In which Ritchie castigates Philip Inman

Odd for me to be defending a Guardian columnist, one on economics come to that. But it does have to be done.

You see, what Inman has done is gone off and found out about the economic impact of taxes. And he\’s come back with this new found knowledge. We should lower or abolish corporation tax, have a land value tax and stick up VAT. Oh, and lower income taxes as well while we\’re about it.

To which Ritchie says:

That’s going to ….? And boost the economy a lot, isn’t it?

And the answer is, yes, it is. Because Mr. Inman has done what Ritchie has conspicuously failed to do, which is go and look up the economics of taxation.

As in this from the OECD.

All taxes have deadweight costs. That is, they wipe out economic activity that would have occured in hte absence of said tax.

Yes, it\’s absolutely true that the spending of the taxes raised can increase said economic activity. I\’m rather fond of having a court system for example. Ann\’a police force, bin collections, vaccinations and so on.

But we would obviously prefer to collect that tax in the least reducing of economic activity manner possible. Even if we do wondrous things with the money that\’s still what we\’d like to do, the least harm in the collection of it.

And what the OECD tells us, what the basic economics of taxation tell us, is that different taxes have different effects upon the amount of economic activity that they wipe out. That is, that there are different deadweight costs. Or, if you prefer, if we tax in one manner we might wipe out £30 of activity for £100 in revenue (a reasonable estimate for current US tax rates at the margin) and if we do the taxing in another manner that we might wipe out £20 for £100 of revenue collected.

And we even know the order of precedence of these taxes. From least effect to most: recurrent taxes on property, taxes on consumption, taxes on income, taxes on corporations and capital.

So, if we collect exactly the same amount of revenue, but shift taxation from corporates, capital and incomes to consumption and land then we get a boost to the economy. For we\’ve moved from taxes with higher deadweight costs to taxes with lower deadweight costs.

Which is what Inman has found out because he\’s bothered to go and look up the economics of taxation and what Ritchie is ignorant of because he\’s not bothered to go and look up the economics of taxation.

Something that hasn\’t bothered Ritchie in his vehemence about how we should all be taxed but then that\’s the problem, isn\’t it?

12 comments on “In which Ritchie castigates Philip Inman

  1. But VAT isn’t a tax on consumption – its a tax on the value added by the producers of goods ‘n’ services.

    Shiney

  2. “what Ritchie is ignorant of because he’s not bothered to go and look up the economics of taxation”

    Ignorant, or dislikes the conclusion so refuses to study it?

  3. shineymart – VAT is mostly a tax on consumption, collected in stages by taxing the value added.

    (Except for exempt businesses, where it’s a bizarre partial tax on certain business expenses.)

    Other than that, whether VAT actually acts as a consumption tax or a producer tax depends on incidence, not the collection method (as it does for all taxes).

    For example does PAYE make income tax an employment tax?

  4. VAT is indeed a production tax. There’s none so blind as will not see this, but it bears repeating anyway.

    “Does PAYE make income tax an employment tax?”

    No, it’s still an employment tax whether it’s paid via withholding or by cheque from the worker to HMRC.

  5. Inman manages to shoot himself well and truly in the foot later, though, when he talks about ‘the owners of wealth, be they rich individuals or corporations’. I’m not especially rich, but I own wealth. And corporations own no wealth whatsoever, in exactly the same way that a gold bar owns no wealth: corporations are wealth.

  6. “but I own wealth”: and which of us will be able to say that in a few years time? Or do I mean months?

  7. @5 – In the US corporations vote, and have political and economic influence. pizza is a vegetable. Things aren’t ever what they seem when you have the need to lobby or influence. If a corporation can vote, should they then also be exempt from taxes?

  8. Bin collections?? I’d rather pay direct and free choice than have some idiot council choose the bin company which does their preferred type of social engineering, tick box, backhander, limited tender hoop jump.

  9. For most of us, in taxation, the quality of mercy is not strained. For the Murph, taxation invariably involves a pound of (someone else’s) flesh.

  10. Richard Allan,
    How would you construct a consumption tax that is not a production tax? Or will they always be the same thing, since the number of things produced is roughly identical to the number of things consumed?

  11. “corporations vote”
    In the USA, individuals (alive, dead, citizens, non-citizens, once, twice, early and often, …) but Corporations”? How does that work, exactly?

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