We already have a 'progressive consumption tax'...

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Bill Gates has responded to the Thomas Piketty wealth tax proposal by moaning that it's not fair. By which he means not fair on entrepreneurs and the like who invest their money in the betterment of the business or society:

Bill Gates frames his argument like this — if you have three wealthy people, one spending money on new businesses, one spending money on charity, and one spending money on luxury items for him or herself, the last one should be taxed more because the first two are contributing more to society.

Now I may be wrong here but Bill's idea already applies (at least in the UK where we have a value-added tax). And, even though there are fewer consumption taxes in the USA, that country gives generous tax breaks for charitable giving and exemptions for capital investment in new or existing businesses.

So, whatever we think of Piketty's policy solution (and I think it mad, bad and dangerous to know), it does have the merit of being an attempt to resolve what that economist sees as an essential challenge to our society and economy. Bill Gates proposal is one that favours 'charity' over consumption and investment over spending. And, this might be fine for very rich folk like Bill but for the rest of us it's a proposal for a tax on the pleasures of life.

So once more let's remind ourselves that we don't live to hoard resources, to invest in business or to have 'charitable' consumption put on a special pedestal. We live to consume.

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Should we end the subsidy of newspapers?

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OK I hear you - what subsidy? There is no subsidy of newspapers and nor should their be.  Except that some people believe that newspapers (and books, and children's shoes and jaffa cakes) are subsidised:

Dwarfing this is an estimated £4bn p/a subsidy on the direct consumption of petrol, gas and coal through a reduction in VAT from 20% to 5%.

Yes I know, this author - drawing on a piece of egregious research from some folk called Oxford Energy Associates - is talking about domestic fuel. But I guess that is no different from the zero rating of food, publishing and children's clothing?

The truth is that this argument - used again and again by green sorts to excuse the actual subsidy of renewable energy - is a load of old cobblers. A subsidy is where I give you money to reduce your costs not where I reduce your (and lots of other businesses') rate of taxation.  Unless, of course, that rate of tax is set to be negative when it is a subsidy.

We do not subsidise fossil fuels not even a little bit. We give producers tax breaks on exploration and development just as we give pharmaceuticals businesses tax breaks on R&D and manufacturers tax breaks on investing in new plant. And these aren't subsidies either. Neither is a hypothetical (and doubtful) estimate of the externalities related to carbon dioxide emissions. These may well be such externalities but their existence is not a subsidy.

If we're to have a debate about whether energy should be subsidised (it shouldn't be) let's have that debate about the actual subsidies rather than some make-believe ones dreamt up by people with a direct vested interest in the continuing subsidy of renewable energy and the promotion of a particular policy response to climate change.

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Fat taxes - targeting the preferences of the poor (again)

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Why do I never hear cries of anguish and anger from those who claim to champion the interests of the poor when the matter of nannying taxes on "junk food" arises.

"Fat taxes" would have to increase the price of unhealthy food and drinks by as much as 20% in order to cut consumption by enough to reduce obesity and other diet-related diseases, experts have said. Such levies should be accompanied by subsidies on healthy foods such as fruit and vegetables to help encourage a significant shift in dietary habits, according to research published in the British Medical Journal.

And the target for these nannying fussbuckets is to change the habits of the poor - to force them to eat more expensive, less pleasing (at least to them) food. And that this will be a "benefit" to those poor people:

Although the less well-off are affected more by health-related food taxes, they may also ultimately benefit because "progressive health gains are expected because poor people consume less healthy food and have a higher incidence of most diet-related diseases, notably cardiovascular disease"

The poor, ignorant chavs don't know any better do they - they must be shoved into a change of habits, into no longer eating the stuff they like to eat because a minority of them get unhealthily fat. There's no discussion as to why so people get so fat or how support from the medical profession might help such folk. No, we make these foods - what we might call "working class" foods - more expensive because we disapprove of them.

The New Puritan's first target is becoming clear - "sugary" drinks. And, as they ever do, the chosen approach is what we might call epidemiological creativity:

Research in America found that a 35% tax on drinks sweetened with sugar sold in a canteen, which added about 28p to the price, led to a 26% drop in sales. Studies have estimated that a 20% levy on such drinks in the US would cut obesity by 3.5% and that adding 17.5% to the cost of unhealthy food products in the UK could lead to 2,700 fewer deaths from heart disease

Read the above paragraph carefully and you'll see that, while it suggests a single piece of research, it really notes findings and "estimates" from at least three wholly unrelated studies. The first one shows that, in a controlled environment, if you increase the price of something by 35% you get a big drop in sales. Nothing surprising there then. However, the writer then eases smoothly into a "studies have estimated" statement about whether those price increases would reduce 'obesity'. This is what's known, in less high-flying circles, as a "guess" - indeed, a guess designed to fit the prejudice of the author.

This creative deception is then repeated with a second estimate, this time on reduced deaths from heart disease. Here we should note that the tax (one assumes VAT since the increase is 17.5%) is applied to all "unhealthy" foods not just to the sugary drinks referred to in the other half of the sentence.

The entire paragraph - I suspect lifted straight from a press release without question or challenge by Mr Campbell the Guardian's health correspondent - is designed to deceive us, to suggest that fat taxes will save lives whereas the truth is that we have no idea at all whether fat taxes will result in such a benefit. Especially when - as we know well - rates of heart disease have been falling, year-on-year for at least three decades.

Just as with minimum pricing for alcohol, these proposals - wrapped up in supposed concerns about obesity - are merely a pseudo-scientific manifestation of arrogant middle-class prejudice.

"Oh no, we wouldn't let our Jamie go to McDonald's"


"We only use natural fruit juices - we won't have Coke in the house"

And so on - these are the thoughts driving the fat tax campaign. It is simply New Puritan disapproval. So what if rates of childhood obesity are falling - something must be done. It you're going to eat burger and chips let is be hand-formed burgers using welfare-farmed lean rare breed beef and organic, hand-cooked chunky chips rather than a Big Mac and fries. So what if ordinary folk then can't afford to treat their kids - think of the health benefits!

We should stop and think for a minute about what all this means. Not just that introducing such a tax would be a "pasty tax" on steroids but that we are targeting the preferences of the poor for no other reason than that we disapprove of them. And this - while understandable in the righteous Guardian reader - is simply wrong.

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More unintended consequences: killing off the Royal Mail

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One of those little regulatory changes (from last year’s Budget as it happens) that rather sneaks up on us arrives on 2^nd April this year. The Government has extended to application of VAT to cover “bulk mail” and related services:

Changes to VAT law and the way in which our services are regulated have affected the VAT status of a number of our products.  A limited range of our services became subject to VAT through 2011, and this will extend to all bulk mail services from April 2012.

Now the government suggests that, because businesses are VAT registered they’ll be able to reclaim this and it won’t be noticed. But think for a second of the big users of bulk mail:

• Local government – all those Council Tax bills and other official bulk communications such as electoral registration forms
• Utilities – water, gas, electricity are all subject to a lower VAT rate or exempt
• Financial services – no VAT is charged on banking, insurance or related services (now there’s a blessing)
• Charities – direct mail is a central tool for charities to raise funds and keep their supporters informed
• Publishing – magazines, journals and so forth again carry no VAT

Now I don’t know about you but it seems to me that the big loser in all this will be the Royal Mail. The 20% increase in mailing costs will accelerate the move to paperless billing and statements for utilities, banking and other businesses. It may even prompt local government to look at the mail they send – perhaps consolidating or moving to electronic means.

One hidden effect of this change will be that some businesses – and especially those unable to claim back the VAT – will stop using targeted direct mail preferring to use cheaper mass leafleting. Meaning that rather than a personalised, specific appeal, we will receive general literature targeted using geodemographic profiling rather than real information.

That and it will cost local government a load of money that might have been spent on front-line services.

And, without a doubt, hammer another nail or two into the coffin of the Royal Mail.

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Why, if you have to put up taxes (and you don't), VAT is the right tax to raise

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Much noise has been made about the intention to raise VAT in January 2011. Now, I’d better start by saying that I’d rather the money came from spending reductions than from tax rises. But, if we’re to have tax rises I’d prefer them to be taxes on spending rather than taxes on working and earning.

The debate about the increase in VAT has boiled down to a rather sterile, ‘did-didn’t’ argument about whether the tax is or is not regressive. The argument goes that increasing VAT is really really bad because it falls hardest on poor folk who spend (rather than save) more of their income. The Labour Party produced some rather dodgy stats showing how terrible was this impost (and before anyone asks, the stats are dodgy for a whole host of reasons the biggest being a classic rule of metrics – not comparing two scales measuring different things – but I digress).

Now I’m absolutely sure that those who have high levels of saving pay a lower proportion of their earnings in VAT. But, I’m also sure that those folk (largely in the third quartile rather than the bottom quartile) for whom housing costs are proportionately highest also pay less of their earnings in tax. Indeed the VAT changes – relatively if not absolutely – are good news for those mythic “hard-working families”.

But yes, VAT does tend to be regressive. And, you know, I don’t care. The use of the tax system as a tool for social engineering is a moral affront – whether it’s ‘sin’ taxes on booze, fags and driving or a so-called ‘progressive’ income tax system. But worse – and this is important because economics is, of course, amoral – such uses for the tax system are inefficient. Progressive tax systems are less efficient at securing the funds needed for the government to deliver its programmes.

Worse still progressive systems are market distorting – the tax system sends out sub-optimal incentives that affect behaviour as people seek to maximise their post-tax income (a situation that can and does lead to actual and virtual international flight). Taxing spending is less likely to result in these distortions (unless – as is the case with booze and fags – special extra, market-distorting taxes are imposed) and is therefore fairer and less damaging to the economy.

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