I agree with you. I’d particularly stress the point about many things not being exempt. Buy a tv – you’ll pay VAT. Go for the occasional Sunday roast dinner at your local pub – you’ll pay VAT. Buy chocolate biscuits each week as part of your family shop – you’ll pay VAT. These are all things that someone would be considered poor without, so either the list of necessities needs drastic revision (not sure if this is possible under international agreements) or we need to keep VAT as low as possible.

I’m really not sure what your point is here. All taxes have this very same effect — that is they reduce the spending capital and investment capital of individuals and companies. They may not do it in exactly the same way, but they all ultimately have the same effect

I’d also add mobile phone top-ups and cinema tickets, which are subject to VAT.

These are now things that the ability to consume which most people consider “necessary” in terms of being able to live a life outside of work, without which their lives go significantly worse. Again, it’s the Smith point about necessity-in-context.

There will be many others: suggestions, anyone?

“They may not do it in exactly the same way, but they all ultimately have the same effect”

But clearly, they don’t all have the same effect *to the same extent* and *in the same ways*.

That’s what I’m trying to point to; that’s one of the points of the article: that we need to consider how a VAT rise might make things worse, regardless of arguments about equality.

DISCLAIMER: Smith may be out of date (he is on a lot of things). I’m not saying that it is necessarily the case that a VAT rise will be counterproductive. I’m saying the possibility needs to be considered, and Smith has some very elegant reasons for considering that possibility.

However, in 2009 it’s an empirical question. No doubt Tim Worstall and co will have empirical data to show my suggestion need not be followed up…though how convincing that data may be remains to be seen.

I concur. Say what you like about income tax, at least it scales obviously in line with people’s income in a way that VAT can hardly be guaranteed to. All taxes cause harm, but VAT might well cause more.

The Tories go for VAT every time because it puts the maximum burden on the peasantry and the minimum burden on the squire, without the peasantry understanding quite how they’re being shafted. Why be one of those absurd neocon flat taxers when you can be a sophisticated operator with a fully regressive tax system?

There was a fairly interesting article (for given values of ‘interesting’) in Taxation a few weeks ago on what was referred to, pace Colbert, as the ‘hissing index’ for tax rises.

Can’t say I agreed with its conclusion (which was that VAT was the easiest tax to increase – the whole issue of taxation of UK property held offshore offers a much easier target, in my view), but it did make the interesting point about the cost of children’s clothes. In essence, despite the UK-specific VAT zero rating for children’s clothing…

“As an example, Stephen considered the zero rating of children’s clothing. Taking a European clothing price average of 100, the average price of men and women’s clothing in the UK is 91, but is 86 for children’s clothing. The benefit difference is 5%, but the tax benefit should be 17.5% at the time of the statistics. The same happens in adult and children’s footwear, where we find that only a 1% benefit is created from a 17.5% tax benefit. So the final consumer is not, in fact, fully benefitted. The main beneficiary is probably the retailer who is receiving an unintended subsidy.”

Scrap the TV licence too, and have the BBC funded through indirect taxation.

A publically funded broadcaster is desirable and TV is a necessity – more so than the Internet, which Gordon Brown apparently thinks is as important as water and electricity – but the TV licence is as regressive as it’s enforcement is totalitarian.

“but the TV licence is as regressive as it’s enforcement is totalitarian.”

I agree. TV license charges should be income-assessed. It’s ludicrous for everyone to be paying the same.

Hello?

(1) isn’t VAT going back up to 17.5% at the end of the year anyway?

(2) the EU sets a minimum VAT rate of 15% so there’s not much we can do there (unless…)

oh, and (3) the Tories have said they won’t do it

You don’t seem to even consider the possibility that the Tories are telling the truth – that they wouldn’t do it if they got power.

You’re even more cynical than me!

Forge,

I generally don’t believe any of the major parties when they deny something that’s blatantly been leaked by somebody on the inside.

I just tend to ponder whether it was leaked on purpose or not.

Regressive taxes like VAT hit the poorest the hardest, that’s pretty basic economics. Indirect taxes are regressive by definition. I still think that someone could stand on a platform advocating almost ending indirect ‘stealth’ taxes and do well, even if this was balanced with rises in direct tax.
At least the debate is now moving on to tax rises rather than just spending cuts

I agree. TV license charges should be income-assessed. It’s ludicrous for everyone to be paying the same.

No. It’s ludicrous for anyone to be paying at all.

Well, I was actually going to turn up and praise a lefty for being quite so in touch with an interesting and useful economist like Smith. So that’s that part.

Yes, VAT is regressive, yes, it weighs more heavily upon the poor than the rich. Yes, I like the linen shirt argument, always have done (we at the Adam Smith Inst rather praised the J. Rowntree report on what was a “necessary income” by using exactly that quote).

However, here’s the problem. The money to run a State of the size we have has to come from somewhere. We’ve got £660 billion a year or so to find.

“Take it from the rich!” I hear you say…….well, the top 10% of households have a total income of £220 billion a year so even if we have 100% tax rates on the bloodsuckers we’d still be a tad short.

OK, but the rich should be paying more, should be paying their fair share!

OK; shall we say that Swedish tax levels are that fair share? OK, let’s raise UK direct tax levels on that top 10% from the current 25% or so to the Swedish 35% or so (those are average, not marginal tax rates. It’s 35% or 25% of total income goes in direct taxes, not 35% of the marginal last pound or kronor).

But as we’ve seen, total incomes of the top 10% are £220 billion: we’ll get another £22 billion from doing this (that’s assuming no Laffer effects at all, a highly dubious assertion).

D’ye see, we’ll not actually get very far in trying to pay for our £660 billion government this way?

So, in order to raise the money to pay this £660 billion bill we’ve got for our schoolsn’ospitals, we have to tax the non-rich as well. Because there really aren’t that many rich around and cumulatively, they’ve not got that much money.

And that is why countries which have higher tax burdens than we do as a portion of the entire economy also have much higher regressive tax rates than we do. VAT in Denmark, Norway and Sweden is all 25%…..because, you see, if you want to have all the goodies that social democracy brings you’ve also got to find the money for all those social democratic goodies.

Which in turn means you’ve got to tax the poor because there just ain’t enough rich people and they don’t have enough money.

Now me? I agree with Adam Smith. We shouldn’t tax necessities. Which means that we’re going to have to hack a good couple of hundred billion £ off the State so that we can have a society where that State is indeed paid for by the rich, not by the money mulcted penny by penny from the poor.

“we at the Adam Smith Inst”
Says it all really, that lot are mental and a bloody disgrace to the name

I agree, VAT ought to be kept down (0% on all goods would be best). Quite why the government feel the need to add 13-15% (depending on 15-17.5% VAT) to the price of many items that it deems to be luxury (no good is automatically a luxury or not, thus whether VAT is due or not is completely arbitrary e.g. are petrol/diesel really a luxury?) I do not know.

However, this is where the issues come in. We are running a massive deficit, of which nearly 50% is structural (according to the IFS). Presumably you oppose spending cuts (most writers on here ideologically do), and you oppose a VAT rise. Most forecasters agree that raising the tax on the rich will generate little extra money, so where exactly would you get the money from to close the deficit?

I’m with Adam Smith in that some good are luxuries and should be taxed more. Lots more, ideally.

I would also take issue with saying that, in my case at least, opposing spending cut is ideological. Look at it like this: jobcentres and the like are going to be in the firing line, yet they’re a good way to get people back into work. People in work bring money in, sitting on the dole doesn’t.
IF, and it’s a big if, the spending cuts can be targetted at those who need the services least, then bring them on. Maybe have a means-tested cut-off point after which X,Y or Z benefit cannot be claimed, child support for example. I’d also like to see tax credits replaced with a fiscally-neutral cut in direct tax.
It’s not dogmatic and ideological, it’s that in hard times those worst off should not have the carpet pulled from under them

All taxes have their disadvantages in terms of the knock-on effect on economic efficiency – I think Paul Sagar perhaps over-emphasises the knockon effect on inflation here. As a one-off it might raise some costs, but its ongoing effect on inflation would not be seriously damaging – and in the current environment, with a threat of deflation, instilling a short-term expectation of prices rising in the future might be no bad thing.

There was no income tax in Smith’s day – I bet his views would have been different had he needed to contrast the two alternatives.

I think income and corporate taxes are worse for economic efficiency, and that this will matter a lot in the next few years. Higher VAT, once it is fully rolled out (and the Tories will definitely do it, IMHO) will bias us towards more saving, which the UK regrettably needs to do. What can’t be contemplated is no taxes rising at all, or some sort of hopeful ‘solution’ whereby a fiscal hole of £700bn is fixed by cancelling Trident and ID cards alone.

VAT is undoubtedly regressive. No question. But so is cutting public spending. And the solution where we fail to address this deficit and end up with massive rates and a default is not exactly good for the poor either. It is not enough to point out what you don’t like about a particular solution: there will need to be about 50 solutions, and every single one of them will stink to a large group of people. At CentreForum (see ‘A balancing act’) we thought property taxes were one least-worst solution – but try selling that to the Tories!

“It’s not dogmatic and ideological, it’s that in hard times those worst off should not have the carpet pulled from under them”

That sounds like an ideology to me.

The fact that you’re already accusing me of wanting to pull the carpet from under the poor shows how receptive you are to the idea of spending cuts, however well intentioned and targetted.

Hi Paul,

What about the expenditure and food survey which suggests that in fact VAT isn’t all that regressive (because many of the things which people on lower incomes buy are exempt) ?

Hi Giles,

I never mentioned the word inflation I was simply pointing to the general possibility that VAT rises could be economically counterproductive

Then again, i do welcome actual economists like yourself following up the piece with an assesment of to what extent that’s true. You’re right though, the “solution” is going to come from lots of places, not just one, and they’re going to hurt lots of people in lots of ways at different levels of wealth/income. I’d just rather it wasn’t the people at the bottom who got hurt if at all possible, hence wanting to push the next government away from deeply regressive policies like VAT.

Tim W,

I disagree with your maths and your empirical assumptions, but just don’t have the time to take you on now. Also, don’t you guys at the ASI advocate a flat-rate income tax of 22% with a tax-free allowance of £12,000? I know you think that clarity and simplicity increases tax yield…but do you *really* think that’s going to plug the deficit?

Don,

“What about the expenditure and food survey which suggests that in fact VAT isn’t all that regressive (because many of the things which people on lower incomes buy are exempt) ?”

I think my point still stands. Over and above what poor people buy that is VAT-exempt, there are many items which will still be considered “necessities” to them and increasing the tax burden of which will hurt the poorest and possibly have worse effects in the wider economy.

And also, I still think VAT is regressive even if most of what poor people buy is exempt: after all, the meagre amount they have left over to spend on non-essentials suddenly gets whacked with a 15% rate of tax…the same rate better-off people who are not spending their last pennies after purchasing essentials incur.

That looks pretty regressive to me. No?

Mark M
I suppose we’re getting into what is ideology and what isn’t.

I don’t think I WAS accusing you of doing so, and having a socialist bringing up the possibility of means testing benefits I thought might be a valid attempt to put something on the table.
I’m not broadly in favour of spending cuts because it tends to be those most in need who have their ‘needs’ met by public sector spending. If that demand can be met with greater value at the same or lower price, let’s do it. Out-sourcing being the controversal example

Bearded Socialist,

“I’m with Adam Smith in that some good are luxuries and should be taxed more. Lots more, ideally.”

I get queesy on this part of the Wealth of Nations. It’s in his dicussion of “luxuries” that Smith talks about how icnreasing the tax on liquour is a good thing even if poor families where the parents spend all their money on booze end up ruining the kids’ lives, because those families are idle and useless anyway, so it’s no loss to society if they drink themselves into the gutter, taking their kids with them.

Smith is not, on all counts, the poster-boy for the right that many would make him out to be. But there’s no straightforward way the left can claim him either.

I agree with Paul Sagar, quite right.
Smith was a moral philosopher, so he puts an emphasis on his idea of morality.
I’m doing the same thing, but from my socialist rather than christian view point.
The thing about rights and wrongs and luxuries and essentials is in a sence social engineering and coercion, which i’m generally against in principle but something I suffer from in practice.
Smith is a liberal from another time, so for either the right or left to claim him is a bit silly. But then, for anyone to claim anyone in that way is a bit silly

“I disagree with your maths and your empirical assumptions”

You do? How nice.

Swedish taxes here.

http://www.scb.se/Pages/TableAndChart____157637.aspx

UK Here:

http://www.statistics.gov.uk/downloads/theme_social/Taxes-Benefits-2007-2008/Taxes_benefits_0708.pdf

“Also, don’t you guys at the ASI advocate a flat-rate income tax of 22% with a tax-free allowance of £12,000? I know you think that clarity and simplicity increases tax yield…but do you *really* think that’s going to plug the deficit?”

Dredging the memory banks I think it was more like 30 or 33%. But it was put together some years before Brown really splurged on the deficit.

Worth noting though that such a direct tax system would in fact be more progressive than the one we have now……

Adam Smith Institute now advocating progressive taxation? Ha, that’s funny.
Not quite as funny as this about a flat tax being more progressive though. Flat taxation is the most regressive thing ever invented. To say it’s progressive is like claiming to be the tallest building in Paris

I think the key radical thing about Smith was that, unlike many of his contemporaries, he didn’t see poverty as ordained or natural, and that institutions played a significant role in deciding how rich an individual or a nation could become.

I’m the Eiffel Tower!

No, I’m the Eiffel Tower!

I’m the Eiffel Tower and so’s my wife!

“Not quite as funny as this about a flat tax being more progressive though. Flat taxation is the most regressive thing ever invented.”

Math challenged are we?

How progressive a flat tax is depends upon what the tax free allowance is. One of 0 and it is not progressive at all.

One of 100,000 and it would be very progressive.

One of 12,000 is actually more progressive than the current system.

Try working it out. At 30% tax rate and 12,000 allowance, what is the percent of total income that is paid in income tax at different income levels?

You’ll see that the percentage rises as income does. This is called “progression”.

As to more progressive than the current system: how much income tax does someone earning 10,000 a year pay now? 1,000? 800 or so? Something like that.

With a 12,000 allowance, how much would they pay? 0.

The poor would pay less tax under this system, another sign of it possibly being progressive, no?

Sorry, Paul, I was interpreting you a bit – ‘rise in average prices’ into ‘inflation’

On the regressiveness, I think there is little doubt, if you use the ONS figures

http://www.statistics.gov.uk/statbase/product.asp?vlnk=10336

But to pose a (probably unpopular) counter-point: if the problem is “the poor always suffer the most in a recession”, well, the same report(s) show (table 24) how the effect whereby VAT takes most of the income of a low-income set is very much concentrated in the bottom decile: £875 from a gross income of £6826. But they also get by far the greatest proportion of their incomes from benefits (unsurprisingly) and therefore might expect to have a better recession than, say, the fifth decile which will be hit much harder by redundancy etc.

So if the govt’s job here is to smooth things out over the recession, I am not yet convinced that the VAT rise would be a dangerous backward step.

“he didn’t see poverty as ordained or natural, and that institutions played a significant role in deciding how rich an individual or a nation could become.”

Err, he saw poverty as being entirely natural. It was those unnatural things, institutions, which human beings create, that lead to its absence.

Tim,

Dredging your website, I find that you say 22% in your report:

http://www.adamsmith.org/images/stories/flattaxuk.pdf

I will try and make time to respond to your stats etc later.

Right now I’m writing an article for TJN. About Adam Smith. And the Adam Smith Institute. And flat tax.

Oh, what fun we’re going to have!

Tim, Bearded Socialist, you’re both right.

“Err, he saw poverty as being entirely natural. It was those unnatural things, institutions, which human beings create, that lead to its absence.”

Yes, this is true insofar as Smith thought that man’s “natural” condition without institutions was poverty. (If we thereby want to make Smith into a sort of “state of nature” economist.)

But Bearded Socialist is surely right that Smith saw the existence of poverty *after* institutional society has been enacted as in many cases not the “fault” of the poor or due to some “natural failing”, but rather because of factors of the society they were born into.

Tim Worstall
You cheeky little prat, lucky we’re not in the same room or you’d get a slap. When you’re challenged just resort to being a patronising snob eh?
Look, we are not going to agree but i’d appreciate some level of informed debate, not you squealing like a child because someone shows you up.
Now if you’re honestly going to argue that a flat tax system is more progressive than a staged system, regardless of your fair point about allowances, then i’m going to have to get as high as you because you seem to be tripping out. It’s a blinding over-simplification in order to support your low-tax aims, which is fair enough if you’re honest about it. By that I mean that the percentages of income paid for things makes a huge difference, and that’s just a start. I’d go on at length but i still want to punch you, so i’m taking it out on my computer in the mean time.

Nice one Dave Semple

“Oh, what fun we’re going to have!”

Make sure you include the points about it reducing tax income to start with: and do pay special attention to how it is more progressive than the current system, something clearly laid out for you in a chart…..

“This is not a tax break for the rich; those on below-average earnings would see their after-tax
income increase by over 12%, while the average benefit for the top third of earners is barely
0.5%.”

Wouldn’t that be an appalling result of a flat tax?

Effect of current income tax system,
compared with flat tax of 22% with £12,000 personal allowance
Families:
Average
income (£)
Current income tax
(% income)
Flat tax
(% income)
Saving
(% income)
Poorest 10% 2,549 9.2 0 9.2
2nd 4,280 7.9 0 7.9
3rd 6,811 9.8 0 9.8
4th 11,464 12.1 0 12.1
5th 16,792 11.9 6.0 5.6
6th 21,696 12.8 9.8 3.0
7th 28,427 14.0 12.7 1.3
8th 35,571 14.9 14.6 0.3
9th 44,981 16.3 16.1 0.2
Richest 10% 79,187 20.1 18.7 1.4
Figures derived from National Statistics data19

Doesn’t come out all that well but it’s from that ASI flat tax report that Paul linked to above.

It’s on page 6.

“Now if you’re honestly going to argue that a flat tax system is more progressive than a staged system, regardless of your fair point about allowances, then i’m going to have to get as high as you because you seem to be tripping out.”

I said that *one* proposed flat tax system was more progressive than our *current* staged system. As that shows.

[15] So the Adam Smith Institute thinks that the State should stop spending £1 of every £3 that it presently spends. I’m unclear whether this includes debt service or not*, but let’s note that this is spending not direct activity so privatising a function but still paying for it out of taxation doesn’t count. To get a feel for what this is like, you’re looking at both means-testing all benefits (including the old age pension) and scrapping the NHS altogether (or alternatively the defence, devolved assembly and defence budgets).

How does Tim expect a government which did that to be re-elected? Does he perhaps think that it is such a desideratum as to be worth a few years’ dictatorship on the Chilean model? Will he tell us?

*If so, and I can read government statistics right, debt service currently costs as much as the NHS. However, it has increased 4.5 times in the last few years so presumably can go down as well as up.

“So the Adam Smith Institute thinks”

No, that’s me, not ex officio.

And the real point I’m trying to make is that if you want that level of spending then you’re going to have to tax the poor. The only way you can have a system which does not tax the poor is if you have one that spends less.

Tim,

your flat-tax system only appears to be more progressive because it extends the tax-free allowance for the first £12,000, before hitting everyone with the same 22% tax rate.

Compared to the disgraceful situation at persent whereby people making £10,000 a year are paying income tax, that might look pretty good.

The objection, however, is that over the threshold mark everyone pays the same rate, regardless of whether they are a millionaire or only earning £13,000.

And that to a lot of people *is just wrong*. People who are able to contribute more to society’s upkeep – the society that is a prerequisite for them being affluent in the first place – should do so.

Now, we progressives can take your point about increased allowances and say “Yeah, poor people should be getting a bigger tax-free allowance”, and we can marry that with a graded system of increased tax rates for those on higher incomes. Thus we get the best of your proposal, whilst avoiding the regressive aspect of a flat tax above the tax-free threshold.

This has two main benefits: it makes the tax regime fairer, and it promotes equality. And as The Spirit Level showed quite nicely, equality is good for everyone…

Tim Worstall – does your flat tax ideal exclude tax credits, etc?

I’m as concerned about overall family income as I am about individual income. Surely a flat tax throws up some anomalies, like:

a) A couple who earn £6,000 and £20,000 each pay much more tax between them (30% on 8,000) than a couple who earn £13,000 and £13,000 (30% on 2,000). Neither are particularly well off. I’m surprised a liberal wants to force relationships into a particular balance of work rather than allowing them to find the level that works best for them.

b) A couple who earn £13,000 and £100,000 get more personal allowance (£24k) than the couple who earn £6,000 and £20,000 (£12k). From the state’s point of view, (and that matters to all of us who rely on the services we fund through the state) that isn’t very good value for money.

Now we’ve had your demonstration that flat tax is more progressive than progessive taxation, why not dazzle us all with a geometric proof that the earth is flat also?

tim f,

nice. hadn’t looked at it that way.

Tim W, you’ve inspired me to put a disclaimer in the article I’m presently writing:

“[Disclaimer: proponents of flat tax will typically attempt to argue that, in fact, their preferred regime is more progressive than what is typically considered progressive taxation. This is generally achieved by pointing to the presence of the tax-free allowance and claiming that lower-income earners are left better-off than under present arrangements. Yet this fails to address the core charge of regressivity: that all pay the same rate, regardless of their ability to pay. Tax-free allowances may mitigate the worst impacts of taxing those on the lowest incomes, but they do not alter the fact that the system overall is regressive in spite of the allowance]“

Just a quick one on the taxing luxuries idea … it needs some thinking about. If you set the bar for “luxuries” at Ferraris and Beluga Caviar, then yes you hit only the rich, but you aren’t going to raise much more tax revenue than you do now, or have much of an impact on overall inequality. If you raise taxes on luxury goods where “luxury” includes goods that get purchased in any sort of meaningful volume, then you are putting such goods even further beyond the reach of the poor. I’m not saying it’s a bad idea.

Strategist, did you just compare a simple proof that flat-tax-with-allowances can easily be more progressive than the current ‘progressive’ system, to suggesting that the earth is flat? (that doesn’t mean it’s more progressive than for example a £12,000 allowance, 25% above that and 50% above £100,000, or something, but then Worstall isn’t saying it is)

“I said that *one* proposed flat tax system was more progressive than our *current* staged system. As that shows.”

You’ve quoted figures which claim that the poorest 10% of families (earning on average £2,500 per year) pay 9% of their income in income tax. Since under the current system, the first £6,035 is tax free, I would be fascinate to know how that works.

Your flat tax proposal at 22% with a personal allowance of 12k also raises around about £50 billion per year less than the current system. That’s not a like-for-like comparison with the current system.

“your flat-tax system only appears to be more progressive because it extends the tax-free allowance for the first £12,000,”

No, it *is* more progressive because of the allowance.

“everyone pays the same rate”

We need to define what you mean by “rate”. Do you mean average rate (ie, percentage of total income paid in tax) or marginal rate (percentage of next pound earned)?

Given that we often see people shouting (one Murphy, R, comes to mind) about how the poor pay a higher percentage of their total income in tax than the rich do then I think I’m justified in insisting that we should use this standard here as well. And of course a flat tax with a personal allowance does indeed lead to steadily rising average tax rates.

“People who are able to contribute more to society’s upkeep – the society that is a prerequisite for them being affluent in the first place – should do so.”

And under a flat tax system they do so. 22% of 100,000 is of course more than 0% of 10,000.

“throws up some anomalies”

You’ll have to show me how those anomalies don’t show up under a progressive (or even regressive) tax system I’m afraid. They seem to be innate in anything which has allowances.

“Now we’ve had your demonstration that flat tax is more progressive than progessive taxation”

No, as above, this specific flat tax system is more progressive than our current misleadingly named progressive one.

“Yet this fails to address the core charge of regressivity: that all pay the same rate, regardless of their ability to pay.”

Can I suggest you look up the meaning of “regressive”? Obviously want your article to be the best it can be, of course. For all paying the same rate means “neutral”, not regressive: that means that higher incomes would pay lower rates.

Paul, your disclaimer is wrong that under flat tax and allowance the “system overall” is regressive – it is clearly progressive in the sense that higher earners pay a higher percentage of income, it’s just that the progressiveness is very shallow – the rate just approaches whatever the flat tax is set at.

For example, using the 12,000 allowance, 30% rate example, somebody earning £17,000 pays 9%, somebody earning £52,000 pays 23% and somebody on £102,000 pays 26%. You can say it’s hardly progressive at all, once you get up into the upper quartile of incomes, but you can’t say it’s regressive.

It is also a bit weird to say that “all pay the same rate, regardless of their ability to pay” when people with low ability to pay – under the allowance – pay zero.

[apols if I've misunderstood - i haven't read all comments and could be missing something]

I think Bearded Socialist has already said all there is to say on this matter. My late jibe has added little.

The point about higher thresholds being good for the poorest is obviously true and has already been conceded. His proof that the flat tax is better for everyone else than the existing system appears to based on the sleight of hand of not being revenue neutral. (The argument on how much tax should be raised and how much spent by the state is a totally different one from how best to raise the final figure.)

Our existing shite taxation system needs reform to make it more fair. The reform it obviously doesn’t need is the flat tax. The absurd ideologues who push flat tax are trying to smuggle their idiotic proposition through on the back of widespread support for reform of the existing system. They do this because the real reason for pushing the flat tax – more, more, more for the very rich – is worth concealing.

Some of the flat taxers are so mad that they actually think it is a good idea for everyone and not just the very rich. They are the ones who I expect can supply the geometric proof of a flat earth.

I’m not a flat tax advocate, by the way. I agree many people advocate flat taxes because what they really like is lower taxes for the wealthy.

I’ve never really understood why, in this age of computerisation, why tax rates don’t rise smoothly with income. Why do we have to use income bands with large jumps and hence zones with large marginal rates, why don’t we tax according to a curve?

Luis Enrique,

I suppose it depends how you define “progressive taxation”

I’m working on the understanding that greater income levels are met with increased rates of tax. Thus, it’s not just that they pay more in absolute terms (which as you point out in your post, they do), but that the rate they are expected to contribute is itself higher.

I think that’s the standard understanding of “progressive taxation”. Though of course the term – like most things – is essentially contested. Tim Worstall, for example, contests it. But then, I just think he’s wrong.

@51:
Strategist, your comments are long on crushing abuse for the “absurd” and “mad” flat-taxers, but a little short on detail.

Leaving aside flat-tax, what reform do you think our current “shite” system needs?

But Paul, I’m not talking about absolute terms, I’m talking about rates – look again – those on higher incomes are met with increased rates of tax.

So, and please correct me if I am wrong.

A person earning 12k +1 would pay 30p tax for that year?

A person who is earning 50k a year would pay 30% on 38k?

A person earning 100k a year would pay 30% tax on 88k?

My edit: That would mean a lot of people would then say “Fuck, get me below 12k as fast as possible” would it not?

Will,

you seem to be arguing that progressive taxation is a disincentive to work! not an argument I’d have guessed to come from you.

Under this system somebody earning £50,000 pre-tax would be taking home £38,600 – they wouldn’t be in too much of a hurry to get under £12,000

*Sigh* I see Timmeh Worstall is at it again with his ‘I can’t believe it’s not flat tax’ boll… sorry, obfuscation.

A ‘flat tax with a £12k allowance’ is a progressive tax. It has two bands. Look: 0% and X%. Two bands. It’s progressive. There’s a lower band for lower earnings, and a higher band for higher earners.

You could equally truthfully state we already have a flat tax system in place (er hrrmm hrrm hmm, twiddles standard-ASI-issue bow tie, strokes beautifully-cast ASI Adam Smith bust, get yours here http://www.adamsmith.org/news/news/asi-online-shop-200810142283/“)… Once you get into the 50% band.

Luis

you seem to be arguing that progressive taxation is a disincentive to work! not an argument I’d have guessed to come from you.

Well no – I am trying to add into the equation of flat tax the human condition whereby people hate paying taxes at any rate, progressive or not. A question rather than a statement.

If you use zero as the starting point and then use, say, 30% so all income is taxed at that rate – where is the over all incentive to get above the mean? Because, as we know, social mobility will not allow the poor to rise as it is now.

If we use Tim’s 12k, and then 30% above income, we have to assume that the flat tax rate will kick in on the pound above 12k. Hence people will still want to stick below 12k because they pay no tax.

I want all people to work – but I also want them to pay their fair share of the revenue burden.

Take my wife, she now no longer cares if she gets a pay rise because most, if not all that pay rise is taken back in taxation because of the system we have.

IF, on the other hand she had a rise of 5k a year, that would make a difference.

The utilisation of the percentages is, to me, all wrong. People on the ground talk in real terms not in percentages.

Neil,

come on now – the tax rate paid as a result of a flat-tax plus allowance system, rises progressively and smoothly – see my post @50 for some numbers. To present it as a two-level system is to misunderstand it. Remember, I am not an advocate of flat tax, but facts is facts.

Will,

“I am trying to add into the equation of flat tax the human condition whereby people hate paying taxes at any rate, progressive or not.”

well, no. your argument only applies to progressive taxes, because it concerns taxes that “kick in” above a certain income. If the tax rate was the same regardless of income, your argument wouldn’t make sense. Other than that, you may think there is a difference between what you argue and arguments about how progressive taxes provide disincentives to earn more, but I think the only difference is that the former is an argument you’re making, the latter is one you associate with your political foes.

Bollocks,

went away and did some homework, and I was talking out of my bottom when I said flat tax is regressive.

It is, by definition, a proportionate tax – and in the case of what the ASI advocate, a proportionate tax with a tax-free allowance.

Having said that, it’s still considerably less desirable than a progressive taxation, though clearly it’s better than regressive taxation (e.g. a lump sum, or any tax that lowers the incidence rate incurred as income inreases, e.g. VAT).

Which means Tim is still wrong: flat tax is not “more” progressive than a progressive tax, by definition.

Thanks Luis for pointing that out/making me go away and read.

@54 What next?: “Strategist, your comments are long on crushing abuse for the “absurd” and “mad” flat-taxers, but a little short on detail. Leaving aside flat-tax, what reform do you think our current “shite” system needs?”

I’ll go with simpler, fairer taxes that actively help to create the world we want. I’m not a tax specialist but here’s try for you.

I am a land value taxer though not necessarily a single taxer. But natural and community-generated rent could form a much greater part of the tax base. I accept the argument that taxing rent is the only tax that encourages rather than burdens economic activity. But maximising all market-valued economic activity is not the sole goal, we need to target environmental and social outcomes, so:

* Tax environmental pollution, ecological damage and other externalities we don’t want so that the polluter internalises externalities in his/her decision making.
* Don’t tax work higher than unearned income and dividends. Don’t recreate 19th century social inequality by protecting inheritances from a fair tax. Actively seek the social benefits less wealth inequality brings – a solidarity tax on great accumulated wealth?
* Close down the tax avoidance industry and make sure all high net worth individuals and corporations benefitting from British citizenship pay their fair share, wherever they locate in the world. International co-operation to stop the tax race to the bottom.
* Remove the jerky anomalies in income tax/National Insurance and make it properly progressive (5% then 5% increments up to a top rate of (say?) 80% for very very high incomes (the million and first pound?). Remove the anomalies that see city wankers paid in shares one year, diamonds the following year, and God knows what next year.
* Stop the poverty trap in the best way possible. (Not a tax credits expert but it seems to me an overcomplicated system with too many not getting the benefits from it.)

All the stuff that wanker Brown has spent 12 years not doing and that wanker Osborne will spend the next whatever years not doing either.

Will that do for now?

“If you use zero as the starting point and then use, say, 30% so all income is taxed at that rate – where is the over all incentive to get above the mean?”

Because it means you have more money?

“If we use Tim’s 12k, and then 30% above income, we have to assume that the flat tax rate will kick in on the pound above 12k. Hence people will still want to stick below 12k because they pay no tax.”

At the moment people don’t pay income tax on the first 6k (plus a bit) that they earn. That doesn’t seem to make people stick below 6k because they pay no tax.

By the way, I had just drafted my stuff on land value taxes when I spotted this excellent piece from Ashley Seager in today’s Guardian. http://www.guardian.co.uk/business/2009/aug/10/property-taxes-stabilise-boom-bust

This is where the debate on a site like this should be, not on nonsense like flat tax. This is where the Tories should be looking (but utterly won’t) not lazy regressive rubbish like 20% VAT.

60: Luis

the latter is one you associate with your political foes.

?

63: Don

“If you use zero as the starting point and then use, say, 30% so all income is taxed at that rate – where is the over all incentive to get above the mean?”

Because it means you have more money?

So a flat tax it is then?

“Having said that, it’s still considerably less desirable than a progressive taxation, ”

Ah….but that is what you have to prove, not assume…..

64: Strategist

This is where the debate on a site like this should be, not on nonsense like flat tax. This is where the Tories should be looking (but utterly won’t) not lazy regressive rubbish like 20% VAT.

101% agree with that!

65 – “So a flat tax it is then?”

Well, no, there are lots of good arguments against a flat tax which people have already made in this thread. But the argument that ‘we shouldn’t have a flat tax with a higher starting rate before you pay tax because then everyone will want to earn less than 12k because they hate paying any income tax’ is not a very good one. That is not actually how most people behave in the real world.

68: Don

That is not actually how most people behave in the real world.

Well no – and one of the major reasons I am against flat tax. I thought I had intimated that in previous posts, but it must have been too subtle.

Flat tax, even with a starting 12k means that people will still get 12k – those on 50k will still get 12k, plus whatever is left after the 30% tax take. This is still far higher than the original 12k.

30% is 30p in the pound, as we all know, inverse to that is it leaves 70% untaxed or 70p in the pound left over.

The only people who would genuinely benefit from a flat tax are those way up the pay scale.

Which means Tim is still wrong: flat tax is not “more” progressive than a progressive tax, by definition.

I don’t want to be rude here, but is there some kind of scale of ‘progressiveness’ you have in mind which allows you to linearly compare two systems or are you talking out of your bottom here too? Because it seems to me that it will turn out to be just like inequality, which is notoriously hard to measure with a single number, because of the different dimensions tax regimes can vary on.

“Well, no, there are lots of good arguments against a flat tax which people have already made in this thread. But the argument that ‘we shouldn’t have a flat tax with a higher starting rate before you pay tax because then everyone will want to earn less than 12k because they hate paying any income tax’ is not a very good one. That is not actually how most people behave in the real world.”

Don is right. No doubt about it.

Dan,

let’s go with wikipedia definitions, as they look fairly good:

“A progressive tax is a tax by which the tax rate increases as the taxable amount increases. “Progressive” describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate.It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay.”

“A proportional tax is a tax imposed so that the tax rate is fixed as the amount subject to taxation increases. In simple terms, it imposes an equal burden (relative to resources) on the rich and poor. “Proportional” describes a distribution effect on income or expenditure, referring to the way the rate remains consistent (does not progress from “low to high” or “high to low” as income or consumption changes), where the marginal tax rate is equal to the average tax rate. It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Proportional taxes maintain equal tax incidence regardless of the ability-to-pay and do not shift the incidence disproportionately to those with a higher or lower economic well-being.”

Now, it looks to me that *by definition* a flat tax – and example of a “proportional tax” – cannot be more progressive than a progressive tax.

The tax-free allowance might mean that those below the £12K mark are better off than under the present system whereby they only get tax-free allowance of £6 and a bit K…but above that threshold, flat tax is proportionate becuase it charges the same rate regardless of income, whereas progressive tax regimes increase the rate at higher income levels.

Ergo, by definition flat tax can’t be more progressive than progressive tax, because it’s all about the rates set. It might yield greater untaxed income to those at the bottom of society, but if progressivity is defined by rates altering according to income then by definition look where we end up.

Of course, you can try and argue that progressivity isn’t really about rates varying with income…but then, you’re junking the accepted terms of progressivity, and I’m not sure you’re entitled to do that.

““Progressive” describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate.”

Hey, your quote, right?

A flat tax with an allowance of pounds one has an average tax rate less than the marginal rate at all levels of income above 99 pence.

No, no. I’ll let you do the back of the envelope calculations on that one.

So, therefore, as I’ve been saying, a flat tax can indeed, depending upon the size of the tax free allowance, be a progressive one.

I’ll do my victory dance out of your sight shall I, no need to rub it in, is there?

Now, it looks to me that *by definition* a flat tax – and example of a “proportional tax” – cannot be more progressive than a progressive tax.

I don’t want to be excessively pedantic, but I thought the whole point of this exhaustive debate is that this is false if you take into account tax-free allowances. You can think of a flat-tax as a progressive tax with 2 bands, the lowest band having a 0% tax rate. Now I really don’t think there is a general (in the mathematical sense) way to compare the progressiveness of different tax regimes: like inequality, it is a multi-dimensioned thing, which makes any attempt to put it on a linear scale extremely difficult.

Has anyone crunched any figures on how much the logistics of means-testing actually costs out of the tax take ?

@60 – “To present it as a two-level system is to misunderstand it.”

Mmmm, remind me not to go walking anywhere near Beachy Head with you economists. “Nope, no sheer drop or discontinuities here, just a constant flat plane, it’s fine…”

Chris Gilmour

I did have a look at the total amount of cash benefit paid out as described in the ONS effect of taxes and benefits survey of 07-08. I estimated total payouts to be around £120bn. Budget 08 estimated the social protection expenditure at £138.5bn for 07-08, plus £17.1bn tax credits.

I’ve no idea whether that (~£35bn) is even remotely in the ball park as to the actual cost of our benefits system, but it’s the best I can manage from the data available.

“So, therefore, as I’ve been saying, a flat tax can indeed, depending upon the size of the tax free allowance, be a progressive one.”

Shorter: A flat tax can’t be progressive.

@75:
Now you’re talking. There are significant potential benefits inherent in simplified tax regimes (flat-rate tax for example). There seems to be extraordinary hostility to the idea of flat-rate tax, and it seems to be based on the idea that only the rich can benefit and that it’s a scam pushed by the greedy wealthy.

Potential benefits include:

1) A massive reduction in bureaucracy, leading to a reduction in the amount of tax actually required.

2) Further to 1), far less money would need to be sent back and forwards between the state and individual tax-payers. It cannot be stressed enough that, thanks to Mr Brown’s tax credit structure, the lower paid face the highest marginal tax rates in UK history.

3) Flat-tax disincentivies tax avoidance amongst the wealthy. Don’t forget, the highest paid tend NOT to pay the same % of tax as those just making the higher-tax bracket.

Erm, doesn’t this work?

A progressive tax = one with different (increasing) rates of tax for higher incomes

A proportionate tax = the same rate of tax for all income levels

A flat tax as advocated by ASI = a proportionate tax with a tax-free allowance

Now, as you say, we could think of a flat tax as therefore a “progressive” tax with two bands, or rates.

But it would seem correct to say the following: the more rates of tax there are in a tax regime, varying with income, the more progressive that tax regime is.

As a “progressive” tax regime (i.e. in the sense usually understood, e.g. with 0%, 20%, 40% and 50% rates for differing income levels) has more rates varying with income than a flat tax regime (with a mere two, allowing your contention) then it would seem by the logic of our definitions that…a flat tax system cannot be more “progressive” than (what is typically referred to as) a progressive tax system.

The presence of an untaxed allowance merely exempts some people from taxation and in the process both mitigates against the gross unfairness of a tax regime which did not provide for such an exemption, and shelters poorer people from a tax burden they could least afford. It does not, however, render the flat tax system “more progressive” than a progressive system as traditionally understood.

So no, Tim, no victory dance yet. And whatever it is you want to rub in my face, it’s not time for that, either.

But it would seem correct to say the following: the more rates of tax there are in a tax regime, varying with income, the more progressive that tax regime is.

But that still doesn’t work.

Compare the current system with the following bands: £0 – £1 billion taxed at 20%, £1billion – £2 billion taxed at 30%, £2 billion – £3 billion taxed at 40%, …, everything over £8 billion taxed at 100%. Now, my system here has more rates of tax than the present system, but I think we’d be hard pressed to call it more progressive (for the simple reason that everyone earning under a billion pays the same proportion).

Also, at what point does a tax system become too progressive?

The most desirable tax regime possible will not be the same as the most progressive tax regime possible.

I mean desirable as in providing the greatest benefit to the greatest number.

It took 62 comments before land tax got a mention. Given the OP’s focus on what sort of tax Adam Smith might have approved of. it ought to be pointed out that Smith himself supported such a tax:

“Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them.”

From Wikipedia – A progressive tax is a tax by which the tax rate increases as the taxable amount increases.

So, for a flat tax system with a tax-free allowance of £12,000 and 30% tax rate

Earnings of £5,000 – Tax paid £0 – Tax rate 0%
Earnings of £21,000 – Tax paid – £2,700 – Tax rate 12.9%
Earnings of £50,000 – Tax paid £11,400 – Tax rate 22.8%

From the definition above, flat taxes qualify as progressive taxes. And yes, I do realise that the marginal rate doesn’t increase but if you take that argument to the extreme you’d end up having a 100% marginal band at some point, effectively capping wages.

I agree that our system should be more progressive than it is, but that is fault of big-statists who wanted a government that provides for everyone. As someone has already pointed out, the rich simply don’t have enough money to pay for a £700bn state. You know we’re overtaxed as a nation when lefties are calling for tax cuts.

Neil – remind me, umm, not to pay any attention to anything you have to say about taxation.

Right! here’s a f*cking spread sheet. Look at it, for Christ’s sake.

Look at the tax rate paid as income rises – see how the flat tax with allowances is better for the poor, and see how it progresses as incomes rises, but that the progression fades away at higher levels of income. See my post @50. See how the current system hurts the poor more, is easier on the middle classes, but then once you get up to about £70,000 becomes more progressive than the flat tax scheme. (Dan is right, there is no completely satisfactory way of comparing progressiveness, because progression isn’t constant at different income levels) …. but for God’s sake can we end all this flat tax isn’t progressive / it’s a two tier system rubbish – there are (at least) two ways of achieving a smoothly progressive tax system – one is to have headline rates rise with income, and the other to use allowances (or combinations of the two) – when it comes to what matters – how much tax you pay, both deliver a smoothly progressive tax system.

A great deal of what Adam Smith actually said contradicts what today’s free-marketeers say. Adam Smith would have some difficulty in recognising the line taken by the Institute that now bears his name. When Adam Smith analysed the operation of the free market, he was thinking of it beng relevant only to a part of human activity. He thought that some human activities worked best through competition and some worked best through cooperaion and collective action. Adam Smith would probably have difficulty with some of his disciples who try to extend the operation of free-market theory into areas where it doesn’t fit. So we shouldn’t be surprised that the Conservative Party don’t understand Adam Smith: the Conservative Party rarely understands Adam Smith.

“He thought that some human activities worked best through competition and some worked best through cooperaion and collective action.”

Sure. Your point is? Have you missed things like the ASI’s long running (decades) support for things like congestion charges and road pricing?

“So we shouldn’t be surprised that the Conservative Party don’t understand Adam Smith: the Conservative Party rarely understands Adam Smith.”

Sure: just as many problems in trying to hammer Smith into Tory brains as there is in Labour ones…..

My point is fairly clear, I think. The Adam Smith Institute selectively interprets Adam Smith; the Conservative Party selectively interprets Adam Smith and the Institute that bears his name. The Conservative Party draws on what Adam Smith said when it suits certain interest groups, they ignore Adam Smith when it doesn’t suit them. We shouldn’t be too surprised that the Conservative Party proposes something that Adam Smith would find odd, because that happens all the time.

The question of congestion charges and road pricing is an interesting one. Back in the 1970s I used to campaign for restraint on vehicle use in city centres. At meetings there would often be people from the Conservative Party who would object to restraint through closing roads to cars: they would say that there should be a free-market approach, ie road pricing. I would say “Fine. Good. Go ahead and do it!” They would then say that we cannot do it quite yet because we don’t have the technology. Fast foward 25 years and the technology exists, and what do we find? The Conservative Party objects to a London congestion charge. Among their talking points are the fact that it is unfair and it is costly! To some extent they are right, but probably their real objection is to the very idea that there should be restraint on vehicle use in city centres and not to the method.

“The Conservative Party objects to a London congestion charge.”

And there you have the difference between politicians and policy wonks.

BTW, just as a matter of historical curiosity, know who first came up with the congestion charge idea? Sir Alan Walters. Yes, Maggie’s favourite economist.

As I say, there’s a large difference between economists and wonks extending a particular intellectual tradition into hte modern day and what politicians actually pick up from what they say.

“but for God’s sake can we end all this flat tax isn’t progressive/it’s a two tier system rubbish”

But the scheme we’re discussing *is* a two tier system, therefore it’s not flat.

Please, don’t shoot the messenger. It’s not my fault if the spivs trying to sell us this idea use misleading language.

There is a difference between politicians and policy wonks, but policy wonks are not completely apolitical. Policy wonks often have a political agenda, so are different from academics whose work impinges on policy. Policy wonks often
float political ideas with which politicians are reluctant to openly identify. There is a difference between the Conservative Party and the Adam Smith Institute, but it seems to me that ASI still have a political agenda and ignore part of Adam Smith said because it is politically inconvenient.

Guano

The problem with congestion charging is that it is the result of people asking the wrong questions. When councillors see congestion as a result of cars they ask “what can we do to prevent cars entering a congested area?” rather than “what would we have to offer in order to encourage a car user to choose another method of transport?”. So instead of offering a positve solution (i.e. something that is a better choice than a car) they offer a negative one (i.e. something to make cars a worse choice).

“When councillors see congestion as a result of cars they ask “what can we do to prevent cars entering a congested area?””

That is indeed the wrong question. The right one is “Those people in their cars are causing a cost, an externality, to the other people in their cars. How can we make them pay the costs of their actions?”.

Thus congestion charges (and road pricing would, if and when the technology is right, be a better answer to that very question).

Interesting! A discussion has stared about what the “right question” is. You cannot keep the politics out of these questions. Financial incentives such as road pricing can help to achieve certain objectives, but it is politics that decides objectives in these cases.

Interesting debate, though much about semantics. A flat tax with a tax free allowance is progressive (each pound earned is taxed at a higher rate than the one before) but the, it’s not really a flat tax then, is it.

Our current system is highly regressive because:
1) the rich do not typically get their income through PAYE. They can be paid in investments, dividends, trusts, etc which attract a lower rate of tax than PAYE does. Their companies buy houses, employ spouses etc and have monstorous pension schemes.

2) the poor depend on benefits to top up income. The benefits system withdrawal rates are effectivly tax rates and so the poor face tax rates in excess of %100 due to the design of the means tested benefit system. Interesting to see socialists are in favour of means tested benefits which result in the most regressive aspect of our system.

Guano, you are going to have to be a bit more specific, I think. What part of Adam Smith’s philosophy is the ASI ignoring? Bear in mind it is a policy institute so it is obviously going to deal specifically with matters of public policy, and not, as Adam Smith did, offer a comprehensive ethical doctrine from the individual upwards. So what part of ASI’s platform is the sort of thing that Adam Smith would object to? It is not as if ASI suggest there should be a free market in families or friends or something!

“It is not as if ASI suggest there should be a free market in families or friends or something!”

Err, actually, that’s exactly where we would insist upon free markets. Imagine the alternative….that State insists upon who you marry and who you are mates with?

I’m sure Tim would sell his grandmother to prove a point.

Marksany

Also, if you look at Table 14 of the ‘effects of taxes and benefits 07/08′ report from the ONS, you can see that the poorest 10% actually receive, on average, less benefit money that the next 10% (the poorest 10-20%).

Not only does means testing provide marginal tax rates of up to 95% for those receiving benefits, but they don’t even provide for those most in need.

[97] Poor Tim. He thinks if it isn’t part of the State apparatus, it must be a market-place. According to him, Judaism must be a bad thing in Israel but a good thing everywhere else; Islam all wrong in Pakistan and Saudi Arabia (among others) but all right in India and Europe…

“According to him, Judaism must be a bad thing in Israel but a good thing everywhere else; Islam all wrong in Pakistan and Saudi Arabia (among others) but all right in India and Europe…”

I’ve no objection to what people want to believe is the meaning of life, certainly: but I do object vociferously when a country is run on what the sky fairy said.

Your problem with that stance is what?

“I do object vociferously when a country is run on what the sky fairy said.”

Oddly, that statement is more accurate without the last six words.

“Err, actually, that’s exactly where we would insist upon free markets. Imagine the alternative….that State insists upon who you marry and who you are mates with?”

Ok, maybe I shouldn’t be defending you after all:) there is more to life than the State and the market. You have moral obligations that cannot be cached out into either institutions. Things like family and friends have an intrinsic, rather than a pure use value that is attributed to markets. Not that you should be forced to fulfill those moral obligations by the state. You are free to accept or reject them, but that doesn’t make those choices market transactions. I am pretty sure Adam Smith would agree with me on this point and I am pretty sure ASI employees don’t treat every single free action they have as a rational choice.

“but that doesn’t make those choices market transactions.”

What? You have never even heard the phrase “marriage market”? Not noted that the babes tend to pair up with the alpha males?

Jeebus, sex and mating are one of the purest markets we have.

Just because there’s no money changing hands (or not money changing hands most of the time) doesn’t mean that it’s not a market.

Sure you can use economic tools to analyse decisions to marry (though not, I would hazard without defining alphas tautologically as “those people seem to want to get hold of”). But the obligations you take on when you get married (or engage in any intimate relationship) are more than that which can be reduced to transactions and contract.

According to people like the Adam Smith Institution, there is nothing which cannot be reduced to transactions and contract

Price of everything, value of nothing.

“when you get married (or engage in any intimate relationship) are more than that which can be reduced to transactions and contract.”

You are unaware of the phrase “marriage contract” then? The one that is considered so important in English law that it over rides all others, which is why pre-nups don’t work?

The point is there is more value in a marriage than can be reduced down to a marriage contract. I am petty sure Adam Smith would be with me on things like this, as his economic theory was part of a rather wider theory of morality and virtue. I think quite a lot of Deidre McCloskey’s work (a libertarian academic) focusses on this: http://deirdremccloskey.org/books/index.php

“The point is there is more value in a marriage than can be reduced down to a marriage contract.”

Sure, there’s more value to everything other than a contract itself than what can be reduced down to a contract.

And?

And nothing. I was just trying to illustrate that the ASI is not especially at odds with Adam Smith’s wider theory. Since I haven’t spotted the ASI advocating the application of market policies to people’s personal lives, I believe that is quite an easy thing to show.

I am saying, with respect to Guano’s expression of that nuanced picture of Adam Smith, that what ASI has to say is in no-way incompatible with it. They are a policy institute so they concentrate on stuff relating to the economy and public services, in which Adam Smith was substantially a free-marketeer.

“Since I haven’t spotted the ASI advocating the application of market policies”

Don’t know why you use “advocate” there. We certainly notice that people run their personal lives along market lines: you know, voluntary exchange and all that?

Where at ASI?

“Where at ASI?”

I wasn’t saying there was a scpecific paper: rather that it is in the general background

Ok, well I guess I disagree with that general background. I think markets are a common property of human interaction, especially free action, but not the be all and end all of it. And, for what its worth, I think that view is closer to Adam Smith’s. But hey, it is just the name of the institute!

When I agreed to be notified of updates, I had no idea how vibrant the discussions could be here . . .

On the subject of “marriage is a market/free market”, I think Tim needs a tighter definition of “market” for his statement to have much clout and meaning.

I think a market needs a price. It normally needs more than one competing buyer and/or seller. The price needs in some way to be decisive in settling the outcome. Otherwise, if it is any sort of relationship that could in some way bring forth a contract, you can probably call everything a market, including much of what the state does. When you get conscripted into the army, there is no doubt some sort of contract (or oath), but it is State action par excellence.

So a permanent exchange mediated by a price exchange. In this case, is marriage a market? In some cases, you could imagine: think gold-digging types, arranged marriages for the dowry, etc. But in general, no.

“I think a market needs a price. It normally needs more than one competing buyer and/or seller. The price needs in some way to be decisive in settling the outcome.”

There’s usually more than one competitor for a maiden’s virtue. There’s normally more than one competitor for a man’s loyalty. There we have competition and the prices being paid.

So, yes, it’s a market.

My point here is that markets do not have to be intermediated by money. Only by exchange.

[117] FFS Tim, according to that definition team sports are markets because the two sides compete for possession of the ball, control of the field of play etc etc

According to that definition any and every interaction is a market, including coercion – the units of exchange being ‘acquiescence’ in return for ‘not being killed’.

Superficially true but utterly meaningless and practically useless, you say?

Oh come now – without pundits who slave over hot keyboards peppering blatant truisms with words like ‘economic’, ‘market’ and ‘rent’, how could we understand the world? How would we cope as a species entering the 21st century without such staggering feats of insight as Tim Harford’s “people are prepared to pay extra for a larger cup of coffee… because they want a larger cup of coffee and they’re prepared to pay extra for it!” (see, one *whole fucking chapter* of The Undercover Economist)?

“one *whole fucking chapter* of The Undercover Economist”

Boy, did you miss the point of that chapter. Which was about market segmentation, price discrimination and Ricardian rent.

“According to that definition any and every interaction is a market, including coercion ”

Sure, almost all interactions are indeed markets. Which is the whole point of the insight. It should be added though that we generally only approve of voluntary interaction, that is, without coercion. Like, when, you know HMRC threatens to gaol you unless you pay up….

“Sure, almost all interactions are indeed markets. Which is the whole point of the insight.”

No it’s not an insight at all; it just shows that you can use the word ‘market’ as a synonym for the word ‘interaction’ to make what you’re saying appear silghtly more interesting than it actually is.

Or to put it mathematically:

Economicpunditry = (Truisms + Buzzwords) * Condescension

Where the value of Condescension is inversely proportional to the strength of your argument.

Yeah, I think Neil is right: define market as “every interaction” and you get such a wide definition that the standard normative urgings of, say, the ASI (to choose a random example), that something should not be done by the government but left to the market become meaningless. Because the government, under that definition, could say it was a market: it was exchanging an implicit promise not to imprison me in return for my providing £x of purchasing power, etc.

“Leave this to interactions” urges the Adam Smith Institute in a profound piece that calls on the government to stop taking over all sorts of activities in a non-interactive way . . .

Indeed Tim, I think the Austrians would in fact define as a “market” transaction as something like “any voluntary exchange of scarce goods in which both parties must gain – something they prefer over what they are giving up to exchange for it” (in the case of “marriage” that would be my solitude for someone else’s company say).

If one or other parties or both do not gain in such a way then it would appear to be evidence that it is not entirely voluntary and coercion is involved.

What are the chances of anyone involved in this discussion getting a girlfriend and so being able to try the theory out?

“the chances of anyone involved in this discussion getting a girlfriend”

On my part pretty slim. Don’t think the wife would approve….

@124 – Those who *do* have girlfriends should explain to their partners how the last N years together have been nothing more than a market transaction.

Could you not describe it as analytical market-transaction research? *insert winking face to signal humour*

Neil @ 126:

Only yesterday I found a set of wedding vows in which both parties said something along the lines of “My life is better because of you”. Which describes a voluntary free market transaction quite accurately I’d say!

You don’t need to say it like you were mimicking Adam Smith. Say it like you mean it and she’ll never know that you are in fact describing the profit you have made out of that particular transaction!

I vetted my mrs for her political views before we got together (we sat in the pub talking politics).
She’s left of me so if i starting talking about us as ‘market transactions’ i’d get a slap and not much tickle

“Don’t think the wife would approve…”

Surely you, of all people, could negotiate a price for her indifference?

Neil @ 130
Brilliant

“could negotiate a price for her indifference?”

Sure, might not be a price I would be willing to pay though….given that it would start with “Goodbye”.

So in other words Tim, there is no alternative transaction that you would prefer giving up your present arrangements for. Ergo, no trade takes place. Simples.

“D’ye see, we’ll not actually get very far in trying to pay for our £660 billion government this way?”

Moron. It’s £660 billion in TOTAL not a year. You can pay off bits year by year.

“Moron. It’s £660 billion in TOTAL not a year. You can pay off bits year by year.”

Err, no. Total govt spending is around £660 billion a year (much higher this year of course). You’re thinking of the national debt which isn’t what I’m talking about at all.

“Err, no. Total govt spending is around £660 billion a year (much higher this year of course). You’re thinking of the national debt which isn’t what I’m talking about at all.”

You’re right I am thinking of the national debt, however you said:

“We’ve got £660 billion a year or so to find.”

I interpreted this as related to the national debt, since money to pay off the debt is what we’ll have to find at some point.

Now you say this was about total government spending, not the debt, but we don’t have to find £660 billion in that case, as that money is pretty much already being paid to fund the government.

Why do you think we need to find £660 billion to fund total government spending?

“Why do you think we need to find £660 billion to fund total government spending?”

Each and every year we need to tax some group of people £660 billion a year to keep the machinery of government ticking over.

Yes, got that?

Now, some people say that it ought to be the rich who pay for everything. OK, but the rich (the top 10% of families as above) only have £220 billion a year. And if we raise their current tax burden to Swedish levels we’ll only get an extra £20 billion or so on top of the £60 billion they already pay.

This is why we have to have taxes like VAT which tax the poor as well as the rich: because the rich don’t have enough money to pay for the amount of government we have.

I’m not saying that we need to raise £660 billion more than we do at the moment. I’m, rather, trying to explain why we have the taxes we do which raise the £660 billion we do at the moment.

All of which leads to the conclusion that if you want to stop taxing the poor then we need to have less government.