Tag Archives: tax

Intergenerational equity and the perils of groupthink

As the implications of what it appears that the coalition is about to do in the upcoming budget sinks in, I have to admit to growing increasingly concerned. No-one – outside of the Labour leadership contest anyway – denies that the structural deficit needs to be tackled or that we don’t face some unpleasant spending cuts over the next few years. But I’m mystified by the economic strategy behind what the government apparently has planned.

If the government does have a game plan, thus far it has not been spelled out. Nick Clegg’s speech on Monday was remarkably void of much of an argument, resting as it did on two points:

1. There is no alternative: “to do anything else would not only be irresponsible, it would be a betrayal of our progressive values”.

2. It is a matter of intergenerational equity: “There is nothing progressive about condemning ourselves and our children to decades of debt, higher interest rates, fewer jobs.”

Nick Clegg and company keep emphasising how shocked they were by the state of the country’s finances, but thus far – despite all the welcome transparency – they have offered nothing to explain why they were quite as shocked as they were. The report of the Office of Budget Responsibility was mixed: it suggested that the structural deficit was worse than we’d thought but that public spending was actually under better control. Clegg himself keeps talking about this meeting he had with Mervyn King and how it made him see the light; it is almost as if he has come back from Mount Sinai carrying tablets of stone. But Mervyn King is just one man, and not one whose prognostications in the past have proven to be infallible. What is King saying in private that he can’t tell us in public? Why wasn’t it being said before the election? And how has it shattered Clegg’s and Cable’s own views of economic policy so irrevocably? I always knew that both of them were fiscally conservative, but this is radical neo-liberalism. It is the most spectacular policy volte-face I’ve ever seen.

More to the point, why does no-one else in the world appear to be pursuing a similar strategy. The UK is not in the mess that Greece is in, yet the coalition government is behaving as if it is. We know why the Tories want to do this: they’re Tories. I’ve yet to hear a single, coherent Liberal Democrat argument for why we should be going along with this.

The thing is, we do have choices here; lots of them. The government have made two fundamental choices which, on the face of it, contradict the advice of a very large number of economists and thus urgently need to be explained. Firstly, they are seeking to tackle the whole structural deficit within five years (something which the Lib Dems denounced during the election). Secondly, they are seeking to do this overwhelmingly by cutting rather than taxing (something which, to be brutally frank, the Lib Dems fudged during the election). I can see nothing in the OBR figures which suggest that such a strategy would be madness; quite the opposite. If the structural deficit is larger than we imagined, then surely there is a case for tackling it over the longer period of time, and an even greater scope for tax increases? To do otherwise would just risk damaging the economy, surely?

It is one thing to cut £6 billion this year: frankly I was pretty unfazed by that. But the numbers the government has started talking about really will risk – if not guarantee – a double dip recession. Withdraw the amount of money from the economy that we are talking about, and it is hard to see how the outcome will be anything other than negative growth. It actually looks as if, despite all the reassurances a few weeks ago, the government’s agenda is to actually engineer a new recession, seeing it as a necessary bit of pain with a view to long term benefits.

The last time that was done was the early 80s, under Thatcher. The result? In some parts of the country a whole generation was left on the scrapheap. Far from tackling the structural deficit, we’re still paying for it. That shocking welfare bill that Frank Field and Iain Duncan Smith have been given the task of slashing? A large proportion of it is due to the government plonking a large proportion of ex-miners onto incapacity benefit. The price has not just been financial; lives were shorn of value overnight; communities were destroyed; the following generation grew up with no hope and no aspiration. Social mobility fell. This is what shock doctrine economics does to a country and even the Tories pledged we would never return to it.

This brings into question the claims that such a hard and fast approach is progressive from an intergenerational perspective, and also causes us to consider some other worrying trends emerging from the government. Leaving aside David Willetts’ extraordinary views that higher education is an intolerable burden on the taxpayer, we have the fact that one of the main things the government has slashed over the past month has been youth employment schemes. Clegg’s argument that it is progressive to cut now to ensure that future generations don’t end up paying for our mistakes are only actually convincing if the future of those generations are not being curtailed by the same economic policies. Deny a graduate or teenager a chance of either employment or training now, and it won’t matter to them how high taxes are in the future because their own earning potential will go through the floor.

All of this flatly contradicts Clegg’s emphasis on social mobility, or does it? Because when he talks about social mobility, as he did on Thursday, Clegg’s emphasis is all on children. We can all agree that the most effective time in a person’s life to invest in is their early years, but this truism appears to have fallen victim to doctrinal reductionism. Simply put, it makes no sense whatsoever to invest in early years and schools while having nothing to offer people once they hit 16. What is the value in the government creating the most aspirational dole queue in history?

All of this adds up to an emerging picture of futures of the current crop of teenagers and young adults being sacrificed in the name of their younger and older generations. You’ve got to ask what they’ve done to deserve it? Equally, you’ve got to wonder if Clegg and Cameron would be quite as ready to do this if Antonio, Alberto, Miguel, Nancy and Arthur were a little older.

No-one else seems to be taking as much of a hit. Wealth taxes have been almost entirely ruled out, despite the fact that taxes on property values (or, better yet, land values) would have the least negative economic impact. And yet, far from being an economic burden, it is the 14-22 generation that we will largely depend on to make our economic recovery over the next decade a swift one. I am completely mystified; it makes no sense to me whatsoever. It seems to have been concocted by a bunch of people more concerned with sounding tough and being seen to make grown up decisions than actually steering the country down a fair and economically sustainable path. In short, it screams of groupthink; I pray that I’m wrong.

Late last week I spoke to someone on the “inside” and painted them a rosy picture. I speculated that all this doom and gloom that had been coming out of the Treasury and Downing Street over the past fortnight was a shadow play designed to placate the Tory headbangers and that what would emerge would be something surprisingly progressive and far-sighted; people like me all breathe a collective sigh of relief.

I still like to think that is a distinct possibility, but my source didn’t seem to find my theory anything more than charmingly off the ball. If they would at least offer us an actual economic argument, it would be something. Instead we just get echoes of Thatcher’s There Is No Alternative.

Conference and canards

God know’s why I’m still up at 3am. Still a bit wired after conference I guess. I’m not staying up much longer but I wanted to write that I thought it was an excellent weekend both for the party generally, the Social Liberal Forum in particular and me personally. A few random thoughts:

1. I was pleased by the answer Danny Alexander gave me regarding the FPC playing a more pro-active role in formulating a response to government legislation in light of the Digital Economy Bill debacle. I have a few thoughts on this but will write about them later.

2. I was less pleased by Nick Clegg’s non-commital answer to my “friendly” question about if he rules out further tax rises, as he appeared to do in the Spectator this week. He neither confirmed nor denied the position he took. SLF Chair David Hall-Matthews also pressed him on this during the economy debate. The rumour going round was that he privately acknowledges “misspeaking” but it is concerning nonetheless.

3. Despite my constant grumblings, I really do think that Nick Clegg nailed it in his conference speech. “Change that works for you. Building a fairer Britain” is a lousy slogan but then, aren’t they all? As spelt out during the speech however, at its core is a brilliant narrative which encapsulates what distinguishes the Lib Dems from the other parties. The fact that we even have a narrative (or rather, a narrative of our choosing rather than one imposed on us) is a bit of an innovation for the Lib Dems going into an election. The four themes work well and, crucially, join together. The bad old days of the 2005 policy pledges seem long ago.

4. Standing room only at both SLF fringes, including the one about passing a constitution. FTW!

Finally, over on the SLF website, I’ve written a response to the Left Foot Forward/Fabian “research” which purports to prove that the Lib Dem tax policy is regressive – by its own admission it only applies if you cherry pick the tax cut while ignoring the tax rises being introduced to pay for it. Spectacularly bad.

The Peopl(ish) Budget

Vince Cable has been dropping heavy hints about raising taxation over the last few days, so it is not a tremendous surprise to see him and Clegg calling for a tax on the value of properties above £1m.

I will blog in more detail later, but initial responses? Firstly, it is regrettable that this is yet another badly handled stunt announcement which has bypassed the policy committee, but it will surprise no-one to hear me say that I believe it to be a step in the right direction. It doesn’t go anything like far enough though. 0.5% on properties above a £1m threshold? So a £2m valued property would be looking at a £5,000 tax. Chickenfeed for the people who have profited from a property bubble for decades.

It won’t raise very much – £1.1bn. Why, when it comes to public services is the emphasis all on “savage” cuts, yet when it comes to wealth taxes we are taking such baby steps? There is a real cognitive dissonance between the two approaches. We should go further and ideally the tax should be on land values rather than property prices (although if we want to introduce something immediately, the latter will be easier and it can be replaced by a land value tax over time). Even Centre Forum, the holders of the Orange Book flame, are calling for a 1% property tax (plus scrapping exemption of capital gains on property), which they would estimate would raise £6-10bn annually (pdf). That sounds like a good compromise to me.

The right, no doubt, will start hopping up and down and denouncing this as a tax on “aspiration.” What are tuition fees though, if not a tax on aspiration? Vince is currently calling for benefits to be scrapped for all middle income earners – families in particular. If that isn’t effectively a tax on aspiration, what is? They need to get serious and stop realise that aspiration is not a luxury that only the rich can afford.

Anyway, I need to digest this. In particular, I need to read what Vince has to say in ALTER‘s new pamphlet The Case for a New People’s Budget.

Are only classical liberals interested in saving money?

I was intrigued to see Mark Littlewood’s suggestion that Nick Clegg’s latest “In The Know” initiative is evidence of his innate classical liberalism.

Maybe Mark is right and inside Clegg there is a slash and burn tax cutter struggling to come out (it certainly seems like that at times), but the idea that saving money is a preserve of classical liberal/libertarians is bunk.

Way back in January I was the rapporteur for a session at the party’s policy conference where we discussed tax and spend. There didn’t appear to be many classical liberals sitting around the table with me but one of the things that exercised us all was how to make pledges to save spending that sound authentic rather than, to coin a cliche, the usual nonsense about cutting paperclips. It ended up forming one of the main things I ended up reporting back. It was just a brainstorming session, but it generated a lot of good ideas:

A said he was sceptical about efficiency savings, citing the Gershon Review and the James Review as ineffective attempts to do this.

B pointed out that the UK government spents £123bn per year on quangoes – the savings could come out of that. He suggested scrapping pay to sit on quangoes (although C pointed out that that would mean that only the wealthy would be able to afford to sit on boards).

He suggested that the current civil service encourages people to manage as much staff as possible. He suggested giving civil servants “financial incentives to do themselves out of a job.” Civil servants who managed to come up with money saving ideas should be rewarded with a proportion of the money they had managed to save. This idea seemed to enjoy broad support from within the group.

D said that, having worked in the public sector, she was disgusted by the level of waste she had seen. Too much pointless paperwork. She called for front line workforce to be “empowered.”

E was concerned that money saving measures would lead to redundancies, but the general view was that this would free up money that could be passed on a tax cuts (or spent differently).

F suggested more extensive use of the Sustainable Communities Act “right to know” how public bodies spend money within each local authority.

(Names deleted).

I like to think that our groups’ call for giving civil servants incentives to do themselves out of a job may have helped pave the way for In The Know, although of course I have no way of knowing if this submission was actually read by anyone rather than quietly shelved.

The week in Georgism

I still haven’t got my post-election blogging groove back. In the meantime, here are this week’s news referencing Henry George out there in the internets.

First, “The Silent Consensus” has a piece on the Daily Kos. He begins by quoting Thomas Paine:

“Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds.”

See also FDR’s Second Bill of Rights and the Progressive Mission and Resurrecting Henry George: The Case for National Housing Assistance. George also gets a brief namecheck on the Huffington Post this week.

Old Henry also appears to have been the inspiration for a sculpture garden in Fairhope, Alabama.

Over in New Hampshire meanwhile, Professor Richard England is making the case for a land value tax.

I’ve noticed a slight increase in talk about LVT stateside recently. Is it the start of a post-crash trend? Time will tell.

One Year On: Orange Bookers Found Wanting

If the newspapers are anything to go by, Nick Clegg has taken the party irreversibly to the right; we are all economic liberals now.

Strange then that, on the day Clegg marks his first year as leader he unveils a policy of purist Keynsianism. Still, as the old saying goes: if you have a reputation as an early riser you can lie in until noon.

The Green Road Out Of Recession is not merely not a tax cut – it is an alternative to a tax cut. That low rumbling noise you can here is David Laws’ teeth grinding.

But I am here to praise Clegg, not bury the so-called Orange Bookers. I was relatively supportive in principle of a VAT cut; a VAT cut is better than the Tory plan to do nothing. The Green Road Out of Recession is better still.

Cobden’s complaint that the money won’t be spent immediately is, to use his choice turn of phrase “utter bollocks.” If the UK government were committed to this plan, it could start handing out cash to private contractors within a matter of days. That would mean saving real jobs at a vulnerable time; jobs and skills that no fiscal stimulus could save.

Reading through it all (pdf), it really is a great piece of policy work, matching campaign objectives with specific costings. In short, it is everything Make it Happen and Clegg’s ill-advised blagging about vast bulky tax cuts was not. On top of that, it offers economic relief in the short term followed by a boost to our environmental and social goals in the longer term. Steve Webb deserves hearty congratulations. It kicks caboose.

Fundamentally, it shows that for all his talk about not wanting statist solutions, there is still a real place for precisely that. In this case, one of purest economics, the more rightwing economic liberals simply have nothing to say. They’re whole case is built on a presumption on excess capacity and endless growth; as soon as both those presumptions go out of the window all they can do is stare dumbly.

So at end of a… variable year, I find myself with a big smile on my face. A clear sign that we are going in the right direction at last. Here’s hoping the next twelve months will have a lot more days like today in it.

Lord Jacobs becomes rightwingers’ new poster child

The Times reports that Lord Jacobs has quit the party to sit as a crossbencher on the grounds that the party’s position on tax does not include tax cuts for the rich, paid for (if Lord Rennard is to be believed) by a 6p hike in NIC. Despite Sam Coates’ best attempts to dress this story up into another typical Times piece of donor porn (I was half-expecting the piece to start going on about the quality of the soft-furnishings in his central London home and to coo erotically over the prospect of him owning a yacht), it hardly looks damaging for the party. Old man in a hurry throws toys out of pram. Shrug.

What is rather more interesting has been the reaction on Lib Dem Voice. The general reaction has been one of bemusement, but Tim Leunig leapt to Jacob’s defence:

It is easy to rush to attack someone who is leaving, but I think this is a bit churlish. Lord Jacobs has worked very hard for the party over the past twenty years, in financial and other ways. He is not someone who turned up, donated £100k one day and became a Lord the next without understanding or supporting our principles. When someone that committed leaves the sensible thing is to sit them down and talk to them. Because who knows, they may be representative of a chunk of the party.

Except that, um, no-one was attacking him. Later still, Oranjepan quipped:

“…Jacobs his obviously flounced off in a huff…”

Oh dear, I don’t think anyone could seriously believe that (I mean seriously!).

For someone who has been around our party (and forebears) for so long he is clearly aware of our role in the process and pragmatic enough not to have walked away during more contentious times.

Jacobs clearly sees some other merit in these actions as he is still overtly supportive, so I think it will be interesting to see whether he continues to be a donor to the party… wheels with wheels…

My feeling is that he has deliberately isolated himself in order to open up a debate on this issues. If the Fabians and others are coming out in favour of Clegg’s leadership then these manoeuvers demonstrate clear political dexterity and a full awareness of how opinion is formed.

At age 77 such a principled gambit should be applauded and it shows he has both the nous and the cojones to make one more throw of the dice.

I genuinely don’t understand this. Cutting personal taxes by raising employer NIC is not a tax cut at all. To use Osborne-esque rhetoric, it is a tax con. It would massively increase the cost of employing people. Those who weren’t made redundant as a result of the hike would find their wages suppressed over the medium term and find themselves no better off over the longer term. And what is this to pay for? A tax cut for the pensions of the wealthy.

I can understand why an old school Tory would be attracted to such an idea – as I said before they aren’t the free marketeers they are often portrayed as – but why would an economic liberal be attracted to it?

It does seem, superficially at least, that they got drawn in by the Times (and Jacobs’ own) spin about tax cuts and thought they would portray him as some kind of martyr of the right. The enemies’ enemy is my friend, and all that. It is quite curious and generally surprising. I look forward to seeing if this is the start of a discernable pattern with interest.

The return of clear blue water? I’m bored already

As regular readers of this blog will be able to testify, whenever I say nice things about the other parties, it always comes back to bite me in the bum.

So it was that I backed Caroline Spelman and Ray Lewis, shortly before it became clear their actions were indefensible. And last weekend I wrote a favourable review of plans to cut VAT, responding to reports that the Labour Government were planning to do precisely that.

I still say that cutting VAT now and short term unfunded tax cuts in general, makes a certain amount of sense right now. They won’t stave off recession, but they could give us a softer landing. Doing nothing and whinging about how “I wouldn’t start from here” – the Tory approach – is likely to make things worse. What a shame therefore that the Pre-Budget Report was such a confused mess.

You can sum up the confusion at the heart of the PBR with one statistic: NI is set to increase by 0.5p in the pound. When you’re reduced to playing with silly numbers like that in taxation policy (and that’s only after 2011 – something tells me the Treasury will have rewritten their plans several times by then), it’s clear you lack the confidence of your convictions. It’s just so faffy.

Putting VAT back up in 13 months is just daft. Personally, I’m willing to be on it not happening. We’ll get to next November and the CBI, FSB et al will be lining up to demand the rise get deferred another year. And since when did the Treasury do January-January budgeting anyway?

What we needed was something strategic. Gordon Brown is a tactician, not a strategist and this has always shown in his budgets. It is all about the detail. The Lib Dem proposals for a tax shift are all about strategy – where we want to be in 5-10 years time not merely about getting out of the current hole. As it happens they would help there too.

And what of the Tories, this back to the 1992 bombshell stuff is already getting old. They’ve now replaced the vague, ominous threats with specific threats. The Treasury’s stupid fumble over releasing the wrong draft of the PBR enabled them to start talking about a VAT increase to 18.5%, and now they’ve managed to magic up a VAT increase to 20%. All very scary sounding stuff, except for two things. 1) You cannot argue, as Cameron and Osborne are that a 2.5% reduction will have no effect on the economy while claiming that a 2.5% increase is a “bombshell”; 2) If the situation is really as bad as they claim it is, if they do get into power they will either have to detonate the “bomb” themselves or slash public spending – we’re talking decimate the numbers of schools and hospitals here. In reality, they’ll probably end up doing a bit of both.

So it appears we are back to clear blue water: the Tories scarifying about tax increases and Labour scarifying about public funding cuts. None of this is to question the fundamentals of our economy or to ask why it is that individuals at the bottom of the socio-economic ladder pay so much in tax while those at the top pay so little. None of this is to question whether we can continue to base our economy on financial speculation. None of this is to ask how we might start to rebuild our industrial base. And don’t even mention the environment, that is so 2006. A return to party politics in other words, in which the main parties conspire to avoid talking about anything that actually matters.

Curb your enthusiasm.

Cutting tax is not a zero sum game

I’m cautiously optimistic about the rumoured plan of a 2.5% drop in VAT. It sounds like a good move to me, for several reasons.

One thing a VAT cut won’t do is lead automatically to a reduction in prices. Most food isn’t VAT-rated and it is hard to believe that a CD priced £9.99 this week will be priced £9.78 next week. However, taken together those 11ps start to add up. At the top end of the scale, being able to shave a bit more off the asking price for that plasma screen might just make the difference between whether it sells or not. If spending on the high street is down a couple of percentage points, dropping VAT by about the same amount could save real jobs. That means more people paying NI and income tax (and VAT) and fewer people claiming JSA. Looking it in that way, we have to ask ourselves the question: would it cost the Treasury more or less to keep VAT at 17.5%?

Gideon Osborne is not this blog’s favourite Shadow Chancellor, but I will give him credit for one thing: he has managed to get the media to completley buy into his claim that tax cuts now – any tax cuts – will automatically lead to paying a greater price in the longer term. The truth is much more complicated than that. VAT is a deadweight cost – a tax on commerce which is generally seen as a good thing. In my personal utopia, we wouldn’t have it in the first place. Dropping it at the start of a downturn has a real chance of softening the landing. It isn’t a magic feather, and there is certainly a point where the cost of dropping it outweighs the benefit, but it is a practical measure.

Vince Cable has broadly welcomed it, while emphasising the Lib Dem’s own policy for a tax switch (both policies are compatible). Cameron and Osborne have rubbished it. That should surprise no-one because VAT is the tax of choice for the Conservatives. It was Mrs T’s favourite tax. Raising it still further was one of Norman Lamont’s first acts as Chancellor. Ken Clarke, keen not to be outdone, expanded it to gas and electricity (Clarke has now come out as a VAT-cutter, suggesting his common sense now outweighs his dogma). Tory ginger group Direct Democracy – the closest the Conservatives get to genuine localists – envisage a world where council tax will be replaced by, you guessed it, a sales tax.

Once you remember that the Conservatives are not a pro-business party but a pro-entitlement party, it is easy to see why: piling the VAT on the proles means that you don’t have to pay for things by taxing unearned wealth. So for future Baronet Gideon Osborne to recoil at the merest suggestion is no surprise. The only tax cuts he will consider are on things like inheritence tax for millionaires.

The Tories have decided they are back in 1992, and have relaunched their “tax bombshell” posters. Labour should follow suit. Anyone remember VATman?

What Clegg should ask in PMQs tomorrow

Unusually for me, for the past couple of weeks I’ve been watching PMQs.

It hasn’t been a happy experience for me. On both occasions Clegg has been felled by Brown, who on both occasions has simply swatted him away by smearing about £20bn cuts in public services. And I can’t help but feel that the confusion at the heart of Clegg’s own strategy has lead these blows to be effectively self-inflicted wounds.

It’s time he rethought this strategy. Instead of flailing wildly once Brown has accused him of wanting to cut public services, he should confront it face on. I’d like him to say something like:

The Prime Minister has repeatedly accused me of wanting to cut public services. If by that he means I am calling for him to abandon the appalling money pit of the national identity card scheme, scaling back the NHS IT programme and [your choice here], then I plead guilty. In this time of economic crisis, how can he possibly justify continuing to waste public money on these projects?

Come on Nick, don’t make me put my head in my hands for the third week running.