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?