The Deadweight Costs of Taxation


Someone finally gets this subject into the papers! Jamie Whyte:

Measuring the deadweight cost of a tax system is difficult. You cannot observe all the valuable things that are not made or done but would have been if not for taxes. But economists are clever, and estimates have been made (I will spare you the methodological details). Most put the deadweight cost of raising £1 of tax revenue at between 20 and 50 pence.

Though systematically ignored by politicians, this is a fact of the greatest importance. It means that just to break even, government spending must deliver a return of 20 per cent (or probably more).

Some of it passes this test. The most obvious examples are those where the Government provides public goods: that is, goods that people benefit from even when someone else buys them.

Rubbish collection provides a good example. If your neighbours pay to have their rubbish collected, then you need not. You can simply stuff your rubbish into their bins overnight. Since everyone can figure this out, no one will pay to have their rubbish collected, and soon we will have a public health crisis.

Without tax-funded local council spending on rubbish collection, it might not happen at all. And the return on this spending surely exceeds 20 per cent. The value people place on the aesthetic and public health effects of rubbish collection is far greater than its cost.

But most government spending is not aimed at avoiding such “free rider” problems. Most merely provides people with what they would otherwise buy for themselves, such as education, healthcare, housing, unemployment insurance and pensions. Given the enormous cost of raising funds by taxation, such government spending is ludicrous.

For example, a tax-funded school with an annual budget of £10 million costs society more than £12 million. So, to avoid imposing a net cost on society, state schools must provide education worth at least 20 per cent more than the educations provided by private schools with the same budgets. But how could they?

More than half of all government spending replaces what would otherwise be private spending. So Mr Cameron is wrong that tax is at its acceptable limit. It is at least double what it should be.

Right on Jamie!

There are of course people who have been trying to point this out with reference to the US agitation for tax funded health care, just as an example.

O, Oh.

That rise in the personal allowance? Yes, it was only for one year:

A Treasury spokesman hinted last night that the one-off help to most taxpayers this year would not be repeated and that Darling would target assistance at the lowest paid next year through tax credits.

Harsh as it may sound I\’d actually love him to claw it back at the next budget. I would relish the cratering of the entire Labour Party at the next election.

Aviation Again

The government should completely rethink its aviation policy and shelve plans to expand Heathrow and Stansted airports, according to an influential advisory body.

The Sustainable Development Commission, chaired by Sir Jonathon Porritt, said there were big question marks over the environmental and economic arguments underpinning the proposals for British airport expansion. It warned that the government faced a wave of legal challenges if it did not hold an independent review of its 2003 aviation white paper, which sanctioned new runways at Heathrow, Stansted and other airports.

Sigh. Look guys, let\’s do as Stern said we should. Whack a Pigou Tax on air fares to pay for the externalities of flying. That\’s it, problem solved.

And guess what? Air Passenger Duty is already at the levels suggested by Stern, roughly that $85 per tonne of the social costs of CO2 emissions.

Great, job done. So please bugger off.

You Know, There Might Be a Connection Here?

Cambridge\’s residents used to typify the kind of dandruff-flecked, unworldly academics who put loan sharks out of business. But with the flood of computer and biotech companies, and affluent London commuters, came the age of excessive living.

Hmm, lots of highly paid peoplpe in expanding industries arrive in town.

As we trudge the streets of north Cambridge he\’s forever stopping to exclaim: "How the hell can they afford that?" The scenario that typically provokes his ire is a bog-standard dwelling with a gleaming new Audi Q7 parked outside. His wrath is frequently inflamed by the glimpse of a plasma TV in the front room.

I explain to my spouse that there\’s a small but real possibility that the occupant earns shed-loads of wonga in one of those quasi-professions that crop up on The Apprentice, such as "global pricing leader". Either that, or they\’re up to their eyeballs in debt.

Might the cause be those highly paid people mentioned, not the debt?

A Decent Schools Policy

Mr. Heffer finally says something I agree with wholeheartedly.

Nor can the Tories brook the dirty word "vouchers", even though that is what the system cries out for. Their policy should be simple. Abolish local education authorities and charitable status, zero-rate all schools for VAT by law, and then hand out a voucher that would not only be a small compensation to fee-paying parents for the loss of charitable status, but would reward them for taking such a burden off the state.

Under such a plan, the state system as we know it would vanish. All schools would be independent, freed of LEAs. The voucher could be used in all of them, whether formerly state or formerly independent.

If you really want to break down the barriers between the two systems, want to drive bad schools out of business, raise standards in the rest, take the politics out of education and give everyone a crack at "elitism", that is the way forward. It would allow choice for parents, and choice for schools too: they could select by whatever means they wanted, or not at all.

Some schools would be more expensive, just as some shops are. Why should the market, which can do so much to improve education, be kept out of it? And why should the Tories be so embarrassed and fearful?

With the sole excecption of the ability to top up the voucher that is indeed roughly what happens in such disgustingly inegalitarian places like Sweden, Denmark and Holland. Finland, usually appearing as the top school system globally when such things are measured, also has a variation. So why are people so opposed to it?

Why is it that people cannot understand the most basic truth, that some things are simply too important to exclude them from the market?

What a Crocking Surprise!

Taxpayers\’ money tied up in Northern Rock is more at risk than first thought, the nationalised lender\’s chairman, Ron Sandler, has conceded, as the credit crisis threatens to undermine its restructuring.

Appearing before the Treasury Select Committee yesterday, Mr Sandler admitted: "If house prices decline 5pc, 10pc, 15pc, it would certainly put a great deal of stress on how we would deliver the plan. I don\’t want to pretend it is without risk and I don\’t think we should take anything for granted at this stage.

Really now, who couldn\’t see that one coming?

And of course the Crock also faces the problem of adverse selection. To repay it needs to shrink its loan book….but if lenders are leaving the market, then those that leave the Crock for others are more likely to be the better risks, leaving Northern with the appalling risks.

Mr Sandler added: "There is a risk of adverse selection. Those customers who represent a better credit risk will get mortgages elsewhere. We do expect it will increase the riskiness of our book." He accepted that the bank may have to create a special category of mortgage "in extremis" for highly-indebted clients.

We\’re not going to know for some years how this plays out but all of the money back looks increasingly unlikely.

But it is a Cult!

Seems a little odd that you\’re not allowed to tell the truth on the streets of Britain today.

The boy, who is described only as a minor, was taking part in a demonstration outside the church\’s central London headquarters on May 10 when City of London Police officers ordered him to remove the placard.

It read: "Scientology is not a religion, it is a dangerous cult."

When he refused, he was issued with a form of summons for an alleged breach of public order. Police plan to pass a file to the Crown Prosecution Service to decide whether charges can be brought.

There\’s a Fine Line

Between very savage satire and being sick. Methinks this crosses it.

On the day it was announced that Sen. Ted Kennedy had been diagnosed with a malignant brain tumor, nationally syndicated radio host Michael Savage opened his show by interspersing audio of Kennedy singing "Ay Jalisco No Te Rajes" with clips of news reporters discussing Kennedy\’s diagnosis and audio from Kindergarten Cop in which Arnold Schwarzenegger\’s character says, "It\’s not a tumor." Later, Savage played the Dead Kennedys song "California Über Alles" after stating: "The poor guy\’s been suffering for years, you know? Unfairly he\’s been accused of alcoholism, but we see now that it was something much more deep-seated. And so, to cut this out in some respect for Ted Kennedy, here\’s a tune coming at you from the Dead Kennedys. Go ahead and play it, please."

No, I\’m not a fan of the Senator either but that really is beyond the Pale.

Blogging Job Available

I\’m wondering whether there might be anyone out there interested in earning some cash by blogging?

An impecunious student or some such?

The old blog works pretty well and I\’ve tested it out to see how much traffic can be got by simply burbling about celebrities and so on. I also don\’t have the time to do it myself. So there\’s an asset there going wasted.

Add labour to it and we might get a reasonable income from it (for a not very high value of "reasonable").

What does anyone else think? Blogging might be more fun than flipping burgers perhaps?

I\’m assuming that two or three hours a day (which is what I did spend on it to test it) would be required.

Currently the blog makes maybe £200 a month which is what would be the base pay. So at present it\’s not even minimum wage.

I\’m thinking along the lines of an income split of whatever is made over that: I did one month manage to get earnings up to £1,000 or so (on 500k page views), so a 50/50 split would bring the blog writer a more respectable £500 a month, or £8 an hour….and of course higher traffic would simply increase that.

Anyone got any bright ideas? I can teach whoever it is how to grab traffic, that\’s quite simple.


Right On!

John Stuart Mill argued that the guiding principle of democratic society is that citizens should be free to make their own choices, unless and until such choices present a danger to other citizens – and he was not referring about the dangers posed by leather paddles and handcuffs. The freedom to engage in behaviour that meets the approval of the leader writers of the Daily Mail is no freedom at all.

Well Done!

Neil Diamond has broken a 42-year duck after topping the UK and US charts with an album of original material for the first time in his career.

Not quite my cup of tea but applause for a man who has taken 42 years to become an overnight sensation.

Well known fact about the man. After his divorce he paid squillions to his ex and remarked that she was worth every penny. Class act, eh?

Dr Robert Spink

No, not bonking.

Our report (An affair, an e-mail – and another Tory MP bites the dust, News, March 13) may have been understood as suggesting some impropriety in Dr Spink’s private life. No such suggestion was intended. We are happy to clarify this matter and apologise to him.

Crewe and Nantwich

Polly points us towards this obscene piece of political posturing today:

Ed Balls shows up to name a gleaming new school IT unit after Gwynneth Dunwoody.


Naming something after a statesman (ie, a dead politician) yes, but this, in the middle of a by-election?

The rest of Polly\’s piece is her noting that the rest of the population now sees Labour as some of us have done for a decade and more.

Raj Patel

Sorry, but how does this work?

They observe that "petrol tanks and stomachs were competing well before biofuels were proposed to tackle climate change," since transportation and industrial agriculture are both premised on cheap fossil fuel. One way to tackle the competition for a scarce resource is to change transport policy – a shift towards walking and cycling would reduce both the demand for fossil fuel, and secondarily mean that there were fewer overweight people, thus driving down the need for food. All well and good.

They estimate that a population of a billion people at a healthy body mass index would use a total of 10.5 MJ through the daily business of eating and living.

And then they throw in this grenade. It\’s worth quoting at length to see the damage that gets done subsequently.

"An obese population of 1 billion people with a stable mean BMI of 29.0 kg/m2 would require an average 7 MJ of food energy per person per day to maintain basal metabolic rate, and 5.4 MJ per person per day for activities of daily living (calculations available from the authors). Compared with the normal weight population, the obese population consumes 18% more food energy."

It\’s a straightforward comparison between a billion not-quite-overweight people and a billion obese people.

If those obese people become not-obese by exercising more then their food consumptions doesn\’t go down. Indeed, dependent upon how much exercise they do, their weight could come down while their food consumption goes up.

If they got slimmer not by exercise, but by eating less while using more fossil fuels for transport (instead of walking and cycling) then food demand might go down.

In fact, there\’s been one researcher who claims that using your car to go to the shop is "more efficient" than walking, as the calories you need for the walk take more emissions to create than the petrol gives off.

So I\’m a little confused here. My understanding is that farming plus the inefficiencies of human conversion of food into energy mean that exercising, that walking and cycling, will increase food demand, not reduce it. If that\’s correct, then what are these people talking about?


In economic terms, Tim Harford argues in his book The Logic of Life that divorce is "a rational response to changed incentives" (women\’s ability to earn money outside the home) and both less marriage and less divorce are simply the result.

That\’s not quite how economic incentives work. If divorce is a rational response to changed incentives, such as that women are no longer financially reliant upon the man, then we would expect to see more divorce.

Yes, the same incentives will lead to fewer marriages in the first place and thus logically to fewer divorces. However, that\’s rather counting the wrong thing: it\’s the rate of divorce amongst those already married which is the important thing, for those not married cannot of course divorce.

So while we might indeed see fewer divorces (or less divorce, to carry on yesterday\’s grammar Nazi argument) in fact, amongst the relevant population we\’ll be seeing more.


Much as it pains me to say so, on one issue at least El Gordo deserves praise:

To give Gordon Brown credit where credit\’s due, his instinctive hostility to the euro has paid dividends. Had we been party to the ECB\’s interest rates, our credit bubble would have been larger and we would now be in an even more parlous state.

To paraphrase, if we\’d joined we\’d be even more fucked than we are now.