Stumbling and Mumbling

A solution to Brown's tax muddle

It's widely though that the government's efforts to compensate the low paid for the abolition of the 10p tax rate would be either complicated or expensive. But it needn't be so. There's one possible solution that's simple, revenue neutral, a benefit to the median voter, which would lift thousands out of the tax system, unite Labour MPs behind Gordon Brown, and probably cause Polly Toynbee to die of ecstasy.
Step one would be to raise the personal income tax allowance by £1200. This would save all 20p tax-payers £240 a year (20% of £1200) - the amount lost by the biggest losers from the abolition of the 10p rate. This would cost £6.6bn, according to the Treasury's own estimates (pdf).
This £6.6bn could be recouped by a 7p rise in the top tax rate.
On top of its aforementioned benefits, this would cause the Tory party a problem. Brown could ask: "Are you serious about standing up for the poor or are you what you've always been - the party of the rich?"  And he could justify the rise in top taxes more easily now than ever before. Something like this'll please Labour backbenchers:

This government is supporting the financial sector to an unprecedented degree, with a £50bn bail-out. It's only right that those who work in that sector should pay in some way for this state aid.  What's more, the financial crisis that triggered this hand-out has shown that - in many cases - the justification for big salaries was only ever self-serving hogwash. Big earners in the City were not skillful judges of risk, helping to improve economic efficiency by cutting the cost of capital, but just ignorant punters who whine like five-year-olds who have pissed their pants the moment things go slightly against them. Higher taxes on these won't much damage the wider economy.

Of course, it's possible that a 7p rise in top taxes wouldn't raise as much as the Treasury thinks, if some top earners migrate (though not to New York) or downshift. But Brown could mitigate this danger by raising the top rate by less and  raising the capital gains tax rate*.
Whatever, the fact is that Brown has every chance to get out of his own mess in a way that'd delight Labour backbenchers and benefit most voters.
So, what's stopping him? Is it the fear that top tax-payers are so footloose that they would migrate en masse? Or is he just more scared of the right-wing press than of his own MPs?
* Corrected from earlier version in light of comment one.

Taxes & labour supply

What effect do taxes have upon labour supply and tax revenues? Everyone's got a prejudice here. But if instead you want some facts, you could try this big new paper which surveys the evidence, and the difficulties involved in getting those estimates. Some highlights:
1. "Male hours of work are almost completely irresponsive to changes in work incentives." For reasonable changes in tax rates, we work full-time whatever.
2. But "for high skill men higher rates of taxation are likely to discourage effort and creativity quite substantially." We might go into the office as much as ever if taxes go up, but we spend less time working and more time arguing about our favourite member of Girls Aloud. However, most estimates here suggest elasticities of tax revenue to rates (around reasonable levels) are less than one, so higher tax rates do just about bring in more revenue.
3.   The self-employed are more responsive to taxes. It's here - if anywhere - that we might find big adverse Laffer curve effects upon taxable income and hence revenues.
4. Women's hours are more responsive to taxes than men's, but not much.  On average, a woman working 25 hours a week needs a 20% rise in post-tax income to work one extra hour.
5. Participation in the labour market, rather than hours worked, is sensitive to incentives, especially for low-skilled men. This suggests the benefit system and tax credits can have big effects upon whether men work or not. And this, combined with points 1 and 4, suggests there's something to be said for big in-work benefits at the expense of high marginal withdrawal rates.
One big caveat here, however, is that the very long-term effect of higher marginal taxes might be larger than the shorter-run effects. Higher taxes might reduce incentives to get education and training (as they reduce the pay-offs to having high skills) or might even change social norms to create a "why work?" culture.
These effects, however, are almost impossible to quantify. 

UK vs US taxes

George Bush is a stronger believer in income equality than Gordon Brown.
These figures (pdf) from the CBO (via Greg Mankiw and the Kruse Kronicle) show that the poorest fifth of Americans paid an average of 4.3% of their income in federal taxes whilst the richest fifth paid 25.5%.
How do these figures  compare to the UK? Table 16A here gives the answer. The poorest quintile in the UK paid 36.5% of their income in tax, whilst the richest fifth actually paid less - 35.5%.
Britain's tax system, then, is  regressive whilst the US's is progressive.
You might object that I'm not comparing like with like. I'm including indirect taxes, whilst the US figures exclude local sales taxes (though they include excise duties).
However, if we look only at income tax and national insurance, the UK system is still less progressive than the US's, at the federal level. The bottom fifth pay 6.2% in direct tax (net of credits) whilst the  top fifth pay 23.7%. The ratio of these tax rates is 3.8, compared to 5.9 for the US federal tax takes.
If you don't believe these figures, check out Willem Buiter's calculations that top marginal taxes are higher in New York than London.
Sure, you can quibble with these numbers. The US figures exclude local income taxes. And perhaps the UK taxes the poor more because they have more income thanks to more generous welfare benefits.
But however you slice it, the message seems to be that the UK's tax system after eight years of "Labour" government (my figures refer to 2005-06) is less progressive than the US's federal tax system after years of pro-rich Bush presidency.

Philanthropy vs redistribution

Should there really be tax breaks for donations to the arts, as Paul Myners and Nicholas Serota demand here? The Pigovian case for such tax breaks is well-known; without them, there'd be an under-supply of such public goods. However, the egalitarian case for such breaks is very shaky, as this recent paper discusses.
It argues that donations to the arts can actually increase inequalities of well-being  in two ways - even leaving aside the possibility that such donations are really intended to boost the ego of the donor. First, because  the rich gain from donations by other rich people; if I donate to an art gallery, others' donations will benefit me by improving the gallery, and by attracting attention towards my generosity. Second, because some of the non-rich go to art galleries more than others, inequalities between the non-rich might rise.
It's possible, therefore, that such gifts actually increase inequalities. In such cases, philanthropy isn't a substitute for redistribution, but actually strengthens the case for it.
There are of course many arguments against redistributive taxes. However, the claim that they stop the rich giving to the arts is not one that should concince egalitarians.
This doesn't mean there should be no tax breaks for charitable donations. What it means is that the case for such breaks lies in efficiency, not equality, and that there's a big difference between the sort of philanthropy that benefits the poor directly and the sort, like art donations, that do not.

Tax public schoolboys

We should tax the privately educated more heavily. That's the inference I draw from the interest in Greg Mankiw's proposal (pdf) to tax the tall.
The logic - explained by NotSneaky- is the same. All taxes distort behaviour. Taxing high earners, for example, deters them from working and so reduces output and tax revenues. Given that taxes must be raised, therefore, it's best that they be imposed upon productive assets which won't be withdrawn from use if they are taxed.
Height, says Mankiw, is one such asset. It's correlated with productivity - the tall earn more on average - but taxing tall men won't make them shorter. A height tax is therefore efficient.
But the same thing goes for private education, at least in the UK. This is strongly correlated with earnings, even controlling for university - more so, I guess, than height is. So it is a productive asset.   
And because people who have been privately educated can't go back in time and change where they were educated, they can't avoid the tax in the way that high earners can avoid being taxed by working less.
Of course, such a tax might reduce the future supply of public schoolboys, as parents choose to send kids to state schools. But this might be desirable on egalitarian grounds.
Now, here's the rub. If you think taxes on income are very distortionary - that Laffer curves matter - then you should especially welcome calls to tax inelastic productive assets such as height or having had a private education, as you should believe the efficiency gains from doing so are potentially great.
So, Tim and DK, what say you?

Taxing men

It's not just looks and height that should be taxed. So too should having meat and two veg, according to this paper (pdf, via CEPR).
The thinking here is based on an old, well-established theory - Frank Ramsey's "inverse elasticity" rule. This says that taxes should be lightest on those goods which are most price elastic. And women's labour supply is more price-elastic than men's. Men will go out to work (or not) more or less come what may. But some women, at the margin, can choose between being a home-maker or going out to work. This choice means their labour supply is more responsive to tax rates than men's. Which in turn means that shifting tax from women to men might raise labour supply and hence output.
But that's not all. If women go out to work more, men will have to share the housework and childcare more. Is this efficient?
If you believe in diminishing returns, yes. The first hour a man spends looking after the kids should be better quality than the 50th hour a frazzled mum spends with them.
But this isn't necessarily so. Some men might be so bad at childcare that children are better off with their mother. In such cases, incentives for women to go out to work would backfire.
All this raises the question. If there is, in theory, something to be said for taxing height, gender, or looks, why does the government never even consider these possibilities? It can't be because such schemes are complicated; the existence of the tax credit system shows the government doesn't value simplicity highly. Could it be that the government taxes income for the same reason Willie Sutton robbed banks - because that's where the money is?

A burden on the taxpayer?

The government's planning a big rise in spending on training in the hope of getting the unemployed back to work. Is this cost-effective?
Take a married couple with one child with both out of work.  Let's say one of them gets a full-time minimum wage job, paying £220.80 a week (40 hours at £5.52) . How much would this save the taxpayer? 
Out of work, this family gets benefits of £320.62 a week (table 1.5d of this pdf). In work, they still get  net state benefits of £118.77 a week, in tax credits and housing benefit.
The taxpayer therefore saves just over £200 a week.
If we assume - heroically - that half of the 824,800 claimant count unemployed find work this way, the taxpayer saves a total of £4.4bn a year. If - heroically again - all this saving is used to cut income tax, we'd save a mere £3.10 for every £100 of income tax we pay.
And against this saving, we must weigh the cost of training people up to get basic skills: the total training budget is £11bn.
The benefits to the taxpayer are, therefore, small.
But what of the benefit to the unemployed? In our example, their income rises by just £36.25 a week - less than £1 an hour.
The message here is simple. In narrow financial terms, the benefit of shifting people from unemployment to low-paid work is small, to both the worker and taxpayers generally.
You might reply that work - even minimum wage work - is a stepping stone to better things, to better-paid jobs. But it ain't.
The strongest justification for schemes to move the unemployed into work is probably the non-financial gain. There's evidence that the employed are happier than the jobless. But how strongly does this weigh in  Boss Party thinking?

Taxing marriage and the median voter

Confirming that we are "ruled" by the Tories' second XI, we get this:

Chief Secretary to the Treasury Andy Burnham said there is a "moral case" for promoting the traditional family through the tax system.

Now, even if we assume - which we perhaps shouldn't - that the state should promote marriage, tax breaks are an expensive way of doing so. Few people will get married because there are tax breaks, and those who do so are likely to be the sort of mean-minded money-grubbers whose marriage won't last anyway.
Tax breaks for married couples mean giving money to people who'd be married anyway - that's a deadweight cost. For a given level of public spending, this cost is paid by the non-married.
And this is inegalitarian. On average, ceteris paribus, married people are richer, happier and healthier (pdf) than the unmarried. Tax breaks for married couples therefore give to those that already have, at the expense of those who haven't.
You might think this moronic Tory policy is just another attempt to woo the median voter.
To which I can only quote Robert Robinson: "would that it were, would that it were."
The truth is, the Tories second XI (I refuse to dignify these reactionary gobshites with the word "Labour") has little interest in the true median voter.
The median voter, if he's a man, earns around £500 a week - £25,000 a year - and lives in a house worth less than £200,000. He has more chance of being made redundant than of inheriting big money, his livelihood is threatened more by incompetent or rapacious bosses or the tax man than by immigrants, and his kids' future depends much more upon the condition of state schools than upon inheritance tax thresholds.
But the Tories second XI isn't interested in this median voter. The only median it seems to care about is the median Daily Mail editorial writer.
And the joke is, I suspect he might not believe what he writes anyway.

Labour party, RIP

If there's anyone stupid enough to still believe the Labour party is the party of the working class, Darling's Pre-Budget Report should have disabused them of this moronic illusion.
He's announced a £1bn a year cut in inheritance tax. In a glorious example of newspeak, this was described in a chapter (pdf) of the report called "fairness and opportunity for all." Contrast this with three things:
1. Taxes on ordinary workers. In a couple of years' time, workers without children earning less than £300 a week will pay more tax than someone inheriting up to £700,000.  1.9 million workers face a marginal withdrawal rate of 60% or more.
2. Cuts in some parts of adult education funding. Darling is helping those who drop out of the right womb and wait for their parents to die, at the expense of those who want to pursue self-improvement through education. How much of a betrayal of Labour's traditions is that?
3. The weaselly way in which asylum is being denied to many Iraqis who have worked for the British army, in effect condeming them to death.  The message here is that of the cruellest 19th century factory-owner - that workers are to be cast aside to die horribly the moment they have ceased to be useful.
How can anyone who considers themselves on the Left remain in such a party?

Defending Tory tax plans

Under Osborne's tax plans, you'll pay more tax if you earn £240 a week (table 1.1d of this pdf) than if you inherit £999,000. How can this be right?
I don't think it's meant to be justified - party politics is not about justice or efficiency. But, as no-one else will try and defend it, let me do so.
Start with efficiency. A cut in inheritance tax will cause altruistic parents to work and save more, as they can leave more to their children. That'll make the whole economy richer, thus giving the man on £240 a week better prospects.
By contrast, cutting taxes for him won't make much difference. People on low wages just don't have the skills to earn much more. So giving them incentives to do so is pointless. As long as they've an incentive to work rather than stay home watching Jeremy Kyle - which can be achieved by low unemployment benefits - incentives are doing as much as they can.
Efficiency requires lower marginal taxes on the rich than poor.
Next is an argument adapted from Michael Walzer's theory of complex equality. This says that goods should be distributed according to their social meaning. So, medical care should be allocated according to ill-health rather than money, honour to the meritorious, and so on.
Now, the social meaning of an inheritance is very different from the meaning of a wage income. An inheritance is an act of love between parent and child. For the state to intervene in that is a violation of the meaning of inheritance. By contrast, no such violation occurs when the state intervenes in the employer-employee relationship, because we accept that it should do so in many ways - health and safety laws, employment protection and so on. So, taxing wages is more just than taxing inheritance, in the sense that it conforms to social meanings.
Finally, there's an argument from utilitarianism. Someone with parents rich enough to leave almost £1m will grow up with high expectations, and will be bitterly disappointed if these are not met, as this guy shows. Taxing his inheritance will there impose further unhappiness.
By contrast, someone on low wages probably grew up in a poor home, and has low expectations; as long as he doesn't have to dive behind the settee when the rent man comes, he feels rich. Taxing him therefore doesn't trouble him so much. He grew up to expect nothing but a slap in the face, and is pleasantly surprised when it's only a mild one.
The state therefore increases aggregate utility by taxing the poor rather than the children of the rich, and quite possibly increases equality of welfare too.
Now, my gut feel is that all this is the purest bull. But then I know better than to trust my instincts. I suspect the arguments are intellectually flawed too. But in pointing this out, wouldn't I merely be articulating my prejudice? Or is that all that conventional politics is about?