Thursday, July 30, 2009

A Criticism of the Taxpayer's Alliance's "Tax and Entepreneurship"

Since getting in to politics I've spent a fair bit of time reading policy reports of various sorts, some are long winded and tedious, some are quite insightful and offer up good ideas. The most recent one I've read though is the Taxpayers Alliance report "Tax and Entepreneurship" and I have to say that it's a work of utter drivel.

So, let's start with the main findings of the report on how the tax system affects entepreneurship:
  • It may reduce the amount of capital they can access from their own wealth or their family. In particular, existing research suggests that receiving an inheritance leads to higher levels of self-employment. Inheritance Tax, in particular, may reduce the extent that entrepreneurs can obtain finance without the risks that come with a bank loan.[their highlighting]

  • The tax system undermines the large rewards that justify the risks attached to starting a new business. Indeed, further to this they state that under the present system suffer a marginal tax rate of around 90%, introducing the 50% tax could increase this to 92% and even using Entepreneurs Relief they still face a marginal rate of 86%.
Harsh stuff, but let's examine these two ideas a little more closely.

Inheritance as a source of capital
The argument here is that starting a business requires some form of initial investement and that the lack of this initial investment is a hurdle to many intent on starting a business. There is a lot of literature to back this up including the one quoted by the report, "What makes an entepreneur?" by David Blanchflower and Andrew Oswald. Inheritance here is viewed as a way of providing this initial capital without the risk attached to a bank loan, inheritance tax reduces this and thus reduces the amount of starting capital.

There's a few obvious observations here, the first is that the effect of inheritance on self employment is still not especially substantial, for example, Table 3 on the Blanchflower & Oswald paper (page 34 on the PDF) shows that in 1981 a 23 year old male who had recieved no gift or inheritance but lived in the South East would have a 16.3% probability of being self employed, an individual in Scotland who had inherited £5,000 would only have an 11.7% probability of being self employed. Table 4 (page 36) shows that for older individuals (age 33) an inheritance makes only a small difference. The general conclusions from the paper seem to be that while inheritance does increase the likelihood of self employment, it is far from being a major factor. A second point here is that inheritance tax only affects a small number of estates (around 7% I think), very few new entepreneurs are likely to benefit from such a tax cut. In addition, for the a majority of entepreneurs, an investment of this kind of magnitude is often not necessary. Table 3 in Blanchflower & Oswald emphasises that relatively small inheritances (£5,000 in 1981(£) which is between £13,400 and £27,300 in todays money according to measuring worth).

The obvious conclusion here is that while an inheritance is likely to be a positive influence in terms of encouraging self employment, it tends to only have a small effect. In addition the kind of inheritances needed to encourage self employment are not especially large. The case for inheritance tax as a barrier to entepreneurship in this instance is not made.

Marginal Taxes
As far as the numbers go here, I can give you a short version or a long version.

The short version: The numbers in the report are completely meaningless.

The long version: The calculations in the report appear to have been taken from this blog post by Greg Mankiw (a Harvard Economics Professor). He devised a formula that went along the lines of:

(1-t1)( (1+r(1-t2)(1-t3))^T )(1-t4)

Explanation t1 is income tax, t2 is corporation tax, t3 is capital gains and t4 is inheritance tax, r is the rate of return and T is the number of years. The TPA use t1=0.40 t2=0.28 t3=0.18 and t4=0.40 a return of 10% and a time in years of 35 years. There are so many flaws with using a formula like this, so I'll point out some obvious ones. The first is that it completely ignores tax thresholds which are a pretty vital part of any calculation, the second is that capital gains don't fall under income tax so the income tax component of this completely irrelevant.

Further to this, the numbers that you get out of the formula depend entirely on the numbers you put into it, for example the 90% marginal tax rate that the TPA use depends entirely on their choice of 10% yearly growth of the business over a 35 year period. The resulting tax rate varies depending on whether I use a different time period, as shown below.

Or alternatively if I use a different annual growth figure.

The resulting marginal tax rate depends entirely on the figures plugged into the formula, the size of the figures is simply a consequence of the exponential growth that you get when you do compound interest calculations. And of course this completely ignoring the fact that most businesses are unlikely to grow in the exponential manner suggested. The whole calculation is of little relvance to most entepreneurs.

And In Conclusion...
There are a few other little gripes I've got with the contents of the report, but from what I've demonstrated above I think it's safe to conclude that. A) The benefits to entepreneurship from a reduction in inheritance tax are minimal at best B) The marginal tax rate figures derived in the report depend entirely on the figures plugged into the initial equation and are almost completely meaningless. What we have here is a report that draws conclusions based on incredibly shakey reasoning and really exists for no other reason than to attract positive press coverage for a bunch of policies that will benefit the well off.

Monday, July 27, 2009


Just been unable to find the time to blog, however I've noticed a piece of utter drivel from the Taxpayers Alliance that deserves to be ripped to shreds, so I think I might have a crack at that.

Just, not right now.

Sunday, July 19, 2009

Korea and Capitalism (Or if you prefer "Fraser Nelson is an Ignorant Tosspot")

I was reading a little piece by Fraser Nelson discussing James Purnell's leadership platform (please god no). What amused me was this little snippet:
6. But he's still stuck in that 1994 cul de sac of "Market Socialism". "It's not a phrase that is ever going to inspire a political movement but it does capture a lot of what I believe – that markets are a good means to spread power and create innovation but they can be yoked to leftwing goals and not to capitalism." This is a well-worn staging post on people's journey to conservatism. If he does enough research at Demos, he'll come to realise that "leftwing goals" -ie, fairness, poverty reduction, etc - can never be achieved by leftwing means. This is the great tragedy of leftism: all that energy expended by all those well-meaning people, all wasted. Such goals are best achieved by capitalism. Ask China. Or Korea.
I'm amazed that this kind of drivel is what passes as "Champagne for the Brain" among rightwingers. Capitalism has come in many flavours, Korea's for example involved quite heavy use of measures that many might think rather left wing. Take this little snippet from "Industrial Policy in Action - The Case of Korea", a chapter in this book:
As soon as it came to power the Park regime moved swiftly to prepare the institutional grounds for a political-economic agenda. One of the first moves was to nationalize all the banks and thereby gain control of the financial flows in the economy.
Need I say more?

Tuesday, July 14, 2009

Yet More Thoughts on Norwich North

I had a conversation yesterday with a colleague that went something like this:

Colleague: Bet you're really glad you're not the candidate, it looks like things are getting really vicious
Me: I take it you got a Lib Dem leaflet through the door
Colleague: Yep

I've got to say that from what I've seen of the leaflets, by far the most vicious and nasty campaigning has been that of the Lib Dems. In particular, they seem to be targeting the Greens with a hell of a lot focused on Rupert Read. I'm not surprised by that at all, when the Greens came riding into Norwich the first wards they conquered were the Lib Dem ones (I was living in Nelson ward when it first fell to the Greens).

Whatever I might think of the Tories and the Greens (and even for that matter UKIP, Craig Murray and the various others) I think it's safe to say that all have run clean (as much as is possible) campaigns. The Lib Dems on the other hand have been vicious, dirty and underhanded. Personally, I think they'll pay a high price for it.

Sunday, July 12, 2009

Pragmatists vs Ideologues

Who says this?

So what is it with the church and the political Left that it attracts people only too keen to judge others’ beliefs? I guess it comes from the fact that both Christianity (and any other religion) and socialism are based on faith — faith in God or, in socialism’s case, faith in the basic good of mankind, in moral absolutes and in economic concepts. Once those beliefs are codified and acknowledged as The Truth, it becomes easy to identify those who stray from the One True Path.

The political Right is blissfully unencumbered by such rule books, preferring a more pragmatic approach to politics.
It is of course, Tom Harris MP and I have to say I really don't get this whole battle of the pragmatic righties vs the intransigent ideological lefties. I'd have to say that further to this I find it rather depressing that a Labour MP seems to swallow this particular piece of rightwing mythology hook,line & sinker. Especially since it seems to me that the right have been equally guilty of putting ideology before practical concerns.

For example, I as a muddle headed, ideological leftie believe that the pricing signals of the market can be useful in the unconcious coordination of economic activity but believe that it is a thoroughly foolish to put believe that such unconcious pricing signals should be the primary determinants of how economic activity is coordinated. This view of how markets work seems, to me at least, a far more practical way of viewing the activities of the market than the right wing view which seems to ascribe the market almost supernatural wealth creating powers.

I would also argue that they have too much faith in the benefits of competition. For example, I would argue that the introduction of competetive tender in certain services such as hospital cleaning introduces a lack of flexibility and accountability to the service due to the arms length relationship between the contractee and the contractor. I would follow that up by pointing out that there is little scope for increased productivity through innovation in this field meaning that only scope for financial savings can be found through lowering the cost of labour. Essentially the only thing opening such services up to competition ever did was reduce the wages of some already very low paid workers, the benefits from competition in such a situation are minimal.

The point here is that the right is equally guilty of putting ideology before practical considerations, as left wingers we are often apalled by the political consequences of many rightwing policies. The counterargument usually presented by the right is that while the political consequences may be undesirable, the policy is still worthwhile because of the practical benefits (it saves money, promotes gowth, creates wealth etc). I do think that far too often we give these claims of pragmatism the benefit of the doubt, in truth we should be far more skeptical of these claims.

Friday, July 10, 2009

Uh Oh...

Not happy about this, not happy at all. Needless to say this somewhat dampens my previous enthusiasm.

UPDATE: Since I notice the Lib Dems are linking to this post, I want to make it clear that this post should be treated as an instant reaction to finding out about Chris's previous party affiliations. I will not be pleased if my remarks are quoted out of context. For the record I think that despite his past I still think he will make a far better MP than any of the other candidates.

Wednesday, July 08, 2009

Warning: This mortgage could seriously damage your wealth..

From here:

Alistair Darling will sketch out plans tomorrow for a health warning system for financial products as the government seeks to show that consumers will benefit from the Treasury's wide-ranging revamp of the banking industry.

Alistair, all I can ask is: WHAT THE HELL WERE YOU THINKING!!?

When faced with a gigantic problem of a nation with huge amounts of consumer debt, driven by excessive marketing of financial products you do not go for a solution that:

  1. Duplicates existing regulation - Most financial products already require quite the seller to make quite clear exactly what they are buying into.

  2. Will not be particularly effective - Is a government health warning really going to drive home the financial consequences of, say, taking out a mortgage.

  3. Reinforces the exisiting, patronising nanny state image of this government.

I'm not sure what to say except this is a really stupid idea.

Tuesday, July 07, 2009

More Thoughts on Norwich North

I've just come from a reception at Labour's campaign HQ in Norwich North and I have to say that I really was impressed. Hanging over Labour at the euro and council elections was this awful atmosphere of defeatism. In what I saw today there was none of that, instead, there was a newfound enthusiasm in the air.

Having now met our candidate, Chris Ostrowski and soaked up the incredible atmosphere of enthusiasm among the various campaigners, I've got a really good feeling about this election. I really do think that Labour stands a good chance of winning the election.

Sunday, July 05, 2009

Green New Deals

Tim Worstall reckons that a Green New Deal will make us all poorer, and cites this report on actions taken by the Spanish government to encourage renewables as justification for it. On the face of it it all looks pretty damning:

7. The study calculates that since 2000 Spain spent €571,138 to create
each“green job”, including subsidies of more than €1 million per wind industry
8. The study calculates that the programs creating those jobs also resulted
in thedestruction of nearly 110,500 jobs elsewhere in the economy, or 2.2
jobsdestroyed for every “green job” created.

Harsh eh, on that kind of assertion I don't think that anyone would back the idea of a green new deal. It's not until you take a closer look at the paper and how it calculates the figures that you realise that all is not what it seems and in fact this particular assertion is little more than mickey mouse mathematics combines with a little unthinking neoclassical economics.

The report derives a figure for the cost of a green job using the following calculation:

cost of green job = (total subsidy / jobs created)

And comes up with a figure of €571,138, it then makes a comparison based on the average capital per worker between 1995 and 2005 coming up with a figure of around €259,143 it then does the maths of dividing the subsidy figure by the capital figure to argue that for every green job created an equivalant of 2.2 private sector jobs could have been created. It then does a similar comparison with the productivity per worker vs subsidy per worker and achieves similar numbers.

There are a number of counterarguments to this logic:

  • First, it has to be asked whether it should be expected that a job created in what is essentially an infant industry can be created at the same capital cost as a private sector job. A new industry is likely to have a higher cost due to the need to learn about the technology and the processes behind running an entirely new business. It is therefore not entirely unexpected that the cost of creating a green job was initially higher.
  • Second, the measurement used by the writers of the paper makes no asessment of the relative values of the jobs created. It could be argued that the highly skilled nature of the work in creating hydro-electric, photovoltaic and wind energy would mean that they require more capital than a worker in other sectors. Even if we accept the assumption of the authors that a job created in the green energy sector will mean jobs not created in the private sector (which I do not) it could be argued that the creation of jobs as Hydroelectric Technicians is worth more than the creation of twenty two jobs as, say, waiters.
  • Third, the argument that a job created in one sector means a job (or jobs) not created in another sector is in itself flawed since it relies on the assumption that the private sector is instantaneously able to respond to the additional availability of resource and create jobs in the appropriate field. This is not the case.
All in all, despite the shocking numbers quoted here, theres little reason to believe that the Spanish Green New Deal had anything like the shocking negative effect on jobs mentioned in the paper.