Ritchie’s quite startling logic

She also notes my support for extending national insurance to investment income. Here, unfortunately an extra zero has crept into the Guardian copy. This will not raise £40 billion. Cautiously it may raise only £4 billion after exempting small receipts and those of some pensioners, but the impact will be bigger. A great deal of tax avoidance is still focussed on national insurance. This would stop much of that in its tracks.

Then we might get business focussing on more important things, like productivity, making things people want, and investing for the future. Right now far too much business advice is simply about how to reduce tax payments. When that whole scenario changes to a situation where people seek advice on how to boost their incomes by doing things better we might see a real gain to the UK economy. Without reform on tax that is not going to happen. That’s a very good reason why tackling tax abuse should be so high on the agenda now.

That’s really…..fascinating. If we tax the returns to investment more highly then people will do more investing, work harder to make their investments work. This is akin to his earlier argument that if we raise income tax rates then more married women will go out to work in order to maintain the family income.

That is, in both cases he’s arguing that the income effect is more important than the substitution effect. That latter being where people look at higher tax rates, decide “Ah, fuck it, not worth it” and go fishing instead. The former being the idea that we all have a target income in mind and that we’ll do whatever work necessary to achieve it.

And it should be said that both effects are true: all people some of the time, some people all of the time and the net effect is of course the balance of who does what in any one situation. Thus our Laffer curve.

There’s one problem with Ritchie’s thoughts here though. With those higher income taxes he thought that the income effect would be strong among those married women. Yet we know very well (from careful empirical work) that it’s actually the substitution effect that’s very strong for married women. Stronger than it is for unmarried women, stronger than it is for men. For the obvious reason that they’ve already got something to do if they’re not working which is to stay home and run a home (along with whatever children etc). They can, just as a partial example, not go to work to earn the money for childcare but stay home and do it themselves.

So, Ritchie’s first stab at this failed simply because he doesn’t know enough economics to know how the income and substitution effects play out.

And his second attempt also fails for he doesn’t understand that the substitution effect is higher for capital income than it is for labour income. Thus why there are higher deadweight costs to capital taxation than there are to labour: deadweight costs being the loss of economic activity we get from levying a particular and specific tax.

And thus, of course, why Sir John Mirrlees got his Nobel in part: for pointing out that the tax rates on capital income should be lower than those on labour income. Because doing it that way makes the entire society richer.

But obviously all of that is empirical economics worked out painfully over the past couple of hundred years by lots of very bright people. All of which is wrong according to Ritchie. Because, well, because it’s wrong, d’ye see?

22 comments on “Ritchie’s quite startling logic

  1. Right now far too much business advice is simply about how to reduce tax payments.

    The solution to this problem is to introduce a punitive tax on accountants.

  2. “unfortunately an extra zero has crept into the Guardian copy.”

    Laugh

    If tax rises make people work harder, why not set tax at 90% and have a nation of Stakhanovites? We would once more rule the world, like in the 1970s.

    Or maybe we’d have unions demanding 40% pay increases and 30% being seen as “the norm” by a relieved government.

  3. Rob,

    When Ritchie can tear himself away from the task of looking through the accounts of 30,000 companies and reorganising HMRC I’m sure he’ll be a true Stakhanovite and support the CPs resolution:

    The resolution of the plenum said: “The Stakhanovite movement means organizing labor in a new fashion, rationalizing technologic processes, correct division of labor, liberating qualified workers from secondary spadework, improving work place, providing rapid growth for labor productivity and securing significant increase of workers’ salaries”

    However it will be another sighting of Kip’s Law style as he will no doubt see himself as one of those spared the secondary spade work and doing the central planning.

  4. “A great deal of tax avoidance is still focussed on national insurance”

    Let’s make artificial self-employment through LLPs in the service sector where, looking objectively, only one of the members is active (any LLPs come to mind here?) the subject of anti-avoidance provisions.

    Instead of being taxed as self-employed such members will be treated as employees receiving a salary of their profit shares, with no deductions for expenses not wholly, exclusively and necessarily incurred by them in the earning of that salary and also charge employer’s NIC on that deemed salary.

    That should stamp on that abusive tax and NICs avoiding practice.

  5. The Dick is now completely mad.

    So the Grauniad was wrong £36 billion. Meh.

    And what I did for a living was wrong. Giving businesses tax advice. Just so wrong.

    And what I’m saying now might be construed as wrong by people who have studied the evidence empirically. So what?

    So really, when you take all his arguments as a whole, you find that he’s someone who shouldn’t be in his position, spouting complete and utter rubbish, to people who don’t understand, nor care about getting their facts right.

    This way to the sanitorium please, little lefties…

  6. “Then we might get business focusing on more important things…”

    That’s right mate. Raise a charge that won’t affect corporates at all and then watch those corporates change their behaviour. Brilliant!

  7. “…making things people want. ..”

    This is the affluent bugger who spent last year’s long summer holidays on Norfolk’s Gold Coast decrying people who want too much “stuff”.

  8. I do agree with Ritchie on one point though, which is that the tax system needs reform. But I can’t understand his objection to individuals and corporate entities responding to the system as it exists. If there are any faults to be addressed, or inequities to be considered, the blame (such as it is) must surely attach to the system and not to those affected by it.

  9. ‘Then we might get business focussing on more important things, like… making things people want…’

    With ‘business’ evidently focussed on making things people do not want, I wonder who is buying the products and how there is any ‘business’ left.

    I thought focussing on things people don’t want was the purview of Government… mass immigration, Concorde, HS2, for example.

  10. Is Richie proposing the taxation equivalent of “the beatings will continue until morale improves”?

  11. Murphy is saying that government can’t in practice tell the difference between labour income and capital income, and therefore we should tax both the same. Economic theory says that his conclusion does indeed follow from his premise.

  12. Paul, you’re a useful counterpart to my views, you’re also one of the few lefties willing to comment repeatedly around here. All of that is great: I learn from you.

    But this is crap:

    “Murphy is saying that government can’t in practice tell the difference between labour income and capital income, and therefore we should tax both the same. Economic theory says that his conclusion does indeed follow from his premise.”

    This ain’t true. It’s entirely clear and obvious that interest from owning Treasuries is capital income. To the point that Americans even make the interest from munis tax free. It’s also equally obvious that the wages paid for sweeping the streets are labour income.

    Thus government doesn’t have a problem in distinguishing between labour and capital incomes.

    Until, of course, we come to the margin. Someone running a small business will be using some amount of capital and also some amount of labour. Divining which is which is difficult: this is why in GDP figures we don’t ascribe such incomes to either capital or labour, but to “mixed incomes”.

    All of which is great. But you’re now using that (and the problem I have with you doing so is that I know damn well that you know all of this already) small part of GDP, what is it, 5, 8%, something like that? difficulty over where exactly we draw the line to argue that a) capital income should be taxed like labour and b) that the Murphmonster might have a point.

    Agreed, b) is something that winds me up but a) , as I’ve pointed out, is something that you know is wrong.

    Shame: troll better.

  13. ‘The books are wrong’

    ‘I am not a personal substitute for Google’

    Tim – I am mortified, Are you seriously suggesting that the likes of Ricardo, Schumpeter, Smith, Mises, Hayek, Say, Bastiat or Senior in the classical era or Bauer, Galbraith, Buchanan, Simon or Nutter in the modern era (to use examples) know more than Richard Murphy?

    You are obviously neo-Liberal/ Paid multi-headed hydra/troll/ timewasting/ far removed from the political mainstream etc……

    I shall refer you to the comments policy forthwith…..

  14. Thanks for your kind words Tim. I think that’s the politest slagging off I’ve ever had on here.

    I didn’t say that Murphy was right. I said (or at least implied, it was a short comment) that theories of optimum tax structure often overlook the possibility that the taxpayer might seek to gain advantage by representing one sort of income as another, and that that consideration pushes what is optimum in the direction of equal treatment of different sorts of income.

    I agree with Murphy that National Insurance is a tax (and so I’m sure do you). I agree with him also that a given tax structure may encourage economically unproductive effort aimed at circumventing its provisions, and that government may not be able to stop that working. I have no opinion on what in practice would be the best differential between taxes on labour and capital income. I suppose it might be precisely the amount of national insurance, on the basis that government over time arrives by experiment at a roughly optimum solution. I’d be surprised if you had much faith in that line of reasoning.

  15. And what exactly has NI on capital income got to do with the products corporates choose to make?

  16. “And what exactly has NI on capital income got to do with the products corporates choose to make?”

    I’ve explained it enough times already and it’s all perfectly clear.

    Don’t call again.

  17. “And what exactly has NI on capital income got to do with the products corporates choose to make?”

    Isn’t it typical that a comment like this comes from a member of the far right using a pseudonym (and a pseudonym he can’t even spell correctly)?

  18. Bravefart

    I was typing in a hospital in Lourdes, snatching a minute. Don’t you feel bad now! I’m a great guy.

  19. @ PaulB
    But National Insurance does not apply to those over State Pension Age (or below school-leaving age). So, to the extent that it is a tax rather than an insurance premium, it is illegal because it discriminates on grounds of age. If NI is charged on investment income, will it apply to investment income of pensioners? will it be at the same rate for the self-employed as the employed? will it apply to the idle rich who do not pay NI because they don’t have a job?
    Murphy is not proposing that we should tax income from labour and income from capital the same. To do that would require, inter alia, the restoration of indexation to the original cost of capital assets and only taxing “real” capital gains at the marginal rate (which he won’t support because that would be Thatcherite) – the conversion of highly-taxed into lower-taxed Capital Gains has always been the most common switching strategy. No, Murphy merely wants to increase tax rates on *some people’s” investment income. You may not have noticed that *his* investment income would only suffer a 2% charge while the employee on one-quarter of his income would pay an extra 12%.

  20. Ironman

    Apologies then – I’ve been to Lourdes – the holy water didn’t work for me either.

    Have you thought about using a new name – Ironnan?

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