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September 2011

Ritchie\’s blast from the past

Man\’s a genius I tell\’ee.

The solution to our banking woes?

Candidly, we have to prepare now for the complete, even if temporary, nationalisation of banking.

How excellent, we\’ve now just bankrupted every sovereign in the world. For of course when the sovereign owns the banks then the banks\’ liabilities become liabilities of the sovereign.

This is what Ireland did, recall, in what has quite rightly been called the single most stupid and damaging action of the entire crisis.

And then what do we do?

I call my solution Network Banking. Think of it as a bit like Network Rail.

Network Rail as the model? Blimey, even we at the ASI who pushed for the whole thing agree now that it didn\’t turn out quite like we\’d hoped it would.

In every case however the depositor will know that a reasonable proportion (but not all, in the case of very high-value depositors) of their funds will be subject to guarantee, and all of those funds will be placed on deposit with the Bank of England each night to back that up.

Hmm, so all banking funds have to be deposited at the BoE overnight do they? Through CHAPs as that\’s the only way to do it. But aren\’t we going to have a Tobin Tax which charges a fee on every CHAPS transaction? Why, yes we are in fact, at least we are if Ritchie has his druthers.

Which means that annual interest rates to depositors will be around and about minus 12.5% (250 banking days, o.o5% tax) or 1.25% (0.005% tax). These are negative interest rates recall, not positive ones. This is what you will lose for the privilege of having a deposit account.

I suppose we could exempt such transactions from the tax: in which case the tax ain\’t gonna raise any money, is it?

Why is it that the man never bothers to piece things together?

Nonsensical bollocks on tax from the Sky Fairy folk

Every pound avoided in tax is a pound less to spend on childcare, social care, health or education.

Nonsense. Entire bollocks.

Every pound avoided in tax is a pound less for the government to spend on childcare, social care, health or education, this is true.

But when someone pays themselves a dividend not salary (recall, Ritchie tells us this is not only tax avoidance, it is tax abuse) and thus pays less tax, that money does not then disappear into the ether.

It gets spent or invested just like any and every other pound in the economy. If invested it increases the capital in the economy which then leads to future growth and thus higher standards of living for our children. If spent it becomes the income of someone else: and of course, some of it will be spent on childcare (nannies? au pairs?), social care (home helpers? paying the fees at granny\’s nursing home?) health (you have heard of BUPA?) and education (Eton anyone?).

Tax avoided is less money for government to spend on things, yes, and it\’s also more money for peeps tpo spend as peeps wish to spend it.

Which is why people do it of course.

This is fascinating

About Low Value Consignment Relief on shipments from the Channel Islands, Ritchie tells us that:

I’ll tell you – although Gauke is not doing so – that the EU has said the UK has carte-blanche to act to stop this abuse altogether – so the only question now is when will they do so?

I\’m not quite sure how this can be true.

LVCR is a general rule that applies to all countries within the EU and all countries without it. It is possible for each individual country to vary the amount that is defined as \”low value\”, true, but even then only within certain prescribed limits.

I think I\’m right in saying (and am open to correction) that it cannot be less than € 10 and cannot be higher than €20.

The UK can cut the LVCR number to €10: but I\’m reasonably certain that it cannot abolish it.

Well, yes, of course I agree with this line of thinking

Most, of course, are simply trying to protect consumers. But is that strictly necessary? Have we really taken leave of our senses? We are all perfectly capable of using the equipment we possess, along with common sense, to take responsibility for ourselves. Both sniffing and examining fresh ingredients is a perfectly reliable way to tell if it something has deteriorated too far. The olfactory memory is an excellent device and can instantly summon the scent of fresh chicken to compare with one that smells a bit iffy. We are alerted by a stench, attracted by a ripe odour and seduced by fragrant aroma. Smell, discolouration and shape tell us much.

It\’s just that this line of thinking seems to contrary to the current zeitgeist. Which is of course that manufacturers of any and everything have to be rigidly controlled by bureaucratic laws or they will poison us all in our beds.

Vide my favourite EU law, the jams, jellies, marmalades and sweet chestnut purees one, which lays down the allowable composition of compotes for 500 million people. Including the delightful assertion that carrots are fruit.

The problem is here that we human beings are really rather good at playing repeat games. We see this all the time in that new field of behavioural economics: we\’ll punish people, at our own cost, if they make what we consider an unfair division of the spoils. When we\’ve an activity, an interaction, which is repeated multiple times these social methods of controlling the propensity of others to cheat work very well: they\’re baked into us as a species. It\’s what explains why brands work, they\’re a signal of continued trustworthiness. It\’s trivially easy for such a brand to be destroyed if and as when the collective experience turns against it (see Ratner, G.) and it is thus something which is rigorously protected by not allowing quality to fall and thus damage said brand.

We human beings are also not so good at playing not repeat games. The once off purchases in life, the ones where the payoff comes many years into hte future, these we\’re not so good at. A pension for example. Which is of course why those who would sell us such products work so damn hard to have an image, a brand, of probity and reliability.

But all of this added together tells us that the rational form of consumer protection is to have a sliding scale of it. From, at the routine end of life, not very much at all in a regulatory sense: let humans be humans there. Allow exactly that human behaviour, experience, at repeat games, to do the product sorting. At the other end, with those once off decisions that we\’re more likely to get wrong, pensions, wills, probate, more regulation is just fine.

One of the things wrong with the modern world is that to an extent we do this exactly the wrong way around. We have rigid bureaucratic rules governing those day to day products like jam and leave the really big decisions to professional reputations. You know, if someone screws up probate, by definition a once in a lifetime event, it\’s the Law Society that you complain to about their not following professional standards…..

 

 

So I\’m asked to comment on the FTT

Dear Tim,

I would like to draw your attention to a debate on EU Financial Transactions Tax, which is currently starting on Debating Europe, a platform for discussion supported by the European Parliament.

Feel free to contribute your thoughts and/or share the following link amongst your network: http://www.debatingeurope.eu/2011/09/15/should-we-have-a-financial-transactions-tax/.
Best regards,

Alessandra Baldissin

So I do:

A Financial Transactions Tax, the Robin Hood Tax, apologies to those who haven\’t been thinking, but this is an entirely insane idea. No, really, flat out and clear lunacy.

There are all sorts of technical points that can be made, that one on currency trading would probably be illegal under current EU laws (it would interfere with the free movement of capital), that speculation itself reduces price volatility, not increases it, that passing tax revenues to the unelected has never proven historically sound, even the effects of those FTTs that do exist (the UK one on share transactions is known to reduce pensions and raise the cost of capital to companies, neither being desirable outcomes).

But the largest and most important point is that of \”tax incidence\”. If you don\’t know what this means then you\’re not competent to be taking part in this debate. But because I\’m a nice guy I\’ll explain it for any politicians or other ignorants who happen to pass by.

Who hands over the cheque for a tax is often not the person who is really carrying the economic burden of a tax. Studying who really does carry that economic burden is known as the study of tax incidence. Economists have been doing this for a long time: we\’ve known since 1899 (Seligman) that it absolutely is not a company which pays corporate taxation for example. For a company is only a legal fiction: a tax must, in the end, mean some lesser amount of money in the pocket of some live human being.

So, we\’ve known for over a century that whoever ends up paying the FTT it absolutely will not be the banks. Banks are, as you may have noticed, companies, and companies cannot and do not pay taxes.

So, everyone shouting that \”the banks must pay\” and that an FTT will make them pay is either deluded or ignorant. Or a politician, but I repeat myself.

So who will actually pay this tax, carry the economic burden? We\’re left with three possible groups: the shareholders in the banks, the workers in the banks or the consumers of the products of the banks. Rather than take you through all of the various arguments I\’ll just recommend that you read the various IMF, OECD and EU reports on this idea. All of them make exactly the same point. The people who will pay this tax will be the consumers of financial products.

That\’s you and me, that\’s us, the average man and woman in the street. The banks don\’t end up paying this tax, it\’s not even the bankers, it\’s us.

Two further technical points: Sir James Mirrlees (you know, Nobel Laureate, man who knows what he\’s talking about on tax) tells us that we should not use transactions taxes when there are other methods of achieving the same goals. This is because transactions taxes cascade through the economy and in doing so multiply. Joe Stiglitz (another NL, worth listening to on matters economic) has shown that the incidence of a tax can be higher than 100% (he was talking specifically about the corporate income tax but that\’s quite similar to this FTT). That is, that the amount that you and I have to pay is greater than the amount of money actually collected in tax revenue.

And yes, it\’s a trivially easy process to show that this is likely to be true of an FTT.

So, the Financial Transactions Tax. It\’s not banks who pay it, it\’s the citizenry. We will almost certainly end up paying more than the tax will actually raise. It\’s an absolutely terrible tax except for one unfortunate point.

The politicians will tell us that it\’s the banks being taxed and we\’ll often believe them even as they pick our own pockets for that money.

Bad economics and great politics. No wonder politicians love the idea.

Dunno if they\’ll publish it of course. Or whether it having been published it will stay so.

I missed this earlier on Johann Hari

The most important point is that, while you could make a political criticism of Hari, and many people have done so, over the years, what’s done for him is professional criticism. Namely, not his opinions but his basic journalistic standards. In fact, more so as the criticism has centred on the technical journalistic side. Tim Worstall has been saying for ages that Hari’s economic writing was wrong not just ideologically but in terms of basic facts, but that was easily dismissed on the grounds that Tim is one of these mad free marketeers and he would say that, wouldn’t he?

If I can get it back to the top of my pile of things to do there might even be an e-book on this point.

Blimey, a sensible government decision on smoking

This is a surprise:

The government\’s \”nudge unit\” wants to encourage the use of smokeless nicotine cigarettes, banned in many countries around the world, in an attempt to reduce the numbers killed in the UK by smoking diseases each year.

The Cabinet Office\’s behavioural insight team – better known as the nudge unit – wants to adopt the new technology because policy officials believe the rigid \”quit or die\” approach to smoking advice no longer works. Rather, they want nicotine addiction to be managed to help smokers who otherwise won\’t quit – an approach the unit believes could prevent millions of smoking deaths. Ten million people in the UK smoke, and smoking claims 80,000 lives a year.

Cue hysteria from ASH in 3…2…1…

Cretinism on housing policy

Property developers are sitting on more than 300,000 plots with planning permission for new homes, undermining the case for controversial government planning reforms.

Campaigners say that the “land banks” are enough for more than two years of house building, meaning there is no need to water down current planning laws.

This really is cretinism.

1) How long does it take to gain planning permission? A couple of years, yes? Thus the builders are being entirely rational in having a couple of year\’s landbank. You\’d expect any business to have a supply of its most important stock, a stock which would cover the time it will take it to gain more of said stock.

2) Prices dimwits. Planning permission is still worth over £100,000 per house in the South. If we want to reduce the price of housing then that\’s the price we\’ve got to reduce. We\’ll do this by issuing more planning permission.

Ritchie: Pah, I Spit on Your Nobel Laureate

And replace it with my own feelings! So there!

Take some examples:

– This morning’s headline that 50p tax does not work, when there is no evidence to prove that case: this is just far right promotion of the Laffer curve by Mirrlees

Sir James tells us:

‘It is not clear whether the 50% rate will raise any revenue at all. There are numerous ways in which people might reduce their taxable incomes in response to higher tax rates; at some point, increasing tax rates starts to cost money instead of raising it. The question is, where is that point? Brewer, Saez, and Shephard (2010) addressed precisely this question for the highest-income 1%. Their central estimate is that the taxable income elasticity for this group is 0.46, which implies a revenue-maximizing tax rate on earned income of 56%.29 This in turn (accounting for NICs and indirect taxes) corresponds to an income tax rate of 40%. So, according to these estimates, the introduction of the 50% rate would actually reduce revenue.

So a Nobel Laureate quotes one of the best empirical papers on the subject and this is all just \”far right promotion\” is it? Sir J goes on to say that:

Whatever the precise revenue-maximizing tax rate, it seems unlikely that much additional revenue can be raised simply by increasing the income tax rate for the very highest earners. But it is important to realize that this is not the only tool available for extracting money from this group. Widening the income tax base—removing reliefs and clamping down on avoidance—not only raises money directly but also reduces the scope for shifting income into tax-free forms and thereby makes tax rate increases more effective revenue-raisers.

The thing is, you see, Ritchie\’s own work on how to get more tax out of the highly paid works on exactly this point. If you pay UK tax anywhere in the world you live then you cannot escape the higher taxes by moving. If you restrict pension relief to lower rate tax then you cannot escape it by dumping cash into your pension. All of the things which Ritchie himself recommends are based on this very damn point which he\’s now rejecting as \”far right promotion\”.

Wouldn\’t it be lovely if Ritchie could actually understand the interconnections between his own views and reality? You know, had enough foundation in theory to understand what it is that he himself is saying?

Our Man:

The promotion of much higher VAT

Yes, because the OECD tells us that a VAT has lower deadweight costs than corporation tax or capital taxation for the same amount of revenue raised.

The suggestion that corporation tax should be abolished to be replaced by yet mo0re VAT

No, they don\’t. They suggest that the normal rate of return, on either interest or corporate profits, should not be taxed. Only excess returns should be. The aim here is to lessen the current tax system\’s bias towards debt finance: something that Ritchie himself has been known to worry about.

The suggestion that taxes on savings should be reduced

No, the idea is that taxes on returns to savings should be reduced. See OECD above.

The idea that NIC should be abolished shifting the burden from employer to employee

And we have another Ritchiebollocks on tax incidence here. For even Ritchie has been known to agree that so called employers\’ NI actually falls upon the worker in the form of lower wages. Thus there is no transfer of incidence here, there is simply the taking away of a potential misunderstanding.

It was Ritchie a couple of days ago stating that taxes must be visible for democratic participation reasons, wasn\’t it?

I\’m sorry to have to break this news to you: Mr. Murphy is simply ignorant on the points about which he opines.

Financial speculators responsible for rising global food prices, claims report

Really? Gosh, who is this report by?

The activity of financial speculators is overwhelming agricultural commodities markets, fuelling global food price inflation and hunger, according to new analysis from the anti-poverty group the World Development Movement (WDM).

Teenage Trots claim capitalism is bad, M\’Kay?

Rilly? This is news?

I shall read the report later but the newspaper list of crimes seems to indicate that they\’ve no clue what they\’re talking about. For example, they\’re claiming that lots of money in futures is driving up spot prices. This simply isn\’t possible. Spot prices can rise as a result of speculation, yes, but it needs to be speculation where someone buys and stores the commodity.

Which means we would see a rise in stocks of that commodity and no, we\’ve not seen a rise in stocks of food. So we\’ve not had that sort of speculation then, have we?

At first blush it\’s all very like their last report. Commodity speculation is something done by men in offices with money. Evil then innit?

 

The Unicef report on consumerism in children

Hmm.

Thereport by Unicef, the UN children\’s agency, warns that materialism has come to dominate family life in Britain as parents \”pointlessly\” amass goods for their children to compensate for their long working hours.

While parents said they felt compelled into buying more, the children themselves said spending time with their families made them happier.

Unicef UK said the obsession was one of the underlying causes of the riots and widespread looting which gripped the UK last month, as teenagers targeted shops for the designer clothes and goods.

My word. So, who wrote this report?

The report, authored by Dr Agnes Nairn, an academic and marketing expert, said: “Parents in the UK almost seemed to be locked into a system of consumption which they knew was pointless but they found hard to resist.\”

That would be this Agnes Nairn would it?

Agnes is currently working with organisations who want to operate ethically in the fields of marketing and market research – particularly when working with children. She provides:

  • Consultancy
  • Ethics Awareness Programmes
  • Ethics Training
  • Guidance on implementing marketing and advertising codes and practices

The Agnes Nairn who is of course entirely impartial on the subject of the commercialisation, consumerisation, of childhood and the Agnes Nairn who would have no financial interest at all in an increase in concern about such matters?

That Dr. Agnes Nairn?

Oh, rightie ho then.