Institute for Economic Affairs on top form

From the IEA:

* The UK could have a tax system that has a low negative effect on welfare and efficiency, with small compliance and administration costs; a system that is nondiscriminatory, avoids double taxation, and that is transparent and easy to understand.

* As such, we suggest that the TV Licence, Inheritance Tax, Stamp Duty Land Tax, the stamp duties on buying shares, the Apprenticeship Levy, Vehicle Excise Duty, Capital Gains Tax, the bank surcharge, and duties on alcohol, tobacco, and gambling, could be scrapped.

* Other property taxes such as Council Tax, the Community Infrastructure Levy, business rates and affordable housing and other s106 obligations, could be replaced with a single land value tax. Under this proposed system, disincentives for property improvements and housebuilding would be removed.

I would have added "the TV Licence, Inheritance Tax, Stamp Duty Land Tax... Capital Gains Tax" to the next list of truly wealth/land-related taxes to make it clear to Joe Public that LVT is a like-for-like swap. In more detail...

A land value tax

Our solution to the problems raised with the four previous taxes would be to create a land value tax system to provide a reliable source of income to local authorities, encourage development and reduce complexity in the tax system.

A single land value tax would tax the owners of property only on the value of the land itself. Buildings, improvements and land use would be of no concern to the tax system, avoiding the current disincentives for property improvements or housebuilding. Such a tax would also enable councils to receive part of the planning gain (the increase in the value of land when it is re-zoned for development, such as agricultural land being granted planning permission for housebuilding), giving local communities a major incentive to allow development.

I don't understand the insistence on LVT being a 'local tax' and hence inherently regressive, but it's an excellent start.

When Oxfam talk more sense than the ASI and the IEA..

From Oxfam's actual report (page 10-11 of summary):

The mainstream economic justification of inequality is that it provides incentives for innovation and investment. We are told that billionaires are the ultimate demonstration of the benefits of talent, hard work and innovation, and that this benefits us all.

Yet there is growing evidence that the current levels of extreme inequality far exceed what can be justified by talent, effort and risk-taking. Instead they are more often the product of inheritance, monopoly or crony connections to government.

Approximately a third of billionaire wealth is derived from inheritance. Over the next 20 years, 500 of the world’s richest people will hand over $2.4 trillion to their heirs – a sum larger than the GDP of India, a country of 1.3 billion people. Monopolies fuel excessive returns to owners and shareholders at the expense of the rest of the economy.

The power of monopoly to generate extreme wealth is demonstrated by the fortune of Carlos Slim, the sixth richest man in the world. His fortune derives from an almost complete monopoly he was able to establish over fixed line, mobile and broadband communications services in Mexico. The OECD found that this monopoly has had significant negative effects for consumers and the economy.

Monopoly power is compounded by cronyism, the ability of powerful private interests to manipulate public policy to entrench existing monopolies and create new ones. Privatization deals, natural resources given away below fair value, corrupt public procurement, or tax exemptions and loopholes are all ways in which well-connected private interests can enrich themselves at the expense of the public.

And so on and so forth. That seems like a fair summary to me. Their actual recommendations are a bit wishy-washy and vague, but at least they are on the right lines in identifying the causes of massive concentration of wealth - monopolists who add nothing to the economy and are only rich because other people are poorer. In no way can you construe the report as anti-capitalist or anti-free trade.

I'll mark Oxfam down for confusing "wealth" with "income" though. If interest rates fall and share prices go up, then that doesn't really change anybody's net income. You can't live off share prices, you can only live off the dividends. Similarly, it is the ongoing payments of rent which make tenants poorer and the landlord richer, not how much the house changes in value. Who cares what Carlos Slim's business is worth - what matters is that every Mexican is overcharged by a few $ a month, which all goes into Mr Slim's pockets.

Enter stage right, the Neo-Libs, who clearly couldn't be arsed to even read the summary document and just trot out the usual irrelevant story about capitalism and free trade being A Good Thing. Well of course they bloody well are, and the Oxfam report doesn't say that they aren't.

Mark Littlewood in City AM:

More needs to be done to break down trade barriers and to encourage more countries to replicate the radical free market policies that led countries like South Korea, Japan, and more recently China from grinding poverty to great wealth in a single generation.

This means advancing property rights and ending corruption in countries like Zimbabwe, privatising state monopolies in Venezuela, and working to abolish trade barriers such as the EU’s Common Agricultural Policy.

Charities like Oxfam should be out leading the charge on these issues. But instead of focusing on those who have too little, this report again relentlessly targets those the charity believes have too much.

From The Daily Mail:

Sam Dumitriu of the free market Adam Smith Institute said that every day for the past 25 years, capitalism has lifted 138,000 people have been lifted out of extreme poverty.

He said: 'The report is, as ever, exceptionally misleading and misses the point - we should care about the welfare of the poor, not the wealth of the rich. As China, India and Vietnam embraced neoliberal reforms that enforce property rights, reduce regulations and increase competition, the world's poorest have received a massive pay rise leading to a more equal global income distribution.'

'It's the countries that rejected free markets that have bucked the trend. In Venezuela, the move to socialism under Chavez and Maduro has meant that more than 75 per cent of the population now live in poverty with many unable to afford basic necessities like food and medicine, despite having the world's largest proven oil reserves.'

All of which highlights that these Neo-Libs are being paid to dress up privilege, corruption and monopoly power as free enterprise.

Fun with numbers: Falling unemployment vs falling median wages.

From the BBC:

UK unemployment fell in the three months to January but there was a sharp slowdown in wage growth.

The Office for National Statistics (ONS) said the unemployment rate fell to 4.7% - it has not been lower than that since the summer of 1975.

However, wage growth has slowed significantly to 2.2% from 2.6% in the previous three-month period. Wages are rising above the rate of inflation, which is currently 1.8%, but the gap has narrowed...

Chris Snowdon at the IEA reconciles this apparent contradiction:

A one per cent drop in median earnings, as shown in the FT graphic, does not mean that people have been slogging away in the same old job on lower wages than they received before the recession.

Nor should it be inferred that life is rosier in France and Spain where median earnings are slightly higher than they were in 2007. When it comes to wage data, you only count if you have a job. The unemployment rate in France is twice as high as it is in Britain. In Spain, it is four times higher.

Understanding changes in the labour market helps us to explain the counter-intuitive finding that median incomes have risen since 2007 while median wages have fallen. Part of the reason is that people who were previously on benefits have found work, thereby raising their own incomes, but have disproportionately taken jobs that pay less than average, thereby lowering the median.

In general, this has made people better off. If, on the other hand, the economy had shed large numbers of low-skilled jobs, the median income would have risen mathematically without benefiting anyone.
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His article also mentions this:

But whilst there is no evidence that wages are falling, it is true that they have fallen and that whilst median earnings are rising they have still not returned to the levels seen in 2007. 

That is what the Financial Times chart actually shows and the FT offers several reasons for this, including the relatively high inflation rate between 2008 and 2011, but averages can be misleading and there is one statistical explanation that is so important that the ONS dedicated a whole webpage to it in 2015.

There is another obvious explanation for that. Let's assume our employer has been allocating £100 of pre-tax profit ('value added') to wage costs since 2007.

Back in 2007, the maximum he could pay out was £100 less 17.5% VAT less 12.8% Employer's NIC:

£100/1.175 x 1/1.128 = £75.49

Fast forward to 2017, the maximum he can pay out is £100 less 20% VAT less 13.8% Employer's NIC less 3% Workplace Pension contributions (assuming the median employee has opted in, which is questionable but let's run with it):

£100/1.20 x 1/1.138 * 1/1.03 = £71.10.

Those tax changes would cause a +/- 6% decline in reported total wages over the period, or 0.6% a year on average.

Outbreaks of common sense in right leaning think tanks!

Exhibit One: Philip Booth (of the Institute for Economic Affairs) in today's City AM:

Cafod argues that we should remove our trade barriers without expecting anything in return from other countries. There is much to be said for this. Our trade barriers hurt British consumers and poor-country exporters and, ultimately, harm UK industries with an export focus. For example, we still have very high tariff barriers of up to 30 per cent on processed foods such as coffee and chocolate. We should just remove them...

Trade deals have become extraordinarily complex because most trade barriers relate to regulation. When it comes to agriculture, for example, regulation of GM foods is used to keep imports out. In financial services, we make enormous efforts to make already complex national regulatory systems internationally compatible. This all requires a great deal of commercial expertise. The result can be a marathon process and trade deals that create regulatory regimes that benefit incumbents and large firms.

Outside the EU, the UK government can be more relaxed about not using trade deals to harmonise regulation except, perhaps, in extreme cases of health and safety. Products and services that abide by UK regulations can be clearly labelled as such and consumers can then make their own choices.

We cannot go on negotiating trade deals that resemble the Encyclopaedia Britannica. Such deals should go the same way as the hard copy of that great set of books. We should give an intellectual and political lead so that countries such as India and most African nations might follow. Such a policy would enrich consumers and disempower elites.

He doesn't specifically say "Sod this, let's have unilateral free trade" but I think we can assume that's what he meant.

Which is what I and others have been saying here, free trade agreements (which sometimes take ages to sort out) are themselves a hindrance to free trade, not least because a free trade agreement with any one particular country automatically means less favourable terms for other countries. Far better to start with unilateral free trade as a general assumption and - if needs be - impose embargoes now and then.
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Exhibit Two: David Bentley (of Civitas) in The Times (via MBK):

[The government's] goal is to increase the amount of land brought forward for development and the speed at which it is built on. There are various proposals for achieving these objectives and one fundamental obstacle to both: the right of landowners to hold back potential sites and squeeze as much profit from them as they can.

Securing planning permission for homes on greenfield sites usually results in an enormous windfall for the landowner. These are often life-changing sums for a farmer, say, who happens to occupy the land that is needed for new homes due to the expansion of the local town or city.

The average hectare of agricultural land in England is worth about £21,000; with permission to build homes on it that rises to about £2 million (excluding London, where values are very much higher still). If the owner does not think they are getting a good enough price, they can sit tight and wait while the market rises, as it usually does, or someone comes along with a better offer.

But the right to extract every last penny from sites like this — enshrined in the 1961 Land Compensation Act — is to the cost of the rest of the community. The more the developer pays for the site, the less money there will be for infrastructure or social housing, and the more the new homes will have to fetch to turn a profit...

Underlying the housing crisis is the issue Mark Twain was addressing: that land is inherently scarce and inflates in value as the population grows and more people come to draw on it. The question is, who should benefit from this progress?

He's falling for the "increasing supply will push down prices" myth but at least he's grasped some of the basics. I don't like his suggested solution to this either, as Richie in the commenters says: "Three words, 'land value tax'.", but hey, it's a start.

Those Institute for Economic Affairs tax proposals.

Full report available here.

Most of the more detailed stuff slagging off existing taxes on pages 167 to 222 is actually quite good. They make the usual Faux Lib mistakes in thinking that VAT is a tax on 'consumption' and that corporation tax is a tax on 'capital', but hey.

Here's the fun part:

Location value tax

One exception [to their rule that 'wealth taxes' are bad], however, is tax that captures the location value of land. If properly constituted, a tax on location value may cause disproportionately little economic damage, because land cannot be hidden or taken overseas to avoid the tax and owners cannot respond to the tax by producing less value in its location – for the reason that they are not responsible for it in the first place.

A location value tax involves a tax on the value of land in a given location which is normally calculated on the assumption of the land being in its most valuable permitted use. However, it is a tax on the land value only and not on any associated buildings…

So far so excellent. Then come the KLNs...

A further objection arises from the fact that the burden of a location value tax falls on the owner of the land at the time when the tax is announced. The value of the land should fall immediately by the discounted present value of the expected future tax payments required under the tax. It is therefore a windfall tax on landowners and amounts to arbitrary and retrospective confiscation of the value of their assets.

That's not actually an argument against LVT, that is a huge advantage in favour. You can view it as a large one-off tax hit today, payable in instalments by whoever chooses to own/occupy the land in future; in exchange people will get a reduction in other taxes, leaving most people plenty of extra income to pay it. After the tax has been introduced, people will be largely unaffected; they are just paying in LVT what they otherwise would have paid in rent of mortgage payments (out of higher net incomes). So it's not retrospective at all, the tax (in cash terms) is due in future on the basis of where they decide to live in future.

And why does the word "confiscation" creep in? They don't describe income tax as "confiscation" of part of your income, even though that actually be true.

Over the next few pages there are the usual further KLNs, army of surveyors, poor widows etc, but still very favourable overall.

Being numpties, they estimate the site premium of all UK housing at £74 billion, which is only one-third of the true figure. But at least they propose a high tax rate of 75% (page 221), so their LVT (on housing, commercial and farmland!)would be enough to replace Council Tax, Business Rates and SDTL, so amen to that.

And even though they say that taxes should be simple, they also propose this:

To better adhere to the neutrality and transparency principles, almost all exemptions and all reduced rates for VAT should be abolished. But new dwelling construction, repairs and maintenance, and rents should not be subject to VAT. Instead, these items should be captured along with the consumption value of owner-occupied housing with a housing consumption tax which should be set at the same rate as the standard VAT rate and should aim to mimic VAT.

A system such as this this operated in the form of domestic rates until its abolition in 1990, when it was replaced by the community charge (‘poll tax’) and then council tax. The rates were intended to be reassessed frequently but, in practice, reviews were usually long delayed, which led to even stronger pressure to resist reviews as the changes in particular households’ tax rates that the review would lead to would be so great. This distorted spatial patterns of housing consumption and opened a gap in the level of taxation on housing versus other consumption.

To avoid repeating this problem, three design features should be implemented:
• Assessed rents should be automatically increased annually in line with a local rent index.
• Rent reassessments should be carried out at a fixed frequency, perhaps every four years...

In isolation that seems better than what we've got, but why bother with two taxes on essentially the same thing? Elsewhere they point out the stupidity and unfairness of levying two layers of income tax on employment income (income tax and national insurance), why have two similar, smallish taxes on housing instead of one bigger one? And why should the rate be the same as normal VAT? The normal VAT rate should be heading towards zero, for a start.