The Perfect Tax (1)

There are plenty of articles explaining why taxes on the rental value of urban land/location* are the best kind of taxes (see e.g. 2013 article in the FT), 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-issue).

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 (poll tax, income tax and land value 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 £700 billion a year – this post is just to illustrate the principles.

Poll taxes

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.

vi) 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. A 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 (non-cash) 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 no ultimate correlation between the amount of tax you pay and the cash or non-cash benefits you receive from the government. If anything there is a negative correlation at the bottom end (welfare and pensions claimants) and at the top end 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 urban/developed 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%.

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.

Ur-language: "Tax"

A recent archaeological discovery in the Caucasus is being hailed as the most important find for over a century.

Deep in a cave complex whose location is still secret lies extensive evidence of life before the last Ice Age. Cave Six, dubbed "Rosetta Max" by the researchers based there, is festooned with images and writing spanning tens of millennia, yielding radical new insights almost weekly into human prehistory, social development and the evolution of language. Yet last week's revelation may be the most dramatic of all: Palaeolithic political graffiti.

Cave 11c - a tiny and obscure offshoot of one of the most remote spaces in the system - appears to have been visited only once before in all of history. Examination of the dust and debris has uncovered the ashes of a fire and a single human coprolite. The latter is provisionally dated to 25,000 BCE, but a more precise figure will be ascertained with the use of advanced scientific instruments. However, the season of the ancient visit (autumn) is already established, because of the type of pollen grains found in the stool. And although hunting was a key element in the society of that time, there is no trace of animal matter here.

Low down on the wall, just where the fire might have shed a fitful light, is a crudely-executed image scratched into the rock and enhanced with ashes. This shows a number of stick-figures accompanied by goats, proceeding between lines of other, larger figures armed with short clubs and spears, towards a seated group wearing some ceremonial head-dress. The artist has depicted the latter with large abdomens and above them is a bison, unmistakably defecating.

There are glyphs beneath the sketch, most of which are currently untranslatable as they are not found again elsewhere in the cave-chain; except for one, phonetically rendered as "taks." Wild, but very tempting speculation has it that there is a connexion between what appears to be the exaction of payment in the form of herd-animals, the artist's meatless coprolite, the word "taks", the apparently disrespectful drawing and the use of rare language.

The work continues.


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.

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.

Strangling the goose

When the dust has settled on the Keydata case...

when Keydata and its directors no longer pay the taxman on profits, wages and dividends derived from a business that had, until the tax office got zealous and technical, apparently paid off all its debts, was showing a profit and had cash in hand;

when the former employees are claiming a complex array of benefits instead of paying income tax and National Insurance;

when PriceWaterhouseCoopers have sent in their final massive bill for services rendered;

when the investors, many worried half to death for months, finally (most of them) get massive collective financial compensation from the Government...

.. will this really look like a win for the Shylock approach to revenue gathering, and to regulation?

The British taxman has become a laughing-stock

Following the ridiculous 2001 sale of the taxman's own offices to a property company that smartly transferred the ownership to the tax haven of Bermuda, the British Treasury has made itself into a charity case and is asking for tax-deductible donations to reduce the National Debt.

Two questions on productivity

A couple of quick ones:

1. Turn on, tune in, drop out

Robin Hanson says we are living in a "dream time", when survival instincts have been dulled by wealth so that Nature has (temporarily) let us get away with acting stupidly. I recall the old saying, "From clogs to clogs is only three generations" (i.e. the middle generation spends it all).

In this context, it's also interesting to note how at a time when we're drugging children and old people to stop them being a nuisance, libertarians are calling for young adults to have the right to zombiefy themselves with "harmless" mind-altering substances. Yes, they will still be able to work, some of them, for some time; I guess the same argument goes for functioning alcoholics. Dream on... until, as the Germans say, "Aus der traum, lieber Freund."

I've known black people who maintain that drugs liberalisation (and the associated laissez-faire approach to law enforcement) is a plot to keep their children in subjection. I tend to put it down to middle-class selfishness, instead; but I can see why they might think that.

2. Think big, think small

As higher taxation looms, some are already trying to draw a distinction between "productive" and "unproductive" workers. Well, effectively, practically everybody (including the poor) pays 40% tax already, when you look at the combination of income tax, National Insurance and sales taxes; though I do agree that a proposed 50% higher-rate income tax rate is likely to generate various avoidance strategies that will mostly wipe out the hope-for extra revenue.

But if Mish's friend "BC" is right, we are entering a "Schumpeterian Depression", during which big biz uses its access to finance to crush small enterprise; and so it may be a decade before young entrepreneurs develop the muscle to get out from under and start to succeed.

Besides, how much big business is founded on destroying small businesses and the self-employed? What, for example, if we looked at it closely, would be the real, total net benefit of the giant supermarkets? Weigh up the cheaper prices against the exploitation of their suppliers and the ruination of small shopkeepers - and the smashing of one of the ladders by which the aspirant working class - and their children - could rise and become self-supporting.

Niall Ferguson's rivers-of-blood prophecy

Read Niall Ferguson as edited by Jesse - he talks straight.

About the only bit I don't quite agree with, is the ending - the note of hope is blasted too early in this battle. We are not going to stay in 1995, I'm quite confident about that; and one of the causes/consequences will be capital flight from/strike in America.

E.g.: "China, concerned about their U.S. reserves being devalued by U.S. monetary policy, is exchanging their holdings for long-term oil contracts from countries all over the world, locking in oil prices at exceptional levels, like the $11.40/barrel estimate for the Russian deal."

The elite, and foreign investors, will take care of what's left of their billions. Wealth will flee from inflation and taxation. Somewhere around the world will appear a new Liechtenstein.

Maybe in the calmer end of the Arab Street. Let's see American tax authorities try to lay down the law there.

Denninger demystifies "the Fed"

You tend to get a clear and concise explanation from somebody, when they either blow their cool or are in a hurry to get somewhere else. Here, in a very crisp and useful post, Karl Denninger blows away the conspiracy theories surrounding the Federal Reserve.

He explain that his beef with them is that they are acting ultra vires (very damagingly), and notes that there is, unfortunately, no statutory penalty for their doing so. The caning will, he thinks, have to be administered by the bond market instead.

Some, like Eric Janszen of iTulip, would say that's exactly what the government intends.

Taxation is inflationary, not deflationary

I've often wondered whether that's the case - now the Mogambo Guru says so. If taxes cut our take-home income, we insist on more income to make up for it.

They could be right, darn it

The British Government claims it wants to do more for our health.

There's the new Change4Life campaign, encouraging us to eat less fat, take more exercise and live longer; and there are the perennial pushes to give up smoking and (after they've extended the licensing hours and vastly increased the number of licensed outlets) reduce alcohol consumption.

On the other hand, we have the prospect of the State pension system hitting the buffers, thanks to millions of coffin-dodgers; not to mention the cost of care homes and the bed-blocker burden on the National Health Service. And if we all became totally abstemious, we would cost the State its £10 billion annual revenue from tobacco, and £8 billion from alcohol. At first sight, if you wanted to destroy the State, you'd follow its advice - a novel strategy of subversion by civil obedience.

Hence, tabloid-style contrarianism! I haven't found the evidence, but I expect that staying healthy (and working longer) will more than pay for itself, by reducing the costs of chronic ill-health and increasing revenue from taxes on income.

Am I the idiot, or are they?

For years, at least since the Reagan era, we in the US have heard the Republican Party mantra that the answer to growing the economy is to cut taxes for the richest, since they will 'invest in business'.

It never made sense to me, especially as I saw such a transfer of wealth to those same rich people, who spent their money on luxury imported goods. Incomes for the middle and lower class barely kept pace with inflation, even as industry became ever more efficient.

Today, thanks to posts here and elsewhere, I finally realized what is wrong with the claim above: buying stocks does not 'invest in a company', unless you are buying stock directly from that same company. All it does is put money in the pockets of the stockbrokers, while you have a piece of paper that must rise in value by profit plus fees, and find another sucker to buy it. The real estate market is no different.

Nonetheless, all of the experts that I have talked with over the years insisted that I simply didn't understand, implying that I was an idiot. Am I?

UK economy: between a rock and a hard place

CU has asked me to comment on his latest post on the UK's economic crisis. I'm flattered that someone thinks my opinion is worth anything, but here's my effort:

There's often a kind of self-destructive excitement as a crisis develops, as at the gathering of forces for a war. But the Rupert Brookes will be succeeded by the Wilfred Owens.

I have believed for about 9 years that we are in for an unpleasant time, and that is why I returned to the public sector pro tem at the end of 1999: I really did (and do) think that everybody should prepare for a storm. I have also been encouraging my clients to become/stay cautious, for the last 10 years. I thought we'd returned to sanity in 2003, when the FTSE had halved from its start-2000 peak, but off we went again. From my amateur perspective (and who exactly is an expert on the world economy?), the delay in facing economic reality has allowed the patient's condition to worsen.

Mark Wadsworth's opening comment here was "Sell to rent. Cash is King." Yes, I agree, at this stage. I was talking to my wife last year about selling the house (and, I think, the year before that) but personal circumstances and priorities often trump the cold financial calculations, don't they?

However, I don't think cash will be king for a long period. I can't see the government rapidly shrinking the public sector, and at the same time we shall see reduced earnings, more insolvencies and increasing unemployment in the private sector. The financial sector, which has helped our nation's books to nearly balance, is being hit in banking and investment now, and will (I think) be hit worse in future; that cow will yield far less milk to the Treasury, and so the budget will be even more unbalanced than it is today.

Europe seems keen to enforce a discipline on the Chancellor of the Exchequer, that it has been unwilling to emulate with respect to its own accounts for many years; if the EU continues to take such a rigid line, maybe there will be a tear in the EU fabric, along the line of the English Channel.

Meanwhile, I think Gordon Brown's reputation as a money manager is ruined. As has been said, he failed to fix the roof when the weather was fine. A playboy can seem a financial wizard as long as he keeps partying on his yacht, but the adoring guests will disembark when the holes below the waterline make themselves felt.

(I wonder what would have happened if the Conservatives had won again in 1997? Can we be confident that the consequences would have been better?)

To right the ship of State will take money, or (since we hardly know what faith to place in money any more) perhaps it would be apter to say, wealth. This, I think, is where the "cash is king" slogan will wear thin. At the moment, we see a devaluation/destocking in houses, cars, computers and other big-ticket items. It's a good time for Loadsamoney to go shopping, even if the price of his dried pasta is up 40%.

But when the stocks have been run down to match shrunken demand levels, and Loadsamoney's firm is on the skids, the game will probably change. RPI is on the up, but now the causes are more external than internal: we have forgotten the lessons of WWII and have become very dependent on imports of food and fuel, which are major components of those inflation indices that aim to reflect the circumstances of the ordinary person. So interest rate rises are unlikely to reduce the cost of such necessities, except indirectly insofar as they may help strengthen sterling; yet a weakening in sterling is the hope for our trade in manufactures (the pound has dropped 15% or so against the Euro, in the last year). Indeed, we seem to have a policy of shadowing the plummeting US dollar, as once we shadowed the Deutschmark; perhaps, perceiving this strategy, George Soros will stage another coup, to our country's cost, again.

If revenues are down because of recession (or the D-word), where else will the Chancellor find wealth to repair the yacht? More sale of assets to sovereign wealth funds (there goes the family silver)? More bonds sold to trade-surplus foreigners (but will they have the cash, at a time when their own economies may be slumping together with Western consumer demand)? (Perhaps they will, if the US insists on handing the Chinese mortgage bail-out money - see Mish!)

Left high and dry in public view as the tide of wealth recedes, will be the billions in cash held by the crafty, the nervous and the cautious old. And the subtlest way to steal it is by inflation.

I do not know what will be the best store of wealth when major inflation strikes. All the world's gold currently above ground could be made into a cube that would fit comfortably under the arches of the Eiffel Tower (and historically, a fair bit of it could have been found not far away from the Tour Eiffel, stashed away in French ceiling-bowl lights). The gold market is small enough to be a prey to manipulation both ways.

Perhaps a safer store of value would be NS&I index-linked savings certificates. If inflation gets too bad, the easy way out for the government will be not to launch new issues, and the old ones have a maximum term of 5 years. There could theoretically be a problem for investors, in the effect of inflation between the date of maturity and the date the money is cleared in the investor's bank account, but we must hope that the government will never permit a hyperinflation.

And I note that landowners such as the Duke of Westminster have rarely sold their land because of temporary monetary inflation. Even if house prices do decline towards 3 times earnings, they will always have a value, and if rented out, will create an income. Perhaps Mark's comment would then be reversed: buy to rent, not sell to rent. Even now, as many try to get out from under the mortgage trap, there are signs that renting out property is a promising sector, since (I understand) demand is increasing faster than supply.

I'd be interested to hear other ideas.

The inflation race

The pound is now worth around $2.10 US, which has some advantages: I know someone who's just had two nice holidays in America this year - to Disneyland and Las Vegas. Anyone who's inclined to sniff should remember that these places, unlike so many in Europe, try really hard to make it fun for you to spend your money.

But why doesn't the pound buy even more dollars? After all, look how gold has soared against the buck. The answer is that most currencies are competing in a devaluation race, as Chris Puplava shows here. The UK is ramping up its money supply at a similar rate to the USA's, but we don't hear so much about it on this side of the water - I think middle-income Americans are generally more clued-up on finance and... is it fair to suggest that they're more patriotic?

For a long time, we've been buying from poor people around the world. They've been storing up the money - you do, when you know how hard you've worked for it and don't want your children to go back to the fields - and now they're not quite so poor. Unemployment is on the rise here, but our trading partners aren't going to pay the Social Security bill for us.

So it's more taxes, or printing more money. The difference between taxation and inflation is the difference between robbery and theft. Theft is less confrontational.

Ron Paul was talking about digital gold currencies five years ago - now watch for the progress of the gold dinar.

More surprises from Warren Buffett

Warren Buffett wants to pay more tax, according to NBC today.

And he doesn't have an accountant! (How many enemies can you make in one day?)

Secret taxation

This is a payslip for a supply teacher, showing income and deductions. On an emergency tax coding, tax is levied at basic rate (22%) on all earnings after pension contributions have been made. National Insurance is paid at the reduced rate of 9.4%, because the teacher is in his/her occupational pension. Total tax and NI: £399.61 / £1,472.20 gross pay = 27.14%.

Oh no, it isn't.

The tax that dare not speak its name is employer's National Insurance, which would be around £93.37. It's an extra cost that the employee never sees, but it's money that could be paid in wages if it were not deducted at source. Therefore, the gross (pre all stoppages) pay is higher than shown, and so are the deductions.

So why don't we see payslips that tell the whole story, say something like this? ...

The reason is obvious, isn't it? Especially when you show the appropriate marginal rate.

And if this was a payslip for someone not in an occupational pension, the marginal rate of N.I. would be 11% for the employee, and 12.8% for the employer. In other words, £100 extra payslip-declared salary would actually cost the employer a total of £112.80, with marginal-rate deductions of £22 in income tax and £23.80 in N.I. ! In that case, the real effective marginal rate of revenue-raising would be 45.80/112.80, or 40.6%.

The average wage earner is, in fact, a 40% taxpayer, without knowing it.

Is it illegal to show the truth on your employees' wage slips? Don't you think it would make the ordinary person start to take the taxation issue seriously?

Invisible earnings may disappear

The UK's trading balance has been substantially assisted by the money flowing through the City of London's financial community. Martin Hutchinson's 20 August essay in PrudentBear explores the possibility that the City will eventually lose its eminence, and the loss of revenue will have to be replaced by higher domestic taxation.

Prohibition: Uncle Sam beat Eliot Ness

Don Boudreaux, of Cafe Hayek fame (see blogroll), writes that Prohibition ended, not because of popular demand, but because the US government was running short of tax money in the Depression.

It's an interesting theory. I have long thought that the UK government is more hooked on cigarettes than the smokers. If they really wanted to ban smoking, they'd start by cutting the tax, so as to wean themselves off financial dependence. But how would they replace the lost revenue?

European sclerosis and a Chinese freebooter

I have just begun reading James Kynge's book, "China shakes the world". He takes as his starting-point the move of the enormous ThyssenKrupp steelworks from the German Ruhr to China in 2002. Lessons are leaping off the page immediately:

1. German steelworkers expected a 30-odd hour working week; the Chinese demolition team worked 12-hour shifts, seven days a week and unmade the factory in a third of the estimated time. The Chinese didn't use safety harnesses and looked like acrobats.

2. The political project of a united Germany had incurred costs that led to higher taxes, which slowed the economy at an already critical time, the late 90s.

3. The Germans were willing to sell the steel plant for its scrap value, because the market for that commodity was in a slump in 2000. But the Chinese man (Shen Wenrong) who bought it could see several things: the slump would eventually come to an end; the plant produced high-quality steel that emerging Chinese car factories would need; buying a second-hand factory meant he could get into production faster and more cheaply.

The writer points out that if the Germans had waited until 2004, the market in steel would have recovered so far that the plant would have been profitable again, in Dortmund, where iron had been made for nearly 200 years.

Doubtless Kynge intends us to see this as a symbolic example: a Europe more concerned with unification and workers' rights, than with global competitiveness; regulation and taxation hobbling the economy; stupid, short-sighted management. (This, by the way, is the Europe that my country seems determined to marry, sans pre-nuptial contract.)

Shen not only foresaw the resurgence of steel, but expects it to collapse again. In 2004 he said:

When the next crash in world steel prices comes, and it will certainly come in the next few years, a lot of our competitors who have bought expensive new equipment from abroad will go bust or be so weighed down by debt that they will not be able to move. At that time you will see that this purchase was good.

Industry and thrift, as per Benjamin Franklin (or indeed any late eighteenth-century enterpreneur). And long-sighted strategy, without the benefit of an MBA. Shen has a tiny desk, takes information by word of mouth and on A4 paper (not plasma screens), and makes fast, one-man decisions all day.

Yet what he does, is no more than what our people once did here.