Well said, Stuart. All that’s missing from Toby Helm’s article is a quote from the TaxPayers’ Alliance. Bring back Gaby Hinsliff as political editor!

Because he’s a EDITED ON GROUNDS OF COMMON DECENCY

Not really surprising. The Observer does have a habit of being disgustingly middle class.

Thanks to Sunny and Sunder for posting this from Next Left — and for some editing which improves the article.

The Observer has an odd record on this issue. Andrew Rawnsley and Will Hutton have both written well on it. But The Observer’s ‘Money’ section ran a campaign against inheritance tax back in 2007 which played on a lot of the cliches and myths about the tax (e.g., that it is objectionable because it is a ‘double tax’)….

If inheritance tax is ‘crippling’ there must be an awful lot of people desperate enough for wealthy relations to die to fuel an eternity of Midsomer Murders.

The problem with it is quite different. It’s that people who are about to, or who have just lost a loved one (usually their mother – women tend to live longer than men) really don’t want to have to deal with the taxman and so they don’t think straight about their liability – a close mate of mine just lost a night’s sleep over it and then wondered why – and of course the right-wing press abuse them as well.

The difficulty I think is that any inheritance tax level is arbitrary because there is no logical way to defend

- what proportion of estates should fall with the tax
- what proportion of taxation it should raise
- whether or not it should be tiered

One thing that might help is for testators to declare their total worth in wills and so their tax liability, send a copy to the Excise and have a law that says that will be the tax paid (index linked).

inheritance tax is a handy issue for the left because it allows us – despite Helm’s idiotic appraisal – to characterise the Tories as being in it for themselves. And by themselves we mean the landed gentry.

However – it is something of a distraction compared to the need to dispell their arguments about public spending.

For example – I’ve seen no articles anywhere criticise the Tory line issued last week that had the public sector kept pace with private sector productivity gains since Labour came to power, the same services as today would presently cost £60billion a year less to provide.

That is of course not true. It is not true because the same services could not have been provided without deliberately cutting productivity as was done after 1997. It is easy to forget that children went days untaught, and hospitals had too few nurses and doctors to treat people. So the UK increases wages (and thus reduce productivity) to attract enough people to do the job.

But no one has said so.

@Margin

Completely agree.

But arguments about public sector productivity are very complex – they do not lend themselves to being explained easily.

I am sure Phil Hammond isn’t stupid enough (having met the guy he seems intelligent and honest if he’s off-the-record) to really believe what he is saying about the so-called “productivity gap”. It’s a good rhetorical point though, due to the difficulty in explaining concisely why it is wrong.

@6 tax all income at the same rate, whether earned or unearned. If I want to leave my (extremely imaginary) million quid to 300 unemployed friends and relatives, it falls within their untaxed limits and there’s no double-taxation; if I want to use it to make someone a millionaire then they get charged the same as if Goldman Sachs made them a millionaire.

sevillista / Margin4error – agree with you on the subject of productivity, if either of you would be interested in doing a guest post on the subject, or point us to someone who has written about this, we’d happily put something up…

I’d love to Don. Indeed having posted that I did realise my hypocricy in not writing a piece myself.

I’ll try to have you something by the end of today, maybe tomorrow.

Stuart,

excellent article – you beat me to it!

“As a matter of maths, nobody, but nobody, will actually pay 40% of what they inherit in tax because no tax is paid on the amount below the threshold.”

So the income tax rate isn’t 20 p, the higher rate isn’t 40 p, the proposed yet higher rate isn’t 50p and CGT isn’t 18% then?

That isn’t the way most think about it really now is it?

Further:

“As a matter of maths, nobody, but nobody, will actually pay 40% of what they inherit in tax because no tax is paid on the amount below the threshold. So referring to it as ‘the 40% tax’ is misleading. It risks fuelling the misperception that, once the threshold is breached, you pay 40% on the whole estate.

For example, if someone inherits £400,000, then they would pay 40% on £75,000 – a tax liability of £30,000 on £400,000. So, in this case, the ‘40% tax’ would actually be a 7.5% (3/40) tax.”

If you’re going to wibble about inheritance tax you’d do well to actually understand it.

People do not pay tax on what they inherit. The estate pays tax on what is to be inherited. So, if there are four people inheirting from the same estate then there are not 4 different exemptions of £325,000 each. There is one exemption of £325,000 for the whole estate.

Meaning that someone inheriting £400,000 (depending on the total size of the estate and the number inheriting) could be paying anything from 7.5% to fractionally under 40% (for a very large estate with many inheritors).

JohnB is correct above in that what should be happening is not the taxation of the estate but the taxation of the inheritance (if we’re going to have any such taxation at all of course).

“inheritance tax is a handy issue for the left because it allows us – despite Helm’s idiotic appraisal – to characterise the Tories as being in it for themselves. And by themselves we mean the landed gentry.”

If the left think that then they’re (you’re?) clearly not up to speed. Farmland (the usual definition of landed gentry being those who have such) isn’t subject to inheritance tax.

[13] Tim, is the logic of your argument that we should scrap Inheritance Tax and charge Capital Gains Tax against heirs instead?

I’m perfectly happy with not taxing inheritance at all: but if we are going to tax it then yes, as JohnB above says, better to tax whatever the recipient gets (at their marginal rate) than tax the estate itself.

This would be the same as the CGT rate, which would of course be the same as the income tax rate once we’ve abolished corporation tax…..

Tim @ 13/15: your point about the current tax being paid on the estate and not on the amount received is, of course, absolutely right. To simplify the exposition I was assuming a case where one person receives the whole estate. However, I don’t think my main point – The Observer’s misleading language – is in any way affected by bringing the distinction you rightly make into view. But, in retrospect, I should have included a note in brackets to explain the distinction.

If you take a look at the pamphlet I co-wrote for the Fabian Society, How to Defend Inheritance Tax, you’ll see (a) that the distinction you make is upfront and clear and (b) that, like you, we argue that it would be fairer to switch to a tax on capital receipts. Ditto my article in Political Quarterly on the subject. (As we make clear in the Intro of the pamphlet, we defend the principle of taxing integenerational wealth transfers, not the existing IHT – though I would rather have the existing IHT than nothing.)

sevillista

Sorry – missed your comment there.

He is a very capable man, and a freind of mine has blogged about how he will be the real chancellor for the Tories in all but name for that reason. (Osborne is rather dimwitted despite his education, and won’t work hard enough either)

However – that he is smart enough to realise he can get away with fibbing because it is a complex process to explain the nature of his fib doesn’t make it OK.

“That is of course not true. It is not true because the same services could not have been provided without deliberately cutting productivity as was done after 1997. It is easy to forget that children went days untaught, and hospitals had too few nurses and doctors to treat people. So the UK increases wages (and thus reduce productivity) to attract enough people to do the job.”

Sadly that’s a static argument about productivity. What we’d really like to know is how to increase productivity over time. And that is (see Baumol) much more difficult in services than it is in manufacturing.

So we expect to see services increase in price relative to manufactures over time.

However, we also know that the way to increase productivity is by the use of new technologies: innovation in short. And we also know that markets (no, not particularly capitalism, just markets) increase the adoption of innovations faster than not markets (Baumol again).

All of which leads us to hte conclusion that precisely because services are more difficult to get better productivity in then this increases our need to have services provided through markets……

Tim

Most services are provided by markets. But obviously markets fail in education, healthcare, policing and fire services. We can’t let people die, go uneducated, have crimes against them go deliberately unpunished, or let their homes burn down because they are poor.

Well we could – but we refuse to.

So for those services we have the public sector.

Within the public sector though, productivity is a tough but, and the Tories have offered no hint as to how they would crack it. They have just come out with a headline figure to hint at Labour waste and at the chance to cut spending without hurting services.

“Most services are provided by markets. But obviously markets fail in education, healthcare, policing and fire services. We can’t let people die, go uneducated, have crimes against them go deliberately unpunished, or let their homes burn down because they are poor.”

Oh please, do stop being pathetic.

“The provision of a service through market mechansims” is not the same damn thing as leaving it all to some free market fairy who will wave their wand and make things lovely….and with a pony too!

The Sweidsh education system is a market based one: with deliberately low barriers to entry. Any two qualified teachers can set up a school and see how many pupils they can get. The local council then sends along the money for however many pupils they do manage to attract.

It’s entirely possible to have market systems, market methods of delivery, inside what you so quaintly call “the public sector”.

What is it with you people whereby you insist that anything with the mildest market problems (ill functioning ones, absences of them, free rider problems, public goods etc) immediately means that only direct employees of the government, managed centrally in a manner that Stalin would have envied, can possibly provide them?

Haven’t you fucking realised yet that the entirety of GP services for the past 70 years have been provided by small businessmen and women, operating on market based contracts? Get patients, get a capitation fee. Don’t get patients, you starve?

[20] There’s no arguing with a religious lunatic, is there? Tariq Ramadan will convert to Judaism before our Tim will admit any market shortcomings at all, let alone as many as Adam Smith found.

“Tariq Ramadan will convert to Judaism before our Tim will admit any market shortcomings at all,”

Err, Mike, having reading comprehension problems today?

“mildest market problems (ill functioning ones, absences of them, free rider problems, public goods etc)”

Is that not a list of market shortcomings?

Just to add to it shall I? I’m well aware of the following problems with markets: monopolies, oligopolies, public goods, externalities (both positive and negative), free rider problems, distributional…..

Jeebus, get a grip will you?

[22] Shall we now both agree to be some vague heed to LC’s comments policy?

Markets fail in health you say?

Better not tell the French that.

Tim

You seem to be easily confused. So I’ll keep this simple.

You have got your point completely and entirely the wrong way round.

In Sweden a system of private capital operating (in theory) for a profit provides school places.

That is capitalism.

In Sweden the provision of education for each child is resourced through an arbitrary fixed price set by the state. – That is public sector.

Do you thus notice what there isn’t in Swedish education?

A market!

There is no price competition to establish efficient use of resources. There is no price competition to restrict demand. Thus there is no market. And the reason for that is obvious. As I pointed out and you criticised – market failure is so comprehensively damaging in some sectors that we don’t use markets in their provision.

So in Sweden there is capitalism within public sector provision. Not a market.

And here’s the great bit.

Having got that completely wrong – you then wrongly assume I’m opposed to such a set up.

Amazing!

Tim

You have got your point completely and entirely the wrong way round.

In Sweden (as you say) a system of private capital operating (in theory) for a profit provides school places.

That is capitalism.

In Sweden (as you also say) the provision of education for each child is resourced through an arbitrary fixed price set by the state.

That is the public sector.

Do you thus notice what there isn’t in Swedish education?

A market!

There is no price competition to establish efficient use of resources. There is no price competition to restrict demand. Thus there is no market. And the reason for that is obvious. As I pointed out and you criticised – market failure is so comprehensively damaging in some sectors that we don’t use markets in their provision.

So in Sweden there is capitalism within public sector provision. Not a market, and not even a hint of one.

And here’s the great bit.

Having got that completely wrong and misunderstood that you were describing capitalism within the public sector, not markets, you then wrongly assume I’m opposed to such a set up.

Amazing!

You seem to have a gobsmackingly odd idea of what it is that constitutes a market.

Imagine, if you would (just as a thought experiment) a series of pubs in a town. All beer is priced the same. They distinguish themselves, and the customers distinguish among them, by their distance from where they live, the music played, (or not), the size of the gazongas on the barmaid or for those with more specialised or different tastes, the firmness of the buttocks on the bartender.

Some pubs specialise in the music and gazongas that gets the young crowd in, others in what’ll get the old boys playing dominos in the corner (where the two markets do not overlap of course)….ah, but there I’ve just let slip why your definitions are so gobsmackingly strange.

For of course, in the pub example, we can see that we do indeed have a market, even if we haven’t got price competition. We’ve got “non-price competition” but we can all see that it is indeed competition and that we’ve a market here.

Replace gazongas and firm buttocks with (after all, we are talking about children here) music lessons, languages, religion, discipline, lacross instead of soccer, Montessori, Steiner, streaming, comprehensives, special needs and we’ve got, oh my, competition between schools and thus a market without there being price competition.

Just as we have a market in GP services in your area: remember that? Each and every GP costs you exactly the same amount of money and yet you get to choose between which one you register with. They respond by warming up their speculums so as not to give you too much of a shock when you come in for your pap smear so as to attract your capitation fee. See! Market, no price competition!

Gobsmackingly odd assertion you’ve made. Gobsmackingly silly.

[27] Excellent stuff, Tim!

Now – for your next trick – explain why it is that publicans are so much better than GPs at non-price competititon (for this is so, in my experience)?

I have my own ideas, and I believe they contribute to the understanding of markets more generally.

A market is the rationing of goods, services, capital and labour at a price freely determined according to supply and demand.

@ 29.

No, a market is the exchange of goods and services. Your definition might follow from that but it’s a subset, not the whole thing.

^@28. No idea,

@Margin @TimW

While interesting, this argument is missing the main drawbacks of public sector productivity data.

Which are:

1.
Many things are ignored in public sector productivity statistics – for example, the education productivity measure is number of children adjusted for GCSE results. It is very difficult to measure output of public services that are trying to achieve many things other than just maximising output for given cost (though there are some things – e.g. processing benefits claims – that can be measured. Incidentally, DWP productivity in this has risen significantly since 1999)

This misses a lot – the current Government’s investment in e.g. classroom assistants for primary school children is by definition a complete waste of money (as it won’t show up as productive until primary school children aged 5 years old in 2000 have sat GCSEs). A broad curriculum that teaches children more than to just pass GCSEs is defined as a waste of time. A decrease in the average quality of children in a school shows up as a decrease in output and productivity.

2.
As public services are not marketised, the impact of quality is under-estimated compared with services in the private sector. People seem to demand a high quality of public services (e.g. short queues, short weights for doctors appointments etc). But investment in these things is definitional a waste of money

3.
Much of public sector output (e.g. defence, policing, general public administration) is still measured on a inputs=outputs basis, leaving productivity growth definitionally equal to zero. Figures including this will bias the final productivity figure downwards (or upwards) depending on actual productivity trend

The insights from measuring productivity are useful – I am sure there are ways that productivity could be improved (e.g. outsourcing junior civil servants and administrative work to India to people paid 20% of the money – learning from how the private sector has driven productivity up. The political acceptable of your benefit claim or tax assessment being dealt with in Delhi is far from clear though). But comparing highly flawed public sector productivity data to private sector data is just pointless.

Though as I said, I’m sure Hammond knows this and is just making his rhetorical point that civil service are wasters and the government have failed to reform, and this is complicated stuff (as I’m sure will be pointed out to me by the more ideological righties on this thread – the simple numbers are easier to quote especially as they prove the point)

[28] Well, I don’t know but the following thoughts are based on my experience of pubs and surgeries! I assume that all publicans and doctors know all about Hotelling’s beach!

First, who takes the decision? In the pub, there’s only one publican and s/he is presumably focussed on profit maximisation. In the surgery, there may or may not be a strong-minded senior partner and there may well not be the same focus on profit (e.g. the doctors may prefer to spend more time with fewer patients).

Second, the publican can reasonably assume near-perfect knowledge in his customers which the doctor cannot. Empirical research would need to be undertaken before we could say whether male customers of pubs are more affected by barmaids or female customers of surgeries by doctors.

Third, the pub customer can easily find out what the publican pays for his beer (we have to assume this to be constant, too – let’s say all pubs are microbreweries so that the answer is the cost of brewing it, a public domain cost) and thus make a judgment on added value. The patient, however, is confronted by the brick wall of contract confidentiality.

Fourth, beer-drinking is a low-risk high-frequency practice (in economic if not medical terms) – most customers will consume a (relatively small) quantity of the product most weeks, and thus generate a high density of market signals. Going to the doctor is exactly the oppsoite – a low-frequency high-risk practice, so that the density of market signalling is much poorer. We expect markets to function better, the greater the density of signalling.

@32….I’ll go with that to some extent. Although I’d add in that people tend to search for more information the more expensive the decision they’re making. For a pub, pop in, have a pint and find out.

for registering with a GP? People do at least tend to ask about.

@31 I agree that productivity is difficult to measure anyway, let alone in services and then again in the public sector.

My original point above was that we know what improves productivity: innovation. We also know that market based systems work better at improving innovation than planned (and definitely than centrally planned) ones.

Now, pace some of the stranger ideas on this thread, markets do not mean free markets, nor do they mean nothing but markets. They also do not require cash to be changing hands between producer and consumer: we can still have the buyer being someone else. We also do not need the incentives for innovation to be monetary: professional pride works as do many other things.

Now, having said that we don’t want a total free market in health care (pay your doctor cash in advance or die, scum!) this doesn’t mean that we cannot create market like or near market structures which allow us to gain some if not all of those impeti (impetuses?) to innovation which a market like structure would offer us.

I happen to think that bringing a little more cash into UK health care will improve it a great deal. A Tenner to see the GP perhaps etc but that’s not the real point here.

Let us imagine two possible systems. One where near randomly we choose 10 or so of the people from the most successful vote stealers at the previous election and hand over to them an organisation with 1.3 million owrkers and a budget north of ^£100 billion. We keep swapping those 10 people around for the life of tha parliament and then replace them again. While they’re playing musical chairs we ask them to plan, in detail, the largest and most complex organisation on hte planet after the Chinese Army and the Indian Railways.

And that planning does include what new treatments ought to be, how they should be implemented, which innovations are worth pursuing and which are not.

Our second example: We have a few hundred units of professional, teasm, around the country each in their own specific buildings, with budgets and so on. They do the best they can treating those who come to them. Some of them will have good ideas for innovations (others will have bad ones). They try them out. The good innovations are rewarded: not with cash necessarily. Perhaps a KBE, an MBE, professional pride, but those which have proven successful have raised productivity….and we should thus encourage them to spread through the other few hundred hospitals.

Which is going to produce more innovation and which is going to raise productivity faster?

Quite, if the planners at the centre know how to do it it ain’t innovation, is it?

Now of course, both of those already exist in our current system. All I’m really suggesting is that if rising productivity is what we’re looking for (which it is in hte long term, it’s the only thing that’s important) then we want to have a more decentralised system, one with more of the attributes of a market and less of the planners.

[33]

A Tenner to see the GP perhaps etc but that’s not the real point here

Would need to be more like £20 to cover admin costs, I’m afraid. Politically problematic – do you exempt those who get free prescriptions etc etc? Many doctors favour it in principle (to keep out hypochodriacs) but it doesn’t work in practice. The only additional source of income I can think of is for employers to be able to pay for a “fast track” service for key personnel, but don’t know if this can be made to work price-wise against BUPA etc either. Probably not, or it would exist by now.

***
More generally there is a difficulty that when people think of “markets” they don’t think of your technical (and politically neutral) definition but of the kind of sloppily bounded beast politicians and pundits conjure up.

[34] I meant to add that I think the biggest difference between us, Tim, may well be that you believe in rational expectations and I don’t!

Tim (30)

I’m going to suggest you just apologise for calling me pathetic and for ranting at me with a ludicrous assumption about me holding opinions I’ve never expressed and don’t hold. #20.

Or maybe if you are uncomofrtable with that, I don’t mind if you just stop posting about it. But please stop trying to “win” this discussion. It is leading you to say foolish things you have not thought through and can’t possibly mean.

For example you say

“All of which leads us to hte conclusion that precisely because services are more difficult to get better productivity in then this increases our need to have services provided through markets……”?

And

“a market is the exchange of goods and services.”

Since the second of those means there is no exchange of services that isn’t a “market”, the first is a meaningless statement along the lines of “all football should be a sport.”

I mean seriously, do you actually believe the NHS operates as a market? If so you render the terminology meaningless, and your position fascile.

So just apologise for insulting me.

sevillista

I’ve written an article that covers a lot of those problems overnight and plan to post it later today. But you are spot on with the problems in areas like defence, and with the impracticalities of judging productivity in the public sector.