Wednesday, 27 November 2013

Some thoughts on national economics

I've been thinking recently about how to design an economic system that might actually work for both a nation and it's citizens. It's too early/late to do this with any real form or structure, but some of the ideas have been floating around in my head whilst I was trying to sleep so I thought I may as well get them down.

The problems are apparently legion in the UK. Our productive base is too low, our skill set is limited and the government coffers are bare so it is impossible to drive investment (or so the thinking goes) from a national level. Now the last is a particular issue for me as I personally believe in relatively high amount of nationalised industry and infrastructure being essential if a nation is to work for all of its citizens. As such a lot of my thinking is around taxation, and how to raise this (and all government income) to provide for the level of service I think would be desirable.

With that said, the first thing I would do would be to introduce a tax cut for some of the highest paid. Don't worry, I've not just suddenly turned into a conservative. The elimination of the personal allowance strikes me as unfair and hides a large marginal tax rate, so I would get rid of that in the aim of simplifying the tax code. This would be followed by a reinstatement of the 50% threshold at £150k. I've not run the numbers on this, but expect it would be largely neutral in terms of revenue. I believe there would be scope to increase the high earnings threshold further than this (there have been some studies recently that suggest the peak of the Laffer curve is anywhere between 55% and over 80% depending on if the additional salary drawn is a form of rent-seeking) and would point out to those against such an argument to the link between the UK's economic performance in the last three years and FTSE executive pay.

Land is a fixed commodity in the UK, and any use or ownership of it should be (in my opinion) taxed. While this concept may cause a lot of people to flinch, it is something that already happens via council tax and business rates. One issue with those though is that the rates are localised and (in the domestic case) the scale is effectively regressive accounting for a higher proportion of the living costs of those of limited means compared to those earning more. An LVT based on the land's rental value will aid this. There would probably have to be some safeguards in place for the elderly who now lived in houses where the tax was unaffordable. This could come (for example) in the government paying for the tax via an inflation linked loan, repayable when the house was sold or the occupant died.

There would be a system of penalty for idle ownership of multiple homes, or of land that was viable for development that remained undeveloped. In the former case, things like private rental would have to be accounted for as a protection. A suggestion would be to have to prove that the property was occupied via private rent for at least 180 days via rental invoices or contracts. Where this condition wasn't met the rate of tax on that property would be doubled, or at least increased by a percentage. There (for me) is no room for the government to force land-owners to develop, but the tax system is not just there as a means of raising income, but also for providing incentives for behaviour (bear this in mind as I continue). Thus, the longer idle undeveloped land is held the rate of tax would increase on a sliding scale.

Also on property, I would get rid of stamp duty for property sales and instead charge capital gains tax on the profits made from the sale of every property. This would function as a counter-cyclical brake on the housing market. If prices were rising too fast, the disincentive of CGT would cool it slightly. In a slow market there would be no tax levied on house sales which should stop the market drying up entirely.

Now to corporations, companies and employment. There are a lot of conflicting arguments about this, and they are often all couched in terms of absolutes. The problem is that the economy is made up of lots of companies of varying sizes who would be affected in very different ways by the same arrangement. But as the range is continuous, it would be impossible to tailor a two tier system without harshly punishing people close to the divide. For example, an argument against the minimum wage (and one I have some sympathy with) is that a small cafe in the North-East may become nonviable if they have to pay all staff a calculated living wage based on national averages. However not having a reasonable minimum wage enables those that provide capital to exploit those that provide labour where there is a labour surplus.

It's a difficult square to circle. How to allow smaller businesses to stay afloat in tough times, while ensuring those that can exploit weaknesses and loopholes in the economy pay a far share of tax. Instead of looking at an raising an absolute minimum wage, perhaps it would be better to leave that as it is, and instead look at enforcing payment ratios onto large companies. This would mean that if the ratio between the annual salary (after bonuses perks and the like) of the highest paid executive was more than a certain multiple of the lowest paid in the company, that company would be penalised through the tax system.

You may well be asking how this is possible, given that the complicated tax arrangements of the largest corporations means they pay as little as a tenth of a percent of earnings in tax. Dealing with that is also essential, but probably beyond the scope of this post. Instead I would propose a 'fine' of a tenth of a percent of UK turnover (defined, for example, as a transaction where at least one of the parties was domiciled in the UK) for every multiple above the limit. The highest paid in this scenario would be the highest paid in the company full stop. For this exercise we would only be looking at the lowest paid in this country. So if the multiple limit was 100x (for the sake of argument) and the true multiple was 110x, then the company would be 'fined' 1% of it's UK turnover, regardless of their P&L figures.

That isn't exactly the problem solved in it's entirety, but it is as far as I'm willing to write tonight. A further night of insomnia in the future may lead be to add to this via another post.