Here's a chart of UK public spending and receipts since 1974-75, taken from HM Treasury's Public Sector Finances Databank (Tables B2 and C1):
Now, most of us would agree that taxes in the UK are too high, but even so, current receipts have only been between 35% and 38% of GDP over the last twenty years. So what strikes me is the following:
1. Whatever your political leanings, and whether or not you believe in low, flat taxes (which I do), it must be pretty obvious that it'd be pretty difficult to get total receipts much above one-third of GDP in the long run.
2. Deficit spending of more than 2% or 3% of GDP is a hiding to nothing in the long run (the economy usually grows faster than this, so even with annual deficits of this much, the debt-to-GDP ratio would still stay flat or reduce.
3. Therefore, in the name of all that is unholy, surely we also have to try and get government spending down to around one-third of GDP as well? Besides paying for the core functions, the biggest chunk of government spending is redistribution, which up to a certain level is money well spent provided it alleviates rather than entrenches poverty and improves social mobility (vouchers for schools, etc). It would appear therefore that the government has been collecting and wasting ten per cent of GDP for most of the past thirty years, which seems like a pretty stupid idea to me, seeing as the deadweight costs of this is somewhere more like twenty per cent of potential GDP.
Just sayin', is all.
Saturday, 2 January 2010
Even more fun with numbers
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31 comments:
I'd go along with that! Makes perfect sense to a non-accountant like me!
Can you do the graph from 1945?
Importantly the trend in both graph lines seems to be downwards, until 2000/2001, unsurprisingly.
The most important thing for social mobility is parents that care about their own childrens education.
Vouchers don't solve this problem.
Parents will care about what their children are upto at school when they have to pay for it themselves.
That's why I favour loans (with interest deducted from CD) rather than vouchers.
WFW, ta, but that's about all there is to it.
L, the tables go back to about 1964 (there was a good reason I started 1974 but I can't remember it).
AC1, it depends how high you pitch the vouchers. If parents had to pay one or two thousand pounds a year themselves, it would achieve the same thing.
So why not charge the whole lot then?
More CD for everyone, PLUS subsidy tends to permit over-charging.
Therefore, in the name of all that is unholy, surely we also have to try and get government spending down to around one-third of GDP as well?
There are the horns of the dilemma.
I don't know, but I reckon government spending at 1/3 of GDP would still be too much. I base this on the theories that:
(a) We are lucky if government spending is 50% efficient.
(b) Government does more than twice what it should.
Hence spending at the current approx 50% level would under my formula end up at about 12.5% of GDP level. Nearly a 'tithe' wouldn't you say?
10% of GDP works for me. That would be about £160Bn per annum. Take out £60Bn for a thorough defence budget leaving £100Bn for everything else.
AC1, I fail to see a fundamental difference between education vouchers and CD.
JH, what dilemma?
L, a lot of government spending is less than 0% efficient (all the climate change, stop smoking quangos, for example), some adds an enormous amount of value (law and order, refuse collection) but the largest part is redistribution (whether you call it 'free' education, 'free' NHS, welfare or pensions).
Notwithstanding that I prefer vouchers and universal benefits, the maths is quite simple - if the deadweight cost of taking £1 in tax off a wealthy person is 20p, but £1 extra given to a poor person is worth 20% more to him than to the rich person, it is still worth just about worth doing. (Of course LVT has no deadweight costs, different topic).
Maybe not that simple - after all (and I'm sure there are many arguments from the other direction) the rich person might gain something (e.g less crime) from the 20p given to the poor person.
"The most important thing for social mobility is parents that care about their own childrens education."
I think (assuming there is a missing 'greater' before 'social') this is true of individuals, but by definition can't be true of the country as a whole. Or at least it is true both ways, greater social mobility requires parents who both care and don't care about their children's education.
Of course the Green New Dealers in "The Cuts won't work" cut out the middleman and seek just to create credit ex nihilo instead of the commercial banks doing it.That kind of approach answers the question put by Ezra Pound viz. is n't taxation like re-cycling old tin cans when the State can create its own money?
By Social Mobility, I mean Mobility is only constrained by ability and effort.
I don't think credit is created ex nihilo, but the pound is "stretched" more thinly by credit, as the crdit debit pairs wraps "around" the initial deposit.
ACO, I don't see your logic on this at all.
One one hand you say you want mobility to be 'only conrained by ability and effort'. Then on the other you suggest that giving feckless parents cash to pay for their childrens education themselves will help them.
Do you not think some of these people will drink it instead? Have you any idea the sort of people you are talking about?
Very few don't care about their kids education. Many are just happy loving average kids and are more concerned with happiness than money.
I say the opposite of giving parents cash.
I want to LOAN parents the cash solely to pay for their childrens education, if they cannot afford, at that time, to purchase their own childrens education directly.
@ACO
This is not a matter of personal opinion: credit is created ex nihilo, fact.The Green New Deal Group just wants the Gov to do it with quantitative easing rather than let the banks do it through "normal loans practice".
" Our objective is helped by the fact that in the last few months the financial authorities have acknowledged the central truth about modern banking systems.This is that the modern banking creates credit rather than redistributing it" GNDG
This was not written by bloggers on the Net but by Ann Pettifor,Larry Elliott of the Guardian ,Richard Murphy and other authoritative figures
DBC, Richard Murphy is not "an authoritative figure".
Plus we've done this before, banks do no create credit, creditworthy borowers do.
They are more anti-authoritative figures.
Whatever they say is wrong.
DBC Reed appears to be a greeny. He (she?) has just bought into another invented 'economic system', like failed socialism. And like socialism any economic system 'invented' will fail. Or rather it can only succeed by telling everyone else what to do. Let's just call it Fascism, or Totalitarianism and be done with it.
If they all just went away and left us to get on with stuff things would be so much better.
L, DBC is top man and pro-LVT campaigner,
@MW Many thanks for the support(as the old joke goes: I shall always wear it.)
Dunno why Lola has latched onto this green angle.(Probably because I cite something written by the the Green New Deal.)
I annoyed him last week by calling for dreary estuaries to be be filled in as far as poss,and for a whacking great island to be built in the mouth of the Thames with or without the mooted airport.Also massive transport infrastructure projects with LVT collection of resulting land value rises.I would n't call this very green.
The imputation of greenery,followed by riffs on fascism seems a bit over the top.
OK OK. I apologise. Got hold of the wrong end of the stick entirely.
I wasn't annoyed by a recommendation to fill in dreary estuaries at all. I just thought it was mildly amusing that I quite like the solitary nature of dreary estuaries. KIf you want to fill one in with an airport you got right ahead. As long as it doesn't cost me money, as most state sponsored grande projects seem to.
My hearts in the right place. Honest.
"LVT has no deadweight costs."
I don't agree.
If a piece of land costs £100k and you tax it at £10k, then the cost becomes £110k. You consistently assume on this blog that this will cause the market price to fall to £90k, so that the total cost remains the same (£100k). But the market price is determined by supply as well as demand. And supply of land (in an economic sense) is NOT fixed. The market price will fall, and supply will fall. This means the market price will fall by less than £10k, and supply and demand will be balanced by the market at a lower level of both.
The consequence of this must be that LVT would have deadweight costs.
Adam, the supply of land is very much fixed. Isn't that the rallying cry of the Home-Owner-Ists - "Britain is a crowded island"?
It's easier to look at LVT as a higher interest rate. Do higher interest rates reduce the amount of houses or land? Nope, they just depress the capital value, without affecting the rental or enjoyment value one bit.
Your counter-argument must be that scrapping Council Tax (a very crude form of land value tax) and increasing income tax by 4% would have no deadweight costs. As ever, if you have any evidence to back this up, I'd be glad to see it.
The supply of land (as in the amount of land available for purchase) is very much NOT fixed. It depends how many people are willing to sell, and that of course will depend on the price (among other factors).
I didn't say income tax had no deadweight costs. I just said that LVT would too.
Adam, OK. Answer the question - which has lower deadweight costs:
a) VAT/National Insurance/Income tax/corporation tax, or
b) land value tax (taking Business Rates and Council Tax as proxies for LVT)?
Almost certainly a). LVT does have a number of things going for it - simplicity and relatively low distortions caused to the economy. But the distortions wouldn't be zero.
By the way, Business Rates and Council Tax are a little different from LVT, because they include the buildings themselves as well as the land.
Can you answer this question: why do you want to pick on land as an asset to tax? Vehicle Licence Duty, for example, is a tax on ownership of an asset, namely a motor vehicle. Why is that worse than LVT?
AC, car and fuel taxation is a minor topic. I accept BR and CT include property element, but it's a good place to start.
As to LVT, it's not the physical asset that would be taxed (what are a few hundred square yards of earth worth? next to nothing?).
The tax would be on the benefits that accrue to the owner or occupier of each plot from all the stuff in the vicinity, which do not belong to him and have not been created by him (such as roads, railways, shops, schools, nice view, other people, etc), but which are created by society in general.
When you rent or buy a property, you pay a lot extra for the location to one single individual, so you have to contrast income tax (where society claims wealth created by an individual) with privately collected taxes (where an individual claims wealth created by society in general).
LVT just squares that circle - society reclaims wealth created by society, that's all (allowing income tax etc to be reduced accordingly), and uses that income to pay for things that benefit society in general (whatever they may be).
A motor vehicle is not an asset. An asset puts money in your pocket every day. Owning a motor vehicle is the reverse of that. Land is an asset because you get rent from it every day. Or if you own it outright you save the rent you would have had to pay.
There are only four genuine assets...
Shares
Bonds
Property (aka land)
Cash
...because they are the only assets that pay any income. Everything else is a speculation as their returns rely on capital gain. This also applies to Gold.
Hence if you tax land you are just increasing the effective interest rate. Plus land, or rather property, is not a very dynamic asset. It doesn't of itself help to create real wealth. It is required as a place from which to create wealth. Equity and Bond assets give entrepreneurs access to capital which they can use to create more wealth. Cash just lubricates it all.
Taxing these other assets therefore depresses production as does taxing labour, which I consider to be the most iniquitous tax of all - income tax. It is effectively a theft of my life.
Lola, that's not true. I could rent my motor vehicle to someone, just like I could my house. Or I could use it myself.
You say that LVT is effectively an increase in interest rates. I can see that argument. However, different landowners pay, and forego, different rates of interest. An individual borrowing on a mortgage pays one rate; a business would pay a higher rate; and an individual who owned his house outright would be foregoing a lower rate that he could have got by putting the money in the bank.
An LVT would depress land values by a certain percentage. That depression of value would be worth more to those paying higher interest rates than to those paying lower. So an LVT would benefit businesses most, followed by mortgage-payers, and hit outright home-owners hardest. Which may be desirable but is not economically neutral.
L, excellent summary. Taxes on bonds, shares, cash is not really any different to income tax.
AC, "an LVT would benefit businesses most, followed by mortgage-payers, and hit outright home-owners hardest"
In relative terms maybe so (esp. if LVT were replacement for BR). But who has more disposable income (after mortgage costs) - somebody with a mortgage or somebody with no mortgage? If we are using 'ability to pay' as a yardstick, then LVT ticks the box!
PS, renting out a physical, depreciating asset that needs constant maintenance (like a car) is completely different to rental income from land (which neither requires maintenance nor does it depreciate). Rent from buildings is more like the former or course, but it is not rocket science to split up rental values into the element for the building and the 'ground rent'.
AC. Yep, your car becomes an 'asset' once you start renting it out. But it is an asset of a business, AC Car Rentals Ltd. You own the equity of the car rental business and the the income the business generates by renting the car comes back to you as dividends on your equity - assuming that you do not work in the business and draw pay. Plus the car is depreciating. It is a declining 'asset'. It's rental value declines with its age, and at the same time its costs of ownership - operation - increases.
QED the only true 'assets' are shares, bonds, property and cash.
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