Will Ritchie ever understand economics?

Aligning capital gains tax rates with income tax rates seems to do that to me. First, there is no obvious logic why capital gains that are unearned should be taxed at a rate lower than that paid on income.

Sigh.

The entirety of the economics profession argues that returns to capital should be taxed more lightly, even if it they are to be taxed at all, than returns to labour on efficiency grounds. There are, of course, those who think that equity overcomes this efficiency argument.

But the argument that there is no obvious logic is simply an expression of the profoundest ignorance of matters economic.

Don’t forget what Ritchie is really arguing for. A 50% income tax rate, NI to be added to investment income. Assuming that he means employers’ NI (which he agrees comes out of wages anyway) then he’s arguing for a 65% tax rate upon capital income (and he has indeed argued for just that, a 15% surcharge on capital income as of old).

You can indeed make an equity argument for this: but not an efficiency one. And that he doesn’t understand that shows that he really is ignorant.

You know what my real fear is in this election? That Miliboy will win and then do a Glasman. Appoint this fool to the Lords.

30 thoughts on “Will Ritchie ever understand economics?”

  1. His argument is flawed, yet he ends up at more-or-less the right conclusion. Mirrlees (who you always praise) only said that the risk-free return to capital should be untaxed; everything above that should be taxed at the same rate as income (including NICs). With today’s ultra-low interest rates the risk-free return is effectively zero, so we can just tax the whole lot.

    Interestingly, if we had negative interest rates, you would end up having to pay tax on income losses.

  2. What I can’t get my head round is that Miliband and Balls are supposed to be economic intellects yet still give tacit support to the likes of Murphy.

    Didn’t Miliband “teach” at Harvard?

    Balls may be a despicable human being, but I think he is actually a very smart one.

    Surely they (or their advisers) are able to see through his nonsense?

    If they were in a strong position with their own party then they would say to the unions “look, this guy is an idiot – stop listening to him.” Unfortunately they appear to be totally at the unions’ mercy.

  3. As far as I’m aware Mirrlees doesn’t say “risk free” he says “normal” which is not the same thing at all. Normal is risk adjusted usually. So, while the risk free rate (as a result of QE partially at least) might be near zero the normal rate in shares is more like 4% or so (average dividend yield, maybe 4% is a bit high at present).

  4. Murphy doesn’t even think you should make allowance for inflation so a long term investment which did no more than keep pace with inflation could see you lose out badly. It would be a disincetive to invest.

  5. Falling back onto Upton Sinclair again seems appropriate.

    It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

    As for the election more widely, it is becoming clear to me from the discourse that what the country really needs is a much smarter electorate.

  6. “The entirety of the economics profession argues that returns to capital should be taxed more lightly, even if it they are to be taxed at all, ”

    you are overdoing it here. For example, that famous Chamley Judd result of optimal zero capital taxes? If you start with a situation with high inequality , you arrive at that long-run optimum *after a long transition period of punitive capital taxes that redistributes to the poor*.

    see for example here:

    http://www.separatinghyperplanes.com/2014/04/be-careful-how-you-wield-chamley-judd.html

    and here:

    ]http://www.separatinghyperplanes.com/2014/09/chamely-judd-revisited.html

    “As far as I’m aware Mirrlees doesn’t say “risk free” he says “normal” which is not the same thing at all.”

    last time this came up, I quoted directly from the report where it says the risk free rate is what they mean by normal returns

  7. I sneeze in threes

    I like the use of unearned as it sounds like undeserved.

    I thought all tax was ultimately paid by individuals so what’s wrong with the same tax rate on dividends and capital gains as salary?

    Impose a withholding tax on dividends for overseas doms which they can offset if we have tax treaty with their dom country.

    Think of all red tape and accountants we could get rid of. There is no need to skew people’s behaviour in to making investments.

  8. @GlenDorran agreed. It seems to be accepted wisdom that Milliband is smart, but I’ve never seen of heard a shred of evidence.
    It just feels like back in the day when everyone accepted Gordon Brown was smart ‘cos he uttered the words ‘endogenous growth theory’.

  9. Tim

    RE; Murphy in the Lords – I think he’d get bored in the Lords – he seems to suffer from a form of OCD – also it’s possible you can be expelled for offensive and defamatory comments I believe, so he’d be screwed given how offensive he is on his blog.

    On the flipside, I think some of the Tory peers would find it hard to avoid punching him in the face. As would any sane human being.What a thoroughly obnoxious blowhard of a cretin he is – really, words fail me….

  10. GlenDorran/Gary:
    I think that calling folk cerebral or intellectual is often a way of describing someone who is naturally taciturn and socially inept but otherwise of no discernible merit. Rowan Williams was another such.

    Dan Hodges has a piece in The Spectator in which he cites a question asked by Ed Miliband of the head of a FTSE100 company: ‘Why exactly do you need to pay your shareholders dividends?’

  11. Tim,

    The truth lies in between our two positions. From Mirrlees:

    “The normal return is a central concept here. It can be thought of as the return obtained by holding savings in the form of a safe, interest-bearing asset. For this reason, it is often called the normal risk-free return.” – Mirrlees Review, chapter 13

    In the footnote he clarifies:

    “In most developed countries and most time periods, this can be well approximated by the interest rate on medium-maturity government bonds.”

    In the UK medium-maturity 10 year bonds currently trade at 1.60%; in the US just under 2%.

    So it’s neither my short-term bond rate that I was using, nor your stock market expected return. In practice HMRC would have to announce the tax-free rate before the start of each tax year.

    If Ritchie were capable of rational thought he’d probably go along with this method. But then if he were capable of rational thought we wouldn’t be discussing him in the first place.

  12. If Ritchie were capable of rational thought he would leap on this. Because the point and aim here is to tax rents and only rents.

    And it seems a fair enough set up to me.

  13. Tim, I think he’s capable of rational thought all right.

    His rational thought process is as follows:

    1. Hmm. I notice that most people are either stupid, or too busy watching telly and getting drunk to pay attention.

    2. I see that most people also don’t like the idea that someone else is doing better than they are.

    3. I’m aware that fascists and other authoritarians have used demonising language, personal attacks and lies to great effect over the years. The fact that they are obvious lies doesn’t seem to hurt the liar.

    4. Our democracy is utterly corrupt.

    5. These problems are all getting worse.

    6. But wait a minute. Are they problems or opportunities? Maybe there’s money to be made by picking a side and shilling for it?

    7. The fact that my own revealed preferences and historical actions show I don’t believe a word that comes out of my own cakehole doesn’t matter. I shall make a packet and eventually ride around Downham Market on a litter, dispensing shillings to the peasants if it takes my fancy.

    You have to keep this up, but he needs to be laughed at, not taken seriously. It’s the one thing these tools cannot deal with.

  14. The entirety of the economics profession argues that returns to capital should be taxed more lightly, even if it they are to be taxed at all, than returns to labour on efficiency grounds.
    To drive home the point: this is simply untrue. Mirrlees recommends that taxation should aim for neutrality between sources of income.

    Standard income tax schedule applied to
    income from all sources after an allowance
    for the normal rate of return on savings

  15. “after an allowance
    for the normal rate of return on savings”

    Lighter than taxation on income from labour then.

  16. But why is there an allowance for normal rate of return (in normal times, 4 or 5%) if there isn’t some reason for lighter taxation?

  17. Bugger the economics: income from employment carries no risk, whereas investments do. So taxing them the same means people will prefer the former to the latter. Which may be fine, but may not be.

  18. There seems to me sound common sense (if one is to tax capital gains) to only taxing the increase above inflation. That link has been broken (currently anyway for individuals) but at least Darling had some logic when he introduced the flat 18% rate as that was (apparently) the average rate of tax paid on gross gains once you had taken indexation into account.

    Without accounting for some form of inflation (or return above a ‘risk free’ return) you are just taxing inflation which blows a hole in the idea that it is ‘fair’ to tax at the same rate as income tax.

    Also, Murphy is a complete cnut. I pray that Labour don’t win power at the election as the thought of Murphy gaining for his economically autistic view of the world is galling.

  19. “Without accounting for some form of inflation (or return above a ‘risk free’ return) you are just taxing inflation which blows a hole in the idea that it is ‘fair’ to tax at the same rate as income tax.”

    Well, he wants to have inflation, and he wants to tax it.

    It’s like having your cake and taxing it.

  20. We needn’t speculate about why Mirrlees wants to tax investment returns net of the risk-free rate: he explains clearly that he wants the tax system to be neutral between spending now and later, just as he wants it to be neutral between labour and investment income.

  21. Which is why investment income is to be taxed more lightly than labour income. Because investment income generally comes from the savings of previously taxed labour income. As he explains.

    This is all very different indeed from “having the same rate of taxation” on both which is what Ritchie wants. Thus the risk free deduction.

  22. @JeremyT:

    Bugger the economics: income from employment carries no risk, whereas investments do. So taxing them the same means people will prefer the former to the latter. Which may be fine, but may not be.

    It might be low-risk, but it’s not no risk. How many firms have gone bust at the end of the month when salaries need to be paid? Countless numbers. Sure, the employees might get something back from the liquidator, but that takes months to years and might be pennies in the pound.

  23. This is all very different indeed from “having the same rate of taxation” on both which is what Ritchie wants.

    No it’s not. Mirrlees wants the marginal tax rate on investment income (for the same capital invested) to be exactly the same as the marginal tax rate on labour income (including NI).

  24. I confess I have never understood this part of Mirrlees.

    If you are trying to divide the returns on capital into “normal” and “rents”, I have no idea why “normal” should be synonymous with “risk free”.

    The argument seems to be made on the basis that a “risk free” return may be regarded as being the cost of that saving/investment and should therefore be deducted from the return. But that just doesn’t seem to be the same thing as a “normal” (i.e. non-rent) return and doesn’t capture any of the costs associated with risk.

    And that seems to be the difference between an allowance/deduction which is near zero (Paul) and 4 or 5 % (Tim).

  25. It seems to me that it’s not meaningful to interpret Mirrlees’ “allowance for the normal rate of return on savings” as an allowance in the usual taxation sense.

    For example, if someone with a marginal labour income tax rate of 50% invested £1m for a year, and received £16k in interest, then, using the 1.6% suggested by Andrew M as the current value of the “normal rate”, their tax rate on that interest would be zero. On the other hand, if they invested £16k in a speculative venture for a year and made 100% profit, then would pay tax on 98.4% of it, a tax rate on the capital gain of 49.2%.

  26. John G
    How many firms have gone bust at the end of the month when salaries need to be paid? Countless numbers.
    Sure, that happens, but I doubt it’s that common. Whereas when I last looked, an investment that tracked the FTSE over 4 years was 66% likely to end up lower.

  27. Much of what I read here is based on the assumption that work should be well rewarded and cleverness not so much. I take that from the comments about unearned, even undeserved, capital gains, and the general tone that capital gains are somehow suspect.

    Do we really want to encourage work, labour, drudgery, call it what you will, over cleverness / intelligence?

    Tim frequently makes the point that politicos and lefties who crow about their schemes for ‘job creation’ have the wrong end of the stick.

    The idea of taxing capital gains at all bothers me for that reason as well as the usual idea that much, probably most, capital gain is inflation, making a capital gains tax an outright penalty if inflation exceeds some notional ‘fair’ rate of return. If gains must be taxed, the exemption should be based on inflation.

    If we tax clever asset purchasing, will we have less of it, or more? If we have less of it, will the unclever people owning the assets do clever things with it?

  28. Wash your eyes: Worstall knows nothing about socio-economics short of a trumpet doing the revielle of his battered textbook from the eighties with the stuck-together pages.

    Meanwhile; you twat.

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