Low-tax investment zones: three things to watch out for

It’s been suggested that the government is on the point of announcing 12 ‘low tax investment zones’, where businesses and perhaps employees will benefit from deregulation and reduced taxes.  Much of the response to this, predictably enough, will be about fairness, and the suspicion that the government is offering special favours to its mates.

Let me offer a different perspective.  I’m going to assume, although there are grounds for scepticism, that the government’s basic claim is justifiable: that these programmes will have an effect in stimulating economic growth.  The question is: what sort of effect?

There are three things that governments should always be aware of in judging value for money in special programmes and initiatives. They are deadweight, spillovers and externalities. Deadweight happens when those who are benefitting do not actually change their behaviour.  If a firm that is already trading successfully moves from one area into another, simply to get the benefit of the programme, it’s a dead loss.

Spillovers occur when people do benefit  and change their behaviour, but carry on reaping the benefits of the programme after the case for stimulation has ceased to apply.

The term ‘spillovers’ is now increasingly being used in development economics to refer to externalities, but externalities are something different.  Externalities, or external effects, can be positive or negative.  The stimulation of the economy would be a positive externality.  An increase in crime, for example, is a negative externality, and crime in freeports, such as smuggling, drug dealing and money laundering, has been a major concern.

There is no certainty that the deregulation and low tax will have any benefit to the economy.  They may be detrimental.  Let’s have fewer assumptions, please, and more evidence.

The Natcen report on disability benefits is disappointing

The DWP declined to publish the Natcen report on The uses of health and disability benefits.  It’s now been released to the Work and Pensions Committee, and is available here.  The report is presented as a qualitative study; wisely, the authors have avoided numbers.  However, the form of the report is disappointing, and I cannot suppose that it is an adequate reflection of the work that was done.

Qualitative social research works, or needs to work, on two guiding principles.  The first is that what people tell you is evidence.  That is often derided by people in love with quants, but it is fundamental to the nature of evidence.  Courts of law judge evidence by looking for corroboration – probabilities and statistics aren’t enough.  As a broad proposition, evidence is corroborated when two or three witnesses  say the same things, confirming what the others have said.  This report doesn’t do that. It consists very largely of the researchers’ summaries of what people told them.  In a 79-page report, there are 15 ‘case illustrations’, and only 27 direct quotations from respondents.  That means, simply put, that while there are plenty of judgments, there is hardly any evidence given for those judgments.

The second principle is voice: what people tell you, and the way they tell it, matter.  Direct quotations, right or wrong, have a purpose and a moral authority.  Researchers have an ethical duty to report what people are telling them.  The way the respondents express themselves is fundamental to any adequate qualitative social research.

It may well be that this format was demanded by the DWP.  (I’ve been asked by other commissioners, in the past, to dump direct quotations and to just say what I think instead – and I’ve refused to do so.)  It’s very likely that the researchers intend to provide the evidence for this report, and to reflect the voice of the respondents,  in a separate publication.  However, they will need the DWP’s permission for this.  Their report, as it stands, does not do what it needed to do.

The TUC proposes a ‘replacement’ for Universal Credit

It’s been obvious for many years that Universal Credit is failing. On this blog, I’ve considered a long series of critical reports.  When I first made criticisms of the benefit – that was done on the same day that Iain Duncan Smith announced the measure – my concerns were about the concept and its practicability.  Then the criticisms moved on to its implementation, and the impact of further complexity to make up for the deficiencies.  Nowadays, the areas of concern are more likely to be focused on the abundant empirical evidence of failure – for a benefit that has still not fully been rolled out.

The TUC has realised that Universal Credit is a ‘disaster‘, and a new report makes proposals for its ‘replacement’.  The detailed report covers six main areas:

  • making work pay
  • increasing the level of benefit
  • changing rules about conditionality and the initial waiting period
  • changing the process
  • altering the assessment periods, and
  • changing rules for payment.

These are all ways to improve the benefit.  I don’t think this goes anything like far enough.  The fundamental problems will remain:  a tapered benefit, a central focus on getting people to work  when most of its claimants are either already in work or aren’t going to be in the labour market, and a reliance on information that can’t be supplied or managed. The TUC’s proposals are well meant, but they leave all of those elements in place.

 

 

 

What kind of support can be offered to people on low incomes?

Many people in the UK are facing destitution; at least 2.4 million people are there already. One of the complaints we hear most about proposals to cope with current threats to household income is that the proposals are not adequately targeted.   What that usually means is that some people on higher incomes will benefit.   The call goes up, repeatedly, for any benefits to be confined to people on low incomes.

It’s not easily done. Introducing a new means test would be complex, hard to roll out and liable not to reach large numbers of the intended population. There are ways forward, however.  The mechanism used for Cold Weather Payment, for example, gets the benefit to recipients of Pension Credit and to a range of recepients of Universal Credit, including those with children under 5 or people with a range of disabilities – there doesn’t have to be cold weather to call that mechanism into play.

If the aim of benefits is to redistribute income in general terms, there’s an  argument for doing something like this.  That’s true because overall, the effect of making payments on this basis is to improve the average income of people in the lowest parts of the income distribution, generally at the expense of those on higher incomes.  What it can’t do, however, is to protect the full range of people who stand in need of protection.  More than a third of all pensioners who should get Pension Credit don’t.  Official figures claim that Universal Credit goes to 80% of those entitled, but that is highly implausible  – Jobseekers’ Allowance had a takeup of less than 60% and Universal Credit has subjected hundreds of thousands of people to sanctions, exclusions and delays.  And that, of course, only takes account of the people who are supposed to get the benefit.  More people are on very low incomes, but not entitled because they have some savings, because they have theoretical or imputed income attributed to them, or because they fail to meet other conditions such as availability for work.

Any process which calls for a selection to be made has to be subject to some kind of test, and any test is likely to exclude the people who we are supposed to be helping.  The situation has been made worse, however, by the progressive limitations on the scope of benefits that have been imposed by successive governments.  We might have been able to argue, forty years ago, that we had a safety net – an effective minimum income, even if there were some gaps.  We no longer have the same.

That, then, leaves the outstanding question: what can we do to help the people who are most at risk now?  Coming back to the figures on destitution, we know there are three factors which come up repeatedly about destitute people.  They are people with complex needs, migrants, and they are likely to be single.  Any scheme which does not cover those three contingencies is not going to protect others from becoming destitute; and we know that this coverage is not on offer within the scope of the existing benefits system.

There are two main options.  One is to address the specific issues which are causing the current crisis – in particular, the costs of fuel, food and housing.   Labour has proposed a temporary cap on energy prices.  A cap on energy costs, certain foods or rents would would imply direct interference with the market.  We have done all of these in the past – the control of milk, eggs and meat in the 1950s and 60s, the use of rent control, and the current price cap on energy – so we can say that this is feasible.    This would, however, require a fundamental change in the way that governments manage the economy, and indeed on how they think.

The alternative is to think about ways that people can manage in a market-based economy, increasing their command over resources overall.  That can be done both by removing limitations which work particularly against people on low incomes (such as the pernicious effect of laws on debt and debt recovery, or the price discrimination against prepayment meters) and by finding alternative ways for essential costs to be met – such as child care, general needs housing and travel passes.  What wouldn’t work, in this context, is simply giving people more money to pass to the energy companies. Giving people generic money will not cope with the pressures that specific commodities are creating – it will just put up the prices of those commodities.

Additional material, 25th August

The Resolution Foundation has just published a careful and considered approach to targeting.  They recognise that supplementing people on means-tested benefits would fail to reach 40% of everyone in the lowest income quintile – that is, the bottom fifth.  Their suggestion is for a social tariff, more broadly based than current means-tested benefits, covering benefits, pensioners and low earners; but that still suffers from the outstanding problem that it is not possible to target people on lower incomes without introducing ‘a new means-tested benefit outside the benefit system’.   Coverage of people with complex needs could be improved by extending this to cover disabilitiy benefits, and coverage for migrants by removing restrictions on claiming after entry to the country, but there would still be gaps.

We need to talk about Corporation Tax

The contenders in the Conservative Party election are mustard keen on the idea that Corporation Tax should be reduced.  Liz Truss, in particular, seems to think that it will encourage firms to expand and be more productive.  The evidence does not support her.

Corporation Tax is levied, not on activity, but on profit.  It’s possible, at one and the same time, to reduce profits while increasing the rate of return.  It’s done primarily through ‘leverage’ – taking on debts.  Reducing the apparent profit is done by  making the firm pay the costs of takeover.  If the firm pays, the purchaser doesn’t have to.  This is done by loading the debt onto the firm, rather than the purchaser.  This also has a tax advantage: the firm’s profits will be less because servicing the debt repayments is part of its costs.

Debt also increases the rate of return on the initial stake.  Let’s say, for the sake of argument, that a firm is worth £50m in assets and has a return of £5m per annum.  If it’s bought outright, the return is 10%.  If it’s bought with £10m in equity and £40m debt, the return depends on the debt repayment, but a debt repayment set at anything less than £4m – 10% – will increase the effective rate of return on equity.

There are three other factors that help to generate greater returns.  First,  inflation reduces the value of debt – effectively transferring money from creditor to debtor.  Second, the debt is often repaid abroad, so that this part of the return avoids  taxation.  Third, more parent firms are able to bump up costs to offset against profits, for example by the pretence of outsourcing functions such as management, payroll or IT to subsidiaries.

There are two egregious examples of this kind of financial chicanery at the moment: the conduct of residential care providers, and the water companies.   I’m always wary of economic analyses that claim to demonstrate an ‘incentive’ effect, because economic behaviour is far less rational than the textbooks like to claim, but it seems plausible to say, at least, that the effect of Corporation Tax as it is currently constituted is to reward some pretty undesirable behaviour.  In particular, Corporation Tax rewards firms  for financing themselves on debt. It creates opportunities for fly-by-night purchasers who contrive to buy firms with other people’s money.  It offers a bonus for outsourcing economic activities elsewhere in the world, removing them from the British economy.  I’m not going to claim that I have the answer to all this; the people who put together this kind of financial engineering are quick on their feet, and cleverer than I am.  But surely, there must be a better way?

A Charter for Tax Cuts

The contest for the leadership of the Conservative Party has been focusing on the issue of tax cuts.  The case for these cuts has been made by economist Julian Jessop, in a pamphlet for Conservative Way Forward.   (The format of the online version makes it exceedingly difficult to read, but the author has sent me a clean copy I can work from, for which thanks are due.)

The first step is to consider whether or not we need to take measures, at this point, to stimulate the economy through an injection of resources.  I was uncertain about this a year ago.  We’ve moved on from then. We were facing a clear threat of an economic recession at that time, which argues for some kind of stimulus, but now we also have the immediate prospect of rampant inflation.  Injecting money into the economy would fuel inflation – simply put, too much money chasing too few goods. This paper talks about a ‘dash for growth’.  That would be risky, and previous experience argues against it.  The ‘Barber Boom’ (1971-73) destabilised the economy and left us in a parlous position when further problems arose.  The Conservative government of the time had believed that the obstacles to sudden growth were self-imposed, and that if they rushed at the barriers hard enough, the economy would break through those barriers. The conventional economic analysis of the time suggested, on the contrary, that the effect would lead to ‘overheating’ – generating a demand that couldn’t be satisfied, fuelling inflation and forcing money abroad because the domestic economy couldn’t meet the demand.  That is exactly what happened.  By the end of 1973, we had the three-day week; and then there were the deflationary terms dictated by the IMF, which made a bad situation worse.  The problems of the 1970s weren’t caused by the unions, who only responded to the situation, or even by the oil crisis, which only took hold when we we already facing a slump.  They were created by economic mismanagement. There’s every reason to think that pumping money into the economy will have the same effects as it did in the 1970s: fuelling inflation and diverting money abroad.

The second part is the question of what tax cuts will do.  The idea that a modest tax cut of one or two pence from income tax will shield people from rising prices in any meaningful sense is, frankly, preposterous.  There’s a good argument for reforming much that goes on in our tax system – it’s too complex, and there are too many anomalies, and in so far as it creates perverse incentives, the most destructive is the incentive to load companies with debt (because that is tax-deductible) rather than building  viable structures for the long term.  Fiddling with corporation tax or VAT won’t address these problems; both measures are indiscriminate.

Third, there’s the question of values.  The demand for tax cuts is linked here with a set of familiar claims:  that the frontiers of the state should be rolled back, that people should keep more of their ‘own money’,  and that the ‘formula for success’ is (in a short appreciation by Lord Frost) ‘free markets, low taxes and personal freedom’.   The idea that people’s income before tax is ‘their own money’ is spurious (salaries and wages are largely  based on social conventions, including tax rates) and there is no evidence to support the contention that low taxes promote more successful economies.

There are points in the argument which I’d agree with.  The tax system is too complex, there’s been far too much of an obsession with debt, and we should be looking for ways to support effective demand.  However, if we are talking about government using national resources differently, tax cuts are just about the worst possible choice -ill-directed and primarily beneficial only to those who don’t need it.  If we really wanted to inject money into the economy, we should do it at the other end of the income distribution. Let’s get the money to people who can’t afford food or heat.

Further thoughts, 31st July

Since this initial blog, the arguments have been gathering pace.  Some of them seem to me, frankly, half-witted.  One really stupid argument is based on the ‘Laffer Curve’, which claims to demonstrate (as a matter of theory, not practice) that there are circumstances in which lowering the rate of tax will increase the amount of revenue a government receives from tax.  There are two problems with that.  One is saying that there are circumstances where this could happen is not the same as saying that it happens in every case: clearly, it doesn’t.  The other relates specifically to its application to Corporation Tax.  It seems abundantly clear that offering people the option to pay one kind of tax rather than another will lead to those people, especially if they have a competent tax advisor, to choose to pay the lower rate of tax available to them.  That is done, of course, at the expense of revenue from the higher tax.  Corporation Tax is already set at a rate which is lower than the upper rates of income tax, and accordingly those who have a choice will put the money through the Corporation’s books rather than their personal income.  That is not evidence of getting higher revenue – the opposite is the case.

The other daft argument is that tax cuts don’t alter the money supply, and so aren’t inflationary.  That is daft partly because tax cuts (as opposed to cancelling proposed changes in taxation) clearly would inject money into the economy – unless they are paid for by reduced government spending, which would be disastrous for millions of people – and partly because it’s a misunderstanding of inflation.  Inflation depends not just on how much money is going round, but on what that money can buy – it’s a matter of balance.  In current conditions of high inflation, which are already leading to higher production costs and higher wage demands, that balance is at best precarious.  I see no good reason for the current optimism that inflation will fall of its own accord.

The US Supreme Court offers some very sloppy reasoning

Although I studied law for the Bar once upon a time, I never made anything of it.  After a first degree including philosophy, the claims of lawyers to be engaging in rigorous reasoning seemed at best flattering, at worst forced.

It does come as a shock, however, to read a legal judgment from America’s most senior lawyers that is not just sloppy, but destructive and slightly deranged.  It is, of course, Dobbs v Jackson Womens’ Health, the revision of settled law on abortion. There are four obvious problems with it.  The first lies in the dismissal of the relevance of the principle of  privacy – quite rightly noted, in this judgment, to cover “the right to make and implement important personal decisions without governmental interference.”  This concept is what the decision in Roe v Wade relied on. It was first laid out by Justices Warren and Brandeis in an article in the Harvard Law Review in 1890: they called it “inviolate personality”.   Justice Thomas, in this judgment, dismisses such ideas  as ‘ethereal’, for which read airy-fairy.   In doing that, he is jettisoning more than a century of legal reasoning.

Second, there is the simple objection that this judgment throws stare decisis out of the window – not just precedent, but the principle that judgements should not have to be repeatedly revisted and laws should not have to be constantly reinterpreted.  There are now nearly fifty years of intervening case law, all of which are being invalidated.

The third problem rests in the dismissal of the relevance of the 14th Amendment: “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States …” Note the language: not liberty, not rights, but privileges and immunities. There are more than a hundred references to the 14th Amendment in the judgment, and every one of them refers either generally to ‘liberty’ (the main reference) or ‘rights’ (in order to deny the existence a ‘right to abortion’).  The word ‘liberty’ occurs   in the second part of the 14th Amendment – that no State shall “deprive any person of life, liberty, or property without due process of law.”  That clause is  considered more than once and its relevance is rejected – but it was not the point at issue.  The effect of the ‘Privileges or Immunities’ clause, by contrast,  is relegated to the footnotes in the judgment, and not directly discussed.

In a classic US legal article, Some fundamental conceptions (1913),  Wesley Hohfeld explains what a privilege is, and cites legal cases to back that up. A privilege is a special form of legal liberty: when people have a privilege, he explains, they are legally “under no duty to do otherwise”.    Ever since Roe v Wade, women seeking an abortion have been under no duty to do otherwise.  Roe v Wade established a specific privilege that has been the law for nearly fifty years. The 14th Amendment explicitly extends protection to people’s privileges, for the express purpose of ensuring that the States cannot resile from them, and the Supreme Court has flatly refused to apply it.

The fourth problem stems from the bizarre reading of the 14th Amendment as a purely historical document relating to a single point in time.  The judgment complains, more than once, that Roe v Wade did not review the law as it stood in 1868, the year when the 14th Amendment was passed.  At this point, the reasoning tips from strained into sinister. In 1868, women could not vote – an 1875 judgment, Minor v Happerset,  explained that being citizens did mean that women had voting rights. Votes for women are protected by a further constitutional amendment, the 19th, but votes for African Americans aren’t – those have been assumed to be protected by the 14th. If the interpretation of the 14th has to go back to its pristine state in 1868, then by the same argument, the Court could now throw out the 1964 Civil Rights Act or the 1965 Voting Rights Act – and we know there are politicians out there who would love that to happen.

The main issue on which one might say the justices have a point is that the judgment in Roe is very prescriptive about implementation: they could have opined that the Court had previously exceeded its authority, loosening the straps by delegating more authority to State governments to interpret the law.   What the Court has done instead is, metaphorically speaking, to set fire to the building – they have begun a  bonfire of the precedents, and it is not going to stop here.  The decision, to borrow a phrase from the judgment, is ‘egregiously wrong’.

 

The way out of poverty is not to be found ‘holistically’

I attended a session the other day that was intended to discuss the Scottish Goverment’s current plans for tackling child poverty.  A word that was used repeatedly in that document, and so in the presentations, jarred with me.  The word is ‘holistic’.  The plan promises a ‘holistic’   response at many points, and in a range of different contexts – such as employability, support, income generation.  What could be wrong with that?

To my mind, there are three great flaws in this approach.   The first is the implicit assumption, in much of this, that the appropriate way to respond to poverty is ‘person-centred’, personal or individualised.  Here are some examples:

We will invest [in] Whole Family Wellbeing Funding … This will help transform services that support families to ensure that all families can access preventative,
holistic support which is wrapped around their needs, and provided when they need it and for as long as they need it.

Through direct efforts to get more cash in the
pockets of families now, alongside a genuinely holistic, person-centred package of family support, we can help to ensure families receive the right support at the right time, for as long as they need it, creating the  conditions for families to navigate their way out of poverty.

It takes all of us, across Scotland, working together – united in focus  and purpose – to deliver the change to  how public services are delivered, moving to a person-centred holistic approach to supporting families.

In the published document, there are more than thirty similar phrases to choose from.  It should be recognised, however, that the circumstances that lead people to be in poverty are not, for the most part, specific to the individual or of the family.  The central purpose of the strategy is not to deal with the individual circumstances of poor families, but to reduce overall the numbers of people who are falling into poverty.   To do that, the focus has to be, not just on those who are poor currently, but on the throughput – the very large numbers of people, actually most of the population, who will pass through poverty for an extended period.  That calls for a structural perspective, not an individualised one.

There are strong hints in the figures where the problems are likely to be concentrated.  Why, for example, are most children of young mothers likely to be poor?  The answer has little to do with personal or individual factors.  It’s because the capacity of women to earn is critical to household income,  the children of young mothers  are far more likely to be young, and young children have to be looked after.  The situation calls for higher income for people with responsibility for children, and extensive, affordable  child care – ours is almost the most expensive in the OECD.

The second problem about the claim to be providing ‘holistic’ services is that it’s not true.   It doesn’t happen, anywhere, ever.  The reason why we have medical practices delivering health care, schools providing education and social security providing money is that these are all things that matter, that need to be done, and require specific routes and channels to be delivered.  We often hear the complaint that Scottish services are based in ‘silos’.  Of course they are. The doctor doesn’t teach your children to read, the social security officer doesn’t allocate houses  and the social worker is not there to take your appendix out. It’s true that specific services can be transformative, changing every part of a person’s life. Decent housing can turn someone’s life around in days, but that doesn’t happen because of an holistic assessment; it happens because housing is so important for people’s lives. The most effective strategies for  dealing with poverty have generally worked by focusing on one of the elements that lead people to be deprived – elements such as health care, education, income support or housing – and removing part of the burden from poor people.

The third issue is about policy. Targeting resources on  poor families has a clear value here and now, but it is not the only  way to deal with the problems.  We could do much more. To safeguard people now and in the future, we need to change the conditions which underlie the experience of poverty.  I have already given the  example of  child care; that needs to be done as a universal basic service, not a process targeted on poor families.  Let me take another: the case for free school meals.  That contributes to poverty reduction precisely because it is universal and basic.  Neither  child care support, nor free school meals, are ‘holistic’ policies. The same arguments extend to a wide range of services – energy, communications, transport.  Public services can make a major contribution in improving the command over resources of people on low incomes.

Computer says ‘no’

It’s admittedly difficult to get resources to people given the state of the benefits system.  The Chancellor has pleaded that it’s difficult to get higher benefits paid to people, because so many benefits don’t run on the shiny new systems introduced for Universal Credit.  Many people are still on legacy benefits, which rely on older computer systems.

A focus on Universal Credit may seem the best option available, but there are two large deficiencies in that.  The first is the deliberate exclusion of so many people from Universal Credit itself.  The coverage of UC is limited by design: the limitations are produced by

  • work requirements
  • people excluded from recourse to public funds
  • sanctions (the largest number being for people who have missed a meeting)
  • limited entitlements because of notional (or imaginary) income
  • capital rules
  • the arbitrary changes in entitlement coming from fluctuating incomes, and
  • Inaction/suspension because information required

At slightly higher income levels, people may also drop out of the UC system because of the benefit cap or the two child limit.

The second problem, of course, is that people may not have claimed UC although they were entitled to it. The government seemes to be working on the wholly implausible assumption that takeup is about 83% – which would mean that the takeup of UC was markedly better than the previous takeup of Pension Credit, Job Seekers Allowance or any disability benefit, and that that would be true despite UC’s special blend of all the factors identified as deterring takeup in previous research (PDF file).

There are other ways of getting money to people on the lowest incomes.  Cold weather payments  (ignore the weather bit) provide one obvious mechanism: they make it possible for the government to transfer money automatically to  recipients of Pension Credit, UC, Income Support, income-based JSA or ESA.   Or, if that’s too finicky, Winter Fuel Payments (which aren’t actually assessed in winter anyway) go to every pensioner, and Child Benefit goes to every child – that covers, in a simple and practical way, a substantial majority of people on lower incomes.   Putting money into pensions and Child Benefit as well as UC would be hugely more helpful than UC alone.  The targeting is not perfect, but it’s practical and a more effective than tax reductions could ever be.

Designing the National Care Service

Common Weal has offered a blistering critique of the process for designing the new National Care Service in Scotland.  They argue that it’s been designed for top-down governance, rather than service delivery, and that pledges to ‘co-design’ the service with users and carers have proved empty.  Their criticism seems to me justified. The design, and the patterns of governance which are being proposed, are both centralised and corporatist.

I don’t know, to be honest, whether a service that is ‘co-designed’ is likely to be better than one that isn’t.  People who have experience of the system are often conditioned by that experience to look for tweaks and minor improvements, rather than thinking how things might be done differently. The needs of older people with limited mobility, adults with mental health problems or people with developmental disabilities are rarely the same, the interests of ‘carers’ and ‘service users’ vary hugely, and we cannot imagine that one set of service users can speak for others.

I have written recently about some of the long-standing problems in social care: fragmentary, insecure and expensive services, the misplaced attempt to create ‘markets’ in disparate fields and the treatment of ‘personalisation’ as if it meant a selection of services from a shopping list.  I argued there that people need flexible forms of provision based on personal relationships, rather than a commoditised response. If a National Care Service is going to work, it needs to be conceived in terms very different from the old models.