## Saturday, 31 March 2012

### Calculating pi = 4/1 - 4/3 + 4/5 ...

There's a mildly interesting series on BBC4 at the moment called The Story of Maths, which is unfortunately more about history than maths (and an excuse to take a few expenses paid holidays around the world), in which the presenter explained how somebody had worked out that you could calculate pi by taking 4/1, subtracting 4/3, adding 4/5, subtracting 4/7 and so on.

All I can say is, although it was clearly an insight of blinding genius to realise this, they must have been really bored after that, as it takes you a heck of a long time to get anywhere near pi in this manner.

The first chart showing the results for the first 20 iterations looks very promising, but it strikes me that after about 40 iterations (second chart), somebody will have said "Sod this for a game of soldiers, let's take an average of the last few results and call it a day." Even if they'd slogged their way up to 100 iterations (third chart) or up to 1,000 iterations (bottom chart), they wouldn't have got much closer than by just averaging the 39th and 40th results:

### Questions to which the answer is "Yes"

"Meanwhile, are they going to ban barbecues and bonfires?" , asks Simon Clark of Forest in response to this deluge of propaganda.

Yes of course! They already more-or-less banned gas fuelled patio heaters, what makes you think they're going to stop any time soon?

Whether they were ever actually officially made illegal is doubtful, but you can't buy the things at your normal garden superstore any more.

## Friday, 30 March 2012

### Killer Arguments Against LVT, Not (209)

People who know a bit about blocks of flats and leaseholds (but not very much, obviously, or they wouldn't raise such daft objections) claim that it would be very difficult to apportion the LVT bill between the leasehold flats and the freehold. I discussed this with Ben W (the ideas factory - more to follow) in the pub' and we came up with a couple of simple methods. It's actually very easy, if you know what you are talking about and apply common sense.

For illustration purposes, let's assume that one person owns the freehold of the block. There are ten leasehold flats with thirty years to run. Each flat has to pay £200 a year ground rent to the freeholder. The bricks and mortar rebuild cost/value is £500,000. The total site rental value is £50,000 and the LVT to be collected is £40,000 (80% of rental value).

The alternative methods of apportioning that £40,000 are:

1. The Table in Schedule 5 TCGA 1992 was designed for a different purpose, but the principle is the same. This tells us that a leasehold with thirty years left to run is worth 87.33% of a freehold flat (fifty or more years, makes no difference). This is merely the NPV discounted at 5%, from memory. So the freehold must be worth 12.67% of the whole. So the £40,000 is apportioned 12.67% to the freeholder £5,068 and 87.33% to the flats £3,493 each.

2. LVT is on the current rental value, and the freeholder receives £2,000 rent a year. So his bill is 80% x £2,000 = £1,600, leaving £38,400 to be collected from ten flats x £3,840 each. We just ignore the future value when the leases end.

3. We assume that the £40,000 bill is, in the first instance, split up between the ten leasehold flats unless they have put in an offer to acquire the freehold reversion, under the provisions of the Leasehold Reform Act 1993, which says that leaseholders have a right to buy the freehold for its market value (plus minus other bits and pieces). So the leaseholders can write to the freeholder and ask him how much he'd sell the freehold reversion for.

So all the leaseholders need to do is value the leasehold flats as they stand (not too difficult - in this example let's say £60,000 each) and the freeholder names his price. The LVT is then simply apportioned pro rata. If the freeholder asks for £75,000* and the leaseholders think this is too high, he pays 11.11% of the bill £4,444 and the tax for each leasehold flat is £3,556 - unless the leaseholders want to enfranchise and buy the freehold off him for the price he named. If he is too greedy and the leaseholders don't want to enfranchise, he ends up with a larger share of bill. If he is not greedy enough, he will end up selling for undervalue. This is how prices are set in free markets.

4. Whichever method we use, it's no big burden on the freeholder. If he thinks he is being saddled with too much of the bill under method 1, he can always just waive his interest and allow it to revert to The Crown, or he can extend the leases unilaterally for free.

And he can pick and choose his own tax bill under method 3. If he is not prepared to pay more than £2,000 (so that it's cash neutral each year), then he has to offer the leaseholders the freehold reversion for £31,500 or less (you check the maths); if they accept, then he gets his £31,500 and is out of the picture; if they think this is too expensive, he ends up with a £2,000 annual tax bill which is conveniently covered by the ground rents he collects.

5. We can apply the same principles to leases of business premises, where the rent is often fixed for five or ten years in advance , but I'll leave that to you to work out for yourselves.

All sorted, next non-existent problem please!

And can we have something different to "Poor Widows In Mansions"? I'm really bored with that one.

* A note on valuations: the value of the £2,000 annual ground rent is worth (say) £30,000. In thirty years' time the freeholder gets the unencumbered leasehold of the whole building. The building is worth £500,000, the same table and tells us that the value of that freehold interest is about 13% of £500,000, but as he doesn't know what state it'll be in in thirty years' time, he might value that at £45,000 and ask for £75,000.

### "Michael Gove calls for faith pupil limit in Bradford school"

From the BBC:

The Education Secretary Michael Gove has suggested a proposed new school should limit its intake to 50% Muslim pupils.

The proposed secondary school is in Manningham, the constituency of Respect MP George Galloway, who wrote to him about the issue. Mr Gove said he would welcome a cap.

A few years ago, the Muslim Council of Britain fought attempts by Labour to open up new schools in Oldham and Bradford to the wider population.

### Is it just me..?

From the BBC:

A fire service spokesman said: "Her daughter asked her mum for petrol because she had run out. The [gas] cooker was on and the fumes ignited."

Station manager Lee Smith, whose Acomb crew attended the fire, said: "The people were cooking their tea and dispensing petrol from a container to a glass jug. The vapour then ignited, the jug was then spilt which obviously ignited as well and the person involved in the decanting was consumed by the flames. Her daughter phoned 999 and was obviously extremely distressed."

### Health Scare Story Du Jour

From the BBC:

Obesity is fuelling a major increase in the number of cases of kidney cancers diagnosed in Britain, experts say.

Cancer Research UK has published figures showing there were just over 9,000 cases in 2009, compared with just under 2,300 in 1975. Obesity increases kidney cancer risk by about 70%, compared with smoking which increases it by about 50%.

Cancer Research UK says too few people understand the cancer risk of being overweight. Kidney cancer is now the eighth most common cancer.

As per usual, it's made up figures time. The chances are there were plenty of kidney cancer deaths in 1975, they just weren't diagnosed or recorded as such. If there are 9,000 'cases' out of over sixty million people, of whom at least fifteen million have been aribtrarily classified as 'obese', that isn't terribly many. And what's a 'case'? A 'death' I understand, but how many of those 'cases' are treated successfully? An increase in the risk of 70% is meaningless unless you know the absolute risk to start off with, either way, only about a third of those 9,000 'cases' are down to obesity*. Smoking looks relatively safe, and if it is indeed true that smoking helps weight loss (supresses appetite), then an obese person can reduce his kidney cancer risk by having a cigarette when he feels hungry. And 'eighth most common cancer', what? What relevance does that have to anything? At a guess, that's only a couple of per cent of all cancer 'cases'. CRUK is a fakecharity. And so on.

* 45 million x normalised risk 1 = 45 million
15 million x heightened risk 1.7 = 25.5 million
25.5 + 45 = 70.5
25.5 ÷ 70.5 = 36%, a bit more than a third.

## Thursday, 29 March 2012

### Killer Arguments Against LVT, Not (208)

The Fat Bigot delivers another dollop of self-contradictory Home-Owner-Ist propaganda in the previous instalment, the crux of which appears to be this:

Let's set the bubble aside and assume there isn't one. On that hypothesis your proposal is to impose a capital tax on one form of savings.

Bollocks. He knows perfectly well that LVT is not really a "tax" but a user charge on private consumption of publicly (not necessarily government-provided) benefits. And the rental value of land is not "one form of savings" chosen by the purchaser of land, the rental value is dictated by everything that happens around it (remember the slogan: Location, location, location!). LVT is the opposite of the damaging taxes like income tax, VAT etc which it should replace.

But he reminds us that the Home-Owner-Ists have managed to turn the whole concepts of 'consumption' and 'saving' upside down; in their world, ownership of land (i.e. consumption) is a kind of saving - I don't see how this amounts to an argument against LVT and in favour of income tax, VAT etc - but others have come up with similar nonsense, so let's deal with it:

Putting your money into a house (the value of which on this hypothesis includes no bubble element) rather than into the pocket of a landlord results in you owning a piece of real property after 25 or so years.

After the property is fully paid-for you have no on-going capital housing costs unlike those who have chosen to rent... the net result is that you are considerably better off each month than you were when repaying the mortgage or that the renters next door are.

I don't see anything objectionable about people arranging their affairs in that way. In fact I think it is a very sensible arrangement because later in life earning capacity is often reduced and having lower overheads makes it much easier to cope with any downward turn on income. It also allows pensions to be lower and still provide enough for people to live on.

In effect the purchase of a house is a savings policy. It provides a lump sum that gradually increases as the mortgage is paid-down (let's not quibble about repayment against interest-only because any sensible interest-only plan includes a capital repayment vehicle). Once it is paid-off it provides a substantial monthly reduction in the cost of living.

It's a typical diagonal comparison - the implication is that the only alternative to buying a house is renting and/or squandering your money. The fairest comparison is between buying a bigger house and buying a smaller house and saving up the difference in cash.

If we work through the steps logically and compare like-with-like at each stage, it is pretty obvious to all except the dimmest Express or Telegraph reader that land ownership is NOT saving (in the narrow sense of 'deferring consumption'), not at the level of an individual and certainly not at a macro-economic level:

i. A and B start off their working lives with similar incomes, they still live with their parents and both have £1,000 a month left over paying for essential living costs. A spends all his spare money on 'stuff' and B spends £500 and saves up £500 a month in the building society. Clearly, B is saving more and A is consuming more.

ii. They both decide to move out. A rents the biggest and nicest flat he can afford for £1,000 a month, and B rents a smaller flat for £500 and saves the other £500. Clearly, B is saving more and A is consuming more, as A is consuming more land rental value.

iii. After a few years they both think that renting is a mug's game and decide to buy. A buys the biggest and nicest house he can afford for £200,000 and pays £1,000 a month mortgage; B buys the smallest house he can happily live in, pays £500 a month mortgage and saves up £500 a month cash (B would obviously be better off paying off his mortgage quicker, but let's stick to like-with-like). The relative consumption/saving between the two is the same; B is saving more and A is still consuming more.

iv. Fast forward to when they've both paid off the mortgage and are coming up to retirement; A has a £200,000 house and B has a £100,000 house and £100,000 savings in the bank (plus accumulated interest*). B has built up more assets because he has saved more; and A has consumed more, having lived in a nicer and bigger house and consumed more land rental value for the past twenty or thirty years. In retirement, B can unwind the position and spend his savings in retirement, buy an annuity or whatever.

v. * How much accumulated interest? Assuming all things being equal, that the rental values = the mortgage repayments and reasonably efficient banks, the interest that all the Bs earn on their savings will be roughly equal to the additional interest which all the As have paid. So B's additional interest paid is the sum total of all the additional housing services which all the As have consumed, so again, we see that A has consumed more in the past and B has saved more (deferred more consumption into the future).

vi. Therefore, if we assume that two people spend the same amount of their spare income on 'other stuff' (non-housing services), then buying a smaller house means more saving than buying a bigger house. Therefore, the more house you buy, the less you are saving. Taking out a large mortgage and buying a house is therefore the opposite of saving money, quite clearly, because borrowing money is the opposite of depositing money; paying off a mortgage is a good type of saving, but taking out a smaller mortgage to start with is an even better form of saving.

vii. Now, go back to TFB's closing arguments and rephrase them in like-for-like terms:

After the properties are fully paid-for, neither A nor B has on-going capital housing costs... but because B has cash savings, the net result is that B is considerably better off each month than A.

I don't see anything objectionable about B arranging his affairs in that way. In fact I think it is a very sensible arrangement because later in life earning capacity is often reduced and having lower overheads makes it much easier for B to cope with any downward turn on income, unlike A who will be claiming Support For Mortgage Interest if he loses his job. It also allows pensions paid to B to be lower and still provide enough for people to live on - but A, having no cash saved up will have to be bailed out by the taxpayer.

-----------------
And yes, the example is simplified, but t'was TFB who said "Let's set the bubble aside and assume there isn't one" so that's where I started.

We can introduce all these real life complexities - rental values grow as the economy grows; land price and credit bubbles and the ensuing recessions; interest payable on mortgages is at a higher rate than on savings; price inflation erodes the value of cash savings; there is tax on earned income and savings income but not on non-cash rental income from housing or capital gains on your main residence - but these are all dictated by the government. All these complexities are only there because the government i.e. weak politicians under the influence of the the banks, the large landowners etc, wants things that way.

But as long as we introduce these complexities one-by-one on a like-for-like basis, and at each stage in the logic compare the outcome with alternative that we abolish income tax etc and replace the whole lot with LVT (or Domestic Rates or more Council Tax bands, or whatever), we will still see that buying a big house is consumption.

Even if people believe that rising house prices make them richer (as individuals) then this is only because future generations are becoming poorer; and at a macro-economic level, rising house prices make us all collectively poorer. They must do, because the massive gains to the "one per cent" are a drop in the ocean compared to the damage this causes to the economy as a whole, i.e. to the "ninety nine per cent" who do not live off land rents.

### "Girl suffers double humiliation after school dinner mix-up"

From The Evening Standard:

A girl of six, who had been given bread and jam instead of a hot school dinner because her mother was £4 in arrears, was humiliated further today after her mother contacted journalists from the local newspaper.

Hazel Lebby, 37, says she was shocked to discover that not all the other children at St Thomas of Canterbury RC Primary in Commonside East, Mitcham knew that her daughter Hannah had been denied a lunch after she fell behind with her payments. So Mrs Lebby allowed the local newspaper to publish the story, together with a photograph of her daughter to make it easier for bullies at the school to recognise her.

Mrs Lebby said: "Hannah made me promise not to come up with lame excuses like 'my car broke down so I totally forgot' and 'the next morning I woke up with a leak. My carpet was soaking wet'. But I felt pretty confident that the older boys wouldn't use this as inspiration for smutty jokes, so I decided to go public."

The school has criticised Mrs Lebby's decision. Headteacher David Feasey said: "Sometimes children experience difficulties - like being a ginger or having a parent who is overweight - and we can work around that. But it’s a parent’s responsibility not to make themselves and their children look like complete whining idiots."

### "US, UK and France consider land release to curb house prices"

From The Telegraph (pinched from Mombers at HPC):

France is in talks with the United States and Britain on a possible release of strategic land stocks to push house prices lower, French ministers said on Wednesday, four weeks before the country's presidential election.

Earlier in March, British sources said London was prepared to cooperate with Washington on a relaxation of planning restrictions that was expected within months, in a bid to prevent house prices choking economic growth in what is also a US election year. France's Energy Minister Eric Besson told journalists after the weekly ministers' meeting that the United States had asked France to join it in a possible emergency liberalisation.

Such a relaxation could happen "in a matter of weeks", Le Monde daily said on Wednesday, citing presidential sources.

"It is the United States which has asked and France has welcomed favourably this hypothesis," Besson said. He also said that the countries were awaiting conclusions from the Institute of International Finance (IIF), which manipulates house prices in case of severe economic disruption.

The French budget minister and government spokeswoman, Valerie Pecresse, also told journalists France had joined the United States and the UK in IIF consultations to receive authorisation to draw from strategic stocks.

Earlier this month David Cameron discussed the option during a meeting with US President Barack Obama. Mr Cameron said at the time: "We didn't reach a decision about planning restrictions but we discussed the issue." He said it was important to "do what we can" to try to help families make their budgets add up.

### Prince of Thieves

From The Daily Mail:

The influence the Prince of Wales wields over government legislation has been revealed in newly released documents. The papers shed light for the first time on the customary routine by which the Prince is consulted on Bills that may affect his estate, before they are debated in Parliament...

The response reveals the level of power the Prince appears to wield in matters of legislation and appears to suggest he sees his role as going further than that envisaged by ministers. Ministers have been forced to seek permission from Prince Charles before passing laws in at least a dozen separate areas during the past five years, from road safety and energy reforms to gambling and planning.

The requirement stems from a little-known constitutional right for the prince to effectively veto legislation in areas which might affect his private [sic] interests.

### "Corruption risk from foreign aid target, say Lords"

The House of Lords' economic affairs committe dares to utter in public what everybody else has known for a long time:

DRIVING up the government’s foreign aid budget risks stoking corruption in poor countries, an influential House of Lords committee has found.

The department for international development (DfID) must "do more to tackle corruption" that stems from British aid, the Lords’ economic affairs committee will argue today. "DfID detected only £1.2m of fraud in its £7.7bn budget in the year to March 2011," the report says, slamming the figure as "paltry and implausibly low".

The report added that the UK’s "arbitrary” target of committing 0.7 per cent of GDP to aid – which it plans to embed in law – would “wrongly prioritise the amount spent rather than results achieved".

Just last week the Independent Commission for Aid Impact gave DfID’s programme in Afghanistan an “amber-red” mark, signalling that it is “not performing well” and needs “significant improvements”. The US government has cut aid payments to Afghanistan after allegations that western funds are being smuggled out of the country in suitcases stuffed with cash.

The Lords committee argued that humanitarian aid, which receives under 10 per cent of the aid budget, should be maintained.

## Wednesday, 28 March 2012

### Killer Arguments Against LVT, Not (207)

Righty-ho, as we now know from experience, any suggestion that we have more Council Tax bands (or move towards Domestic Rates or LVT), whether that's on a Tory or Labour-supporting website is met with horrified cries about Poor Widows In Mansions.

The Fat Bigot reckoned it was unprincipled of me to suggest that we simply exempt pensioners and make 'everybody else' pay a bit more, so how about this for a plan:

1. When you get sent the Council Tax/Domestic Rates/LVT form to confirm that you are indeed the registered owner, there'd be a box to tick saying "I am over pension age and I can't afford to/don't want to pay" and then there are a few empty lines in which you can enter the names and addresses of your adult children, or "None" if appropriate.

2. The council then splits the bill between equally between your children and in turn sends them a bill for their pro rata share of your bill*. It's then up to them whether to pay up or not. If not, the unpaid amounts are just registered as a charge against the land and are rolled up with interest. Clearly, these liabilities take precedence over any other liabilities, i.e. outstanding mortgage; if the mortgage company doesn't like the sound of this, it's up to them to sort things out in their own inimitable way.

3. If the ageing parents genuinely want to "keep wealth in the family" then it's up to them to trade down and their children will have every incentive to help them do so (exactly as they do now, if they want to gets their hands on 'their' inheritance ASAP). And if the ageing parents would rather stay where they are, or indeed if they have no adult children, then they can just tick the first box, enter "None" in the empty lines and that is the end of that.

4. Yes, actuarially, some people's rolled up debts plus interest will exceed the ultimate selling price of the house, but so what? The interest charge will just have to be calculated so that overall it's a break-even, and there is no advantage, ex ante to either a) paying up front or b) deferring. And yes, that means the government won't get hard-cash-money from some land until decades into the future, but the government also has debts (National Debt, public sector pensions) that do not have to be redeemed/paid until decades into the future, so it all still matches off in cash flow terms.

* If I were sent such a pro rata bill, I'd have to have a serious discussion with my siblings about whether we pay it or not. The chances are I'd say sod it, I'm not getting involved. My parents' house is of no interest to me, and if ends up all going in tax, then so what? I've managed without it so far, haven't I? Anybody who has staked his whole future on inheriting an [overvalued] house is beyond redemption.

### China one-child puzzle

An article in today's FT repeats the story that in some areas, there was an exception to the one-child-only rule: the Chinese are obsessed with having as many boys and as few girls as possible (quite why escapes me, unless they want them all to turn out gay or lonely), so if a couple's first child was a girl they were allowed to have another child.

I've read this before, so let's assume it is true for the sake of this discussion. The other article I read also pointed out that this sort of policy, in the absence of sex-selective abortions, does not lead to a relative increase in the number of boys.

Assuming a random arrival pattern of boys and girls:
- half of all couples will have a boy as their first child and that is the end of that.
- if the other half, who've had a girl, try again, half of them will go on to have a boy and half will go on to have another girl.

So out of 100 couples, we end up with:
- 50 having one boy = 50 boys
- 25 having one girl and one boy = 25 girls and 25 boys
- 25 having two girls = 50 girls

Tot those up and there are 75 girls and 75 boys. You can repeat the exercise and say that couples who have had two girls are allowed to try yet again, it doesn't make any difference, you always end up with the same number of each.

### "VAT on pasties threat: No 10 denies causing panic"

From the BBC:

Downing Street has dismissed claims it caused "panic" over the threatened imposition of VAT on hot pasties by urging Greggs customers to make "contingency plans" such as filling up.

Labour described the comments as the "height of irresponsibility" for giving the impression people should panic buy. But No 10 said it had alerted customers to the consultation period in "a calm-headed and sensible way".

The civil contingencies committee Cobra* will meet later to discuss plans in the event of a strike by angy bakers.

* Sigh. 'Cobra' is the name of the room in which they meet (Cabinet Office Briefing Room A). The committee itself is just the 'Civil Contingencies Committee'.

### "Sustainable development"

From the BBC:

What is 'sustainable development'?

That's part of the problem - critics of the draft plans said the phrase was too vague. It had been defined it as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs" to be "interpreted and applied locally". The Commons environmental audit committee said the lack of a definition in draft plans opened the door to legal challenges.

That seems crystal clear to me.

If somebody wants to build something now it's because they need it now, so that meets the need of "the present". They're not depriving owners of other houses of their houses, they're not depriving them of anything. This is not a zero sum game, the sum total of human wealth increases when more houses are built in response to demand. For sure, owners of existing houses might lose the nice view or some of their privacy, but it was never 'their' view or 'their' privacy, was it? The view or privacy is just there in the negative, they just means an absence of other buildings, i.e. they are a measure of the amount by which the sum total of human wealth has been reduced.

The chances are that "future generations" will be glad that what we've built is already there when they arrive on the scene, in the same way as people who live in a house must be glad that the house exists; and they must have been glad that the house existed when they bought it (or else they wouldn't have bought it). It makes no difference how much somebody else may have objected to that house being built decades or centuries ago, relative to the past, we are the future etc. I've never met a NIMBY yet who agrees that his own house should never have been built, pays to have it demolished and moves into a tent.

Sorted.

## Tuesday, 27 March 2012

### It's almost as if they want people to join protest groups like the EDL...

From the BBC:

Swansea University student Liam Stacey, 21, from Pontypridd, admitted inciting racial hatred over remarks about the Bolton Wanderers player, who collapsed during a FA Cup tie at Tottenham. A district judge in Swansea called the comments "vile and abhorrent"...

Yes, I'm sure that his Tweets were very hurtful, like millions of other Tweets posted every day which are intended to hurt someone else's feelings, and I can tell you right now that I wouldn't have agreed with them, but the words "totally", "disproportionate" and "response" spring to mind.

### Killer Arguments Against LVT, Not (206)

Would a federal land value tax be fairer than the current federal income tax? I was reading an article on Georgism,a 19th century idea of American philosopher Henry George, and was wondering what others thought of this.

The first comment is an onslaught of Home-Owner-Ism:

The first rule of taxation is this: Make sure that the taxpayer can AFFORD to pay the tax. The ONLY tax that universally adheres to that critical rule is a properly implemented graduated income tax.

Nope. The first rules of taxation are 'make sure the tax does not damage the economy' and 'make sure that there is some moral justification for the tax, ideally levying user charges for value received by the payer from society in general'.

Property taxes only have a loose association to ability to pay, assuming that you buy within your affordability range while you are earning and values don't go haywire and surge past wage growth.

In the real world, people do buy 'within their affordability range', with or without LVT. And in the real world, prices are set by first time buyers/tenants, so if they can afford it, so can older people who've climbed the job ladder a bit and who don't have young children to look after. Whether you commit to paying a big mortgage for 25 years or a smaller mortgage and LVT (but no income tax) is neither here nor. People will quite simply choose to live in a home (or carry out their business from premises) on which they can afford the tax (by definition), so the whole 'ability to pay' issue sorts itself out.

Once you retire on a fixed income, you are basically screwed as taxes will fairly quickly surge past your ability to pay.

If 'ability to pay' is all that matters, a mugger could argue in court that as he only took spare cash which his victims had in their pockets, it was well within their 'ability to pay' and therefore caused them no harm. The 'fixed incomes' to which he alludes are of course taxpayer-funded pensions, there's no natural reason why these can't be funded out of LVT or out of savings (people will pay less tax during their working lives). Failing that, the retired can ask their heirs to pay. They want to inherit the house, don't they? If the parent wants to 'pass on wealth to his children' then all he has to do is trade down; if he doesn't want to trade down and his children aren't interested in inheriting, then the problem solves itself.

There then follows a long rant about the difficulties with valuations, all of which are nonsense, and he rounds off with this:

19th century ideas won't necessarily work in the 21st century.

Yes they will. It's the same land as we had in the 19th century, site rental values are being generated in exactly the same way as ever, (the extremes are in fact even greater the more sophisticated the economy is), and this is throwing up exactly the same problems as ever (but worse).

Henry George published Progess and Poverty in the late 19th century against the backdrop of a land price bubble and the ensuing financial crisis, and this 18-year boom-bust pattern was already well established in the USA. The book could easily be re-written against the background of the 'financial crisis' which started in 2007.

### The hard-nosed realism of politicians

From City AM:

NEW RULES pushing up the price of alcohol will affect almost half of drinks sold at off-licences and hit moderate drinkers, a study by the Institute for Fiscal Studies claims... However, analysis of off-licence sales by the IFS shows 47 per cent of units of alcohol sold will be affected by the minimum price... The minimum price is also being implemented in an inefficient manner, the think-tank warns.

"The policy could also lead to substantial transfers of revenue to the alcohol industry. It would seem more sensible to establish a floor price through the tax system by treating different types of alcohol more consistently, and allow these revenues to flow to the exchequer instead."

However, the Home Office rejected that view, telling City A.M. "alcohol sold at a loss benefits the heaviest drinkers and costs the rest of us (1). Supermarkets can use any extra profits to lower the price of other goods and make the average shopping basket cheaper."(2)

1) No it doesn't. Even if sold at a loss (for which I have seen no evidence), the alcohol duty is still being paid, and that's what goes into the pot for "the rest of us". Admittedly VAT receipts from below-cost booze are lower, but VAT is an indescribably shit tax anyway.

2) Can anybody explain what would motivate supermarkets to do that?

### Sainsbury & Sainsbury

From Wiki:

David John Sainsbury, Baron Sainsbury of Turville, FRS (born 24 October 1940), is a British businessman and politician. From 1992 to 1997, he served as the Chairman of Sainsbury's (a supermarket chain established by his great-grandfather John James Sainsbury in 1869). He was made a life peer in 1997, and currently sits in the House of Lords as a member of the Labour Party.

From Wiki:

John Davan Sainsbury, Baron Sainsbury of Preston Candover, KG (Born 2 November 1927) is the President of J Sainsbury, a British businessman and politician. He sits in the House of Lords as a member of the Conservative Party.

## Monday, 26 March 2012

### "Cameron sinks to new depths"

From the BBC:

British PM David Cameron has returned to the surface after plunging nearly €300,000 (£250,000) down to the deepest place in politics, the Cash For Questions Trench in the west end of London.He made the solo descent in a submarine called "Deep Pocket Challenger", taking over two years to reach the bottom. His party treasurer spent more than half an hour exploring the possibility of a large donation, before a speedy sacking once news reached the surface.

Undercover journalists were kitted out with cameras and lights so they could film the depths to which politicians will stoop. This is the first manned expedition into the murky depths of graft since journalists from the same newspaper tried to trap the then leader of UKIP with similar leading questions and journalists from the BBC caught out three Labour politicians - which took place in 2010.

Before the dive, the Prime Minister told the BBC that making the descent was "the fulfilment of a dream".

He said: "I grew up on a steady diet of sleaze at a time when politicians were living a totally corrupt reality. Peerages were being sold and the entire EU Commission has to resign for corruption. And that's what I grew up with, what I valued from my childhood."

### Fun Online Polls: Next Archbishop of Canterbury and super-food

Thank you everybody for taking part in last week's Fun Online Poll.

Who do you think will be the next Archbishop of Canterbury?

Don't know, don't care - 66%

John Sentamu - 15%
Richard Chartres - 4%
Richard Dawkins - 3%
Nicholas Baines, Christopher Cocksworth, Steven Croft - 1% each
Also rans: Graham James, Barry Morgan, Michael Perham, John Pritchard, Justin Welby
Other, please specify - 13% (including 3% for Richard Dawkins)

So there we have it. There was quite a high turnout for that poll, I didn't realise that people took such a keen interest in ecclesiastical matters.
---------------------------------
Something else about which I know little and care less is super-foods, apparently they discovered a new one last week. So that's this week's Fun Online Poll: which is your favourite superfood?

Vote here or use the widget in the side bar.

## Sunday, 25 March 2012

### Afternoon outing to Camden & Regent's Park

First we walked along Regent's Canal from Camden Road station. My kids spotted something sinister lurking on a balcony:.Hiring a rowing boat is a bit pricey at £20 for a family for an hour, but a kid's pedalo is pretty good value at £3 for 20 mini: Finally, as ridiculous as those young men look who wear trousers round their knees, it's nothing compared to all the Baby Boomers we spotted walking along with idiot sticks like this. Have some dignity, FFS:

### "Kim Jong Un warns USA against missile test launch"

From the BBC:

North Korean leader Kim Jong Un has warned the USA that it will "achieve nothing by threats or by provocations".

The warning comes as America prepares to launch a long-range missile which Washington says will put a satellite in orbit. Mr Kim was speaking in Ottawa with Canadian PM Stephen Harper ahead of global nuclear security talks. The two leaders said the USA risked further sanctions and isolation if it did not cancel its launch plans.

"America knows its obligations and it must take irreversible steps to meet those obligations," said Mr Kim, adding that Pyongyang and Ottawa were "absolutely united" on the issue.

Mr Harper said he and his North Korean counterpart had "agreed to respond sternly to any provocations and threats by the United States and to continually enhance the firm Canadian-North Korean defence readiness". But he said the international community stood ready to help the USA improve the lives of its citizens if it chose a path of peace.

The launch of the missile is scheduled for 4 July, to coincide with the 236th anniversary of the adoption of the Declaration of Independence. On Sunday, Canadian defence officials said the main body of the rocket had been moved to the launch site in preparation.

## Saturday, 24 March 2012

### Economic myths: what caused the UK public sector deficit.

Thanks to Icarus at HPC for additional input.

People are vaguely aware that the UK government has been running horrendous deficits for the past few years, around one-tenth of GDP, i.e. +/- £150 billion a year. Various explanations, nay excuses, are bandied around:

Excuse #1: A fall in tax receipts

Nope. According to the Public Sector Finances Databank Tab C1, tax receipts in the last pre-crisis year were £519 billion, and by 2009-10 they were down to £513 billion. Tab C1 also shows that taxes went down slightly from 38.6% of GDP to 36.5%, in other words that nominal GDP went up by 4.5% over the three years (which was still a small real fall after inflation).

So that's a fall of £6 billion.

Excuse #2: An increase in the cost of welfare

Nope. According to DWP's June 2010 Benefit Expenditure Tables, working age + child welfare went up from £46 billion in 2006-07 to £52 billion in 2009-10. Tax Credit spending is in addition to that, which according to Table 1.1 of the Public Expenditure Statistical Analyses ('PESA'), went up from £19 billion in 2006-07 to £28 billion in 2009-10.

So that's a total increase of £15 billion.

Excuse #3: The cost of the bank bail outs

Nope. Table 1.1 of PESA includes cash outflows for 'Financial sector intervention', but as explained in Box 2.A, those are zeroed out again, in other words they are treated as short term investments which are expected to be recovered, and so excluded again as 'accounting adjustments'.

The figures included under 'Resource Departmental AME' show a big expense in the first year of the bail-outs and then corresponding income in the following three years, the line appears to net off to +/- nothing.

The figures included under 'Capital departmental AME' show the amount invested in RBS and Lloyds shares and money lent to banks (total £122 billion), the shares are currently standing at a loss (I believe) but the cost of the shares was added back as an 'accounting adjustment', it's an investment not spending (allegedly).

So the net impact of the bank bail outs on official government spending was, according to Box 2.A +/- nothing.

Excuse #4: The current government has to deal with Labour's deficit

Not really true. From PESA, under the last three years of the Labour government, total public spending went up from £550 billion to £669 billion, that's even after excluding the cost of the bank bail outs. Under the Lib-Cons, spending is still drifting upwards, they've pencilled in total spending of £744 billion by 2014-15. So it's increasing less rapidly, but it's not falling in cash terms.

From PSFD, annual deficit was about £30 billion in the years up to 2006-07, and it shot up to £156 billion in 2009-10. The Lib-Cons hope that this will come down over time, but they plan to run deficits for the foreseeable future, their spending plans are a continuation of where Labour left off.

As Sherlock Holmes said...

"Once you have ruled out the impossible, what you are left with, however improbable, is the truth"

In this case, the truth is not improbable at all, the real reason for the deficit is quite simply that the UK government is spending money like water and makes no pretence otherwise. This has little to do with the tired old excuses listed above. From PESA, the total increase in annual public spending between 2006-07 and 2009-10 was £119 billion, and the annual deficit went up from £30 billion to £156 billion.

Either way, this looks like and increase in spending/deficit of about £120 billion a year.

If you want, you can deduct £6 billion tax revenue shortfall and £15 billion extra welfare spending from the extra £120 billion spending/deficit (these were a direct result of the financial crisis), and make some cunning inflation adjustment as well, but that still means that £100 billion of the extra annual public spending (compared to pre-crisis years) is unaccounted for or unexplained, i.e. it's just waste and crap (in addition to the £30 billion pre-crisis deficit which also went on waste and crap).

Just sayin', is all.

### Poor Widows In Church Toilets. For The Disabled.

From an article in today's Daily Mail, which I can't find online:

Why church repair bills will now be 20% higher

Churches across Britain, including some of the most beautiful and historic buildings in the land, have been hit with a VAT bombshell. A small-print clause in the Budget will mean that any alterations to thousands of listed buildings, including churches, will be liable to the 20% tax in future.

Having decided they didn't like this change one little bit, the Daily Mail's fearless reporters couldn't quite find a Poor Widow who would be 'clobbered' by this 'inquitous' tax 'grab', so they went for the next best thing:

So, for example, a church that needs to spend £18,000 to install new disabled toilets, [sic] ramps and hand rails would now suffer a £3,600 VAT bill.

## Friday, 23 March 2012

### "HM Revenue & Customs: The Exchequer effect of the 50 per cent additional rate of income tax"

I've reverse engineered the calculations they made in explaining why cutting the 50p top income tax rate to 45p would probably be revenue-neutral (see their calculations and explanations on page 15 and the chart on page 51) and I've embedded the key part of the spreadsheet below for your entertainment.

Their aim seems to be to set the income tax rate at the revenue-maximising rate, there are a few of problems with this:

1. They accept 12.8% Employer's NIC and 1% Employee's NIC as a given, even though these have both increased by 1% and are just another layer of income tax.

2. They cheerfully admit that they have no idea what the elasticity of supply of labour is (which they refine slightly and refer to as 'Taxable Income Elasticity' or TIE). On pages 18 and 19 they summarise lots of studies from various countries which give figures between 0.2 (people continue working and paying tax, even if wages fall and/or tax rates increase) and 0.8 (people will work less, avoid or evade taxes, move abroad etc if wages fall and/or tax rates increase), ignoring outliers. They can't make up their minds whether to use 0.35, 0.45 or 0.55 (so their chart uses all three).

3. As the calculations show, this is the most important unknown of all; if you assume a low sensitivity of 0.2, then the revenue-maximising income tax rate (i.e. the top of the Laffer curve) is 67%, and if you assume a high sensitivity of 0.8 it's 35%. Of course, different people respond differently; the rate might be different for high earners and low earners; the short term responsiveness might be more or less than long term etc.

4. They say that TIE can be split up into three things: labour supply (people work less or move abroad), tax planning (people work just as much but use legal loopholes) and evasion (people work just as much but do it cash-in-hand), and say the labour supply effect is "between one-third and one-half of the total TIE". This is their roundabout way of admitting that taxes on income have dead weight costs.

5. Those dead weight costs are also an incredibly important consideration. My spreadsheet shows the fall in potential GDP in the last row, i.e. the fall in declared taxable income multiplied by 0.4, which seems to come out at between 10% and 15%. That's a heck of a lot of lost output and unnecessary unemployment, by the way.

The figure for total revenues assumes that GDP starts at 100, with a flat income tax rate of 10% and National Insurance still in place (even these low rates must depress GDP by five per cent or so, let's gloss over that).

6. Another thing they ought to consider is that the cost of welfare is just an upside down Laffer curve; the way to minimise the cost of means-tested benefits is to find out what the revenue-maximising tax rate on lower earners with a small independent income would be and then to use that as the marginal withdrawal rate.

As a matter of fact, marginal withdrawal rates (especially for people who have tax deducted and benefits withdrawn at the same time) are between 70% and 100%, which is way beyond the top of the Laffer curve - in other words, we could reduce the cost of means-tested welfare by reducing income-based means-testing, although that point seems to escape them.

### Euphemism Of The Week

From the BBC:

Earlier she told journalists that heads were also leading schools that were the last bastion of "old fashioned values and discipline", teaching children "rational and restrained ways of dealing with conflict".

Secondary school staff were increasingly having to become role models for pupils who were often more influenced by what they saw on television than their parents*, she said. In the area of London where she is head, four fifths of pupils have English as an additional language and different ways of settling disputes.

Dude WTF?

"Abdul! Abdul! How many times have I told you that a brief fisticuffs followed by a scuffle on the ground and then being dragged off to see the Head is how we settle things round here! You can't order an honour killing just because Aisha looked at Achmed from Year Three!"

"Leroy! Leroy! Put that knife away and let Simon take his turn on the slide!"

* That is a load of crap, people who are parents now grew up in the 1970s or 1980s when we watched just as much television as we do now, and the programmes were just as violent as they are now (plus in olden days, characters were allowed to smoke on-screen).

### How very bloody inconvenient! Not to mention painful.

From The Telegraph:

... accountants say thousands of buy-to-let landlords are sitting on a “tax timebomb”. Many will have to pay two years’ tax liabilities during the next six months, creating a cashflow crisis after years of lightly-taxed income and gains...

Geoff Davies, a partner of UHY Hacker Young, explained:

"Many buy-to-let landlords came into profit on their investments in the tax year that ended on April 5, 2011, after the interest rates they were paying were slashed during the recession.

"This means that landlords could have to pay as much as 24 months’ tax in just a six month period. Tax for the 2010/11 tax year was due by January 31, 2012, along with half of the tax for the current tax year, while the remaining half of the tax for the 2011/12 tax year will fall due on July 31, 2012.

"Baffling though the rules may seem; the painful fact is that HMRC expects its share of the buy-to-let boom; no matter how inconvenient its timing may seem"

H/t Alan at HPC.

### Minimum hot pastie price planned for England and Wales

From The Telegraph:

Greggs' shares fell 4pc to 528p on Thursday morning, a day after the Treasury announced in the Budget that: "VAT will also apply, to the extent that it does not already do so, to the sale of hot food, cold food consumed on the supplier’s premises, sports drinks and holiday caravans, and to the rental of hairdressers’ chairs. This will have effect from 1 October 2012."

Greggs, which has more outlets in Britain than any other takeaway company, sells 140m sausage rolls every year. It has successfully argued – following a lengthy and complex VAT tribunal – that the products are baked in store, and just happen to be hot. As a result its hot pastry products have been free of VAT.

A source at the Treasury said: "We want to remove all these anomalies. This is a big step towards simplifying the VAT system." They added that anything that a normal consumer would consider hot, would be deemed by the Treasury to be so and subject to the tax. Most tax experts believe the definition of "hot" is above room temperature.

It is likely that companies will respond by trying to pass on the higher costs – an extra 20pc on these products – to their customers. Though some experts said that it would be difficult when shoppers were watching their pennies. Lorraine Parkin, head of indirect tax at Grant Thornton, said: "At a time when retailers are operating in a very challenging economic environment, this will further reduce their profits unless they are able to pass the tax increase on to their customers.

But... but... aren't investors being completely irrational here? Aren't the politicians always telling us that VAT doesn't affect producers, as the consumer pays the tax? Surely they wouldn't be lying to us, and surely politicians know a lot more about the hot pastie business than mere bakers and pie-eaters?

So why does a VAT increase affect Greggs' profits or share price? Maybe somebody could point out the same to Ms Parkin?

### Minimum knife price planned for England & Wales

From the BBC:

The government is proposing a minimum price of £4 per knife in England and Wales in an effort to stamp out violent crime.

Ministers say the proposal would not affect responsible restaurants or diners. But they predict that it could significantly change the behaviour of those who cause the most problems for hospitals and the police, by making it more expensive to stab somebody. The cutlery industry said the plans were misguided and would hit consumers hard.

Similar proposals are already being considered by the Scottish Parliament. Under the proposal, a minimum price, such as the proposed £4 per blade, would act as a floor and retailers would not be allowed to offer potential weapons below that level. In effect, it would not alter the price of most table knives, but could significantly alter the price of heavily-discounted steak knives, bread knives and carving knives...

Prime Minister David Cameron said the government wanted to reverse a stabbing culture that last year contributed to a hundred thousand knife-related violent crimes and hospital admissions. "Binge stabbing isn't some fringe issue, it accounts for half of knife-related injuries in this country. The crime and violence it causes drains resources in our hospitals, generates mayhem on our streets and spreads fear in our communities. We can't go on like this. We have to tackle the scourge of violence caused by binge stabbing and we have to do it now. So we're going to attack it from every angle."

## Thursday, 22 March 2012

### Evening Standard: policy based evidence

The Evening Standard solemnly reported some Home-Owner-Ist shite a couple of weeks ago, which included this statement:

An analysis of estate agent Savills’s deal book found that three in 10 properties in London worth more than £2 million have been in the same ownership for more than 10 years.

Fair enough, so seventy per cent were bought within the last ten years. Nationwide's calculator tells us that a house in Greater London costing £2 million in Q4 2011 would have cost £1.4 million in 2002, so the seven-out-of-ten who bought in the last ten years must have been earning a good wedge back then and there's no earthly reason to assume that they'll be earning much less now.

From today's Evening Standard:

Vince Cable’s mansion tax, an annual levy on biggish houses, was avoided largely because most people who own £2 million-plus homes are wealthy but have little in the way of an income stream. That run-down, five-bedroom place they bought 30 years ago just happens to have turned into a potential goldmine in the years since they raised a family who flew the nest.

Yup, in the space of two weeks, instead of it being three-in-ten people who bought more than ten years ago, it's "most people" who "bought 30 years ago".

FFS, by all means tell lies, but can't these people at least agree the official lies and stick to them? Or do they flip-flop like this deliberately just to remind the Winston Smiths among us that the truth is whatever they want it to be at any given moment and they reserve the right to change it without notice?

### HM Treasury makes surprise move over to The Dark Side

From that report explaining why the 50% income tax rate should be reduced, page 8:

The impact on economic growth

2.16 In addition to their impact on the level of GDP, changes in tax rates can have an impact on economic growth. Other things equal, high tax rates in the UK make its tax system less competitive and make it a less attractive place to start, finance and grow a business...

2.17 The relationship between tax and growth has been extensively studied in research undertaken by the OECD*. Their analysis suggests that corporate taxes are the most harmful type of tax for economic growth, followed by personal income taxes and then consumption taxes, with taxes on immovable property being the least harmful tax.**

* OECD (2010) Tax policy reform and economic growth

** HM Treasury were a bit sneaky there: what the OECD actually said was "with recurrent taxes on immovable property being the least harmful." There is a huge difference between taxes on purchases/sales of land and buildings such as Stamp Duty Land Tax (bad taxes) and annual taxes on ownership of land and buildings like Business Rates (good taxes), but hey.

### Tory think-tank makes surprise move over to The Dark Side

Thanks to Thomas H for emailing me a link to ResPublica's Principles for the Budget 2012:

The Budget opens up a genuine opportunity to address these inequalities, stimulate economic growth and put dormant capital to use. The most effective way of doing this is through taxing wealth* not income. While avoiding the unwanted consequences of high income tax – such for instance as, disincentivising profit maximizing and driving investors off-shore – tax on ‘unearned’ wealth could prove a successful way of raising finance without hampering economic recovery.

A truly radical budget should therefore not only call for a revaluation of the property values unrevised since 1991 and introduce a tax paid in proportion to the value of property; it should also introduce a land value tax to generate extra income. These wealth taxes would have added benefits of stimulating land and property markets, as well as addressing jarring social inequalities.

In this context, it is worth being reminded that nearly 70% of the land in the UK is currently owned by 0.6% of population. These, and related topics, ResPublica intends to explore as part of its research into the Social Mobility agenda in projects such as InterGenerational Covenant.

* Let's deduct a mark for saying "wealth" instead of "community generated rental value of land", but apart from that... wrap me in tinfoil and call me Angela!

### Laffer Curve Fun, with a side serving of nepotism

HM Revenue & Customs has finally come up with a sixty-page report explaining why total revenues will not fall if the 50% income tax rate is reduced to 45%, here's the chart showing possible Laffer Curves from page 51:(image pinched from The Guardian, that's a good article if you ignore the leftie spin).

Fair enough, but what is this TIE of which they speak? It's short for 'Taxable income elasticity', see page 14:

The measure of the overall responsiveness of total taxable incomes to changes in marginal tax rates is the "taxable income elasticity" (TIE). This estimates the percentage change in total taxable incomes in response to a one per cent change in the net-of-tax rate (the proportion of each additional pound earned received by the individual after tax, also known as the marginal retention rate), and therefore captures all the behavioural responses described in Chapter 2.

Chapter 2 isn't much use either, but basically TIE is some sort of estimate of the price-elasticity of supply of labour. So if TIE is low at 0.35, people don't drop out the (taxpaying) workforce in response to lower post-tax incomes, and the increase in tax revenues by nudging the rate up to 50% outweighs the effect of the smaller tax base. If TIE is high, at 0.55, then once you get to an income tax rate of 43%, so many people drop out of the (taxpaying) workforce that total revenues start to fall if you nudge the rate any higher.

But HMRC cheerfully admit that they have no idea what the average TIE of higher earners is, so the whole thing is fairly useless, except to illustrate the point that a reasonable man concludes that while there must be a revenue-maximising income tax rate:

a) Whatever the true TIE is, the revenue-maximising tax rate could be anywhere within a very wide range (between 43% and 57%, going by the chart) and caution dictates we ought to go for the lowest figure in that range (43%).

b) We do not want to be anywhere near the revenue-maximising income tax rate anyway, we would rather be at the economy-maximising income tax rate, which happens to be zero per cent.

For your side-serving of nepotism, see City AM.

## Wednesday, 21 March 2012

### Killer Arguments Against LVT, Not (205)

I'll leave the last word on The Budget to Dick Puddlecote and move on to more pressing matters.

1. Khards over at HPC (which seems to be defunct at the time of writing) said he'd mentioned LVT to his colleagues, and one of the rhetorical questions put to him, was: "Ah yes, but what about a high earner foreign couple who are over here to earn as much as they can, live in a small flat and want to return home again in a couple of years? Is it 'fair' that they get away with paying less tax than a single earner family in a 'modest' house with a garden, where mum stays at home with the kids?"

Answer: it's a trick question, because it is a diagonal comparison (notwithstanding the Child Benefit which the family gets and the two-earner couple doesn't, which evens things out).

The reply is: if there are two high earner foreign couples and one lives in a big house and the other in a small flat, is it fair that the couple which occupies more land, which is a scarce resource (in an economic rather than a literal sense) pays more? Yes.

And if there are two single-earner families, one of them can only afford a small flat and has to take the kids to the park to play, and the other can afford a 'modest' house with a garden, is it 'fair' that the wealthier couple pays more? Yes.

2. Another common diagonal comparison is: "What about a pensioner couple who've paid taxes all their life, if there are four young people sharing the house next door using twice as much local services. Why shouldn't the four young people pay twice as much?"

Bullshit. Why not compare four young people who can only afford a house-share with a two-earner couple next door who can afford a house to themselves? The four sharers are prepared to put up with the aggro of sharing so that they can benefit from sharing the rent, the utilities etc. Sharing is usually not a choice, it's a necessity. If the two-earner couple can afford a house to themselves, that's their choice and good luck to them; they are always welcome to take in two paying lodgers if they want to pay less tax and have more money to spend on cars or holidays.

And why not compare a pensioner couple with a large house to themselves with a pensioner couple in a small flat? Why is it 'unfair' for the pensioner couple in the large house to pay more than the pensioner couple in the small flat?

3. Then the diagonal comparisons are taken to extremes: "What about a Poor Widow In A Mansion who bought the house for 12'6 back in the 1940s; why should she pay more tax than a millionaire who lives in a bedsit? That gain is only on paper, she doesn't have a cash income to pay the tax."

Nope. Let's do a proper comparison. Why shouldn't the Poor Widow, who has struck property gold and won the lottery of life and who can bank her winnings any time and still afford somewhere nice with enough money left over to pay the tax for the rest of her life, pay more than a genuinely Poor Widow [whose husband was a coal miner and died of lung disease twenty years ago etc] who still lives in a back-to-back that's barely beaten inflation since the 1940s?

Apart from the fact that there are very few millionaires who live in bedsits (with or without LVT, you can save a lot of money by trading down from a swanky home into a bedsit - how many of them do?), if one millionaire really chooses to live in a bed sit to save money and another millionaire wants to live in a nice house, why is it so terrible if the millionaire in the bedsit pays less tax? If you are going to argue that both millionaires 'should' pay the same amount of tax, then you might as well argue that non-smokers ought to cough up a few hundred quid tobacco duty every year, or that teetotallers should pay a few hundred quid alcohol duty.

4. The Homeys then usually take the "millionaire in a bedsit" example to extremes and say that all millionaires would trade down and so the tax base would collapse. Well, apart from the fact it wouldn't happen (or else why don't millionaires buy a second hand banger for £1,000 instead of a Bentley for £100,000, which includes about £50,000 in embedded taxes?), so what if they did? If everybody sold their second homes and holiday homes, if all empty homes came onto the market, then the price of housing will fall until somebody else is willing to buy them; and the people most likely to buy them are people who want to actually live in them (or buy them to rent out to somebody who wants to live in it).

So what is the net impact of all this? Very little indeed. At the moment, we've got twenty-six million homes and twenty-six million households to live in them; once everybody has sold up for as much as they can get and moved out, prices will - by definition - fall to a level where everybody can promptly afford to move back in again because it's so cheap, then we'd have twenty-six million homes with, er, twenty-six million households living in them.

Of course, in the highly unrealistic scenario that everybody flatly refused to pay more than a bare minimum of LVT and desperately tried to trade down, take in lodgers, stay living with their parents etc, then yes, LVT revenues would fall, but so would the price of housing (the two move in tandem). Those are Good Things, not Bad Things!!

That would reduce the cost of living enormously and we'd hardly need a welfare system or the taxes to pay for it; because people would have enough money left over from their wages (after paying a small amount for buying a home and LVT) to pay to send their children to school; to take out their own medical insurance, unemployment insurance, to save up for their old age etc.

Don't forget, even if the selling price or rents of all the housing in Wales or the north of England fell so low that the corresponding LVT revenues were +/- £nil, there will always be enough people prepared to pay £5,000 a year more than £nil to live in or near London or in the south west (I know that I certainly would, as would millions of others).

Even if the tax raised from houses in the rough part of town were +/- £nil, people will always be happy to pay £1,000 a year more than £nil to have a house overlooking the park, nearer the station or near the best school (again, I know that I certainly would, as would millions of others), with a gradient in between, so the tax will always average out at a couple of thousand pounds a year per household.

This - together with Business Rates, which disproves the 'collapsing revenues' theory anyway - would still be quite enough tax revenue to pay for the core functions of the state, which are a laughable one-tenth or so of total current government spending, and everybody else can live their lives free of any sort of publicly or privately collected taxes.

Win-win!

### Absolutely hilarious article in The Soaraway Sun

From here, I had to keep checking it wasn't the print version of The Daily Mash:

Computer repair man Larry Peters, 42, is convinced a giant solar flare will strike the Earth at the end of THIS YEAR, knocking out communications, energy and food supplies and resulting in worldwide anarchy.

To give his family the best chance of emerging from this "catastrophe", Larry has joined in the US phenomenon of "prepping" — stockpiling food and water and teaching his kids, including nine-year-old daughter Lily, to HUNT and GUT animals. Larry has also kitted out his family's three-bed terrace in Cornwall, to cope with every eventuality.

"Food, water and power are all in place. I'm ready for it. In a way I want it to happen. Humans need a fresh start. We've gone too far from our old ways and need to return to nature. Solar flares are from the sun — energy particles sent towards the Earth. These flares have the ability to disrupt human technology such as radar, radio, mobile phones, the internet — everything modern society depends on to keep running. By the end of 2012 a huge flare is predicted that will wipe all this out. It will be a total breakdown of society, complete anarchy. Lots of people are going to die."

He said: "Seventy-five per cent of my day is survivalist. I first became aware of prepping a couple of years ago. I came across the website of the American conspiracy theorist and former wrestler Jesse Ventura. He wrote an article about governments building underground bunkers in preparation for solar flares. I watched his documentary and conducted my own research online."

The family still shop at Asda for essentials such as milk, butter and cheese, but each time they go they buy something to squirrel away for the impending disaster. So far they have amassed 20 tins of potatoes, 15 tins of carrots and peas, 15 tins of steak and kidney pie and 100 tins of beans. They also have 12kg of pasta, sweets for the kids and their water store. They even have half a pig, which they slaughtered themselves, in their chest freezer.

As summer approaches, the family plan to install a wind generator and solar panelling. Larry said: "We plan to stay at home but we would use the Mitsubishi 4x4 if we had to 'bug out'. Bugging out is when you leave your home to survive. I believe the safest place in Britain would be Scotland, as there is more space and fewer people."

But one member of the family does not buy into the philosophy — 12-year-old Jago. Larry and Shelley have to disguise their wild food as shop bought to keep Jago fed and happy. Jago said: "I like to play Xbox. If there was a solar flare I would be shocked. I don't eat wild food and I hate gardening. I leave the room if they start talking about a solar flare. I really don't like it."

On being shown the two-page article in a national newspaper, Jago ran out of the room screaming: "I hate you! You've ruined my life! My friends might see that, for f-'s sake! Oh God!"

### Nice bit of intellectual cowardice by David Miles

He can do maths (see previous post), but he's a bit timid in going against the status quo. From page 16 of his presentation on "Mortgages, housing and monetary policy – what lies ahead?" of November 2011 (pdf):

The natural way of addressing the tax distortions is to change the tax treatment of rental versus owner-occupied property. The recent Mirrlees Review* describes how this might be done. But changing the tax system is not easy. Losers are invariably created. No one should expect change to come quickly. But so long as the tax system favours owner-occupation we should recognize that – other things equal – this will make the owner-occupation rate inefficiently high.
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* The Taxation of Land and Property in J. Mirrlees et al (2011), ‘Tax by Design: the Mirrlees Review’, Oxford University Press.

The Mirrlees Review includes far bolder statements such as: "... deciding exactly how to tax land and property is particularly complex, because they combine a number of characteristics that each suggest different tax treatments. Take a house. It sits on land, the value of which we might want to tax because the land is completely fixed and the return to it is an economic rent

But the house also provides services that are consumed by the occupier—just as a fridge or a car does. So it is natural to think that the value of this consumption should be subject to VAT. The house is also a valuable asset, whose value rises and fluctuates like those of stocks and shares. So we might see homeownership as a form of saving that should be taxed consistently with other savings.

Also important is the distinction between owner-occupied and rented property. Ideally, we would want to treat these consistently. But, at present, their tax treatments are quite different in the UK, providing a clear bias towards owner-occupation.

## Tuesday, 20 March 2012

### A nice bit of maths by David Miles

First, let's get the spin over with

The Home-Owner-Ist media were cock-a-hoop at a report brought out by David Miles, an external member of the Bank of England's Monetary Policy Committee:

The Telegraph ran the headline House prices to rise for years, says BoE's David Miles, the Mail went with New house price boom is on the way but the young will have to wait longer to buy, says Bank of England and the deeply schizophrenic City AM with BANK’S MILES SAYS HOUSE PRICES WILL RISE. Only The Guardian saw the obvious downside, and ran the headline Bank of England house prices paper is grim reading for first-time buyers.

Now let's look at the maths

I've printed out but not read the full report yet, but its a lengthier rehash of a presentation he gave in November 2011, which I have read in full. His cunning formula says that assuming a constant average house price (of four times earnings), the size of the deposit required before you can take out a mortgage affects the average age of first-time buyers ('FTBs'), and further that the average age of FTBs affects the proportion of owner-occupiers.

Formula number one assumes that houses cost four times one year's earnings, first-time buyers take four years to save up a 5% deposit (i.e. they save on average 5% of their gross income every year, which is quite a lot), and they start saving at age 28, so if banks are happy to dish out 95% mortgages, the average FTB will buy at age 32.

Formula number two says that an average housing career is from age 20 to age 80 (when you die), and that people spend the last 5 years of their lives in a care home. So if deposits are only 5%, the proportion of households who are owner-occupiers will tend (or trend?) towards 72% as follows:

(75 - 32) ÷ (80 - 60) = 43 ÷ 60 = 72%.

His Chart 8 shows that deposits of 5% were the norm between 1980 and 1997 and owner-occupation levels reached 68.6%* at the end of that period. Working backwards, average FTB age during that period must have been about 34 [check: (75 - 34) ÷ (80 - 60) = 41 ÷ 60 = 68%.] and people must have started saving at age 30 (34 - 4).

From 1997 to 2007, the average deposit was 10% and owner-occupation levels were 70.7%* in 2005 (the peak was 70.9% in 2003, but after that, stupid prices started choking things off again). So average FTB must have been 32.5 and people must have started saving at age 24.5 (32.5 - 8).

His chart shows that average deposits demanded shot up from 10% to 25% between 2007 and 2009, they now appear to be 20%. We don't know whether the age at which people start saving up for a deposit is more like 30 or 24.5, so let's pitch it at 28 (younger people are worse paid nowadays). Using formula number one, it will take them 16 years to save up a 20% deposit and average FTB age will tend towards 44. If we insert 44 that into formula number two, that means a long-run rate of owner-occupation of only 52%.

Is 52% plausible?

A rate of only 52% would push us back to 1972*, the first dawn of the Home-Owner-Ist era. Clearly, we're not going to have twelve years of there being absolutely no FTBs at all, as some young people can and will save much more than 5% of their income every year, or they will get help from BOMAD, but FTB numbers are down to about half of the number required, so the adjustment period will take twenty-four years, rather than twelve.

In the six years after 2005, owner-occupation rates fell from 71% to 67%, if this continued for eighteen years, we can deduct another three falls of 4% every six years and we are down to 53% (BOMAD will run out of money sooner or later), which is pretty close to 52%.

* I've taken those figures from the DCLG, not the report.

### "Tax statements to be tailored to your idiotic, tribal prejudice"

According to The Daily Mash: "Later this year taxpayers will receive a form from the Treasury asking whether they would like a right wing, left wing or spineless, middle-of-the-road tax breakdown. Tax offices across the UK will then issue bespoke statements that will fill individuals with both righteous anger and the realisation that they are the cleverest person in the world.

*rage, froth*

As the cleverest person in the world, allow me to point out - before we even start arguing about the categories used to divide up total spending* - that they are going to send people statements using a deliberately and maliciously incorrect figure for "total tax paid".

As the BBC explains, somebody earning £25,200 a year has £5,702 income tax and Employee's National Insurance deducted from his nominal gross wages and send him a breakdown of how that £5,702 is being spent.

Fair enough, but income tax and Employee's NIC together only raise about £200 billion out of total tax revenues of about £570 billion-odd. So the median full-time earner is paying vastly more than £5,702 tax every year.

Even if you only chuck in Employer's NIC, VAT and Council Tax/TV licence, he's paying something more like £11,000 a year. Booze, fags and fuel duty is on top of that; a bit of corporation tax if he owns shares etc.

*/rage, froth*

* Old age pensions have been included in category "Welfare" to keep the Daily Mailexpressgraph readership on the boil; even worse than that, there is no category for "Procurement from and subsidies to nominally private companies" which is the largest spending category of all at 40% of total spending.

### Professor of Health makes people sick, shock.

One of the usual suspects trotted out the usual lies and myths about VAT in today's CityAM Forum. He is perfectly happy with VAT of course, because neither health services nor higher education, nor being a quangocrat is liable to VAT:

The 50 per cent of income tax payers on lower incomes account for just 15 per cent of revenue. The longer-term aim should be to eliminate income tax payment for all those earning under £20,000. This, especially if we move away from national insurance as a tax, would create powerful new work incentives. It would reduce the fiscal costs of underemployment by bringing back into the workforce many who would otherwise have had the highest claims on public spending. It would give greater traction to the government’s much-needed reforms on welfare.

Fair enough so far.

This change could be funded by a shift to consumption taxes, mainly through a widening of VAT coverage to include the same range of goods and services as in other developed countries. Such a widening of the VAT base could raise the £20bn to £25bn required to lift 50 per cent of income tax payers out of income tax. It would raise VAT receipts by about 25 per cent.

Idiot. VAT is just a tax on the gross profits of businesses, which includes their wages of course. Whether a hairdresser pays £2 income tax or £2 VAT on a £10 hair cut makes little difference to the tax burden or its deadweight costs. As I showed last week, it is the most damaging tax of all.

The fact that VAT only applies to the productive economy and not land-based activities (housing, food, banking) just makes it worse. Note again: he does not suggest that VAT be applied to his own sources of income: health services, higher education or quangocracy.

Consumption taxes make sense in terms of a fairer distribution of the tax burden between those in and out of the workforce. They would be paid by the more affluent elderly and would, in effect, fund many of the extra benefits, like heating allowances, that come their way. It would mean that the baby boomers would make a fairer contribution.

VAT is not a consumption tax, it is a tax on economic activity and is the most immediate cause of unemployment (worse than Employer's NIC). If you want "the affluent elderly" to pay more taxes without clobbering the unemployed with a double-whammy of higher taxes and lower chances of employment, then collecting more revenue from the rental value of land is the way to go. That way there's more reward for working and more incentive to work.

Consumption taxes fall on imports, including imports of services, while income taxes are a tax on domestically-produced outputs.

Slightly true, but so what? If you want to be protectionist, then let's be honest about it and have import duties instead of VAT.

Consumption taxes also increase incentives to save.

Save the biggest lie for last.

VAT measurably reduces the size of the economy; it reduces people's earned incomes and profits disproportionately; it erodes the value of businesses. If people have less disposable income and there's less there to invest in, then it is futile worrying about Nanny-state "incentives to save", all that happens is that the price of the shrinking pool of assets - like house prices or shares in the pension funds of Baby Boomers - worth investing in gets driven up. Which is perhaps why the Home-Owner-Ists love VAT?

## Monday, 19 March 2012

Somebody found my 'blog today by Googling Things that people say that aren't true.

### Fun Online Polls: Jessica Ennis and the next Archbishop of Canterbury

The results to last week's Fun Online Poll are as follows:

Who is Team GB's cutest athlete?

One of the beach volleyball team - 18
Shana Cox - 0

'Others' included two nominations for Victoria Pendleton, nowhere near enough to knock Jessica Ennis off her perch.
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This week's Fun Online Poll is also from the vast realm of "topics about which we know little and care less". Read the form guides here and here and then vote here or use the widget in the sidebar.

It's a bit worrying that I've been doing caricatures for so long they are now caricatures of "formers" and "exes": I hope the next guy is as easy to draw.

### Crash course in fractions for portfolio managers

Dear Ms Park,

A fraction is when we divide the number above the line (called the numerator, which I shall abbreviate to 'num') by the number below the line (called the denominator, which I shall abbreviate to 'den').

So when we say one-quarter, we mean 1/4, or 0.25 or 25%, it's the same thing. The funny thing about fractions is, they are upside down. So although five is a bigger number than four, one-fifth (1/5) is smaller than one-quarter (1/4). It's very important to remember this, and that the rule only applies if the num stays the same, so although 1/5 is smaller than 1/4, 2/5 is bigger than 1/4! Confusing, huh?

I hope that you know what gross domestic product ('GDP') is, and that you also know what money supply is (put simply, it's like adding together all the money in people's bank accounts, or if you want to be really clever, it's like adding up everybody's mortgage - be careful not to mix the two up as one is a plus and the other is a minus).

For reasons best known to themselves, economists like dividing GDP by money supply and they call the result 'velocity'. So if GDP (the num) is about \$15 trillion a year and money supply is \$5 trillion (the den), the velocity is 3. So what do you think happens if GDP stays the same and money supply goes up?

Remember the example with 1/4 and 1/5? Yes..? Correct! If the num (that's the number above the line, which in this example is GDP) stays the same, and the den (that's the number underneath the line, which is this example is money supply) goes up, then your answer (which is 'velocity') goes down. It doesn't necessarily mean that the economy is doing worse (it might do, but not necessarily). No it doesn't. I just told you that GDP stayed the same, didn't I?

Right... we know that GDP in your country has more or less stayed the same (about \$15 trillion) for the past five years (things aren't as bad as some people say, but not as good as other people say) and that money supply has gone up from about \$7.7 trillion to \$9.4 trillion, so it's not really surprising that velocity has gone down, from 1.95 to 1.6.

Yes... if we divide 15 by 7.7, we get the answer 1.95. If we divide the same number 15 by 9.4, the answer goes down to 1.6.

You can check your answer by multiplying back up again, if you like... no, too advanced. But the main thing you've learned today is that velocity is not really "plunging", is it? It's just that money supply is going up faster than the economy is growing. I think it's those naughty men in Washington allowing the Fed to print loads of money to give to the naughty men on Wall Street that causes this, but nobody is really sure.

Kind regards etc.

## Sunday, 18 March 2012

### My outline budget for 2012-13

Forecast tax receipts for 2012-13 are £571 billion, so assuming we can get public spending levels back to 2003-04 levels (adjusted for 3% annual inflation) to get the deficit down to +/- nothing, here's how I'd raise that (I've checked the workings forwards and backwards).

All existing taxes can be assumed to be scrapped unless expressly mentioned on this list (so please don't come along asking "What about Inheritance Tax? What about Vehicle Excise Duty?" if it's not on the list, it's scrapped):

- Flat income tax of 10%, no personal allowance = £100 bn. Income from overseas will be exempt from UK tax (unless avoidance was afoot).

- Flat corporation tax of 10% (but keep surcharge for North Sea companies) = £20 bn

- Income tax at existing rates 20% and 40% on pensions/pension funds which have received tax relief or accrued prior to 6 April 2012= £20 bn. If people would like to withdraw cash or shares from their pension fund, they will be free to do so and the tax charge will be a flat 20% of the value of assets withdrawn.

- Ad valorem 10 % duty on imports of physical goods 10% = £50 bn (it's mildly protectionist and a bit of a cop-out, but needs must).

- Petrol, booze, tobacco and gambling duties, no changes (maybe reduce tobacco duties a bit and increase fuel duty as VAT will no longer apply), chuck in duties on various drugs which will be legalised; auction proceeds from radio spectrum, airport landing slots etc = £80 bn

- Ad valorem 1% tax on new goods to cover waste disposal costs = £5 bn

- Bank asset tax of 0.5% on higher of UK financial assets or UK deposits = £30 bn (banks will deleverage and shrink their balance sheets like topsy, so the rate will be nudged up in future years to keep revenues constant.

- Business Rates on commercial land and buildings will be approx. doubled and made more like Site Value Rating = £50 bn

- Domestic Rates at 3.5% - 4% of current market value of residential land and buildings = £220 bn*

Total £575 bn
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The welfare system as it stands (excluding payments for severe disability and long-term care) will be replaced in its entirety with a flat rate, non-contributory, non-taxable Citizen's Income/Pension as follows:
Children up to 18 = £35/week
Young adults to 24 = £52/week
Adults 25 - 64 = £70/week
Citizen's Pension for 65 and over = £140/week.

The total cost of the scheme will be about £240 billion (a bit less than the current welfare system), which is not uncoincidentally, a similar amount to that raised in Domestic Rates.

These amounts will be deducted from a household's Domestic Rates bill and any surplus paid out in cash monthly. Approximately three-quarters of households will be due a small cash rebate.
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* This is the only contentious bit. We don't have time to implement proper Land Value Tax in the next three weeks, so all homes will be valued using the same computerised method as in Northern Ireland in 2005 and allocated to twenty-six bands which are each 20% 'wide'. The annual tax will work out at about 3.7% of the starting value for each band. Band A will be for homes worth between £50,000 and £60,000 (annual Rates approx. £1,800), all the way up to Band Z for homes worth more than £4,800,000 (annual Rates approx. £175,000).

To put your minds at rest, over ninety per cent of homes will be in Band A to Band K and the tax for Band K will be about £11,500 a year; the Citizen's Income for two parents, two kids will be over £9,000 a year, so it's not really a large amount of money in net terms.

If anybody wants to gripe that his home should have been allocated to a lower band, then, unless it is quite clear there has been a misallocation, before a case is looked at, that person will have to submit details of all his income and assets for the previous year. If it turns out (as it will in nine out of ten cases) that his overall tax bill will go down anyway, then no need for a downwards reallocation.

Pensioners who cannot afford to or do not want to pay will be able to enter into a binding will and their heirs will be asked to pay the Rates on their behalf. if the heirs are unwilling or unable to pay, the rates will be rolled up and redeemed on the death of the surviving owner or any earlier disposal.