The Wit & Wisdom of Persimmon's Chief Executive

From The Telegraph:

Mike Farley, chief executive of Persimmon, the UK's second largest housebuilder, said home buyers were still finding it difficult to secure mortgages, particularly on new homes. "It makes absolutely no sense that some lenders won't offer as high a mortgage on a new home as they will on a second hand house. We need more competition to change this," said Mr Farley.

Well duh.

It makes absolutely perfect sense, partly for the reasons that Drewster explains at comment 2 at HPC; partly because there appears to be a "new house premium" of 5% or 10%, which clearly disappears after a couple of years*, and partly because of the risk that there is subsidence or something which is far more predictable/manageable with older homes.

To use a crude analogy, if somebody buys a second hand car for £5,000, it will lose value at £500 a year, but if they buy a new version of the same model for £15,000, it will lose about £5,000 in value in the first year or two. So if you are in car finance and expect the loan to be repaid over three years, you'd be comfortable lending the the buyer of a second hand car 70% of its current value, but you'd only lend the buyer of a new car 60% of its current value; and if you did offer a 90% new car loan, you'd have to charge a higher interest rate.

And 'more competition' will not have the slightest effect on the difference between new and existing houses.

* FormerTory in the comments reminds us about 'incentives', so what I should have written is: "there appears to be a "new house premium" of 5% or 10%, which clearly disappears after a couple of years; and 'incentives' can inflate the official selling price by another 5% or 10%, which is purely fictitious value that never existed."

Fake Statistic Of The Day

From The Metro:

Children whose mothers smoked heavily during pregnancy are more likely to become career criminals, research suggests.

And the two are linked regardless of factors such as family wealth, the study shows. Children whose mothers smoked heavily were 31 per cent more likely to have been arrested than those whose mothers never smoked.

They were also more likely to be repeat offenders. The increased crime risk is found among children whose mothers had 20 or more cigarettes a day when pregnant, according to the report by Harvard School of Public Health in the US.

Prof Kate Pickett*, from the department of health sciences at the University of York, said: "The study adds to a substantial body of evidence linking smoking in pregnancy to difficult temperament in infants, behaviour problems in children and antisocial behaviour in adult offspring. These relationships seem to be robust and can be seen even after accounting for many differences between women who smoke and those who do not."

For the study, more than 3,700 new mothers were interviewed between 1959 and 1966. In 1999, criminal record checks were carried out on their offspring.

* Ahem: "Professor Kate Pickett is a Cancer Research UK-funded health researcher, and co-author of The Spirit Level."

Bank Levy Fun

From City AM:

Q. WOULD BANKS PAY LESS BY MOVING OFFSHORE?

A. Some banks would, yes. Foreign banks only have to pay the levy on their UK operations. So if HSBC or Standard Chartered were to move to Hong Kong, it wouldn’t have to pay the levy on any foreign assets at all – just British ones – saving it a considerable amount. However, some foreign banks could be levied twice, if their home countries adopt a similar tax. The Treasury says it will give relief to banks being taxed twice but it hasn’t come forward with details on how it expects to do this.

It never ceases to amaze me how stupid the people are who design our tax laws.

The Golden Rules of Taxation are "Don't tax things that can be moved abroad (unless you want them to)" and "If you tax things, you usually get less of them (which might be desired, if you are discouraging certain activities or trying to ration something)", so the very first rule to lay down would have been that a bank levy only applies to UK assets and/or liabilities, for the simple practical reason that not doing so drives banks abroad and you end up with less tax revenues than you started with.

More Fun With Iain Duncan Smith

From page 5 of the DWP's white paper on welfare reform (pdf):

... we know that work, and the improved incomes that flow from it, have beneficial effects in terms of people’s health and well-being, the educational achievements of children and improvements in communities, such as reduced crime and anti-social behaviour. It is difficult to quantify these effects precisely but their existence is not in doubt.

Broadly agreed, the figure for the social and economic cost of the welfare state, in its current form, is huge, but we don't know what it is. This document is proudly signed by Iain Duncan Smith, Secretary of State for Work and Pensions.

This is presumably the same Iain Duncan Smith whose signature appears under an article on the website of his own think tank, (this is just one of hundreds of articles and reports which referred to the £102 billion figure in 2008 and 2009) containing this particular hostage to fortune right at the end:

A stronger voluntary sector, enabled by government not usurped by it, builds a stronger society where people take more responsibility for their lives. In damaging economic times, with the annual cost of social breakdown well over £102 billion, this is more essential than it has ever been.

Had he just said £100 billion, then fine, that means "somewhere between £50 billion and £150 billion", but he added that extra £2 billion at the end and stuck to it through thick and thin.

Where did they get the 65% withdrawal rate from anyway?

1. The suggested rate for the 'Single Unified Taper' has crept up over the past year:

Iain Duncan Smith's Centre for Social Justice suggested a maximum withdrawal rate of 55 per cent in September 2009 (page 303 of this pdf)

According to the Daily Mail a month ago"A withdrawal rate of between 60 and 65 per cent is being debated, according to sources."

The actual White Paper of last week says 65%.

2. These rates are misleading as they apply after PAYE is deducted, thus the effective rates after tax would be 69%, 73% and 76%. As I keep pointing out, 50% is the ideal rate because the administration would be very simple - it could be done via the tax system using K-codes for PAYE, i.e. a flat 50% of wages are deducted in lieu of income tax and National Insurance with no personal allowance.

What would the wider impact of this be?

3. Let's focus on people who earn the National Minimum Wage of £6 an hour (in round figures) of whom there are 747,000. This paper says that the price elasticity of the supply or labour in The Netherlands is 0.1 for men and 0.5 for women, which makes sense, because more men are in work than women, so it is easier to tempt relatively more women into work than more men. So let's assume that the price elasticity of the supply of labour is 0.3. What this means is that if wages offered increase by 10%, the number of people willing to work for that wage increases by 0.3 x 10% = 3%.

4. I explained in my previous post that with a 65% withdrawal rate, a worker also liable to PAYE keeps 23.8 pence for every £1 he earns if he earns above the income tax threshold, and HMRC and DWP between them take 90 pence. If we did the means testing using K-codes, the worker keeps 50 pence and HMRC takes 63.8 pence.

5. So let's assume those 747,000 people all work about 16 or 17 hours a week and earn £100 gross (to keep the numbers simple) and keep £23.80 net. If their net wages went up to £50 for the same hours and the same work, that's an increase of 110%, so we'd expect the number of people prepared to do such jobs to go up by 33%, so an extra 247,000 people would be prepared to take such jobs. This is perfectly plausible, there are about 8 million working age adults not in work in the UK, and the DWP claim that the Universal Credit system would reduce the number of workless households by "up to 300,000" (page 50).

6. Under DWP's plans, the amount of tax and benefit withdrawal that HMRC/DWP will be taking from those 747,000 people would be 747,000 x £90 a week = £67 million a week. If we reduced the Marginal Deduction Rate from 90 pence to 63.8 pence, then HMRC would be taking £63.80 a week from 994,000 people = £63 million a week, a fall of £4 million.*

7. Remember also that the DWP and HMRC between them are so staggeringly inefficient that it costs them about £34 per household per week to process benefit claims (including fraud and error), see earlier post. I think it's reasonable assume that my system, by which all means testing and benefit withdrawal is done at source via PAYE codes would get this cost down by at least a tenth (I would hope that it would get the admin costs down by about nine-tenths, but you can't budget for miracles).

8. So HMRC/DWP would 'lose' £4 million a week in PAYE and benefits clawed back, but the cost of administering the benefits for those 994,000 people also goes down by a tenth, call it £4 a week each, which will save HMRC/DWP £4 million a week.

9. But the most important thing about this is that instead of 747,000 people taking home £23.80 a week, we'd have 994,000 people taking home £50 a week. The total disposable income of those one million people would increase from £18 million a week to £50 million a week. On average, those people at the overlap between being welfare claimants and being workers would be £32 a week better off. That's £1.5 billion a year, which is still only one-tenth of one per cent of GDP, so not an unreasonable estimate (but well within the range of measuring error).

10. It's not going to get us out of recession at a stroke or anything, but it will make it absolutely clear that you are always better off working, so no need for these authoritarian gimmicks like forcing longer term claimants to sweep the streets every now and then. There are people who are happy to sweep the streets for whatever wage the council pays them, why not leave them to it?

Here endeth.

* For all these calculations, I've assumed that the workers concerned earn over the personal allowance for PAYE. Maybe they don't, in which case their net wages would go up from £35 a week to £50 a week, and the number of additional people prepared to do minimum wage jobs would only go up by 96,000. In this scenario, the DWP/HMRC would 'lose' £3 million a week and these 843,000 very low paid workers would end up collectively £16 million a week better off. Certainly still worth doing, because all that £16 million will go back into the economy as spending or rent, so the extra taxes generated will be at least £3 million.

There is a more pessimistic view, that the employers who currently pay £7 or £8 an hour and know that the bulk of their workforce claim Working Tax Credits would simply drop the wages they pay to soak up some of the tax saving. There will be some element of this, but not enough to distort the whole picture; in any event, the best thing we can do for employers (apart from scrapping VAT) is to reduce Employer's National Insurance and all the stupid employment regulations, which would benefit employers in particular but workers in general; is it so terrible if we adopt a measure which benefits workers in particular and employers in general?

There's an outrageous lie at the top of page 11

From the DWP's Universal Credit: welfare that works:

The Government spends a further £3.5 billion each year on administration. The Department for Work and Pensions and its agencies spend around £2 billion a year, Local Authorities spend a further £1 billion to administer Housing Benefit and Council Tax Benefit, while HM Revenue & Customs spends £450 million administering Tax Credits. Multiple agencies use valuable resources to gather and manage essentially the same information.

Nope.

The DWP's own accounts show that it will spend £10 billion on administration costs (Total resource budget DEL) this year, page 89.

And as far as I remember HMRC admitted that administering Tax Credits costs 3p for evey £ paid out, and as they pay out £27 billion or something, that puts their admin costs at something like £810 million a year. Para. 1.2 on page 10 of this by the National AUdit Office says HMRC spent £581 on administering tax credits in 2007-08.

Tot that all up and stick on the very low estimate of £5.2 billion for fraud and error from the previous page and that comes to a nice round £17 billion a year. There are about ten million households claiming benefits and/or tax credits, so that works out at administration/fraud and error costs of £1,700 per claimant household, or £34 per week.

"Just when you thought it was safe to go for a ramble..."

I was just about to nod off when they featured this story on BBC News 24 (Freeview, channel 80), so I had to drag myself out of bed again and stick it on the 'blog:

A 63-year-old man has been killed and his wife, 67, was critically injured in an attack by a bull in Nottinghamshire. The couple, wearing walking gear, were near the Leicestershire border when it happened at about 1630 GMT on Friday. It is unclear why the bull attacked the pair, who were walking on a footpath near the village of Stanford on Soar.

"Wearing walking gear" near cows? That's like a Mod in full regalia going for a walk on a firing range! The embedded video at the BBC is an absolute delight - it's basically a young BBC reporter, standing in a nondescript field at twilight, who lapses from BBC/Queen's English when pronouncing the words "couple" and"public footpath".

Other highlights from the article:

Police inquiries will now continue in a joint investigation with the Health and Safety Executive. A post-mortem examination is expected to take place early next week.

PS, as Julia M reminds us, cows kill more people than sharks do, item 6 here.

Aung San Suu Kyi

They couldn't run a sweet shop

To expand on the Kind Tooth Fairy/Wicked Tooth Fairy analogy, see bullet 2. of my earlier post, let me try and explain the sheer and utter deliberate stupidity of trying to claw back 45.8 pence from every £1 earned via the PAYE system and clawing back 44.2 pence via means-testing by using another analogy (which came to mind when I left the paper shop, having bought myself the latest copy of VIZ, a packet of Wrigley's Extras for the lass and some 'penguin cards' for the lad).

1. Let's imagine the Tooth Fairy (the DWP) runs a sweet shop and dishes out a fixed number of sweets to each person who visits the shop (the Universal Credit, or welfare payment). The price that 'customers' have to pay is 90 pence for every £1 they earn. It would be simple enough for the Wicked Tooth Fairy (HM Revenue & Customs, who man the tills and run security) to collect that when people 'leave the shop' (i.e. when your employer does the payroll), by asking employers to hand over 90 pence and to give the worker 23.8 pence. Workings below*.

2. The only opportunity for fraud is working cash in hand, and with such a high tax rate, it is hardly surprising that a lot of people do this; or even worse, people will simply not bother working. But this isn't good bad enough for the civil servants whose main aim in life is to keep the bureaucracy as bloated as possible, so they go one better:

3. The WIcked Tooth Fairy at the till takes 45.8 pence from you, and compiles long lists of which people 'owe' the Kind Tooth Fairy another 44.2 pence. The Kind Tooth Fairy then sticks these lists in a computer and tries to match it all up, and then sends its 'customers' a bill for the 44.2 pence at the end of the month or the end of the quarter, by deducting it from the sweet ration that the 'customer' gets in the next month or the next quarter.

4. The admin and faff involved will be stupendous of course, and the admin burden on the employer will go up by a factor of twelve - instead of just sending off one cheque for PAYE every month and then doing a PAYE summary once a year which breaks down the total PAYE and NIC deducted from each 'customer', it will have to submit all these lists every month.

5. And the bills for some customers - usually small amounts of tens or hundreds of pounds - will be delayed or lost, or they might accumulate and then after six months, the entire arrears will be deducted from future sweet rations in one go, long after the customer has assumed that is was all sorted out and paid for, thus leading to further hardship and write-offs down the line.

6. To cut a long story - if you were running a sweet shop, would you demand payment from your customers when they go though the till, or would refuse to accept full payment and just take half, telling them that they'll receive a bill for the rest at some vague unspecified point in the future, which will require the services of as many people again sending out the bills as you already employ manning the tills and running shop security?

* For £1 of wages, the Employer pays 13.8 pence NIC and the employee pays 20 pence basic rate tax + 12 pence NIC, assuming that the basic rate does not change and the Tories merrily press ahead with Labour's 'tax on jobs', which I have every reason to believe is the case. That makes 45.8 pence collected via the PAYE system.

The DWP then also reduce the worker's Universal Credit by 35% of their net wage after PAYE of 68 pence (£1 minus 20 pence minus 12 pence), i.e. by another 44.2 pence. So the net wage is 23.8 pence for every £1 earned.

The real enemy is the civil service

I printed off the DWP publication on their proposals for a Universal Credit, and a lot of it is to be welcomed, such as this on page 8:

Currently, when combined with tax and National Insurance payments, the withdrawal of Tax Credits, Housing Benefit and Council Tax Benefit can lead to Marginal Deduction Rates which are nearly 96 per cent, much higher than the highest rate of Income Tax... The combined effect of benefit withdrawal rates and additional tax as earnings increase is called the Marginal Deduction Rate and has the same practical effect as a tax rate.

Correct! It is to all intents and purposes taxation.

1. Let's imagine the Kind Tooth Fairy (the DWP) insists of giving every citizen a bit of money so that they don't starve, and has no method of clawing any of it back again (a bit like Child Benefit or the basic state pension); and the Wicked Tooth Fairy (HM Revenue & Customs) has to collect as much money as it can by deducting it from people's wages.

2. If the Wicked Tooth Fairy knows about the Laffer Curve, he would know that the revenue maximising rate on lower earners is about 60%, which he could arbitrarily split up into 12.8% from the Employer and 47.2% from the employee, call it 50% from the employee for sake of argument, which the Wicked Tooth Fairy would then ask employers to deduct from people's wages and send straight to him.

3. So the cash-cost minimising MDR is, by and large, the same as the revenue-maximising tax rate on the Laffer Curve, which sure as heck ain't 80% or so*.

4. The civil servants have deliberately spiked the whole point of the scheme by having a MDR of 65% or 76% (which I looked at yesterday), but, despite having admitted on page 8 that means testing is to all intents and purposes the same as taxation (in other words could be deducted straight from people's wages, to the extent they have any), they write this in the Executive Summary:

For those in employment, Universal Credit will be calculated and delivered electronically, automatically adjusting credit payments according to monthly income reported through an upgraded version of the Pay As You Earn tax system (on which HM Revenue & Customs will be consulting shortly).

The system will be simpler and will respond more quickly to changes in earnings so that people will not face the same complexities as they do now, particularly at the end of a tax year. As a result people will be much clearer about their entitlements and the beneficial effects of increasing their earnings by taking on more hours or doing some overtime...

This would involve an IT development of moderate scale, which the Department for Work and Pensions and its suppliers are confident of handling within budget and timescale.

AAAAARGH!!

5. How is that in any way better, or cheaper or less prone to fraud and error than simply giving welfare claimants £64 a week (or whatever the amount will be) and a PAYE code with no personal allowance, which tells employers to deduct 50% income tax and no back chat? The regular payments don't need to 'respond to changes in earnings', the claimant knows that he has £64 a week coming in (or whatever) and knows that for every £1 he earns legitimately, he will keep half.

6. And do you know what? We already have PAYE codes like this, they are called K-codes, it's all routine stuff that any payroll lady can handle (in fact, it's the easiest PAYE code of all to deal with, even easier than a BR 'emergency code' as the 50% covers both income tax and Employee's National Insurance.)

* Once Employer's NIC has gone up to 13.8% and Employee's NIC to 12%, for every £113.80 the employer pays out, a worker on the Universal Credit would keep £23.80, i.e. £90 makes its way back to the government, which is a tax rate of 79%. It's even higher if you add the VAT on top of the wages.