Non-distortionary taxes

From an article in today's Scotsman comes this nugget:

... [house] prices north of the Border are continuing to rise – due in part to the oil price spike fuelling the Aberdeenshire market ...

Which set me thinking about "least-bad" taxes...

When they first discovered oil under The North Sea, the government did not hand out free drilling licences willy-nilly; it basically auctioned them off. Oil companies (who are experts in these matters) made estimates of future oil prices, extraction costs, added a profit margin; worked out the net present value thereof; and submitted bids. And the best bids won. (The full story is of course far more complicated than this, but let's just go with it for now).

Alternatively, the government could have given away the licences for free (to Party donors and in exchange for offers of directorships for ex-Ministers, no doubt).

Those are your two basic options - auction off licences for "market value" and use the revenues to cut other taxes, or trade them for money and favours. To me, the auction must be the preferred method for allocating the licences - it raises money for the Treasury without depressing economic activity, i.e. without reducing the amount of oil extracted*.

This sort of auction is a "non-distortionary tax".

Now, to extract oil, you don't just need a drilling licence, you need a shedload of money for oil rigs, boats, pipes, helicopters and for employees to run the show. And those employees have to live somewhere. So they all bought or rented near e.g. Aberdeen, so the secondary beneficiaries were local landowners, who could sell for higher prices or let out for higher rents. So the employees need higher salaries, so the profits of the oil companies, who are taking all the financial risk, go down.

Now, if you are agreed so far that auctioning off the licences is a non-distortionary tax, why not go one further and skim off a land value tax from local landowners? A large part of that land value relates to the value of the oil - but while the oil companies have to stump up for drilling licences and take all the financial risk, the local landowners just sit there and make capital gains.

Wouldn't a land value tax on such landowners also be a "non-distortionary tax"? The selling prices or rents that they can achieve will go up whether there is a tax or not - it's not like a landlord could tear down his building to avoid the tax (as it is a tax on land values, so the tax would be due either way). And so landlords would be keen to let out as much space as possible, and other people in the area (who don't work in the oil industry) would be more amendable to selling up their houses and moving elsewhere (to avoid the higher land value tax); this would depress rents and house prices, so oil workers wouldn't need such high wages so the auction value of the drilling licences (next time they came up for auction) would be even higher, and so on.

A sort of negative Laffer-curve effect, if you will - it's like a balloon with water in it. If you squash it on one side, the water (in this case the unearned profits) just go to the other end - what you have to do is squash in at both ends simultaneously (but not so hard that it bursts, obviously).

* A smartarse would no doubt say "If the oil companies didn't need to spend money on licences, they'd have more money to spend on oil rigs". Superficially true, yes. But oil companies do not have a fixed amount of money - as long as profitable opportunities are there, they can raise as much capital as they need. Similarly, would a smartarse apply this argument if oil were discovered under his own back garden? I doubt it. So if the North Sea oil belongs half to the United Kingdom (and half to Norway) would smartarse approve if the oil were just given away to multinationals? I hope not.

Number crunching

UK aid to India: £825 million over three years

UK foreign direct investment in India in 2007: £2,500 million (excluding Vodafone/Hutchison deal of £5,500 million).

UK imports from India: £397 million per month

UK exports to India: £213 million per month (see previous link)

William Hague completely loses the plot

From his letter in today's FT:

There is an attractive alternative text at hand, in which the EU ... gets on with delivering on the issues where it can make a positive difference to people's lives: making Europe's economies more competitive, tackling global warming and alleviating global poverty...

Wot?

1) The best way for governments to make economies more competitive is to butt out, in terms of the EU this means scrapping - the EU-wide Value Added Tax (the worst tax of all); all the stupid regulations; and all the trade barriers. So there's not much chance of that happening.

2) Temperatures have stopped rising, so even if there were anything that anybody could do about it (which there isn't), there is no need for it to be done.

3) Trade not aid, that's simple enough. Again, all the EU has to do is ... nothing.

I've long had doubts about Hague, but he is either totally deluded or the EU have already bought him off somehow.

"Police apologise over offensive puppy ad"

Do these miserable buggers realise that the police are sometimes referred to as "pigs"?

Mortgage broker joke

Broker 1: "Things are terribly quiet, aren't they?"

Broker 2 "Yup. The number of new mortgages being taken out is only about one-third of the long-run average, I read it in The Telegraph recently"

Broker 3: "Bloody hell! If this goes on any longer, the number of new mortgages will go negative!"

Two party rotating dictatorship (2)

Continuing the theme of my an earlier post, the answer to the question Are we destined to be stuck in a two party rotating dictatorship for good? is, rather depressingly, "Yes". Bluntly speaking, this is not just because of the dishonesty of politicians, it is because of the dishonesty (or stupidity, or petty-mindedness, or lack of vision) of voters.

The two (or three) large parties have policies that are virtually indistiguishable; because it is easier for them to "fight over the centre ground". This is not really centre-ground at all, it is Large Government.

If a small-government, free market liberal sticks his head above the parapet, sure, most people will agree with him on one or two narrow issues, but most will also be more worried about losing some trifling advantage that the tax, welfare or planning system gives him; or by the thought that others might benefit more; or, Heaven forbid, that the State might stop interfering in people's lives so much. This forces the large parties to stick to the pre-agreed script; any perceived differences are purely presentational and not of substance.

I can't be bothered rehearsing the arguments in favour of low, simple taxes and Universal Benefits, it's easier to consider this in terms of relatively trivial matters, for example my manifesto for a Coalition Of The Willing. The accompanying Fun On-Line Poll ended up 60% in favour of scrapping all these silly bans, but I doubt whether any political party, short of LPUK, would have the nerve to recommend such a list. And to be honest, I doubt whether this sort of thing is a vote-winner, because voters are basically a spiteful lot, who quite happily give up one or two freedoms of their own if it means that they can outlaw all the little things of which they don't approve.

Crudely, Tory voters don't like the fox-hunting ban but wouldn't dream of legalising cannabis; Lib Dem or Green voters are relaxed about legalising cannabis but disapprove of fox-hunting. The Labour Party just enjoy banning everything, I am not sure if Labour voters have even noticed this, so it might not be fair to generalise on "What the stereotypical Labour-voter would or would not ban".

And there we have it, a classic impasse, that can only get worse as time goes on.

Outbreak of commonsense!

Against a long backdrop of the LibLabConsensus trying to out-do each other in the MMGW-f***wittery stakes, comes this in today's FT:

Hutton eyes coal to replace imports of gas

John Hutton, business secretary, yesterday paved the way for a new generation of coal-fired power stations, claiming Britain could not wait for new clean-coal technology to come on stream... He said the Conservative policy on these plants - which would place a limit on carbon emissions - was "a potential threat to our energy security"... But Alan Duncan, shadow business secretary, said the intent of the government to develop coal "at any cost", was a decision that would leave future generations with a "massive carbon headache". He added: "That means they can only keep the lights on by being dirty."

What a turnaround! It only seems like a few days ago that The Goblin King heralded windpower as The Next Big Thing ... oh, it was.

Of course, John Hutton seems to have overlooked the EU's Large Combustion Plants Directive, which means we can't build them anyway, but hey.

Arc Capital & Income plc 'Bricks and mortar plan'

Here's an investment I wouldn't recommend!

Basically, they stick your money on deposit for six years (that's where the 30% comes from) and there must be some well-capitalised house-price-bears somewhere who are prepared to take the other side of the gamble, in other words, the more prices fall, the bigger their pay-out (and vice versa).

If I were a bank or building society, or indeed a big property company, that's exactly the kind of punt I'd take - it insures me against house price falls.

So, who do you think will win this bet, the Big Boys or the mugs who sign up for this?

"Poland in new blow to EU treaty"

Thank you, Mr Kaczynski!

In denial

House prices "have fallen 7.3% from their peak last October" says the Nationwide, in a rare fit of honesty.

But they also come out with the inevitable drivel like "... the strength of house price growth up until last year means that prices are still 4% higher than two years ago and 9% higher than three years ago."

I love the way that the time-frame keeps moving further into the past. Each month's fall is now wiping out two months' gains.

Update - if you look at Nationwide's real house price index (i.e. adjusted for RPI), we are already back to mid-2004 price levels (ignoring brief dip in first half 2005).

So the real gain over the past four years has been a BIG FAT ZERO.