Introducing LVT by stealth

I love LVT and I love maths, so here goes...

First, write down what you know.

1. Let's get rid of the four biggest and most egregious taxes on housing/wealth: Council Tax (regressive) net of rebates annual revenues £25 bn; SDLT (progressive) £10 bn; Inheritance Tax (hyper progressive unless you are really rich) £5 bn and the TV licence fee (hyper regressive) £4 bn.

2. And let's get rid of Employer's NIC, a tax on jobs, annual revenues (say) £86 bn (60% of total NIC revenues £143 bn -  I've never found an official split between Employee's and Employer's).

3. To be fiscally neutral and replace those five taxes, a residential LVT would need to raise £130 bn a year. This would require an LVT of 65% of total annual site premiums, or for the uninitiated, about 1.8% of current selling prices.

4. Politically, this will only way this will fly is if you minimise the numbers of losers and maximise the number of winners which is how the buggers get away with hiking tobacco duty each year, because only one-fifth of adults even notice.
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Let's start in the middle (and work outwards) with a recent first time buyer couple in an average/median value home, both employees on an average/median wage of £25,000 a year, who bought a house with a 20% deposit (or who have 'built up £50,000 equity' since they bought) and a 4 x joint income mortgage, so their house is worth £250,000.

At present, their P60 looks like this (courtesy of Listentotaxman.com):
+ Salary £25,000
- Income tax £2,498
- Employee's NIC £1,964
= Net £20,538

What they don't know is that their employers have each had to chip in £2,259 Employer's NIC. In truth, their gross wages are £27,259 each and they pay £6,721 tax each.

What they do know is that they have to pay about £1,100 in Council Tax and the TV licence fee out of their net income.
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Next year the LVT on their home will be £4,500 (£250,000 x 1.8%), which will be collected via PAYE, half each (the same as any coded out benefit, Student Loan repayments etc) and their P60s will look like this:

+ Salary £25,000
+ Employer's LVT contribution £2,259
- LVT £2,250
- Income tax £2,498
- Employee's NIC £1,964
= Net £20,547

So no real difference there, except they no longer have to pay the £1,100 Council Tax and TV licence fee. So they will be modest winners and will wonder what all the excitement was about.

HMRC won't care whether they tax they collect is called 'Employer's NIC' or 'Employer's LVT contribution' or 'LVT', it all goes in the same pot and can be dished out again as old age pensions or as block grants to local authorities (to make up for council tax). Those councils with high council tax get the same high amount; those with low council tax get the same low amount.

Employers won't care either for the same reason. Cost to them is the same.
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It is easy to find 'hardship cases' where people will pay more than now:
- Poor Widows in Mansions (who get the 'defer and pay on death' option);
- the self-employed who pay  much about one-third as much in National Insurance (tough, they now get the same state pension rights so there is no policy justification for this);
- private landlords. Super tough, they should have seen it coming.

It is just as easy to find a huge group of people who will pay a lot less - tenants (and young adults who still live with their parents), who out-number all the Poor Widows in Mansion and the self-employed in electoral terms, if they can be bothered to register to vote and actually vote.

They will see the lines 'Gross salary' and 'Employer's LVT contribution' with no deduction for 'LVT', so that's like a 9% pay rise,  well worth registering and voting for.
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Then the government just has to keep going...

If LVT goes up from 65% to 100% that means a £70 bn reduction in other taxes; such as reducing the rate of VAT from 20% to 5% or so (and getting rid of a load of dumb exemptions and the zero rating for new housing). The maths gets a bit more complicated here because of the circularity, but it's all do-able, I'll plan the next step once we've got going.

"BBC uncovers 'aggressive' tax avoidance scheme"

From the BBC:

Anderson Group, one of the recruitment industry's most high-profile companies, is promoting an "aggressive" tax avoidance scheme which experts are calling "abusive".

The scheme was once expelled from school for stealing lunch money off younger children, has since been found guilty of a string of petty thefts and is currently trying to mug the government's Employment Allowance.

The scheme has cornered the Treasury in a dark alley and is demanding tens of millions of pounds of National Insurance refunds.

Anderson Group says that all of its services are fully compliant with UK tax laws. It says it is "totally incorrect" to say that Anderson Group is promoting the scheme and says the product arrived at its offices one day and "made it an offer it couldn't refuse".

When invited to comment, the scheme punched our reporter in the face and left abusive comments on his Facebook page.

Economic Myths: Corporation tax is a tax on capital

More Faux Lib tomfoolery in City AM:

... what has not filtered through to the public debate is the question of who bears the economic burden of [corporation] tax – is it fat cats, or could it secretly come out of wages or turn up in higher prices?

If this is confusing, this is because, for economists, a tax’s burden is borne by who it makes worse off. For example, though shops hand over VAT to HMRC, it is generally accepted that consumers bear the burden through higher prices...

Nope.

Basic logic as well as any sort of fact-based study show that suppliers bear the bulk of VAT; prices do rise slightly but output, and hence profits and employment, go down.

So what he is saying is: I will make up facts as I go along to support my preconceived notions.

And while employers hand over national insurance contributions, economists tend to think this money comes at the expense of lower wage offers than there would otherwise be.

Yes of course, you can't redeem yourself that easily though.

There then follows a load of drivel which you can dismember at your leisure. Here's my favourite bit:

First, higher corporation tax means less profit for firms and workers to bargain over.

Nope.

The amount of pre-tax profit is exactly the same; workers and employers share this between them and then each pays tax on his own bit.

Second, higher corporation tax means less relative reason to tie up investment in capital as opposed to consuming it in general, and in particular less relative reason to tie up investment in capital in a given country.

Yes, all things being equal, businesses prefer countries with a lower tax rate, but that is way down the list of concerns. Nobody is going to relocate from Oxford to Afghanistan to save a few quid corporation tax (paper profits get shuffled around a lot, but not real profits).

But…

1. "Investing" or "making profits" is not an alternative to consumption, it is the flip side of consumption, you can't have one without the other. So if you decide to 'consume' not 'invest' you are merely pushing up other people's profits and thus the amount other people will be prepared to invest to tap into those profits.

2. Corporation tax is not a tax on 'capital', however defined, in the first place.

It is a tax on profits accruing to businesses owned by limited companies/shareholders regardless of how much capital and of what type the company owns. Those profits arise if people are prepared to consume the business' output = turnover, and that turnover is in excess of costs incurred.

The profit element might stem from goodwill i.e. customer inertia/loyalty, dominant market position, low wages, monopoly rights (patents etc), owning the best sites (to trade from or rent out), simply doing everything a bit better than most of the competition, whatever.

Unbeknown to this idiot, corporation tax is anything but a tax on 'capital' as reinvested profits are not taxed and there is tax relief for capital investment (yes the capital allowances system is a bit shit, but broadly speaking it nets off). And if you set up a business with loads of capital assets but make no profit, you pay no corporation tax either.

Further, the amount of 'capital' owned by a business bears little or no relation to its profits. A well-run employment agency owns a few computers, telephones and desks, that's it; if it makes more profit than a capital intensive business like a steel works, then it pays more corporation tax.

Less capital per worker means lower productivity, and lower productivity means lower wages.

Workers/labour are capital and capital is workers/labour; capital is accumulated work/labour; if anything, taxes on wages are taxes on capital (because for a given £1 expense, the employer/investor gets less capital in return), not corporation tax.

"It's grim"

From City AM:

REAL wages are still falling, on average, and nobody seems to know what to do about it…

There is a growing body of evidence – including an excellent new report from Towers Watson – that shows that rising non-wage employment costs are crowding out wages and are the primary structural cause of depressed wages.

Employers are paying more to employ people – but the staff aren't noticing because hidden taxes and especially employer pension contributions are crowding out wage hikes…

As the Towers Watson paper shows, this represents a transfer from those without pensions or with defined contribution pensions – typically low income or younger workers – to those with final salary pensions – older workers and pensioners.

I don't believe in generational warfare, but young people struggling to afford housing are also taking a pay cut to finance generous pensions of a sort that will never be accessible to them.

It's grim. Auto-enrolment will cut pay packets further in the years ahead.

As per usual, as long as Heath sticks to facts, figures and micro-economics, he makes good sense. He glosses over the fact that price-inflation is a deliberately engineered by governments to help transfer wealth from savers to landowners, and to act as a handy ex post justification for Home-Owner-Ism ("It's the only asset which beats inflation"), but hey.

One thing which is not clear, and probably not to him either, is his throwaway remark "I don't believe in generational warfare".

Does he mean he doesn't believe it exists (as in "I don't believe in God") or does he accept that it exists (having just provided plenty of evidence for it) but that he thinks it is A Bad Thing (as in "I don't believe in capital punishment")?

One-sided economics (post script)

Further to my earlier post...

Of course, while corporation tax is the most reviled tax among authoritarian right-wingers, authoritarians on left, right or middle go along with the myths that VAT is a 'tax on consumption' or that Employer's NIC is a 'contribution towards employees' welfare'.

If you sit down with a pencil and paper you will realise that VAT or Employer's NIC are far, far, worse than corporation tax in terms of discouraging re-investment, employment or economic growth:

Company A has found a nice niche market and coasts along with turnover of £1.2 million and a wage bill of £600,000. It has to hand over £200,000 in VAT (being the sum total of its own VAT bill which it pays to HMRC and the additional input VAT it pays to suppliers, which they in turn hand over to HMRC) and £82,800 Employer's NIC (13.8% x £600,000, ignoring the amounts which fall below primary threshold). That leaves it will profits chargeable to corporation tax of £317,200, liable at 21% plus a bit, call it £67,000 corporation tax, total tax bill £350,000, post-tax profits £250,000.

Company B is very similar, but management decide to re-invest £280,000 of its profits in the business by taking on a load of new employees to do market research, product development, marketing etc.

Its VAT bill of £200,000 remains unchanged.

its Employer's NIC payments go up to £121,440.

Its corporation tax bill goes down to +/- nothing (taxable profits are £317,200 minus £280,000 extra wages, minus £39,000 extra Employer's NIC = +/- nothing, 21% x +/- nothing = +/- nothing).

And the company/its shareholder have spent £250,000 but their employees are only £190,000 better off (because while corporation tax is only 21% for most companies, the marginal rate of basic rate income tax + Employees' NIC is 32%). So that's another £60,000 down the tax toilet as a result of the decision to take on more employees and try to expand the business.
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So tell me, of the three taxes, VAT, Employer's NIC and corporation tax, which discourage re-investment the most?

in absolute terms, it's VAT, in relative terms its Employer's NIC and in behavioural terms, corporation tax actually encourages re-investment. And the fact that corporation tax is at a lower rate than basic rate income tax + Employees' NIC doesn't exactly help matters - far better to have a flat rate on tax on everything.

NuLab BluLab LibLab

Our three major parties have now managed to agree the terms of the Indian Bicycle Marketing-fest, and spend their whole time bickering about something relatively trivial, whether to increase National Insurance by 2% or not

This, the parties hope, will distract voters from the fact that the £6 billion extra tax that might or might not be collected is anything more than a drop in the ocean compared to a current deficit of £170 billion.

Towards the end of more yadda-yadda-waffle on the topic on the BBC is this:

As campaigning enters its fourth day, the Tories are to make other announcements about curbing excessive public sector pay and tougher sanctions for benefit cheats.

Under plans for a "fair pay review", the salaries of public sector senior managers will be linked to the lowest paid workers in their organisation and capped at a multiple of 20 times those at the bottom of the pay scale. Mr Cameron told the Guardian that requiring public bodies to publish details of their best-paid staff was "not enough" and further action was required to tackle pay inequality.

Can you guess whether that's a NuLab, BluLab or a LibLab proposal? Click and highlight the excerpt to reveal the answer.

As an afterthought, and having re-read the BBC article, one does wonder on which planet these people live. The Tories reckon they can get rid of £12 billion unnecessary public expenditure, and 'experts' said that this could lead to 40,000 (public sector) job losses. This works out a saving of about £300,000 for every (public sector) job culled. Sounds good to me!

As others have already pointed out...

From the BBC:

Mr Brown said the National Insurance rise would protect investment in schools, police and NHS guarantees, while the Conservatives would "put hospitals, police and our health service at risk" - claiming they would take £6bn out of the economy.

Others have already debunked the Big Fat Myth that tax cuts would 'take money out of the economy', see The Fat Bigot (long version), Adam Smith Institute (technical version) or The Crown (short version), [UPDATE: or John Page (medium length version)], but what is also worth highlighting is that:

* £6 billion is a huge amount of money but amounts to only about one per cent of total government expenditure, or one-thirtieth of our current annual deficit or indeed one-thirtieth of planned spending on NHS and the state education system (which is of course a lot more than the amounts actually spent on 'healthcare' or 'education' in their own right).

* On a static basis, additional receipts of £6 billion look 'about right' (i.e. new rate/old rate - 1 x total NI revenues x 3/4 of workers in private sector), but the Tories can't be bothered to point out that this will reduce turnover and profits chargeable to corporation tax by £6 billion as well, so the overall increase in revenues will be barely more than £3 billion. That's the 'Laffer Rainbow' in action - you can't just look at one tax in isolation. Sure, most of the £6 billion we first thought of gets spent again, but not necessarily on value-adding stuff, so let's ignore that effect.

* On a dynamic basis, things are even worse. Labour's plan is to increase National Insurance by two per cent from April 2011 onwards, i.e. Employees' contributions up from 11% to 12% and Employers' contributions up from 12.8% to 13.8% (none of this is final of course).

Assuming no changes to basic rate of tax or main rate of VAT, this would increase the marginal overall rate of tax for a basic rate taxpayer/employee from 38.8% to 40.2% (non-VAT-able business) or from 47.9% to 49.1% (VAT-able business), which is getting perilously close to the top of the Laffer Curve, so the chances are the increase in revenues will be considerably less than £3 billion and possibly negligible (or even negative).

Just sayin', is all.

Policy Exchange redeem themselves somewhat

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

Employers’ National Insurance one of worst possible taxes to rise

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

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

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

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

*sigh*

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

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

So that's not much of an argument.

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

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

*/sigh*

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

R&D Tax Credit Fun

The R&D tax credit is one of the biggest scams around, actually.

The bulk of the qualifying expenditure is salaries, of course, so let's look at...

1) A large company. It pays a scientist £100,000 salary, on top of which it has to pay approx. £12,000 Employer's National Insurance during the course of the year. When it prepares its corporation tax return, it can reduce its taxable profits not just by the £112,000 but by an additional 30% thereof, so its corporation tax bill is reduced by 28% x 30% x £112,000 = £9,408, which is rather less than the Employer's National Insurance that it paid in the first place.

If you want to dot i's and cross t's, I suppose you could argue that the company also got 28% tax relief on the £12,000, which is another £3,360, bring the total relief to ever so slightly more than the Employer's National Insurance it paid, but it's one heck of a long way round.

2) A small or medium sized company which is in start-up mode and doesn't have taxable profits (yet) employing a scientist on the same salary as before. It can reclaim, in cash, a maximum of 14% x 75% x £112,000 = £11,760, a tad less than the Employer's National Insurance it paid. Again, one heck of a long way round.

Is it just me, or would it not be easier to just phase out Employer's National Insurance? Don't forget that the relief only applies to incorporated businesses - not sole traders or partnerships (or indeed LLPs, which don't count as incorporated for most tax purposes).

More VAT and Employer's NIC fun

Let's imagine a law-abiding* sole trader with a turnover of £60,000 a year and minimal expenses - a painter and decorator, a mobile hairdresser or a gardener or something - whose taxable profits are therefore about £60,000. He or she is given an opportunity to double the size of the business to £120,000 a year, which would involve employing two people on a salary of £20,000 each, thus leaving him, one would assume, an extra gross profit of £20,000 a year.

The sole trader is fairly naive about tax. He thinks he'll have to pay over 40% income tax on the extra £20,000, so he'd end up better off by £12,000, which he thinks makes the expansion worthwhile. And if we only had a flat income tax, he would be right, of course.

His accountant explains to him that it doesn't work like that. He would have the hassle of registering as an employer (and dealing with PAYE deductions, statutory maternity or paternity pay and so on) and registering for VAT (yet more form filling and faff), which costs money and hassle, and his profit and loss account will look like this:

Turnover £120,000, less 7/47 VAT = £102,128, less 2 x [£20,000 salary plus £1,828 Employer's NIC**] = £58,472, so before income tax he would actually be £1,528 worse off (even ignoring all the extra form filling and red tape). And in any event, he isn't just paying 40% income tax, he's paying 41% income tax plus Class 4 National Insurance on his net profit.

So the sole trader doesn't bother.

Bonus round: what is the maximum annual wage that the sole trader can pay each of the two employees he needs to be able to double his turnover from £60,000 to £120,000 if he wants to end up £12,000 better off, after all taxes?

Click and highlight to reveal: £10,300 (to the nearest £100)

Bonus bonus round (h/t Man Widdecombe): assuming the two employees are aged 22 or over and are working 40 hours a week, which other law would the employer then be breaking?

Click and highlight to reveal: The National Minimum Wage

* 'law-abiding' inserted for the benefit of TFB.

** £20,000 minus 52 x £110 threshold = £14,280 x 12.8% = £1,828.

Fun Online Poll Results & Bank Bail-outs

Thanks to everybody who took part in last week's poll, "Which economic variable do you think most voters care about most?". The results were as follows:

Job security, full employment - 63%
Steadily rising house prices - 17%
Reducing the overall tax burden - 15%*

I'm surprised that only 17% thought that people cared most about house prices, but let's assume that Job security is indeed people's main concern. The way I see it, government's main aim seems to be to prop up house prices, for example by bailing out the banks yet again (or "throwing good money after bad", as it's known in the trade) in the vague hope that the banks will lend this money out to home-buyers.

They say that they are doing this to get credit flowing to business, but that can't possibly be true, can it? If the government wanted to get money to business (and hence improve job security) the most effective way of doing it would be to take less off them in the first place, i.e. to cut taxes, surely? Instead of giving the banks another £40 billion, wouldn't it make more sense to give business a tax cut worth £40 billion, and preferably a tax cut that reduces the burden on employment, i.e. not increasing VAT again and reducing Employer's National Insurance?

So that's the topic for this week's Fun Online Poll. Vote here or use the widget in the sidebar.

* Also rans: Reducing the government deficit - 3%; Low and stable inflation - 2%; The strength of sterling - 1%; Reducing the trade deficit - 0%.

The Laffer Rainbow: Employer's National Insurance

Click to enlarge:

The right-wingers are the only ones who vaguely grasp the concept that income tax would raise nothing if the tax rate were either zero per cent or a hundred per cent, and that the 'revenue maximising point' must lie somewhere in the middle (nobody quite knows where - it's different in different jobs or at different income levels). For some reason they mainly talk about it in terms of the income tax rate or corporation tax rate, but there is of course a Laffer Curve for every individual tax, be it tobacco duty or dog licence.

What interests me is the "Laffer Rainbow" for taxes which are effectively double-taxes on income, such as our Second Worst Tax, Employer's National Insurance. An employer in the UK currently has to pay a tax of 12.8% on top of salaries and wages paid out (above a certain very low weekly level), whether this is economically borne by the employer or the employee is not so important, and currently raises about £40 billion* per annum.

What would happen if the rate were cut to 0%? Would total tax revenues fall by £40 billion? Of course not. In the very short term (the 'static basis'), business income would rise by £40 billion, so corporation tax or income tax/Employee's NI receipts would increase by about 30% of £40 billion, i.e. by £12 billion (the red area).

Next, new businesses would enter the market once they see the great profits to be made, so overall business activity would expand. Sure, this would compete away some of the profits made by existing businesses, but by the same token it would bid up wages in existing businesses, so the additional corporation tax/income tax revenues would increase by at least half as much again, say £6 billion (the green area, the 'dynamic basis').

Finally, even if the 12.8% cut in employment costs only increased business activity by 5%, that would mean an extra million jobs, so assuming a lot of these go to people currently on welfare or in a public sector non-job, and that each person who finds a job claims £5,000 a year less in benefits or £25,000 less in salary, that would be another £15 billion saving (the blue area)

So, scrapping a stupid tax which currently raises £40 billion would not lead to a £40 billion fall in revenues, the overall 'cost to the Exchequer' would be no more than £10 billion, and might even be revenue-neutral, so this is pretty much a win-win.

* I used that figure for illustration, prompted by Neil Craig I've checked the stat's and actually it is probably more like £50 billion, i.e. considerably more than corporation tax, but the principle stands.

Ten reasons to hate the Tories (6) Part 1

Point 6 from Cameron's Blueprint for Britain was this:

"We will cut corporation tax to create jobs (1), reform inheritance tax to encourage saving (2) and build a stronger society by rewarding families in the tax and benefit system (3)."

They've jumbled three topics into one here, so let's take ruthlessly pragmatic look at part 1.

Right now, in the teeth of a recession, it's more important to worry about preserving existing jobs, i.e. keeping existing businesses afloat, than it is to dream about businesses miraculously creating new ones. So in order of administrative simplicity, political resistance etc, here's my hit list:

a) Businesses will stay afloat as long as they are making net profits. And to make net profits, a business has to make gross profits. As the results of Sainsbury's and Wm Morrison's clearly show, reducing VAT is a good way of improving gross profits, out of which salaries are paid. Seeing as VAT swallows up 3/23 of the turnover of a VAT-able business and is payable whether or not a business makes net profits, why not resist any suggestion that VAT be increased back to 17.5% or even higher?

Unfortunately, the UK cannot reduce VAT below 15% until we leave the EU, as 15% is the minimum standard rate.

b) The optimum number of jobs (whatever that is) would exist in a tax-free world. Seeing as that is a pipe-dream in the short term, the next best position is where the tax rate on business profits is the same as that on employment (neither higher nor lower). The main rate of corporation tax in the UK is 28% and the usual rate of PAYE is 31% (20% income tax plus 11% Employee's National Insurance), which are pretty close. It is Employer's National Insurance (another 12.8% of salaries) that drives in the wedge.

So the next-best quick-fix must be to reduce Employer's National Insurance. Taking all the dynamic effects into account, it is quite possible that such a move would be revenue neutral, as it happens.

c) Those who are already out of work and claiming welfare face enormous administrative hurdles if they go back to work, and because of means testing are barely better off unless they find anything short of a full-time, permanent job on a median salary. So how about scrapping the distinction between out-of-work and in-work benefits and scrapping means-testing? It's called "Citizen's Income" and is the oldest idea in the book.

d) The next barrier against job-creation is the National Minimum Wage. At present, this is set at £5.73 per hour gross, to which the employer adds 12.8% National Insurance (soon to be increased to 13.3%) so it costs him £4.65 per hour after corporation tax relief. The employee on the other hand will probably be on means-tested benefits, so only nets 30% of the gross amount = £1.72, or barely a third of what it costs his employer.

So let's imagine we scrapped Employer's National Insurance; scrapped means testing so that a benefit claimant in part-time or low-paid work only paid PAYE at 31%; and scrapped the National Minimum Wage, and that the new gross hourly wage settled down at £4. That costs the employer £2.88 after corporation tax relief (40% cheaper than before) and the worker nets £2.80 (60% more than before). Does anybody in their right mind dispute that this would lead to higher employment levels?

e) Next up, we ought to scrap all the silly regulations that dampen economic activity in general and employment in particular, but that's a bit heavy for this time in the morning.

f) Oh yes, let's not forget corporation tax. What sort of effect does reducing corporation tax on employment levels? Not much, actually. A lower rate encourages a few marginal business to relocate to the UK (or discourages others from not emigrating). But a lower rate also means that the business owners retain a larger share of profits, so encourages them to cut costs as far as possible. In the long run, economic progress is largely only possible because of business processes being automated or outsourced to cheaper countries, of course (in other words people being made redundant, i.e . cost cutting), which is pretty unpleasant in the short run, but hey, if minimising job-losses is a short- or medium-term aim, cutting corporation tax rates has got to be pretty much at the bottom of the list of priorities.

Killer arguments against LVT, not (18)

Ian B, who now posts over at Counting Cats came up with two more non-arguments against Land Value Tax/Property Value Tax in the comments here.

(As background, I have long said, as a first step in the right direction, we could replace all existing taxes on residential properties (Council Tax, Stamp Duty Land Tax, Inheritance Tax, TV licence fee, Insurance Premium Tax etc) with a fiscally neutral flat tax on land/property at current market values, which would be about 1% per annum, i.e. on an average property worth £150,000, the annual tax would be £1,500, which is much the same as current council tax plus TV licence fee. Any such system of taxation would have to work on the basis of averaged-out market values based on actual selling prices of properties in each area (i.e. postcode sector or local council ward etc). Sure, it's a bit rough and ready, but better to be roughly right than precisely wrong, say I.)

Ian B's first argument seemed to centre around his claim that "...nothing has value except when it is traded. You are confusing an estimated value with actual value. An estimated value is the value that somebody thinks something would have if it were traded. [and later] You are confusing three things; value (which is instantaneous), utility (which is purely personal) and "the going rate" which is simply an average of similar goods, and which can change arbitrarily at any moment."

I cheerfully agree that I am a simplification campaigner, but his argument overlooks the fact that LVT is still the best way of making land-ownership (which is a series of state-protected local monopolies) more like a free market (see footnote). If we average out selling prices of similar houses on a particular estate and arrive at £200,000, the tax bill would be £2,000 per house. By definition, because there is a free-ish market in the purchase and sale of houses (even though houses themselves are a state-protected monopoly/artificially scarce resource), the tax would act like a price signal, and house prices and the corresponding tax bill would reach an equilibrium where people are happy to pay it.

If £2,000 tax were "too high" in Year One, then instead of five per cent of houses coming up for sale in that area, maybe ten per cent would come up for sale in Year Two, and purchasers would offer rather less than £200,000 to compensate them for the fact that the tax is "too high", so selling prices would fall to £180,000 or £160,000 (or whatever) and the tax would fall to £1,800 or £1,600 (or whatever), i.e. to a level where those marginal households who were thinking of moving, or put their house on the market but failed to sell, decide that they'd now actually prefer to pay the tax and stay put.

It is, in other words, not so much a question of finding out the exact market value of houses, but finding out the market value of the state-protected privilege of owning a home in any particular area. Provided market participants can influence the level of the tax by choosing to buy or sell, the tax will be at the market rate.

I'll cover his second "killer" argument in the next post.
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Footnote: Remember always that land and property-ownership is not a "free market" and not in any meaningful sense a "private" contractual arrangement. Although there is a free-ish market in buying and selling property, what you are buying are state-protected monopoly privileges, and not the physical thing itself.

In real life, your come-back against the vendor of a property is minimal (unlike other goods and services, where you either have legal rights under the contract, and if not, at least the producer of faulty goods and services stands to lose his reputation), as you have to do your own property survey and legal searches. Apart from restrictive covenants imposed by developers when houses are first built, you have little or no private contractual rights/obligations as against your neighbours. If there is a dispute between your and your neighbours that you can't settle amicably, you have to resort to The State to try and sort it out for you.

So the main benefits of owning land and property - the right to have a house on a particular plot, exclusive possession and legal protection of title - are rationed or provided by The State, via land registration (or recognition of title deeds to unregistered land) and the legal system that guarantees you exclusive possession (backed up by force, i.e. the police will eject squatters or tenants in arrears) and so on, as well as the fact that The State provides or organises the road maintenance, street lighting, refuse collection, planning restrictions so that your neighbour doesn't open a pig farm etc.

Conversely, although the police do a good job in solving murders (and the courts do an even better job in releasing murderers ...) the state cannot protect your "right to life". If somebody shoots or stabs you or runs you over, you are dead, and nothing can bring you back. Similarly, the recovery rate for stolen property or cars is pretty appalling, so in a practical sense, the state does a pretty poor job in protecting your physical possessions. The same goes for investments; if you invested money with Bernie Madoff, no amount of imprisoning him is going to get you your money back.

So the only type of property which The State can really protect on your behalf is land. It does protect the actual building as well to some extent (i.e. the fire brigade, investigating burglaries, evicting squatters) but there's not much it can do if somebody smashes in your front window or smashes the bottles you put out for recycling (that's one for Charlie B!). And without that protection, land/property would be more or less worthless, seeing as the cost of hiring the services of a private army would be prohibitive.

UK unemployment now higher than in 1997

See the BBC article.

The official figure for 'unemployment' is of course completely made up as it excludes Incapacity Benefit claimants, students, married mums who aren't really looking for a job (but might take one if offered) or three million 'salaried unemployed' in the public sector. But let's see how Nulab spin their way out of this one.

Here's the stupidest rent-a-quote from the article:

David Kern, chief economist at the British Chambers of Commerce, said the government should now "seriously consider" temporary wage subsidies.

Nope. How about just reducing or scrapping Employer's NIC?

Flat tax and The Laffer Curve

Here's a summary of the effective marginal tax rates faced by the UK economy*:


Commonsense tells us that if tax rates are high enough, the additional extra tax revenue generated by a further hike in rates is cancelled out by a corresponding fall in economic activity, or indeed straightforward tax evasion; a phenomenon known as The Laffer Curve.

Nobody knows what the rate at the top of The Laffer Curve is, my gut feeling is that it is sixty per cent or so; I once read a convincing argument that for employment income it was as high as seventy per cent. As a simplification campaigner, it strikes me that we'd be a lot better off if there were a flat rate on all types of income, let's say 40% for starters**. The fall in income tax collected from those currently suffering a 48% rate would not be 16% (i.e. 8/48), it might be half that, say 8%. Conversely, the tax collected from those currently paying 20% would nearly double. In other words, to achieve fiscal neutrality, a flat rate across all sources of income would be lower than a simple average of all the disparate rates.

It is also important to remember that the sectors of our economy that have benefitted the most from the house price and credit bubbles (the bursting of which has now caused a global recession, if not worse) are either exempt from VAT (banks, speculating in housing) or VAT zero-rated (construction of residential dwelling). But the real underlying distortion is that capital gains from housing are, by and large, tax exempt. 

Even assuming that house prices fall 40% from their peak by 2010, using Nationwide's figures, house prices have been increasing at a compound rate of 8% (not adjusting for inflation) for the past half a century. So if we accept that 40% is a fair rate**, in fairness we ought to have an annual 3.2% flat rate tax on housing wealth*** as well (in place of all existing property related taxes, such as Council Tax, Stamp Duty Land Tax, Inheritance Tax, TV licence fee, Insurance Premium Tax ...) to ensure that all types of income and gains are taxed at the same rate. Such a tax would also act like a higher interest rate and keep house prices low and stable in future.

* I have made a lot of simplifying assumptions; for marginal or loss-making businesses, the overall effective rate is over 100%. The maths is tortuous; the most important rate - the rate suffered by basic rate employees of a VAT-able business - is calculated as £100 gross income divided by 1.175 (to strip out VAT), divided by 1.128 (to strip out Employer's National Insurance) and multiplying the result by 69% (to strip out basic rate tax and Employee's National Insurance). The effective rate on reinvested business profits is only 0% or 15% if profits are spent on current expenditure that attracts full tax relief; the effective rate on expenditure qualifying for capital allowances will be higher than this, and the effective rate spent on land and property will be close to the rate on retained profits.

** Yes, forty per cent is much higher than I'd like, the lower the better obviously, but you have to start somewhere. Forty per cent just happens to be the average of the figures in the table.

*** i.e. 40% x 8%. Of course, conceptually, a tax based purely on location values rather than total property values is vastly preferable, that's a different topic. And in case you think this is a loonie left-wing idea, Professor Patrick Minford suggested in his Agenda For Tax Reform that notional rental income from owner-occupied housing be taxed at the same rate as any other income. OK, he assumed notional rental income of 6% of property values and a flat tax rate of 22%, but that's details.

Obnoxio's Manifesto

OTC makes the sensible case for scrapping large chunks of the quangocracy; buried away in the comments is his fuller manifesto, which is pretty much the same as my own:
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First step would be to leave the EU.

Second step would be to repeal every law based on EU directives. We can always re-implement later. Mass repeal of every law introduced by Labour since 1997. (Probably a lot of overlap!)

Third step would be to shit-can every consultancy contract with the government and renegotiate.

Every single drop of government funding for quangoes and charities stopped dead.

Massive tax simplification: flat tax of 25% on everything above £12,000 per annum. Dividends untaxed. Corporate tax abolished*. All duties abolished**. VAT abolished. National Insurance either abolished or replace the current Ponzi scheme with actual insurance.

Sell off the NHS.

Renationalise the trains and resell them in such a way that you don't have oligopolies on routes. Same thing for buses.

Deregulate schools and introduce vouchers.

Introduce citizens income, end ALL welfare programs. Implement program to gradually phase out citizen's income***.

Sack the entire civil service, district and town councils. Review the entire governance requirement.

Go to the market to get us out of the bank ownership business.
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* I'd quibble with this. It would be far better to have a 20% flat tax on all income, personal or corporate, than 25% on personal incomes and 0% on corporate.

** 'Duties' that equate to user charges, such as fuel duties to pay for roads; a modest tax of a few percent on new goods to cover refuse collection costs; or indeed taxes on land values seem like 'good' taxes to me.

*** I'm not sure where this is going. A higher effective income tax-free personal allowance is an important corollary of a Citizen's Income-style welfare system; as nobody can be sure which is preferable, why not give people a choice?

Dave don't got no clue (6)

Faced with this degree of f***wittery from the supposed HM Official Opposition to the Most Corrupt Government Ever - to wit today's waffling about 'targeted' reductions in Employer's National Insurance - I almost lose my will to live, or at least, my will to fisk (I work in tax, I can imagine now how complicated and pointless the form filling will be, even putting the economics to one side).

Luckily, Patrick Vessey at the Libertarian Party 'blog and the Taxpayer's Alliance have stepped up to the oche:

PV's response:

What a stupid, stupid idea. Let's see what's wrong with it:

In a recession, most firms will be laying folks off, not hiring (so at least the proposal wouldn't cost anything!)

Employers who do want cheap, unskilled labour will be encouraged to fire existing workers and hire new ones, just to get the tax break.

It would put 'additional' money into the hands of business owners, who, in perilous economic times, and with a lack of bank credit, would be likely to hold onto it rather than it ending up in the wider economy.

It's a measure redolent of big government micro-management, so beloved of Labour, and increasingly so of the other major Kapitalist party in our country -- the Tories.

It does nothing for the average, employed person in our country. Nothing.

The TPA's response:

Too small scale: An estimated £2.6 billion tax cut is a mere 0.5% of the Government's 07/08 tax take. Given the scale of the crisis, and the fact that Corporation Tax, Business Rates and employers' National Insurance Contributions alone place a burden of over £100 billion on business*, much larger tax cuts are needed to help businesses and workers through the recession.

Too complex: Contrary to the stated Conservative Party principle of tax simplification, this proposal increases the complexity of the tax system with numerous conditions and qualifiers. These not only threaten to increase administration costs for business and Government, but also risk distorting companies' behaviour and even potentially skewing the balance of the economy when it comes to recover from the current crisis.

Poorly targeted: Because the proposals are targeted at recruitment, they do nothing to help firms which are having to shed jobs. Tax cuts should be aimed at helping companies to avoid having to lay people off in the first place. Any firm making redundancies within three months of recruitment will be barred from the scheme, so businesses most affected by the financial crisis will get no benefit at all.

* Heaven knows why they single out Business Rates (take £20 billion, the least bad tax that we have) and ignore VAT (take £80 billion, The Worst Tax Of All).

UPDATE (re Anon's comment): to be fair to the TPA, one of their sensible proposals at the end of their response is "Cutting VAT by two percentage points [would 'cost' £10 billion]. Cuts by more than 2.5 percentage points would require a change in European Union law but a 2 per cent cut could be implemented immediately.

"Cameron proposes 1p cut for firms"

Hurray! The Tories finally propose something half-way sensible: a modest cut in Employer's National Insurance, the Second Worst Tax Of All.

But it's only for six months and for firms with four or fewer staff, blah blah. So a firm with five staff will be able to qualify ... if they sack one member of staff? Have they thought this through?

Here's a better plan, Mr Camerosborne, scrap Employer's National Insurance. Once you factor in all the dynamic effects, the overall net fall in revenues would be minimal.

Flat tax

As a simplification campaigner, my Budget manifesto is broadly as follows:

a) Cut out £100 bn of waste from government spending.

b) Scrap the two worst taxes of all - VAT and Employer's NI - dynamic cost of this, no more than £60 billion. This leaves us around £40 billion net saving, meaning that PSBR will be more or less nil.

c) Get rid of as many in-work-benefits and income tax breaks (esp. tax relief for pensions contributions*) as possible and replace it with a flat rate income tax of 30% or so (comfortably on the upward slope of the Laffer Curve) and a personal allowance of £10,000. The dynamic cost of this would be minimal - perhaps 35% is closer to fiscally neutral?

d) Replace Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance tax, TV licence fee etc. with a flat rate Land Value Tax (or Property Value Tax) on all land and buildings. A fiscally neutral rate would be about 1.2% per annum of total property values at today's values. This will go up to about 2%, assuming that values fall by 30%. If nothing else, this will keep property prices low and stable, as it will act like a higher interest rate (like in the 1950s and 1960s, when we had Schedule A taxation and Domestic Rates).

This has to be one package. I am aware that altho' people pay lip service to the benefits of simplification, there are huge vested interest in preserving the status quo:

The Lefties scream blue murder when you suggest getting rid of their beloved jealousy surcharges (higher rate tax and Inheritance Tax). The interventionists will cry foul if the tax system no longer 'encourages people to save' (rather than just enabling them to save, by leaving them higher post-tax incomes in the first place). The 'asset rich, cash poor' will whine about 'ability to pay' the LVT or PVT, which is a red herring - pensioners will be allowed to roll up unpaid tax to be repaid on death (which is yet another reason for getting rid of IHT - or else it clearly would be double taxation). The public sector unions will be horrified to learn that hundreds of thousands of bureaucrats will be made redundant. And so on.

Under my system, it will be a straight fight between people with high incomes relative to the value of property they own (in particular, tenants) and the 'asset rich, cash poor'. But seeing as income tax payers are paying for old age pensions in the first place, I think that the balance would be about right.

* As a quid pro quo, pensions paid out of funds that had not received tax relief on the way in would of course not be taxed on the way out.