Something for everyone to hate

So I’ve finally got around to the post I promised would be my “next post” three posts ago, back in December! If I were Queen Penelope, what taxes would you be in for, and what could you expect in return?

There’s a mixture of left and right-wing ideas here, hence the title of the post. But here goes, in point form, and without any detailed description:

Taxes:

  • V.A.T. of at least 20%, on all goods and services with no exceptions.
  • Personal tax brackets from 20% to 50%, rising incrementally.
  • Tax credits available as a fixed amount, higher for married people with children under 18, or single parents with children.
  • Payroll taxes levied at the same rates for all, no exceptions.
  • Low corporation tax rate of 15%.
  • Tax on the disposal of financial assets (this one will get a post all of its own and this time I do promise it won’t take four months).
  • Carbon taxes and “sin taxes” maintained at fairly high levels.
  • No capital gains tax.
  • No tax on interest income from investments.

Spending:

  • free education all the way to third level (first degree) studies. Tuition only but with means-tested assistance available for other expenses, with STEM fields receiving higher priority. A form of national service (two to three years, depending on the level of assistance) mandatory after graduating, serving in the field of study. This will be paid, but not at market rates. Some of this may take place in the private sector, with the government paying a portion of the wage.
  • free health care (means tested).
  • income supplement to low income workers with families.
  • unemployment benefit, on the condition that people make themselves available for work in a government program, such as the national service program described above.
  • disability benefit, upon regular assessment by the person’s own doctor, and a state doctor.

So there you have it – the complaints department is located below, in the comments section.

Not the Laffer Curve again!

I’m a little embarrassed that my previous, rather nasty post was at the top of the home page for so long. I haven’t posted since August! The human has changed jobs and only recently acquired a new netbook that I’m now appropriating. Anyhow, I’m going to make my right-wing bashing a bit more measured going forward. And what better place to start than the Laffer Curve, that piece of economic fantasy from the 1980’s that every now and again gets dragged out and dusted off. Given the supply-side tendencies of the current US vice-presidential hopeful Paul Ryan, such theories are very much in vogue right now.

The theory behind the Laffer curve (originally, so legend would have it, drawn on a napkin during a 1974 meeting) is essentially sound, and intuitive. If you accept that a government cannot raise any revenue at a tax rate of zero percent, or at a rate of 100 percent, there must be a rate somewhere in between at which revenue is maximised. Where the fantasy comes in is with any attempt to show where this point is. Indeed, any attempts to actually plot data for any given country shows a series of disconnected dots not even resembling a curve. The problem with data of this nature is that it is very difficult to establish what effect the tax changes alone have on the economy. Any study that could actually show that the Laffer curve is more than just a warm feeling in the conservative bosom would be big news indeed, especially with the current ideological war raging in the US.

So when I saw this video, I was intrigued:

Firstly I had a bit of a chuckle over what Tim Groseclose had to say about his economics textbook from 1984. My economics textbook from the same era has this to say about it: “Again, things did not turn out as supply-siders hoped. The tax cuts of 1981 did not generate additional tax revenues. Government deficits ballooned.” Oops!

But Groseclose claims we were all misled. And the really interesting bit is that he cites the Romer and Romer study from 2007 as evidence that the curve peaks at a 33% tax rate. He makes a big deal out of the fact that Christina Romer was an economic adviser to President Barack Obama, and the Romers are liberals. Of course, the king of all arguments from authority is one delivered by your ideological foe but supporting your position. Unfortunately for Groseclose, the Romer study does no such thing.

Here’s the study. I’ve spent a few days getting to grips with it, econometrics not being my thing much at all. The Romers isolated the effects of tax changes implemented for mainly ideological reasons, and conclude that such a tax increase has a significant negative effect on GDP (the study did not cover effects on government revenues). It doesn’t show anything we didn’t already know (although it’s great to have the data), that specific, targeted tax changes can be very effective in changing economic behaviour. This is what I’ve been saying for a long time, and it’s why I support the Irish government’s low corporation tax rate; something I’ve been criticised for by some of my more left-leaning friends.

But Groseclose must have some brilliant insight that he’s not sharing with the rest of us when he claims if you “do the math” you come to 33% as a revenue-maximising tax rate. I can’t figure it out and I’m not the only one. Even his fans are scratching their heads over that one. Come on Tim Groseclose, you owe it to conservatives everywhere to show us the math and prove us supply-side sceptics wrong.

 

 

On taxes and government spending

Economics is intertwined with politics, indeed in Adam Smith’s time no distinction was made between the two disciplines. One of the great questions right at the heart of this intersection-from-hell is that of how involved the government should be with regard to the economy. Everybody has an opinion, ranging from the extreme left’s Soviet-style planned economies to the extreme right’s libertarianism and laissez-faire approach. Neither approach can be shown to be empirically unworkable, yet planned economies were tried, and failed, and a completely “free market” is an elusive fantasy – fairytale economics.

So it would seem that the sensible approach would be a mixture of the two, but how to mix them is crucial, and economic success doesn’t always mean political success, especially in the short term. That is because you humans are very short-sighted when it comes to your comforts. Most of you would choose a lifetime of poverty if it meant you could be rich for just one day, as long as that day is today. But I digress….

Taxes – Spending = Surplus (or Deficit). Even politicians can understand the mathematics of this (you’d think). Raise taxes or cut spending (or do both), you get a surplus. Lower taxes or increased spending puts you in deficit. Countries are not corporations; a budget deficit is not necessarily a bad thing and, as David McWilliams points out in this piece: if everyone and everything is balancing their budget at the same time, that’s a recipe for disaster. Because my spending is your income, and vice versa. A targeted mix of policies is necessary to balance a myriad of potentially conflicting forces.

In general, I like taxes. But taxation is a powerful tool and should be used responsibly. It’s a bit like chemotherapy, it might kill the cancer but could also kill the patient. Tax policy needs to be simple. The simpler the tax, the harder it is to avoid. I love VAT, I could wax lyrical about VAT for hours (don’t worry, I won’t). VAT is a beautiful tax because it’s simple, impossible to avoid, and all the work in its collection is borne by VAT vendors, not the government. It’s also about the most fair tax you could imagine; because it’s a tax on consumption, everybody pays, and what’s more everybody pays the same percentage. Whoever invented VAT should be knighted and sainted.

I cannot understand how, in general, the same people who favour cutting taxes also want spending cuts. Lower taxes and increased spending are two sides of the same coin, they bring you to the same point, and can even complement each other. Of course you can’t always substitute one for the other; roads won’t be built and maintained if we cut taxes. And governments can be wasteful spenders. A low corporation tax, as we have in Ireland, is another way for the government to invest money (that would otherwise be raised by a higher tax) in job creation. This is an example of a sensible, targeted policy. It involves one tax type, and achieves a very specific outcome. Now think of the govt spending equivalent: Family Income Supplement (FIS). This is a social welfare payment made to working people  with families, to supplement their income (the clue is sort-of in the name). This effectively allows employers to get away with paying lower wages; it’s not only the employee who is being subsidised here. Now why would you be in favour of a low corporation tax, but averse to a government income subsidy? The answer is that some humans hold economic ideas the same way they do religious ones, and they don’t think about the implications of those ideas; this applies to left and right equally.

Which brings me to a final musing; there’s a growing fascination in right-wing economics with an unsubstantiated fantasy called “Supply-side theory”. One of the central dogmas of this religion is that lowering taxes leads to increased government revenues. Even if the Laffer Curve was an actual curve, and not just a series of disjointed dots (with very different results for different countries) which is what the actual data gives us, it’s still the Laffer Curve not the Laffer Vertical Line and you might just still be on the left hand side of it. It’s amusing that this is presented as a serious economic study……….sure, and Alice in Wonderland is a great work of non-fiction. To be fair to supply-siders, other economic factors, especially shifts in demand, are always getting in the way of them ever proving their theory. Which kinda just goes to show that those factors are much more important.