! etc.

That the idea, that if we want the working poor to have more money we should simply stop taxing them so much, has caught on is lovely. That it annoys the Resolution Foundation so much is just icing on the cake.

However, they do make one good point:

Kelly also said it would be fairer to prioritise raising the national insurance threshold, because this would benefit the 1.2m people who earn enough to pay national insurance but not enough to pay income tax (for which the threshold is higher).

Yep, raise that NI limit (including the employers' part) to again that full time, full year, minimum wage. Sure, it would be "expensive" if you take that horribly statist attitude that all money really belongs to the State and thus that not taxing it off people is a cost. But out here in the real world most people do get the basic idea. If there is some minimum amount that it is righteous and just (an idea we're not sure about ourselves) that the State insists people are paid then it is equally righteous and just that the State doesn't dip its fingers into those wallets getting that righteous and just minimum amount.

Or, as we've been saying for these long years now. If you want the working poor to have more money then stop taxing them so bloody much.

This is a bit of cheek from Tessa Jowell, isn't it?

One of the reasons that we around here aren't in politics is simply because we've not got the cheek to be a politician. This doesn't seem to be true of Tessa Jowell (who, we might recall, resigned from her family to spend more time in politics) as she shows here:

Now Labour MP Tessa Jowell is launching a campaign to cap excessive charges on money transfers, saying remittance companies have become “the international Wonga”, referring to companies that charge exorbitant interest rates on short-term loans. She says the “transfer tax” can add £20 to a payment of £100, especially in the case of money sent to sub-Saharan Africa. Fees to countries in Asia and Latin America are also high.

“Many people who are trying to support friends and family abroad are being ripped off. Instead of their hard-earned money going towards medical bills, books or to cover the cost of failing crops, huge amounts are being creamed off by the giant money transfer companies who have cornered the market,” said Jowell, who will launch a campaign to “Stop the Transfer Tax Rip-Off” in Brixton on Sunday.

We're almost rapturous in our applause for the effrontery of this. Tessa Jowell has been in Parliament since 1992. She has held ministerial office in a government that increased the costs to such money transfer firms by tightening up all of the money laundering and know your customer rules. Now that she's leaving Parliament she's setting herself up to run a campaign to undo the evil effects of those very laws she voted for while in Parliament.

It's quite a cheek really, isn't it? Earn your pension crust by campaigning against the things you did while still employed by the electorate?

No, no, we here at the ASI do think ourselves quite brazen, have no illusions about our own chutzpah, but we really cannot rise to this sort of level. Which is, as above, why we're not politicians. Just can't do it.

Geoffrey Lean's still not getting it about housing

It's becoming somewhat tedious to have to continually correct the misunderstandings that people have about the English housing market (and yes, it's really an English problem, not a British one). Today's example of just not getting it is Geoffrey Lean in the Telegraph:

You hear it all the time, in the mouths of developers, ministers and commentators. The reason for building over unspoilt countryside is that the nation is short of land for housing, thanks to an unduly restrictive planning system.

This mantra drives government planning policy, and – under its pressure – councils have set aside sites for up to 700,000 new homes on greenfield land. It is also the rationale for allowing, nay encouraging, speculative building that is threatening to swamp village after village across the country: its “physical harm” – even one of Downing Street's favourite MPs, Nadhim Zadawi of Stratford-upon-Avon, who sits on the No 10 policy board, has warned – threatens to become “the defining legacy of this Government”.

But it's wrong, plain wrong. For a start, developers are sitting on enough land for 400,000 houses which have already been given planning permission. That's enough for nearly four years at the present much too low rate of building – or two years of what would be needed to meet a realistic demand.

Yes, that land bank. So, how long does it take to get planning permission (by which we mean, from a standing start to actually being allowed to break earth on the project)? Two years? Four? It's most certainly not 6 months, is it?

Great, so, we would expect any responsible business to have enough, in stock, of its basic raw material to cover the lead time necessary to create more of that basic raw material. If it takes one week to get more steel then we'd expect a car plant to have, somewhere around and about the place, a week's worth of steel. So, given that we have a constipated planning system we expect builders to have a stock of their basic raw material, land with planning permission.

That these land banks exist is proof, not that the builders are hoarding, but that the planning system suffers from that constipation. Everyone would be a great deal happier if they didn't have to have vast amounts of capital tied up in such land.

Then there's brownfield land. This week a report by the Campaign to Protect Rural England concluded that there is enough of it in England alone for at least a million homes, enough to meet five years of demand, or to build that terrace from London to Cairo. What is more, it is constantly increasing as factories, hospitals and other institutions are merged or close down.

Ah, yes, brownfield land.

Developers far prefer building on greenfield sites because they make bigger profits, as they do not have to clear – and at times decontaminate – the land.

Er, yes, that means that brownfield land is more expensive to develop. To the point that, for some sites at least, the clean up costs are so high that even at current house prices a development proposal is entirely uneconomic.

More than that, what is actually being complained about is not the volume of housing available (although obviously these two are intimately linked) but the price of what is available. Meaning that yes, we want to build a great deal more housing. But we're not going to bring prices down, the aim and point of the plan, if we insist that only the most expensive to develop land can be used.

Finally – the property company Savills has just reported – central and local governments and the NHS are between them sitting on enough for two million homes, a full decade of supply and enough for a terrace from London to Caracas. Some 600,000 of them are held by the very central Government that has been so loudly trumpeting the scarcity of land.

That might well be true. But think through the implications of what is being hinted at here. Government is so inefficient, so cack-handed, that it's sitting on £200 billion's worth of development land (£100k a plot seems reasonable, at least for the SE) and yet the suggestion is that such fools should be tasked with planning the allocation of housing land.

It's doesn't work as a logical assumption, does it?

Should governments compensate taxis for allowing Uber?

An interesting thought. Governments have, over the years, privileged taxi providers in a number of ways. They've also imposed costs upon them: in the US things like taxi medallions (which can become very valuable in some cities) and in London by insisting on a couple of years as an apprentice doing things like The Knowledge and so on. Now governments are allowing companies like Uber (and Lyft, Sidecar and so on) to enter these markets without imposing the same costs upon those companies. This is akin to government taking the property of a citizen, similar to a compulsory purchase order to build a railway through the land. So, should governments be compensating those cab drivers? I think Mike Munger has the discussion and the conclusion correct here.

Yes, that cab license is property, akin to land. But compensation for the removal of a legal privilege it's doubtful should have been granted in the first place is not the same as compensation for the removal of a righteously owned piece of property.

The analogy I would use is that of free trade. It's often said that OK, perhaps a move to free trade is justified. But there's all sorts of people who gain from the current, not free, trade. So, those who will gain from the move should compensate those who lose. Which is an attractive idea: except, except. That except being, well, those who currently gain from not-free trade aren't currently sending cheques to those who suffer from not-free trade. So, why should the reciprocal be enforced?

We consumers are those who would have to compensate the cab drivers, through our taxes. The cab drivers aren't compensating us presently for the benefits to themselves of the restrictive legal privileges. So, the removal shouldn't lead to us having to compensate them.

Let them eat cake...and buy discounted TVs

Already (and keep in mind they’re five hours behind), Americans are storming Wal-Mart, Best Buy, Macy's (and a whole lot of small, independent shops too) to snag the best Christmas deals of the season. It’s Black Friday- the biggest shopping day of the year in the States, when stores open ‘early’ and offer huge discounts on otherwise pricy, luxury goods. Unlike the Brits, who started looking forward to Christmas post-Halloween, Americans had to at least pretend they weren’t listening to Bing Crosby on their iPods until the day after Thanksgiving; and now, with less than a month till Christmas day, shoppers will spend well over $1billion today alone to make up for their tireless waiting.

Over the past few years, this all-you-can-shop American trend has spilled over to the UK, with Amazon, Apple and Wal-Mart’s Asda taking the charge to bring discounts, up to 70%, to British consumers. Still in its early phases of becoming any kind of British tradition, the demand from customers for these kinds of deals continues to sky-rocket; last year, according to Visa’s estimate, £1million was spent on its cards every three minutes, and it’s expected this year’s charges will be up 22%.

And this year’s looking even bigger:

However, this year, the day is expected to be even busier. Black Friday 2014, scheduled for November 28, should be the biggest online shopping day ever in the UK.

Christopher North, managing director of Amazon.co.uk, said: “Black Friday took an incredible leap forward in 2013 with so many more customers taking advantage of the great deals on that day, resulting in sales of over 4m items for the very first time in our history.

“This year, we are offering more deals and savings than ever before and we are expecting record numbers to benefit from Black Friday Deals Week.”

Some take a moral stance against Black Friday, arguing that it promotes consumerism and unnecessary purchases; and some in the UK have gone so far as to say it defies British identity, as Black Friday has, until recently, been a post-Thanksgiving, US tradition.

It seems almost too obvious to point out that the the millions of pounds that will be spent in the UK today are a huge boost to business; benefiting not only businesses and their employees, but the customers themselves who are able to buy electronics and goods they could not otherwise afford at hugely discounted prices. It's all very well to claim the moral high-ground on consumerism if you and your family want for nothing; but for many customers, necessities in the digital age (like computers and phones for their kids) aren't accessible at their normal prices.

As for British identity - Black Friday is far too new to the UK for us to know how it–as a sales pitch or as a tradition–will play out in the future. Under no circumstances should Britain adopt the crazy shop-till-you-drop celebrations if it doesn't want to; but no one can deny the huge, and ever-growing, demand from British consumers for the Black Friday tradition. And as long as there's demand, let the rush commence.

Where the US justice system is and isn't racially biased

In a timely post Scott Alexander investigates the evidence around the US justice system to see where, if at all, it is systematically biased against African-Americans. He looks at quite a lot of empirical evidence and concludes that:

There seems to be a strong racial bias in capital punishment and a moderate racial bias in sentence length and decision to jail.

There is ambiguity over the level of racial bias, depending on whose studies you want to believe and how strictly you define “racial bias”, in police stops, police shootings in certain jurisdictions, and arrests for minor drug offenses.

There seems to be little or no racial bias in arrests for serious violent crime, police shootings in most jurisdictions, prosecutions, or convictions.

This is important given the news coverage of the killing of Michael Brown, an 18-year old African-American in Ferguson, MI, by a white police officer. Although a lengthy grand jury investigation found that the police officer did not act unlawfully, many have rejected this verdict.

They may be motivated by a belief that the justice system is predisposed to exonerate white police officers who act wrongfully to racial minorities. This is a phenomenon I have written about in the past – one has to use one's existing beliefs to assess new information to make sense of the world at all. But Alexander's investigation of the evidence suggests that things may not be as clearly biased as they believe (or, indeed, as I did before reading the post myself).

Alexander makes an important point, however. Although law enforcement may be less biased in the US than we think, the laws themselves may still be very biased (even if that bias is unintended, which perhaps it is). Drug laws, which seem extremely unjust, will cause more injustice to African-Americans if they use drugs more regularly than other racial groups. And then there is the fact that African-Americans may be poorer on average than than white Americans, so they cannot access the same quality of legal defence.

The lesson from this may be that, though we can never escape the 'webs of belief' we construct to understand the world, we can try to be aware of the fact that we use these. If instead we decide to view disagreements about politics as existing because bad guys have incentives to fight good guys, we may end up in dark places where no amount of evidence will ever convince us that we may be mistaken.

But *which* right on and trendy thing should I be doing?

One of those lovely little conundrums is raising its head over in the right on and trendy food movement at present. The problem being, well, which part of being right on and trendy should people sign up to? This has actually got to the point that there's a New York Times opinion piece imploring people to, umm, well, ditch one principle in favour of another:

And yet, if you look closer, there’s a host of reasons sustainable food has taken root here in central Montana. Many farmers are the third or fourth generation on their land, and they’d like to leave it in good shape for their kids. Having grappled with the industrial agriculture model for decades, they understand its problems better than most of us. Indeed, their communities have been fighting corporate power since their grandparents formed cooperative wheat pools back in the 1920s.

For the food movement to have a serious impact on the issues that matter — climate change, the average American diet, rural development — these heartland communities need to be involved. The good news is, in several pockets of farm country, they already are.

"Sustainable" food here means organic. Oh, and small producer: you know, one who cannot get economies of scale because they're running too few acres. but, you know, if people want to produce this way, live on the pittance they can earn in this manner, good luck to them and all who sail with them. and if people want to buy their produce similarly good luck. However, there's something of a problem:

But just as these rural efforts started gaining steam, an unfortunate thing happened to the urban food movement: It went local. Hyperlocal. Ironically, conscientious consumers who ought to be the staunchest allies of these farmers are taking pledges not to buy from them, and to eat only food produced within 100 miles of home.

Montana has perhaps three people in addition to all those cows. And it's a lot more than 100 miles away from any of the hipsters who are interested in small scale organic farming. And those hipsters are all eating local. Which is, don't you think, just so lovely a problem?

Those urban aesthestes are simply missing the point of farming altogether. Which is that it's a land hungry occupation (organic even more so than conventional) so it makes great sense to do that work where there's no people. Farming right by the big cities of the coasts, where land is hugely expensive (because there's lots of people in those big cities) is simply not a sensible manner of using the resources available.

Just so much fun to see the fashionable being hoist on their own petard really.