Eight ideas for supply side socialism that the left should pursue


11:02 am - March 12th 2013

by Chris Dillow    


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I rashly promised yesterday to suggest what some supply-side socialist policies might comprise. Here goes.

1. Invest in education, especially in the early years. The demand for unskilled labour has collapsed, and we shouldn't bet in on recovering. Instead, we should try to raise human capital. This requires pre-school interventions, improving the standards of schools in poor areas (pdf) and, perhaps, simply more intensive education. If inequalities of human capital can be reduced, so will one source of income inequality. 

2. Shift the tax base. Efforts to tax profits don't work. Better ways of taxing the rich, whilst preserving incentives to work and save would involve taxes on land, inheritances and a progressive consumption tax.

3. A state investment bank. Personally, I'm sceptical of the idea that banks systematically starve promising companies of funds; I suspect the bigger reason for low investment is the lack of innovation. Neverthless, we should ensure that the few good investment ideas there are get funded. And most of the arguments against a state bank are exaggerated.

4. A citizens' basic income. This is normally seen as a redistributive policy, a way of increasing workers' bargaining power. It might raise productivity through at least two routes. First, it would give workers the chance to reject bad jobs, and wait until a better match turns up. Second, the increased wages which would follow from this rise in bargaining power might compel firms to raise productivity in order to maintain profits.

5. Freer migration. In the short-run, immigration can raise growth by removing labour market bottlenecks. In the longer-run, it can increase innovation and productivity (pdf).

6. Coops. The financial crisis is, in many ways, a crisis of managerialism and ownership. Top-down bank CEOs got overconfident and made terrible decisions; failed to solve principal-agent problems that led to excessive risk-taking; and failed to adapt well to the new macroeconomics of the 2000s.Outside shareholders did nothing to prevent this. This suggests the need for new forms of ownership. The obvious (though not only) candidate is worker ownership. There's good evidence that this increases productivity, and it might have longer-term benefits for growth too, insofar as it helps encourage a culture of trust.

7. Shrink the state. It's possible – I put it no stronger – that a smaller state is conducive to faster economic growth in the long-run. Hopi's proposal for zero-base spending review might therefore make sense. But you cannot cut spending intelligently from the top down. A precondition for intelligent cuts is to empower public sector workers, who are better placed to identify genuine waste.

8. Macro markets. One role for government should be to encourage – perhaps via nationalized banks – markets for insurance in income risks, as Robert Shiller has proposed. Such moves might be egalitarian – insofar as such products are given freely to worse-off workers. But they might also help encourage real innovation by allowing entrepreneurs to insure against the background risks (eg of recession) which can undermine otherwise good investments.

This is not a complete list, and there are countless details to examine. This list should, however, remind us that supply-side economics needn't be the preserve of the right.

Another thing. Some of you might remember my book. Some chapters, however, were not published. This pdf is one of them.

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments


1. Shinsei1967

An interesting list. Dealing with just one point – a state investment bank.

Wouldn’t a boost to venture capital funds (either through legislation and/or tax breaks) be a better source of funding for good investment ideas than a single investment bank ?

Surely the ever-present danger with a state bank is that it won’t be funding the next Dyson but rather supporting the likes of HMV or Blockbuster.

2. Luis Enrique

In case the focus here is not clear, supply side policies means policies to either raise the level of the economy’s productive capacity, or its rate of growth. So for example point 4 mentions but sets aside the redistributive role of CBI, because whilst desirable in itself, from a left wing p.o.v., redistribution is is not necessarily productivity enhancing ( although one could construct arguments in which it is. Most arguments about how inequality are holding back growth are demand side).

Chris Dillow

As both of your recent OPs contain the word ‘socialism’ how about considering some real socialism, Gorz has a good model which addresses the supply and demand side of economic activity.

“Better ways of taxing the rich, whilst preserving incentives to work and save would involve taxes on land, inheritances”

An oxymoron if ever I heard. Taxing land or inheritances, apart from the fact that these are purchased through income already taxed, turns them into liabilities and not assets.

“In the short-run, immigration can raise growth by removing labour market bottlenecks.”

I’m not usre the UK truly suffers from Labour market bottlenecks….indeed, hasn’t migration to the UK predominantly taken up the lower skilled jobs, where there was no real bottleneck (unless you count the minimum wage)?

5. Luis Enrique

“Taxing land or inheritances, apart from the fact that these are purchased through income already taxed, turns them into liabilities and not assets.”

utter garbage. If my Dad leaves me £500,000 (I wish!) and it is taxed at 50%, that is a £250,000 asset for me. If I own some land that yields £10,000 per year and that land is taxed at £5000 per year, I have an asset yielding post-tax income of £5000 per year.

Taxes have to be applied somewhere. If you were an intelligent right winger Tyler, rather than somebody who just tries to rubbish anything left wing on sight, you would agree with Dillow that it’s a good idea to design taxes that minimise distortions, i.e. incentives to engage in productive activity. See this example of an intelligent right winger:

http://www.themoneyillusion.com/?p=19884

6. Luis Enrique

an argument for why redistribution – or rather the lessening of class barriers – could be productivity enhancing. Take this (pdf) argument (theoretical and empirical) about gender and race, and apply it to class.

@4 Tyler
There are plenty of labour market bottlenecks in the UK.
I work in IT and the shortage of trained IT professionals has got steadily worse since I started in 1990
This isn’t helped by a lack of training. But in the short term the industry relies on imported labour from India and Commonwealth countries (Australia, New Zealand and SA in particular) without these workers almost all of this expanding industry would move offshore.

Not sure if the long term skill shortage is covered in 1, but certainly we need to keep immigration in the short to medium term

5 – the difficulty with IHT is that it massively distorts behaviour without raising all that much revenue – pretty much the opposite of what you want a revenue raising tax to do.

It’s also a very difficult area to close loop holes in – a lot of avoidance comes through gifting things prior to death, and tracking and taxing gifts is a) tough, and b) pretty illiberal. The rest comes through the use of trusts, which is such a large part of the English legal tradition that knocking a hole through it would be non-trivial (cf the abolition of the Lord Chancellor!).

9. Chaise Guevara

@ 8 Tim J

I assume that tracking and taxing gifts in the form of real estate, at least, is pretty easy and not very illiberal, given that houses have paperwork anyway. It’s not the same as making a list of everything in your house and declaring who owns it so you can’t tell your son to say he owns the plasma TV when you pass on.

10. Planeshift

Before we get more tories on here rubbishing the idea of a state investment bank, it’s worth pointing out that creating one in Wales is the policy of the Welsh Conservatives.

“As both of your recent OPs contain the word ‘socialism’ how about considering some real socialism”

Perhaps because he couldn’t find any examples from the real world?

The French experience with Crédit Lyonnais, which was the largest bank in France and state-owned since 1945, is an object lesson in demonstrating that public ownership of a major bank ensures absolutely nothing:

“By July 1997, French finance minister Dominique Strauss-Kahn could admit that the bank had probably lost around Ffr100 billion, or around $17 billion, in its colossal spending spree. Independent commentators have suggested that the debacle will end up costing the French taxpayer between $20 and $30 billion.”
http://www.prmia.org/pdf/Case_Studies/Credit_Lyonnais_1.pdf

12. Shinsei1967

Bob B

And the state-owned Landesbanks in Germany were also not a paragon of good long term investing in the public interest.

FRANKFURT — Even in an era of bad banking deals, the case of Bayerische Landesbank, a bank based in Munich, stands out. Its ill-fated attempt to expand in Eastern Europe has cost Bavarian taxpayers 3.7 billion euros ($5.4 billion). It has also led to a criminal investigation of the bank’s former chief executive, which included the spectacle of Munich police and prosecutors raiding offices of an institution whose supervisory board is stacked with local politicians.

http://www.nytimes.com/2010/01/12/business/global/12landesbank.html?_r=0

9 – in the form of real estate sure. Most gifts aren’t of real estate though. As you start estate planning, you sell down assets and distribute them, and the ones you can’t, you place in trust. That’s what Ralph Miliband did for his sons.

Shinsei1967: “And the state-owned Landesbanks in Germany were also not a paragon of good long term investing in the public interest.”

But then with the examples of Lehman Bros in the US and, in Britain, RBS – which became one of the biggest banks in the world during its ascendancy – and HBOS, banks in the private sector manifestly aren’t models of robust excellence either. On the evidence, there must be something about a British bank having its headoffices in Scotland rather than London.

Curiously, this attraction to the idea of a state-owned investment bank has a provence going back to Benito Mussolini, but then he was a member of the PSI before he created Fasci Italiani di Combattimento in 1919. Try this:

“However it was with the idea of a state planning agency that [Stuart] Holland [Labour MP for Lambeth, Vauxhall 1979-89, political assistant in Downing St to the PM 1967/8, and shadow Financial Secretary to the Treasury 1987-9] hoped to show the new possibilities open to a more just economy. He looked to the Italian example of the IRI (the Industrial Reconstruction Institute), set up by Mussolini and used by subsequent Italian governments to develop the economy. This had, of course, already been tried through the IRC (the Industrial Reorganization Corporation) set up as part of the National Plan [in Britain] in 1966, but the IRC had been too small to have much effect on the British economy. A revamped IRC in the form of a National Enterprise Board would, however, have a major effect in stimulating the private sector through an active policy of state intervention and direction.”
Geoffrey Foote: The Labour Party’s Political Thought: A History (Palgrave, 1997) p.311.

The attraction for Stuart Holland of Mussolini’s model for funding business projects is further advanced in his book: The Socialist Challenge (1975). But then the provenance of Blair’s Third Way nostrum also goes back to Mussolini. Personally, I think Douglas Adams was correct all along: 42 is the answer to life, the universe and everything.

15. David Ellis

3. Once a decade the economy overheats and collapses back into recession. Interest rates plummet both those that the banks pay to the BofE and those the banks charges the public until it becomes profitable to borrow again and the recession slowly turns into another bubble.

This time the banks are bankrupt so instead of passing on those record low interest rates they are being charged by the BofE (0.25%) to the public it is all but impossible to borrow for less than 8% and frequently it is more like 12 to 15% and with the sharks 2000%. The bankrupt banks instead of lending on the cheap money are using it to pay out their billionaire creditors who bought their Ponzi bonds in their trillions. This is then fuelling a stock exchange bubble which now passes for a boom whilst the real economy flat lines.

Gone are the days of `creative destruction’ whereby each recession led to a new advance. Now the West is monopolised, sclerotic and bankrupt. Each tiny uptick will lead to an ever greater recession and eventually a global depression as global capitalism disintegrates.

What is needed is an end to the bail out of the bankrupt banks. Their staff, estates and deposits must be taken into administration by the people to form a new People’s Bank with a monopoly of credit to prevent the privateers from organising global thievery ever again by printing counterfeit claims on the social wealth in their trillions and trillions. This bank could issue money at a non-inflation inducing rate and lend to small business at base rate. It could also facilitate social investment (greening of infrastructure, etc) according to a democratic and sustainable plan.

16. Shinsei1967

Planeshift

“Before we get more tories on here rubbishing the idea of a state investment bank, it’s worth pointing out that creating one in Wales is the policy of the Welsh Conservatives.”

The Welsh proposal isn’t a stand alone investment bank but a partnership with existing High St banks to make available more funds for directed lending to SMEs.

One of the major differences between the UK and the USA economic models is the prevelance of venture capital money for “innovation” (which is specifically what Chris Dillow was talking about rather than “bog standard” corporate lending) and goes part of the way to explainimg the US’s lead in industries like software and biochemistry.

There’s no shortage of capital in the UK. Look at the money going into gilts, corporate bonds, London property etc. Tweak the system to make long term VC investing more attractive and that can fund innovation. And the government can spend its (borrowed or printed) money funding things that really only governments can do well, like major infrastructure.

For the other SME corporate lending we don’t need a big government investment bank we need more High St banks and bankers that know their local economies. Government can, and should, do more to encourage their creation.

17. Shinsei1967

@Bob B

I think the history of banking shows that there is no one model of banking that always works well. You just have to look at most recent banking crisis to see that highly leveraged derivatives traders like Lehmans (with senior employees owning 10s of millions in equity and so “supposedly” risk averse/long term) and bog standard mortgage lenders like the Bradford & Bringley all managed to go bust through bad lending decisions.

Which is why I think it is naive to think that a UK investment bank will solve most of the UK’s banking problems.

There’s two reasons why HIgh St banks aren’t lending more: the draconian regulatory environment has made it very much more difficult and there just aren’t good credit risks out there. Sure there are plenty of companies out there that want more lending, but too mnay are retail or property companies. Would you lend to them ?

Luis @5. If you dad left you £500K cash then it would be easy to pay the tax of 50%. But that hardly ever happens. Inheritance is more than just cash. You inevitably end up having to sell some of your inheritance to pay the tax. At the most perverse, you get a painting worth £50K, but you don’t have £25K in savings – so you end up selling the painting to pay the tax and end up with £25K of inheritance. I suppose some would think that better than nothing, many others would think why should the state get some money just because someone has died. Why don’t we make it more equal and have a tax when someone is born.

And then you go and mix up assets and income. Land is an asset but doesn’t provide an income. So taxing it is a liability. Rental on land is income and can and is taxed.

IHT is just another state interference which results in perverse results through the law of unintended consequences. IHT’s predecessor, Death Duties, was one of the major causes of the destruction of historic houses. This resulted in yet another government intervention to cure the problem of the first government intervention and was one of the reasons for the creation of the National Trust.

Why can’t anyone see that the government is just a bunch of people. People like MPs who care more about their expenses than the public. People who are not super intelligent. People who have vested interests. People who care more about following procedure than actually caring about the people they serve.

“There’s no shortage of capital in the UK. Look at the money going into gilts, corporate bonds, London property etc.”

With Britain’s economy teetering on the edge of a triple recession, it’s little wonder that investors are reluctant about putting their money into business.

In the BBC news today: “The pound has fallen against the dollar and the euro after official figures showed UK manufacturing output fell by 1.5% in January from the month before. The drop came after a 0.9% rise in output in December, and has added to fears of a third recession since 2008.”

Hence: “UK Business Investment Drops by £400m in Fourth Quarter”
http://www.ibtimes.co.uk/articles/440021/20130227/uk-business-investment-ons-q4-economy.htm

@ 5 Luis

Sorry, but you are simply wrong there. I’ll start with IHT, using your numbers.

That 500k your Dad leaves you has a tax liability attached to it. Of 250k in fact. Indeed it would be much better for your Father simply to spend the money before you get close to it, and suffer only 20% tax (VAT). Or do what the Millibands have done and put it in trust. Or buy other assets and give them out in stages as gifts. Or take it offshore. etc.

What no sane person would do is simply wait to give all that hard earned cash to the government, rather than your progeny. Indeed – increase the tax and it makes people more likely to try and avoid it.

As for housing: you are right *only* in the case where your house is a productive *cash generating* asset. Which is great if you own more than one house, as that second one will be giving you a rental income. Most people don’t own multiple houses though. The first or only house is prooductive in the sense it gives you a roof over your head, but it is NOT generating cash for you. Indeed, you are likely to have paid stamp duty, and will be paying a mortgage and council taxes.

Your mortgage payments are secured against the house. Any mansion tax style payments aren’t though – they have to come out of other income. So it’s a liability….and a massive one if you aren’t cash flush.

That’s before you consider other massive problems with a mansion tax: It will push down property prices, which will massively damage credit extension. It is likely to push up rents, as buy-to-let guys push the cost onto their occupiers. It will cost the givernment a huge amount to revalue properties, and will lead to massive arguments as those valuations will be subjective.

I’m not against these ideas because they are socialist. I’m against them because they are stupid, damaging and unworkable. Though it has to be said it tends to be socialists who argue for them.

I would agree with Dillow that it is a good idea to design taxes to reduce distortions…but the two above *create* them. Something like removing corporate taxes, which would achieve that aim though, are roundly rubbished by the left though….because the idea of cutting taxes for many on the left is simply an anathema.

@ 7 Redfish

Point taken for your specific example of IT, and there will always be specific bottlenecks in an economy. However, the point I was making is that the bulk of immigration into the UK over the last 10 years has been low or unskilled….where there certainly isn’t any bottleneck in the UK’s labour force.

@ Chaise

You can gift shares in houses to your kids. It’s a pretty common way of dealing with IHT, you just have to be organised and start doing it in advance. It’s common when a house is worth only a little over the IHT 0% band. Very expensive properties tend to go straight into trust.

@ 11 and 12

To add to what you guys have said – the Spanish Cajas were probably the biggest state owned/influenced disasters of them all.

21. Luis Enrique
22. Luis Enrique

Tyler, please look up definitions of words “asset” and “liability”. Whilst sufficiently high taxes may turn an asset into a liability, to say that any level of taxation turns assets (an inheritance, some land) from an asset into a liability, is nonsense.

23. Planeshift

“You can gift shares in houses to your kids”

I wasn’t aware of this – is there a link to more info?

24. Chaise Guevara

@ 13 Tim J

“Most gifts aren’t of real estate though. As you start estate planning, you sell down assets and distribute them, and the ones you can’t, you place in trust.”

Ah, so we’re looking at less well-off people having to sell their parents’ homes, while people with big portfolios find a way around it all? OK, fair point.

I can’t imagine why any of sound mind believe investment decisions made by politicians in Britain or by political appointees are inherently better than investment decisions made by private sector banks. Look at the track record:

£3.4 billions of taxpayers’ money was sunk into the noe defunked British Leyland.

Concord, which only Air France and British Airways would buy and where the development costs were paid for by taxpayers and written off.

Britain built the first commercial nuclear power station at Calder Hall:
http://www.youtube.com/watch?v=OkmuokeU4Zc

But we are now (desperately) hoping EDF, a French company, will build Britain’s next nuclear power station asap so Britain can meet our greenhouse gas emission targets.

Where is ICL now, the computer company that was once Britain’s answer to IBM?

“Philip Hammond, defence secretary, has declared the government has eliminated a £38bn black hole in the Ministry of Defence equipment budget, bringing its finances into balance for the first time in a decade.” [FT 14 May 2012]

Why do we have to buy American Trident missiles to deliver Britain’s nuclear deterrent when France, India, Iran and North Korea design and make their own missiles?

If state ownership of banks is such a great idea, why is it intended to privatise state ownership of shares in RBS and Lloyds-HBOS?

Ignoring the socialism part that we can put down to an unfortunate typo, nobody sane believes in socialism anymore. The points that Chris raised are the types of conversations that the left should be having. What has happened in recent years is the right take the lead on supply side reforms and the left get all conservative and defensive. When the left became the conservatives they became captured by producer interests. The left such as Chris Dillow make much more sense and will achieve more than the demo, screamy hyperbole, leaflets and lots of badges brigade.

Point 2 is correct. Taxing profits and income is a useless way to build a tax base that will not be riddled with distortions. Numbers on screens is not wealth, only consumption is wealth. Unearned increases in the ability to consume and consumption itself is the proper base for raising taxation.

You say arguments against a state bank are exaggerated. I am not convinced that they are exaggerated. There is nothing that private bankers can do badly that civil servants can’t do worse. As soon as the state is involved the rules change. Just to give one example, RBS used to provide Chavez in Venezuela with a $5 billion credit line. When the UK government bought a majority equity stake in RBS, the credit line was quietly cancelled. Clearly the UK government could not be seen to have an even tenuous connection to Chavez, because where the state goes the media follow. Now, just imagine a state bank who had advanced loans to a firm in a marginal constituency. Firm gets into financial difficulties, is the state bank going to put them into bankruptcy putting hundreds out of work and embarrassing whatever government is in office. Over time the state bank would be captured and end up only lending or investing in lame duck firms. Its record would be discredited because a disproportionate amount of lame ducks would seek funding from the state bank.

If we want banks to lend more then reduce the capital requirements. Too simple for the UK government who are raising them and complaining about the fall in lending. There is plenty of venture capital and angel investment around for good business models. There is no free money lying around from firms being starved of investment. You know, maybe they are just not that good an investment. I will say it for the umpteenth time but what the UK could do with is a decent bond market for SME.

@ 22 Luis

Any level of taxation assigns a tax liability to a given asset. That liability may be a once off, or a continuing one, but either way it will impair the value of the asset, and anyone in their right mind would do everything to minimise it – and there is always a way to do that. In the case of your Father the simplest way is to spend and pay 20% VAT rather than paying 50% IHT.

Ah, so we’re looking at less well-off people having to sell their parents’ homes, while people with big portfolios find a way around it all? OK, fair point.

That’s it – IHT is really only paid by people with houses in the SE, but not much other wealth. Rich people find ways out of it – and the point I was making was that it’s very hard to stop that.

29. Shinsei1967

Tim J

That sums up IHT very nicely. It really only impacts on the moderately rich, and avoids the very rich and the middle classes.

Someone 70 years old with a £1m house and £1m in the bank is unlikely to be able to afford to gift away any of his assets to his kids. He still needs somewhere to live (and likes his house) and might live to 90, in which case that £1m in the bank will be useful.

Someone 70 years old with a £2m house and £30m in the bank can probably happily gift away 80% of his assets tax free to kids or grand kids and see no impact on his standard of living.

(and, yes, I know many old people have to live off £10k pa but we’re talking about wealthy people who have no inclination to substantially reduce their standard of living).

@ Shinsei

I’ll give you my Father’s (74 years old) example.

He lives with my Mother in a house worth approximately 750k, which they bought almost 50 years ago. They have an OK pension and a little cash, but not enough to be meaningful in IHT terms.

Given they jointly share the house, they both are able to claim the 325k Nil rate band. On either of their deaths 325k of the value of the house will transfer to my Brother and my own owndership, tax free, and the rest will transfer to the remaining spouse, again tax free.

When the other one of them dies, again there will be a 325k tax free transfer of property ownership. So we would only end up paying 40% on the 100k over their combined IHT limits. Of course, we won’t though, as you are allowed to gift 3k a year tax free, so each year 6k of the value of the house is being transferred to my Brother and I.

It’s not hard to legally avoid IHT. If we wanted to we could also go down the trust route, or several other paths.

Call my old man an evil tax-dodger all you want, as Richard Murphy and the like probably would, but he has worked and piad tax his whole life (indeed, at 74 and 73 both my parents still work) and the house is the only major asset they have to show for it. Having the government take another major slice of that money rather than leaving the fruits of his labours to his progeny simply isn’t on his to do list.

That said, I’m not sure how many on this site countenance things like an IHT. You work, and have much of your income taken as tax. You then buy a house and pay large taxes for that pleasure. Then you die, and the government takes a third slice of your income. When will people realise that *it is NOT the government’s money* they are spending, but someone who has laboured long and hard for it.

31. Shinsei1967

Tyler

To be strictly accurate the government isn’t taxing your father’s income but rather your (as the inheritor) inheritance of it.

As long as he lives he doesn’t have to pay tax on his hard earned assets (only on the income derived from them).

So the question becomes one of whether someone in death should be able to gift tax free all or some of their assets to their children.

I happen to believe that it is right that people should be able to work hard and pass on some of the fruits of their labour to their kids (nothing could be a stronger human motive) but I also happen to believe that some form of redistribution is also in society’s best interests.

Hence it is probably no bad thing having a generous IHT threshold and IHT after that. And we can argue about what the threshold or tax rate should be.

But I happen to think the “but we’ll have to sell the family home” arguments against IHT a bit silly. In 99% of cases the family home (ie the home you grew up in 40 years ago) has been sold years earlier and most people now have their own family home (and then their spouse has their parent’s family home).

32. Chaise Guevara

@ 30 Tyler

“When will people realise that *it is NOT the government’s money* they are spending, but someone who has laboured long and hard for it.”

The crux of the whole inheritance tax issue is that you did not work hard for it, or indeed work at all for it, because it was earned by your parents (or whoever you’re inheriting from). Most people can’t honestly say they helped their parents earn all the money they have when they pass on.

While there will be cases where progeny facilitate their parents’ income in a big way (e.g. a young adult staying at home to look after their smaller siblings so Mum and Dad can work full time), most inheritances are essentially a pile of free money, a windfall, even if it’s a windfall that the former owner always wanted to pass on to you. And those that get a big pile of free money are more likely to have had priviliged upbringings in the first place.

My practical attitude to inheritance is a lot more laissez-faire than my principled one, but prioritising the dead over the living is just strange.

@ 32 Chaise

“The crux of the whole inheritance tax issue is that you did not work hard for it, or indeed work at all for it”

So by default it belongs to the government? Whoever earned the money should have the right to give it to whoever they choose, be it children or charity, with no interference from the government. After all, that person has already paid his due tax on the money.

“that you did not work hard for it, or indeed work at all for it”

That very same statement could easily be applied to a large number of the recipients of the UK’s 200+bn welfare bill. But I doubt you would ever countenance cutting benefits for those who haven’t earned them, would you?

Strikes me as many people are more than happy to argue for a large tax on “unearned” income if it is inherited and therefore somehow unfair or unjustified, but if that unearned income is from the largesse of the state, to a preferred or protected clientelle, it is sacred.

34. Chaise Guevara

@ 33 Tyler

“So by default it belongs to the government?”

Well, that was one hell of a straw man. I’m simply stating the fact that the vast majority of inheritance recipients did not earn the vast majority of what they inherit. I didn’t actually make any value judgements on it. Happy to, but it’s a bit disheartening that your opening response is to make something up and attribute it to me. It doesn’t exactly suggest you’re entering the conversation with your reasonable hat on.

“Whoever earned the money should have the right to give it to whoever they choose, be it children or charity, with no interference from the government. After all, that person has already paid his due tax on the money.”

Yes, I understand that this is the central position of the anti-tax side on this (it’s important to note that you’re focusing on the giver, not the receiver, because it completely changes how the issue looks). I sympathise and to an extent agree with this. However, there are other factors at play.

The main one is that the person who left the money is now dead and that, from the POV of the living, it’s hard to justify handing all of that money to their (for sake of argument) already loaded offspring, when there are people in the country who can barely afford to get from week to week. It’s not that I don’t think it’s nice to ensure people can provide for their family after they die. It’s just that it’s not the only thing that’s important.

“That very same statement could easily be applied to a large number of the recipients of the UK’s 200+bn welfare bill. But I doubt you would ever countenance cutting benefits for those who haven’t earned them, would you?”

Wrong. I suspect your problem here is that, as you hold to one extreme on the matter (no government interference at all), you assume anyone who disagrees must be on the other extreme, black to your white. There are shades of grey. So no, I don’t think we should have a “never cut benefits” rule, just like I don’t think all of a deceased person’s estate should go to the government.

“Strikes me as many people are more than happy to argue for a large tax on “unearned” income if it is inherited and therefore somehow unfair or unjustified, but if that unearned income is from the largesse of the state, to a preferred or protected clientelle, it is sacred.”

Are you saying we should pay people benefit, then tax some of it back? Well, ok, but I think you just invented the least efficient system ever.

from the POV of the living, it’s hard to justify handing all of that money to their (for sake of argument) already loaded offspring, when there are people in the country who can barely afford to get from week to week.

This applies equally to gifts made while the donor is still alive. Why tax one and not the other?

Are you saying we should pay people benefit, then tax some of it back? Well, ok, but I think you just invented the least efficient system ever.

I could never understand why public sector workers were taxed on their incomes. Why not just cut out the middle-man and pay them less?

36. Shinsei1967

Tyler

“So by default it belongs to the government?”

Again, to be accurate, only 40% of it, after the £325,000 threshold (well over the value of the average UK house) “belongs” to the government.

The only way you could object to this in principle (rather than debating specific thresholds & tax rates) is if you think all taxation is intrinsically wrong.

Why should 20% or 40% or 50/45% of what you earn “belong” to the government ? Or 20% of anything you buy (excluding food, utilities & kids’ clothes) ? Or 70% of whatever you put in your petrol tank or put in a whisky tumbler or wine glass ? Or 2-7% of what you spend on buying a house ?

37. Shinsei1967

Tim J

“This applies equally to gifts made while the donor is still alive. Why tax one and not the other?”

There is a £3,000 per year gift allowance. ie you can only gift £3,000 pa tax free.

Any other gifts beyond this have to comply with the seven year rule. ie if you die within seven years of the gift then IHT is due.

No idea why the 7 year rule exists. I could guess that it is aimed to improve “liquidity” in the economy. Better an old person shifts £100k from his or hers deposit account to their youngish offspring who will spend it on housing and furniture.

There is a £3,000 per year gift allowance. ie you can only gift £3,000 pa tax free.

Any other gifts beyond this have to comply with the seven year rule. ie if you die within seven years of the gift then IHT is due.

I know – but it was more a moral question. If inheritance should be taxed because the recipient needs the money less than the deserving poor, why shouldn’t gifts? They’re essentially identical transfers. The seven-year rule just operates to turn some gifts into inheritance.

39. Chaise Guevara

@ 35 Tim J

“This applies equally to gifts made while the donor is still alive. Why tax one and not the other?”

There isn’t really a moral difference, but pragmatically it’s completely different. As noted, you’d need to force everyone to inventory their possessions (which does fall into the moral side of things too), plus the world would suddenly be full of indefinite loans and 1p sales.

“I could never understand why public sector workers were taxed on their incomes. Why not just cut out the middle-man and pay them less?”

Presumably because that would actually end up more complicated, but in principle there’d be no problem.

@ Chaise

I agree that this is not a black or white issue, but shades of grey, but fundamentally my point is still valid.

Someone who has paid tax on their accumulated wealth is then being asked to pay tax on it again, with the notion that they don’t somehow deserve to make the decision about where that wealth goes themselves – instead the government takes a large slice and decides for that person which causes are worthy.

Do all people on benefits “deserve” the money they get for nothing? I’m sure some do, and need it, but others I’m sure don’t.

Implicitly you are suggesting that the government is a better arbiter for the use of that money, and also that people who have to pay IHT or their offspring who will benefit are somehow undeserving, because they are “rich”. How very socialist of you….but also a touch authoritarian.

@ Shinsei

“Again, to be accurate, only 40% of it, after the £325,000 threshold (well over the value of the average UK house) “belongs” to the government.”

You are wrong there, I’m afraid. None of it “belongs” to the government. It’s ALL taxpayers money. The government extracts money from taxpayers through threat of punishment, but ultimately it never belongs to them – which is something people like Richard Murphy seme to get so wrong. Their default position seems to be that money belongs to the state, not the individual who earned it.

“The only way you could object to this in principle (rather than debating specific thresholds & tax rates) is if you think all taxation is intrinsically wrong.”

Following on from what I say above, I don’t think all taxation is intrinsically wrong. It amounts to a contract between the individual and the state for the individual to subsidise the state to provide services that individual needs.

That contract can become strained when the amount being levied by the state becomes too large, especially if the state demands more than the individual gets to keep and spend on his own needs. It also breaks down when the state takes away the responsibility of some groups of individuals to fend for themselves, creating the client state.

As an aside, VAT is a poor example, as whilst it is a consumption tax, it is not levied on most basic needs, so you can choose to avoid much of it. It isn’t a direct draw on wealth like income tax or IHT.

41. Shinsei1967

Tyler

“(Taxation) amounts to a contract between the individual and the state.”

Indeed. And it is a contract that is made democratically.

“We” vote for governments that make taxation policies, ie in this case to impose IHT at 40% for sums over £325,000. If “we” thought IHT was morally wrong then someone could put abolition of it in their manifesto and we could vote to have it abolished.

Your arguments about the size of taxation, size of client state and personal responsibility are all fine as arguments (I’m inclined to your point of view) but they are political arguments and ones that are surely best decided democratically.

(Even if most people are wrong !).

42. Chaise Guevara

@ 40 Tyler

“I agree that this is not a black or white issue, but shades of grey, but fundamentally my point is still valid.”

Never denied that. My whole point is that the base ideas behind both sides of this argument are valid and that the answer lies somewhere in between, which is why I’m calling for neither 0% or 100% inheritance tax.

“Someone who has paid tax on their accumulated wealth is then being asked to pay tax on it again, with the notion that they don’t somehow deserve to make the decision about where that wealth goes themselves – instead the government takes a large slice and decides for that person which causes are worthy.”

You’re still attacking a false version of my view. I said nothing about whether the person giving the inheritance deserves to say where it goes. The issue is that there is more than one form of fairness. We’re looking at the core libertarian/socialist dichotomy here: is it “fair” to make sure people keep the fruits of their labours, or to make sure that wealth is evenly distributed?

Most people, self included, would answer a bit of both. Because there are several factors at play and we need to consider them all instead of ignoring all but our favourite one. Please note that I haven’t accused you of saying no poor people “deserve” the better life that tax revenue can help to give them.

“Do all people on benefits “deserve” the money they get for nothing? I’m sure some do, and need it, but others I’m sure don’t.”

Agreed. But there are other things at play here. Firstly, it’s hard to create a perfect policy where only the deserving benefit. Secondly, throwing money at “undeserving” people might actually save the country money in the long term – perhaps we’d have fewer long-term unemployed if we provided more free vocational education to people who didn’t engage with their schooling when younger. Thirdly, there are some things most of us just can’t countenance. If someone blows all their money on fancy holidays and as a result is bankrupt on retirement, that’s their own fault, but we have trouble kicking old people into the street to starve.

“Implicitly you are suggesting that the government is a better arbiter for the use of that money, and also that people who have to pay IHT or their offspring who will benefit are somehow undeserving, because they are “rich”. How very socialist of you….but also a touch authoritarian.”

Well, yes. Financial authoritarianism is an inherent part of socialism.

I do think the government is a better arbiter of the use of that money for the benefit of society, because it damn well is. Individuals tend to spend their money on themselves and their children. The Victorian laissez-faire system saw children in workhouses, on the street, or getting by on harmful jobs. Our system doesn’t. That’s because it’s a simple historical fact that you can’t rely on the wealthy to maintain a humane society out of charity, however much libertarians stick their fingers in their ears and pretend otherwise.

If you don’t care whether society benefits, then rich people might be better arbiters based on whatever lights you follow.

I don’t like the word “deserve” here, because it implies a moral judgement that I’m not making, but I’ll use it as long as you don’t equivocate. Under the aforementioned socialist definition of fairness, rich inheritors are less deserving than the needy. I’m not sure how they’re more deserving under the libertarian definition – do you inherently deserve the sweat of your father’s brow?

@ Shinsei

“Indeed. And it is a contract that is made democratically.”

I agree, but there is an underlying dynamic at work. Democratic power doesn’t lie in the hands of the rich, but in the masses (as it should with one person one vote). The masses will tend to err towards populist policies where the rich are taxed to an ever greater degree, in the interests of “fairness”. After all, they’re rich, aren’t they?

However, those same rich people can only be taxed so much before they do something about it – avoid tax, move, simply work less etc. Then the total tax take goes down….which is in turn bad for those sef-same “poor” people who voted for it.

Ultimately, politics as I see it tends to swing on the amount of people who feel they are being taxed too highly to pay for the other group who are net benficiaries of the state.

I don’t want to argue too much on the merits or where we actually lie on the greyscale of taxation, not least because I think you, Chaise and myself are all somewhere within that scale and really are only fighting about technicalities, but I do hope you agree that when it comes to fairness regarding tax, it really is a two way street.

@ Chaise

I did intentionally polarise my points towards the 100% and 0% ends of the argument – and I don’t suggest that the state shouldn’t provide some form of welfare.

The question is how much welfare though. The welfare state can also act as a corrosive and negative influence, especially in the hands of politicians.

Gordon Brown and the previous Labour government massively increased welfare spending, but it didn’t solve any of the underlying problems in any meaningful way. Indeed, thanks to his system of tax credits, in acted to trap some people in welfare thanks to the enormous marginal tax rates. it also, I believe at least with some intention, created a larger client state dependent on the governmennt and more likely to vote for Labour in order to maintain their financial wellbeing.

At the risk of opening another black/white debate here, welfare itself can act both positively and negatively. Too little and we regress to Victorian times…too much and you disincentivise certain sections of the populace to become active producers.

Which brings us full circle. In my view, taxes and government spending are already too high, and there is little more that can be squeezed from the rich – though thanks to the financial crisis that is the easy political message for the time being. Likewise, the massive expansion of the state and welfare under Labour is not sustainable fiscally, nor is it even beneficial. It’s a trade-off, but balance is tipped too far, and the high taxes/high spending isn’t good for long term growth – and the result will be bad for everyone.

Let’s try facts instead of ideologically motivated rhetoric.

By this OECD chart for 2009 (published in 2012) public spending on social welfare as a percentage of national GDP in Britain (GBR) was anything but generous as compared with many other west European countries on the corresponding measure for other countries.
http://www.oecd.org/social/soc/socialexpendituredatabasesocx.htm

Compared with peer-group countries, how badly was Britain’s economy doing before the financial crisis struck in the autumn of 2007? Try Sam Brittan in the FT:

Sam Brittan: “The relative decline of the British economy in the century up to the late 1970s has been reversed. Since then, the UK has caught up with and even overtaken its principal trading partners. The previous two sentences are neither a typing mistake nor a daydream. They are the sober conclusions of the country’s leading quantitative historian, Prof Nicholas Crafts”
http://www.samuelbrittan.co.uk/text399_p.html

We have had several posts on various threads here saying – truthfully as best I can judge – that quite a few other west European countries were spending more on healthcare as a percentage of national GDP than we do. The live issue is whether we get value for the money spent rather than is too much being spent on healthcare.

Try the Wikipedia entry on: European Social Model. By the account there, spending on the social welfare by the “AngloSaxon” countries (Britain and Ireland) is rather meagre as compared with the Nordic countries.

@ Bob B

Your own links show (total) UK spending on welfare is just over 30% of GDP! Above OECD and EU21 levels, and only behind 7 other northern european countries, all of which are tradtionally high spending ones….so we *are* spending lots on welfare.

What’s your point?

47. Shinsei1967

Perhaps “spending too much” is the wrong question.

There is no such thing as “spending too much” per se but there is an issue with spending too much compared with what you raise in taxes.

As a democrat I have no problem with an elected government deciding to spending 30% or 40% or 50% or 60% of GDP on public spending, SO LONG AS that spending is raised in taxation.

The trouble with much of UK political debate is, as Polly Toynbee always says, “we” want Scandinavian levels of government spending but American levels of tax.

Over the last 50 years the amount of tax raised in the UK has been remarkably consistent at about 35% of GDP (in both high tax 1970s and low tax recent years).

Thus we get in serious fiscal problems when government spending hits 40% or above. As Gordon Brown recognised when, in his prudence and golden rule days, said that government spending should remain below 40% over the course of the economic cycle. As he realised spending much more than that would run into difficulties with raising more tax.


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