Rachel Reeves is no Dick Barton.

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It was 45 years ago that the Commercial Union insurance company used the slogan “we won’t make a drama out of a crisis”. In fairness, given that she wasn’t born until 1979, the Chancellor of the Exchequer has a plausible excuse for not remembering the slogan. But not being old enough to remember the advert is not much of an excuse for not understanding the meaning of the message. The handling of the winter fuel allowance (WFA) for pensioners has now gone beyond simple drama, and is rapidly becoming a long-running soap, with a cliff-hanger at the end of every episode as viewers attempt to work out how on earth she will extract herself from this week’s latest plot twist. Where’s Dick Barton’s “one bound” when you need it?

Her reluctance to give a handout to millionaires is understandable in principle, although her initial attempt to prevent that by limiting the payment to only the very worst off pensioners was something of a sledgehammer approach. Her latest approach – setting the cut-off at £35,000 a year – isn’t a whole lot better. Given that the average full time earnings before tax in the UK are a little over £37,000, the new cut-off point is going to exclude a lot more people than those who are really millionaires – unless the definition of ‘millionaire’ is now being changed to include everyone on average earnings or above, a definition which will come as something of a surprise to most working people, let alone pensioners.

In order to implement this ‘new improved’ version (as the advertising companies would surely try and present it), she’s inventing a whole new tax rate of 100% which only applies to a tiny part of people’s incomes and which comes into effect at a completely new threshold, unused for anything else in the tax system. It’s hard to envisage any approach she could have taken which would be more complex to implement, and probably end up costing a significant chunk (in terms of staff and IT costs) of the claimed savings to implement – as well, potentially, as requiring a couple of million extra pensioners to file annual tax returns which someone will then need to process.

I’ve never been a fan of the WFA anyway; it’s always struck me as a bit of a gimmick. Simply adding £300 a year to the state pension (even if paid once annually rather than as part of the weekly pension) would mean that those who most need it get it tax-free, whilst pensioners with other income would effectively pay tax on it at up to 45% anyway. It’s true that ‘millionaire pensioners’ would still end up pocketing 55% of £300 (£165), but it would be a great deal easier and cheaper to administer using existing systems. I don’t know how many ‘pensioner millionaires’ there are, but given that a cut-off at £35,000 (well short of millionaire status) will only exclude around 2 million people, we can reasonably assume that it’s a lot less than 2 million. Even 2 million net payments of £165 would only cost £330 million – a drop in the ocean for the Treasury. And lower administration costs reduce that further.

Still, for fans of long-running dramas, where the heroine of the piece finds herself tied in ever more complex knots at the end of every episode, why cut the serial short when the pain and agony can so easily be prolonged?

How real is paper wealth?

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‘The markets’ have reacted fairly predictably to Trump’s puerile attempt at a conjuring trick by registering some dramatic drops. The analysts tell us that this reflects their pessimism about inflation, interest rates, and economic growth, all of which are likely to be adversely affected by the trade war which Trump has kicked off. Whilst I don’t doubt that economists (most of them, anyway – there are always some who’ll take a different view) do indeed see Trump’s actions as a threat to economic prosperity, I wonder if that’s what ‘the markets’ are really reacting to. It probably would be the case if markets were doing what classical economics says that they do, which is matching capital with investment opportunities in expectation of future profits. But if those same markets are actually more about gambling and speculation, which is probably the reality behind most trading, then what really drives them is an attempt to second guess what other players will do in response to tariffs in the hope of turning a profit by making a better guess than those other players.

It underlines that share prices an extremely poor indicator of economic value; they often bear little relation to the value of the underlying economic assets which they nominally represent. And their volatility makes them a poor measure of the wealth of their owners. To take just one simple but current example, the share price of Tesla has plummeted since Musk got involved with Trump’s administration. He’s still a very wealthy man, on paper, but his total wealth is apparently a lot less now than it was a few months ago. In his case, the scale of things means that it makes little practical difference, but the question is whether ‘paper wealth’ is a sound basis for assessing anything.

That’s relevant in the context of the increasingly strident calls for a wealth tax here in the UK. Whilst the idea appeals to many of us, assessing the amount of wealth owned by an individual is not a simple or straightforward task, especially if the value of a significant component of that wealth can vary from day to day – or even hour to hour. And non-paper wealth – property, land etc. – is not easily realisable or assessable without being realised. What is easier to assess, albeit still difficult when the tax system is complicated and people can afford to pay expensive advisers (although both of those obstacles could be overcome by a government intent on fairness), is the income generated by that wealth including, of course, any increase in value from the date of acquisition to the date of disposal of any asset. We certainly should do more to tax the wealthy, but taxing the wealthy isn’t necessarily the same thing as taxing their wealth. Their income is a lot easier to get at.

When does a gift become a tip, and therefore taxable?

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A new law comes into force today regarding the distribution of tips in service industries. Some less than entirely scrupulous employers have been keeping all or part of the tips themselves rather than passing them on to employees. Whether tipping is a good thing or not is a matter of opinion; some of us would certainly prefer that the staff are paid a proper wage in the first place, even if that means prices go up a bit, rather than the staff being dependent on the arbitrary generosity of customers. Leaving that aside, tipping is currently a fact of life, but happens in two ways. Sometimes, cash goes directly into the hands of individual employees, but increasingly customers can choose to add an amount to the bill, and the total gets shared out and processed by the employer.

Tips have long been taxable (as the name suggests, income tax is a tax on income, not just on earnings), and one advantage of employers doing the collection and paying is that the tax can be, and generally is, processed through the employers’ PAYE systems. Cash put directly in the hands of individual staff members, however, is only taxed if it is properly declared to HMRC, and there must be at least some doubt as to how much gets declared in practice. As a general rule, ‘gifts’ are not taxable (although there are exceptions, especially when gifting is used as a means of attempting to avoid paying tax), but ‘gifts’ received by an employee as a result of his or her employment – which is what tips effectively are – are unquestionably taxable, although it does open up something of a grey area.

It made me wonder, though: if gifts received as a result of the job a person does (i.e. they would not be received by the same person if he or she were doing a different job) are taxable, why are gifts received by MPs not subject to income tax? It is clear that they effectively boost the spending power (and thus the ‘real’ income) of the recipients and that they are only given because of the job the individuals are doing, so why are they not treated as income? Why should a waiter earning at or around the minimum wage, say, who receives a tenner at the end of a meal, have to pay 20% tax on it, whilst a person on a substantial salary who receives clothing worth £30,000, to pick a recent example at random, pays nothing? It wouldn’t be a huge money-spinner in the scale of things, but if the Chancellor is serious about closing loopholes on tax avoidance and clamping down on benefit fraud, perhaps she should also look a little closer to home at the people around her.

Protection from whom?

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Sunak’s claim about Labour’s tax policy has been widely debunked, and exposed for the silliness which it is. Whether the next government will actually increase taxes or cut services is an open question, however – doing neither whilst adhering to a stupid and unnecessary fiscal rule of their own invention is a logical impossibility, but exactly the same can be said about the Tories. His claim that he will protect pensioners from ever paying income tax on their state pension, however, enters a new world of unreality.

It is a fact that the default position, as of today, is that an increasing number of pensioners are going to end up starting to pay income tax on part of their state pension. That is the result – the inevitable result – of both freezing tax allowances and increasing the pension. The resulting effective increase in income tax doesn’t only affect pensioners, it’s just more obvious because the state pension has long been set at a level below the threshold for income tax. Sunak’s promise to increase the tax threshold, for pensioners only, to ensure that it always stays higher than the level of state pension will certainly do what he says – i.e. ensure that no-one pays tax on their state pension.

But he is effectively arguing that the best way to protect pensioners from the effects of Tory policies is to vote Tory. “Vote for me to protect you from me” is a novel – probably unique – election gambit.

What's the catch?

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A survey was published last week showing that voters want income tax cuts to help with the cost of living crisis. Shorn of context, that’s hardly a surprise. To the bald question, “Would you like more money?”, “Yes, please” is a wholly rational response. As far as I can see, though, people weren’t asked about how that should be funded. There is, as has been pointed out many times here, no necessary direct relationship between tax raised and government expenditure, but since both Tory and Labour claim that there is and will act on that basis, it’s reasonable to ask how they would fund it.

If the people getting the ‘extra’ money in their pockets found that they were also expected to pay more for school stationery and materials, or that NHS dentistry became even harder to access, or that cash-strapped councils would raise parking charges to try and balance their books, or that people would have to pay for their own bin bags in future, (add to the list as you will: all of these reflect what is currently happening in various places) would they still want that ‘extra’ money in their pockets? Because a tax cut only leaves people with more money to the extent to which they don’t then have to pay for things which were previously being paid for out of that taxation.

It's regressively selective as well. Those receiving the biggest benefit from any tax cut and those facing the biggest increase in expenditure as a result of cuts in services or higher prices for those services aren’t the same people. And those most in need are the ones who are most likely to find out that the cost of that tax cut outweighs the benefits, whilst the most well-off bank the cash. “Yes, please”, is an entirely rational and reasonable response to the question, “Would you like a tax cut?”, but a more appropriate response would be “What’s the catch?”. It’s a question to which you will not find an answer in a survey designed to show that tax cuts are popular. And increasingly it appears that the colour of the rosette doesn’t tell you which ones are selling the snake oil.

The myth of fiscal headroom

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Fiscal rules are magical things which, apparently, every party needs to have. Parties can and do, however, invent their own rules. And change them, if ever they become ‘inconvenient’. It’s easy to see why the Tories, particularly late in a parliament facing an election which they are all but certain to lose, would want to lay down rules which would constrain an incoming Labour government. It’s a lot less easy to understand why the Labour Party would be stupid enough to let them get away with that.

Whatever, the Tory rule is, in essence, a very simple one: it must show that government debt overall is reducing by the end of the current five year period. Effectively, it doesn’t matter what happens in years 1 to 4, as long as the numbers show the right answer by the end of year 5. Although it might sound very difficult, it’s actually quite easy to achieve, all they have to do is make up the numbers. And that, in effect, is exactly what the Office of Budget Responsibility accused them of doing last week. As their head honcho put it, it’s not that the government figures are a work of fiction, because there was no work involved. They are simply invented numbers, with no plan for achieving them and no evidence to justify them, yet statute requires the OBR to pretend they are serious.

But that isn’t the end of it; the rule is even more magical than that. When one year ends, what was year 5 becomes year 4 and a new year 5 gets added on to the end. The rule now only requires a reduction in debt by the end of the new year 5. If they want to, the government can put off debt reduction almost indefinitely and still claim to be meeting the rule which says it’s reducing. By definition, the figures for year 1 will always be firmer and more accurate (or rather, less inaccurate) than the figures for later years, and they become the basis on which the government manages the books for the year. So, if income increases for whatever reason (such as more people being brought into payment of income tax through frozen limits) or expenditure reduces (such as lower interest rates leading to reductions in the cost of debt servicing), the government finds itself with what it and the media like to call ‘fiscal headroom’. Without borrowing any more than they’ve already planned to do, there is suddenly cash available with which they can do one of three things.

They could reduce the planned borrowing for the year, they could increase spending on failing public services – or they could cut taxes. And all the talk at the moment is that the Chancellor will use this apparent windfall to reduce taxes in next month’s budget, in the belief that doing so will be a big enough bribe for people to vote for the Tories. They will still be borrowing the same amount as they’d already planned to borrow (for all their talk about needing to cut borrowing, that’s a task which they’re more than happy to put off until the mythical year 5 and thus leave to an incoming government). They’ll just use some of that borrowing to reduce taxes. That’s right – the policy is effectively the same as that promoted by the previous worst PM on record, Liz Truss, namely borrow money to cut taxes. The only difference is that she alarmed people by planning to exceed the budgeted amount of borrowing without providing a good enough set of fictitious figures for the future, whilst Hunt is promising to stick within the already agreed fiction.

Here are two facts we know. Firstly, cuts in income tax always help higher earners more than low earners. And secondly, when the government borrows money and pays interest thereon, it necessarily borrows from those who have money available to lend, whether that’s directly through NS&I investments or indirectly through pension pots. Heads the better-off win, tails the less well-off lose. Doubly so, in a sense – the less well-off are also more dependent on the failing services in which the government is deliberately choosing not to invest. It’s easy to see why such policies appeal to those who have money: who wouldn’t prefer to pay less tax and then lend money to the government and receive interest on it instead? It’s a lot less obvious why this ploy will appeal to the majority who neither have the money available to lend to the government nor are likely to benefit greatly from any tax cuts. But then, sleight of hand is the secret of a good magician; most people aren’t seeing the full picture.

Giving with one hand and giving with the other

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The theoretical basis for reducing taxes on the highest paid is that they will invest the money saved in ways which boost economic growth. It’s a sweeping assumption. There is no doubt that ‘some’ of the money will be invested like that, but no-one knows how much, and it isn’t the only option. Some will simply be spent, which is another way in which the economy might be boosted a bit. But some will be saved, and no doubt a significant amount will find its way into secretive offshore tax havens. One of the big unknowns at the heart of the gamble is how the money ends up being split between those four options. That in turn depends on the calculations that those in receipt of the unexpected windfall make before deciding what is in their own best interests. And one of the factors in those calculations will be expectations about the future, which make it unlikely that much of the money will end up being used as the government might wish.

Investing in new businesses and innovation is a long term decision, so one obvious question is whether those making the decisions really believe that this is a good time to be taking long term decisions. With a government which looks as though it might, just about, limp through to an election in two years time, but which has an obvious potential for collapse a lot sooner than that if things go horribly wrong; with a major war raging in Europe, whose progress and outcome, to say nothing of its effect on energy availability and prices, remains highly unpredictable; and a pandemic which is far from being over with the potential for large new waves, many are likely to conclude that ‘certainty’ is a little lacking at present. Major investments look to be riskier than they have been in the past, and the rate of return on savings may be a better bet for many.

We know that interest rates on both borrowing and saving are likely to be rising, a trend which the not-a-budget-at-all will only accelerate, whilst the volatility of the pound adds to uncertainty. All that also has a negative impact on a willingness to take investment risk, and provides a positive incentive to find a safe haven for cash, whether overseas or in the UK itself. And one of the safest havens of all in the UK is government bonds, the interest rate on which rose sharply in the aftermath of the ‘fiscal event’. There is a common belief that when the UK government borrows money, it borrows it from other countries or overseas investors; but in reality, most borrowing is on the domestic market. Most is, effectively, borrowed from UK citizens; sometimes directly, but more often through financial institutions, such as pension funds, investment funds, banks and insurance companies. In a sense, therefore, most of us (through our pension funds etc.) are actually lending money to the government, even if we don’t realise it. This is, on the whole, something which benefits most of us. It’s worth noting, though, that the wealthier people are, the more money they are likely to have in their pension pots (as well as insurance, investment funds, banks etc.), and the more, therefore, that they lend the government. The interest on those loans, however, is paid by all taxpayers, even those who have loaned precisely nothing, either directly or indirectly, to the government. It’s one of the hidden ways in which wealth is transferred from those who have little to those who already have a lot, and that transfer is far more significant than the intergenerational transfer as which it’s sometimes inaccurately painted (the nonsense about future generations paying for today’s borrowing), because future generations, collectively, will inherit not only the liability but also the asset. The issue is that the people inheriting the asset aren’t the same ones who inherit the liability; it’s an inequality issue, not a generational one.

There is another effect here. Those traders who have been betting so substantially against the pound in expectation that the budget would lead to a crash have not only made small fortunes for their banks, they have also made it certain that interest rates will go up – maybe this week, and possibly even as soon as today. The traders can now receive bumper bonuses for their efforts, pay less tax than they previously would have done, lend the difference to the government, and be paid for the privilege at the higher rates of interest which they themselves have done so much to bring about. Verily, this is a government which giveth with one hand and then giveth a bit more, just to be certain, with the other. To the select few.

Faith-based economics

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It is an article of faith for the Conservative and Unionist Party that the answer to all problems is to cut taxes, by which they really mean taxes on income, whether personal (income tax) or corporate (corporation tax). So when inflation is high, the solution is to cut taxes so people have more money to pay the bills, and if there is deflation, the solution is to cut taxes so people have more money to spend. If the Tory Party is united, it’s time to cut taxes, and if it’s divided it can magically be reunited by cutting taxes. The possible inconsistency in arguing that the same solution can be applied to diametrically opposite problems can safely be ignored – we are, after all, talking faith not fact here.

What they never mention is the caveats and corollaries which come with tax cuts. The first, and most obvious, of those is that income tax cuts only benefit those who pay tax in the first place. Many of those who are struggling the most in the face of rising fuel and food costs are on incomes so low that they pay little or no income tax; a cut of 1% of nothing is still nothing. Conversely, those who pay the most £s in tax gain the most pennies back if the rate is cut – who would ever have expected that a Tory policy would provide its greatest benefits to the most well-off? The second is that another of their articles of faith (equally poorly grounded in fact) is that government expenditure must be limited by the amount of tax revenues received; tax cuts must therefore also lead to spending cuts. It is, again, not exactly a coincidence that those most impacted by cuts in government spending will be those least able to fund alternatives.

When it comes to corporate taxes, their argument is that businesses which retain more of their profit will have more money available to invest, and that investment drives growth. Whilst investment can indeed drive growth, the evidence that businesses with greater retained profits will invest that extra cash is not exactly overwhelming. Many will simply choose to give that money to their shareholders, in extra dividends or share buy backs, having effectively externalised the costs of the public services which they use by passing them on to the rest of us. If there were good investment opportunities available, which would produce a better return than keeping the money in the bank or returning it to shareholders, they would be making the investment anyway, and borrowing the money to do so. And it is often the businesses which are struggling, for whatever reason, which most need to invest in new products, equipment, or processes; businesses which make little or no profit do not benefit from cutting taxes on profits. The people who do are shareholders – who would ever have expected that a Tory policy would provide its greatest benefits to the most well-off?

There is another article of the Tory faith worth referring to here – and that is the infamous Laffer Curve. This purports to show that there comes a point where tax increases have a negative impact on government revenues because people are incentivised to find ever more creative ways of avoiding or evading tax. For those who follow the true faith, this ‘proves’ that tax cuts can lead, counter-intuitively, to increased government revenue. There is just one problem. There is no – zero, zilch, nada – empirical evidence to support the Laffer Curve theory. It's junk economics, especially in the way the Tories seek to apply it. Indeed, such research as has been done tends to support the rather more blindingly obvious, and completely intuitive, conclusion that a government which cuts tax rates will end up collecting less money.

It is, unfortunately, far from unique in the history of man and economics to discover that a government basing its economics on articles of faith rather than empirical facts ends up pursuing policies which somehow, miraculously and entirely coincidentally of course, end up benefiting its own supporters.

Honourable action not expected soon

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Standard advice for individuals and organisations facing bad news stories is to get all the bad news out at once, apologise profusely, make the necessary changes to what you’re doing, and hope people will forgive and forget. And if really necessary, let a few heads roll. The worst thing one can do is deny the undeniable, justify the unjustifiable, and hope that whoever felt sufficiently motivated to leak the bad news won't go on to leak the worse news. Neither Boris Johnson over the widespread rule-breaking during lockdown, nor Rishi Sunak over his tax affairs, seem to have received the memo.

The idea that the Chancellor’s household could benefit from a tax avoidance loophole which he could have chosen to close but didn’t was bad enough; the revelation that he held a US Green Card visa for six and a half years as a UK MP (one and a half years of that time as Chancellor) is worse, much worse. And his answers to date leave a series of obvious questions unanswered. In the first place, they tell us that Sunak, like Johnson, believes that rules don’t apply to people like himself: having given a binding commitment to be a permanent resident of the US, moving to another country and taking on a position as a government minister looks a lot like extracting the urine. It also suggests a certain lack of commitment to both countries – for how long does one have to be a member of a legislature, let alone a minister of the Crown, before realising that you are, perhaps, no longer a permanent resident somewhere else?

The statement issued on his behalf says that “All laws and rules have been followed and full taxes have been paid where required in the duration he held his green card”. It’s deliberately opaque. If all taxes on all worldwide earnings were paid to the US authorities in accordance with green card rules, that would imply that he paid tax on his MP and ministerial salaries to the US government. The unanswered question is whether that was as well as, or instead of, paying them to the UK Treasury. Either would be astonishing: on the one hand, paying tax twice on the same salary, to two different governments, seems somewhat out of character for a household willing to use tax avoidance measures (people don’t get to be, or to stay, as rich as the Sunaks by paying tax twice over), whilst on the other hand, having a Chancellor setting income tax rates which he doesn’t have to pay himself because he’s officially resident elsewhere would be a very strange state of affairs.

There is another unanswered question about the circumstances in which he then surrendered his green card. The statement says, “Upon his first trip to the US in a government capacity as chancellor, he discussed the appropriate course of action with the US authorities. At that point it was considered best to return his green card, which he did immediately.” The use of the passive is interesting. Whilst obviously intended to give the impression that the Sunaks were being pro-active here, the statement does not tell us which side initiated the discussion, nor does it preclude the other, and probably likelier, interpretation that the US authorities said something along the lines of, “You’re having a laugh aren’t you? Hand it over now.”

In what strange universe could Sunak, or anyone else, have thought it appropriate to continue to hold the card, and claim to be a permanent resident of the US, whilst serving as a legislator and minister of another country? In any functioning democracy, the actions of the Chancellor would be considered terminal for his career as both a minister and an MP. But that would depend on him acting honourably. And given that honourable action by the Chancellor might lead people to expect the same from the PM, it's unlikely that his resignation should be expected anytime soon.

To each according to need...

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In the last few weeks, the Conservatives-in-Wales have turned their faux anger on the Welsh Government’s proposal to trial a Universal Basic Income in Wales, with their Finance spokesperson telling us that it would hand money to the wealthy and the MS for Aberconwy adding that it’s a step towards Wales becoming a communist state. They succeed only in demonstrating how utterly clueless they are. There’s nothing new about the idea of a UBI – in one form or another, the idea has been floating around for the last 4 or 5 centuries. And there’s nothing particularly left-wing about the idea either; there are some good right-wing arguments in favour as well.

It’s true, though, that in broad terns, the ‘left’ and the ‘right’ approach the idea from different perspectives. I can sort of see how Finch-Saunders almost has half a point about the relationship with communism. But only almost, and only half. Marx did indeed utter the phrase “…to each according to his needs”, implying that goods and services should be distributed on the basis of need rather than ability to pay, something which is anathema to modern-day Tories. It was, though, based on the questionable assumption that a developed economy could produce such an abundance of good and services that there would be no need to ration them on price (which is the basis on which capitalism works). And the first part of Marx’ phrase is omitted, because he also assumed that all in society would be making a contribution, or as he put it: “From each according to his ability”. It’s an important caveat.

From a more ‘left-leaning’ perspective, UBI is about ensuring that society provides at least the basics for all its members, and therefore inherently conveys a sense of what ‘society’ is or should be. Supporters of UBI who lean to the right tend to see it more in terms of simplicity and efficiency. A single fixed payment to everyone gets rid entirely of an overcomplicated benefits system and all the bureaucracy associated with it. (And if the same sum is also paid to pensioners, it removes another over-complicated system and the costs of administering it.) It’s true that it also involves the state paying money to millionaires, but that’s a complete red herring; a progressive tax system on all income over and above the level of UBI would mean that the wealthy simply pay more tax. And I very much doubt that the suggested target group for the Welsh trial – care leavers – contains a large number of millionaires.

Whether UBI discourages people from seeking work or not is an open question. Freed of the need to work in order to pay for food, shelter etc., there may well be some who will decide not to work at all, but then there are some who do that at present anyway. They’re more of an exception than the media would have us believe, though: most people living on benefits are either unable to work, or unable to find suitable work, rather than have taken a positive decision not to bother. It depends to a very large extent on how the level of UBI is set and how ‘basic needs’ are defined, but most people’s ‘wants’ go way beyond their ‘needs’. UBI could equally increase the incentive to find work for people freed of the daily worry about how to meet the basic costs of simply staying alive.

The bigger concerns with the proposed pilot in Wales are firstly its necessarily limited scope (given the lack of power of the Senedd) and secondly that it is being viewed as a way of simplifying the benefits system for the target group. Not only does that look more like a conservative argument for UBI, it is also likely to be of limited use in judging whether it should, indeed, become truly ‘universal’. It’s in danger of being a trial which contains the seeds of its own destruction, to adapt another of Marx’ sayings.

Theory unsupported by fact

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The familiar old nonsense about an increase in income tax leading to outward migration or deterring people from moving in made another of its regular appearances in the Western Mail yesterday.  (I can’t find it on Wales Online, but it’s available here).  This time, the warning comes from the Chartered Institute of Taxation (CIOT), and asserts that whilst the Welsh Government can make minor variations, any variation of more than 5-10% over the long term would probably start to have a significant effect on people’s choice of residence, so the Welsh Government should think very carefully before making such changes.

The basis for this assertion is unclear; it looks to me like one of those 85% of all statistics quoted by politicians which, according to the old joke, are simply made up at the time of being required.  We do know, of course, that some extremely wealthy types go to a lot of trouble to reside in jurisdictions where they can avoid paying large sums in tax, but this is more about greed and an unhealthy and anti-social aversion to paying any tax at all than a response to a fairly marginal variation between countries.  According to the figures here, Belgium’s top rate of tax is 60% and it kicks in at an annual income of around €49,600, whilst France’s top rate is a mere 55% and it doesn’t kick in until income reaches rather more than €562,000.  If the argument about high tax rates causing migration were true, then Belgium should be half empty by now.  Yet, the last time I was there, it didn’t look empty, and I have seen no empirical evidence of mass migration to France.  The CIOT itself refers to the example of Scotland and notes that there is “no clear evidence of significant effects on migration” but goes on to say that this is “probably because of a lack of awareness of devolved income tax rates”.  So, there’s nothing wrong with the theoretical model, and it’s not that higher income tax doesn’t cause emigration, it’s just that higher earners in Scotland are too thick to have worked out that they’re supposed to migrate to England to avoid paying higher rates of tax.

Classical economics tells us that, in a perfect market where all participants have perfect knowledge and where all but one of the variables are controlled for, then a change in that one variable should precipitate a change in behaviour by way of reaction.  It’s a good way of illustrating why theoretical economists should never be allowed anywhere near policy making.  My example above (of Belgium and France) is a very silly one, because there are a whole host of other reasons why people might choose to live in Belgium rather than France.  The CIOT article does itself suggest that tax differences alone won’t drive decisions – it suggests that people will also consider what they get for the taxes as well.  But reality, unlike the article, doesn’t stop there – people don’t make such decisions solely on economic grounds anyway.  The theoretical economic animal of economics responding solely to economic stimuli is a convenient fiction for the purposes of exploring theory in academia; but it doesn’t exist in practice, even if we allow for the relationship with the stimuli to be rather more complex.  

So, what can we actually say? 

1.    There is no hard, empirical evidence, anywhere that I am aware of, which supports the theoretical notion that differential tax rates drive migration between tax jurisdictions, other than for a tiny number of extremely high net worth individuals

2.    Actual human beings – as opposed to the mechanistic robots of economic theory – make decisions on a whole range of factors, not all of which are economic

3.    Anyone arguing from a basis of theory, unsupported by fact, that the Welsh Government should not vary its tax rates other than very marginally from those set by the UK Government because it may drive richer people out may, just possibly, be pursuing an agenda unrelated to what might be best for Wales.

Still, I expect that the argument will have another outing before long.

Substance and semblance

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The report published today by the Wales Centre for Public Policy neatly and effectively debunks many of the over-simplistic arguments about the possibilities for increasing revenue in Wales following the devolution of power over part of income tax.  On the one hand, the proposal which the Tories have put forward, of reducing the higher rates of tax in order to attract high earners to come to Wales and start businesses here, would have an impact only if significant numbers of people moved, and on the other hand, the number of high rate taxpayers in Wales is so low that an increase in the tax rate is unlikely to generate a lot of revenue either.

Of course, it is true that, as the report states, “Were the Welsh Government to change income tax rates in Wales, there would likely be some behavioural response from Welsh taxpayers”, but what is unclear is how much behavioural response to how great a stimulus.  I have long been highly sceptical about the idea that comparatively small changes to a single tax rate will provoke a widespread change in behaviour, but some politicians with an axe to grind attempt to argue either that a penny on the rate of tax would lead to a mass exodus or that a penny off would lead to a mass inflow.  Or even both. 

I simply don’t find that credible; the financial situation of individuals is obviously affected by income tax rates, but it is also affected by a range of other factors, including the services which they get in exchange for paying taxes, and questions such as house prices, and that is without even mentioning the wide range of intangible factors such as closeness of family and friends, and other attachments to a particular area.  Within the likely range of any changes to tax rates, I think we can largely disregard any impact on terms of population flows.  What we do need to recognise is that tinkering within a narrow range isn’t going to produce much, if anything, by way of additional revenue, and the report delivers a very clear message on that.  It might enable the taxes being raised to be distributed differently amongst the population, and that might well be a reason for the Welsh government to adjust tax rates – but any expectation of a significant revenue boost is misplaced.

Where that leaves us is exactly where many of us have long believed that the devolution of limited powers over income tax would leave us – in a situation where the apparent ‘power’ is close to meaningless.  Real power over taxation involves the right to vary a range of taxes and includes the ability to shift taxation from indirect to direct taxation (or indeed the other way).  But then, delivering the semblance rather than the substance of power has been the defining characteristic of devolution from the outset.

Whatever happened to whatsisname?

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I tend to agree with Alun Davies that “People would be happy to vote for a penny on income tax to help fund the Welsh NHS”; opinion polls have consistently suggested that there is a general willingness to pay more tax in order to have a properly-funded NHS (although there is also some evidence that that doesn't always translate into a willingness to vote for a party which proposes exactly that).  But the ‘conclusion’ which he, like several other politicians before him, has drawn (some sort of hypothecated tax increase specifically for the NHS) is one of the daftest and most unworkable policies ever suggested.

Firstly, a hypothecated tax which only pays for part of the NHS does not protect the NHS from cuts.  Future governments can always point to the extra revenue from the ‘new’ tax and say that the whole of ‘that revenue’ is still going into the NHS, but it can only be ‘extra’ if the whole of the previous budget is protected in real terms for the indefinite future.  And that represents a tying of government hands to which no government could or should ever agree, as well as potentially fossilising the way in which funds are spent from that original budget.

But secondly, and more importantly, far from being the radical approach claimed, it is in fact an acceptance of the basic premise of ‘austerity’, which is that government spending depends on first raising funds through taxation.  The blind acceptance of that mantra is what leads the Labour Party in general to a position in which its argument is, in effect, that Labour austerity will be kinder and fairer than Tory austerity; it does not expose the premise of the policy for the lie that it is.

In fairness, of course, the situation in Wales is different.  As a non-sovereign devolved parliament, the Assembly is obliged to produce a balanced budget, in the same way as the local authorities to which it is equivalent in this sense.  Without the powers of a sovereign government, the Assembly cannot break free of austerity – the best it can do is to “ameliorate Tory policy” – exactly what Alun is arguing that Labour should not be doing.  The really radical argument would be to demand that Wales break free of those constraints which ‘devolution’ places on it.  I remember another Alun Davies who used to argue along similar lines – I wonder what became of him?

Selfishness isn't always the driver

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In yesterday’s post, I referred to the response by a group of LSE economists to the suggestion made by a group of economists led by Professor Minford of Cardiff University that a so-called ‘hard’ Brexit would boost the UK economy substantially.  Part of the LSE group’s critique of the report by Minford et al was that “Minford uses a 1970s style trade model in which all firms in an industry everywhere in the world produce the same goods and competition is perfect. There is no product differentiation – a German-made car is identical to a Chinese-made car. Importantly, trade does not follow the gravity equation – everyone simply buys from the lowest cost producer”.

This idea of a ‘perfect market’ where everyone acts in accordance with his or her own best financial interest, seeking to maximise income and minimise spending, is at the heart of a lot of thinking on what is often referred to as the ‘right’ of politics.  Many of them really do believe that we are all motivated by one and only one factor, and that our behaviour in response to events can be predicted from that.  It helps to explain the bemusement of many of the Brexiteers when they discover that the EU27 are considering factors other than exporting cars from Germany or Prosecco from Italy.  I think that they generally don’t get the idea that people might just be considering other factors rather than solely economic ones.

It isn’t just in relation to Brexit that we see this tendency.  We’ve seen it time and time again from the Tories in the Assembly who argue – and seem genuinely to believe - that increasing income tax rates will lead to an outflow of wealthy people whilst reducing them will lead to a corresponding inflow.  There is, as has been discussed before on this blog, no hard evidence of which I’m aware to justify this belief, but the theory says it should be so, so it must be so.  Empirical evidence is not necessary to justify or support beliefs derived from theory, from their perspective.

Today, there was another example of the same sort of thinking.  The Adam Smith Institute has come up with what they see as a wizard wheeze to persuade young people to vote Tory – scrap air traffic duty on flights to Ibiza.  Seriously.  OK, there are a few other suggestions as well – including one to make it easier for young people to travel to ‘English-speaking countries’ to replace the lost European opportunities post-Brexit, and another to legalise cocaine – but the basic underlying point is an attempt to appeal to what they see as the naked self-interest of young people.  Or, perhaps I should say, a certain type of young people, since some of the suggestions make me wonder whether they’ve ever spoken to any young working-class people at all.  But then, they don’t need to speak to anyone; their theory says that people will act in their own selfish interests at all times, and the theory must be right, no?

At one level, I find it deeply depressing that anyone could believe that selfishness is the sole motivation of all humans, but at another level, the fact that they are so divorced from the complex reality of modern life in the developed world shows the extent of the opportunity available to present an alternative vision for humanity’s future.

Why not do the job properly?

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It’s likely that Labour’s promise to force all those earning over £1 million a year to publish their income tax returns will prove popular, although the likelihood of them being called on to implement this promise any time soon is low, and based on past performance, no promise given by a politician before an election can be relied upon to become fact once the people have voted.  They are, though, appealing to a general feeling that the richest in our society are not paying their fair share, and that they are using clever accountants and advisors to come up with ways of paying less than they should.

The problem, however, is that most of what they do is perfectly legal – there is an oft-stated distinction between legal tax avoidance and illegal tax evasion.  And if people are doing something entirely legal, it leaves me with an uncomfortable feeling that Labour is, in effect, arguing that the media and public should be allowed, nay encouraged, to hound them into doing what’s morally right rather than simply what’s legally right.  It’s almost encouraging an outbreak of mob rule.

That doesn’t mean that I support the idea that anything goes as long as it’s legal.  I don’t agree that people should be allowed to use the fact that something isn’t actually illegal as a defence for doing something which offends the public sense of what’s ‘right’.  But I know, even as I say that, that I’m making some assumptions about what public morality is, and about who has the right to define what is, or is not, acceptable; let alone take enforcement of such morality into their own hands.  And let’s be honest, based on the utter dishonesty of some sections of the press in the UK, do we really want to put that definition into their hands?  Yet that could be the effect of what Labour are proposing.

None of that means that Labour don’t have a point.  But here’s an alternative suggestion: instead of using legislation to force people to undergo a semi-random process of ritual public humiliation for doing things which are entirely legal, why not legislate to make those dubious practices illegal?  Why not simplify and reinforce the UK’s hopelessly over-complex tax code, and employ adequate resources to ensure compliance with the law?  That would seem to me to be a better and more consistent and evenly-applied use of government power than reinstating the medieval practice of “hue and cry”.

But then, perhaps it doesn’t make for such an easy headline.

Tax and migration

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This story on ClickonWales yesterday did not provide a link to the report which formed the basis for it.  But it looks to me like the same report that I posted on last October.  And the detail is replete with all the occurrences of ‘may’, ‘could’, and ‘might’ that I noted at the time, all of which make it very non-robust as a basis for taking decisions on taxation.

One of the basic premises is that we can extrapolate the tendency of a difference in council tax rates to cause people to migrate between council areas to deduce the likely tendency of people to migrate between areas where different income tax regimes operate.  It requires some complex calculations about the differential impact of different taxes on a household, but in principle that premise seems to me to be reasonable.  However, it clearly requires a good understanding of the extent to which people move between council areas in response to different rates of council tax.  And their conclusions on that point seem to me to be a good deal less robust.

As I understand the methodology here, they’ve analysed large numbers of movements between different council areas, attempted to eliminate those which are due to other reasons which can be identified, and attributed the net remaining migration to the difference in council tax.  Have I oversimplified?  Yes, of course – but I believe that I’ve captured the essence of the approach.  For the purposes of academic research, it’s an entirely valid approach; without asking people why they chose to move, the reasons for that behaviour can only be deduced.  The problem is that such an approach does not provide hard evidence that all that migration was actually driven by council tax differentials.  I’d go further – it doesn’t provide hard evidence that any of the migration was actually driven by tax differentials.

Much of theoretical economics seems to be based on an assumption that human decisions are driven first and foremost by the perceived economic interests of those making them; that man is essentially an economic animal.  For the purposes of analysis and academic research, it’s a reasonable starting point, and it can produce some interesting results and hypotheses.  But one of the reasons why theoretical economics does not always accurately predict what actual people will do is that real living people take decisions based on a whole range of factors, not all of which are down to money.

I wouldn’t argue that ‘nobody’ will ever decide where to live based on the taxation regimes in operation.  Quite the reverse; we know that some very wealthy people choose to live in tax havens in order to maximise their own wealth.  But I suspect that the number is much more limited than a simple – or even a complex – economic model would predict.  One of the reasons for that is that single tax changes rarely apply in isolation; another is that what you get for your taxation varies as well.  So, whilst a lower income tax regime might attract some, a higher council tax regime in the same place, or a lower level of services supplied because of the lower tax revenues of the government, might offset that.

No doubt some will respond along the lines of, “yes, but what about the Laffer curve” under which there comes a point where higher taxes become counter-productive and generate lower rather than higher revenue as the higher taxed seek ways to avoid paying their taxes.  The problem is that although the theory is clear and makes intuitive sense, hard evidence that it applies in practice is much harder to come by.  Academic theory isn’t always backed up by the actual behaviour of real people – some of the reasons for that have been touched on above.

The problem isn’t with the research and analysis itself; it’s useful and interesting in its own right.  No, the problem is when people attempt to use this sort of research as a justification for a particular tax regime which just happens to match their own ideological perspective.  In this case, it’s already been used by the Tories to justify their own predilection for low taxes.  And the article on ClickonWales sought to use it to justify opposition to further tax devolution.

There’s nothing wrong with arguing for low taxes as such, or even for a common taxation regime across different jurisdictions (although I wouldn’t agree); the problem comes when people start to argue that they don’t need to cut spending to pay for lower taxes because lower taxes will actually increase rather than reduce government revenue, or that differentials in tax rates will directly lead to migration, because the evidence offered in support of those positions is theoretical rather than based on hard facts.  We should always be wary of anyone offering us what looks like a free lunch.  And tax cuts with no matching spending cuts look a lot like a free lunch to me.

Conflicting arguments

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There are many things for which Baron Kinnock is well-known.  Support for devolution, of anything, to Wales is not prominent amongst them.  So it was hardly a surprise that he spoke against devolution of income tax powers to Wales without a referendum.  But it was the arguments he used which struck me.

On the one hand, he claimed that this would "very profoundly change the way in which Wales is governed", whilst on the other, he said that the additional power was being offered in the "certain and cynical knowledge" that it would not be exercised.  Whilst I tend to agree with him on the second point, am I the only one left wondering how a power which will never be exercised can make a profound difference to the way Wales is governed?

Where's the logic?

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In what must surely count as evidence of it being a slow news day, the Western Mail devotes almost an entire page to an edited version of a speech which Lord Hain has yet to deliver to the House of Lords opposing the idea of devolving income tax powers to Wales without a referendum.  

There is much in his argument with which I actually agree; devolving the power to set a proportion of the income tax levels in Wales without agreement on the Fiscal Framework does indeed create a serious danger that Wales will lose out financially in a big way.  And he is absolutely correct not to trust anything the Treasury says when it comes to funding Wales, although I suspect my distrust would go rather wider than his, since I am equally sceptical of Labour Treasury ministers.

He also makes the standard unionist argument about pooling and sharing resources.  Here, I start to part company with him; whilst I’ve long thought that to be one of the best arguments that the unionists have for maintaining the union, the problem is that it remains a theoretical argument, and unless backed up by action to ensure the “common welfare and decent standards of life for all citizens” which he lauds, then it’s not an argument which holds much weight for me.  And he loses it completely by referring to an annual subsidy of £15bn from the UK Treasury to Wales, a wilful and deliberate misinterpretation of the facts which is becoming standard unionist practice.

What I found completely missing in all of it however was any exposition of the rationale for making tax-raising powers subject to a referendum.  The question of whether the Assembly should or should not have the power to vary income tax rates, and what, if any, safeguards should be put in place to protect Wales’ financial position if it should happen, are entirely sensible subjects for debate, and, as mentioned above, I’d even agree with some of his concerns.  But how do we get from that position to a suggestion that there is a requirement for a specific referendum on that very limited question?  It’s a non-sequitur.

It’s true that at the time of the last referendum on legislative powers for the Assembly, some of those campaigning in favour stated that there would be no move to devolve income tax without a further referendum.  But that was a foolish thing to say at the time, and it was a promise which the campaigners were in no position to either make or keep.  That is not the sort of consideration which will deter a politician though.

I understand the argument for a further referendum if substantial further powers are to be transferred to Wales (although there’s a lot of scope for debate about what ‘substantial’ means’), and if a wide range of tax powers were to be included within that then I wouldn’t see a problem.  But the hang-ups that some have over devolving the power to vary a small element of one specific tax seem out of proportion, and look more like a method of blocking, or at least stalling, devolution to Wales than of arriving at a coherent position.

I suppose that’s not really new though.

Never unknowingly undersold

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It seems that I may have been a little unfair to the leader of the Conservatives in Wales the other day, when I said that “His faith in the power of a penny off tax to turn round an economy is touching”.  From today’s news, it appears that I undersold him by a penny, and omitted the proposed 5p cut for the more well-off taxpayers.

Coming hot on the heels of a report drawing attention to the huge fiscal deficit which Wales has, promising to maintain spending on health and increase spending on schools along with a host of other costly pledges, and at the same time cutting the income available to pay for it looks more than a little reckless.  He talks about turning Wales into the ‘low-tax capital of the UK’, but where is the evidence that doing so will bring any economic benefit in the long term, let alone the short term?

I suppose that deliberately proposing to increase Wales’ fiscal gap will allow unionists such as himself to continue to argue that Wales can’t be independent because of the ever larger fiscal transfer from the rest of the UK, but it doesn’t look like the action of anyone who seriously wants Wales to take more responsibility for its own financial future.

Taxes we don't notice

Tweet One of the first things that the previous coalition government did in 2011 was to increase the standard rate of VAT from 17.5% to 20%.  In later years, they increased the point at which people started paying income tax, claiming that this was helping the lower paid in particular, although the main beneficiaries were actually those on higher incomes.

Any switch of taxation from what people earn (income tax) to what they buy (VAT) will almost inevitably have the effect of increasing the proportion of taxes paid by those on the lowest incomes.  But when they need to raise money, politicians tend to prefer indirect taxes in the belief that, after the initial shock of any increase, people notice them less, and resent them less, than a line on a payslip showing how much of their hard-earned cash is being sent to the Treasury.  They’re probably right in that assumption, but taxing people in a way that they don’t notice isn’t at all the same thing as taxing them in a way which is fair.

This story in the Independent, showing that the outcome of this approach to taxation is that the less well off pay a higher proportion of their income in tax when all the taxes are added together should therefore come as no surprise to anyone.  (Apparently, though, it does to some.)  We will never get a progressive taxation system unless the burden of taxation is shifted away from indirect taxation to direct taxation on income.