The TPA: praising merit, talent and a juicy inheritance


1:17 pm - July 29th 2009

by Clifford Singer    


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The TaxPayers’ Alliance’s latest report, "Tax and entrepreneurship: How the tax system impedes the creation of new firms and decreases employment", contains four familiar ingredients:

1) A foreword by someone well-know (or at least not completely unknown)
2) A generous handful of footnotes (whether relevant or not)
3) Some elaborate formulae (to add a scientific veneer)
4) A hard-hitting press release (however flimsy the research).

In this case, (1) is provided by Julie Meyer, "the well known founder & CEO of Ariadne Capital, founder of Entrepreneur Country, co-founder of First Tuesday, dragon on BBC’s Online Dragons Den and weekly columnist in London’s City AM".

That’s how the TPA describes her, though it may have been equally attracted by her recent article, "Call me one of Thatcher’s children any day", in which she said of the great matriarch:

"She wanted the children of Britain to be strong and grow tall, and some would grow taller than others depending on their merit and talent… Thatcher obviously couldn’t make life perfect for every single British citizen. But she raised the bar very high indeed in terms of executing a vision of ‘Great’ Britain."

Meyer’s foreword for the TPA report continues in a similar vein – a worrying mix of motivational speak and market fundamentalism. Thus we have:

"We are fortunate that there exists that class of people – who have been there throughout history – the Michaelangelos, the Gutenbergs, the Christopher Columbuses – who are the artists, adventurers, architects, inventors and business people of their day – who are prepared to live abnormal lives in the bringing to life of their vision of the world, their products and services. Greatness drove them, not work life balance. They sought excellence, profits and transparency, and made the impossible inevitable."

followed by:

"No one under 30 that I know wants to work for anyone anymore… We are all slowly becoming Individual Capitalists. Not only can the government not shoulder the burden of the bloated welfare state which it has created. The balance sheet creaks enough already. But far more importantly, we – the little guys of the world – know what to do with our lives."

To help pad out ingredient (2), the footnotes, the report substantiates its own conjecture by citing the conjecture of others – like James Manzi of the right-wing Manhattan Institute:

“Some people start companies because they’re driven by a dream that transcends rational economic calculation. But most successful entrepreneurs are pretty serious about comparing risks with opportunities. Higher tax burdens raise the price of entrepreneurship. When you raise the price of something, then, all else held equal, you usually get less of it.”

Ingredient (3), the formulae, includes the likes of:

T(E) x P > T(E)

and:

(1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4)

The latter is used to calculate "the marginal tax rate on income that is earned, saved and invested in a company and then passed on as an inheritance", where "t1 is the income tax rate, t2 is the corporate tax rate and t3 is the capital gains tax rate and t4 is the inheritance tax rate and r is the pre-tax return on an investment in a company".

We’ll come back to that in a moment, but here at the Other TaxPayers’ Alliance, we have our own formula:

tpa=bs2

Finally, add ingredient (4), the press release, which begins:

New research attacks 50p tax rate that will mean fewer entrepreneurs and fewer jobs

  • New report argues that government tax changes will reduce the incentives to become an entrepreneur.
  • The top marginal tax rate on income earned, saved, invested in a company and then passed on to children is currently 90 per cent.
  • With the forthcoming 50 per cent top tax rate, that will rise to 92 per cent. That means the measure will take 20 per cent of the money entrepreneurs are left with the current 40 per cent top tax rate.

Note the contrived formulation, borrowed from (3) above: "The top marginal tax rate on income earned, saved, invested in a company and then passed on to children." Although this report is ostensibly an attack on the new 50p tax rate, the TPA can’t resist bashing its other bête noire, inheritance tax (liability to which is naturally taken as given – despite the fact that 94% of estates are below the threshold). Loss of compound interest has been chucked in the mix too, to inflate the figures further.

Now, I suppose it is conceivable that some of the buccaneering twentysomething entrepreneurs that Julie Meyer eulogises – "the Michaelangelos, the Gutenbergs, the Christopher Columbuses" – will sit down and calculate that because they may one day be fortunate enough to find themselves among the top 1% of income earners and 6% of estates, and because they may not be able to pass every penny of their enormous wealth tax-free to their children, they’ll think sod it – let’s go down the pub instead. But this research doesn’t prove or refute that – it simply speculates.

And, more to the point, isn’t there something ridiculous about a report that employs the entrepreneurial spirit to make the case for untaxed inherited wealth? I hope you have a strong stomach, because we must turn once again to Meyer’s foreword:

"The trouble in the UK is – and I can say this as an American who loves this country, and plans to become a British citizen – that effortlessness is considered a virtue. No one likes to talk about how hard they have worked. I first realised this at INSEAD, where I went to business school, where without exception, all of my British classmates suggested that they hadn’t prepared for the entrance exam at all.

"So British society doesn’t educate itself about the work that went behind the fortunes as the whole goal is to make it look easy."

If your fortune comes to you in the form of a huge inheritance, it doesn’t just look easy – it is easy.

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About the author
This is a guest contribution. Clifford Singer runs The Other Taxpayer's Alliance website. You can join the Facebook group here.
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Reader comments


1. Mike Killingworth

No one under 30 that I know wants to work for anyone anymore

Clearly, she doesn’t know any teachers, soldiers, doctors/nurses or even the people who work for her. Well, after all, one doesn’t know the hired help, does one?

The TPA show they really do not understand tax: assuming that you really are creating an entrepreneurial trading company the rate of Inheritance Tax is not the 40% they claim (which is a massive assumption in its own right), but 0%.

You see – there is no tax on the gift of shares in an unquoted entrepreneurial company. Which means that the top rate of tax is not the 90% + that the TPA claims – but a figure much lower – and lower still when other double counts such as credits for corporation tax paid against income tax are taken into account (as they fail to do)– which does make things look very different.

It really does seem the TPA need the services of a good accountant. Their so called experts would miserably fail any tax test if this is the level of their competence.

3. John McKenna

Having grown up with the entrepreneurial spirit – my father building a multi-million pound business from the spare bedroom – I can safely say what drives entrepreneurs to work 18 hours per day, six days per week is not obscure calculations about tax (unless of course they are a tax consultant!).

What drives every successful businessman is the passion for his product or service – if tax goes up, which are they more likely to say:
“Right, let’s just make sure we get bigger and better and make more money” or “bugger it, that extra 10p makes my passion and years of hard work irrelevant. Might as well go and become a wage slave again”?

If it’s the latter, then I guess they’re not part of Meyer’s ‘great’ breed prepared to live “abnormal lives” anyway.

Good post Clifford, I had to squint several times at the equations in that report, trying to make sense of them. Then I realised they don’t actually make any sense.

As for inheritance tax, the current threshold is £325,000. Anyone who inherits over £325,000 can cough up a little of it for the good of our public services. And they can buy me a pint while they’re at it.

It seems almost unfair to criticise the Taxpayers Alliance on the basis of logic and factual information.

Excellent post. I do see Ms Meyer’s column in s****y AM and without fail it gives me a good old chuckle when she deifies that paragon of woman’s opportunity thatcher

For a group that pissed and moaned severely in a woeful paper about discount rates wrt the Stern Report, they seem to have completely forgotten about them here. Future returns are not discounted at all but, then again, we’re deeply in Solow/Napoleon/Austerlitz territory here. I think this is quite possibly their most dishonest report yet, which really is going some. Why is none of the income being spent? Why the fuck is the rate of CGT being compounded year on year for 35 years?

Using some alternative figures, let’s concern troll and look at the poor little grandchildren of this poor investor – after all, who doesn’t care about their grandchildren? Even using very low flat rates of 10% for each of income tax, CGT (compounded again, though fuck knows why), corporation tax and inheritance tax, we still get a shocking effective rate of 78% (over one generation, 35 years, it’s still 56%). The effect of compounding here is crucial: the results are very sensitive to the time period chosen, the rate of return for the business, and the rate at which the entrepreneur discounts future returns.

Cracking article – and what a lovely comments thread so far!

Alas, tis only a matter of time before CJCJC and Co. find their way here…

9. the a&e charge nurse

[4] Anyone who inherits over £325,000 can cough up a little of it for the good of our public services.

Excepting certain high profile NuLab luvees, of course.
http://www.telegraph.co.uk/finance/personalfinance/2807995/If-theres-a-will-theres-a-way.html

and what a lovely comments thread so far!

Goodness, you guys hate dissent, don’t you?!
I have no problem with inheritance tax actually!
Unlike the new 50% rate which will end up raising less…

I am against inheritance tax but not for the TPA’s reasons.

cjcjc

50% tax could raise billions

Just remove the right to allowances from those who have to pay it

Simplifies the tax system for the well off (the only people who complain about that issue), kills tax planning and raises revenue all at the same time. A triple whammy!

Yes it could but unless those other things are done it won’t will it?

the only people who complain about that issue

Yeah, I’m sure all those earning 12k and forced to claim genius Gordo’s tax credit would much rather keep doing that than be taken out of tax, right…

We’ll come back to that in a moment, but here at the Other TaxPayers’ Alliance, we have our own formula:

tpa=bs2

LOL – well put!

First 13k should not be taxed – end of.

“I’m sure all those earning 12k and forced to claim genius Gordo’s tax credit would much rather keep doing that than be taken out of tax, right…”

At a guess, those who get more in tax credits then they pay in income tax would prefer to get tax credits, and those who pay more tax than they get in tax credits would prefer the tax cut. There are not many people who think “I’d lose twenty quid a week if they raised income tax thresholds and scrapped tax credits, but good on them for simplifying the tax system”.

Well let’s start by raising the threshold to 12k or 13k and then see where we are…I would pay 50% tax to see that happen

Give me time re 13k

I don’t think that could be done

I do now radical reform is possible

but you’ll be paying for it……

Good afternoon,

I’m afraid I’m not going to have the time to respond to all these comments or get into a protracted argument. But I thought it would be worth responding to a couple of the criticisms here:

On inheritances and their effect on entrepreneurship, clearly we have to find which of these two effects will predominate:

a) Inheritances provide people with access to finance without the risks attached to a bank loan. That means they increase entrepreneurship. The effect we discuss in our paper.

b) Inheritances reduce the amount of work needed to achieve a certain income, they therefore decrease entrepreneurship. Clifford’s argument.

The way to work out which one predominates, and whether inheritances increase or decrease entrepreneurship, is to conduct empirical research. Fortunately, someone has done that already as we cited in our report. See Blanchflower, D. & Oswald, A. J. ‘What makes an entrepreneur?’, Journal of Labour Economics, 16(1), 1998, pp. 26-60. Of course, that isn’t necessarily the end of the debate. But, I don’t think you can dismiss our report’s argument unless you have better evidence than the paper which we cited.

On the discount rates question which some people have raised in the comments. The fact that some of the taxes are delayed would only matter if we were talking about income that was consumed at different points in time. As both our pre and post tax scenarios operate over exactly the same time scale, and pay out in the same year, there is no reason to discount. The taxes are levied on the nominal sums and the payout (which should be discounted) happens in the same year in both numerator and denominator meaning that any discount would be cancelled out.

Best,
Matt

I dismiss all Matt’s arguments presented here in a debate I’ve had with him today at http://www.taxresearch.org.uk/Blog/2009/07/29/the-taxpayers-alliance-needs-an-accountant/

He clearly has no idea what makes an entrepreneur

And why should an academic do better?

He dismisses my experience by saying only peer reviewed journals count – that’s 30 years as a practising chartered accountant and as a serial enterepreneur

That experience says tax does not matter to entrepreneurs. By the time tax does matter to people who were entrepreneurs they’ve become wealth preservers – and that’s something quite different

21. sevillista

I’m not sure whether raising the personal tax allowance to £13K.

The current personal income tax allowance is £6,035.

Raising this to £13K while keeping other tax bands the same (based on taxable income over the personal allowance) will mean that the rich gain far more than the poor. This is why this is so attractive to right-wingers – seems like it will help the worst off most but won’t.

People with incomes over £150K will gain by £3,500 a year each (£7K*.5)
People with incomes over £50K will gain by £2,800 a year each (7K*.4)
People with incomes over £13K will gain by £1,400 a year each (7K*.2)

Everyone else will gain by less than this. For example, someone working part-time (24 hours a week say) on the minimum wage of £5.73/hour will earn £7,200 a year. They will gain a massive £223 a year from this.

The cost of an increase in personal allowances is massive – £500 million per £100 increase in the allowance. The £6,965 increase in the personal allowance of raising it to £13K will cost an estimated £35 billion.

Where will this be found? Increase in tax for the rich? I don’t think so. It will be in abandoning programmes (e.g. tax credits, sure start) that benefit the poor. They would lose out from this policy.

And that’s without the fact it will give more firepower to the “people contribute no taxes so deserve no services” brigade.

In a way Mr Sinclair is right that inheritances are crucial to people’s ability to start businesses, but it making that point he only demonstrates how marginal the “tax” stuff is. It’s incredibly unimportant compared to cheap (or free) access to capital. And for that matter, the rate of inheritance tax is not a particularly significant impediment to people, in receipt of inheritances, starting or continuing in business.

[The author of this post is starting up a small business next week, with his wife. He has never inherited a penny in his life. he does not consider himself an entrepreneur and considers most of what is said about entrepreneurs to be self-serving cock.]

16- worrabout them as don’t claim because the system is too labyrynthine & they dread being overpaid & having it all clawed back out of their meagre earnings?

Let us also bear in mind youthers under 25.

24. sevillista

Inheritances provide people with access to finance without the risks attached to a bank loan. That means they increase entrepreneurship. The effect we discuss in our paper.

Really? Are you sure?

You come back with:

a) a reliable statistic that estimates the number of recipients of inheritance tax from estates that paid inheritance tax who have utilised the money to start up their own business

b) a reliable estimate of the increase in the number of people who would use inheritance to start up their own business if inheritance tax was abolished

Surely the £325,000 inheritance tax free lump-sum is sufficient capital to start up a business in any case, even if split betwen 3 or 4 people.

This seems another self-serving argument on behalf of your sponsors who own some of the 6% of estates liable for inheritance tax.

25. sevillista

And, to add to that, most people who inherit money are retired or just about to retire.

How many of these people in their late 50s, 60s and 70s start their own business?

What a lot of tosh.

26. Rob Knight

Richard Murphy’s comment at #2 is worth more than the original post, which is kneejerk nonsense. The fact that the TPA are wrong is no excuse to disengage your brain when criticising them.

Inheritance Entrepreneurship Fail!

On inheritances and their effect on entrepreneurship, clearly we have to find which of these two effects will predominate:

a) Inheritances provide people with access to finance without the risks attached to a bank loan. That means they increase entrepreneurship. The effect we discuss in our paper.

b) Inheritances reduce the amount of work needed to achieve a certain income, they therefore decrease entrepreneurship. Clifford’s argument.

So you are implying (ignoring the article cited, which I don’t have access to at the moment, although if you link to a pdf I can have a read) that allocating resources at random throughout the population is a good way to stimulate entrepreneurship.

Let’s examine a couple of points: I think it is Dani Rodrik that proposed that the market produces a sub-optimum number entrepreneurs. The reason for this is that the benefits of entrepreneurs, their business and their innovations are spread out across all of society and that all the wealth created is not easily captured either by the entrepreneurs or those who fund them (banks etc.).

This means that some non-market mechanism, which fully costs all the positive externalities which entrepreneurs bring is necessary. I believe Rodrik proposes a Government fund providing below market rate loans. It appears you propose the allocation of fortune by lottery of birth.

Am I correct in concluding that the TaxPayers’ Alliance propose that creating a tiny minority of arbitrarily enriched individuals will boost entrepreneurship in the most efficient way?

Because it seems a very odd way of allocating resources, if entrepreneurship is your goal. I would even go so far as to say you are bending (or twisting out of recognition, your choice) the facts and theories on a subject to fit the interests of those you represent (who do you represent by the way? I don’t think it’s many of the TaxPayers here).

19 – sure, but, if you don’t explicitly discount the final amounts, you’re obscuring the fact that your implicit assumptions are that the decision faced by prospective entrepreneurs is based on their willingness to give up 60p of current consumption to finance a present-value 10p of future consumption (assuming that the RoR is the correct discount rate to use here) by their children in 35 years’ time (if they are not, then your entire calculation is not only misleading but totally irrelevant anyway, because you’re not using a consumption bundle that anyone is actually choosing), and that this is an important factor at the time of their decision on whether or not to invest. This is not what would usually be deemed plausible. Again, we’re firmly on Austerlitz territory.

Any idea why you’re compounding CGT year on year?

27 – Jamie Galbraith spells out the same point in his most recent book. Even abolishing inheritance tax is a pretty useless tool for correcting for the market failure that causes a less-than-socially-optimum level of investment.

If inheritance encourages entrepreneurship why do so many entrepreneurs refuse to leave cash to their children?

Take Warren Buffet

Closer to home – but a genuine entrepreneur – Nigella Lawson

Could it be that their insight that inherited cash is harmful to their children’s work ethic might be right?

In which case, let’s up the rate of Inheritance Tax

“If your fortune comes to you in the form of a huge inheritance, it doesn’t just look easy – it is easy. ”

Really? That would be why absolutely none of us managed to engineer our way into hte lucky sperm club then? Might be more difficult than it looks.

“If inheritance encourages entrepreneurship why do so many entrepreneurs refuse to leave cash to their children?

Take Warren Buffet”

Once again Murphy’s lack of knowledge shines through. Buffett is on record as wanting to leave his children “enough to do anything but not enough to do nothing.”

One might also add that he has not in fact left all his money to the Gates Foundation. He certainly gave a substantial fortune to it, yes, but he also set up a more traditional family foundation with (I think this figure is correct) $6.7 billion. That’s the American style family foundation, the one which enables the family to keep the investments, pay no inheritance tax on the amount, or capital gains taxes on any future profits, providing that 5% of the foundations assets (think it’s assets, might be income) are spent upon the “charitable” activities of the foundation each year.

Such charitable activities including paying the family to run the foundation. There are hundreds of these sorts of foundations over there: they are an excellent way of making sure that the descendants always have access to huge incomes but do not have the chance to piss away the assets.

Watever else Buffett has done he most certainly has indeed left a huge sum to his children, even if it is tied up in a foundation.

“Really? That would be why absolutely none of us managed to engineer our way into hte lucky sperm club then? Might be more difficult than it looks.”

Do you understand the word “if”?

“Do you understand the word “if”?”

Do you understand the word “joke”?

Tim

Do you understand the words “tolerance”, “respect”, “compassion” and “humanity”?

Sorry – bit since semantics appear to be part of this debate I thought these should be added

Richard

Eh, I understand the word “joke”, I just prefer jokes to make the first bit of sense.

“Do you understand the words “tolerance”, “respect”, “compassion” and “humanity”?”

Sure. Do you understand the word “facts”?

Buffett and Gates are not good examples since (a) although they will not be leaving much of their fortunes to their children even a small rounding error (0.1%) would leave them tens of millioms and (b) he will certainly make sure that the taxman gets as little as possible as Tim Worstall has stated above.

“If a dog has no nose, then how it smells is TERRIBLE”

“Really? My dog has a perfectly good nose and smells fine.”

On the subject of Warren Buffet: I was reading something on actual paper (and therefore can’t link the quote) which cited Buffet saying, approximately, this: “I have a skill which our society rewards disproportionately highly. I am good at guessing what markets will do next. That skill is useless in all practical terms.” Later in the same conversation, he said something along the lines of “The rich in this society are not taxed nearly enough.”

Later in the same conversation, he said something along the lines of “The rich in this society are not taxed nearly enough.”

The hypocrisy of the super rich. Wonderful.

He is ensuring that none of his estate is going to the taxman.

And you can bet your bottom dollar that he ensures that Berkshire Hathaway pays as little in tax as possible.

(Nothing wrong with either of those things – but it is not *he* who will bear any higgher tax burden.)

Cjcjc: According to his logic in the interview, he pays exactly the tax he owes, and it’s the government’s problem to change the tax laws. He personally thinks they ought to do this, but is not dumb enough to sacrifice an edge while his competitors can continue to play the system as it stands. This seems rational to me.

I was mainly interested in the logic behind his contention that the rich are under-taxed. He seemed to think this for two reasons: 1, that the percentage of the civic burden carried by the rich, versus that carried by everyone else, is lower now than at any point in his lifetime (which is true) and 2, that asset concentration was a fine method for setting up USA Inc. and getting it profitable as fast as humanly possible, but that robber barons are no longer the most effective or nationally beneficial way of running a mature modern country. He seemed to be saying what the lefties say; which is that you’d have a better economy if accumulated wealth was redistributed.

I wish I could remember where I read it. I think it might have been an Economist someone left in the pub, back in the early autumn last year but I’m really not sure. I remember the issue of entrepreneur expatriation being raised, and him basically saying “That’s pure PR, no realistic businessman does anything as dumb as pulling out of an entire First World market just because the tax regime got a bit more rational. Anyone who does do that is not a realistic businessman and you can do without them”

What about the family firm? Many large companies took more than one generation to build . However , often the third fourth generation having been born into wealth, turn their back on the business and enter the professions or the arts. JCB , is that run by the son or grandson of the founder?

I would suggest that one of the reasons why many asian families do well is their ability to financially support each other. Branson , educated at Stowe was given £10K , by an uncle in the late 60s. I would suggest that receiving a sum of money from family/friends rather than a bank makes life easier.

Much depends upon how much capital or R and D a business needs to undertake. it would be difficult to set up a large construction/mining or oil production , car company from scratch due to high capital demands .Setting up a software company probably needs less capital than Dyson setting up a manfuacturing plant. What may help is reducing paperwork required to submitted in the first two years of the company’s life.

I tend to agree with Tim Worstall when considering Buffet. I would like to see if family trusts were set up. There are plenty of Americans who receive money from a trust. Reading of one situation, the value of 4 families trusts in the 1930s was $2B in the 1990s they were worth $34B. What appears to happen is the trust gives an annual income to the family member and sometimes buys a home for them. The family member may not be worth a vast amount but they sure have a comfortable life.

Perhaps we should look at what someone does with the inherited money. Someone who inherits a business with a turns a £ 2M turnover increases it to a £100M turnove , has done well. Someone who wastes their income /inheritance on idleness is a wastrel.
I would suggest inheritance amplifies the persons characteristics; those with drive make the money ( Branson) more quickly, the wastrel loses any insentive to work at all- better not say due to the libel laws.

Well he wouldn’t be sacrificing any edge by choosing to pay more *personal* tax.
Obviously he has a duty to other BRK shareholders as far as the company is concerned.

But his real opinion is clear – he believes that his foundation (and Gates’s foundation) can spend the money better than the government – and I’m sure they can – which is why they are getting his all of his estate and the government is getting FA.

“1, that the percentage of the civic burden carried by the rich, versus that carried by everyone else, is lower now than at any point in his lifetime (which is true)”

Not wholly convinced of that. I agree that marginal tax rates for the high income earners (yes, there is a difference between them and the rich ie wealthy but as neither the UK or US has ever had a serious wealth tax I think he means high income earners) are lower than they have been since WWII around and about.

However, the portion of the total income tax burden that is carried by those high income tax earners is higher now than it has been since, umm, around and about WWII I think.

Got to distinguish between the two, so which do you mean? Marginal tax rates? Or the amount of the entire tax bill that is paid by the rich?

“That’s pure PR, no realistic businessman does anything as dumb as pulling out of an entire First World market just because the tax regime got a bit more rational. Anyone who does do that is not a realistic businessman and you can do without them”

Which is slightly missing the point about the rewards entrepreneurs get. Buried under the TPA’s rather confusing arguments was one truth. Entrepreneurs only earn money (let’s leave the rent seekers out of this and talk about real entrepreneurs) if what they produce is of value to the consumer. There’s a great paper out there (Schumpeterian profits in the US economy or some such name) by William Nordhaus which tries to detail how much beigger the benefit the consumer gets is than the stack of cash the entrepreneur gets.

He reckons (and there’s no other papers trying to make the same calculation that I know of) that only 3% of the value created ends up with the entrepreneur. 97% ends up with the society at large.

My favourite example here is that sure, mobile phones have made lots of people stinking rich. But they’ve made society as a whole vastly richer (try googling “cell phones fishermen Kerala” for an example of how) than whatever billions have accrued to the entrepreneurs.

Looked at this way, the $3 million made by an entrepreneur isn’t a reward for their having created $97 million of value for everyone else. It’s an incentive for the next bloke with an idea to create $97 million of value for society to go ahead and do so.

“Buffett is on record as wanting to leave his children “enough to do anything but not enough to do nothing.””

And no proponent of the inheritance tax wants inheritance to be completely impossible. The fact that Buffett wants to give SOME money to his children means nothing unless he wanted to give ALL of his money to his children, which from your quote, he does not want to do. It is quite clear then, from the quote, that Buffett believes that children inheriting all is wealth would be a bad thing for society, so would presumably be in favour of some sort of IHT.

I think you’ll find he’s on record as arguing for increased estate taxes in the USA

As is Bill gates

Now why is that Taxpayer’s Alliance ?

“I think you’ll find he’s on record as arguing for increased estate taxes in the USA

As is Bill gates

Now why is that Taxpayer’s Alliance ?”

I’m not from the TPA buit how about this? Because both of them are rich enough that whatever the estate tax rules they won’t get caught in them. They can (as Buffett has done) set up a foundation and thus not get caught in the net at all.

You will know, from your own research Richard, that the truly grand estates never get caught by these taxes. As here, so in the US.

Tim

But in that case surely the TPA, as it seems to be on the side of the very rich should be arguing for higher rates of IHT?

After all, surely they accept the maxim that only the little people pay tax?

Using your logic haven’t they got their campaign strategy terribly wrong?

Or could it be Gates and Buffet meant what they said?

You wouldn’t let that fact get in the way of a good argument would you Tim?

Richard

Richard, please, I’m not (thankfully) responsible for the way the TPA frame their arguments nor the way they run their campaigns.

My complaint, for many years, about inheritance and estate tax (one for each country) is that the very rich simply don’t pay it. It’s those with millions, not those with hundreds of millions, that do.

Yet the moral justification for the tax is that those very rich, those with hundreds of millions, should not be able to pass on such sums without their being taxed.

The tax is justified by the one thing that every tax practitioner (like yourself Richard) knows is untrue.

We’ll not get anything more than a pittance of the Duke of Westminster’s 5 billion in inheritance tax, it’s all tied up in trusts etc. (And the family ain’t going to make the same mistake it did in the 50s either).

But the justification for the tax is that it will be unfair if the next D of W starts off with 5 billion.

Personally, I’d abolish inheritance tax, as Sweden has done. There are enough idiot third and fourth generation out there that the great fortunes do get dissipated anyway. Clogs to clogs in three generations and all that.

Tim

As ever you ignore the better solution – stop the abuse

And yes, it can be done

For a start let’s ‘look through’ trusts

Richard

50. sevillista

I think the wider inheritance tax argument is besides the point.

The TPA (in Matt’s comment above at #19) claim that inheritance encourages entrepreneurship as inheritances provide people with access to finance without the risks attached to a bank loan. That means they increase entrepreneurship. The effect we discuss in our paper.

This is a completely fact-free assertion (unless Matt Sinclair care to rise to the challenge of providing us with some e.g. the answers to my questions at #24.

Would the TPA, for example, say a Government programme aimed at boosting entrepreneurship through randomly distributing lump-sums throughout the population represents good value for money? And yet this random distribution of cash is how inheritance works to boost entrepreneurship.

TImW @44:

Not wholly convinced of that. I agree that marginal tax rates for the high income earners (yes, there is a difference between them and the rich ie wealthy but as neither the UK or US has ever had a serious wealth tax I think he means high income earners) are lower than they have been since WWII around and about.

However, the portion of the total income tax burden that is carried by those high income tax earners is higher now than it has been since, umm, around and about WWII I think.

Got to distinguish between the two, so which do you mean? Marginal tax rates? Or the amount of the entire tax bill that is paid by the rich?

As far as I understood it, he meant neither of these because he was talking in real rather than tax terms. In the past, things that were done for public good; roads, canals, cathedrals, famine relief, dealing with banditry, setting up guilds, exploration of the unknown, science (I’m thinkking of monastic institutions and later the Royal Society) and so on were overwhelmingly (i.e. 100%) funded by less than 5% of the population. The percentage of those things (there’s a lot more things to do now, what with the Enlightenment, education and national health, etc.) that is paid for by taking money from the poor (I am here meaning those who do not own land outright and earn less than, say, Lloyd-George’s 125kpa as it would be in modern money) is massively higher than 0%.

The rich pay for less of the things that are done for the public good than they used to. That’s what he meant talking about “the civic burden”; things done because they should be done, rather than because they accrue any profit.

My favourite example here is that sure, mobile phones have made lots of people stinking rich. But they’ve made society as a whole vastly richer (try googling “cell phones fishermen Kerala” for an example of how) than whatever billions have accrued to the entrepreneurs.

Looked at this way, the $3 million made by an entrepreneur isn’t a reward for their having created $97 million of value for everyone else. It’s an incentive for the next bloke with an idea to create $97 million of value for society to go ahead and do so.

See, here I agree. That’s what real entrepreneurs do. However, did you read my article about how the tied lease has led to the pub industry being taken over and then sold off for flats by “entrepreneurs”? That’s what entrepreneur means outside of the academic or marketing worlds.

Mobile phones (and the Internet, which are intertwined at this level) are the best and only recent example. No-one has created systemic wealth like that since; no-one had created systemic wealth like that, a really new thing, since either the spread of the telephone or of the passenger aeroplane, depending on how you count. That’s the kind of wealth creation you’re talking about.

What economists (and plutocrats) mean is “people who are sitting on a huge pile of cash and employ that cash to end up sitting on a bigger pile”. That’s what they mean when they talk about “wealth creation” these days; they mean the sub-prime market.

People who are going to do something new (the Google guys, or Jim Baen) are not going to leave their country because their country has a sane tax regime. The guys who are all about leveraging pre-existing capital accumulations to end up owning the fruits of other people’s labour and innovation will.

Sevillista @51:

But from the point of view of the people who run the Great Machine, the distribution is most certainly not random. All the money is in the hands of the correct people: i.e. people like them.

“For a start let’s ‘look through’ trusts”

Fair enough. Let’s “look through” the Scott Trust. Set up specifically and deliberately to make sure that ownership of The Guardian would not be diluted by inheritance tax.

Great. You and I (and others here in Liberal Conspiracy) make an occasional crust from writing for them. Let’s do that shall we?

You have said several times that you are funded, in some of your work, by the Ford Foundation. Let’s look through that shall we? How many Ford descendants get how much money from that Foundation?

You want to shine the light before we start to change the laws?

Hmm. Given that I usually have three items in that list, I can’t understand why I forgot the most significant one preceding the cell-phone: the PC revolution. Which really was wealth creation. Sorry about that.

“The percentage of those things (there’s a lot more things to do now, what with the Enlightenment, education and national health, etc.) that is paid for by taking money from the poor (I am here meaning those who do not own land outright and earn less than, say, Lloyd-George’s 125kpa as it would be in modern money) is massively higher than 0%.”

Ah, well, now you’re in Chris Dillow territory. He who insists that you cannot have a large state entirely paid for by the rich, for the rich don’t have enough money to pay for a large state.

I did some back of the fag packet stuff and I’m running here from memory. But the top 1% or income earners get around 90 billions or so a year. Government, as we have it, costs 660 billion a year. Even if tax was 100 % on those top 1%, there’s no way at all that they can be made to pay for government as we have it.

As Chris points out, if you want a state paid for solely by the rich, you need to have a small state. If you want a large state then you’ve got to tax everyone, because that’s where the money is.
Yup, 35% (the current total tax share as a percentage of income of the working class, including direct and indirect taxes) of everyone’s money is more than 100% of the incomes of the top 1%.

I consistently argue that we should not in fact be taxing the (working) poor. If that means that we have to have less government to pay for not doing so, well, so be it.

Oh, and John Q, an example.
I’m currently considering flogging prescription glasses over the net in Portugal. Long story why, but an optician here will charge 400 euro just for the lenses for prescription varifocals.

Now, I may ormay not do this, but if I’m flogging the same specs at 90 euro, I’ve just created a consumer surplus of 310 euro. And put local opticians out of business.

It’s not necessary to have “systemic wealth” as you put it. Just incremental use of new technologies, the one thing that capitalism does better than any other system (see William Baumol for more on this).

Sorry for coming back to this thread so long after my original post – I was working with a client all of yesterday. That’s because I am – yup – yet another entrepreneur, running a small web design company. (I’m sure even Matthew Sinclair appreciates the irony that most of the TPA’s critics have more business experience than its own staff.)

Tim Worstall writes: ‘My favourite example here is that sure, mobile phones have made lots of people stinking rich. But they’ve made society as a whole vastly richer (try googling “cell phones fishermen Kerala‚” for an example of how) than whatever billions have accrued to the entrepreneurs.’

That’s true – but were the scientists and engineers who developed the technology entrepreneurs? Was Apple’s design guru, Jonathan Ive, an entrepreneur when he was hired by Apple? Entrepreneurs play an important role, but rarely on their own.

Good luck too in your new venture, but remember there’s a strong chance that the technology behind your website is open-source, developed by a community often with motives other than profit. Entrepreneurs play a role here too (as indeed they do in co-operatives and social enterprises) but none of them remotely resemble Julie Meyer’s model of the Individual Capitalist (as spelled out in the report’s foreword), driven by “greatness… not work life balance”. (It’s hard to see how these Individual Capitalists find time to have children, let alone fret about their inheritance. If they do have children perhaps they should worry more about finding some time to see them.)

This debate also got me thinking about some things that are important to my own business. They include:

– A good digital communications infrastructure – and most crucially right now, fast broadband (it would help too if I didn’t have to put up with lamentable customer services from private/privatised suppliers)

– A highly-skilled workforce

– Affordable and good-quality childcare for my young children

– And, needless to say, a banking system that actually works.

Most of these things depend on, at some level, the state. For all their whingeing, the entrepreneurs portrayed in the TPA report don’t just give to the state, they take from it too.

As I said above, thankfully, I’m not responsible for what the TPA says.

“Entrepreneurs play an important role, but rarely on their own.”

Of course, by definition. Entrepreneurs are those who organise other economic resources and further, take the risk of failure. That’s actually the definition.

There’s a whole sector of economics which tries to study this point and one set of conclusions (led by William Baumol who one would normally think of as rather a lefty) points to the idea that there are two things we need to separate, invention and innovation.

(Those words themselves have slightly different meanings dependent upon who you’re talking to.)

In this area, invention is the, well, invention of stuff. The phone itself perhaps. Or a laser, or an engine, whatever. Innovation is taken as the spread of that new, if better, invention through the society. (Their definitions at the start of the debate remember.)

The point that these economists make is that there are a number of different ways of getting the first, invention. They point out that the Soviet system certainly invented some pretty cool stuff (and I certainly agree, I still make part of my living by distributing the results of one such Soviet avenue of research).

However, what the capitalist / free market system (and yes, capitalism and free markets are two different things and they do mean both together, not one or the other) is superbly good at, vastly better than any other system anyone has ever tried, is the innovation side, picking up those inventions and getting them into the hands of consumers.

Which is, in their eyes, the reason for the astonishing growth in the capitalist economies over the past couple of centuries. Invention is just fine, but it’s only when people start to use them that their productivity, and thus general wealth, starts to rise.

The entrepreneur is not, as you rightly point out, responsible often for the original invention, nor for the infrastructure used to disseminate it, but they are indeed the people that do the, in this definition, innovation and the reason the system works as it does.

Thus justifying the rewards to the successful: not as rewards, but as above, as incentives to the next lot.

I don’t insist that this is completely correct, this view of the world, even if I think it has huge explanatory value. But that is what the people trying to explain that unique feature of capitalism, the growth, have been pointing at as the explanation.

Please also note that pointing to the way in which others have created the economic assets that entrepreneurs use (the infrastructure, open source, the WWW, telephone systems, educated workforces etc) is not a way of diminishing the importance of them. Rather, it boosts their importance. For the very definition is that of one who takes extant economic resources and then combines them in a new way to add value to them. And adding value to extant resources is of course the very definition of creating wealth.

And what Tim if the resource of the state was not available to enterepreneurs because they won their argument that it should not be paid for by them, or anyone else?

What then?

Are we to presume in that case, as the TPA does, that inheritance will provide the alternative resource? And how, if it is not taxed?

Please enlighten – for you seem to be arguing quite convincingly to me for the importance of the state as the bedrock of security, stability, protection and insurance from which entrepreneurs (like me in my time) launch their ideas – and indeed without which most simply could not do so.

Or have I got you wrong, again?

Richard

I wonder whether it is possible to suggest that the state should take, say 1/3 of national income as opposed to 1/2 without being accused of wanting to destroy the “bedrock” of anything?

Richard, you seem to have me confused with some strawman that exists only in your head.

“And what Tim if the resource of the state was not available to enterepreneurs because they won their argument that it should not be paid for by them, or anyone else?”

I do not, and never have done, argue that the State should not exist. I also consistently argue that tax is something that needs to be paid in order to fund that State.

I might disagree about the extent of the State and the taxation levels necessary to fund it, this is true, but please don’t confuse me with anarcho-capitalists. I’m a classical liberal, through and through.

A rough guide to a reasonable taxation system would be one that taxes capital less than incomes and incomes less than consumption. Meaning low capital gains taxation, low corporate taxation, higher income taxation and higher consumption taxation. (Please note, I do not mean lower or higher than rates currently extant in the UK, I mean relative to each other.)

That is, after all, the system of taxation in such social democratic paradises as Sweden. High VAT (and excise taxes), high income tax, low capital taxation, low corporate taxation and no inheritance tax at all.

Looking at the UK system I’d be entirely happy to see CGT at the same rate as marginal income taxes….although I think the reaction here to marginal rates of Sweden’s level would be different as we’re a different society….as long as corporation tax was abolished in its entirety.

Tim @55:

I did some back of the fag packet stuff and I’m running here from memory. But the top 1% or income earners get around 90 billions or so a year. Government, as we have it, costs 660 billion a year. Even if tax was 100 % on those top 1%, there’s no way at all that they can be made to pay for government as we have it.

You’re assessing only personally held private wealth here.

The place most of the money is currently hiding is in corporate (private) pockets; in the past, there was no such place for a rich merchant to hide money. It was his money, it could be taxed. It’s easier to find under the floor than in Grand Cayman.

and @56:

I’m currently considering flogging prescription glasses over the net in Portugal. Long story why, but an optician here will charge 400 euro just for the lenses for prescription varifocals.

Now, I may or may not do this, but if I’m flogging the same specs at 90 euro, I’ve just created a consumer surplus of 310 euro. And put local opticians out of business.

It’s not necessary to have “systemic wealth” as you put it. Just incremental use of new technologies, the one thing that capitalism does better than any other system (see William Baumol for more on this).

Actually, yes, it is necessary to create new systemic wealth. You are trading on a locational imbalance. I am discussing species economy; total wealth in the world economy that did not exist before. The way you do this right is make something new. The way you do this wrong is trade in leveraged financial instruments.

My analyses are rarely just about Britain or the West unless I specifically say so or the context is unquestionable. When I talk about economic effects and the Great Machine I’m talking about the mechanism by which money flows towards pre-existing concentrations of money internationally. When I talk about creating wealth, I’m talking about creating wealth. Not making a good (or aggressive) trade decisions which take advantage of local differences in economic and technological conditions. That’s just the market; we know that exists.

Regarding capitalism; yes. It is the best bootstrapping system that can be implemented at low bandwidth levels. Read this series for a more developed thesis about this.

Please also note that pointing to the way in which others have created the economic assets that entrepreneurs use (the infrastructure, open source, the WWW, telephone systems, educated workforces etc) is not a way of diminishing the importance of them. Rather, it boosts their importance. For the very definition is that of one who takes extant economic resources and then combines them in a new way to add value to them. And adding value to extant resources is of course the very definition of creating wealth.

And with this I don’t agree. The definition of creating wealth may well speak of value but if so it is flawed at the theoretical level. Creating wealth involves creating worth. Raising a price is described as ‘adding value’ to a product; ask the taxman. Value is assessed in billions of dollars based on ‘consumer confidence’; when the music stopped, look what happened to the economy.

To create actual wealth that can trickle down you have to make something new, or do something different: this is your incremental innovation model of social bootstrapping. What entrepreneurs should be for. The fictional values of large companies are viewed as wealth creation, but as was recently proved on a global scale they aren’t worth a damn thing. One of the most insidious unexamined axioms of the modern economic system is that value is arbitrary but people must be taught to believe it is rational.

A rough guide to a reasonable taxation system would be one that taxes capital less than incomes and incomes less than consumption. Meaning low capital gains taxation, low corporate taxation, higher income taxation and higher consumption taxation. (Please note, I do not mean lower or higher than rates currently extant in the UK, I mean relative to each other.)

They’ve tried this with VAT exemptions.

The problem with taxing consumption goes like this. If you tax consumption of necessities, the poor are paying a tax level intended for the rich; you can’t asset-check someone at the supermarket checkout. If you do not tax food and clothes and public transportation and fuel and electricity and gas, but instead tax “luxury goods” two things will immediately be true; firstly, no-one who is not filthy rich will be able to afford any luxury, because the taxes will have to be very high per item to generate the same amount of money. And secondly, the taxes will be set by the rich (who own the system and will be the only people affected) and will thus be set at a level too low to make a difference. If you try and make value judgements between items (designer versus Primark clothes) you end up in the mess our VAT system is in.

Taxing corporate consumption and private (high) income might work. Currently, consumption taxes look like 4 pounds in 5 on a packet of cigarettes (another reason I don’t buy pre-rolls). If it’s an even choice, people ultimately stop doing it, which is the rationale behind tobacco taxation. Which is, of course, highly addictive… If it’s not a choice, for example being able to drive isn’t for a lot of people depending on job type and rurality, people can’t stop doing it but end up in about 10k of debt per person; this is the rationale behind fuel taxes. …er, wait, what?

Consumption taxes will always disproportionately affect the poor unless there aren’t any poor.

“The definition of creating wealth may well speak of value but if so it is flawed at the theoretical level. Creating wealth involves creating worth. ”

Don’t think the value/worth distinction is worth making.

The one I do think is worth making is value/worth “to whom”?

To which my answer would be the consumer of whatever it is. If the 90 euro specs are of greater value to the consumer than the 400 euro ones then that is value that has been created ( and they probably are, to around 310 euros worth of value….which, yes, I know gives the paradox that we can be creating value by driving down GDP….but that is the way it is).

Tim @63:

The value/worth distinction is a bugger, I’ll admit. This is because if you look at the world without embedded assumptions, there is a clear difference between something which costs x to make and provides y benefit all the time (say, a cucumber) which can be sold for z: and something which costs a to make and can be sold for b (say, an iPod). The cucumber’s value is z, its worth is y, and its cost is a. The iPod’s value is b and its worth is … well, it’s not worth anything at all if you don’t live in a place with electric power.

So there is clearly a difference between value, which is entirely arbitrary, and worth which is to a limited extent based on how much something costs to make and what benefits it supplies to the owner. But exactly how you distill that into a useful formula is something I (and everyone else who’s tried) am still working on.

This, however, is just easy:

The one I do think is worth making is value/worth “to whom”?

Everyone. In the context that I was talking about. You are talking about exploiting localised economic differentials to move wealth from someone else to you. I am talking about activities which increase the total quantity of wealth available to the human species.

Regarding taxation based on consumption and how it screws the poor to benefit the rich: examine tables 5 and 9 here as they show my argument up very clearly. The whole piece is well worth a read. I’ve felt for some time that the owners of the Great Machine are doing better out of our tax regime than they like to claim; this analysis is pretty solid.

Everyone.

But there’s the contradiction. I hate cucumber: its value to me is nothing (so, as it happens, is the value of an iPod). There is not “worth” which is independent of the value assigned by whoever is doing the assinging. Essentially you’re still travelling around the medieval path of trying to discern “real value” a la Thomas Aquinas.

It simply doesn’t exist.

“Regarding taxation” I’ve had a go at that on my own blog, also on the newer thread here which discusses it. It’s not news (well, OK, to those who read economic statistics it isn’t), although I agree it is interesting.

Tim: no, I’m really not trying to find “intrinsic value”. I’m trying to get around the propaganda which says that market value is in some way “correct”.

Markets can be manipulated (as in the case of the release of the Sony PS2 or the recent sub-prime situation). Many things are traded generating vast wealth for people who were already rich which have no actual utility or worth at all: such as those sub-prime instruments. Whereas food, water and shelter have utility that is not dependent on consumer confidence. They have something that leveraged financial instruments do not have. What is it? Hard to define.

My problem with arbitrarily assigned value is that people have been taught to think that the arbitrary values assigned are rational. They are bloody well not rational when a stock-market speculator is considered more valuable to society than a physics teacher. That, among many other things, indicates that the system is rigged.

I do not have an answer. Intrinsic worth doesn’t quite exist; it would be nice if it did but it doesn’t. Value is always going to be affected by market forces; that’s what they’re for. Supply and demand make sense as a method for fixing prices in a scarcity economy, particularly if the market is free (which ours is not). I’m not arguing with any of those things. I’m arguing with the perception at large in society that values are necessarily set in the right place just because the market happens to set them. In a 100%-free-zero-scarcity market they might be, but we don’t live in one and we never will.

It is pretty clear that our arbitrarily assigned values are not rational; and yet people still accept the system. It bugs the hell out of me.

The value of (as you say, free) markets determining these values is that they are, by their very definition, the weighting of everyone’s opinion of what that value is.

Er, no, that’s not true at all. That is only true in a free market which is also post-scarcity; i.e. there is no longer any shortage of any resource, which is also post-capital (there are no pre-existing power bases in the system which can distort the market). As an example, I can in no way at all affect the price (thus: value) of cigarettes or of a gallon of fuel or of the units of gas required to heat my house. All of these are “valued” by schema which are rigged to ensure that market realities do not result in a rational valuation.

In practice, value is principally determined by pre-existing entrenched capital and its ability to manipulate both perception and scarcity, particularly in a mass-media/advertising age. I point you again to the “market value” of a good physics teacher versus the “market value” of a terminally bad investment banker.

This is why I’m always drawing the distinction between “created wealth” which relies on an irrational valuation of something, like the a leveraged financial instrument, versus created wealth which relies on doing something new, or doing something old in a new way (like the invention and development of telecommunications technology, or like creating a better way to teach people about bones). The latter is worth doing, the other is not; the latter should therefore be rewarded more by the market. However, it isn’t. The model is therefore broken.

“That is only true in a free market which is also post-scarcity;”

Can’t really help there. Economics is the study of allocation under conditions of scarcity. Absent scarcity you’re not talking about economics any more.

Can’t really help there. Economics is the study of allocation under conditions of scarcity. Absent scarcity you’re not talking about economics any more.

But the problem is with your model, not mine; your model says that the market value of something is defined by everyone’s opinion. I pointed out that it isn’t; that the only way it could be is if a) no-one had pre-existing capital accumulations, and thus everyone’s opinion was equally relevant and b) no-one could leverage pre-existing capital accumulations to engineer or control supply or demand.

The point is that what you’ve just said is propaganda not fact; the market absolutely does not set values based on the opinion of everybody, it sets values based on the capacity of plutarchs to manipulate supply (by control of scarce resources or the creation of artificial scarcity) and demand (by advertising, buying laws, buying schools etc.) You’re right about the book definition of economics but you’re still wrong about how the market sets its values.

By being wrong, and doing so publicly, you are both buying and propagating a fundamental piece of social propaganda; that the values set by our market are reflective of something other than entrenched capital interests (otherwise known as ‘unreasonably rich people or corporations who can thus afford both armies and politicians’). To get rational consensus valuation you need an actual free market, and free markets are theoretically and practically impossible under conditions of either scarcity or pre-existing capital accumulation.

“the market absolutely does not set values based on the opinion of everybody,”

Sure it does: given current asset distribution. You’re reinventing the wheel constantly and getting is square sometimes.

Plutarch:

“Greek biographer and Neo-Platonist philosopher.”

He’s setting prices from his grave?

…much as a command economy sets values based on the opinion of everybody (given a very, very skewed distribution of power).

72. Luis Enrique

forgive me butting in ….

poorly defined question … setting values “based on the opinion of everybody” does not entail weighting those opinions equally.

In a reasonably competitive economy, in most markets, the ability of the owners of capital / scare resources to manipulate supply and demand is constrained – whether what ability they have is “large” or “small” – well, poorly defined question again. Tim should agree it’s non-zero, at least.

plus, as we move from away from the simplest economic models, assuming perfect competition, perfect information, toward the real world then we get different “weights” on whose “opinion” sets “values” – if somebody has monopoly power, how much? If somebody has private information, of what sort? Tim is surely aware of all this, so I’m not sure which model of his is flawed. All economic models are flawed, in so far was we are nowhere near even having say a general equilibrium model that can incorporate strategic behaviour, for example. On the other hand there are tons of partial economic models that can cope with – or at least give some insight into – all the various shenanigans John sees going on – not sure which of these Tim does/doesn’t adhere to, but bit unfair to accuse him of spreading false propaganda … even with unequal power etc. imperfect markets do set prices according to the interactions and underlying preferences of all participants, even if some participants actions count for a lot more than others, but then again no free-market endorser with half a brain has ever thought otherwise … to endorse free markets (with appropriate institutions, regulations and in most settings) you just have to think the market is a better information processing machine than the available alternatives.


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