If you're yet to be convinced by the idea of a Land Value Tax - either in pure form or as a political compromise like a Mansion Tax - here's my (hopefully) concise argument as to why such a system would be desirable not just economically, but also ethically.
Land is location. In the housing market, both rents and selling prices are a split between the value of the buildings/improvements that sit on the land, and the land/location value. Compare two ordinary 3-bed houses, one on the end of a farm track in rural Lincolnshire, one in a leafy London suburb. Both cost the same to build/maintain, so the building value is identical, but the land value will be vastly different. Why?
The difference is 'locational advantage'. The London house has a good school next door, a tube station at the end of the street, and lots of high-paying employers in the area. These are real benefits that people will pay a lot more money to obtain, hence higher land value.
The crucial bit is this: the landowner does not, and cannot, create this value. He didn't build the school, or the tube line, or provide the high-paying jobs. These are built by the collective efforts of the community. What right does the landowner have to enjoy these unearned benefits, whether he is receiving them in cash (as a landlord charging rent, or a bank charging mortgage interest) or indirectly through the economic advantages available at that location (as an outright owner-occupier)?
Once you understand this, you'll find it asks severe questions about the moral basis for private land ownership, and by extension, whether it can be just bought or sold like any other good.
Buildings are different, they behave much like any other good. At some point in the past, they had to be built. The builder was paid a fair price for his labour, as were various suppliers for bricks etc, that's fine, everybody is square. They also depreciate over time if not maintained, and selling prices take this into account, so private buying and selling is perfectly fine too.
Land, though, presents a problem. Obviously there was no original cost of production. When you buy land, either on its own, or as part of a "property", you're paying the previous owner for the permanent right to enjoy his locational advantage. But he didn't pay for the creation of any of those benefits, any more than the owner before him did, or the one before that, and so on back to the dim and distant past when the land was first appropriated (most likely by the use of force).
Land value is community created value. While it's pretty easy to put a figure on the total value (just deduct building rent from total market rent), it would be impossible to track down every last person who has contributed to increasing land value over the course of a year, and then compensate them fairly for their efforts, in respect to each individual location.
Yet we still need a system of exclusive occupation; people want to live private lives, and businesses need space to operate. So unless we prefer feudalism - where a few individuals divide all the land between them according to relative strength of force, and everyone else has to work there in virtual slavery in return for a subsistence - or communism - where an all-powerful and certainly corrupt state divides up the land according to what it thinks is best - then we need a fair free-market solution.
LVT is the simplest and least "statist" solution. All land is taxed at 100% of its rental value, leaving buildings and improvements untaxed. Rights of exclusive occupation are unaffected, but the unearned benefits at each location are not allowed to accrue to landlords, banks, or owner-occupiers. The state then redistributes the revenue evenly, first through cuts to existing taxes on the productive economy, then through a citizen's dividend; a universal, non-withdrawable benefit paid to every citizen regardless of status.
With this system, each person pays a fair price for the value of the land they occupy, and everybody else is fairly compensated for the value of the land that they can't use.
Thursday 12 February 2015
Wednesday 24 September 2014
Is more building the only way out of the housing crisis?
No.
Lack of supply is only part of the problem, and not a very important part at that.
Between 1945-1980, home ownership doubled. Why? Because house prices were essentially regulated; kept low and stable by a combination of government policies:
-Rent controls
-Mortgage restrictions
-Social housing
-Property taxes
Briefly, there was always a cheaper alternative (renting/council house), and people were less willing (or able) to borrow vast sums of money to buy houses if tax liabilities would follow.
Thus, house prices had to stay low to meet affordability, and rents were cheap, so young couples with one average income between them could easily save up for a small deposit on a house, and afford a 10-year mortgage on the rest.
Over the years since, all these policies were steadily removed or watered down, most egregiously by the Thatcher government. Rent controls scrapped, bank lending almost completely deregulated, council house building stopped (after all the nicest ones were sold off), Schedule A taxation and Domestic rates replaced by a Poll Tax (later rebranded as Council Tax).
The Blair government continued the trend, did nothing to reverse it, probably because rising house prices made the middle-class voters he craved feel richer.
The burden of taxes shifted off property and now falls most ponderously on incomes and productivity, with predictably bad results for wages and employment.
Property is now an unregulated tax haven, and the entry fee (house prices) has shot up accordingly.
If the Tories had any interest in deflating the housing bubble, they would be looking at any of the above policies, or even better, at a tax on land values, which would avoid most of the obvious downsides of (for example) rent controls.
But they're not. Their only solution to the housing crisis so far is Help-to-buy. More lending! Even higher house prices in the medium term!
And why should they? Banks like high house prices; they can lend people more money over much longer periods. And wealthy landowners like high land values; they can charge more rent for the same building costs. Clearly, those are the people whose interests they represent.
Lack of supply is only part of the problem, and not a very important part at that.
Between 1945-1980, home ownership doubled. Why? Because house prices were essentially regulated; kept low and stable by a combination of government policies:
-Rent controls
-Mortgage restrictions
-Social housing
-Property taxes
Briefly, there was always a cheaper alternative (renting/council house), and people were less willing (or able) to borrow vast sums of money to buy houses if tax liabilities would follow.
Thus, house prices had to stay low to meet affordability, and rents were cheap, so young couples with one average income between them could easily save up for a small deposit on a house, and afford a 10-year mortgage on the rest.
Over the years since, all these policies were steadily removed or watered down, most egregiously by the Thatcher government. Rent controls scrapped, bank lending almost completely deregulated, council house building stopped (after all the nicest ones were sold off), Schedule A taxation and Domestic rates replaced by a Poll Tax (later rebranded as Council Tax).
The Blair government continued the trend, did nothing to reverse it, probably because rising house prices made the middle-class voters he craved feel richer.
The burden of taxes shifted off property and now falls most ponderously on incomes and productivity, with predictably bad results for wages and employment.
Property is now an unregulated tax haven, and the entry fee (house prices) has shot up accordingly.
If the Tories had any interest in deflating the housing bubble, they would be looking at any of the above policies, or even better, at a tax on land values, which would avoid most of the obvious downsides of (for example) rent controls.
But they're not. Their only solution to the housing crisis so far is Help-to-buy. More lending! Even higher house prices in the medium term!
And why should they? Banks like high house prices; they can lend people more money over much longer periods. And wealthy landowners like high land values; they can charge more rent for the same building costs. Clearly, those are the people whose interests they represent.
Saturday 22 June 2013
The law is an ass
Jeremy Forrest is sentenced to five-and-a-half years in prison for abducting and having sex with his 15-year old student. The news is full of people proclaiming this as a great blow in the battle for child protection. He is referred to as "the paedophile". It is said that he "abused his position of trust". It is a good day for justice.
Wait a minute! Has everyone in the world gone bloody mad? What has actually happened here? A girl has a crush on her teacher. It has been known. He, going through marital difficulties and struggling with depression, ends up returning her affection. Hardly inconceivable. He knows that teachers probably shouldn't have relationships with their students, and that she is beneath the somewhat arbitrary age of consent; but consent she does, nonetheless. By giving in to the possibility of an intimate relationship with an attractive young woman, and gaining the sexual and emotional gratification that was otherwise absent from his life, he makes a mistake for sure, but of what magnitude? What man, or indeed, woman, has never craved these things, and would place themselves above succumbing to such temptation?
As for the suggestion of paedophilia, I am entirely mystified. One cannot be a paedophile unless one is attracted to children: as in, girls or boys yet to reach puberty. Even if, hypothetically, the girl in this case had been pre-pubescent, paedophilia would be an explanation, not the crime itself. How have we become so confused about this?
It seems what we have here is an example of the full weight of the law blundering in where it doesn't belong, like an articulated lorry driven by a seven-year-old into a fine glassware emporium. This is a situation which really ought to be sorted out by grown ups, or at least by people who understand how human beings work. They would bear in mind that, had this girl been a year or two older, and in a different teacher's class, then the law would have had nothing to say about their relationship. They would understand that while teacher/pupil relationships are to be discouraged, expecting people to always make the most ethical decision - certainly where sex and emotions are concerned - is asking too much. They would also realize, unlike Judge Michael Lawson QC, that knowledge of the full severity of the laws already broken often compels people to compound their mistakes by trying to escape, much as how taking a good look at the ravening tiger that's chasing you would probably encourage you to run faster, rather than give up and be eaten. They might even consider that had the sexes of the participants been reversed, and a troubled young female teacher had run away to France with a horny teenage boy who fell in love with her, then the public, the media and the authorities would have viewed it in an entirely different light.
Now, this situation is sounding increasingly far-fetched, but let us imagine we live in a sensible, non-hysterical world. In this world, a man who fell in love with a young girl in his care would be able, without fear of prejudice or over-reaction, to sit down with all the parties concerned, and explain the situation to them, and figure out together what, if anything, needed to be done about it. But we do not live in that world: in reality, such an admission would be met with shock and horror by parents and employers, and the law, which should know better, both feeds and panders to those fears. So the couple are inclined not to be sensible, to keep it secret, until things have gone too far and there is no good way to get out of the situation. They perceive - rightly - that the world is against them, and this sense of persecution unites them and intensifies their passions. They try to run away, but are caught, and the law is now so stacked against them that they can only be viewed through the narrow lens of abduction and child abuse. The justice system then wades in, taking matters out of the hands of those who have genuine interest in it (an abduction, in itself), and proceeds to complete the chain of mistakes made by meting out a heavy-handed punishment. It concerns itself only with what it has to, the crimes committed, and ignores every other facet of this complex affair. And it all stems from that initial inability of people to sit down together, to be honest, calm, and listen to each other.
I accept that I am taking a rather sympathetic view of Forrest here, and I admit to the possibility that the account he has given as his defence in court, while not implausible, may not be entirely true. He may have convinced the girl to change her story post-capture, and while I would stop short of using the term "grooming", there may have been elements of cynicism in how he approached her and allowed the relationship to grow. Yet, even if so, we cannot overlook the fact that there will be reasons behind his behaviour, however self-aware, and I'm afraid they will probably be more complex and less convenient than "He's just an evil bastard".
Who does this judgement actually serve? Well, the high profile and extreme severity of the sentence will act as a very sobering example, and may well cause other teachers to think long and hard before making similar mistakes in the future. But how necessary is it that we take such a medieval approach to crime and punishment in this case? Is the risk of pupil/teacher relations so high, and so serious, that we must stamp down so very harshly on a man for such an understandable mistake? Just how bad would it be to allow a fifteen-year-old girl to have a relationship with an older man, to have consenting sex, to experience all the ups and downs of emotional entanglement, even to ultimately have her heart broken? Perhaps you think it would be better if this was left entirely to fifteen-year-old boys, in whose expert care girls would surely be safe from any of those dangers?
No, this judgement serves only the irrational fears of parents since time immemorial, desperately afraid of how to continue to protect their children as they inevitably become adults. It only makes sense if you view the main victim as the girl's mother, who clearly and emphatically disapproves of the match. For her, locking Forrest away for five years is decidedly convenient, hopeful that it is (probably) just about long enough for her daughter to forget about him and get on with more wholesome pursuits. She is quoted as saying "I feel the [daughter] I knew is dead". She may as well say "She's not my little girl any more", and as every parent must eventually come to realize this sad, but not tragic, truth: she's right. And no amount of law can ever change that.
Wait a minute! Has everyone in the world gone bloody mad? What has actually happened here? A girl has a crush on her teacher. It has been known. He, going through marital difficulties and struggling with depression, ends up returning her affection. Hardly inconceivable. He knows that teachers probably shouldn't have relationships with their students, and that she is beneath the somewhat arbitrary age of consent; but consent she does, nonetheless. By giving in to the possibility of an intimate relationship with an attractive young woman, and gaining the sexual and emotional gratification that was otherwise absent from his life, he makes a mistake for sure, but of what magnitude? What man, or indeed, woman, has never craved these things, and would place themselves above succumbing to such temptation?
As for the suggestion of paedophilia, I am entirely mystified. One cannot be a paedophile unless one is attracted to children: as in, girls or boys yet to reach puberty. Even if, hypothetically, the girl in this case had been pre-pubescent, paedophilia would be an explanation, not the crime itself. How have we become so confused about this?
It seems what we have here is an example of the full weight of the law blundering in where it doesn't belong, like an articulated lorry driven by a seven-year-old into a fine glassware emporium. This is a situation which really ought to be sorted out by grown ups, or at least by people who understand how human beings work. They would bear in mind that, had this girl been a year or two older, and in a different teacher's class, then the law would have had nothing to say about their relationship. They would understand that while teacher/pupil relationships are to be discouraged, expecting people to always make the most ethical decision - certainly where sex and emotions are concerned - is asking too much. They would also realize, unlike Judge Michael Lawson QC, that knowledge of the full severity of the laws already broken often compels people to compound their mistakes by trying to escape, much as how taking a good look at the ravening tiger that's chasing you would probably encourage you to run faster, rather than give up and be eaten. They might even consider that had the sexes of the participants been reversed, and a troubled young female teacher had run away to France with a horny teenage boy who fell in love with her, then the public, the media and the authorities would have viewed it in an entirely different light.
Now, this situation is sounding increasingly far-fetched, but let us imagine we live in a sensible, non-hysterical world. In this world, a man who fell in love with a young girl in his care would be able, without fear of prejudice or over-reaction, to sit down with all the parties concerned, and explain the situation to them, and figure out together what, if anything, needed to be done about it. But we do not live in that world: in reality, such an admission would be met with shock and horror by parents and employers, and the law, which should know better, both feeds and panders to those fears. So the couple are inclined not to be sensible, to keep it secret, until things have gone too far and there is no good way to get out of the situation. They perceive - rightly - that the world is against them, and this sense of persecution unites them and intensifies their passions. They try to run away, but are caught, and the law is now so stacked against them that they can only be viewed through the narrow lens of abduction and child abuse. The justice system then wades in, taking matters out of the hands of those who have genuine interest in it (an abduction, in itself), and proceeds to complete the chain of mistakes made by meting out a heavy-handed punishment. It concerns itself only with what it has to, the crimes committed, and ignores every other facet of this complex affair. And it all stems from that initial inability of people to sit down together, to be honest, calm, and listen to each other.
I accept that I am taking a rather sympathetic view of Forrest here, and I admit to the possibility that the account he has given as his defence in court, while not implausible, may not be entirely true. He may have convinced the girl to change her story post-capture, and while I would stop short of using the term "grooming", there may have been elements of cynicism in how he approached her and allowed the relationship to grow. Yet, even if so, we cannot overlook the fact that there will be reasons behind his behaviour, however self-aware, and I'm afraid they will probably be more complex and less convenient than "He's just an evil bastard".
Who does this judgement actually serve? Well, the high profile and extreme severity of the sentence will act as a very sobering example, and may well cause other teachers to think long and hard before making similar mistakes in the future. But how necessary is it that we take such a medieval approach to crime and punishment in this case? Is the risk of pupil/teacher relations so high, and so serious, that we must stamp down so very harshly on a man for such an understandable mistake? Just how bad would it be to allow a fifteen-year-old girl to have a relationship with an older man, to have consenting sex, to experience all the ups and downs of emotional entanglement, even to ultimately have her heart broken? Perhaps you think it would be better if this was left entirely to fifteen-year-old boys, in whose expert care girls would surely be safe from any of those dangers?
No, this judgement serves only the irrational fears of parents since time immemorial, desperately afraid of how to continue to protect their children as they inevitably become adults. It only makes sense if you view the main victim as the girl's mother, who clearly and emphatically disapproves of the match. For her, locking Forrest away for five years is decidedly convenient, hopeful that it is (probably) just about long enough for her daughter to forget about him and get on with more wholesome pursuits. She is quoted as saying "I feel the [daughter] I knew is dead". She may as well say "She's not my little girl any more", and as every parent must eventually come to realize this sad, but not tragic, truth: she's right. And no amount of law can ever change that.
Thursday 7 February 2013
Jobs cheaper than benefits?
I've just heard it again on the news; a fallacious argument that comes out whenever job cuts are mentioned. This time it was a one of the usual culprits, a union spokesman, but I have often noticed senior Labour politicians rely on it, and they really should know better. Yet it refuses to die, perhaps because for some reason it is hardly ever challenged by either journalists, or the opposing side. The argument goes like this:
"Remember, public sector workers pay their taxes too, so cutting jobs means that people who are currently paying their contribution to society will be made unemployed, and have to claim benefits, and instead be a burden on the system. At a time when the benefit bill is rising, this just doesn't make sense."
No. It's this argument that doesn't make sense. Public sector employees are paid for entirely by the state. Their wages come from the same vast, taxpayer-funded pot from which benefits are drawn. Public services don't make a profit, generally they don't charge people for using them, so where else can the money come from? So when a teacher or nurse pays his taxes, the government is only ever recouping a fraction of the money that they have already paid out. And when you consider that average pay in the public sector is fairly low, and that they are eligible for the same tax-free allowance as anyone else, then you're usually left with just 20% of the remainder. Which is probably not a lot. In strict financial terms then, it will always be cheaper to keep an unemployed person on benefits, than to pay them a full salary, minus taxes, in the public sector.
Also, there's the surprisingly contentious fact that the public sector actually provides no direct benefit to the national economy. It's all paid for by the state, so no self-sustaining growth is stimulated; and this would be the case even if the public sector wasn't hugely inefficient and wasteful, which it certainly is. That's not to say that the private sector is 100% efficient (in fact it may be worse), but profit-making businesses provide the economic growth, and pay the wages, which means they must always contribute a little more than what they take out of the system. This must be the case, unless they rely on state subsidy to break even, or fiddle their taxes, or go bust.
Don't misunderstand me, public services provide significant social benefits: supplying less tangible products that make people happier, safer, more secure. And of course the economy gains indirectly, whenever businesses don't have to pay to provide private health plans to their workers, teach them how to read and write, employ their own private security, or build their own roads. Who knows, the indirect economic stimulation provided by a teacher during her career may be many times that of someone who spends their life selling car insurance - but that's not quite the point. Any job has to be useful, and a private sector job that is useful, and done by someone who is competent, will bring in enough new money for the business to make a profit, the employee to receive a wage, and the government to take a slice in tax.
Public sector jobs don't have to pay for themselves in this way. Mostly the economic and social benefits they create are almost impossible to quantify, so in some cases, there may well be none. A business that employs someone incompetent, or creates a job which generates no discernible extra profit does so at a measurable monetary cost. I'm sure this still happens a lot in the private sector, but it's much easier to get away with it in the public sector, where the government will always pick up the bill. People easily assume that every public sector job is necessary, and always does society good. But this is simply not credible. Many jobs will not create benefit equal to their cost in wages, others may be completely useless, some yet may be counter-productive for all we know. And in such a case, it would definitely be better to pay them £70 a week to sit at home, than £30k a year to do more harm than good....
"Remember, public sector workers pay their taxes too, so cutting jobs means that people who are currently paying their contribution to society will be made unemployed, and have to claim benefits, and instead be a burden on the system. At a time when the benefit bill is rising, this just doesn't make sense."
No. It's this argument that doesn't make sense. Public sector employees are paid for entirely by the state. Their wages come from the same vast, taxpayer-funded pot from which benefits are drawn. Public services don't make a profit, generally they don't charge people for using them, so where else can the money come from? So when a teacher or nurse pays his taxes, the government is only ever recouping a fraction of the money that they have already paid out. And when you consider that average pay in the public sector is fairly low, and that they are eligible for the same tax-free allowance as anyone else, then you're usually left with just 20% of the remainder. Which is probably not a lot. In strict financial terms then, it will always be cheaper to keep an unemployed person on benefits, than to pay them a full salary, minus taxes, in the public sector.
Also, there's the surprisingly contentious fact that the public sector actually provides no direct benefit to the national economy. It's all paid for by the state, so no self-sustaining growth is stimulated; and this would be the case even if the public sector wasn't hugely inefficient and wasteful, which it certainly is. That's not to say that the private sector is 100% efficient (in fact it may be worse), but profit-making businesses provide the economic growth, and pay the wages, which means they must always contribute a little more than what they take out of the system. This must be the case, unless they rely on state subsidy to break even, or fiddle their taxes, or go bust.
Don't misunderstand me, public services provide significant social benefits: supplying less tangible products that make people happier, safer, more secure. And of course the economy gains indirectly, whenever businesses don't have to pay to provide private health plans to their workers, teach them how to read and write, employ their own private security, or build their own roads. Who knows, the indirect economic stimulation provided by a teacher during her career may be many times that of someone who spends their life selling car insurance - but that's not quite the point. Any job has to be useful, and a private sector job that is useful, and done by someone who is competent, will bring in enough new money for the business to make a profit, the employee to receive a wage, and the government to take a slice in tax.
Public sector jobs don't have to pay for themselves in this way. Mostly the economic and social benefits they create are almost impossible to quantify, so in some cases, there may well be none. A business that employs someone incompetent, or creates a job which generates no discernible extra profit does so at a measurable monetary cost. I'm sure this still happens a lot in the private sector, but it's much easier to get away with it in the public sector, where the government will always pick up the bill. People easily assume that every public sector job is necessary, and always does society good. But this is simply not credible. Many jobs will not create benefit equal to their cost in wages, others may be completely useless, some yet may be counter-productive for all we know. And in such a case, it would definitely be better to pay them £70 a week to sit at home, than £30k a year to do more harm than good....
Friday 13 April 2012
Elected Mayors
Now, I usually take a close interest in politics, but this has come as something of a bolt out of the blue. Apparently, here in Leeds, and in several other large English cities, we will be asked to vote in a referendum on having a directly-elected mayor on 3rd May.
http://www.bbc.co.uk/news/uk-politics-17687751
I must confess I'm at a bit of a loss on this one. I'm initially suspicious of devolving a lot of power to one individual, but then our current system of pretty much invisible councilors electing a largely powerless leader doesn't seem like the paragon of democracy either.
The only thing I feel I can say is that with the public's interest in local politics being even smaller than it is on the national scale, perhaps having just the one bloke to concentrate on might simplify things a bit, so ordinary people might get more involved. But would that necessarily be a good thing?
Are there any other regional city-dwellers out there who are affected by this? Are you just as surprised and confused as me, or do you already have a clear view? Or maybe you're a Londoner (or a resident of one of the other places, like Middlesbrough or Leicester, where they apparently have also had a mayor for ages
), and if so would you encourage smaller cities to follow suit?
Seriously, I really would like to know what people think about this, otherwise I'll be drawing my own box on the ballot paper, marked "Don't have a smegging clue".
http://www.bbc.co.uk/news/uk-politics-17687751
I must confess I'm at a bit of a loss on this one. I'm initially suspicious of devolving a lot of power to one individual, but then our current system of pretty much invisible councilors electing a largely powerless leader doesn't seem like the paragon of democracy either.
The only thing I feel I can say is that with the public's interest in local politics being even smaller than it is on the national scale, perhaps having just the one bloke to concentrate on might simplify things a bit, so ordinary people might get more involved. But would that necessarily be a good thing?
Are there any other regional city-dwellers out there who are affected by this? Are you just as surprised and confused as me, or do you already have a clear view? Or maybe you're a Londoner (or a resident of one of the other places, like Middlesbrough or Leicester, where they apparently have also had a mayor for ages
), and if so would you encourage smaller cities to follow suit?Seriously, I really would like to know what people think about this, otherwise I'll be drawing my own box on the ballot paper, marked "Don't have a smegging clue".
Friday 23 March 2012
An excellent budget, with one (well, two) tiny flaws...
Well, if this is the dreadful reality of coalition politics that so many have warned about, then perhaps we ought to allow such a catastrophe to happen more often. While some of the reaction in the papers to the budget has been pretty bad, most people (who by-and-large don't read newspapers, of course) can look at it as an overall package, and actually breathe a sigh of relief. Excellent work by the Lib Dems has moderated the worst instincts of the Tory-led government, and in many ways brought out their better side, such as long-overdue tax relief for lowly paid workers. Is this really what anybody would've expected of a Conservative budget at this stage of an enforced austerity drive? No, and we have Liberal influence to thank for it.
But I'm not going to go over the good points in exorbitant detail, many others have and will continue to do that better than I can. Once a cynic, always a cynic; so I'm just going to mention these slight oddities I've noticed.
But I'm not going to go over the good points in exorbitant detail, many others have and will continue to do that better than I can. Once a cynic, always a cynic; so I'm just going to mention these slight oddities I've noticed.
- Firstly, it is claimed that the 50p tax rate does not raise enough money, due to avoidance. Therefore cutting it to 45p will not diminish revenue gained from the rich overall, thanks to closing loopholes which will reduce tax avoidance. My question is: if the loopholes can be closed, why not leave the rate in place, and raise even more money? Further measure mentioned for the future, like a general anti-avoidance law, are only likely to increase its capacity for revenue raising. If the rich paying more is desirable, why give up after only one year?
- There is the argument that the 50p rate is damaging to the economy, demotivating richer taxpayers from creating the wider wealth that we badly need. Opponents have been quick to declare that a "Granny tax" is a bad way to fund this, and it would be, if the equalizing of the income tax allowances for working people and pensioners had been anything of the sort. But that's the wrong comparison to make. Look instead at the removal of child benefit for better-off families. Perhaps it is right to remove these benefits from people who earn £50-60,000, more than double the average wage. But how can it also be right to use this to give a tax cut to those who earn twice as much again? Isn't this almost the very definition of squeezing the middle?
Please feel welcome to comment if you can see how to reconcile these problems...
Monday 19 October 2009
It's time we all had NITS
In my last post, which was a little while ago, I vented my spleen and rubbished Her Majesty's Tax Credits system. It seems nobody has a good word to say about the system as it stands, except perhaps that "it's better than nothing". The Lib Dems have suggested some ways to simplify the system and make it more flexible when it comes to changes in earnings, which I applaud. But, in my opinion, the system is fundamentally rubbish, and a more radical and imaginative solution is called for.
Enter NITS: Negative Income Tax System. The principle is simple, if a little unusual; we traditionally pay tax at a positive rate, and if we are in the 20% band, we owe 20% of those earnings to the revenue. There was (until recently) a 10% rate below this, and under this a tax-free allowance, which you could say was really a 0% tax band. Now imagine another band below this, for the people on the lowest incomes, a -20% band. These earnings would not only be exempt from tax, but would be due an additional 20% payment from the revenue. To put it another way, rather than paying a 20% tax debit on higher earnings, those on lower earnings would receive a 20% tax credit.
So, given that we have a tax system that, for most people, calculates and deducts tax from your pay before you ever see it, it should hardly be difficult to design into this system the ability to automatically supplement the pay of people on low incomes by applying a simple negative income tax formula. This in itself would be a massive improvement on the ridiculous situation we have now, where you must pay tax first through one system, then apply to claim it back through a second system. But, if we apply this principle slightly differently, then much more than tax reform becomes possible.
Instead of applying a negative tax rate per se, we set a guaranteed minimum income for every citizen in the country, for the sake of argument say £5000 a year. The revenue then simply credits this sum to everybody's tax account (either in one go, or perhaps in installments) for them to spend or save as they wish. This payment will still count as taxable earnings, though, so any further earnings will be added on top of it, until a certain threshold is crossed, and tax becomes payable.
Provided the tax bands and rates are properly set, we could then have a system where the lowest paid will be paying no tax, and have their income supplemented by a £5000 a year stipend. Those slightly better paid will be paying a little tax, but this will be offset by the initial £5k they have already received, so they will still be net beneficiaries of the system. Further up the scale, there will be a level where people are well paid enough so that the tax they pay entirely recovers the initial payment, above which they will become net contributors. And so the tax system continues to escalate as normal, and of course the very highest earners will be paying so much tax that it will dwarf a £5 grand payment. The government gets its tax income, and all the initial stipends paid by the revenue are claimed back automatically through tax, but only by those who can afford to pay it.
Now, you may have noticed two problems with this system: firstly that it sounds very expensive, and secondly that a guaranteed minimum income, applied in this way, would be payable to everyone, whether or not they are working. Well, hold your horses, because let me tell you that both of these seeming problems in fact add up to one massive advantage.
The truth is, we are already paying people who don't work, and the amounts are roughly equivalent to such a yearly stipend, except we do it through a massively bureaucratic and inefficient benefits system. The number of different benefits, allowances, pensions, grants and loans available from the state is now too many to count. All of these are administered separately, applied for separately, and have their own set of eligibility criteria (ie. being unemployed, old, disabled, having children etc.), which obviously costs an absolute fortune. However, when it comes down to it, only one criterion really matters, and it's the one they all have in common: being on a low income.
The beauty of a NITS system with a guaranteed minimum income, implemented in this way, is that you get not only a vastly simplified means of directly redistributive tax (as in tax credits), but the ability to dismantle the entire apparatus of assessing unemployment benefit, state pension, incapacity benefit, student loans, child allowance... the cost savings of rolling all these separately administered benefits into one straightforward mathematical equation would be simply astronomical. Nobody falls through the net, working is always be more financially rewarding than not, and all the money is automatically and fairly recouped through the tax system from those who can best afford to pay.
Now, tell me that prospect isn't exciting.
Enter NITS: Negative Income Tax System. The principle is simple, if a little unusual; we traditionally pay tax at a positive rate, and if we are in the 20% band, we owe 20% of those earnings to the revenue. There was (until recently) a 10% rate below this, and under this a tax-free allowance, which you could say was really a 0% tax band. Now imagine another band below this, for the people on the lowest incomes, a -20% band. These earnings would not only be exempt from tax, but would be due an additional 20% payment from the revenue. To put it another way, rather than paying a 20% tax debit on higher earnings, those on lower earnings would receive a 20% tax credit.
So, given that we have a tax system that, for most people, calculates and deducts tax from your pay before you ever see it, it should hardly be difficult to design into this system the ability to automatically supplement the pay of people on low incomes by applying a simple negative income tax formula. This in itself would be a massive improvement on the ridiculous situation we have now, where you must pay tax first through one system, then apply to claim it back through a second system. But, if we apply this principle slightly differently, then much more than tax reform becomes possible.
Instead of applying a negative tax rate per se, we set a guaranteed minimum income for every citizen in the country, for the sake of argument say £5000 a year. The revenue then simply credits this sum to everybody's tax account (either in one go, or perhaps in installments) for them to spend or save as they wish. This payment will still count as taxable earnings, though, so any further earnings will be added on top of it, until a certain threshold is crossed, and tax becomes payable.
Provided the tax bands and rates are properly set, we could then have a system where the lowest paid will be paying no tax, and have their income supplemented by a £5000 a year stipend. Those slightly better paid will be paying a little tax, but this will be offset by the initial £5k they have already received, so they will still be net beneficiaries of the system. Further up the scale, there will be a level where people are well paid enough so that the tax they pay entirely recovers the initial payment, above which they will become net contributors. And so the tax system continues to escalate as normal, and of course the very highest earners will be paying so much tax that it will dwarf a £5 grand payment. The government gets its tax income, and all the initial stipends paid by the revenue are claimed back automatically through tax, but only by those who can afford to pay it.
Now, you may have noticed two problems with this system: firstly that it sounds very expensive, and secondly that a guaranteed minimum income, applied in this way, would be payable to everyone, whether or not they are working. Well, hold your horses, because let me tell you that both of these seeming problems in fact add up to one massive advantage.
The truth is, we are already paying people who don't work, and the amounts are roughly equivalent to such a yearly stipend, except we do it through a massively bureaucratic and inefficient benefits system. The number of different benefits, allowances, pensions, grants and loans available from the state is now too many to count. All of these are administered separately, applied for separately, and have their own set of eligibility criteria (ie. being unemployed, old, disabled, having children etc.), which obviously costs an absolute fortune. However, when it comes down to it, only one criterion really matters, and it's the one they all have in common: being on a low income.
The beauty of a NITS system with a guaranteed minimum income, implemented in this way, is that you get not only a vastly simplified means of directly redistributive tax (as in tax credits), but the ability to dismantle the entire apparatus of assessing unemployment benefit, state pension, incapacity benefit, student loans, child allowance... the cost savings of rolling all these separately administered benefits into one straightforward mathematical equation would be simply astronomical. Nobody falls through the net, working is always be more financially rewarding than not, and all the money is automatically and fairly recouped through the tax system from those who can best afford to pay.
Now, tell me that prospect isn't exciting.
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