Taxing businesses

In conventional economic theory, the costs of any tax on business will be transferred to the customers of that business. That implies that business taxes can only be used with caution, that they tend to distort markets, and that it makes more sense to raise money in other ways. Business taxation does, however, have another function, and that is to ensure equity between different taxpayers. Current concerns about Amazon are based in issues of fairness, not about the economic effects.

More generally, there is another side to business taxation. People who run businesses often have the option of treating revenue as either part of the income of the business, or as personal income. If business is lower than income tax, the incentive is to run costs through the business. If income tax was lower, the reverse would be true. The only equitable position would be if business taxes were set at the same rate as personal taxes. That would not quite be neutral, because business expenses can be offset against income in a way that personal expenses cannot be, but it would be fairer.

The cult of leadership

Two items on Friday morning hit a common, jarring note in rapid succession. The Metropolitan police have again been accused of insufficient activity to deal with racism; there was an immediate call for leadership. Mayors are being elected to serve English cities; they will provide leadership. ‘Leadership’ is not a solution to anything; the belief that it is has become part of our problems.

The first problem is that the idea misunderstands what public services do, and how they do it. People in public office are supposed to be public servants, not masters. The public services rely on a strong system of accountability – nothing is done that is not part of the “golden thread” – and everyone is responsible to others for their actions. The proposals for mayors are based in the inappropriate belief that what we need to settle our problems is someone who’s really in charge. Nonsense. Anyone who thinks they are “leading” their city should be kept on a leash.

The second problem is that what “leaders” are supposed to do is not what we need to have done. Leadership is commonly described in terms of motivation, influence, strategy and vision. We have bucketfuls of documents of this sort – all made by partnerships, not by leaders – but if they are valid, it is because they rest on participation, empowerment and diverse voices, not the vision of an elite group. Mayors will be advocates for an area, communicators between people and authority, and perhaps executives.

The third problem follows from the second: people are being appointed to senior office on the wrong criteria. They are being selected because they appear to have “leadership” qualities. We have seen a series of fiascoes where “leaders” and “leadership teams” have made visionary but ill-informed decisions – such as the NHS computer system. It might be better if people in senior positions were appointed for their competence, knowledge and skills.

Flat tax in Kazakhstan

Following other work on tax, I have just been listening to a student paper about the flat tax in Kazakhstan.  Most earned income is subject to a flat tax of 10%, one of the lowest rates in the world, but the incomes of some groups are exempt.  They include soldiers, police, veterans of the second world war, fire services, some disabled people and their families, the victims of a nuclear accident and lawyers.

More job seekers

The DWP has sent out 124,000 letters today to tell lone parents with children aged 5 to 7 that they will have to claim JSA instead of Income support, from this May onwards. Yesterday I commented critically about the assumption that the claimant count is expected to fall by half a million in five years …

Budget 2012

The Budget documents are generally available as soon as the Chancellor sits down, and as always there is a convenient summary in tabular form (though annoyingly, this time it is in the middle of the document, starting at page 50). I am always puzzled by the elements that the press pick out for attention, and those they do not. For example, this morning’s reports include coverage of the measures that benefit Dundee (which is of great interest to me, but possibly not to all of you) while some important measures seem to have passed under the radar. Examples include announcements of

  • a single-tier State Pension, ending the state second pension (para 1.212); and
  • the intention to allow the minimum wage to be eroded by inflation – it will no longer be uprated to maintain its value (1.242).

Although it has been announced more than once that plans to stop mobility payments for people in residential care were to be dropped, the savings from that measure are back in the tables (top of page 53).

I should add that the numbers of unemployed people are predicted to fall by about a quarter in the next five years (para 1.23), and the numbers of unemployed claimants are predicted to fall to 1.2 million. This will happen at a time when more than half a million people currently on ESA will be reclassified as fit for work and required to claim Jobseekers Allowance instead. The figures are not credible.

Public sector pay

The government expresses concern that public sector pay has risen above private sector pay. That is only to be expected. Whenever services are commissioned from the private and voluntary sectors, lower-paid workers are moved out of the public sector. Those who are left behind are the senior managers whose task is to commission services, and their pay tends to be higher than those of the employees who have been transferred out. This has been the policy of both Labour and Conservative governments for more than twenty years.

New fraud figures

A new government report explains that fraud costs the public sector £21.2bn a year. It claims that “The majority of the fraud loss is due to fraud against the tax and benefits systems”. That presumably is why Panorama recently mis-reported benefit fraud as being £22 billion. What the report’s introduction does not explain – and what the statement disguises – is that the benefits systems does not belong with the larger figure at all. Tax fraud is estimated at £15 billion; the next largest loss is through procurement fraud, at £2.4 billion; and benefit and tax credit fraud together come to £1.5 billion. Annex 1 has the estimates.

The Greek tragedy

The continuing crisis in Greece has been presented in questionable terms. First, we have been told that the alternative to ‘austerity’ is a disorderly default. Defaults do not have to be disorderly. New York and Cleveland, both members of a different currency union, have defaulted on their debts in the past; the dollar was unharmed, and they were not forced to adopt a new currency.

Second, we are told that Greece will have to leave the Euro. Greece cannot be forced not to use the Euro. Money is what people accept as a unit of exchange, and if people in Greece opt to trade in Euros, they cannot be stopped. Some countries use other countries’ currencies informally; some (like Ecuador, which uses the US dollar) do it formally. Germany might have more success in insisting that Greece should use a different currency from them if Germany itself was to leave the Euro, but that seems unlikely.

The economic policy that the EU, and Germany and France in particular, are forcing on Greece has led to a major depression – and the problem does lie in that policy, not in Greece’s deficit. Austerity is the worst possible answer to an economic depression; and austerity which is targeted on the poor is indefensible morally as well as economically. If France and Germany want to ensure that Greece does not default, to protect their own banks, they need to take steps to shore up the Greek economy. At present, they are doing the opposite.

"No business is good business": undermining QE?

The level of money in the economy has an important influence on demand, and so on economic production and growth. The Bank of England has expanded its quantitative easing, injecting money into the British economy, by a further £50 billion, taking the total to £325 billion. At the same time, reports which focus on the rewards given to RBS’s Chief Executive have been emphasising what a splendid job he has been doing in rationalising the bank’s balance sheet, shrinking its holdings by £600 billion to date, with a further £200 billion to come before long. That seems to square with a view attributed to some banks – “no business is good business”. These two figures are not commensurate or directly comparable – RBS is disposing of assets as well as loans, outside the UK as well as within it – but the relationship is close enough to raise questions. While the BoE is injecting money into the economy, RBS is working assiduously to take money out. And that raises the question, not whether Stephen Hester is being overpaid, but much more seriously, whether he is being paid to do the wrong things.

Stimulating the economy: a partly baked proposal

I have written before about plans to inject money into the economy, and for the present I am going to leave aside the arguments for and against doing it. The Conservatives are pleading for tax reliefs; Liberals, for a rise in the tax threshold; Labour, for a cut in VAT and more quantitative easing. The question I want to address is a simple one: what is the best way to inject money into the economy?

There seem to me to be three main criteria. The first is effectiveness: the money needs to arrive in places where it will stimulate the economy. Too often in the past, indiscriminate financial stimuli have led to inflationary demand or to money leaking abroad. Second, there needs to be some consideration of the distributive impact. Third, the stimulus has to be practical: one of the reasons why Labour went for a VAT cut was that it could be done immediately, when changes to income tax would have been much slower. Cutting income tax fails on all three criteria. VAT meets the third criterion; it has limited benefits for the second, because VAT is only slightly regressive; and it fails on the first.

Some benefit payments could serve more effectively as a stimulus than tax cuts could. Although there is a case for higher benefit levels in general, the implementation would be too slow and complex, and it would be politically controversial. It is however feasible to make additional payments to the recipients of certain benefits. Child Benefit goes to every family with a dependent child; Winter Fuel Payment (disregard the label!) is an ad hoc payment to every older person. In other words, the administrative mechanisms exist to deliver one-off payments directly and rapidly to individual households. The distributive effect would be generally progressive (it could be made more progressive still if the payments are treated as taxable); and it would lead to an immediate, localised stimulus to spending that would fall roughly in proportion to the prevalence of deprivation. And if such payments happened to do a little to alleviate child poverty, that is a side-effect I think we should be able to bear with equanimity.