Potential Laffer Curve incident spotted in the wild

That the Laffer Curve exists is a mathematical certainty. The difficult question is where is the point that tax revenue starts to fall as rates rise, where would lower rates produce more revenue? 

What complicates this is that each and every tax, in each and every different economic set up, will have a different rate at which this is true. For example, the EU's own investigation into the financial transactions tax showed that a rate of 0.01% on trades would be revenue losing. We would rather assume that an income tax, or VAT, rate of 0.01% could be raised quite substantially before it became revenue losing.

We do also have examples of where lower rates have led to higher collections. Russia did away with the Soviet era income tax system and replaced it with a 13% flat tax upon incomes - collections rose substantially. NY raised cigarette taxes so much that revenue fell. And now we have an interesting potential addition to the list:

George Osborne’s controversial tax raid on Britain’s most expensive homes has triggered a dramatic slump in stamp duty revenues.

Sales of properties worth more than £1.5million fell by almost 40 per cent last year, according to analysis of Land Registry figures provided to the Daily Mail.

This has caused the total amount of stamp duty collected by the Treasury to fall by around £440million, from £1.079billion to a possible £635.7million.

We would not insist, at this stage, that this is a pure Laffer effect. Rather more research would be needed for that. But it's most certainly a possible incident of the Curve striking back.

At which point could we just register our lack of surprise? That it would be George Osborne among Conservative Chancellors who would hit that Laffer Curve peak going the wrong way?

Of course the Bank of England will not predict the next crisis

The Bank of England treats us all to a statement of the obvious here:

Bank of England: Our economic forecasts will always be wrong

The Bank of England will "probably not forecast the next financial crisis" as economic forecasting can never be completely accurate, top officials have warned.

The Bank has poured resources into economic forecasting since the financial crisis when its predictions were utterly wrong.

There are three entirely independent reasons why that next crisis - and there will be one - won't be predicted. The first is as the Bank says, economic models of the economy aren't all that good. It's a complex, chaotic, system and we don't model those well and further, as Hayek pointed out, we're never going to be able to assemble the information to even know in detail what has happened, let alone what is or will.

This is why planning an economy does not work.

The second is that efficient markets hypothesis. Markets process extant information efficiently (do note that's all the theory says, it's nothing to do with trying to assert that markets are always the efficient method of doing something) and thus move only when new information arrives. We cannot predict new information, that's the very reason that it is in fact new information.

The third is much more basic in its logic. Imagine that we do manage to, through the fog of misinformation, note that something which is likely to be problematic is about to happen. Thus we act to stop it being a problem, don't we? In which case there is no crisis as we've been able to predict it.

The BoE is quite right that they won't predict the next crisis but that's a comment about the nature of the beast, not some failing of the BoE.

A very strange suggestion about winter veggies

Felicity Lawrence tells us of her first realisation that Britain was different:

I can remember the precise moment I first understood that we had been taken into this fantastical, nature-defying system without most of us really noticing. It was 1990 and I had been living and working with Afghan refugees in Pakistan’s North-West Frontier province for a long period. The bazaars where we bought our food were seasonal, and stocked from the immediate region. Back home on leave in the UK, I had that sense of dislocation that enables you to see your own culture as if from the outside. It was winter, but the supermarkets were full of fresh fruits and vegetables from around the world. The shelves looked wonderful, perfect, almost clinical, as though invented in a lab in my absence; but there was no smell. It was vaguely troubling in a way I couldn’t identify at the time.

It really does take a certain type to clearly see the difference between the cornucopia of our present society and its food markets, contrast it with those of medieval peasantry, and decide that it's the cornucopia that has to go:

The UK’s clock has been set to Permanent Global Summer Time once more after a temporary blip. Courgettes, spinach and iceberg lettuce are back on the shelves, and the panic over the lack of imported fruit and vegetables has been contained. “As you were, everyone,” appears to be the message.

But why would supermarkets – which are said to have lost sales worth as much as £8m in January thanks to record-breaking, crop-wrecking snow and rainfall in the usually mild winter regions of Spain and Italy – be so keen to fly in substitutes from the US at exorbitant cost?

Why would they sell at a loss rather than let us go without, or put up prices to reflect the changing market? Why indeed would anyone air-freight watery lettuce across the whole of the American continent and the Atlantic when it takes 127 calories of fuel energy to fly just 1 food calorie of that lettuce to the UK from California?

Our answer would be that we can and we like it. Which seem good enough reasons to us really. But this is not Ms. Lawrence's point at all:

Leaving the EU could be an opportunity for a radical rethink of the food system, but the government shows little sign of grasping it.

After some 10,000 years of this agriculture stuff we've developed the technologies that allow us to be free of geographical location and the associated weather systems. Ms. Lawrence's argument is that because this works we must stop doing it.


Well done to The Guardian, not getting the point of trade at all

The Guardian has tried to analyse the effects of reverting to WTO tariffs on Britain's post-Brexit trade. And their sums are just fine, it's the theory that they've not managed to understand:

Crashing out of the European Union without a trade deal would saddle British exporters with more than £6bn a year of extra costs, according to analysis that reveals the limited options facing UK negotiators just weeks before Brexit talks start.

No, they do manage to avoid the mistake we're all already thinking about. Tariffs are paid by the importers of course not the exporters. But to remain competitive perhaps the exporters will have to try and trim their margins, that's possibly true. They're a bit dismissive of this argument:

Not all British manufacturers are worried. Andy Palmer, of Aston Martin, which exports heavily to the US and Asia, points to the fall in sterling as a temporary compensation for higher tariffs

Actually, standard trade theory tells us that exchange rates will permanently adjust to cope with any tariff barriers. And the fall in sterling has already been very much greater than he average level of WTO tariffs.

And this is just nonsense of course:

“People don’t seem to understand that any trade deals are years off,” said a senior civil servant in Liam Fox’s Department for International Trade. “There are 27 other countries with their own aspirations about Brexit. We cannot even start for two years.

Someone needs to find that bureaucrat, fire them and strip them of their pension rights for saying something so damn stupid. We can negotiate anything we like with whomever. We just cannot bring a treaty to fruition, into law, until we've actually left. There is absolutely nothing at all stopping us from getting everything primed so that we sign treaties with all and sundry 15 seconds after we've left the tender embrace of Brussels.

But the horrendous mistake here is this:

This mutual dependency also threatens British consumers. A WTO estimate before the referendum calculated that British consumers faced total annual tariffs on EU imports of £9bn, which could not be waived without also allowing a flood of cheap imports from the rest of the world.

A flood of cheap imports is not a problem, it's the very point of doing this trade thing in the first place. And it would make us considerably richer to have such a flood too. Patrick Minford has done the calculations and GDP would rise by 4% as a result.

Being outside the tariff walls the European Union imposes upon us is the very economic point of leaving in the first place. So that we can go back to Cobden and Bright and have the only logically valid form of trade, unilateral free trade.

Aviva's family finances report is getting savings and investments badly wrong

This year's edition of Aviva's annual report into family finances is still getting something badly, badly, wrong:

Low income families in Britain hold an average of just £95 in savings and investments, compared to a mean £62,885 that higher income families have, according to new research, which highlights the widening gap between rich and poor.

This is not true, it is not even remotely close to being true.

So, let us imagine what happens in a society where you have £95 in savings and investments and then you lose your job. That £95 will be pretty soon exhausted and then you will start to starve. Or, of course, you can hope to find another job before that happens.

Now let us think about what happens in our own society when you lose your job and you have only £ 95 in immediate cash resources. 

Someone else stands there ready and willing to pay for any medical care you may require. Your children still do to a school paid for by someone else. Arrangements will be made for your housing costs to be paid. Even contributions to your future pension will be made on your behalf and there will be a modest amount of cash provided as well to cover food and other bills.

This is of course wealth, a form of savings, and just because we call it the welfare state not ready cash doesn't change the fact that it is indeed wealth, a form of savings. 

Thus there is just no one at all in the country with £95 in savings, investments or wealth. Nor of course is the gap as stark as it looks between rich and poor. For there is a value to that welfare state. Quite what it is could be controversial but let's say, just for that sake of argument, that it's £30,000 (which is a very low estimate indeed).

Thus low income families have savings of £30,095, higher income of £92885, the same nominal distance between them but a very much lower multiplier, no?

What is the Citizens Advice organization for?

The Citizens Advice (CA) organization is, in many ways, a paragon of the Voluntary Sector.  In an increasingly regulated society, more people have problems coping with the benefits system, tax, energy bills, housing, debt, trading standards and employment issues amongst others. The 21,600 volunteers provide £111 million donated hours in the 316 CA (independent) charities and do a fine job of bringing together those who need help and those whose experience can provide it.  Matters requiring professional expertise are referred to accountants, lawyers etc and that line, which might seem hard to draw, appears to work well.

It is also remarkably good value for money. CA “help two in three people to resolve their problem [sic] and for every £1 spent on CA we are worth £8.74 to society, we save the taxpayer £1.51 and our clients benefit by £10.94.

According to the CA Annual Report, their income in that year was:

CA works closely with, and is largely funded by, local government and yet only Devon shows up in their financial statements.  That is because the 316 independent charities which do all the work, and get the local funding, are not consolidated into annual report.  Imagine Tesco’s annual report failing to include any of its shops and supermarkets. 

A separate document partially consolidates the whole but it is a PR document, rather than an annual report. That said, and it may be rather unfair as it is truly impressive and the Impact Report makes heroic efforts to quantify the value of the CA organisation to the UK. There is no question that the benefits hugely outweigh the costs.  The financial costs are far easier to measure. The whole organization service received £239m in 2014/15 (p.29).

The two documents together suggest, however, that the HQ is more pre-occupied with political campaigning than with actual advice to citizens: their primary purposes are given as “campaigning on big issues, informing national policy and connecting people with society” whatever that last may mean.

They are so caught up in the fashionable issue of equality that it is the largest of the half dozen governance committees. “Equality, diversity and inclusion drive everything we do.”

The objects of CA “are to promote any charitable purpose for the advancement of education, the protection and preservation of health and the relief of poverty, sickness and distress. In carrying out its objects and in all aspects of its work, CA is committed to promoting equality and diversity, preventing prejudice and discrimination, ensuring equal access and promoting good relations between all sections of the community.”  Nothing in either “purposes” or “objects” (whatever the difference might be) about actual advice to citizens.

Of the £88M received by CA HQ, 46% was passed on to the 316 local charities, 21% was spent on IT and support to the local charities and 33% retained for national campaigning and central overhead.  Directors receive expenses but not salaries and the CEO and two other executives have six figure salaries, including the “Director of Consumer Futures” who joined when the “Consumer Futures” (previously called the National Consumer Council and including some watch committees such as for energy and postal services) quango was merged with CA in 2014.

It remains a separate unit within CA with the original role, namely to Consumer Futures’ role is to: “contribute to regulatory decision-making processes on behalf of consumers, represent consumers on advisory groups and panels, be consulted by regulators and businesses and undertake investigations”. This may have been a neat political move to get rid of a quango but do we benefit from it at all?

No rationale is given for retaining 33% of the income for the centre but the centre takes care of its own interests in priority to the needs of the local units.  It has £32M in the bank and afforded £1M for “rebranding” which amounted to removing the word “Bureaux” and the apostrophe after “Citizens”.  It can afford initiatives, e.g. promoting equality, which have little or nothing to do with advising citizens.

BIS, as the largest single funder, should refocus the organisation onto advising citizens, cutting its grant accordingly.  Furthermore there is a huge opportunity for the private sector, notably the large banks, accountants and law firms, to takeover much of the funding through sponsorship of the individual charities. 

Citizens Advice would provide valuable publicity for these big firms and it would be easy enough to maintain separate between general sponsorship and business links.  Sponsoring a horse race has no impact on your horse’s chances of winning.  But this is a great opportunity for professional firms to gain publicity in a positive, friendly and relevant way as well as relieving HM Treasury of a sizable burden.   

Does the Government have a Strategy for the Voluntary Sector?

A cash-strapped government, looking to expand community welfare, should prioritise the voluntary (or “third”) sector which provides more benefit at less cost that the public or private sectors.  “The labour value of formal voluntary activity in DCMS sectors in 2000 was approximately £12.7 billion [at a cost of] £301 million.”[1]

Increasing social complexity and an ageing demography means more people looking for help whilst the increasing affluence and size of the post-employment population could supply the helpers with a little motivation and support from government. Britain would be a happier place if government raised its attention from spending our money.

The voluntary sector workforce has grown by about one third, to over 800,000 in the 10 years following 2004 although the rate of growth has slowed since.  Government prefers commercial contractors to encouraging volunteers.

In 2012, the NCVO estimated that “The combined income of all 164,000 voluntary organisations in the UK, is of a similar magnitude to the UK revenue of Tesco (£38.6 billion for 2009/10).” The voluntary sector covers a wide range of community services including day care centres for the elderly, Citizens Advice, sports and arts coaching and supervision, feeding and sheltering the homeless, youth clubs, and the National Citizen Service.

The Blair government recognized the importance of this third sector and declared 2006 to be the “Year of the Volunteer”.  Not a lot happened and few remember it.  Responsibility was given to the “Office of the Third Sector” until, in 2010, the Coalition renamed it the “Office for Civil Society”. The Civil Society became, under the Cameron government the “Big Society” which was supposed to take power away from politicians and give it to people.  No action backed that up and the term has largely disappeared.

In 2016, the May government transferred the Minister, actually Parliamentary Under-Secretary Rob Wilson, from the Cabinet Office to DCMS, further downgrading the government’s interest in the voluntary sector.  He remains responsible for:

  • The Big Society agenda
  • National Citizen Service (NCS) and youth policy
  • Social action
  • Civil society sector support
  • Social enterprise and social investment.

Quite why these are seen as culture, media or sport is unclear but they are words without action.

The NCS was conceived as non-military national service where young people would learn life skills and society would benefit from their good works, a.k.a. “granny bashing”.  The NCS Bill is going through Parliament at present: “the scheme takes place in the spring, summer or autumn coinciding with school holidays. Groups of teenagers undertake a week-long residential visit, usually to an activity centre for an Outward Bound-style course in the countryside involving physical and team building activities.

After this, volunteers undertake a residential week, gaining a taste of independent living and learning a variety of skills for their future. In the third (and sometimes fourth) week, participants plan and deliver a 'social action' project in their local community, often to raise awareness of or fundraise for a particular cause. Those completing the [3 or 4 week] course receive a certificate at a graduation ceremony. The certificate is signed by the Prime Minister in office at the time of graduation.”  In January 2017, the National Audit Office reported unfavourably on the pilot schemes estimating, amongst a long list of problems, that just 60% of target (213,000) would be participating by 2021.

However much time Parliament may give to this NCS Bill, it will have minimal impact on Britain as a whole.  Meanwhile worthwhile voluntary organizations are denied the help they so much need.  

In short, the government has no overall grasp of the voluntary sector, nor of its potential. There is no voluntary sector strategy, no plan and no means to implement a plan even if it had one. It is missing a major solution to its problems.

[1]  Engaging with the Voluntary and Community Sector: The DCMS Strategy for Implementation of HM Treasury's Cross Cutting Review, 'The Role of the Voluntary and Community Sector in Service Delivery' Updated February 2006

Robots are taxed, Mr Gates – too much

Microsoft creator Bill Gates says that robots that take human jobs should pay income tax. Zillionaire businessman he may be, but does he understand basic economics? It seems not.

First, robots are already taxed – to the hilt. They are a form of capital, and capital has long been an easy mark for high-spending politicians. But capital does not just grow on trees, you have to create it. That means cutting your consumption and putting something aside to make all the tools that you hope will make your life easier and more productive in the future.

Of course, the only certainties in life are death and taxes (and unfortunately they come in the wrong order), so the labour-saving robots we buy for our homes and kitchens come out of taxed income. And if we are silly enough to actually invest our savings until we have enough for that new computer or new car, we pay tax on the interest (and on inflation as well).

Regarding the businesses that make robots and computers other tools, the investors who finance them already pay income tax, or company taxes on the return that their investment makes.

Second, remember that a robot is just a tool. They may be very fancy tools, but to economists they are no different from any other kind of tool going back to pre-history. They are just another form of capital that boosts your productivity.

The tools that have ‘taken’ most human jobs are not robots, but the most basic tools developed by our early ancestors. Think how many workers you could save by digging the peat to fuel your roundhouse with a wooden spade, rather than by hand. It is a hundred times easier. If you then transport the peat back home using a wheelbarrow – another tool – you save even more time and back pain. And so it goes: the spinning jenny, the cotton gin, the water frame, steam, internal combustion, electricity, the internet, industrial robots… they all allow us to produce and enjoy much, much more. Bill Gates’s logic is that we should tax all tools, from spades to spanners. Nuts.

And do these tools actually ‘cost’ jobs? No, they have allowed humanity to prosper and increase, with far more of us now engaged in far more productive and useful things with far less effort, time and cost. 

Most of us would think that a rather good thing. When you tax things, you tend to get less of them. So why tax tools? Why tax progress?

Third, do not get taken in by the politicians’ talk about how great jobs are. Leisure time is Christmas: jobs are the January credit-card bill. Jobs are the sacrifice you have to make to get what you want.

Entirely naturally, we want that sacrifice to be as small as possible. We want to work less, work in more enjoyable forms of labour, and have more time for ourselves to spend with our families, our leisure, our interests, our philanthropic activities and all the rest. You don’t help human workers by making the tools they need to achieve these things more expensive. Indeed, if robots liberate us to do all these desirable things – as they do – they should get a reward, not a tax bill.

Fourth, if you really do want to help humankind, is yet another tax the answer? We’re taxed on what we earn, what we spend, the spirits we put into our cars and our stomachs, the flights we take, the investments we make, the people we employ, the gambling we enjoy. Taxing our tools too is too much.

A much better idea than putting income tax on robots would be to remove income tax on humans. That would spur human progress faster than even the visionary Mr Gates could ever imagine.

Fake news spotted in The Observer

And we all do have that duty to fight back against fake news, don't we? That corruption of our body politic which we must be ever vigilant against

One of Britain’s most successful orchestras is moving to Belgium amid fears that its musicians may be among the victims of a post-Brexit crackdown on immigration.

The European Union Baroque Orchestra has been based in Oxfordshire since 1985, but will give its last UK concert in its current form at St John’s Smith Square, London, on 19 May, before moving to Antwerp.

Gosh, really? 

Other major orchestras are also weighing up their options. The highly influential European Union Youth Orchestra (EUYO) has been based in London since it began life in 1976. Now it is making contingency plans to move to the continent while it waits to see what life after Brexit might look like.

Marshall Marcus, former head of music at London’s Southbank centre and now chief executive of the EUYO, said the orchestra had already received invitations to move to other EU countries. “For some time we have been forming our plan to be ready to relocate, if and when this becomes necessary. Or indeed simply advantageous,” he said.

“If we do land with a hard Brexit it is really difficult to see how British musicians will be able to continue to take advantage of the opportunities that the EUYO and other EU initiatives have been able to offer generations of European musicians,” he added.

He lists EU worker protections, customs unions, import documents (carnets) for instruments and visa requirements as possible future headaches. “No one I know in the music industry – here or on the continent – wants to have to return to the bad old days of filling in more forms, taking up more time and spending more precious money in order for musicians to be able to perform for audiences on both sides of the channel,” he said.

Sounds terrible doesn't it? Paperwork in Channel, Europe Isolated!

We do tend to think that it really is about paperwork but perhaps a rather different sort, the now tallow enabled crinkly folding stuff. From the EU Baroque Orchestra page:

The European Union Baroque Orchestra is unique: EUBO nurtures and supports young baroque music performers through the challenging transition between conservatoire study and the music profession.

The activities of EUBO are an integral part of the EUBO Mobile Baroque Academy (EMBA), a Creative Europe co-operation project 2015-2018 co-funded by the European Union.

From the EU Youth Orchestra page:

The EUYO is funded with support from  the 28 member governments of the European Union.

With the support of the Creative Europe Programme of the European Commission

It doesn't seem all that remarkable to us that EU funded projects would like to remain in the EU in order to maintain their EU funding.

What does seem remarkable to us is that absolutely no mention is made of this in a report in a so called serious newspaper. But you know, maybe we're just picky about propaganda and fake news?

If the law specifically allows something then it's not a loophole

Yet another whine about how Uber is doing something or other:

Uber has been accused of exploiting a legal loophole that allows its drivers to operate in UK towns and cities where they don’t have a licence, leaving local authorities powerless to regulate them.

Mick Rix, the GMB union’s national officer for the hackney and private-hire taxi trade, said the company behind the cab-hailing app was “acting with impunity” across the UK, where it was increasingly “spreading its tentacles” into smaller towns and cities.

What is happening is that if you've a license from anywhere then you can work anywhere. As opposed to the former system where you could drop off anywhere but only pick up in that local authority that you were specifically licensed in:

After changes to the law surrounding taxi licensing, brought in by the Deregulation Act 2015, drivers with a private-hire licence from a local authority can use it to operate anywhere in England and Wales. Previously, the law required drivers to return to the area in which they were licensed between jobs.

The law was specifically changed to allow this. This is not therefore a loophole. Except if we are to assume that our Lords and Masters who write the laws are idiots of course and that would never do would it? 

It also seems like an eminently sensible change:

Councillors in other local authorities have also complained that Uber drivers who do not fulfil the authority’s specific licensing requirements – such as minimum vehicle age and successful completion of a knowledge test for the area – can still operate legally in their jurisdiction with a licence from elsewhere.

Licensing fees also vary from area to area, leading some to suggest that drivers are seeking out the authorities where it is cheapest to get a private-hire licence.

Reading council denied Uber a licence to operate last year, but during the summer’s Reading festival an average of 1,000 passengers a day took a trip using the taxi app. Although it is not known where the drivers travel in from, it is thought that many are licensed by nearby Slough borough council and Windsor and Maidenhead borough council.

Sensible on several levels. With sat nav that local knowledge requirement is rather old fashioned. Monopolists do tend to be monopolists and there's always the possibility that licensing fees will become, given the former monopoly of their issuance, a nice little tax upon the taxi using public.

But perhaps most important a series of locally planned monopolies is going to have a capacity problem. Demand is hugely variable across small areas - look at that festival there. If provision is limited to the drivers the area would more normally support then many will not be able to get a cab at those times of high demand. Allowing the one license which can then be used nationally leads to supply being able to move across those local authority borders and thus match demand more closely.

The end result of this should be greater efficiency of use of the fleet (and drivers). Which is pretty much the economic offering from Uber in the first place, less time waiting for a ride (on either side, driver or passenger) and thus a more efficient use of said fleet. More rides from fewer cars and less driver time, an increase in economic efficiency and as always with one of those, something that makes us all richer.

We can't see what 's wrong with this picture at all and it's most certainly not a loophole, is it?