Tuesday 23 March 2010

Policy Exchange redeem themselves somewhat

Following the ASH-sponsored report on the completely-made-up-cost-of-smoking that we have all roundly abused, Policy Exchange have produced a fine summary of the relative impacts of Employer's NIC, VAT, income tax and corporation tax*, which supports my contentions that Employer's NIC and VAT are The Worst Taxes. From the press release:

Employers’ National Insurance one of worst possible taxes to rise

With a 1% rise in National Insurance Contributions planned for next April, Policy Exchange’s latest report today warns that Employer’s NIC is potentially a very damaging tax. New modelling in the report, Taxation, Growth and Employment, finds that increasing employers’ National Insurance dramatically increases unemployment and reduces growth. The report
recommends that the Treasury urgently re-examines the decision to raise employers NIC.

The report also finds that:
• It is not clear that raising VAT is less damaging than rises in the basic rate of income tax – it may even be worse.
• Long term, increasing the tax on debt and cutting corporation tax ought to reduce economic volatility (albeit probably only modestly), potentially increasing economic growth.
• There are a number of fiscally neutral tax reforms have the potential to boost growth and reduce unemployment.
• A fuller understanding of the dynamic effects of tax increases make tax rises look like a less attractive to address Britain’s fiscal problem.


Yesterday's FT focussed on the finding that VAT was The Worst Tax (even though that is not what the report says - it says that Employer's NIC is The Worst Tax) and wheel out some rent-a-quote EU-apologist academic fuckwit who deserves to be taken out and shot:

Michael Devereux, of the Oxford University Centre for Business Taxation, said an advantage of changing the VAT rate was that – unlike income and corporation tax – it would not induce individuals or corporations to move abroad.

*sigh*

This argument boils down to the fact that VAT is much the same as an import duty. If the UK levies import duties on something that can be produced here, the superficial argument is that with import duties, there is no tax advantage in making that abroad and then importing it.

As we know, import duties are just protectionism, which reduces overall wealth, and are a subsidy to less efficient domestic producers, who can thus increase their own prices rather than being exposed to competition and maybe focussing on something else where they have a comparative advantage.

So that's not much of an argument.

If the argument that VAT does not induce individuals to move abroad is to hold water, we must go with The Big Lie that domestic consumers are fixed and immovable and thus we can tax their spending as much as we like. But purely as an individual, would you really want to stay in a country where imports are more expensive, where domestic producers overcharge, and where the economy is permanently running below full capacity?

Remember that individuals can't just spend, they have to earn as well. Where do you think the economy will run better and where will your wages be higher: in a free and open economy or in one hampered by protectionism? Don't forget that the cost of imports is exports, and the two balance off in the long run - if domestic producers are cosseted by import duties, then by definition, they won't be exporting so much, so you as a producer-consumer will be producing less, earning less and then overpaying for what you consume.

*/sigh*

* As a Tory think-tank, it wouldn't occur to them to recommend shifting taxes from economic activity to land or property values, which have no negative economic impact whatsoever - as a 'consumer' of land (i.e. the occupier at any one time) the tax cannot increase the overall cost to you (including cash cost and notional cost - worst case, the tax increases the cash cost but depresses the notional cost in equal and opposite measure), and nobody is seriously suggesting that disgruntled landowners would take their land abroad, are they?

14 comments:

Pogo said...

I'm not so sure... Having roundly fucked-up the smoking report, what makes you think that this latest one is any better researched, more authoritative and accurate?

Other than that it agrees with your own prejudices? :-)

Mark Wadsworth said...

P, have you actually read the report? What you refer to as my 'prejudices' is merely the flipside of everybody else being brainwashed about VAT and Employer's NIC.

You just have to sit down and think about them for a bit, rather than going along with the crap that the journalists and politicians spout.

James Higham said...

Nice analysis - VAT in particular is iniquitous because there are so many losers in the end.

Anonymous said...

I do agree with you about the VAT. I don't agree with your last paragraphn though.

"taxes [on] land or property values have no negative economic impact whatsoever - as a 'consumer' of land (i.e. the occupier at any one time) the tax cannot increase the overall cost to you"

That's really not true. The government is still taking people's money and spending it. Somebody bears that cost. You're assuming that the land tax will depress rents by an equal and opposite measure, and therefore landlords will bear the full cost. That probably isn't true. In practice, the cost is likely to be met partly by landlords getting less rent, and partly by renters paying more overall (in rent plus tax). (Obviously this would mean the renters would have less to spend on other things.)

Pogo said...

Mr W...

Just rattling your cage a tad... 'tis all. :-)

Mark Wadsworth said...

AC, I referred to "shifting taxes from economic activity to land or property values", ergo worst case, individuals would have the same spending power, but
a) there'd be less disincentive to earning more, and
b) because property taxes are like rent, more incentive to earning more.

BTW, what the government spends it on is a separate issue, of course there is value-adding and value-destroying expenditure, that's a different topic.

And even if the government spends the 'rent' (i.e. the land tax) on gold-plated pensions and chauffeur driven limousines, why is the impact of that any worse than a landlord's pension (i.e. the rental income) or the landlord going round in a chauffeur-driven limousine? Rent-seeking is rent-seeking, whether it's public sector doing it or landlords doing it.

P, good cage rattling though :-) That's why I said 'somewhat', as anything from PE is now automatically suspect.

Roue le Jour said...

"import duties are just protectionism, which reduces overall wealth"

I think import duties are like the lock gates on a canal system. If the whole network is at the same level you don't need them, but if your competitors have plentiful cheap labour you either put in a lock or swap your centrally heated semi for a tin shack.

Mark Wadsworth said...

RLJ, spoken like a true politician!

If somebody is prepared to sell you something for less than what it costs you to make it, what is the problem?

The tragedy is, the Chinese are themselves not really making a profit (the only reason they live in tin shacks is because their government is so stupid/corrupt), and they then offered to lend us all their profits back again for low interest - then WE made the mistake (because our government is so stupid/corrupt) of wasting all that cheap money on a house price bubble instead of expanding or improving our economy.

Ed said...

if your competitors have plentiful cheap labour you either put in a lock or swap your centrally heated semi for a tin shack

If we make land cheaper, we don't need to earn as much (in take-home pay) to afford that centrally heated semi. If we reduce income tax and NI, the employer doesn't have to pay as much to give us a given amount of net income. We chose to make ourselves uncompetitive.

Example from Ireland, where income taxes are a bit higher, but overall I think it is not that different to the UK:

http://www.channelregister.co.uk/2009/03/25/dell_limerick_withdrawal/

Note how the disposable income the factory provided was less than the tax taken by the government on this economic activity. When I first read this article I though "disposable income" was after rent/mortgage payments, utility bills, etc. Of course this should be called "discretionary income". So, assuming the newspaper didn't make the same mistake I did, it means that the Irish government was getting 60% of the benefit from the factory, before adding any corporate tax! Why are people shocked that Dell relocated?

Mark Wadsworth said...

Ed, it looks to me as if total tax take was about 50%, which seems 'about right'. The low Irish corporation tax rate is offset by higher VAT and income tax.

Roue le Jour said...

Thanks Mark, now I know how Jim Hacker feels when Sir Humphrey tells him he has made a courageous decision!

But still, I reject the sweeping assertion that import duties are always a bad thing. There must be some circumstances where they are helpful, if a competitor is undercutting you below cost to destroy a given sector, for example.

Mark Wadsworth said...

RLJ, sure, there must be very marginal situations somewhere where they are appropriate (but I've never seen a real-life example).

But... either the Chinese are selling at a small profit to themselves (but cheaper than we can) or they are indeed selling at below their own very low cost to 'gain market share'. I'm not sure how you'd differentiate.

If domestic industries want to 'retain market share' that desperately, then they can always sell below cost as well, can't they?

Or they can move into higher value stuff (in which UK manufacturers excel - Formula One cars, studio quality loud-speakers, electronic weapons etc).

Which is a better strategy?

Roue le Jour said...

The problem with high value stuff is that it employs less people. My argument is that a society with say a third doing productive work, another third regulating them and the final third on benefits is not workable in practice even if it adds up on paper.

I am not saying I have any answer to this, not at all. I just remain unconvinced that the current employment patterns and trends can be sustained for decades and even centuries to come.

It would be interesting to know just how long it would take for China and India to become as rich as the west. This century, do you think?

Mark Wadsworth said...

RLJ, "The problem with high value stuff is that it employs less people..."

Maybe, maybe not. An ordinary saloon car requires (say) forty-man hours, a Formula One car requires tens of thousands of man-hours.

"... a society with say a third doing productive work, another third regulating them and the final third on benefits is not workable in practice..."

Completely agreed. But the way forward is to reduces tax and regulation (in particular Employer's NIC or VAT), reduce means testing of benefits, liberalise planning laws for new factories and power stations and transport infrastructure and see what happens.

A private sector job in catering or tourism may not have the same macho political appeal as one in manufacturing, but it is a private sector job nonetheless, and infinitely preferable to welfare or public sector make-work.

As to your last question, I don't have the foggiest idea and don't particularly care either.