What is a fair tax exactly
Politician often claim that their taxes and benefits are fair or those of their opposition are unfair, in fact this is the basis of the labour campaign, but actually is a fair tax?
It often seem that it is taken for granted that a fair country is one in which there is equality of income and that the tax system should bring this about by being progressive, ie the tax paid as a percentage of income rises with income, and that this is something that everyone wants.
Firstly lets see what the Oxford English Dictionary makes of the word fair
adjective 1 just or appropriate in the circumstances. 2 treating people equally. 3 considerable in size or amount. 4 moderately good. 5 (of hair or complexion) light; blonde. 6 (of weather) fine and dry. 7 Austral./NZ informal complete. 8 archaic beautiful.
clearly the appropriate entries are 1 and 2. Looking at 2 this seems to have two contradictory meanings when we look as income and the tax system. That is the if we treat people equally in terms of their income then we must have an extremely progressive tax system whereby when a certain income level is reached the tax is 100% and below that income level people are given benefits to make up the difference, almost a form of communism. However if we look at equality at the stage of taxation then everyone should pay the same rate of tax. Clearly both of these cannot happen simultaneously. Now the first definition seems in precise since to use it we will be required to look up the definitions of just and appropriate.
However, more importantly in political campaigning is what most people consider to be the meaning of the word fair. To help us understand this we should consider something much simpler than the economy, say a game of cards, such as snap. Most people would consider snap a fair game provided that nobody cheats but its not a game in which the outcome is always equal, in each game there is a winner and a loser, in fact if the outcome was always equal nobody would play it because the game would always end in a draw and quickly become boring.
So what is it that intuitively makes us think that a game of snap is fair? It’s that despite the fact that every game has a winner and a loser all the people playing have the same opportunity to be the winner or loser, that there are no rules in the game that favour one of the players over the others (unlike blackjack in most casinos). But a progressive tax system isn’t just a rule that favours one person over another it is a rule that after the outcome has been decided, ie after people have earned different amounts, then takes the winnings from one player and gives them to the another. It is the same as taking the cards that the first person to call snap has just won and giving them back out so everyone has the same number of cards again.
You may now argue that despite this a progressive tax system is fair because unlike a game of snap not everyone has an equal chance of “winning” in the economy. However there are two reasons why this is an invalid argument.
Firstly it assumes that your only “winnings” are in the form of income but people get enjoyment, satisfaction or whatever else they seek out of things over than money (in fact its only a small minority of people who actually enjoy earning money for the money itself and not for what it can be spent on or as a bi-product of what they did to earn it). For example one person may value a large house more where as another person may value leisure time more. Then the first person therefore spends more time working and resultantly earns a higher level of income in order to buy a larger house than the second person who takes more time off since that is what they enjoy. How is then “fair” to tax the first person for his use of his time whilst not the second thus causing people who both use all of the resources, in this case time, for what maximises their enjoyment to end up with different levels of enjoyment. And why not tax the second person some of their leisure time in order to pay for the first persons house.
Secondly, surely the aim of policy should in this case be to even out the chances of “winning” rather than using taxes to even out some of the”winnings” whilst leaving others like leisure time largely uneven.
A bank tax would be immoral
All the major parties are considering a bank tax of some form, though labour would only do so if there was an international consensus, but I think that such a tax would be immoral and against the basic principles that enable a free market capitalist economy to work. Here is why:
Firstly, free markets result in maximising utility, ie get the most out of the limited resources that are available, by using comparative advantage similar to that between countries in free trade. This means that everyone does what enables them to contribute most to society because this is aligned with what people are willing to pay them to do it. Ie) you empoly a plumber because the benefits to you of them fixing your pipes is greater than the costs to them of doing it and hence you are willing to pay him more than be would require to do it. However, if you introduce a tax on any particular industry you disrupt this balance created by the free market because although total utility may be maximised if banks operate as banks the tax would take away some of the incentive enabling them to earn more doing something that is less beneficial to the people paying them to do it, interfering with the balance of a free market.
Secondly is the much more important issue that you must consider in a democracy. Whilst in general a democracy is good since it means what is done by the government is what the majority of people want this only works with general policies. General taxes can be considered fair because they apply to everybody so people are voting for the taxes upon themselves as they recognise the services that they are able to provide as more valuable than the money they have to pay. However, if a majority votes a tax on a minority this is unfair because the people voting for the tax don’t have to face any of its consequences. It is no different to a white majority voting for discrimination against a black minority. People must all remember that everyone falls into some minority so if this is an acceptable way to vote their will eventually come a time when the majority is voting gain from costs that are felt by you but not them.
Licenses seem pointless. It seems the aim of a License is protect you from getting a rouge tradesmen, taxi driver but why do we need to make it illegal for anyone else to do work. Surely if you’re worried about the person you’re getting to do the work you could see if they are on an approved list, a list of those people who at the moment have a license, but if you want to take a risk and get something done more cheaply that should be up to you – it doesn’t affect anyone else if you suffer as a result of not taking advice given.
So we may now have reached the conclusion we don’t need licences but it doesn’t actually do any harm in having them. The reason we should actually get rid of them is they create a dangerous situation for a free market, that it isn’t actually free. To help improve competition and improve the quality and pricing of services you need to get as close to a free market as you can and this can only be done if firms are as free as possible to enter and exit a particular trade depending upon whether they think they can make a profit doing it, by being better or offering lower prices than the existing firms. Licenses prevent this since only certain people are allowed to enter the market.
They also create the problem of concentrating power on those who decide when the licenses are given out and if too few licenses are given out it can force up prices making things worse for the consumer not better.
Could health care be made fairer by privatising the NHS?
One of the main problems with the NHS is deciding which treatments should be offered, since it doesn’t have unlimited resources the decisions ultimately have to be made. What makes these problems worse is that while NICE can provide guidance it is up to the individual health boards (I think that it the right term) to make these decisions. This is a problem because individuals don’t get to choose what they treatments they would choose to receive and the spending can seem unfair.
So how would privatising help?
By privatising presumably most people would get some form of health insurance (I’ll come onto income inequalities affecting this later) whereby they pay so much a year for insurance and they get treatment if they need it. This is better as it allows individuals more choice, each person can choose which of the different treatments, etc they would rather have and indicate so to the insurance company which will then decide how much to charge.
This works better than the current way the NHS works because it allows each individual to make the decision for themselves, thus increasing “consumer satisfaction”, whereas in order to be “fair” the NHS has to make decisions based upon what it feels the majority wants, which means there is a minority not getting what they want.
How does this work when people are on different incomes
It would be quite simple to make this work for people with different levels of income, in particular people on low levels of income. All the government needs to do is simply take the money spent on the NHS per person and give it back to them. For people on lower levels of income this should be in the form of benefits, which can be spent on purchasing the insurance, and for people on higher levels of income it should be in the form of reduced tax, so they are no longer paying for services that aren’t being provided (I think that this should be a fixed reduction in tax, as could be achieved by raising the threshold for the upper rate of tax say, rather than a reduction in the actual rate of tax as a percentage of income earnt – though this does not form part of my argument in favour of privatising the NHS).
In this way people would be able to buy the same amount of healthcare, in monetary terms, as they do now though the increased competition from a private market should cause the quality of healthcare to improve. It would also allow for people to improve their health care, by spending more than the money they get back from the government, more easily. Though private healthcare exits at the moment people still have to pay taxes which contribute to the NHS so the amount they have to pay for an improvement is much greater than the cost of the improvement itself (as they are required to pay for all the things they already get from the NHS again).
Isn’t it a basic right to healthcare so why should anyone have to pay
Firstly people are already paying through their taxes and the proposed system of giving benefits to people on low incomes will protect their ability to buy healthcare.
Secondly this is in contradiction to the way the majority of our markets work, ie they use a free market. This is true even for other basic rights such as food, if you want food you have to pay for it and if you refuse to you’ll starve to death because it was your own fault (provided their is a sufficient welfare state for those who cannot earnt the required levels of income). If you are willing to pay for food then you should be willing to pay for healthcare. There is no argument that something needs to be provided for people who dont pay because that was their choice and a risk they are willing to take (somewhat similar to the way bankers who make risky decisions should have to face the consequences).
It would help remove negative externalities from activities such as smoking
By making people pay the health costs of activities such as smoking or extreme sports, in the form of higher insurance/medical bills, these negative externalities would be removed thus making these markets more efficient and reducing the need for government taxes on goods such as taxes. If people are willing to pay the costs of extreme sports then anyone else has no right to complain and it is an example of the free market making the decision that would most benefit society. In the case of smoking the taxes could be reduced since some of the externality is accounted for by the market, though some external costs remain such as the effects of passive smoking, reducing the level of government interference in the markets.
What about the care for people with higher costs of treatment through no fault of their own
This is the main problem I can foresee. If someone gets cancer, is physically disabled or has a strong likelihood of having a medical condition in a free market the insurance would be higher through no fault of their own so they would receive a lower quality of treatment than they would from the NHS with the benefits/lower taxes. I can think of two ways around this though neither are ideal.
Firstly the government could provide additional benefits for these people so they could get the required level of care, in order to provide the least possibility for the government to attempt to make the decisions we are trying to avoid from the first paragraph this would have to involve a formula to calculate the additional costs using data from a selection of insurance firms (perhaps finding the average percentage increase in insurance of the top ten most popular firms using a weighting based on their popularity). However this still requires some judgement by the government, and a body set up to do the calculations, on what conditions are a persons own fault and hence whether they should receive treatment (should someone injured in a car accident which was not their own fault get it as they didn’t cause the accident but chose to drive a car knowing the potential risks. If you decide they should then what about someone playing sport or smoking. The questions is what is the level of risk where it becomes your fault you got injured for taking that risk).
The second option is that insurance companies are not allowed to ask for certain information, on genetic disorders for example, and hence cannot raise an individuals insurance costs based on it. However this isn’t a free market as the insurance companies aren’t free to price however they like which is less then optimal.
Further benefits to a private system
In addition to the benefit of individual choice offered by a private system are the usual arguments that there would be improved efficiency and therefore a higher quality of care for everyone. This is also more likely to work in the healthcare industry then other that have been privatised, such as energy and phone lines, because the healthcare isn’t a natural monopoly (there is no reason why two firms can’t be as efficient as one where clearly it is inefficient to have two sets of telephone lines running parallel)
Will breaking up banks help?
Breaking up banks would help prevent another “credit crunch” for two reasons. More competition would mean customers at the banks would have more choice if they decided to leave a bank that they though was being too “risky” meaning they would be more able to influence their banks behaviour. Secondly smaller banks could be allowed to fail and it would acceptable to allow them to.
Competition
Currently the banking market is oligopolistic competition, which means that it is dominated by a small number of large firms. This tends to lead to an avoidance of direct competition (not through any form of illegal agreement just as an unavoidable consequence) and causes firms to copy what their competitors are doing whether they think it is right or not. If one bank starts to do something different and it causes them to gain customers in the short run other banks will copy (even if its bad for everyone in the long run) or if they lose customers the original bank will probably go back its old ways.
However with a greater number of small banks this is avoided as the banks customers will be more able to change to a different bank offering, for example, a different level of risk so the banks will be forced to compete in a way that will benefit the consumer and will therefore likley lead to a fall in the levels of risk taken by high street banks.
Banks can be allowed to fail
If there are more smaller banks then we could let them fail as a result of making bad decisions without a large impact on the economy. This would encourage banks to be more sensible when taking risks and would also allow a greater range of risk levels for banks – some could be high risk with high returns whilst others the opposite – leading to greater choice.
One of the problems with the banks looking like they were going to fail before was that people had all their money with the bank and it was seen as unacceptable that members of the public should lose their money because of “bad bankers”, but this only makes sense if there was a lack of competition. If there are lots of banks at different levels of risk and you choose to go with one which subsequently fails its not a bankers fault for losing your money because you trusted them with, because of higher returns, over saving it with another, less risky, bank.
It seems were out of recession :(
IT looks like the UK is now out of recession with positive growth of 0.1% but fear not this may not bet true. 0.1% is a tiny amount of growth and since the data on GDP is hard to collect the margin for error may be much grater than this meaning we could still actually be in recession, the figures for growth usually get revised as the ONS collects more data and can give a more accurate estimate of growth (though the last few times this change has been to increase growth rather than decrease).
The return of VAT to 17.5% may also be partly responsible for growth, at least thats what the goverment seemed to be claiming it would do before, and since this increase will only happen once the “rush to buy before prices” rise will only happen once. Infact this could damage GDP for the next quarter since people who bought before the VAT rise will have be people who were going to buy now so spending now will fall slightly.
Anyway whilst we seem to no longer technically be in recession 0.1% growth is still very low and it seems quite possible that we could slip back into recession, or at least negative growth for 1 quarter, with badly planned fiscal policy (caused by short-termism by the government during an election campaign) or an interruption to fiscal policy which it seems would be likely to happen if the government in power changed (not through the fault of either the outgoing or incoming government’s, simply that they would have different policy and thus fiscal policy would have to change).
If you want the recession to continue in order that prices will begin to fall again and houses will become affordable STOP SPENDING NOW and begin saving for the ridiculously large deposit on your mortgage your going to have to pay if the recession doesn’t worsen a bit more.
Cadburys Takeover: why we shouldn’t care
People seem to be complaining that a foreign company has taken over Cadburys and we should have more control to stop British firms being taken over by foreign companies. However, to me this doesn’t seem right since the only way in which Cadburys is “British” is that is based here and not that it is anyway owned by the British public or the goverment. The people who do own the company are its shareholders so it is up to them whether or not they decide to sell the company and whether they do or not is none of our business since we have no claim to the company.
What I don’t understand is how just because a company has been based in a country for a long time suddenly means that the people in that country think they have a say in what happens to the company, over and above the people who have built up the company from scratch or the people who have invested this own money in owning the company.
Scrap the TV License
It is strange that in an economy where competition is encouraged and monopolies are avoided and regulated the BBC can maintain its legally enforced monopoly over the TV broadcasting industry. The problem is not with the BBC or the way that it funds itself it is simply with the fact that a TV licence is compulsory whatever channels you are intending to watch. This makes it extremely hard for competitors since their audience is already paying a subscription to the BBC.
Main Problems
- Consumers may want to watch TV but not the BBC but still have to pay for the BBC. This means tha the amount consumers are required to pay exceeds the amount that the other channels need to supply the service creating inefficiency in the market.
- It destroys the market for non-advert TV since no one can enter a market where the consumer is forced to buy their rivals product if they want to buy theirs. This will lead to a fall in the quality of non-advertised TV since the BBC has no incentive to improve.
Solution
What I can see as the simplest solution is to make the license fee and optional subscription to the BBC. People who want to pay it (probably most people) can carry on paying as normal and receive the BBC with no adverts but people who do not wish to pay can still enjoy the other channels but cannot access the BBC.
Raising taxes could worsen the budget defecit
It is given that something needs to be done to reduce the massive budget deficit and start paying off part of the governments debt. One possible option is raising taxes but this may not necessarily work. This is because whilst raising taxes would increase revenue for the government if people didn’t change their behaviour, higher levels of tax will reduce peoples incentives to work and reduce their ability to spend which could eventually lead to a fall in tax revenues.
Why tax revenue could fall:
- People will have less incentive to work so may end up paying less tax. If the percentage fall in income from reduced work is greater than the percentage increase in the tax then the amount of tax being paid will fall. Clearly this means the higher the starting point for the new tax the more likely this is to occur.
- A higher level of tax will mean that disposable incomes will fall so that people spend less reducing GDP (therefore leading to joblosses or lower pages and lower corporation tax revenues) and VAT revenues.
How to decide – Laffer Curve
So does this mean cutting taxes will always raise more revenue? No. Clearly if you tax at 0% you wont raise any money since your not taking any but you also wont at 100% since no one will perform any transaction since all the profit will be taken from them. This leads to the laffer curve which is a graph of tax revenue against the tax rate. It starts a 0 rises to a maximum revenue and then falls back to 0 at 100% tax as shown below.
Laffer curve showing the tolerable rate of tax T
The diagram shows a tolerable tax level,T, where tax revenue is maximised. If we are at point T the goverment should do nothing, if we are at B it could raise more revenue by cutting taxes beacuse of the reasons outlined above and if we are at point A it should raise taxes. The question for the goverment is where does it think we are?
Should Students Pay Tuition Fees
There is discussion at the moment about whether student tuition fees should be increased to £5,000 but I think people should also be considering whether or not they are reduced, possibly even to 0. People argue that since it is the student that gains from earning more from their degree then they should be the ones who pay for it. However, there are three problems with this:
- The students don’t have the money to pay for their degree when they are studying them.
- Because the tax system is progressive then the proportional increase in taxes paid is much greater than the proportional increase in the taxes paid. Not to mention the fact that in absolute times the cost of the tuition fees is repaid many times over in the additional taxes that a person earns.
- The economy as a whole gains from a more highly educated work force since they are more productive in working in industry etc.
Point 2 is the most important. If we suppose that the level of income to pay 40% tax is £30,000 and that there isnt a tax free allowance (a tax free allowance would make the system more progressive and therefore strengthen the argument) and all other income is paid at 20%. If our student was only going to earn £30,000 before they would pay £6,000 but if going to university doubles their income to £60,000 they would now pay 3 times as much tax, £18,000, even though they have only doubled their income. As a result the percentage pay off to the government is greater than it is to the student and the government should therefore contribute to the costs.
How they Should be Paid For
The problem if we decide that the government should pay some or all of the tuition fees is how it would be able to afford the increased fees. What I think is the est method would be to reduce the number of university places available or at least have a smaller number of them which the government pays. This would not only reduce the bill which the government would have to pay for the fees but it would also increase the value of degrees since only a small number of people have them.
If the goverment wanted to avoid the cost of paying for the tuition fees now and only pay for it when they were receiving the higher rates of tax from the graduates then they could allow for the tuition fees loan to be offset against the graduates income tax at a certain rate a year. Say for example the graduate had a tuition fees loan of £10,000 and was paying £5,000 in tax in a given year then the tax could be reduced to £4,000 to allow the graduate to pay off £1,000 of their loan.
Why the number of places could be reduced
The purpose of higher education for most people is one of the following:
- To provide a higher level of education so that the students can perform a specialised job, eg) medicine or engineering
- To enable students to differentiate themselves from each other and demonstrate a level of intelligence which will improve their chances of employment (whether they actually use their knowledge or not)
- In order to go on to do a PHD and research.
The UK economy only benefits from people in group 1 since they actually need their degrees to do their job. People in group 2 use their degree to prove their ability in order to get a job but dont actually use anything they have learnt to do the job and could therefore do it equally as well had they not spent 3 or 4 years studying for it. It seems the majority of people eventually end up in group 2 even if they start off in group 1 since they may find that they are actually better at something else or they can earn more by moving into management, this is also reinforced by the fact the economy isn’t perfectly aligned with our academic subjects.
Since only a fraction of the jobs lie in group 1 we don’t have to worry that a cut in student places would damage the productivity of the economy and since group 2 is about differentiating people it doesn’t make sense to have too many people doing a degree else they wont be any different. Over all the number of students could easily be reduced without damaging the economy or peoples incomes.
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