George Osborne promises simpler and flatter taxation

A little earlier we reflected on George Osborne's defence of his spending pledge during his address on tax reform.  Summarised below are the main messages from the Shadow Chancellor's speech:

Labour is using tax policy for party politics: "Last Spring’s Budget, for example, attempted to present an increase in income tax on the lowest paid as a reduction in headline income tax rates. The con trick lasted all of three hours before it was exposed.  Last Autumn’s Pre Budget is still unravelling.  The ill-judged increase in capital gains taxation and the clumsy changes to the tax treatment of non-domiciles have resulted in a toxic mix of complexity, uncertainty and negative signals to the rest of the world."

Conservatives have a tradition of being tax reformers: "British tax policy led the world with Geoffrey Howe’s shift from direct to indirect taxation.  Our tax policy led the world again in the second half of the 1980s, when Nigel Lawson demonstrated that reductions in income tax and corporation tax rates could over time boost both economic performance and increase revenue.  And Britain led the world in the 1990s with environmental tax reforms such as the landfill tax.  I hope that the next Conservative Government will continue this proud tradition of leading the world when it comes to tax reform."

The Liberal Democrats have also been taking sensible steps on tax: "I am happy to acknowledge that both ourselves and the Liberal Democrats have looked at the future of aviation taxation and come to the similar conclusion that it makes environmental sense to move from a passenger-based tax to a plane-based tax.  This will incentivise fuller planes and cleaner engines and I am glad the government, having fiercely opposed our plans, now want to adopt them."

Adam Smith will be our tax adviser: "I believe that Adam Smith’s four principles – efficiency, certainty, transparency and fairness – still provide an excellent guide for the design of tax policy today."

Lower corporation tax is good for the economy: "Ireland is the poster-child country that has reaped huge rewards from attracting foreign investment with a lower rate of corporation tax.  The Netherlands has led the way with reforms to corporate taxes that helped encourage Shell to tax headquarter there rather than in Britain.  And the new EU member states have also added to the competition on our continent, with countries like Slovakia and Estonia introducing flat taxes.  Meanwhile Britain, which was a pioneer for lower business taxes in the 1980s, has been left behind.  Ten years ago we had the 4th lowest corporation tax rate in the EU.  We now have the 19th lowest.  It is time for Britain to set the pace again.  The evidence on the positive economic impact of lower corporation tax rates is strong.  The work of leading academics such as Jim Hines from the University of Michigan has shown that capital and investment are extremely sensitive to tax rates.  The evidence is not conclusive on how large this dynamic effect is.  The consensus is that it is not large enough to make cuts in corporation tax self-financing in the short run, but over a longer period the returns are likely to be large.  There is also overwhelming evidence that multinational companies shift profits around the world to take advantage of low headline tax rates, however hard tax authorities try to enforce transfer pricing and thin capitalisation rules."

Conservatives will establish a new Office of Tax Simplification: "Our tax code is probably the most complex in the world.  It is certainly the longest – we overtook India for that dubious honour following last year’s Finance Bill.  The size of Tolley’s tax handbook has doubled over the last ten years.  Complexity is also incredibly costly – a survey by the Institute of Chartered Accountants found that the total cost to UK businesses of implementing new legislation is £10.2bn.  That is why we are working with the experts to do the long term thinking on simplification. With PWC on simplifying corporation tax.  And with Grant Thornton on simplifying income tax and National Insurance, and the administration of VAT.  And it is why the final aspect of the proposals being examined by Geoffrey Howe’s group will be so important – the establishment of a new Office of Tax Simplification with a remit to examine the existing tax system and make proposals for simplification.  With a permanent staff of tax specialists aided by secondees from the tax professions, this will create a powerful institutional momentum towards a simpler tax system."

Our proposals for the taxation of non-doms are the right ones: "In order to strike the right balance between a competitive tax system that attracts international talent and a fair tax system that commands public support, I proposed last year a flat rate charge on non-domiciles in return for a promise not to change other aspects of their tax status for at least five years.  The reason why we designed a flat rate charge was precisely to avoid the need to pry into people’s bank accounts and try to assess their offshore income.  It was a good deal and it was broadly welcomed by the City as striking the right balance between fairness and competitiveness."

Download a PDF of George Osborne's full speech: The Principles of Tax Reform.

Comments

[Moral minority]

As I posted on the earlier thread, Osborne has had time to digest Lord Forsyth's Tax Commission Report and the Report by John Redwood's Economic Competitiveness Policy Group. They told him how to cut and simplify taxes so why does he need Lord Howe to chair another review of taxation policy?

George Osborne has been Shadow Chancellor for two and half years. Kicking tax policy into the long grass by having another review is not acceptable. The last thing we need is another Tax Simplification Quango. A strong, principled and capable Chancellor would not need one.

If Osborne really wants Adam Smith to be his adviser, he should ask the Adam Smith Institute and the Taxpayers Alliance to draft his policy but they are too radical for the Cameroons.

[Gospel of Enoch]

Given he is happy to acknowledge where they agree with the Dim-Libs on tax, perhaps he could also acknowledge that UKIP is pro-flat-tax - indeed their abolish inheritance tax policy is even better than the Tory one!

[Veritas]

Ok, hands up, I work in the City and I get a bonus. Will someone please tell me whether I shall pay less if Dave and Gideon are at no. 10 and 11 respectively? Then I'll decide how to vote.

[Tories to stupid to understan taxes]

Maybe now the tory morons will be able to understand taxes enough to add them up proplely. LOL. Oooo help me I cannot understand this it tooooo complicated Ho Ho Ho.

[Martin Coxall]

Scrap Income taxes, national insurance, savings taxes, stamp duty, capital gains, council tax and VAT, and replace them with a single tax on consumption, with rebates for those who fall beneath a generous threshold.

Abolish HMRC.

Look how much simpler that is now!

[Stewart Geddes]

"I believe that Adam Smith’s four principles – efficiency, certainty, transparency and fairness – still provide an excellent guide for the design of tax policy today."

Define Fairness....... Gordon Brown thinks that only Government can guarantee fairness.

[Tony Makara]

Rather than looking to encourage foreign investment we should be encouraging home-based investment which will prove to be more secure over time and less open to flight to more lucrative pastures should they open up elsewhere.

[Martin Coxall]

@Stewart Geddes:

Adam Smith defined 'fairness' in taxation as one which is neither regressive nor creating of a deadweight loss.

Both of these have clearly-defined economic meanings, so it is easy to to verify which of our taxes meet this description.

For example: VAT is fair, Income Tax and National Insurance are not.

Essentially, taxes seek to discourage that which they are applied to. Thus, taxes should only be applied to those activities that consume wealth (consumption) rather than those that produce it (income, savings).

[David]

Of course the EU is increasing its grip in this area. Outside the EU we could even get rid of the ridiculous VAT!

[Matthew Barker]

If George Obsbourne is guided by Adam Smith, his inheritance tax policy is slighlty illogical : The ASI supports inheritance tax because it makes economic sense - If people know they cannot leave money behind they spend it instead ,which is rather handy.

[Martin Coxall]

@Matthew Barker:

Indeed, Inheritance Tax is another fair tax according to Adam Smith, not only for the reason you give, but because it also offsets the huge deadweight loss the economy incurs after somebody inherits.

Every time somebody inherits money, it increases the chances of that person stopping work, and thus that person's future economic productivity is lost to the economy- a deadweight loss.

Still, surely we all know that Osborne mentioned Smith as a sop to us, not because he actually *means* it?

[Martin Coxall]

@David:

Repeat after me: TAX ON INCOME AND SAVINGS BAD, TAX ON CONSUMPTION GOOD.

[Tony Makara]

Although Adam Smith wrote some very interesting observations, his eighteenth century thinking is as out of date as the nineteenth century thinking of Karl Marx and even the twentieth century thinking of John Maynard Keynes. Why do people keep looking back for old-age solutions to modern-world problems? We need to think beyond the confines of these old sages and create a new economic epoch, one that learns from the past but isn't a slave to it.

[Martin Coxall]

@Tony Makara:

I might suggest that perhaps the reason why the thinking of Marx is no longer especially credited is because mankind tried it and it didn't work out too well.

On the other hand, when we tried Adam Smith's ideas, we got the Industrial Revolution.

I'd love to find a way to extricate ourselves from the corporate welfare oligarchical neoliberalism of New Labour, but absent any 'brave new world' economic theories, we should aim for what we already have some evidence works well.

[Paul Oakley]

In order to save Geoffrey Howe some time, it would help him if he read "Flat Tax - Towards a British Model" by Allister Heath (published by our TPA friends)

Only 155 pages too.

[SG]

No, No, No, No, No. Creating more bureaucracy is NOT the way to simplify taxation!!! Maybe the Shadow Chancellor has spent too long under a Labour Government.

[Martin Coxall]

If only we could find some way to surgically remove all of Mike Huckabee's economic populism and borrow it, without it getting tainted by all the Young-Earth Creationist fruitloopery.

Because I think that the FairTax is a brilliant idea, and the number of UK taxes it could replace would be, well, almost all of them.

The basic idea is:

Calculate your total income for the year: I
Calculate your total increase in savings over the year: S

Your net consumption for the year is then:

C = I - S

There is a consumption threshold C0, which shall be set to the half male median consumption for the entire population.

Your taxable consumption is then (C-C0), and assuming the FairTax rate is R, then the tax you pay, in twelve monthly installments is R x (C - C0).

Of course, it's entirely possible for C-C0 to be negative, in which case the state pays *you* twelve monthly rebates at the identical taxable rate. Such rebates count towards your income for the following year's calculation.

I think it's brilliant.

[Martin Coxall]

I should add that big-S also includes increase in equity as well as savings, so money invested in property also doesn't count as consumption.

[Tony Makara]

Martin Coxall, yes, Marxism is a system that has to be imposed, which shows that it isn't a natural way of living. Capitalism is a natural way, built on incentive and reward, but at the same time capitalism leaves certain people behind. Thats why I was encouraged by David Cameron's comments about extending prosperity to all, the question is how best can we do that. As we know under the capitalistic system prosperity is for the most part earnt, either intellectually or by physical labour, but some cannot take part in this process through unemployment, disability and other circumstances. We need to make the economy work for everybody and that means government setting full employment as a priority objective. Not through creating a bloated public sector but by structuring the macroeconomy to promote job creation.

[Martin Coxall]

@Tony Makara:

I absolutely agree with you. The one thing I desparately don't want to be is doctrinaire about such things.

Indeed, it's one-size-fits-all thinking that inevitably leads to failure as we try to impose homogeneous economic models on a heterogeneous society.

There's nothing in what you said that I disagree with at all, save to point out that we were explicitly talking about taxation. And here, I think that Smith's notion of fairness has a lot going for it.

Marx had remarkably little to say about taxation, since he envisioned a scenario in which the state would eventually evaporate, rendering tax a moot point.

[Alex Swanson]

his eighteenth century thinking is as out of date

Most of calculus was developed during the 18th century (although it was only truly rigourised a few decades ago) and it still works remarkably well.

[James]

@Tony Makara: "Rather than looking to encourage foreign investment we should be encouraging home-based investment which will prove to be more secure over time and less open to flight to more lucrative pastures should they open up elsewhere"

But the UK is the second most international economy in the world. We have more foreign direct investment in the UK, and more UK direct investment overseas, than any other country bar the USA. You would be talking about a fundamental change in our economy, and one that would tie UK investors to UK growth levels, and prevent us from benefiting directly from growth elsewhere, such as India and China. Do you really not want British businesses and entrepeneurs to invest in China?

@Martin Coxall: "For example: VAT is fair, Income Tax and National Insurance are not"

I'm not sure that's the case. It's a long time since I did my economics degree, but I'm sure that VAT is considered to be a regressive tax, because lower income groups pay a higher proportion of their income in VAT than higher earners tend to. The reverse is true of income tax, which is not regressive.

[Martin Coxall]

@James:

VAT is not a tax on income at all, so the proportion of 'income' spent on it is irrelevant, it's the proportion of consumption spent on it.

And the poor spend the same proportion or somewhat less of their consumption as the wealthy. It also creates no deadweight loss, because it only applies to wealth-consuming activities. So it would be fair according to Smith's definition.

Nonetheless, Huckabee's FairTax proposal is far better, because it allows a generous non-taxable consumption allowance and rebates for those below it. I don't wish to be seen as standing up for VAT, as to me it is one of the taxes I'd like to see abolished.

[Tony Makara]

James, the fact that we have little by way of a manufacturing base means we will be exporting little to China beyond financial services. There is great danger when a nation relies on foreign powers to generate employment infrastructure. The investment that is here to day could just as easily be gone tomorrow. A more autonomous infrastructure is less likely to re-locate and cost jobs. Government should always be thinking of the long-term consequences, even as far forward as the next generation.

Martin Coxall, the ultimate objective of Marxism is a state without money, without quantifiable values to measure achievement, in effect reducing the value of every person to zero. The Marxist aim to bring about the ultimate recessionary economy, one that reverts to primitivism.

[James]

I'm not sure I agree with you that the proportion of income spent by the poor on any tax is irrelevant. The definition of a regressive tax is one in which the effective tax rate is higher for lower incomes, and lower for higher incomes. A progressive tax is the reverse.

If someone on 10,000 a year spends 30% of their income on VAT, and someone earning 100,000 a year sopends 15% of their income on VAT, it is a regressive tax. And it is generally the case that higher earners do spend a smaller proportion of their income on VAT.

I'm not necessarily on some campaign against VAT, I just thought I'd mention that when I did my economic degree several years ago, VAT was considered to be an example of a regressive tax.

[James]

@Tony

You say that investment here 'could just as easily be gone tomorrow'. Well, not if we maintain the UK as an attractive place to invest. We have been top of the EU countries in attracting FDI for a very long time.

You also say 'a more autonomous infrastructure is less likely to re-locate and cost jobs'. But what exactly do you propose? What autonomous infrastructure? We are not going to rebuild a manufacturing base in competition with China et al given our unit costs for so many inputs (labour, transport, red tape, rent costs etc).

The fact that we have such a strongly international economy, trading with the rest of the world on a greater scale than all of our European rivals, is a good thing. To turn inwards, and think that investments within the UK are somehow better than investments overseas would be extremely counter productive.

[Iain]

"The fact that we have such a strongly international economy, trading with the rest of the world on a greater scale than all of our European rivals"

Having a £80 billion trade deficit would suggest much of the trade is going one way.

"To turn inwards, and think that investments within the UK are somehow better than investments overseas would be extremely counter productive."

And I would question the balance of our investments, when many of our assets have been flogged off to foreign buyers, who would seem to value the opportunities here more than we do , and where many of the assets flogged off will mean the development of these concerns will now be limited, and the income they generate now destined to be exported to other countries. Like P&O, like BOC, like Westinghouse, like our electricity generators etc.....

[John Leonard]

Interesting debate on taxation and generally I welcome George Osbourne's proposals.

Furthermore, I am generally supportive of the idea of consumption taxes over income taxes.

However, I do see one difficulty here in that if the reliance is on consumption taxes what happens in periods of relative economic decline when consumption slows or even falls? Surely in such circumstances it is likely that Government revenue will also fall relatively just at the time when demand for public services might possibly increase.

Of course there are some obvious answers such as 'putting money away for a rainy day'. However, how achievable realistically are such remedies?

I also see some risks in the Huckabee style plan where tax is only paid after the fact.

My understanding of the payment proposal is that it is not paid at source but delayed for 12 months.

How will those who in the year they are due to pay the tax ensure that they can? There are all sorts of unexpected factors (especially during an economic decline) that could leave people in the situation where they cannot pay and whilst the answer is on the face of it 'tough - payment is required'.

With all the potential unpleasant associated consequences for the individual in such circumstances, that will hardly provide the Government that adopts such an approach with a popular image.

As an economic layman its very possible there are satisfactory explanations to these points, in which case I'd be interested to hear them to improve my understanding?

[Tony Makara]

James, those who hold the global economy in such high-esteem don't look beyond the glitz and gloss of the multinationals, they need to look at the reality of the mass unemployment and resulting welfare burden that we have been saddled with since we moved from being a manufacturing economy to being a service-sector economy dependent on imports. There is no way that we can generate the million plus jobs we need without a large manufacturing base and without producing the goods for our domestic market that we are currently employing. Unless we restructure the economy to serve itself rather than living off the backs of other nations we will never cure the social ills of unemployment and resulting welfare dependency. We cannot rely on credit to fuel demand indefinitely, a higher standard of living and the purchasing power to drive it has to come out of productivity borne out of a large manufacturing base. The economic self-sufficiency of the nation has to take precedence over free-market ideology. We need to be thinking ahead in terms of generations rather than living for the here-and-now. Unless serious thought is given to this issue we will decline as a nation and become little more than a pitstop for other more powerful economies.

[Tony Makara]

Typo:

Should read

"There is no way that we can generate the million plus jobs we need without a large manufacturing base and without producing the goods for our domestic market that we are currently importing"

[Martin Coxall]

@John Leonard:

However, I do see one difficulty here in that if the reliance is on consumption taxes what happens in periods of relative economic decline when consumption slows or even falls? Surely in such circumstances it is likely that Government revenue will also fall relatively just at the time when demand for public services might possibly increase.

Of course there are some obvious answers such as 'putting money away for a rainy day'. However, how achievable realistically are such remedies?

Well, it kinda forces the government to run at a surplus during the good times, and then use that money up when things get a bit tighter. I'd like to tie such a tax to some kind of fiscal constitution that would make balanced budgets, low debt and deficits and running surpluses during growth periods a legal requirement of the office.

I also see some risks in the Huckabee style plan where tax is only paid after the fact.

My understanding of the payment proposal is that it is not paid at source but delayed for 12 months.

I believe it is mitigated against by the fact that the payments and rebates *only* apply whilst you're employed.

If you become unemployed, you become exempted from payment until you find new employment. There's also a provision where, on becoming re-employed, you can have payments for the remainder of the tax year adjusted proportionally if you suffer a significant fall in income.

[Martin Coxall]

@Tony Makara:

I agree with you, I really do. I thing any flag-waving globalization nuts in this party really need to spend some time looking at the immense damage organizations like the IMF and World Bank have done.

I'm a Joseph Stiglitz fanboy.

I'd really like to rebuild this country's lost primary and secondary industry base, whilst paying due regard to the doctrine of comparative advantage.

It does seem like your ideas are rather more a wishlist than workable proposals, however.

[Alex Swanson]

"There is no way that we can generate the million plus jobs we need without a large manufacturing base and without producing the goods for our domestic market that we are currently importing"

Oh Tony, how often does this have to be explained to you? Service jobs are not inferior to manufacturing jobs, and there is nothing wrong with importing goods paid for by exporting services.

[Iain]

"Oh Tony, how often does this have to be explained to you? Service jobs are not inferior to manufacturing jobs, and there is nothing wrong with importing goods paid for by exporting services."

But we aren't doing that, for we have balance of payments deficit which at around 6%, is larger than the US's.

In addition the contribution from services is £30 billion, the trade deficit is £80 billion, with an economy that's already got one of the largest service sector in the world, there is no way we can grow it to fill the gap in our balance of payments deficit.

PS in a recession, what's the first sector to get the chop? The service sector isn't it?

[John Leonard]

Martin Coxall:

Fair enough although I'm not sure about the legal requirement aspect of this. If a Government failed to Fulfil its legal economic requirements what would happen?

However, given the current high expenditure on public services it would suggest to me that there is much to do in making the provision of public services efficient (relatively reducing tax spending) before we can make any significant jump to a consumer tax led approach. Furthermore, it would also suggest that much needs to be done to reduce the public debt in advance of such changes.

It also seems to me that the optimum time (in terms of risk mitigation) to implement such a solution would be when the economic outlook was optimistic rather than uncertain ,as it is now, or pessimistic.

From that perspective I wonder whether now would be the right time to move forward on such an agenda?

On the Huckabee plan again that seems fair enough. However, I would qualify that with the more general comments above about the need to rationalise public expenditure and maintain public services at a level acceptable to the electorate. In a situation where there is a notable increase in non-working people, Government could risk a situation where there are shortfalls in the public purse again affecting their ability to provide accepted levels of public services.

Given the economic mess that Labour increasingly seem to have created it seems to me that the first term of a subsequent Conservative Government would have to focus on consolidation and stabilisation rather than implementing quite radical changes in the tax system. If they can achieve these first goals without significantly antagonising the electorate then in a second term they could look forward to advancing more radical tax changes?

I would also agree with Tony Makara's comments that another important aspect of this would be to stabilise the supply of goods and services by making the country more self-sufficient. The idea that large consumption tax increases were being caused by large increases in costs of off-shore supplied consumables and goods could undermine such a tax system. I realise its already true of VAT but by expanding consumption taxes it would only further exacerbate such issues.

[Tony Makara]

One thing I would like to do is create a real debate on the question of free-trade and whether globalization is the great panacea that people believe it is. There is a certain amount of political correctness in Conservative ranks when it comes to questioning the merits of free-trade. Of course we shall always need to import, but why import goods that we can produce ourselves? If there is a market for goods here at home then we should be supplying it rather than allowing the work and our purchasing power to go to other countries.

On the question of manufacturing versus Services the two can live together and work in tandem to supply our economy. Manufacturing by its very nature would employ people in greater numbers than services and will end the welfare dependency that can only be cured by getting people into waged work. My theory is that many in the Conservative party fear manufacturing because they fear the problems that can come with large concentrations of organized labour. However the trades unions need not become a problem if they are de-politicized.

The main thing is we need people that will stand up and dare to question the god of globalization. We need iconoclasts prepared to question whether running the economy to suit multinationals is in the national interest. We need people who will stand up and say that they prefer to buy British goods rather than imported ones. The more we produce for ourselves the more jobs we create for ourselves and the more wealth we keep in our country.

[James]

Tony - good idea.

I'm not any sort of flag waving globalization nut. Nor do I think it is any sort of panacea.

I consider myself to be pragmatist realist. Globalization is a reality, and we can either work with it, or against it.

I am genuinely curious to know just what it is you are proposing? Are you advocating banning imports? Punitive import tariffs? Government subsidies for domestic manufacturing?

Do you feel that inefficient domestic manufactured goods would be preferable to efficiently produced foreign manufactured goods? (I'm not suggesting that domestic goods will automatically be less efficient, but it is an important question? British Leyland?).

I'm not aiming to be provocative, I am genuinely curious as to how you see your vision being implimented in practice?

(although at the risk of being a little provocative, I will just note that the only country I am aware of that tried to genuinely isolate itself from the global economy was North Korea...)

[James]

(Good idea as in let's have a real debate on globalization, not good idea in your views on globalization which I disagree with)

[Andrew Lilico]

Two minutes on a zillion-and-one economic errors.

a) Free Trade is good, obviously. (Having debated this more times than it's worth, I'll simply declare it.)

b) The current account deficit or surplus is irrelevant, since we have a floating exchange rate. Indeed, the normal thought these days is that having a current account deficit is, if anything, a *good* thing, not a bad thing, since having a current account surplus means (as something akin to an accounting identity) that we have a capital account surplus. And a capital account suplus means that foreigners think that Britain is a better place to invest than elsewhere.

c) It's far from obvious that consumption taxes are better than income taxes. In a well-functioning economy, raising income taxes reduces post-tax wages, which then rise, so costs of production rise, so prices rise and incidence falls on consumption. That being so, it would make no difference at all whether we tax labour or tax consumption. Either way we make it relatively more attractive to take leisure over consumption. What really counts is the total size of the roast joint, not whether you cut it lengthways or crossways.

d) Scrapping national insurance is a fantasy scheme of those that take no interest in welfare reform. National insurance is an integral part of the benefits system. We pay taxes annually, but we need benefits every week, because eating a really big meal once a year isn't going to stop us getting hungry. We;ve seen recently, with the tax credits scheme, the disasters that one inflicts upon people in difficult circumstances if one tries to over-integrate taxes and benefits. Benefits are not just negative taxes - they serve a completely different purpose and are associated with completely different incentive properties.

e) No-one in Britain would actually want a "flat tax". It's an idea that is only really useful in jurisdictions with low tax compliance where tax simplification considerably increases the tax take by making avoidance more difficult. The Conservatives has (rightly) never given any serious consideration to a truly flat tax. What we *have* given consideration to is the different, though not completely-unrelated, idea of reducing the number of tax rates and special reliefs. The Government's stupid 10p rate, built on Major's daft 20p rate, was a totally unnecessary piece of tax complexity. What would be good would be to raise tax thresholds considerably so as to reduce the number of people paying income tax at all (thereby cutting down on bureaucracy and reducing the invasion of privacy by the State). We should be able to get ourselves down to only about half the population paying any income tax within a Parliament.

f) Adam Smith. Obviously a great man, with a lot still to teach us. His idea that GDP is the key representation of a country's wealth (accepted at his time but not implemented until the 1930s, IIRC) - this was what The Wealth of Nations is about - is, however, an idea whose time might have passed. I think that some of Cameron and Sarkozy's ideas in this area are likely to lead us on to a richer concept, and even now there are those of us that work on adjusting national production figures to take account of environmental impacts, for example.

That's all for now, but it's enough...

[John Leonard]

James:

Perhaps you might like to start us of then?

As I am nearly as global-sceptic as I am Euro-sceptic (and for many of the same reasons) I'd be interested in knowing what the great benefits of Globalization in your eyes are?

[Tony Makara]

James, firstly I am not advocating that Britain isolates itself from trading with the rest of the world. However we should structure our economy at macroeconomic level so it pays our entrepreneurs to supply our domestic market. This could be done by large-scale tax relief for business that supply the British market, of course this would have to be supplemented by a range of protective measures. Any imported goods that threaten domestic production would have to carry a tariff, these goods would still be available to people who wanted to buy them, but they would become more expensive than British made goods, to protect British Business, goods that were not being produced here at home would not be subject to tariff. This would allow British industry to supply the British market and at the same time allow for imports to supply the needs that we cannot supply.

To kick start a re-birth in manufacturing all new business enterprises should be allowed to operate completely tax-free for a given time to allow them to develop the infrastructure needed to create work. Manufacturing would eventually be in a position to supply the service sector and the two would compliment each other.

The end of wide-scale import dependency would take us away from the need to pursue a strong pound policy and the higher interest rates that come with it. This will make life easier for business to borrow and for people to buy property. As demand responds to supply there will be a more stable price environment as we factor out the need to worry about imported inflation due to currency differentials.

[Iain]

"I consider myself to be pragmatist realist. Globalization is a reality, and we can either work with it, or against it. "

Free trade , globalisation call it what you may, but we don't have that when countries from the US, Germany, France to China are all very protective of their interests, which makes the British states masochistic stance on free trade nothing short of a liability to its people and interests, for while anything here is up for grabs, and the state will stand by while key assets are flogged of to foreign buyers enriching US merchant banks as they go, British interests on the other hand would not be permitted to do the same in those countries.

So perhaps rather than beating our breasts about free trade and sabotaging our interests as we do, we should instead be looking for reciprocity, of course that would require the Foreign Office fighting for UK’s interest in negotiations, which our chinless wonders there would find too much like hard work, and especially as they had been conditioned to roll over, as they have with the retreat of the British empire, and a way of doing things they have continued in negotiations at the EU, thus our haemorrhage of sovereignty to Brussels.

[James]

Aaargh!! Have we learned nothing since 1945?

1. John Leonard - (I'm going to start sounding like a flag waving globalization nut if I'm not careful). THERE IS NO ALTERNATIVE. It's not a question of 'the great benefits' of globalization, so much as it is the only game in town, as we will be considerably poorer if we try to sit on the sides. But in fact, we have benefited hugely. British wealth was built on globalization (or the early forms of it). Why do you think that this tiny little country has one of the largest economies in thw world? Why should we, with less than 60 million people, be in the G7 when huge countries like Brazil are not? Because of the enormous wealth we accumulated over centuries of trading with the world. NowI know that some people will leap out of the woodwork to scream 'Empire', and to suggest that we stole all that wealth at the end of a bayonet, but that it wrong. The empire was largely a tradingh empire. We sometimes enforced our Imperial right to trade at the end of a bayonet (the less said about the Opium Wars at this stage the better), but Britain was built on global trade. And it wasn't all export driven.

2. Tony. So, we impose high tariffs on imprts of goods that can be produced domestically, and we give large scale tax relief to domestic manufacturers. I don't even know where to start:

a. You will start trade wars with everyone. Tariffs will be thrown on British goods, and sufddenly we will be dependent on those protected domestic markets, because you'll have destoryed our export markets (and just have a little look at our remaining manufacturing industries - quite a lot of it is for export, especially the high value end).

b. Where exactly is the government going to generate tax revenue from to pay for all those lovely schools and hospitals with? You're throwing tax reliefs at our domestic industry, and you've driven away our imports. All those multinational companies that you are so keen to pooh pooh will stay a million miles away from our taxman's grasp.

c. We have a floating curreny, we do not maintain a strong pound policy. We maintain a low inflation policy (which can lead to a strong pound granted), but the purpose of the policy is different (and essential).

You want a weaker pound, presumably you are happy to see higher inflation, and you want lower interest rates (and yet you have already railed against the debt driven consumer culture - just watch it explode even more as you seek to drive interest rates lower) to make life easier to buy property - what will happen to property prices on our overcrowded little island with its structural shortage of houses and increasing number of single person households? You think this will lead to a more stable price environment?

Um...let's stick with that for now - it's dinner time.

[stewart Geddes]

Tony your proposals sound suspiciously like the Labour agenda of the early 1970's. If we start imposing tariffs on imported good it will lead to retaliation and will promote inefficient poor quality businesses (remember British Leyland?).

Let's look at some practical issues shall we? Firstly why in the name of goodness do we expect someone on the minimum wage to pay tax? And then give them tax credits... This is bonkers.

Better to raise the tax allowance to 110% of the minimum wage and then set a realistic single rate of tax.

Offer transferability of tax allowances between spouses in order to encourage marriage and in particular to redress the situation we have where mothers (usually) feel presurised to go to work when their children are still young and in need of parental care.

The cost of these measures would be more than recouped by the reduction in tax credits and the associated beaurocracy.

Finally, and with regard to Adam Smith's call for fairness (and I don't mean Gordon Brown's definiton) why should we have a higher rate tax? Why should someone pay 40% just because they earn more? That is the socialist politics of envy.

[Martin Coxall]

@Andrew Lilico:

Goodness, what a lot of points. I'll address each in turn.

(a) Absolutely, although it seems there can be many different interpretations of what constitutes free trade, and I suspect yours and mine would differ somewhat. I feel it fair to point out that while I am fan of free trade, and the doctrine of comparative advantage, I am most definitely a globalizatiosceptic, it seems along with John and Tony above. In especial, I consider much of the influence of the IMF and World Bank to be thoroughly malignant.

(b) That's all well and good if "being a good place to invest" is the primary aim of one's economic policy. I would, at a guess, think that Tony's more concerned with the needs of ordinary British workers than the needs of ultra-wealthy foreigners, which might provoke a different viewpoint.

(c) From the perspective of eliminating deadweight losses they are. They might be politically a harder sell though.

(d) I'm not sure how you can legitimately view National Insurance as being functionally dissimilar from ordinary Income Tax. If we can abolish one, we can abolish both.

(e) Did the Poll Tax count as a flat tax?

(f) The nice thing about "general wellbeing" is that it's flexible enough to include any number of indicators that affect people's quality of life that fall outside the scope of traditional economic models.

[Tony Makara]

James, if we can get most people back into work the level of revenue at hand will increase as people start paying tax and stop drawing benefit. The change would be monumental and would benefit the art of government greatly. On inflation, as I've stated price levels would be more stable in a self-supplying economy. On the pound, I'm not in favour of a floating sterling because it prostitutes our currency and invites the ravages of people like George Soros and others who practice arbitrage. On trade wars, it would benefit all nations to become more self-sufficient, once other nations see the great benefits of such a system they would most likely follow suit. That way a natural order of trade will develop in the world, one based in mutual benefit rather than chaotic undercutting.

James, it would be interesting to hear how you would create the million plus jobs we need to end welfare dependency?

[Martin Coxall]

@Tony Makara:

Your proposals regarding tariffs sound like a recipe for one massive, all-out reciprocating trade war, which would benefit nobody.

Rather than penalising foreign trade, surely it's rather better to ask how we can invest and encourage the rebirth of British entrepreneurialism?

The British have historically shown great capacity for reinventing themselves economically as circumstances have demanded, and that's part of what makes Britain able to punch above its weight economically.

Any attempt to rebuild Britain's primary and secondary industry sectors that could cause the entire world to close ranks against us in retaliation is unthinkable.

[Adrian Peirson]

Did you Know that the Bank of England is NOT Englands Bank, it is in fact a Private Company owned by Rothschild (Who also owns 80% of the Worlds Uranium, Hint Depleted Uranium, Brown suddenly announcing we should go Nuclear, Who exactly bought the Gold that Brown Sold Off )

So, Govt Borrows from a Private Bank, AT INTEREST, meaning it's debt can NEVER Be Paid Off and accounts for Why Paper Fiat Monetary Systems Indflate themselves to eventual Collapse, In the Proicessm the Nations wealth is swept Upwards into the Vault of the Elite Bankers.

Credit is simply thin air, Paper Money costs Pennies to Print, yet on the basis of this Fraud, Private Banks get reposess REAL WEALTH of the Nation and People into their Vaults.

Interest rates are loweres to Ensnare Borrowers, then when enough have been ensnared, the rate is raised again.

Those that have overextended themselves have their Property and assets seized, but why, what did the Bank actually Lose....The vendor is the One who Lost out, he is now holding worthless Paper Money, and so the cycle continues over Many decades in an ever more frenzied spiral of Public Borrowing to Pay off Last Yrs Debt which incurs yet more interest charges....Ad infinitum until the Final exponential and inecitable collapse.
http://digg.com/world_news/Paul_Warns_Middle_Class_Being_Wiped_Out_In_Final_Debate?OTC-widget
http://www.fame.org/
http://www.thetruthseeker.co.uk/article.asp?ID=96
http://www.themoneymasters.com/principles.htm

[Tony Makara]

Martin Coxall, as current trading agreements stand it would be impossible to re-build a manufacturing base without having it undermined by foreign competition. A system of protective tariffs would have to exist in some form. We have to look at this from a long-term perspective. We are already suffocating under the burden of welfare dependency and unless we have an economy that produces jobs in significant numbers this problem isn't going to go away and will increase. There are only two ways to create jobs, by an enlarged public sector, which eventually collapses under its own weight, or by generating the macroeconomic conditions necessary to create work. That is by making it pay for entrepreneurs to set up shop. Obviously the public sector option is a dead-end and must be avoided. That means the only route open to us is to build a productive base that will employ large numbers of people. That must be the aim. I ask anyone reading this if they honestly believe that a future Conservative government will be able to put 1.6 million JSA claimants into full-time waged work? I don't see how it can be done if the jobs are not there. Workfare isn't work and people on workfare are still on benefit. There is only one way to get people off benefit, through creating jobs, a million plus jobs, a manufacturing base supplying our domestic market can do this.

[Tanuki]

Personally, I don't fret about issues of 'flatter' or 'simpler' taxation - what we need is *lower* taxation.

As to globalisation, sure - bring it on! Our ability to buy best-of-breed on the global market, at lowest-cost, is utterly, utterly brilliant! We need much, much more of this! it's the best defence against inflation we have. OK, it will stress some old-style producers, but protectionism is the last refuge of the weak and countries which resort to it are doomed to failure.

Evolve, or die: antique metal-bashing industries are really not part of the UK's 21st-century future. We should once and for all embrace the service/financial/technology-based industries (where a company employing 20 people can turn over £2.5Billion in a year) as the true future.

[Martin Coxall]

@Adrian Peirson:

I was wondering whether we'd see the appearance of the Ron Paul tendency this side of the Atlantic.

You know, I didn't necessarily agree with everything Paul suggested, but you can't fault a man for Thinking Different.

Paul's idea of allowing the treasury to issue their own commodity-backed notes in competition to the Banking system, and allowing the market to decide between fiat and real money is one of the most fascinating ideas I've heard.

I'd love for us to borrow that idea. If the treasury could issue its own gold or silver sterling notes, I imagine that the Bank of England's inflationary fiat currency would lose its destructive power over the British economy very quickly.

[Tony Makara]

On Adrian Peirson and Ron Paul, social credit theory works on paper and I think it would take a totalitarian system to impose it. The current banking practice certainly isn't perfect but it would be far better to fine tune that than to overthrow a system that has worked well for the most part over hundreds of years.

[James]

I'm starting to feel like I've stumbled into the Socialist Students' Debating Society.

Firstly >Adrian Peirson...I'm not sure if you're for real, but I don't think conspiracy theories based on the Rothschilds owning the bank of England and starting wars so they can sell depleted uranium is really that helpful in the current debate.

And dear old Tony Makara - I have to agree with Stuart that your proposals sound like some sort of 1970s socialist nirvana of the type that sounds great in theory but is utterly impractical.

"If we can get most people back into work the level of revenue at hand will increase as people start paying tax..." But where is this taxable wealth coming from in the first place? You seem intent on creating a closed system with huge barriers to wealth creation. You plan to hamstring the economy, but make money by taxing the people who are working in inefficient protected industries that can only survive because of an effective ban on imports and massive government subsidies (or tax breaks as you've called them). I just do not believe that this is the making of an efficient way to use our resources.

There are so many holes...hmm, let's see...this new homegrown industry of yours is going to need to import raw materials, which will now be hugely expensive because of your cheap pound policy. We cannot sell goods abroad to pay for these raw materials (thanks to the Makara Trade Wars, as they'll be known to future generations), so our balance trade in the long run could be worse than it is now!

Inflation would miost definitely not be stable. The high cost of imported raw materials would be one problem. And the inefficient domestic manufacturing base will forever struggle to produce what the economy needs (I take back what I said before about domestic productino not necessarily being less efficient - under your protected and subsidised economic model it will be woeful - leading to inflation, shortages and a black market in smuggled imports (smuggled to avoid your exorbitant import tariffs). Picture a cross between the Soviet Union and North Korea.

"On trade wars, it would benefit all nations to become more self sufficient." Right. Free markets 101. I can make widget X more efficiently than you can. and you can make widget Y more efficiently than I can. So we can maximise our efficiency and our resource use if I make all the widget Xs and you make all the widget Ys, and we swap some of them. We both end up with more of both. THAT is how wealth is created.

Under your system of isolated economies, how do we get the iron ore that we need? Or the oil? Or the bananas? The olives, the wine, the uranium, the timber, the pharmaceuticals, the... everything that we nned to import, but can't afford thanks to the end of global trade and the high world tariffs and the weak pound you advocate? And believe it or not, wars are more likely under your system (if you can't buy the natural resources you need from your neighbour, you have to take it - and global trading nations go to war with each other far less frequently than non-trading nations, because they have more to lose).

And I love your anding...that "a natural order of trade will develop in the world, one based on mutual benefit rather than chaotic undercutting...". Um - that's what we keep trying to tell you. trading with another nation IS mutually beneficial!! (And if you disagree, then what is to stop your new, enlightened, nirvana type of trade from turning into the very thing you are arguing against...globalization?).

You ask how to create the million plus jobs needed to end wlefare dependency. Iwill admit, I do not have a magic bullet...but neither do you. Under your system, we would be considerable worse off. Free trade has lifted more people out of poverty throughout the world than protectionism. And there is a difference between unemployment and welfare dependency. (wait - hear me out). In a dynamic job market, people should be coming out of work and into work all the time. There will always be a natural rate of unemployment. That is good - otherwise how could you start a new business? There would be no one to hire. The key to ending welfare dependecy is to ensure that the same people are not stuck in that group of unemployed. People should bounce into it, and out again. They are not in this country, and that needs to be addressed.

But your socialist solution of fake jobs, paid for through state subsidy and protectionism is not the answer. It would be devastating.

(And George Soros did not make money from a floating pound - hemade money precisely because of the insane concept of the ERM which tried to fix the pound!).

[Hayekian]

Martin Coxall wrote "Paul's idea of allowing the treasury to issue their own commodity-backed notes in competition to the Banking system, and allowing the market to decide between fiat and real money is one of the most fascinating ideas I've heard."

It is not Ron Paul's idea. It was proposed by Hayek in his paper "The Denationalisation of Money" for the IEA over 20 years ago. Most Conservatives desperately need education in free market economics!

[James]

(apologies for the endless typos - I'm trying to keep this debate up while multi-tasking three other things, so I'm rushing!!)

[Andrew Lilico]

Martin@19:44

Regarding (b), I didn't say that being attractive to foreign investors is the main aim of policy. I said that having a current account deficit is irrelevant, and simply implies that Britain is an attractive place for investors.

Regarding (c), you assert that "From the perspective of eliminating deadweight losses [Consumption taxes are better than income taxes]". On what basis do you assert that deadweight losses associated with consumption taxes are lower than those associated with income taxes?

The argument for consumption taxes belonged to an era in which we thought there were significant imperfections in Labour markets (i.e. the 1970s), and hence in which rises in income tax interacted with the monopsony power of unions to create distortions and inflation. It is also true that the opportunities to create distortions "at the top end" by distorting the decisions of the very wealthy are probably greater with income taxes - though one could, perhaps, duplicate the distortions created by having an 85% tax on income over £200,000 per year by having high rates of consumption tax on Porsche's, cappucino's, private education, and other high-earner goods, it would not be straightforward.

But with today's fairly simple income taxes, there is little to be said for cutting the basic rate (say) and raising VAT. The age for that kind of thing has passed. Today there is little reason to suppose that distortions in labour markets are any worse than elsewhere.

[Iain]

"where a company employing 20 people can turn over £2.5Billion in a year"

You don't need 20 people to do that all you need is one, a phone, and a scretary, I suppose the other 18 people can be burger flippers.

[Tony Makara]

James, I've got to give you 10/10 for having a creative imagination but like many commentators you try to attach your own frenzied scenarios to my suggestions. I think its unfair of you to try and equate economic self-reliance with a Korean type autarchy. I can't see how my saying we should have forex stability can be equated with wanting devaluation either. I disagree with your statement that there will always be a natural rate of unemployment, that is a cop-out argument employed by politicians who are afraid of the task of curing unemployment. James, I ask you, are you happy to condemn millions to unemployment and live with the knock-on effects of joblessness in terms of cost and social decay?, or do you think politicians should try to do something serious about ending the nightmare of welfare dependency? You may not agree with my ideas on job creation but surely you must see that something must be done, if we just leave this problem to right itself it will only get worse and the social entropy will continue for millions of our people. We need a plan. We need to do something.

[Tanuki]

Iain@20:59: You don't need 20 people to do that all you need is one, a phone, and a scretary, I suppose the other 18 people can be burger flippers.

Or they go back to Poland and set up businesses of their own?

[Andrew Lilico]

Oh, yes. Tony's latest post has reminded me that at 19:06 I should have written

g) Unemployment in the UK is very low, not very high. That is true in terms of benefit claimants, in terms of ILO measurement, and in terms of overall participation in the labour force (in the last of which we are among the highest in the developed world). The claim that we have mass unemployment in this country and that "Something must be done!" is, not to put too fine a point on it, utter rubbish.

[Martin Coxall]

@Andrew Lilico:

I'm really not certain that I fully understand your point, and you'll have to bear with me here, because as you may have guessed I'm a software developer not an economist.

Are you saying that, essentially, deadweight losses are an irrelevance, don't exist now or something else that I'm not grasping?

The Chicago School tendency and club for growth types still seem to be innately in favour of taxes on consumption.

What do you make of Stewart Geddes's idea that we have one rate of income tax, and set the threshold at 110% of the minimum wage?

[Jon Gale]

James @19:38,

1. Britain was protectionist until about 1840, then switched to free trade. by 1890 protectionist USA and protectionist Germany had overtaken us. The USA was protectionist from its founding until 1970, during which time it became an economic giant. Japan industrialised (twice, pre-war and post war) under protectionism. Modern China is industrialising under protectionism. Protectionism isn't neccessarily harmful!

Brazil didn't become a major power because it was free trade - exporting coffee and raw materials and importing industrial goods.

2.
a. Trade wars are a major problem with protectionism, so should be introduced on a case by case basis. Some goods are easier to "fight over" than others.

What got me thinking about tariffs was farming - If it costs a british farmer £1.50 to produce a pound of pork, but can only sell it in Britain for £1.40, why is that?

Because supermarkets can buy foreign pork for £1.41.

So tariffs should be introduced to at least equalize the price (quality would then win out). If Nation X puts a tariff on British pork in return, it shouldn't matter because our domestic market is now profitable for our farmers, and surely nowhere in the world is importing expensive British pork when they could be getting the cheap £1.41 pork we were eating?

Something like steel though would cause much more problems, because it goes into so many different products that our steel mills may benefit from tariffs, but our widget factories would lose out.

b. The tariffs would raise some money. If we put a 25% tarif on all imports we could almost abolish income tax - until imports fell of course. The difficulty is finding the point of the bell curve to maximise tax income. As countries have abandoned import tariffs income taxes have gone up, isn't that odd?

c. Inflation is another major problem. I dont know how to solve that (yet! I'll think about it :) ). We cant raise interest rates, because we will need to borrow money to rebuild our factories.

Inflation and trade wars are the only things keeping me undecided, otherwise (big otherwise I know) I would support protectionism. Free trade also has downsides - service jobs pay less on average than manufacturing jobs - one of the reasons families now need two bread winners, the drive to compete with cheaper countries encourages the use of immigrant labour, we were promised that we would keep our high-tech jobs but making computer chips, then software, then R&D, have gradually followed the heavy industry to India. The Chinese stock market is booming and will start stealing City business...

I would like protectionism, but it would be very difficult to introduce.

re your 20.49 post,

Protectionism isn't socialism the Conservative Party has alternated between protection and free trade, the Republican party was the party of protection, Abraham Lincoln was a champion of protectionism.

Phew, long post.

[Martin Coxall]

@Hayekian:

I stand corrected. It's still an interesting idea, whosever it was.

[James]

Tony - As I said, unemployment is not the same as welfare dependecy. The latter is an evil that we must seek to eradicate, you and I agree there. Where we disagree is that I think the best way to do it is through a dynamic economy in which new jobs are being created all the time (and yes, some are disappearing all the time) - the important thing is not that there are unemployed people, but how long on average they remain unemployed. I was unemployed last year, but then I found another job - I nounced into and out of the unemployed pool. Without an unemployed pool, where does the new business find staff.

I admit to being a bit provocative in citing North Korea, but I really do think that your vision is a starry eyed, utterly impractical utopia that would lead to collapse and widespread poverty. I have to put it that strongly! It is like the utopian Soviet ideal that, had it worked, we would all be copying now.

And you did state that you disagreed with what you called the 'storng pound' policy. You implied you wanted monetary relaxation, and you specifically called for lower interest rates. I'm afraid the result would be higher inflation and a weaker pound.

Plus, in your model, we do not 'earn' much foreign curreny due to our isolationist economy. Plus, there is little international demand to buy pounds, as a)we don't sell anything, and b) we don't let foreigners invest in the UK economy. I'm afraid that all points toa weak pound.

By the way, in your economic scenario, how DO you envisage we get hold of the raw materials we need to create this glorious domestic manufacturing economy?

Cheers
J

[Jon Gale]

But a very interesting debate - more ConHome threads should be like this!

[John Leonard]

James:

Thank you, I hardly needed the history lesson (rather condescending I thought). However, I did not appreciate that your definition of Globalisation was so simplistic. From your perspective then, there has been no change in this concept (other than who's up and whose down) for milleniums?

That said, it doesn't explain the great hubbub about Globalization over the past 25 years. Is there anything at all new about it in your view?

Furthermore, your response does not provide any view of how this country will be affected in the medium term given the growth of the new industrial nations in our 'Global Society'.

So I will rephrase my question, given the current circumstances why should Britain continue with the same economic and business approach?

What are the benefits and what risks do we avoid by doing so and what risks remain in the current and likely future circumstances?

How will your approach insulate this country from the growth of the new industrial powers over the rest of this century and ensure that we remain an independent prosperous free state?

It seems to me that your sole arguments are that cheap foreign goods are essential for this country and so is having a seat at the top table. Can this scenario exist ad infinitum or is there a point where you will concede that there are other considerations?

Personally, I would have thought a trade surplus, knowledge that we couldn't be held to ransom by external forces (we have seen a wee bit of this behaviour by Russia and other major Oil Producing countries already) or seriously impacted through supply loss by natural or human disasters caused on the other side of the world is what would be good for this country?

[James]

(I have to go - sorry. I was enjoying this debate),

John - sorry didn't mean to be condescending, and yes, I was simplifying globalization for the sake of a discusion about concepts and principals, when in practice of course it is far more complex than I have suggested.

If this is still raging later on, I'll be back. In the meantime - Andrew Lilico, come on, stick up for global free trade!!!

Cheers
James

[Tony Makara]

Andrew Lilico, the fact that you can claim that 1.6 million unemployed is 'low' just goes to show how far the goalposts have been moved. I'm just about old enough to remember the uproar when unemployment reached one million and it made for banner headlines in all the newspapers. Now politicians of all parties see 1.6 million as being a success compared with figures of three million plus from the early 1980s. Its an attitude that shames our political classes. 1.6 million jobless is 1.6 million individuals who are living a life of alienation. They exist but they don't have a life.

[Adrian Peirson]

So instead of the Crown Coining our own Money, you think we should Borrow it into Existance from a Private Bank at Interest which currently costs us 40 Billion Per year.

Simple question , should we coin our own money free of charge, or Borrow it at Interest from a Private Bank..

[Tony Makara]

"Free trade also has downsides - service jobs pay less on average than manufacturing jobs - one of the reasons families now need two bread winners"

John Gale, this is a very important point because the greater the service-sector the more the nation has to rely on credit to drive demand because wages cannot be boosted in the way they can through increased productivity in manufacturing. Of course when the credit dries up those consumers who work in the service sector are also no longer buying from the retail service sector and sales slump reducing further the potential for increasing purchasing power through better wages. Its a dead-end. We need a balanced economy, the shift from manufacturing and into services has be more costly than most people imagine and relies on the oxygen of credit to a dangerous level.

[Andrew Lilico]

Tony@21:43

But the "one million = clamour" that you remember was the number of people claiming benefit. That figure was 794,600, around 2.6% of the labour force. This would have been considered a very low rate even in the 1950s, when the inflation rate averaged a tad under 3%.

The figure you quote, 1.6 million, is for the wider ILO definition, which wasn't used in the past. On that measure UK unemployment is again very low, just 5.2%, only a little above what most economists would consider the minimum sustainable level of unemployment for a dynamic, growing developed economy.

Martin@21:23

I don't deny that there are deadweight losses - how could I, since they are simply a mathematical artefact, existing by definition!

Concerning the proposal to raise the income tax threshold, that is what I myself proposed in my post@19:06, point (e). I would aim to have it quite a bit higher than 110% of the minimum wage, though I appreciate the concept of linking them. The way to reach one rate, if that's what we want to do, would be to raise the basic rate to 25%, hold the higher rate threshold, and phase out the basic rate out by having band shrink, until we were left with just the 40% higher rate. But my guess is that, in fact, two rates of 25% and 40% are a fairly elegant solution.

[Adrian Peirson]

It's not Ron Pauls Idea, the founding fathers of the US and UK Constitutions Knew about Money, they specifically declared that ONLY the Country should Issue Money and it should have real Value (IE be backed by Gold Silver )
The Bank of England and the US Fed Are Private Companies.
Our Banking system is a Massive Fraud, it siole Purpose is to Lower Interest rates, ensnare Borrowers then raise interest rates to trawl in their assets, sell them off for worthless Paper money then convert this to Gold. Or Stocks.

When a Bank reposesses, what exactly did it lose,

If the Bank had lent you real Money IE Gold or Silver then yes, the Bank has a legitimate claim, but credit is thin air, Paper money cost only pennies to print..

http://www.healthfreedom.info/Federal_Reserve_Fraud.htm
http://www.propagandamatrix.com/makow_banking_cartel_is_the_cause_of_humanitys_woes.html
http://www.prosperityuk.com/prosperity/articles/monftp.html
http://www.planetquo.com/The-Law-Is-An-Ass-And-You-Are-Made-Of-Straw

[Tony Makara]

Andrew Lilico, if unemployment is so 'low' why are politicians turning blue over the cost of welfare? Politicians often claim that many of the people on incapacity are on the wrong benefit. If the Conservative plans for a thorough system of testing show this to be true then many more people will be claiming JSA instead of IB and will be designated as unemployed. People estimate this could could mean between 200,000 and even a million switching benefits. So how on earth are we going to move all these people off benefits and into work if there are only 600,000 vacancies at the better end of the economic cycle? What would you suggest? Labour have tried to solve this dilemma by promoting the half work/half benefit system of job-sharing culture topped up by tax credits, but this is clearly papering over the cracks. We have a serious problem with lumpen-unemployment no matter what sophistry is applied to the figures. We need a plan, a big idea to deal with this problem once and for all. Just sitting back and explaining unemployment away as being 'natural' or 'low' isn't going to make the problem go away. What can be done?

[Andrew Lilico]

Adrian@22:09

So your view is that, since its value is created only by a command, all of your money is valueless - indeed, a con. That being so, I'd be very happy to take your valueless waste-of-time money off your hands. If you fancy sending it all to me, I can supply an address...

[anthony scholefield]

Regarding globalization both sides must gain from trade or they would not engage in it. The question of which side benefits to what degree has rarely been addressed but both John Stuart Mill and Paul Samuelson have addressed it and both concluded that the distribution of the gains can be very unequal. Trade is thus always beneficial but the gains can and do change .

[Mike A]

The key differences between Tony et al and Andrew Lilico are:
- Andrew knows what unemployment is.
- Andrew knows what free trade is
- Andrew knows how the tax system works, and he gets tax incidence

However (and this is something which comes up perennially) I don't think raising tax thresholds is any bloody use (I'm not sure Andrew is too hot on distributional economics, which is my little patch of turf).

Editor, I hope you don't mind this, but Adrian Peirson...

You're mental. Your website hosts a video which starts with the words:

"This is the crypto Jew who controls the Zionist disinformation site known as "TakeOurWorldBack.com"...".

This apparently Jewish man is referred to - charmingly - as "hookbeak" and your site states that "Zionists" carried out the Sept 11th attacks. You have a string of flat-out anti-semitic videos.

You'll have to forgive me if I think you're absolutely crackers.

It's incredible how loony you can be whilst retaining the ability to write HTML
http://www.planetquo.com/

[Adrian Peirson]

As long as People do not wake up I'll keep hiold of it to buy food.

Bernanke of the Fed Agrees With Ron Paul
http://www.youtube.com/watch?v=7SLuXBMOKYc

Debt = Slavery
http://www.youtube.com/watch?v=ydGvgcccQok

Who Owns the Media
http://www.youtube.com/watch?v=Xn_LTy4TIpc&feature=PlayList&p=654AD63A40D818F9&index=1

http://www.youtube.com/user/Rassisten

[Tony Makara]

Anthony Scholefield, individuals involved in specific transactions may benefit from global free-trade but we need to look at this question from a national perspective, particularly its effects on unemployment, imported inflation, etc.

Mike A, as much as I enjoy reading Andrew Lilico's economic breakdowns I fear that Andrew puts too much focus on small economic details and isn't setting the focus on the wider picture and most importantly putting forward a strategy on what is to be done. Economics cannot be compartmentalized in the way that orthodox economists believe, economic policy is interwoven with social and political policy and the bad effects of economics ripple through everything.

I am not a professional economist, most of my life has been in security work, that line of work has taught me a lot about people and human behaviour, about what makes some people violent, what makes people reject social norms. I know that people without a structured lifestyle can drift into activities that they would never have contemplated if they had been working and had a more socially connected lifestyle. Unemployment and poverty change people and create a sub-culture, one built on alienation and one that can easily manifest into anti-social behaviour. This is especially true of the under 25s, this is a time in a young mans life when he needs to have a structured life. So looking to solve unemployment is more important than just saving money for the treasury, its real value is social, the economic climate of the day effects the social climate of the day, people must understand this, governments must understand this, and the era of do-nothing government must end.

[Tom M]

I have to agree this is one of the most entertaining CH threads I've read in a long time.

Tony - the issue you have to address before you'll get anyone to take your idea of national economic autonomy seriously is, as several people have pointed out, Ricardo's law of comparative advantage.
Free trade isn't important because its trade but because its free - that is people are free to buy goods and services from whatever producer, in whatever country, can supply them most efficiently. The minute you introduce restrictions on the freedom of producers and consumers you also, inevitibly, restrict the efficiency of the economy. For a modern case study of how that usually turns out have a look at what Chavez is doing to the Venezuelan economy with his price controls.
Thats not to say government can't or shouldn't impose some restrictions on the economy - simply that you have to account for the repercussions of your actions if you do so.

And Adrain....please stop posting. You're giving us monetarist's a bad name.

[Andrew Lilico]

Mike A@00:03

What negative distributional consequences do you envisage from my suggestion of raising the basic rate of income tax (to 25p) and raising thresholds? I'm sure you will be aware that such a scheme reduces taxes for the poor (better to pay no income tax than to pay 20% on a bit), at the expense of higher taxes for those towards the top of the basic rate band (i.e. reasonbly well-heeled, though by-no-means rich, middle class people). Does that seem like a negative distributional consequence?

[Martin Coxall]

You know, one of the most upsetting things about the Paultards is how often they turn out to be completely mental, because I think that Ron Paul potentially had some interesting ideas, but they've become tainted by association with his fruitloop supporters.

The thing that Tony Makara seems not to be getting is that there is an important difference between unemployment and long-term unemployment.

A pool of short-term unemployment is vital for the efficient functioning of our economy, otherwise new jobs could not be created.

The long-term unemployed are in a rather more difficult bind, because they're trapped on incapacity benefit for all eternity in Gordon's benefit client state.

That costs the economy billions, but it buys Labour votes, so he probably doesn't care.

[Martin Coxall]

@Andrew Lilico:

You still haven't explained why most club for growth types seem to prefer taxes on consumption than income, if there's no real economic benefit to them.

Is the fact that, as forced labour, income taxes are a form of state slavery and therefore thoroughly immoral, especially for those who believe in freeing people from the state?

[Andrew Lilico]

Martin@09:10

Apologies - Too many posts = bound to miss something.

I don't know much about the club for growth, but my guess is that they buy the argument that my incidence case presented above was overly static, focusing on working today to consume today. They would say that once we take account of the possibility of saving, consumption taxes come out ahead because savings income will be taxed later, reducing the future consumption fruits of labour.

You can see this argument here, for instance:

http://gregmankiw.blogspot.com/2006/06/consumption-vs-income-taxation.html

I suggest, however, that the problem here is not taxing income versus consumption, but, rather, the double taxation of savings income. And in the UK we have all kinds of schemes to limit double taxation problems (ISAs, pensions, and so on). To be sure, these create bureaucratic complexity, but consumption taxes are rather more complex than income taxes, anyway.

The reality, in my view, is that there will continue to be a place for both significant income and consumption taxes.

[Yet Another Anon]

Capitalism is a natural way, built on incentive and reward, but at the same time capitalism leaves certain people behind.
To some extent every system has it's winners and losers - in Communist and Ba'athist countries a party elite emerged who led a life of luxury getting their wishes granted quickly, in welfare states there have been preferred groups who are exempted from many of the conditions and requirements to others and who have higher rates done in a crude way.

The fact is that in every society there will be winners and losers, there is no point attempting some kind of narrowing of income inequality. The best thing is to hold down tax while investing in the Transport & Comunications, R&D, Police, Military; maintain strong social discipline through the Police & Security Services and with low level residence based but primarily universal and simple system of low level benefits, with a deregulated labour market including virtually no employment regulation and Free Trade and allowing employers to use labour they deem fit (subject to National Security vetting) then an economy will flourish and social order and efficiency will prevail. Through a strong economy everyone will benefit.

Job creation is something best left for public, private or third sector employers to do when they need work doing and on their terms, a strong economy is what will generate jobs and with minimal regulation and benefits at a very low level relative to wages.

I just thought I'd mention that when I did my economic degree several years ago, VAT was considered to be an example of a regressive tax.
This is wrong of course, something costing £1,000 attracts the same percentage tax as something costing £1. There are people who have substantial savings, but little actual taxable income and people on holiday in this country from abroad briefly also pay no Income Tax, but they do pay VAT if they buy anything covered by it in this country - I would favour extending VAT onto Childrens shoes (after all many poor families with children with big feet end up having to buy adult size shoes for there children anyway and I have known of adults who have bought childrens shoes because their feet fit them. I was in mens shoes from the age of 10.

I also think that Food should be covered by VAT, and printed material such as newspapers, books etc.... too.

The threshold on Income Tax should be raised significantly and moves should be made to having it at a flat rate at a lower rate than the rates that apply now. Also the allowances for Capital Gains Tax and Income Tax should be unified - there are schemes for assessing what proportion of Capital Gains are taxable and this proportion that is considered appropriate to apply tax to could be added to amounts considered to constitute Income - thus a simpler system as one rate would be applied.

I think to encourage saving that Savings Tax should be abolished and that Corporation Taxes should be cut.

if unemployment is so 'low' why are politicians turning blue over the cost of welfare? Politicians often claim that many of the people on incapacity are on the wrong benefit. If the Conservative plans for a thorough system of testing show this to be true then many more people will be claiming JSA instead of IB and will be designated as unemployed. People estimate this could could mean between 200,000 and even a million switching benefits.
Because they are committed to substantial rises in benefits for the elderly and some severely disabled people, and welfare spending is so high that this means having to cut the proportions spent on other groups and adjust numbers in those groups. So the Pension age is raised and there is an ambition to make it more difficult to claim Incapacity Benefits because they have higher rates of benefit than JSA - if 200,000 people are transferred from Incapacity Benefit to JSA and did no work before and do no work still it is still saving hundreds of millions or billions of pounds potentially because of the difference in the amount of money being spent in benefits. The new benefit the government is creating to abolish Income Support and Incapacity Benefit and integrate them into one benefit with a contributory and non-contributory element like JSA and with a new benefit for more severely disabled claimants had the support from all sides of the house including I note IDS, the main rate of that benefit is £85 for a Single Person which is high compared to the £37.50-59.15 main rates under JSA, if you add in free bus passes for many classed as incapacitated and things such as DLA, more generous allowances on things such as Housing Benefit and Council Tax Benefit etc.... it amounts to a lot of money. It isn't just the rates applicable and cost of non-cash benefits, Incapacity Benefit is claimable on a contributory basis for up to 2 years, JSA for only 26 months - after this the claimant is only able to claim Income Support or Income Based JSA which assesses savings\capital as well. In my opinion the contributory eligibility should be cut to 26 weeks to bring it into line with JSA.

If a million people were switched across it definitely would be Billions of Pounds saved on benefits.

As for an Office of Tax Simplification, I am suspicious of such a scheme thinking it is liable just to add to bureaucracy, far better to build into government departments especially the Treasury a general ethos of producing regulation whether on tax or other employment related issues that is as minimal and simple as possible. Really the Treasury should deal with all economic affairs including any industrial or labour market regulation so that there is minimalisation of the number of organisations government is dealing with, if government does less on the socio-economic side then this should be no problem and would lead to savings in the cost of running government.

[James Maskell]

Over two years of considering what to come up with and they come up with a Tax Simplification Office? My God, the Tories are running on empty already...

[Tony Makara]

Tom M, those that hold comparative advantage are internationalists and do not understand that a nation and the fate of its people is of more importance that getting goods cheaply. Such people are ideologues who believe transactions and profits of individuals count for more than the collective well-being of the nation. The logical conclusion of comparative advantage is that some nations become active producers and others become passive buyers, or as the Chinese say such nations 'exist to serve the great Chinese economic project' Of course the more goods are imported the less work is available here and we are stuck forever as a middle-man service sector economy, reliant on credit to fuel demand, and with a monumental welfare state to support.

Martin Coxall, unemployment has been a serious problem in our country since the mid 1970s, the figures have been manipulated by all governments but there is now a permanent lumpen core of one million people who cannot work because the work is not available. There are people who join and leave that core, through a revolving door, and there are those rooted to that core for years at a time. Whether the unemployment is short or long term it is still unemployment and as some people break free others fall into joblessness. Another problem we face is that many jobs in the service sector are by their nature transient. There is not enough permanence, not enough job security. It is all to easy to find work and lose it again.

A nation that is producing for itself is going to create jobs, it has a ready-made market to supply, and can plan for the future with training programmes and apprenticeships. Employment then becomes the legacy passed down from generation to generation and not welfare dependency.

[Hayek]

Tony, I'm afraid your views are just outdated. The Conservative party stands for free trade not protectionism. Your views if implemented would lead to less choice at more expense. The people who would suffer the most would be the poor. The unemployment that exists today is caused by welfare dependency and if anything a lack of free trade. We should get rid of all forms of economic protectionism and dismantle the generous welfare state which traps people in poverty.

I do wonder why you are even in the Conservative party. I presume you are a member?

[Tony Makara]

Hayek, there are Conservatives who support protectionism and their time will come. Our country is in economic decline, things will get worse. So the time for protectionism and industrial re-birth will come. As I have stated many times I am not against trade and I am not against importing goods that we need. However I feel it is counter-productive to import goods that we can produce ourselves, why give work and consumer demand to foreigners when we can utilize it to serve the national need.

[Yet Another Anon]

However I feel it is counter-productive to import goods that we can produce ourselves
In sectors where there is good scope for competition this improves quality and leads to lower prices and the best thing for government to do is get out of the way, excepting some areas where for reasons of National Security or because of the nature of the service- railways for example, tapped water , electricity supply and even still in my opinion residential telecommunications cabling and exchanges where to have alternative pipes or rails is impractical for reasons of space apart from anything else and while possible tends to result in wasting money, and also policing and the military where there are national security and order reasons for keeping them under tight control and under a single chain of command, otherwise UK companies have to be given the opportunity in a low tax low regulatory regime to compete in a global market and develop the entrepreneurs that are a major driving force behind any successful economy - the government's role can be purely one of carrying out research & development into technologies that could be considered to have social, technological and economic benefits and then perhaps patent them for the crown and then license use of such patents, costs in Personal Healthcare would be reduced vastly if the NHS switched money from patients to developing medicines - the medicines would then be at a more affordable level and patients could afford to pay for them themselves on a commercial basis.

There are international trading agreements to stop nations restricting their markets, also just because a country can produce something doesn't mean it can do it well - fruits can be grown in this country for example, would you be suggesting for example that the UK should stop importing wine or rum - wine can be mass produced in the south of England, at the Eden Project in Cornwall chillis have been grown. All such moves would do is add bureacracy and leave British people with many expensive goods many in short supply - government would have to divert attention from other things to spend it's time deciding on import quotas for things, and there would be huge trade wars as a result.

[Yet Another Anon]

Did you Know that the Bank of England is NOT Englands Bank, it is in fact a Private Company owned by Rothschild (Who also owns 80% of the Worlds Uranium, Hint Depleted Uranium, Brown suddenly announcing we should go Nuclear, Who exactly bought the Gold that Brown Sold Off )
The Bank of England was founded in the 17th century, so far as I am aware the Crown was always the largest shareholder and the remaining private shareholders were bought out in 1945. It became the UK Central Bank in 1707 - formerly the Bank of Scotland had been Scotland's central bank (The Bank of Scotland always was a private company).

The Federal Reserve is a hybrid organization - the Reserve Banks are private, but the Reserve itself is a statutory organisation with Federal Government appointees.

The Bank of England too works through private banks, however if the government chose to float the Bank of England on the Stock Exchange there is nothing to stop it doing this beyond getting legislation through to do it.

[Tony Makara]

"would you be suggesting for example that the UK should stop importing wine or rum"

Yet Another Anon, certainly not. Everything that is currently available would still be available to those that one to buy it but would carry a tariff to protect home producers. Anyone wanting to buy a foreign wine could still buy one, but the British produced wine would be less expensive. Of course there would be no tariff on imported raw materials, tariff would only apply to a finished product, that is after it has undergone the process of labour and distribution.

[Mike Ainsley]

Andrew:

"What negative distributional consequences do you envisage from my suggestion of raising the basic rate of income tax (to 25p) and raising thresholds? I'm sure you will be aware that such a scheme reduces taxes for the poor (better to pay no income tax than to pay 20% on a bit), at the expense of higher taxes for those towards the top of the basic rate band (i.e. reasonbly well-heeled, though by-no-means rich, middle class people). Does that seem like a negative distributional consequence?"

To be fair, I didn't note the 25p element. However, raising thresholds is a daft way of helping the poor.

It means we spend billions on a very small tax cut which doesn't really help those poor people at the bottom but reduces the rate of return for marginal investments higher up the scale..

If you were to uprate child benefit, or focus on reducing withdrawal rates for tax credits, you'd do far better distributionally.

Income tax is not a tax paid by the poor. In some years fag duty isa big burdn on the average lower decile household than income tax!

[Mike Ainsley]

p.s. we agree on 99% of things, Andrew, especially on this thread... And your argument about tax incidence is a very important one.

[Yet Another Anon]

Of course there would be no tariff on imported raw materials, tariff would only apply to a finished product, that is after it has undergone the process of labour and distribution.
Raw materials still have to be extracted, there is no reason to treat them any differently than things that have been processed.

in my opinion there are no justifications for import tariffs or quotas on raw materials, foodstuffs or artificial products.

[Tony Makara]

Yet Another Anon, look around your home, take note of how many items have been imported but could have been made here, producing jobs for our people and wealth for our nation in terms of profit for business to re-invest and taxable revenue for our treasury. As I sit here now I see a German made PC, two loudspeakers made in China, a mouse made in China, the PC rests on a wooden cabinet made in Sweden, to my left is a biro pen made in China, a notepad printed in the Netherlands, a pair of scissors made in China, a stack of blank CDs made in China, all this and I haven't even moved out of my Swedish made chair. In fact looking around my room the only British made product that I can see is a 36 year old British made radiogramme which works perfectly, has stunning radio reception, a beautiful wood finish and huge booming speakers that produce a rich sound to shame the best superwoofer. If I walked into my kitchen I would certainly find many more foreign made items and foodstuffs. Most of which could have been produced in our own country giving our own people work. Importing what we can produce for ourselves is just crazy.

[Andrew Lilico]

Mike@13:17

I don't think I suggested that "helping to poor" was the point of raising the income tax threshold. Presumably in a sense the poor wouldn't be helped at all, because the truly poor would be on means-tested benefits anyway, and the means test would adjust to reflect the fact that their post-tax incomes were greater, leaving them broadly unaffected.

I see the point as twofold:

a) First, it saves on bureaucracy. It is bureaucratically inefficient for us to tax people and pay benefits to those same people to a greater extent than we can (simply and effectively) avoid doing so.

b) I do think that in another sense of "helping the poor", it's better if people are not any more dependent on benefits than is absolutely necessary. If we can cut their taxes and cut their benefits, then they are more self-reliant - which is good for their honour.

[Mike Ainsley]

a) The difference between assessing people and taxing them at 0% is negligibly different to assessing them and taxing them at any other number. There is an IFS report on this whole issue which races through these things. If you're not helping lower income families, why touch thresholds at all? Cut rates.

b) Fair enough - but the maths of this make me sceptical about the size of this effect.

Tony: your plan is what Salazar tried in Portugal, and was the Latin American policy of choice for decades. It is called "import substitution industrialisation".

It is potty.

[Mike Ainsley]

Tony - so you know, I'm following your advice and am going out this afternoon to shear a sheep. I'm then going to spin the wool and make my own jumper. When I've done that, I'm going to kill the sheep, hang it, gut it and cook it. I've got a gas fitter coming in tp fit a new boiler, but I've told him not to bother. I reckon I can do it as well as him, so I'm doing that myself.

After all, if I can do it myself, I should. I'm giving up a well-paid job in the City to do it, but screw that. It's more important that I, you know, do it myself.

[Andrew Lilico]

Unfortunately, Mike@18:02, wasting time you could be spending earning money in your City job is not the only loss you are likely to find from this arrangement. I fear you may find that your own boiler design is not quite so efficient as that of someone else...

(For anyone missing the irony, in trade, we gain twice over - by getting better stuff cheaper, as imports, and by freeing up our own time to concentrate on doing what we do well.

I have argued these matters out with Tony before, but there's so little to be said in favour of protectionism that it's barely worth bothering any more...)

[Andrew Lilico]

Mike@17:57

Back when I used to work at the IFS in the early 1990s, the line was precisely that raising thresholds *was* a superior way to help the poor to lowering rates. Dilnot, in particular, used to be very keen on this.

I don't agree with you that, psychologically and in terms of personal honour, there is no difference between being taxed £10 and given £10 of benefits and simply neither paying taxes nor receiving benefits. I prefer a society in which the government interferes with our liberty by no more than is required.