Wednesday, 6 June 2018

Hypothecated taxes etc.

1. For an economist, the idea of hypothecating taxes is a bit of a nonsense. Nonetheless, politicians know that earmarking a tax makes it more acceptable to those paying it.

2. I received a classic KLN via Twitter (so classic that even some socialist LVT supporters have advanced it), along the lines of this:

"If you phase out National Insurance and have Land Value Tax instead, how will the government pay for people's unemployment benefit and old age pensions?"

To which the answer is, don't confuse the tax raising side and the spending side. The government can pay pensions and welfare out of borrowing, National Insurance, income tax, Land Value Tax or anything else.

3. We also know that the Home-Owner-Ist majority hate the idea of Land Value Tax. Why should they pay for something they already own, that sort of thing.

4. It is widely believed that it is widely believed the NHS to be some sort of highly prized national treasure (I have no idea how true this is), but we know that it has to be paid for, cost approx £125 bn per year.

5. Sticking with politics, Value Added Tax is imposed on each Member State by the EU. (There is a also widespread misconception among the chronically innumerate that all our VAT receipts are handed over to the EU, but put that to one side). Brexit is our Golden Opportunity to rid ourselves of this troublesome tax, revenues approx. £120 bn per year, economic damage/deadweight costs at least half as much again.

6. With my Georgist propagandist hat, I have merged 1 to 5 into a nice simple policy proposal:

Now that we are leaving the EU, we can scrap the most damaging and regressive tax, Value Added Tax. To make up the shortfall and pay for the NHS, we can have annual "NHS contributions" of 1.8% on the value of each home, which landlords can add to the rent if they so wish. On average and in the longer run, people will get their money back. It's low cost mass insurance - those who seldom need the NHS should be grateful to have their health.

Pensioners, who cost the NHS on average £5,000 a year each, have nothing to complain about, as in most cases their "NHS contributions" will be far less than the corresponding cost of private health insurance/private health treatment. Some people in higher value homes will be paying over the odds, but they are free to trade down to something better value. 


mombers said...

Old people should pay more for the NHS if they can, because having lower taxes when you are old is of no use to those who die young. Think of it as compensation to your cohort who don't make it to retirement... Also, working age people have MUCH higher costs - families to raise, jobs to commute to, etc. A pensioner can move to low value land and still get their dosh, working age folk have to pay a lot for access to decent paying jobs.

Mark Wadsworth said...

M, agreed, that's the back up justification.

Sobers said...

Sound idea in principle, bad in practice. There's no way that the State will allow 'bad' items to drop in price - namely fuel, takeaway food, alcohol and cigarettes. They'll just wack up the duties on all those until the prices are the same as today (or add in new ones in the case of takeaways).
Result - everyone paying LVT AND higher duties on the things they don't want us to consume (why I don't know, the main problem with the public finances is we're all living too long, anything that kills people off young before they need pensions and massive healthcare provision should be encouraged as far as I can see).

Mark Wadsworth said...

S, classic KLN "it will be an additional tax". Must try harder!

Bayard said...

"There's no way that the State will allow 'bad' items to drop in price"

You are confusing economics with neo-puritanism. The case for LVT is an economic one, the case for sin taxes is an ethical (neo-puritan) one. So what if sin taxes continue under LVT, or rather, so much the better. The amount raised by LVT can be reduced, the neo-puritans will be happy and most people will be paying the same in tax as they were before. What's not to like?

Mark Wadsworth said...

B, you're missing his real KLN "LVT will be an additional tax and the govt won't reduce other taxes".

mombers said...

Problem with hypothecation for the NHS is that spending is time shifted enormously. So rather than hypothecated taxes, a hypothecated insurance scheme is more fair. People use the NHS the most at the end of their lives, when they are generally paying the lowest taxes. Baby Boomers would have had to pay much higher taxes to build up a big pot of loot for their old age, eliminating the need for the relatively smaller generation following them to foot the bill. This is not something that the state can reasonably be expected to do - just look at the state and public sector pensions to see how much of a pot is there to match the £5tn of liabilities... In fact it's likely to be stuffed up even more than a non-time-shifted hypothecation

Sobers said...

"LVT will be an additional tax and the govt won't reduce other taxes"

If you don't see that you must be blind.

Mike W said...

As Mark says its all bullshit. As soon as I hear the word 'hypothecated' tax, I think of my BBC license and am incapable of anything other than ranting.

It is also a tax word that draws folks back to the simple 'governement finance is like a household' meme. We just don't need more earnest discussions around this 'political tool' in my view.

Sobers putting a tax on 'bads' like sugar, fags booze is a very bad idea indeed, if gov is (a) serious (ie does want to reduce tooth decay) and (b) wants a stable source of taxation. After all, Guv is increasing tax on the 'bad' to reduce demand for the harmful product. What happens when it achieves its objective in this area?

Ben Jamin' said...

Now we are out of the EU, there's lots of things we can do.

Vouchers instead of free at the point of use services.

NHS scrapped. Each UK citizen, living in the UK gets X amount to spend on health insurance.

State education scrapped. Each UK citizen, living in the UK gets X amount to spend on private education.

Welfare benefits scrapped. Each UK citizen, living in the UK gets a Citizens Income.

Shift to LVT, scrap taxes on output, foreigners wouldn't technically be paying "taxes" anyway. Just user fees, like any other kind of consumer spending.


Bayard said...

""LVT will be an additional tax and the govt won't reduce other taxes"

If you don't see that you must be blind."

The argument against this is the same as the argument against landlords passing on LVT in higher rents, or anyone passing on higher input costs as higher prices, which is that, by and large, if anyone is in a position to make more money by charging more, they would already be doing so. The government already extracts the maximum taxation it thinks it can get away with without either offending the rich and powerful too much or causing themselves electoral defeat at the next election. If it thought it could get away with introducing another big tax like LVT, it would have done this long ago. Thus the only real likelihood of LVT being introduced is as a replacement tax.

Shiney said...


Now yer talkin' !!!!

Bayard said...

"NHS scrapped. Each UK citizen, living in the UK gets X amount to spend on health insurance."

The problem with that is, that unless the health insurance market is heavily regulated, then all that happens is that the statutory amount very rapidly ends up buying you only the most basic service, far below what the NHS currently offers. When the market knows that customers have a fixed minimum amount to spend, then that amount becomes the minimum price. An example of this is how the tax benefit you get with pension contributions is almost entirely soaked up by higher charges by the pensions industry. If the health insurance market is heavily regulated, then we will be faced with the problems of regulator capture.
Another idea that would work considerably worse in practice than it does in theory, worse, probably, than the NHS it would replace.

Mark Wadsworth said...

M, the point about a state providing low cost, compulsory mass insurance is that we don't need to worry about building up a contingency fund or discount rates or any of that nonsense, we can just do 'pay as you go' and it all averages out.

S, stop trotting out the same old KLNs. I refer you to Bayard's comment. If you don't see this then "you must be blind".

MW, the policy I suggested is economic nonsense, sure. The point is, would it make LVT more acceptable? Too many Georgists gloss over what LVT would be spent on, so I am working backwards from that.

BJ, bottom up privatisation via vouchers is a good idea, but the only way to stop prices in private sector health and education rapidly increasing because of rent seeking is the continued existence of a decent, low cost, non-profit state provided baseline (see also 'council housing').

Sh, while I sort of agree with BJ, this makes the idea of an earmarked NHS contribution based on housing values less rather than more sellable. I think.

B, the continental systems are basically vouchers funded out of general taxation, prices are regulated and many of the competing providers are state-owned. It does work if there is the political will. We don't need to go to the other extreme like the USA, who - amazingly - spend more taxpayers' money per capita on healthcare than the UK for a considerably shitter outcome.

Mark Wadsworth said...

... anyway, we are getting bogged down in the minutiae of NHS funding. The point is that this does not sound like "land value tax", even though it comes to exactly the same thing.

Bayard said...

"B, the continental systems are basically vouchers funded out of general taxation, prices are regulated and many of the competing providers are state-owned. It does work if there is the political will."

It never ceases to irritate me that, in this country, people are prepared to put forward every sort of system for health and education as the best way forwards, including the status quo, except what our nearest neighbours on the continent do, tried and tested systems that work. I suspect this is because the French and German way is too right-wing for the left-wingers and vice versa and people who like to go on about the need for change tend not to be middle-of-the-road.

Mark Wadsworth said...

B, I'm a big fan of the "Peter Lilley option", see what works elsewhere, or what worked here in the past, and just copy it.

Lola said...

Bayard "...The problem with that is, that unless the health insurance market is heavily regulated... " Oooooohhh Noooooo. Do NOT let the regulationists anyway near it. They are predictable abject and unremitting failures. I own an FS business and I know this.

Better to have health vouchers to cover crisis stuff - road accidents, heart attacks, strokes etc. and let people decide whether or not to buy insurance for other stuff. In fact critical illness insurance is already freely available at a competitive price and I am sure that medical insurance would drop in price and the policies improve were the NHS to be nationalised and transfer payments made by vouchers as above.

mombers said...

MW, my point about demographics is that very, very few governments will make provisions in a fair way. There is much resentment against the Baby Boomers who are hoovering up disproportionate amounts of public spending while enjoying often much higher standards of living than working people. My children could enjoy a much better childhood if I didn't have to hand over so much of my income to Baby Boomers and if the state spent more on schools, roads, etc instead of old age welfare.

LVT and CI blunts this a lot - it becomes a lot harder to have a higher standard of living than working people if you no longer get imputed rent for free. Much less of the best housing is allocated to low income retirees, allowing more working age people to access it (if they choose to of course). A demographic shift will result in lower working age CI but not nearly as much of an intergenerational plundering as we have now.

Mark Wadsworth said...

M, that's why I chose health spending. Older people cost more and have more valuable homes so would pay more. Fair's fair.