Economy & Tax

Beyond the Call of Duty

  • There is about £7.5 trillion worth of property in the UK, but we tax it in strange and inconsistent ways: residential council tax is regressive and its valuation system hasn’t been updated since 1993; businesses pay at high rates; and homeowners pay rapidly escalating transactions taxes (stamp duty land tax), but private residences are part-exempted from inheritance tax and exempted from capital gains tax.
  • Transactions taxes are widely seen as especially damaging levies by economists: a representative Australian government review found their stamp duty destroyed 75p of wealth per £1 raised.
  • This makes stamp duty land tax around 4x more harmful per pound than income tax and 8x more harmful than VAT; some alternative taxes, like a carbon tax, would have small economic benefits rather than harming efficiency.
  • Taxing housing transactions keeps people in houses that are either too small, too big, or too far away from jobs, which are especially harmful when the housing supply is so tight, as it is in the UK today.
  • In the short term the Treasury should abolish SDLT and replace the lost revenues by reforming council tax – fixing the regressive top end of the system with a more proportional, or even progressive, tax on rental and imputed rental values would bring in the needed revenues easily, with far smaller economic costs.
  • Eventually the UK should rationalise its property taxation system by abolishing SDLT altogether, and then rolling council tax, and business rates into one system, with everyone paying the same rate, set at roughly 20% of imputed rental income, comparable to extending VAT to property services. This would be roughly fiscally neutral on a static analysis, but may lead to large increases in revenue over time, which should be used to reduce other taxes.
  • The UK should consider decentralising property taxation, but this is a separate step which does not need to be considered simultaneously. Abolishing SDLT is attractive whether or not the overall local taxation and governance system is reformed.

Read the whole paper.

Against the National Living Wage

  • The National Living Wage, announced in the 2015 Autumn Statement and effective from 1 April 2016, effectively takes control of the Minimum Wage out of the hands of the Low Pay Commission and gives it to the government.
  • Whereas the LPC had a mandate to balance both pay and employment concerns, free from political pressure, the issue is now politicised.
  • There are worries that abandoning this framework will threaten employment: the Office for Budget Responsibility projected last year that 60,000 fewer jobs will be created under this regime than the previous status quo.
  • This paper reviews the empirical evidence on the direct and indirect impacts of increases to the Minimum Wage.

Read the whole paper here.

Non-Sense: Examining the arguments and rhetoric around non-dom tax provisions

  • Being a UK resident with non-domiciled status simply means that one does not intend to remain indefinitely. The tax system requires residents to be taxed on their foreign income. Non-doms resident in the UK elect to be taxed on either the arising basis (their worldwide income is taxed automatically) or the remittance basis (they are only taxed on worldwide income if they bring it to the UK). 2008 reforms mean that after 7 years of UK residence, non-doms who choose to be taxed in the latter way must pay a yearly fee of £30,000 (rising to £50,000 after more years of residence).
  • Ed Miliband has claimed that there are 116,000 non-doms but this ignores those of the UK’s 400,000 international students and 6 million foreign-born workers who did not have to file a self-assessment form and those who did file it but did not tick the non-dom box. It is estimated that something like 1 million are not permanent residents, so are by definition non-doms.
  • The rules introduced by Labour (and supported by the Tories) in 2008 ended up only hurting less wealthy non-doms and did nothing to really wealthy ones: electing to be taxed on a remittance basis benefits only those with very high foreign incomes.
  • The UK is far from the only country with an arrangement for taxing foreign incomes. In fact, of the 221 jurisdictions which have some form of personal income tax, a mere 35 tax only local income.
  • There is a substantial literature showing that tax systems are very important in deciding where top talent goes. It tells us that punitive changes to the UK tax system could discourage the most valuable potential immigrants from footballers to inventors.
  • Changing how we determine someone’s domicile is likely to have unintended consequences. First, making it easier to acquire a new domicile might reduce inheritance tax receipts, as UK domiciled residents of foreign countries currently pay UK death duties on their worldwide estates. Second, changes to the concept of domicile would have repercussions in other areas of law, such as matrimonial matters and determining the validity of wills.
  • The ethical justifications for Ed Miliband’s view that it is immoral that non-doms do not pay tax on their foreign income are deeply contentious. There is no principled moral case for taxing more than local income.

Read the report.

What Hayek would do: How Austrian economists would fix the crisis

Robert CB Miller gives a modern Austrian explanation of the crisis, and argues that tightening the 'loose joint' of bank credit expansion is the key to preventing a repeat in the future. Based on the work of FA Hayek and other Austrian school economists, he says that the recession is a necessary part of the recovery process, as bad investments are liquidated and new profit routes discovered, but government draws out this process by regulating markets and restricting trade.

Read this report.

The Minimal Evidence for Minimum Pricing

Statistician John C. Duffy and ASI fellow Christopher Snowdon assess the Sheffield Alcohol Policy Model, used as the basis for the British and Scottish governments' calls for minimum alcohol pricing. They find that the model is deeply flawed, based on faulty premises and used to justify policy far beyond what it actually proves.

Read this report.