Tuesday, 4 September 2018

Changing who pays the taxes

In the economic plan which he has produced as part of his pitch for the leadership of Plaid Cymru, Adam Price has put forward a number of ideas for change.  The media coverage has concentrated, perhaps unfairly, on just one of those, his proposals on taxation, with the headline suggestion of a significant cut in income tax.  I find it a little strange that a proposal for an overall increase in total taxation has been seen by some as a tax-cutting proposal (the proposed new land tax would raise more income than the proposed tax cuts), but it is an interesting proposal nevertheless.
There’s a long history to the idea of a land value tax, which is the cornerstone of the proposed changes.  It’s an idea which has been espoused in the past by a range of economists.  There are some practical problems (one of the reasons why it is not widely implemented across the world) which need to be resolved at a detailed level, but in principle it’s an idea I’d support.
As suggested earlier, moving tax from income to land doesn’t per se reduce the total tax take from the economy, but it does, to an extent at least, change who pays the tax.  When it comes to those who own the land on which their house is built, whether income tax or land tax is more favourable to them as individuals depends on the detail and the rates at which taxes are set; there’s no inherent reason why one form of taxation would leave them better off than the other.  But the key point is that, whilst some individuals would be better off and some worse off, overall the suggested plan (given the extra 1p on income tax to fund education) is for an increase in tax, albeit distributed rather differently.  And given the problems facing Wales, I wouldn’t oppose an overall increase in taxation anyway.
In that context, I was more than a little surprised to see the claim being made by Adam that “…cutting the basic income tax rate even to 11% will provide a major economic boost to the Welsh economy through increased spending”.  This strikes me as a very strange claim, since any boost to the economy generated by a decrease in one tax is likely to be more than matched by a hit to the economy generated by an increase in another.  The total amount of money in non-state hands which is available for spending actually reduces under these proposals.
Even supposing that there were to be a net increase in the money available for people, rather than the government, to spend, an assumption that people spending it rather than the government doing so boosts the economy is open to challenge at the very least.  If the government spends £1 billion pounds, that provides exactly the same boost to the economy as if millions of individuals each spend an extra £1 billion between them; at macro-economic level, there is no difference between the impact of private and public spend.  The goods and services being purchased are essentially the same, regardless of who purchases them.  And actually, it might be worse than that; the theory that more money to spend = more spending only really applies in a theoretical world.  In the real world, people who have gone into debt or run down their savings may prefer to pay down that debt or top up their savings rather than spend.  And even those who do spend may opt for an extra foreign holiday, providing a boost to someone else’s economy rather than Wales’.  Such factors mean that, in practice, government spending may well provide a bigger boost to the economy than private spending under a particular set of circumstances.  And it would certainly be on different priorities.
I can understand a political desire to present the proposal as a tax cut for working people, but that doesn’t strike me as an entirely honest presentation.  I simply don’t accept the premise that leaving people with more money in their pockets after tax can, of itself, provide an economic boost; the other changes have to be taken into account as well.  There’s a danger that it provokes a political debate about who can keep taxes lowest rather than about who should be paying which taxes and on what basis.  Taking a basically sound idea and presenting it in a way which plays to the Tory agenda of low income taxes doesn’t look particularly radical to me and misses an opportunity to debate who should be paying which taxes in order to raise the revenue required to provide government services.


Anonymous said...

I think you need to re-think.

There is a huge difference between individual spending and government spending ... it's called waste.

Government spending is inherently wasteful, private consumption is not. Just take a look at all the PPI initiatives or the defence procurement contracts or local government spending. Waste followed by more waste.

The secret to ensuring less waste is to ensure government has less to spend. Less each and every year.

John Dixon said...

Clearly, you start with a perception that waste is an inherent concomitant of all government expenditure, although you give no evidence in support of that assertion. But, as it happens, I tend to agree with you that the way in which some public expenditure operates means that the total cost of some services ends up higher than it might otherwise be; I just don't agree either that that is inherently the case, that it only applies to one sector, or that it can't be changed.

It is, however, in this particular context, largely irrelevant. My comment relates to the macro-economic effects of expenditure, not value for money. In that context, 'waste', however defined and whether we agree that a particular item of expenditure does or does not come into that category, nevertheless provides a 'boost' to the economy. That may sound counter-intuitive, but let's take a theoretical example. A body or individual (whether public or private sector really doesn't matter here) spends £1 million on buying something which, had it done things differently might only have cost £900,000. The net result is that £1 million has been spent in the economy; most of that has probably gone into salaries which consequently gets spent again in the economy. It's a £1 million 'boost' to the economy. Would I prefer to spend only the £900,000 and buy something else with the £100,000? Yes, of course; but that's a question of value for money. In either case, the overall effect is that £1 million has been spent, and most of it has gone into the pockets of people who will then spend it again. My point is simply that the overall effect of spending is the same whoevere does the spending. Value for money is a completely separate argument.

Gav said...

It's arguable that tax changes that benefit mainly poorer people are immediately recycled (buying food and other essentials, for example) while changes that benefit mainly better off people are more likely to be squirrelled away somewhere, or wasted!

Anonymous said...

But, again here you miss something else ...

The £5 spent on buying a lightbulb from Amazon or the £5bn spent on buying military technology made in the USA. How much of this money stays in the UK and how much stays in Wales to 'get spent again in the economy'?

The more we 'waste' the less we have to spend again.

John Dixon said...


That's a reasonable argument. Bear in mind however that the poorest are those who are most likely to be struggling with debt and also that they are the ones who benefit least from a cut in income tax. It is middle and higher earners who benefit most from an across-the-board cut in income tax.


Both reasonable points, but not really germane to your original argument which was about the difference between public and private expenditure. Individuals in the private sector can choose to use their money to buy German cars, or holiday in the Caribbean; money can 'leak out' of the Welsh economy whichever sector is spending it. If you want to argue that the public sector spends a greater proportion of its revenue outside the UK economy, then you'd have a point. I don't have figures on that, and if you do, I'd be interested in seeing them. If it were true that a greater proportion of public spending (as opposed to private) goes on overseas spending (whether through travel, imports, or whatever), then that would be a legitimate concern. I suspect, however, that whilst you can find a number of high-profile examples, the vast bulk of public sector spend happens within the UK economy. That's not an argument not to look at whether that proportion could be increased, of course; but that's a rather different argument from the basic proposition with which I started which is that, ceteris paribus, the overall impact of spending on the economy is, at a macro level, much the same whether that spend is by the public or the private sector. You may have (and I don't doubt that you do) all sorts of other reasons (including ideological ones) for preferring private rather than public expenditure - but that's a different question.

Anonymous said...

John, I think you're right to call out that particular sentence, but your praise for the policy itself shouldn't be so muted for a number of reasons.
A switch from taxing income to taxing land is, as you say, unlikely to have a significant impact on the demand side (particularly, as one of the replies above notes, given that Wales is a very open economy). The primary effect is on the supply side. All taxes change peoples' incentives. We tax petrol in order to encourage people to drive smaller, more efficient cars and use less petrol. It's inevitable that if we tax income, we disincentivise work. Switching taxes away from income (notably wage income) reduces the gap between what employers pay and what workers receive for their labour. Thinking about whether to do that extra over-time shift? Thinking about whether to retire early? At the margin, this does have an impact. Taxing land doesn't have any of this impact on incentives because the supply of land is pretty much fixed - the only example of a significant creation of land in Wales that I can think of is when the Cob was built in 1812 and drained the Aberglaslyn. So taxing land is more efficient than taxing income.
But this isn't the only advantage of the land value tax over income tax. It is fairer and more progressice as well.
I don't agree with everything in Adam's plans, but it's good to see a set of serious and radical alternatives to the status quo, all of which are within the current competencies of the Welsh Government. I hope to see similarly ambitious ideas brought to the table by the other candidates in all three leadership debates.

John Dixon said...

Anon 14:06,

My criticism was more about the presentation than the content; overall, I agree with the policy. I don't think that getting into some sort of bidding war with the Tories over who's proposiong the lowest taxes is a particularly good place for anyone claiming to be offering a radical alternative to be. As for my muted praise - well, there are a lot of devils in the detail, and the detail is so far not obvious. I'll take two examples as to why the policy might not turn out to be as far or progressive as you suggest.

Firstly, take the exclusion for agriculture. Bearing in mind that the tax is based on land ownership and usage, not on the nature of the occupancy, this means that landed estates are also excluded. Now, there may not be a lot of those in Wales, but there are some, and the owners are amongst the wealthiest. They may well end up benefiting from the reduction in income tax without the compensatory increase in land tax.

Secondly, it is central to the concept of the land value tax that the tax cannot be passed on, and comes direct from the 'profits' of the landowners. I'm not sure that will always be true, though. There is an underlying assumption that the fixed nature of the supply of land means that rents are already at market level and cannot be increased to pass on the tax. There's some evidence that that may be true for commercial properties on the high street, but does it also work if the proprietor of the business is also the owner of the land on which the property stands? I suspect not, and the extra tax could end up - in some circumstances - being passed on from a wealthy businessman who has benefited from a reduction in income tax to poorer customers who have not.

These are not insurmountable problems, and individual cases make bad law, but they serve to illustrate the point that there's a lot of detail underlying a proposal like this, and it isn't necessarily the simple fair and progressive approach as which some portray it.

I think that I agree with your assertion that "All taxes change peoples' incentives" (and sometimes in unpredictable ways, which is one of the reasons for considering the detail carefully), but it doesn't follow from that that changing incentives is or was the rationale for the tax. When petrol tax was first introduced, for instance, was it really "to encourage people to drive smaller, more efficient cars and use less petrol"? I think not; and the idea that it has that purpose looks like a post hoc rationalisation of an observed effect.

But I do agree that "... it's good to see a set of serious and radical alternatives to the status quo, all of which are within the current competencies of the Welsh Government". It's just that those producing them shouldn't expect not to be challenged over the detail, let alone the presentation.

John Dixon said...

That's 'fair' not 'far'!