The Japanese economy is back in recession. One of the main reasons is the pattern of consumer spending. Ahead of the sales tax increase people made their purchases. Once the tax rise came in they cut back sharply, leading to a fall in demand and output. It was far less helpful in raising revenue to pay for public services than the increase in VAT introduced in the UK, which did succeed in raising more revenue and did not have the same impact on demand as the Japanese hike.
In the UK it was the rise in higher rate income tax and capital gains tax that led to losses of revenue. The halving of the increase in the higher rate helped bring in more money again. Despite the recovery of property values and the rise in share prices, capital gains tax revenue at the 28%Ā tax rate is still well down on the levels it reached at the Ā 18% rate Ā before the crash.
The art of taxing is to find the rates and taxes that maximise revenue to pay for the health and education services and welfare that modern advanced democracies expect, so people can have the services and borrowing can be kept under control. The danger is governments set rates that reduce revenues or do considerable harm to economic activity as in Japan.
The Japanese tax rise initiated by a previous Japanese government has now led to the decision to delay the second planned rise, and to hold a general election for Mr Abe to seek a renewed mandate very early so he can get on with the economic reforms Japan clearly needs. Meanwhile, the price of the higher tax rate is more quantitative easing, as we have seen with the recently announced expansion of the Japanese programme.
Japan is the one of the world’s largest economies, in recession. Euroland, another of Ā the world giants, is struggling to avoid another recession, generating very little growth. The strategy of bringing deficits down by growth is not working well in Japan or Euroland. The inclinationĀ to raise taxes instead has misfiredĀ in Ā Japan, just as surely as it did in France. Governments need to learn that higher tax rates Ā may be self defeating. They may lower output and incomes and may even lower revenues.
November 20, 2014
Laffer Curve: two words every Socialist hates.
November 20, 2014
Spot on Peter!
They just don’t get it. They think their mantra ‘soak the rich until the pips squeak’ that so appeals so readily to the un-thinking lefty, is the way forward and will provide the money for them to spend (or waste) on their pet projects. They just don’t see that there’s an optimum beyond which the tax-take actually falls.
Taxation is a necessary measure in order to fund vital services. There’s no advantage in a populist tax policy that actually brings in less money. France is a good contemporary example of that, and so many people have left the country because of their own punitive tax levels, but still, they have the UK’s money to bail them out so why should they care.
Tad
November 20, 2014
Hang on chaps, this govt has increased over 509 taxes and failed to deliver on the 80/20 cuts to taxation split promised. Now using weasel words to claim they never meant this. The structural deficit should be coming to be balanced with the debt in sight to be slashed. Osborne now claims the deficit will be cut in 2019 so another five years to add to the debt and debt interest. Meanwhile Cameron saying that the red light is flashing on the global economy! The UK position should have been much better than it is if spending cuts were made, if money was not borrowed and given away on EU and Overseas aid and another housing bubble in the making to home mass immigration and give them working tax credits! This money could have been used in the UK instead of wealth distribution across the world particularly in the EU ie Ā£650 million on climate change for the world when Somerset and other areas are likely to flood again.
November 20, 2014
As we get nearer the election, it is becoming much harder for my economy based posts to get through JR’s moderation process. If my party was making as many economic ****ups as JR’s; I wouldn’t let me through either. That’s the way the game is played. Anyway, you only get shortened, simplified versions of my stuff for the fun of it.
Now, there was a debate on “money creation” in HoC today, a dozen or more MPs turned up for it. Frankly, the lack of economic knowledge of our legacy MPs was frightening. I would not recommend reading Hansard for the debate; unless you are into self flagellation. If you do, you will understand why our economy is in s*** order.
Reply It’s not because you disagree with the government but because you put in lots of references I do not time to check out or misleading material which would take too long to refute.
November 20, 2014
Acorn,
We are both arguing from a post-Keynesian perspective which doesn’t find favour with most Tory MPs including JR, (or Labour MPs too for that matter -at least in public), but I have to acknowledge that he has been very fair in allowing nearly all of my posts.
November 21, 2014
France crowing at the expense of the UK taxpayer paying the extra Ā£1.7 billion without Osborne even negotiating, he just rolled over. Today he rolled over so the EU now decides how much companies can pay their staff. When is Cameron and Osborne going to act in our national interest? Can’t wait to put my cross on the ballot paper to get rid of them.
November 20, 2014
I don’t think anyone would deny that there is an optimum rate for a single tax, which is the basis of Laffer’s argument. But say we optimise the return on Capital gains. Will that mean the return from other taxes, like income tax will be unchanged?
I’d say it would be changed. So we need to look at the “Laffer curve” or the revenue obtained from all taxes. If we have to pay more income tax than we should then the amount of money which is available to be spent on goods and services will fall, meaning that VAT receipts will fall too. So its just meaningless to look at one tax in isolation and expect everything else to remain constant.
All money which is issued into the economy, by government spending, will come back in taxation providing it is spent and respent. It is only when it is saved that the process is delayed.
November 21, 2014
Of course increasing one tax rate inevitably decreases the tax take on others.
November 22, 2014
Sorry if this appears pedantic, but this isn’t quite right, either. It is the process of maximising, or optimising, the return on one tax (which could be obtained from either a reduction or an increase in the rate of that tax as Laffer correctly argued) which would cause a decrease in the revenue raised from other taxes.
So Laffer is correct in terms of one tax but not correct in terms of aggregate taxation.
November 25, 2014
One last time! There is no such thing as a Laffer Curve, there is no peer reviewed proof that it exists. It was invented in the Thatcher/ Reagan period, which is when all our present crisis originated. “Dr. Laffer has prescribed his supply-side snake oil to governors in Republican-controlled states. And almost everywhere they’ve been used, Laffer’s tax cuts have predictably produced oceans of new red ink.”
Taxes are the Brake pedal on the economy. Government deficit spending is the Accelerator pedal. Taxes don’t pay for anything, they disappear into the ether the moment the Treasury takes them out of your pay slip. Without taxes, there would be far too much money in the economy, mostly from commercial bank loans, chasing too few goods, hence inflation.
Taxes are not meant to be “optimised” by some dumb “curve”, they are to stop things happening. High income tax is to discourage high incomes being paid. High capital gains tax is to stop the super rich, extracting large lumps of capital out of the economy and not using it to generate income and jobs.
November 20, 2014
Good morning.
Let’s hope this post makes it onto the pages, unlike the last one.
The problem is, Government is not the best at providing services. Too much politics.
For example. Let us take HS2. This is a Government project (part of the EU’s TENS Network) which is going to cost billions. Private finance will not touch it, why ? Because it will not make any money of course. So this project will, over the long term, to be a big white elephant that will continue to cost the tax payer millions, because, politically, they cannot been seen to lose face.
That is why I always argue, that Government’s should stick to the very basics. The rest can be better done by private enterprise. That way, Government does not need to tax as much and can let private capital do all the work and take all the risk.
But you would not know that we are supposed to be governed by a Conservative lead Government by the way they are behaving. More ‘soft blue Socialist’s’ than Conservatives.
November 20, 2014
The primary purpose of taxation is to control inflation. Government creates the money in the first instance, so why would it want back in taxes what it, and it alone, can freely create anyway?
If inflation is too high then taxes need to be raised and government spending needs to be cut. But if it isn’t or if deflation and recession is the problem, then they don’t. It’s not that difficult, so there is really no excuse for the Japanese getting it wrong.
That’s the economics of the Russian/British economist Abba Lerner (1903-1982). He’s been largely forgotten but it would be well worth all politicians and economists looking up his ideas on Functional Finance.
His prose style is much more readable that Keynes too!
November 20, 2014
Taxes should be set to raise money for essential government spending. We are in a sit now where a good 20% of the money is wasted and a further 10% borrowed or used to pay interest. Government gets lousy value for money and should stick to essentials and get out of the lives of people.
It is a myth that the Tories are the low tax and business friendly party having doubled the national debt in 5 years.
Good luck in Rochester. You’ll need it despite the constant negative campaigning.
November 20, 2014
I would say that government and council waste is much worse than 20%
From the way I see our local town and borough councils working I would estimate that for every tax pound spent we get only 50p worth of value….
November 20, 2014
It is far worse than that. The govt could have introduced standardised unitary authorities to save us all a fortune. They could have merged Police forces and got rid of quangos as promised. The coalition has proven itself not fit to govern. They alleged came together for the. Economy in the national intersest. Five years on and no significant change to Darling’s plan, Treasury plan, to slow the rate of increase not make the cuts as required. And still the doors to our borders wide open increasing demand on all public services.
November 20, 2014
Worse than 50% as half of what government do is totally pointless or actually positively damaging. The few things they do that are actually useful are hugely inefficient and the staff are paid 50% more than the state sector with pensions included too while doing fewer hours and taking more sick days.
November 20, 2014
Why would you wish the Tories ‘good luck’ in Rochester? Are you under the illusion they are good at government? That they listen to the people? That they have any idea how to run an economy?
I’d say they are as bad as Labour and I can’t stand the guff they spout about Europe. Actions speak louder than words. The Tories are a bunch of Europhiles.
November 20, 2014
I was being sarcastic.
November 20, 2014
The result in Rochester may mark the beginning of the end of politics as we know it in this Country. Lies, spin and smears no longer acceptable to the British people.
Tax should only be raised for essential services and security of the indigenous population. No more Ā£#11.5 billion in foreign aid vanity projects or Ā£9 billions for EU foreign farmers and infrastructure. Billions more for foreign health and education services. Ā£5 billions in tax credits to subsidise tax credits for foreign minimum wage earners. British taxpayers subsidising the CBI and BBC via the EU political propaganda machine. Big clues here on how we can get our structural deficit down.
November 20, 2014
Governments need to stop spending (largely wasting) money, they need to stop inconveniencing the wealth creating sector with daft regulations, stop misdirecting them with daft laws, payments to encourage people not to work & expensive energy and misdirected “renewable” grants.
The tax rates in the UK are often well above the rates for maximum tax take. They should however not even be aiming for these rates, just ones that give the maximum good for the people, These are far below these rates, governments should be taking just what they need to provide defence, law and order, basic infrastructure and a few essential services. Something like 20% of GDP should be the aim. Average remuneration rates in the state sector should be about the same or perhaps a little less than the private sector not nearly 50% above as currently.
The private sector deserve decent pensions too and not to have them mugged by Gordon Brown (continued by Osborne).
Government should only do the rather few things they can do better than individuals. Individuals can, for example, give to charity perfectly well without Cameron stealing the money off them and giving it away for them. They can pay to go to sporting events without the government building vastly expensive white elephant stadia. They can educate their children and even sent expensive rockets into space or build Millennium domes should they want to. They can lend to EURO zone countries and the IMF should they wish to too.
Business and workers can also decide on employment contracts without the state making it very difficult for them. Or they can decide on the true risks of insurance and annuities without Cameron pushing gender equality drivel onto them.
November 20, 2014
Absurd attacks on Mark Reckless all day from the BBC yesterday on nearly every “news” item. In an invented non story about existing EU migrants should UKIP ever be in power. Are the BBC allowed to distort democracy in this way? I suspect it will only help UKIP anyway.
Meanwhile with all the states of the USA freezing (and still no warming for 18 years) the BBC still witter on about global warming. At least in the US energy is nearly half the UK/EU price – so hopefully they can afford to keep warm.
November 20, 2014
Yes and stories about the “threat” of UKIP. Why not the opportunity of UKIP?
November 20, 2014
There seems little BBC interest in the by election today. Ranked about 14th item on Ceefax and barely mentioned on the news desk.
Hoping voters will forget to turn out for this vital election perhaps ? Knowing that the numbers are against the main parties ?
November 20, 2014
The by-election’s got a couple of lines in the Politics section of the BBC webpage. It comes behind a fondly written, extensive bio of Sturgeon – she is clearly regarded by that organisation as being very important indeed.
And the BBC is VERY keen to emphasise that Reckless won 49% of the vote in the GE, thus making it appear that people in R&S are voting on personality rather than party/policy.
November 20, 2014
I noticed that too LL. If anything proved that the BBC is far less than impartial, it was their thinly-veiled antithesis towards UKIP throughout yesterday’s ‘news’ programmes. They treat anyone with anti-EU credentials with disdain and ridicule. They are masters of the poisoned nuance. The visual expressions of disapproval. The sneering. The lack of due respect.
It’s curious too how friendly BBC journalists are with Labour politicians, and in a lot of instances, the BBC will casually use first-names even in formal interviews.
Tad
November 20, 2014
Tad Davidson (10.56)
I notice the BBC use the word ‘admitted’ a lot.
“He has admitted that he believes in this policy.”
As though admitting to a crime. With one word it gives the impression that a crime has been committed.
November 20, 2014
He just said there would need to be transitional arrangements did he not? What on earth is wrong with that?
November 20, 2014
Absolutely dead right. The BBC are a disgrace, but as they are part of the CMD propaganda machine they are never taken to task for their partisan views.
It was good to see our host taking Will Hutton apart in a calm but clinical way on the subject of property prices. Socialism in the form of Hutton does not seem to accept that in the none government economy there is a situation called supply and demand, and an elasticity of demand that sets the price. It explains among other things why Viega Sicilia is Ā£250 a bottle.
November 20, 2014
Hutton seems pleasant enough, but has a talent for real stupidity on economic issues. One wonders why he wants to display it to the World on Newsnight. We cannot all live in Chelsea, it is supply and demand. Building & houses are important for production, workers need to live somewhere, many people work from home too.
November 20, 2014
It is amazing how many people do not understand the difference between climate and weather.
It is equally amazing how UKIP supporters can watch Mark Reckless making statements on television and then blame the reporting on BBC distortions
November 20, 2014
Climate is just average weather. If you have enough cold weather for a while you have a colder climate. Is 18 years of no warming not enough averaging for you?
If so then take some longer periods of averaging and you will seems the slight warming this century is nothing statistically significant and certainly nothing to worry about in the hysterical BBC way. Nor something to waste billions on “renewables” on.
Is one still allowed to say “hysterical” on the BBC is it a crime yet?
A little warmer is usually better anyway.
November 21, 2014
Did anyone notice on the reporting (BBC – no less!!) of the EU landing on a comet how they have discovered that CARBON is the building block of life on this planet !!! “Dirty carbon” as we have all been told for the last 20-odd years. I could hardly believe my ears!
How HOT is the comet ???? Or do “they” still not understand the difference between carbon and carbon dioxide !!!
November 20, 2014
Has Mr Cameron, who is reported to have said something to the effect ‘ditch the green crap’ in a hope to gain back a few votes here at home, not just promised Ā£650,000,000 to Africa to ‘go green’ to stop global warming?
We pay our good money in tax for this. I am not a UKIPper but more power to their elbow.
November 20, 2014
There is no acknowledgement by the BBC that the British public need a way to howl their despair and rage at mass immigration – at record levels passports handed out like confetti by this duplicitous government.
Rather than praise the British public for their forbearance and identify WHY they are turning to Ukip the BBC attempts to make them aware that Ukip is a bad choice.
Well there is no choice then.
Why should people vote for parties which offer them promises but whose records show everything to the contrary ?
November 20, 2014
I heard some government flunky trying to defend this total absurdity on radio 4 today.
He lacked any rational reason or logic, but needless to say the BBC asked nothing sensible of him.
November 20, 2014
Did the coalition not say they were going to fix the deficit? It is running at over Ā£100Bn a year and the gap, between what the government spends (usually wastes) and what it extracts in tax actually grew in the first half of this year.
Cameron even falsely claimed he was “paying down the debt” in his recent speech! Paying it down by -Ā£100Bn a year it seems.
November 20, 2014
Yes, and I find it helpful to think about that ‘100 billion’ in these terms.
A million pounds is 50,000 Ā£20 notes. Just imagine someone giving you 50 thousand Ā£20 notes. A billion is a thousand million. So, just imagine someone giving you 50 MILLION Ā£20 notes. YIPPEE! But, of course, the government is not borrowing just the one billion. Oh no, they are borrowing 100 million.
So, 5 THOUSAND MILLION Ā£20 notes.
All to pay for public sector wages and pensions and their nice offices and lots of absenteeism and sick pay and maternity leave and paternity leave and everything else we in the private sector don’t get.
And the Tories keep boasting about the jobs ‘they’ have ‘created’. Hmmm! Low paid jobs that pay no tax and need tax credits for people to survive. BRILLIANT!
November 20, 2014
Indeed.Is there a precise definition for this relatively new term “paying down” because it certainly doesn’t mean paying back
November 20, 2014
You are right LL!
I have noticed that when something the state buys comes in cheaper than expected, the state then believes it can reallocate that money for something else however, this is borrowed money and therefore wasn’t really there in the first place.
If I were to budget say, Ā£1000 for some furniture on a credit card but, in the end, I only had to pay Ā£800 for it, I would not rush out to spend the other Ā£200 and that is where the state and ordinary people with commonsense part company.
If I was earning X number of pounds a month and had already maxed out my borrowings and was paying out each month more than I was earning, I am sure that, if I went to see my bank manager for an even bigger overdraft, just so that I could give that money away to a charity, he would speak Russian to me…..Well, it would end in off, I’m sure.
Perhaps, without using the phrase “because it’s the right thing to do,” Mr Cameron can explain why he wants to add a billion pounds of debt to fund green issues around the world? It seems crazy to me that he tells the poor in this country that he really must make their lives a misery to save a million here and there because it is vital and yet, he throws money at the EUSSR, climate change and other foreign causes like a dizzy aunt at a wedding with a box of confetti…..Is it just to feed his ego or what is it?
November 20, 2014
The Deficit is merely a trend indicator and for politicians a convenient smoke screen. Behind this screen the DEBT has doubled to around Ā£1,3 trillion under the guidance of one George Osborne. It is you ,your children and grandchildren who will be expected to pick up the tab. You do not need an Eton and Oxbridge education to run a country on bottomless borrowing.
November 20, 2014
Cameron is one of those that does not understand the difference between deficit and debt. For that matter I wonder if his pal George does either.
November 20, 2014
Or more cynically perhaps he understand full well, but just thinks he can get away with this lying 7 deception in his speeches, as the public often do not understand.
November 20, 2014
Did HMRC not run an irritating, advert for ages along the lines:-
“Tax does not have to be Taxing”.
Does the government have an exemption from the (very much abused) need to be “truthful” in TV adverts?
What did the ASA do about it nothing I assume?
November 20, 2014
Japan is supposedly losing decades blah blah to deflation (which latter I do not believe is as bad as made out, that’s if it is bad at all in moderate doses as now), has had to face the enormous consequences of the tsunami and is still of course only a smallish island or two off the shore of a much larger mainland just like us except that they do not have the benefit (joke) of the EU or anything like, indeed I suspect their exports to their adjacent mainland are close to nil.
How is it then that Japan’s economy is third largest and much bigger than ours? Does not Japan, in to which it is nigh on impossible to immigrate, prove without doubt, despite all the noises off, that we could manage perfectly well with a much reduced and much more selective immigration policy? One assumes that Japan does have hospitals etc that need staff.
November 20, 2014
Here, here !! I agree entirely. Good point about immigration too, I did not know that.
Most people know we are too heavily taxed and it is damaging all of us. Russia, after communism, reduced taxes to 13% and the coffers overflowed. Even Osborne knows there is a “sweet” level of tax where governments get more rather than all of us avoiding what we perceive as too greedy ! This government is so ignorant of how to treat people even though they tell us they are “people” as well ?!!
November 20, 2014
Indeed, Leslie.
It only takes a sultry summer or a problematic arrest to get our police chiefs jittery about the risk of nation wide public disorder. Imagine the problems with public unity that a Tsunami might have caused to Britain.
A desire for conservatism in Britain is – in many ways – an unrealistic and dysfunctional way of thinking. No wonder we’re called nutters and headbangers.
November 20, 2014
“[Japan’s] exports to their adjacent mainland are close to nil.”
From the CIA World Factbook, China is Japan’s main trading partner for both imports and exports, 18.1%, 21.3%; the import figures are misleading because Japan uses the lower costs of Chinese production for their own branded goods for export.
November 20, 2014
Thanks for that–I confess to never having heard of the CIA World Factbook
November 20, 2014
Before you go mouthing off about the beneficial effects of deflation (try getting the asking price for your house if you live outside the SE of England) you need to understand a few little titbits about economics and Japan itself. In comparison to Japan the UK has about two thirds of its landmass so it can hardly be called “only a smallish island or two off the shore of a much larger mainland” . One of the reasons it has a larger economy is because it has a larger population than the UK too.
November 20, 2014
Eh? I downplayed the badness which is a world away from “mouthing off about … beneficial effects”; and despite what you say Japan is as I described but apparently not quite so small and similar to us as I thought–big deal I’m sure. As to your house sale, CPI is rising in the UK so you cannot blame deflation and certainly not deflation in Japan (and immigration there) which was of course what I was referring to.
November 20, 2014
Is’t the problem though the distribution of wealth when taxes are kept low for the high earners/industry? The books look good yet the extra money and possible growth do not benefit the majority?
November 20, 2014
You should listen to or read Fraser Nelson`s analysis of the income tax rates (Channel 4 Dispatches How the Rich Get Richer). The top 3000 pay as as much income tax as the bottom 9 million tax payers. He also points out that the problem at the very bottom end is very high effective tax rates when people contemplate leaving the benefit system to actually earn an income.
The tax and welfare benefit system is broken, unfit for purpose. QE is not the answer because, as Nelson points out, it has fuelled asset price inflation which benefits the asset rich.
In addition QE has enabled politicians to keep total public spending at an inordinately high level. History suggests that the UK`s maximum taxable capacity is c38% of GDP. QE has enabled the government to keep public spending at c50%, adding hugely to public debt. At these levels the UK is living in a fool`s paradise. The sooner the UK returns to reality by reforming its broken tax and welfare system and getting public expenditure under control the better off the country will be. There is no sign that any of those likely to be in charge after the next GE has a clue how to achieve this.
November 20, 2014
Actually you seem to have put your finger on a very serious matter: the future.
The whole lot depends on money. The USA and Britain are both in a serious amount of debt and, I believe, this debt is not being tackled, but is now becoming part of the backdrop of government.
The rest of the world seems to be slowing down too. And, of course, China is China and doing business there is slowly becoming seen as very dangerous. There are spies everywhere and even the internet is censored.
There seems to be no effort much to support the tiny shoots of capitalism in Africa either. We could clean up there.
There is a growing band of people who are seriously worried about the deficit and the debt. It could, actually, end up in a total collapse of the dollar and then what?
Seen like this, messing about with more taxation is just not going to do it.
Hey – just let us shut our eyes and hope, shall we? There is a special providence for fools, drunks and the British Army/Economy…
November 20, 2014
Get away it’s not taxes that have crushed Japan since 1989 but debt through money printing. Is it not at around 248% of GDP at the moment? You have to go off on a wild goose chase of blaming taxes because the political elite in the UK have no other strategy to get us out of this hole, but to deficit spend likewise, despite Japan showing it leads to nothing but stagnation.
November 20, 2014
Please can we have the headline painted as a large mural on the wall opposite Mr Osbornes desk(s). It would help the country greatly if he saw that every time he looks up.
November 20, 2014
No, the main reason Japan is in recesion (and stagnation for the last 20 years) is the catastrophic level of government overspending and debt. Instead of investing savings in private business it has gone into government bonds where it has been squandered by criminally irresponsible politicians on stupid pet projects and stimulus for corrupt banks. To blame it on spending patterns is simply absurd.
Every single penny that is stolen by the state is a penny not spent on useful productive business. That applies in Japan and here.
Tax is theft from the productive to fund the non productive. Everybody is obsessed with public services to the extent that they cannot realise that every service supplied by the state could be provided better and cheaper by private companies. The worst service is always from a monopoly and whether it is public or private the only way a monopoly can exist is by government regulation. Do away with government interference and regulation and you have a free market where service companies have to perform or they go bust. Capital is then allocated to the most efficient leaving more to invest in wealth creation. Until we get away from the centrally planned socialist model that every single politician sesms to love so much we are doomed to declining living standards and worsening services.
If anyone doubts this I point to the last 100 years where Britain went from a free country with ever declining poverty, very low taxation and vast wealth to a bankrupt, centrally controlled and monitored, tax slave state with virtually no savings and a debt that can never be repaid.
November 20, 2014
Indeed.
November 20, 2014
Japan in recession. Euroland in recession. What do they have in common? The answer is simple: a birth-rate of 1.3 children per woman or lower, in any event well below the 2.1 children needed to achieve replacement, let alone growth. Only extraordinary productivity growth can offset a sustained decline in the number economic participants in an industrial economy. Both Europe and Japan have opted for extinction, economic decline is simply part of the package.
The future belongs to the teeming but fecund masses of sans-culottes of questionable ability and limited educational achievement. Indeed, all the pre-conditions for a retreat in the level of social development (‘Civilisation’ is too patronising) appear to be in place.
November 20, 2014
Tax rates in the UK are no longer competitive. That CGT receipts have fallen at a time of sharply rising asset prices when the rate has gone from 18% to 28% should be enough for anyone to understand and appreciate the Laffer curve effect. It is very unfortunate that there are so many politicians, including obviously the ridiculous Mr Miliband, who cannot open their mouths without proposing some new tax, and who either cannot or don’t want to see that with tax at 38% of GDP, spending at 46% and uncompetitive tax rates, the UK is missing a huge opportunity for much better future growth and prosperity.
November 20, 2014
You say “Governments need to learn that higher tax rates may be self defeating.” They nearly always are! You take the money off people, who generally use it wisely and spend it efficiently and then give it to governments who rarely do.
There is perhaps 5 types of money & spending in order of efficiency:
1. Your money you spend on yourself, usually very efficiently on what you know you wart & need.
2. Your money you spend on someone else such as a birthday present usually rather less efficient.
3. Money that is not yours, has been taken off the public under threat of imprisonment and is spend (perhaps honestly) on what governments actually think is good for the public. Usually very inefficient spent, on totally the wrong things, with vast sum wasted in administration.
4. There is money taken off the public under threat of imprisonment and spend essentially fraudulently by government knowing full well it is fraudulent or spent on political propaganda or essentially buying votes.
5. Finally there are sums taken off the public (but then used to bribe, with grants and tax breaks) businesses and the public to do usually totally daft things. Things such as windfarms, PV roof panels, electric cars, locating businesses in the wrong place and other total absurdities.
On top of this there is the damage done by the high tax rates in the first place. Distorting business activity, making company structures over complex for purely tax reasons, stopping them moving house with stamp duty, not selling assets that have high gains taxes, not working as much as they did, spending money on cruises rather than 40% IHT, moving overseas, using the back market, barter and cash in hand. Also in generating vast numbers of essentially non productive jobs in the tax avoidance and legal industries.
November 20, 2014
Once again your coments on the tax system concentrate on taxes raised through discretionary actions – spending, earning by the wealthy, sales of assets. Of course those who can choose to pay or not pay tax will choose not to.
PAYE takings are down as many roles created do not pay enough to pay tax yet the paltry wages paid by the employer are subsidised by tax credits and housing benefit. Your government has chosen to milk those in the higher rate to compensate for this. We do not get to choose if we pay. So much for being tbe party of aspiration.
In other tax news households with two earners get two lots of tax free earnings worth up to an additional Ā£4.8K per year over households with only one earner. This despite both households having the same costs. How is this fair?
Time to simplify the tax code.
November 20, 2014
“We do not get to choose if we pay.”
There are choices:
A) Don’t do so well
B) Work off the books
November 20, 2014
Mr. Redwood acknowledged in an interview with Andrew Neill some time ago that in the first couple of years of the coalition the tax code went from a notional 13,000 pages of A4 paper to 18,000 pages.
So much for simplification eh?
November 20, 2014
Its not news that each person gets a tax free allowance before they start to pay income tax.
That has been the case for many years.
Income tax is paid on a percentage of an individuals earnings and has no connection to the costs of running a household or the number of people sharing a house.
Altering income tax everytime an individual changed their living arrangements would make for more complexity not less as you call for.
November 20, 2014
A transferable tax allowance per two person household would add one addifional line to a simplified tax code, recognise the role of the traditional family in society and (let us make no bones about my motivation) make me and others like me deservedly better off and more able to compete with two earner households for housing and food.
I could design an online system that would make the switch each time personal circumstances changed quite easy especially once it was tied in to HMRC RTI reporting.
November 20, 2014
NS Good point well made…I am won over.
I like your idea of a transferable tax allowance.
We have also done away with the married mans allowance and mortgage interest tax relief sadly.
November 20, 2014
JR: “The strategy of bringing deficits down by growth is not working well in Japan or Euroland”
It isn’t working well here either. Isn’t the deficit still Ā£100bn per annum and, rather than reducing, still inreasing? If the economy is your party’s strong point, your prospects look poor for next year’s election.
November 20, 2014
Poor old Abe. He got conned by the most dangerous financial organisation on the planet; the IMF. If there is one supranational organisation that needs shutting down immediately, if not sooner, it is Christine Lagarde and her gang of fiscal Hawks.
The last thing you do in a private sector, balance sheet recession is increase sales taxes. The IMF insisted that Japan go from its decade old 5% to 8%. It then wanted 10% next year. Talk about “forward guidance”, the result could have been predicted by next door’s dog.
Guess which other countries near you, are dedicated followers of Madame Christine Madeleine Odette Lagarde. (Financial Times ranked her the best Minister of Finance in the Eurozone … nuff said!
Fortunately in the UK, our sales tax (VAT), is hidden in the sticker price. So going from 17.5% to 20% is camouflaged and easier to blame on the retailer putting up prices. As I said with petrol prices, adding tax and duties at the till leads to a politically smarter consumer. No fear of that in the UK.
November 20, 2014
We need to take a closer look at the workings of the World bank too Acorn!
Tad
November 20, 2014
Basically, to keep changing rates up and down gives the impression that a government is trying to “get one over” on the ordinary voter, and is yet another reason why the three main parties have lost the confidence of the people. They are all complicit in tax-rigging.
November 20, 2014
Taxation is never just to meet essential costs.
Politicians have distorted that philosophy over many years to a stage where the link is at best tenuous. The main use is to keep the party system in place and encourage votes – look at Tax Credits, Benefits etc – much to the detriment of the country at large.
November 20, 2014
In other words, the books would look better if people went hungry. This is the politics of the penny-pinching accountant, of the socially-callous number cruncher. It works in theory, but not in reality.
November 20, 2014
Not so !!
The idea was to get as many people as possible to appear to rely on the benevolent ‘Party’. Don’t vote for Labour and it will go.
There are other ways to skin the cat without disadvantaging the real needy rather than the perceived needy – nobody who tries for themselves goes hungry – a very emotive but nevertheless ridiculous statement by you.
November 20, 2014
The tax rise imposed under Abenomics was of course aimed at fostering inflation, thereby to lower the real rate of interest, thus inducing investment in capital goods and hence generating self-sustaining growth. (Clearly, the QE is also aimed at reducing interest rates whilst also providing liquidity (ignoring that liquidity does not bring forth borrowers).)
There is a view, promoted inter alia by Alvin Hansen, that says that under conditions of structurally weak demand, exacerbated by demographic dynamics (aging population) and so where there is not simply a balance sheet recession with which to contend, investment decisions are driven less or not at all by the cost of capital but rather expected profits, themselves resting upon the expected size of the market. Accordingly, per the Hansen view, with demand constrained, inflation will not bring forth the hoped for investment and growth and so Abenomics is doomed – as is Japan very likely.
Present day Japan challenges the hope that the world is not facing a further recession.
November 20, 2014
We need a grown up debate as to exactly what we want the state to do for us and then, reduce the size of the state(s) to reflect this wish. We are funding too much government both here at home and in Brussels.
I see RBS has been hit by another extra tax for having a software glitch; hardly seems fair to me! Week after week we hear of these “record fines” imposed by one regulator are another. The levels of these so called fines seem to bear no relation to the so called wrong commited. These fines are nothing more than stealth taxes and are wrong at every level. Both governments and businesses don’t have their own money as such, only moneies which they can extract from their taxpayers or customers and therefore, when a business is subject to a “record fine” the full cost is passed on to their customers. I can see no justification for a publically funded body fining another publicly funded body because the money just goes around and around and then dissappears.
It is all very well Mr Clegg et al stating that so many people have been lifted out of tax but, it is not really the PAYE and NI that cripple you, its the other taxes such as VAT, fuel duty and a whole host of other wizzard wheezes the state uses to steal the wealth of the population.
November 20, 2014
We have to raise a lot of tax which is the sad thing about it all.
The efficiency of high tax over lots of tax misses the point by a wide mark and that is why we need so much tax in the first place.
Because we subsidise low paid work and we subsidise not working at all. Welfare dependency creates a helpless class and the problems that come with it creates lots of issues for politicians and government officials to get their teeth into. And so government and state has become one of our biggest and well rewarded ‘industries’.
There will never be enough tax at this rate.
An industry which thrives on problems willfully creates more problems – like a glazier going around breaking windows at night – hence the open door immigration policy and the soft approach to crime and fecklessness.
We don’t want any quick, easy fixes now, do we !
And on the subject of broken windows. Anyone who is subject to this unfortunate cost who doesn’t have good excess on their insurance gets whacked by the Government for 20% too when they settle their bill.
Essentials, not luxuries. A kick in the nads from HMG when you’re down. Think about that the next time you get a repair bill for the car you go to work in to earn money to pay… tax !
November 20, 2014
To clarify my previous comment:
“The efficiency of high tax over lots of tax misses the point by a wide – why do we need so much tax in the first place ?”
Also the example I gave of a glazier breaking windows at night to give himself business. Of course, he wouldn’t do this. It is illegal, punishable by imprisonment.
Alas the only punishment we can administer for Government negligence is at the ballot box.
November 20, 2014
The first lesson you and any future government needs to learn is to stop interfering in the lives of the people you govern. You have a knack of doing it in a most inefficient and totally unnecessary way. Put another way, stop spending other peoples money. It is not necessary and you are useless at it.
The Laffer Curve explains why the greed and profligacy of government leads to diminishing returns for government. Pause and think for a moment what effect a dramatic 50% cut in all taxes would have on the economy. More money in peoples pockets means more choices for them and spending it in the private sector means better value for money, because there are choices in the private sector due to competition for customers attention. In government their are no choices. You get a crap service and a take it or leave it attitude. To add insult to injury the drones running these services achieve higher remuneration and gold plated pensions, all coming out of the pockets of the private sector. Pension provision should be the choice of the individual wherever he/she works, just as it is for the self employed.
In addition you have a civil service that subverts the democratic process, permitting the EU to undermine the sovereignty of the nation in the face of a supine Parliament.
November 20, 2014
Japan needs to reduce Govt spending and transfer half the money saved towards reducing its debts and with the other half, reduce taxes on its citizens to stimulate growth.
Euroland, the USA and the UK could try this instead of continually increasing taxes, printing money and increasing Govt spending.
November 20, 2014
As well as the simplistic Laffer Curve, you also have to remember the psychological aspect of Britain’s absurdly complex tax law. If an honest person is trying to set up a small business, then having survived their first year of trading they will then get hit with the ludicrous tax on account demands, wherein a new business having paid this year’s tax has then to pay next year up front, before the money is even earned. This alone kills a hell of a lot of small businesses.
Next up we have the fact that tax law alone takes up several feet of book shelving, and is complex to the point that not even HMRC fully understand it, let alone a citizen who is merely trying to make a living.
Then we have the fact that the Inland Revenue, with the General Anti-Avoidance rules, can effectively try to make up law as it goes along. No longer is it sufficient to comply with the law as written; now you have to comply with law as some gormless little pen-pusher thinks it ought to have been written. An honest citizen when confronted with this morass generally tends either to give up, or to become a dishonest citizen.
This is what overly-complex and manifestly unfair law does, it forces honest people to take the view that one is only guilty once convicted, and that the State is the enemy. At this point the State is going to find it increasingly difficult to extract taxes from its citizens, as it is behaving more like a parasite and less like a symbiont with every passing day.
The solution here (for the benefit of the knuckle-draggingly stupid, AKA most politicians with the exception of Our Graceful Host) is less law. Make taxation simpler, less confiscatory, and get rid of the general anti-avoidance rules. These aren’t enforceable to any real extent, and merely serve to highlight the government as a bunch of morons. Getting rid of taxes upon taxes like Inheritance Tax would also simplify matters immensely, and reduce the influence of lawyers on society. An ultimate goal might be to enact a single rate of income tax, and to reduce or eliminate as many other taxes as possible.
It would also be an idea to simplify taxes on alcoholic beverages, by simply taxing these based on the amount of potable ethanol sold. That at a stroke removes the trouble of distinguishing cider, beer, perry, spirits and so on, which can only be an improvement.
November 20, 2014
Hmmm yes too much tax is self defeating. but the problem comes when states start competitive tax reduction to attract enterprises, that also can be self defeating
On japan the problem with japan is demographics – it is getting very old rapidly hence the investment in robots to look after the elderly. Japan will be soon be forced to allow immigration to run basic services Human capital is important a nations well being economically and military. The way things are going in Japan in 30 years time the Chinese will just walk in to almost empty land, no need for conflict in the South China sea just wait until the Japanese die out
The UK with its enlightened immigration policies has the demographics other countries will die to have
November 20, 2014
I’ve just received my new Annual Tax Summary with its pie chart showing how our taxation is spent.
Clearly, with Welfare representing almost a quarter of the budget and Health only slightly less, it is surely correct for the government to look at possible ways of reducing these. That doesn’t have to mean reductions in the services but reductions in the waste along with ensuring that only those entitled to receive welfare and use the NHS do so.
The other thing I noticed was that servicing the National Debt cost us almost half as much again as our defence, but in spite of this, the deficit and national debt is still increasing, along with the interest costs.
I will only believe the economy is improving when the national debt starts to be reduced, and there seems to be no possibility of this happening in the foreseeable future.
November 20, 2014
If there is a need to increase taxes, or preferably just change the tax base, then the changes should be carefully targeted. For example a huge amount of the costs of the police. health service etc. are down to excessive alcohol consumption and obesity. Carefully targeted tax changes could help to reduce both of these. They must of course be combined with other measures which the government keeps ducking like minimum alcohol pricing and tougher measures to control shops that sell to under age drinkers and sell smuggled alcohol.
November 20, 2014
The VAT increase in the UK roughly halved the rate of growth of VAT income for the government.
I’d say that was a serious negative affect of a tax rise.
The corporation tax reduction reduced the governments income from corporation tax, but did not affect its rate of growth.
What any normal economist would take from these two facts it’s that corporation tax is now below the rate at which it provides the best income for government, and the rate of VAT is above the best rate.
It’s a shame that George Osborn has never taken a course in economics…
November 20, 2014
And Cameron did Oxford PPE which seems to have taught him duff economics. Though the Australian PM Tony Abbot seems to have come out of the PPE course without these silly delusions, could we get him back as a replacement for Cameron – sound on climate too.
November 20, 2014
Almost all of the guys that I use in reasonably small functions are quite happy to be paid in cash, and its VAT free to boot.
Bob
November 20, 2014
Indeed, taxes can and have done damage. An increase in VAT could theoretically make a product not worth buying and certainly diminish the amount bought. The net effect of increasing taxation is to diminish the amount of things bought which people find useful and increase the amount of government āservicesā which tend to be rather less useful.
There is no God-given law that health and education have to be provided by the government and we would always see this clearly if government providers had to compete fairly with private firms for the publicās custom.
However, many government services would not be purchased at all and I would include the quangos enforcing political correctness and the laws restricting the labour market here. I see that a new quango is to be set up to regulate the relationship between the breweries and their tenants. No doubt a disaster for the pub trade in the offing and another blow struck against freedom of contract.
The ultimate government āserviceā is war and this would be unthinkable on a large scale without taxation. But war has the paradoxical effect of reducing the tax base by killing workers and destroying capital, often on a huge scale. War can even destroy the very states which launched the conflict. One sometimes wonders if the politicians even see this.
November 20, 2014
Japan is one of the World’s largest economies but it is also the world’s largest debtor. The UK is the number 2 in the latter league. A big difference is in the international spread (External) of that debt.
It is the Japanese people who have been buying a large proportion of Government Bonds and keeping their external debt low, whereas much of UK Gilts have been bought up by outside sources. That is reflected in the External Debt League where the UK, with 400% of GDP = $160K per capita, is the number 2 and Japan is 5th with just $24000 per capita. To put that in perspective, each person in this country effectively owes the rest of the world $160,000. In Japan each citizen owes just $24000, a fraction of ours. Now, how will WE be able to repay that debt, given that the Average Wage is just Ā£25000 and the average tax take per person is Ā£7400? I believe that it will never be repaid and it will become a rolling debt funded by even more debt until the buyers stop buying. When that happens, catastrophe rears its fearsome head and we go down the path of serious default and the collapse of the Pound. The outstanding debt must be paid off but the last Labour Government locked in so much Public Sector expenditure that it would be impossible to do within the first Parliament. They knew they were going to lose and deliberately set this trap but at the expense of the UK Tax payers of course. Come May 2015 anyone inclined to vote for Red Ed, should seriously bear this in mind. Labour would borrow more and accelerate the decline of the UK. They have, many times, proven themselves untrustworthy to hold Office in our country. Do not give them another chance to wreck the UK.
November 20, 2014
Conclusion – especially regarding Japan and Euroland: Fiscal deficits and public debt still need to be reduced drastically, so it must be by public expenditure reductions. One can only protect capex if welfare and other current expenditure is squeezed.
November 20, 2014
You say “Japan is the one of the worldās largest economies, in recession. Euroland, another of the world giants, is struggling to avoid another recession*
It takes just a moments thought to consider that Japan’s problem, Europe’s problem, the UK’s problem and USA’s problem are the same: economic policy.
Of course there are vested interests at stake here and even when the worlds economy finally sinks below the waves there will still be those who will emerge insisting a global crisis was the cause.
Keynesian policies will do no more than defer the problem which, in the meantime will continue to grow. His policies were designed to address the 1929 depression and they did a pretty bad job.
I like to think of Keynes advice as advising someone how to escape a forest fire: dig a deeep pit with sheer sides and wait inside until the fire has passed. Problem is that if the fire does not pass overhead quickly then you suffocate and, if it does, nobody has told you how to get out of the hole.
Friedman was also wrong, it was not tight monetary policy by the Fed that caused the depression it was the transfer of wealth from the poor to the rich and the governments efforts to prevent wages falling in line with prices.
Well, here we go again. The transfer is happening with increasing house prices and thus rents and bad lending practices by the banks who, contrary to the Bank of Englands statement, will once again be saved by the taxpayer who, because of their vast numbers are represented largely by the poor.
For those who might have forgotten what sound money is I would suggest downloading, for free, Mises on money from the Mises website.
Additionally I would suggest they throw their Keynes literature in the trash and then agitate for an abolition of the minimum wage.
November 20, 2014
I’m no economist, but I feel the main problem is overspending by Government and a resulting too high level of total tax on their voters.
If you reduced both steadily then growth would re-emerge.
November 20, 2014
Cameron is all in favour of the minimum wages and all the fake equality drivel.
November 20, 2014
We have no better example in the UK than the situation with Capital Gains Tax where receipts have all but collapsed after the LibDems insisted that the rate was hiked to 28% with no corresponding taper relief.
I know that I am not the only contributor here who is hanging on to properties I would much rather sell because the tax rate is far too high. In fact, I know other owners who would be in negative equity if they sold and paid of their mortgage and then had to pay CGT at the 28% rate.
Ridiculous !