Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts

Sunday, March 29, 2015

Kill the old

... is a slogan I saw on the back of an upper deck bus seat in the 1980s. Shocking, but perhaps only just: after all, we have killed the young unborn in their millions, especially since 1967.

Now we face a demographic imbalance that will ravage the Welfare State and cripple us with taxes, as this article explains.

Or to put it visually:



Same story as in Japan, except there they still make something other than City bonuses:




Why does the Government encourage us to eat healthily? We should all do like Ken Clarke.


READER: PLEASE CLICK THE REACTION BELOW - THANKS!

All original material is copyright of its author. Fair use permitted. Contact via comment. Unless indicated otherwise, all internet links accessed at time of writing. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Sunday, October 13, 2013

Why we should switch to Land Value Taxation, by Mark Wadsworth

Harrisburg, Pennsylvania USA - the "Georgist" town is an LVT success story.

There are plenty of articles explaining why taxes on the rental value of urban land/location* are the best kind of taxes, some of them start with the underlying moral arguments – that land is a free gift of nature or that 95% of location values are created by the whole of society (“Location, location, location”) – and some skip straight to the positive outcomes (more efficient use and allocation of land, no deadweight costs).

(* Please note that agriculture measured by farm gate prices is only one per cent of the UK economy and the rental value of all farmland, three quarters of the UK by area is only one per cent of the total rental value of urban/developed land. It is barely worthwhile collecting taxes on the value of farmland, this is a non-issuer).

Just for a change let’s start in the middle and look at this from a purely pragmatic point of view and compare and contrast three basic kinds of tax in terms of these five headings:

i)       assessability

ii)     collectability

iii)   dead weight costs

iv)   ability to pay

v)     willingness to pay

I’ll put numbers on all this in a later post – it is most illuminating if we assume that the government rolled all existing “taxes” (i.e. ignoring duties and rents in the narrower sense) into one single tax which would have to raise about £450 billion a year – this post is just to illustrate the principles.

Poll tax

i) These are easy to assess, it is simply the total tax revenue required divided by the number of adults obliged to pay it.

 ii) Collectability is appalling, as we well know.

 iii) Ignoring the enormous costs of chasing all the people who can’t afford to pay, poll taxes score well in terms of dead weight costs as they are not a tax on income, so they are an incentive to earn as much as you can rather than being a disincentive.

iv) They score appallingly on ability to pay, by definition, as there is no correlation between the tax and your assets or income.

v) Everybody hates paying tax. If the entire government were funded by a Poll Tax then the top third or quarter of people by assets or income would do well out of the system if everybody pays up, but they would have the same incentive to cheat as anybody else by e.g. claiming to be non-resident.

Further, there is no correlation between the amount you pay and the benefits you receive from society as a whole. S successful stockbroker who takes the subsidised train out to his four-bed detached house in the catchment area of a good state school in Surrey clearly receives far more benefits than an unemployed ex-steel worker in a council flat on Tyneside.

 Taxes in turnover, employment, profits and income

 These include Value Added Tax, National Insurance, corporation tax and income tax. Please note that VAT is not a harmless tax on “consumption”, it is a tax on gross profits of unfavoured productive businesses and is simply not applied to most profits derived from land ownership or banking.

 i) Assessability is not impossible, as we know, but most businesses have to cope with four layers of tax on income and split up their turnover, expenses and residual payments out into VAT-able and exempt turnover (or expenses); into payments to employees and the self-employed and into taxable and non-taxable profits (reinvested profits are by definition matched by capital spending or capital allowances). Individuals have to go through the same rigmarole.

 ii) Collectability. There is every incentive to avoid taxes. If it is simple evasion then economic activity still takes place, but the residual rates of tax have to be increased on those who are not in a position to hide their income (or who are just too honest for their own good). We know that even in the UK – which has quite a good record of compliance) there are huge amounts of evaded and unpaid taxes.

iii) Dead weight costs. These are enormous of course. These costs refer to the huge but invisible costs of all that economic activity which simply does not take place because of taxes. It is estimated that every 1% on VAT costs 100,000 jobs, for example, the impact of the other taxes in isolation is not quite as dramatic, but it all adds up. So businesses go out of business (or never get off the ground) and we end up with mass unemployment. The total deadweight costs are ten or fifteen per cent of GDP, i.e. between £100 and £200 billion a year (more than enough to eradicate our trade deficit and to turn it into a comfortable surplus).

iv) Ability to pay. These taxes score relatively well on that front, by definition. But remember that if you look at all these taxes in the round, the marginal rate for our median taxpayer (basic rate employee not entitled to tax credits working for a VATable business) is fifty per cent, with much higher rates for higher and additional rate taxpayers and the highest rates of all for those receiving means tested benefits. Again, the people who lose out most are those who pay little or nothing in cash terms – in other words all the failed businesses and the unemployed.

 v) Willingness to pay. Although most people comply, this is only grudgingly –they are too honest to cheat and there is a vague understanding that somebody has to pay for all the things the government does. But there is absolutely no correlation between the amount of tax you pay and the benefits you receive from the government. If anything there is a negative correlation because the highest earners receive nothing in cash benefits and are more likely to pay extra for private security, private health insurance or private education.

Taxes on the rental value of land

Land Value Tax in all its guises scores well on all fronts and seem to combine the best aspects of the other two types:

i)                   Assessability. Is easy. As a layman, you cannot begin to guess how many adults live in a particular home, how much they earn or what the turnover and profits or a particular business are – it requires the force of law to make people disclose all these things.

But working out the rental value of each site is very easy; all you need to do is to know selling prices and rental values of a reasonably large sample of residential and commercial premises in each smaller defined area. You then subtract the rental value of similar premises in the cheapest area and the balance is the “site premium”, i.e. the “location, location, location” value which is generated by society as a whole.

 
ii)                 Collectability is also a doddle. Whoever is registered as the owner at HM Land Registry has to pay the tax each year. If that owner does not pay, then the arrears can easily be registered as a charge and once two or three years’ arrears have been built up, the title is auctioned off and the arrears withheld from the sales proceeds. For sure, some land owners are not yet registered at HM Land Registry, but that is far from saying that the land itself is not registered and this has never been a hindrance to collecting Council Tax or Business Rates, which have the highest collection rates of all taxes at 98% or so.
 
iii)               Taxes on the rental value have zero dead weight costs – like a Poll Tax - as they are not related to private income or output. There is plenty of evidence to show that they tend to stimulate the economy because land and buildings will always be put to their most efficient use, in other words it would be too expensive to keep valuable urban sites out of use or to allow buildings to fall derelict. If taxes on land replace taxes on output and employment etc, then this would shed the economy of the existing dead weight costs.

iv)               The traditional main argument against taxes on the rental value of land is “ability to pay”, the Poor Widow Bogey. They say that the tax would hit the “asset rich, cash poor”. This is a non-argument in practical terms because it would be easy to give such people discounts, exemptions or even better, the opportunity to defer and roll up the tax to be repaid on death.

It is also only a transitional issue and does not apply to the working population (the “wealth creators”) anyway.  By and large, low-income people move into cheap houses and high-income people move into expensive houses. Each purchaser will take the tax into account when deciding which house he wants to buy and will reduce the amount he is prepared to take out as a mortgage accordingly, so in real terms, the tax costs him nothing. It is the same with business tenants – they work out how much premises are worth to them, subtract the Business Rates and pay the smaller balance as rent to the landlord.

v)                 Willingness to pay. Today’s land owners spit feathers about Business Rates and Council Tax, and we know that the banks and land owners (and their stooges in the press, Parliament and academia) have been are running a highly successful anti-LVT campaign for a century.

But look at in terms of tenants and the next generation of purchasers. Unlike taxes on income, there is a perfect correlation between what you pay and what you get. If you are willing and able to pay more, you get somewhere nicer, if you are unwilling or unable to pay, you get somewhere not so nice – but this is exactly the same allocation as under current rules whereby land/location values are collected privately by the current land owner when he rents or sells.

This is absolutely no different to owners of big cars paying much more in VAT on the new car, in fuel duty or road fund licence. If we go with the fiction that VAT is borne by the purchaser, does anybody complain that VAT on new cars is unfair, as it does not relate to “ability or willingness to pay”? Of course not – if you can afford a new BMW, you pay £10,000 in VAT and if you buy a run of the mill family saloon, you only pay £4,000 VAT. If you can only afford a second hand car, you pay little or nothing in VAT.

Summary
 
Land Value Tax has all the merits of a Poll Tax – it is easy to assess and has no dead weight costs, but beats it hands down in terms of collectability, ability and willingness to pay (there is a match between amount paid and benefits received).

Land Value Tax has all the merits of taxes on income as in the medium term as it relates to ability to pay (once everybody has “right sized”) but none of the disadvantages – it is easier to assess and collect and has no dead weight costs. It also beats it hands down in terms of “willingness to pay”.

So besides the moral or philosophical arguments and the fact that LVT leads to better outcomes (an LVT-only world works better than a world without government or taxes), it is quite simply the case that LVT beats all other forms of tax in a simple everyday pragmatic sense.


All original material is copyright of its author. Fair use permitted. Contact via comment. Unless indicated otherwise, all internet links accessed at time of writing. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Thursday, February 18, 2010

A dire warning

Egon von Greyerz of Matterhorn Asset Management lays out his reasons for investing in physical gold. You may or may not accept his argument, but his analysis of worldwide economic problems is deeply troubling.

Whether or not gold is the right prescription, I am very much afraid that he may be making the right diagnosis and prognosis. Do have a look.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Thursday, December 17, 2009

The inflation-deflation debate

Sheffield-based analyst Nadeem Walayat demonstrates that, apart from a blip a few months ago, the long-term inflationary trend in prices continues. Whether you look at CPI or RPI (the latter includes mortgage costs), household bills are rising.

He also examines the trend in UK public debt, which again seems to be rising unstoppably. The Chancellor has predicted growth for the UK economy, but that growth is more than paid for by borrowing, so overall we will be worse off. Controversially, Walayat suggests that the motive is political: deliberate damage to the economy in order to leave the next (presumably Conservative) government "scorched earth". We must hope that British governments do not really operate so irresponsibly.

Walayat concludes with a look at some commodities that investors may choose as hedges against inflation: energy (natural gas), gold and silver. He offers some technical comments on fund charges and whether the way the fund invests is likely to track the real progress of the commodity's price. He feels that gold and silver funds correlate better with actual prices in these markets, though he warns that theft and fraud are always possible.

But the readers' comments are worth looking at, too. "Raleigh" points to an estimated $6 trillion reduction in the value of US housing, which more than offsets the recent $1 trillion increase in US government borrowing as a result of the banking crisis. His view, if I understand it correctly, is that such net deflation will put a downward pressure on prices and wages.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Tuesday, December 15, 2009

Janszen: Gold is not overpriced

"Gold ads bug us from the TV and radio. To the new gold experts this means gold sentiment is now too bullish. We’re due for a crash.

Have they noticed that the gold ads are about selling not buying gold?"

In a long but well-worth-reading article, Eric Janszen of iTulip maintains that despite eight years of rising prices, gold is not undervalued, because the economic system is unstable. He points out that, for the first time in many years, central banks have started to buy gold.

Unlike many commentators, he doesn't support the notion that the dollar will collapse, because other major economies (e.g. China and Japan) have become dependent on the USA to buy their exports. Global inter-linking means that the coming bust will not take the same form as previous ones.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Tuesday, September 22, 2009

Up with bonds, down with equities, out with with-profits

After the stockmarket ructions, pension funds are getting more cagey and thinking about weighting more towards bonds (htp: Pension Pulse). (A seminar I went to maybe 10 years ago predicted this trend.) Bill Gross of Pimco is also thinking that way; at the same moment when others reckon the recession's over, or nearly so.

My concern is that the market is now so volatile that only active traders will be interested. The smoothing approach of British with-profits funds has been undermined by downswings so sharp that more than once recently, they have had to apply penalties to investors seeking to exit early; which in turn will make those investors less inclined to reinvest in with-profits, and indeed quite possibly put them off investment generally.

That, plus the need to take more income as the population ages, plus a poorer next generation that will work longer, be taxed more and have less in State and other pension provision, plus the burgeoning of the world population, the gradual equalization of world average income (and it's a very low average), plus increasing ecological limits to fast-buck-type growth, all tend to make me more a bear than a bull for as far as I can see, whatever may happen in the short term as a result of desperate overstimulation with fiat cash.

Yes, there'll be opportunities for the agile financial player; but for the mom-and-pop saver?

Sunday, September 13, 2009

What's good for the [Dow] ISN'T good for the country

Jesse: It is possible that the Fed monetizes sufficiently to reinflate an equity bubble, essentially whoring out the Dollar and the real economy for the sake of the financial or FIRE sector.

This is what I have been thinking - that the stock indices are now fundamentally disconnected from the health of the economy.

Fashion and the stockmarket

There has been serious research on the connection between what people wear and the state of the economy. I forget who, but a successful investment manager used to look at all sorts of apparently unconnected phenomena, including fashion, to get a clue as to what was really happening and about to happen.




PS: My wife says 80s-style shoulder pads are coming back in the Autumn catalogues. A bullish sign?

Monday, August 31, 2009

Marc Faber - total breakdown ahead





... in my view, the big crisis is ahead of us. It may come in 4 or 5 years' time, maybe only in 10 years' time, but the total breakdown of the system is ahead of us and it will devastate the global economy. (4:18 on)

You have to decide whom to believe. Including Steve Keen, it's said that only 12 professional economists worldwide foresaw the crunch, although there are 10 - 15,000 practising in the US alone. So the majority verdict is useless. To me, Faber has the ring of truth.

The good news, such as it is, is that we may have a few years to prepare.


As to perceived turning points, I looked at this last December:

Saturday, February 14, 2009

Should we leave the EU?


Is this a fair picture of our relationship with the Far East and Europe? If so, what happens if we disconnect from "ever-closer union?" Wouldn't they just throw away the straw and drink straight out of the glass?

Friday, January 23, 2009

Running repairs

VoxEU describes the international economic strains in the Euro area and the need to patch up the collective fuselage so it can continue flying. I'm not an expert, but it looks like a mess to me.

Pic: "A rocket fired by an enemy fighter inflicted this damage on The Sack, a B-17 of the 379th Group. A 14-inch fragment of the rocket tore the pants off of the turret gunner without hurting him."

Friday, July 25, 2008

Inflation, deflation, the world economy and freedom

This article by Matthew Beller on the Mises website tries to show how the US government can't "print its way out" of the present crisis.

The Federal Reserve controls the "monetary base" of physical currency and bank deposits, which represent only 15% of the money supply; the rest is bank lending. Currently, the banks are in a fright, so they are reducing credit, on which the economy depends. But if the Federal Reserve increases the monetary base, the banks' ability to multiply their deposits could lead to hyperinflation and the destruction of the dollar altogether. Hence the attempts to maintain confidence in the banking system instead, even if that means expensive financial support.

This isn't enough for the monetarists. They say the lending in the recent boom went on consumer spending, which encouraged producers to make too much of the wrong stuff and so the economy developed in the wrong way. The econo-Puritans say we should accept deflation because, although temporarily painful, it will rebalance the economy for a more sustainable long-term future.

However, nobody likes nasty medicine, so a political question is whether democracies will allow politicians to take timely corrective action. Past history suggests that we'll only vote for the treatment when we're half-dead, and even then, we'll curse the doctor afterwards.

My feeling is that this tendency to delay means that underneath the business cycle is a fatal linear trend, moving wealth and power to less democratic countries. When the world economy recovers, it may be on very different terms: for although (e.g.) China may suffer a setback as the Western consumer reduces spending, Chinese industrial capacity has been growing over recent years - not only the factories and tools, but equally importantly the skills base. At the upturn, the East will be well-placed to cater for reviving demand, while the West struggles to supply appropriately-skilled labour, and tries to buy back some of the industrial materials it had previously exported. And as the East industrialises, it will generate locally a greater proportion of world demand.

I cannot see how we can avoid becoming poorer, on average, than we have been in past decades, even if an elite in our society grows richer and more powerful (a phenomenon associated with more impoverished economies). We cannot rely on high-end production: China will address its quality issues, as Japan did in the 1950s. Nor can we be complacent about intellectual property rights, in a world where might makes right.

But China itself has deep problems - an growing and ageing population; an increasingly unbalanced demographic structure, thanks to attempts to limit family size; pollution; water shortgages; declining quality of farm land. The Chinese leadership faces a long-term challenge in dealing with unsatisfiable domestic expectations, which will tend to make it intransigent in its relations with foreign powers. The East-West contest may become characterized by desperation on both sides.

And so democracy in the West will come under pressure. In difficult times, people are thrown back on a network of social relationships and mutual expectations, but sudden, unreal access of wealth has tempted us to put our faith in the amassing of cash, and/or government intervention, to the detriment of agreed internal social control and support systems. When the system enters its failure phase, which Fischer ("The Great Wave") thinks may be starting, the social threads begin to snap: inflation, crime, family breakdown, war. The reification of the ties that bind us together tempts our government to maintain the social order through externalised means of surveillance and enforcement. Ultimately, the mismanagement of national budgets is a freedom issue.

Friday, July 11, 2008

UK the financial "black sheep"

The UK now has the worst fiscal profile of any developed country in the North Atlantic sphere.

Daily Telegraph (htp: Mish)