What the government should announce in the PBR

I’d like to see that immediate action will be taken to reduce the budget deficit... I’m interested in the scope of tax reform... I want Alistair Darling to realise that this isn’t about New Labour. The fact that entrepreneurs are so keen to hear what policies will be announced indicates why we’re still in a recession. The U.S. economy only left the Great Depression once politicians stopped changing the rules of the game and investors got back to business.

Anthony J. Evans, 'Politicians should allow a business-led recovery' Reuters.

What the government will probably announce in the PBR

There is some talk that it could hike inheritance tax on estates over £1.5m to 50 or even 60 per cent (from 40 per cent today)... hiking capital gains tax could be another way to play the class war card... Alistair Darling could lower the threshold at which the new income tax kicks in to just £100,000.

Allister Heath, 'High earners set to be hit by new taxes' CityAM.


Getting there


The Adam Smith Institute's proposals to double the starting threshold at which income tax is levied did not attract much party support at the time. The ASI's case was that it should start at over £12,000, which is about what someone on minimum wage would earn in a full working week, or about half the average wage. Two recent developments show signs of progress.

Firstly the Daily Mirror ran a story that the Conservatives are ready to propose that married couples can pool their tax-free allowance, even when one spouse is not in work. This would give the working spouse a threshold of £12,100. Although this would only benefit 41 percent of couples, it is a start. Once in place, it could lead to pressure for it to be extended to others in work.

The Liberal Democrats have announced their plans to raise the threshold to £10,000. Once again, while not enough, it is a move in the right direction. The same cannot be said of their plans to 'finance' it by tackling Stamp Duty Land Tax avoidance and Corporation Tax avoidance, and by applying National Insurance to benefits in kind. These are all bad taxes, and they should be looking at ways to reduce, rather than increase, their burden. Their proposal to switch aviation taxes away from people and onto planes instead is, however, a sensible move that the ASI has also put forward.

On the Treasury static model this kind of accounting has to be done, whereas on a dynamic model one can factor in the likely gains that would result from a doubling of the income tax threshold. The need for welfare payments (including tax credits) would diminish as low-paid people were left with more of their own money. The relative attractiveness of employment would rise as working brought more reward, reducing the unemployment rolls. There would be other supply-side effects, too, making it worthwhile to do even if it initially increased the deficit. We are not there yet, but we do seem to be inching our way towards it.

Madsen Pirie's book, "101 Great Philosophers," makes a great and affordable Christmas gift.

Two new papers on tax competition


I’ve just uploaded a couple of new briefing papers in the publications section. Both of them were produced for our recent event Tax Competition: Economic Freedom and National Sovereignty. You can watch a video of the event here.

In The Economics of Tax Competition – Harmonization vs. Liberalization the Cato Institute’s Daniel J. Mitchell suggests that the arguments surrounding tax competition are ultimately a debate about the size of government. Tax harmonization means higher tax rates and bigger government: freed from the rigour of competition, politicians would cater to special interests and resist fiscal reforms. By contrast, international tax competition provides a much-needed check on the expansion of government, and encourages pro-growth tax reform.

In Tax Competition – How tax havens help the poor ASI Senior Fellow Richard Teather argues that tax competition brings benefits to all of society, not just to those that directly take advantage of it. By encouraging lower taxes and allowing greater efficiency in capital markets, tax competition encourages economic growth, the benefits of which often fall to the least well off. The unemployed are more able to find jobs as the economy expands, while low-paid jobs are made more productive (and therefore valuable) by increased investment.

Both papers are well worth reading. You can find them, along with all our other recent publications here.

The PC wall


Diversity has advanced quickly through many Western institutions creating dysfunctional bodies. This is the focus of an excellent article on the disastrous consequences of implementing diversity in a security sensitive environment entitled Diversity: An Ideology.

The ideology of diversity is simply social Darwinism - the term being a mindless transplant from the ‘biological diversity’ of life on our planet – as if humans were no different from other living creatures. Diversity: An Ideology gives an account of the security failure within the US army with regard to the terrorist psychiatrist Major Nidal Mali Hassan of the Fort Hood massacre. This very well documented narrative shows how diversity has conquered crucial US security institutions.

After Bill Clinton’s introduction in 1994 of the Gender Integration of Basic Training program to encourage female recruits, gender “discrimination" was implemented and complaints ensued. An independent commission was set up to investigate the cases. It concluded strict separation of genders in housing and basic training just as the Marines had been doing all along. However these recommendations were rejected. As a result quotas along the lines of diversity were even increased in face increased.

The English professor Bruce Fleming of the US Naval Academy found that

21 percent of the 2001 and 2002 classes were admitted on a “minority" basis, had SAT scores 200 to 300 points below the Academy’s average, and were evaluated “on a separate track" from non-minority students.

The joint policy of encouraging diversity and the ban on racial profiling have pretty much pervaded and nearly corrupted the American security system. For instance, in April 13 2004 the Attorney General testified before the 9/11 Commission that, “the single greatest structural cause of September 11th was the wall“ in the Justice Department that separated intelligence cases from criminal cases in order to prevent race, gender, and ethnicity from being used in national-security investigations".

Buy nothing day


It may have passed you by, but Saturday was Buy Nothing Day, a movement whipped up by the anti-consumerist organization AdBusters. They claim that “there’s only one way to avoid the collapse of this human experiment of ours on Planet Earth; we have to consume less". The day “highlights the environmental and ethical consequences of shopping" promising that “for 24 hours you’ll get your life back".

AdBusters has long campaigned on the evils of neoclassical economics and the way in which it has caused cataclysmic climate change, exploitation of developing countries and huge global inequality. However, no matter how much the group may hate today’s society, encouraging people to grind the capitalist system to a halt would of course perpetuate the problems they profess to be so concerned about.

Without the West’s ‘irresponsible’ consumption habits, developing countries would be a lot worse off. Without the soulless global corporations sucking at the pool of cheap labour, many ‘exploited’ workers would have no job at all. Workers wages help them to feed and clothe their family, and boost the income of those around them. Also, those in developing countries acquire new skills and technology that can be used to aid development. The success of the Tiger Economies show that working with a Western economic system is better than rallying against it.

Moving towards a culture of Buying Nothing will also do zilch to address climate change. Consumption leads to the creation of wealth; and increasing wealth is exactly what is needed to deal with the issue. Buying Something leads to the creation of new, better, cheaper and cleaner products. Created wealth is invested in things such as green technology and research into geo-engineering projects. Without an economic system that relies on consumption, we would be sitting in the dark and cold, paying penance for our forefather’s environmental ignorance.

Encouraging a decline in consumption is deluded, dangerous and thankfully impossible. The promise of rediscovering the true you from a day of suppressed spending is utterly daft; our economic system has evolved because it is best at serving our needs and desires. AdBusters claim that if you persist in your sacrifice of shopping “you will transcend – perhaps reaching the kind of epiphany that can change the world." However, all that would be transcended would be all sense of reason. The rejection of a consumption-based economy would change the world, but for the worse.

The Beautiful Tree


There are plentiful reasons to recommend The Beautiful Tree, a book that challenges and inspires in equal measure. It is the remarkable story of Professor Tooley's discovery of how the poorest of poor are setting about improving the education of their children without the state and the often patronizing efforts of many in the development community. The implications this has for thinking about the history and future of education of children in developing and developed world are potentially profound.

The first thing to hit the reader is the immense task that Professor Tooley and his researchers have undertaken. The work behind the statistics that forms the background to engaging narrative is evident on every page. Beyond the geographical and administrative complexities, the willingness to set himself at odds with his peers in his quest for the truth is a commendable achievement that many in the claustrophobic and stultifying world of academia shy away from. With each step, Professor Tooley pulls away from the establishment as he moves closer to the colourful array of entrepreneurs who are already providing the education that the people want in most challenging parts of the world.

Many new insights are garnered from this work. A fascinating revaluation of the impact of British imperialism upon the Indian private education system is given in the penultimate chapter, while the last chapter answers the hanging question of what the rest of the world can learn from his findings in India, Nigeria, Ghana, China and Kenya. It is an upbeat message that could put private education beyond the moral and regulatory power of our politicians. Find out more here.

On reducing inequality


Let us imagine that you are concerned about the amount of inequality there is in UK society. You wish to reduce said inequality. I might not (in fact don't) share that concern but even as the interested amateur that I am as an economist (ie, not an economist, simply an interested amateur) I might be able to offer some guidance as to how you might do this.

The first observation would be that some countries have indeed lowered inequality (and relative poverty) so to reach your ambition (which, remember, I don't particularly share) we could go and look at what they have done. The poster children here are of course the Nordic countries. And the most important thing we can say about their taxation systems is that they are very differrent indeed from what is usually proposed here:

....the countries that have been the most successful in reducing inequality don't have particularly progressive tax structures. The real gains in reducing inequality are achieved by means of well-designed transfers.

Indeed, the Nordic tax structures are not particularly more progressive than the one we currently have in the UK. Yes, they have high marginal income tax rates but they also tend to have lower capital taxation, lower corporate taxation and higher VAT than we do. That is, they have concentrated on growing the goose, taxing consumption more than we do, so as to provide the revenues to make the transfers.

Which leads us to the ritual calls here for the rich to be paying more tax, for companies to pay "their fair share" and so on, that our tax system must be made more progressive. But why, if we know that the way to reduce inequality is not through the tax system at all, should we do that?

Shouldn't we be copying the systems which really do reduce inequality?

As I say, I'm not an advocate of this inequality reduction in the first place. But for those who are there's something very odd indeed about their insistence not to do what has worked elsewhere: cut corporation tax, cut capital taxation and raise VAT. Why is that?