We stand at a unique point in modern times when two new western European nations may appear within the next five years.
New nations, Catalonia and Scotland, demand new solutions and they could well look at the balance between taxes, labour policy and welfare spending through new eyes and adopt novel approaches.
The Taxing Question…..
Traditional Neo Conservative theory states that the lower the taxes, the greater the growth in the economy and the greater the wealth of all in society. In reality all capitalist economies are actually characterised by trickle up. Capitalism is the accumulation of wealth in capital hands, be that an expanding number of citizens or not in society.
On the other hand traditional democratic socialist theory states that this accumulation of wealth in few hands is a process which inevitably empoverishes the proletariat. High taxes on the highest incomes are the best means of addressing this imbalance because the accumulative, pyramid of wealth. On the plus side for the economy in olden days, the super rich were rather nationalistic and country bound and had to work harder to make their cash it could be said, and you can see that effect today in oil lake economies like Norway and Saudi Arabia where the super rich need to invest a lot to avoid taxes and to make money.
However of course in reality these two extremes within parliamentary societies have too much of a down side. Enter then the social democratic parties: modern labour parties in Scandinavia, the Democrats in the USA and the other social democrats and watered down socialists around the world. They have adopted in fact a Neo Liberal model for a growing, enterprise economy with moderate taxation. So they want the best from Capitalism in growing the overall economy, while skimming off enough tax from that to pay for what are socialist welfare policies.
Things Fall Apart……
The trouble is that Capitalism evolves in odd, irrational ways in its pursuit of the multiplication and accumulation of wealth. Both in the 1929 and the financial credit crash of 2008, it fell upon its own sword of freedom, when that became anarchy and a bubble of deciet and lies which imploded. I am sure Trivsky and Kehnann were born at exactly the wrong period between these two events to have actually helped hinder them or inform us on why they happened from their Ivory towers.
Also the trouble with even tame social democratic public spending and welfare state programmes is that they are victim to vagiaries of the current day economy and worst of all the demographics of ageing populations in the west. Only the oil economies can salt away enough money to span any slow downs in the economy, or address actually having a national pension fund.
Forward to the latter paragraph, it seems Sweden and the UK are doom sayers in respect of their envied welfare states due to these factors- lack lustre economic growth over the two decades where the current pensioners worked out their years, and new workers didn’t increase GDP enough. This however is how you want to frame it. You can say that these economies are so large today, that the modest Neo Liberal period growth is actually larger in real terms that those of the 1950s and even 60s. If you take some forms of inflation, RPI/CPI , then also you can say that we have a situation where two to three percent growth is worth a multiple equivalent to the best years. However taxation is far lower. So we need to cut tax to stimulate the economy to bring in more tax to pay for a given level, which is cut anyway.
The net result is these economies hitting the buffers of dissatisifaction. A good proportion of society who own businesses or fluid capital assets have done wonderfully well from both social democracy and centre right coalitions across Europe. However very many were not doing all that well, with mediocre wage rises in the face of real inflation in real living costs far outstripping CPI. Today we only spend about a fith of our income maximum on goods and produce covered in the CPI (former RPI) contra the days when we used about a third on it. So we could have far higher retail price inflation without it making as much a difference as the main costs which are housing, transport, and grouped together university debt and vanity. More of us went to university and now we demand nicer, posher toys than before. 900 pounds for a phone with some games on it? Are you mad they would have said in 1980.
Dissatisfaction is high with the status quo, across many countries, but those with the most right wing controlled media funnily enough manage to spring radical policies which lead to as much uncertainty as they do create clarity. Simple solutions which offer change, when the status quo is a higher risk option. That is why Hilary failed, and why Remain failed.
Optimising Tax to Maximise Revenue
There is of course an area of equillibrium when it comes to income tax and any taxes related to those who sit on investments and property, or just live in a huge pile in the countryside while only paying nominal local rates.
Tax too hard and people avoid paying it, tax too little and you loose income which in fact you do not make up in VAT and economic growth when it concerns the top 30% of salaried workers or the super rich. They just do not spend a multiple of what an ordinary person spends in the economy, and more often they affect the property market via investment in buy to rent or business property, which is an inflationary pressure to the rest of us hoi palloi.
However higher rate tax payers make up a very large proportion of total income tax revenues for the UK exchequor. How much and how that then relates to total taxation is not somethign I remember off hand. But you have to take into account that these salaried folk on 60 grand or more are by number biased to the public sector. GPs earn now around 100,000 pounds, the same for various ranks in the armed forces and senior civil servants. We then also have armies of consultants working for enterprise bodies and other parts of government, hospitals included. So a very large amnount of that money, ourside the city of london and the North Sea, is circulative!
Under the Thatcher years the Neo Liberal doctrine seemed to be working very well, because in fact total tax returns grew markedly. However if we subtract North Sea oil and the effects of BIg Bang on the CIty, and the revenues from privatisation, we get a different picture. It still shows that revenue went up, in line with earnigns. Yet if you take income tax alone what happened? It is more unclear. If we look at VAT which is the Tories’ favourite sneek tax, was the UK actually taxing credit card purchases ?
Luckily England has The City and its regional ring effects via institutions and banks like the Norwich Union and so on, down the the IFAs who sell the lions share of financial products to consumers and businesses. Luckily too Scotland has a slice of this investment ‘over spill’ and the North Sea where average wages are twice the national average wage.
There is then a line where discretionary income rises to when consumers would have to have very lavish lifestyles to spend that money, and being Scots, many of the highest paid are canny and perhaps looking at early retirement, or investing in property and trust funds for their offspring rather than in consumption and investment in productive enterprises. Here we come into the leverage effects raised by Nick Hanauer and Warren Buffet. Also that it has become so attractive to invest in the ‘rentier’ side of the service and property economy rather than in production or value adding processes.
Investing in Productive Enterprises, Personal Well Being and Value Adding Services
There is a line between where the ‘rentier’ economy based on property and services which we all need, and that which multiplies value or adds a distinct value to society which assists our productivity, output or just well being and health.
In the rush to deregulate financial markets, investments and businesses the UK has missed a big trick in not realising that rentier economic investment is inflationary and reduced productivity in society as a whole as a net result of being in a lean efficiency, and maximising prices that can be extorted in a captive market. We see too much price parity and ‘cost plus profit plus admin’ financial models for the private utilities and even within retail.
A future Scotland or Catalonia could do well to examine how taxation is differentiated between productive activities and the rentier economy. There is no fine line between ‘services’ and ‘manufacturing’ in reality. Service engineering – refurbishment and upgrades, are now worth more than new build in the North Sea sector for example. Where does an ordinary car mechanic’s business fall? Is a health provider adding value to society?
Business rates are a contentious area too in respect of this. WHy should a retailer with low wage, low skill, part time workers get to pay the same per square meter as a factory with high productivity, and skilled, full time and well paid workers? Why should a small service engineering enterprise feel hindered by the cost loading of new, larger premises? Why should a slum landlord pay the same as a research laboratory for the same area they own?
New Models In New Countries
So we have two wealthy, productive regions of two kingdoms based on unions of member states, forced, humiliated or negotiated into the ‘greater good’ hundreds of years ago. I dare say Catalonia has had its share of ups and downs, but like Scotland it is an area where very much primary production takes place, and there is then sizeable secondary and large tertiary (service) economies.
They could well consider the dissatisfaction of the ordinary worker with the status quo which is driving the thirst for independence in both these regional states. Just as importantly, they should consider what is good about business conditions and new enterprise creation. They have a unique possibility to shape a novel tax environment.
Punitive Taxes Don’t Work
The trounble with the simplistic solution ‘ tax the rich and spend on the poor’ is several fold. Firstly punitive taxes disuade inward investment ? Well that is percieved wisdom at least. The SNP had as a cunning plan an 18% corporation tax to undercut the UK (and the USA incidentally) level and retain current businesses, help some locate HQs or administration N. of the Border, and attract new enterprises. Who cares how much Bill gates makes if he invests in Barcelona? Here in lies the second issue, that punitive personal taxes politicise the wealthy who organise themselves. Well nothing new with that. This is what predates democratic parliament in the UK and most other European states, and plutocracy was the predecessor of democracy in Ancient Greece. It is a question today of how vehemently they get politicised and who they are prepared to employ to ‘persuade in the new soundbite, viral internet spread sound bite and 15 nano seconds of fame.
Very high income taxes or taxes on personal wealth then are counter productive over time. Yes you can squeeze more internal investment out of encumbants who work harder to make money, or have made so much that they are more interested in building something than how much it makes them, You could say Trump is like this, with some interesting but failed side lines like Trump Air. Also the big Scandinavian dynasties have had a paternal interest in their home lands, until their grand children lost interest at least.
These days there is far more money in real estate and money itself that industrial moguls who employ hundreds of thousands in their home lands are consigned to Korea, India and China. This is really what was behind 1929 and 2008, capitalism got too used to the fruits of the casino rather than production. However today the world’s richest 8 or 10 if you like, are mostly software giants. Warren Buffet is a corporate raider of course, but built as many as he raped I am told. He gives away much of his income anyway. You have Bill Gates of course, and Larry from Oracle and then vrious upstarts. Not the cigar puffing, guffawing evil capitalist like you could paint Henry Ford perhaps.
Investment though has to be considered more in terms of productivity. Inward investment in the UK and Scandinavia is all too often that which is Rentier- it wants to buy up internal service sectors in the economy rather than build on primary production and value multiplication in the secondary economy.
That is one key to the new countries’ taxation of business, but it is argued that this bias is complex. I don’t see that as true, but rather a polticially biased view point that is self serving for the easy life of Rentier investors.
New Taxes Hinder the Economy –Thinking Administration and Regulation Rather Than Just Tax Level
Business is always lauded as complaining about regulations. Very many businesses though have their own internal torturous beaurocracies to ends such as quality documentation or transparecny of accounting which exceed government demands and rather pander to customers and investors. It is not the understanding of regulations, and their effects of level-playing-field intentions, or accident prevention, it is the administration time in complying which businesses and especially SME businesses moan about. In fact many of them enable smaller companies to accept a defined framework of quality and safety, which in turn permits them to trade with large international corporations or governments.
Yet businesses of course want to be productive and not administrative by nature and goal. In my latter day profession as a supply chain manager, I am reminded by my mentors and institute that administration is the theif of time and opportunity to do proper purchasing, logistics and stocking. A single invoice, correctly presented, can cost a Norwegain company almost 50 quid to approve and pay when presented in paper form and the vast majority I get at work are still snail mail ! Reducing tax and employee administration frees up companies to do more enterprise, more endeavour, to use their grey matter on something more than a business process auto pilot.
New taxes for consumers, such as the local levvy in Scotland, also come with a tax collection cost and at some point a burden on businesses in many cases. It is easier to simplify tax affairs for both individuals, small businesses and productive enterprises and raise those simple taxes by percent points than try to sneek in new taxes. Environmental levvies and taxes are also a costly means to affect change, we are better investing for example in cleaner energy production as we do, and also a network of fast chargers for electric cars and delivery vehicles which would transform any nation’s emissions. The internatl combustion engine is the worst offender by far. Electric vehicles are now a fully practical proposition for the vast majority of consumer use.
So here comes my own suggestion for the Caledon and the Catalan:
Shift administration of employee taxation out to the banks and government. Here then an employer still pays those unpopular hidden taxes and national insurance, but just as a flat rate lump sum on top of wages. This is in part the system in Scandinavia and of course in part true of the USA.
We have then the opportinity in the digital age for the bank to take a small fee to manage the tax affairs and of course, abide the laws, regarding income tax and national health and welfare insurance contributions, but also we simplify greatly the tax return set up for individuals. This is how in fact it is done today in Norway, and despite some torturous property taxes and imaginative areas for deductions for people with fours sheep and a pine tree, it works a treat between the banks, other lenders, employers, employees and the tax-man.
Housing and Transport / The Two Big Inflationary Pressures on Most Workers
Second to this above, we have an opportunity to reshape taxation for those exposed most to the infaltionary pressures of real life. Firstly as we still have in Norway, we should allow home owners with modest, average mortgages on their residential home, *and that is crucial* , interest rate relief on their mortgages. MIRAS. Further to this, in order to tempt people away from very high leverages on interest only periods, we should reward modest capital repayments.
We then in the interests of the evironment should allow deduction via tax allowance extension on things like commuting on public transport with season tickets, investing in green homes and green improvements, and in electric cars. Also things that help you get into work, like if you have to commute away all week for a new job.
All the above are present in Scandinavian tax systems. In the UK to address inflation in the housing market, they introduced an inflationary first time buyers underwritten deposit loans scheme. It helped a lot of even highly paid people get their first house in the South East of England at least, but stoked the market at a time when wages were falling in real terms or people had less hours pay. More on housing later.
Can We Strike a New Balance Between Tax for Public and Deduct for Your Own Choice?
On the personal side we should be looking at balance between private and public provision. So for example a privat health care plan often helps with minor ailments or new chronic disease, but in Europe they dont often want to insure or plan for chronic disease, and they dont offer an emergency ambulance and A&E department. So we can reward some of private health plan and insurance via tax deductions, while not making that ridiculous means of spiting the government.
The same is true of infant child care and after school – can these be best done privately or do we benefit from economies of scale via taxation and public provision? We legistlate with some common sense, so in the cities and larger towns with bigger schools and tighter pre school habitation we make it a harder opt out for tax., while in small towns and rural areas we allow for more provision by small enterprises, which is in fact the reverse of much of the current scandinavian model, where kindtergarten is big business in the cities and parents have a very high self payment on top of high tax.
That is where the debate can lie for many social welfare, we give an option to the individual or a means for market provision and offer a level of tax relief which compensates for good, modest services.
We have this type of set up where parents with kids under 18 get larger tax allowances (initial large deduction from salary prior to taxation) for having kids, such that consumption need is addressed. However is it such that older folk should pay for this? Or that folk in the middle age should pay more tax for both young families and pensioners to enjoy welfare goodies? That is I am afraid a fact of life, as why should a pacifist pay for the military or why should a famer pay for a new harbour?
We have some areas where we can offer a better public service for a higher direct tax, and enjoy economies of scale, and a little at odds to that, even quality of provision geographically, and that is fair. It is equitable. But also it is equitable to compensate those who seek private provision which will save the state money of course, inthat they take up services outside the public sector.
This is how in part the EU pensions directive works, but it is not all that popular with some types of employers, and it penalises temporary workers, and some argeu due to the admin burden, it makes temporary employment more attractive. However you could have a better situation likie in Norway where PAYE pension can be propped up in lower income times, and small EU directive pensions like I have, can be consolidated to PAYE pots, which I am about to do! Tax relief on the employee rather than compulsion at the employer on private, a basic PAYE pension contribution and the option to enter that set up during times of temporary work or lower net pay. In Norway you see your pension funds state and private, digital magic, and can make informed decisions about this very set up, and look at outcomes from different risk levels in private pensions. Norway of course does have a state pension fund, but more on that dream of Salmond later.
Employment Patterns Must Change
As mentioned with pensions, employers like to avoid paying for employees and administrating social type things for them and the government. In nearly all EU / EEA countries we see that the major problem for a large part of the work force is not unemployment but UNDEREMPLOYMENT. Too many part time, temporary jobs and too many graduates not working in their field. The latter is about right-sizing the education system, and removing the ‘consumer’ marketism from the school leaver and tyring to inject far more from the employer and job market end instead.
The former requires some blunt action really, because we cannot have three people doing a job which would make a very nice living for one person in that week or those two years of a project. Why? Because they go begging to the state, or rather the state incentivices them to carry on in this, while employers avoid on top costs. As above I say send it to the banks for admin and the tax office can have big clever computers to talk with the banks ones. Catalonia and Scotland are right sized and right banked to do this.
There is always going to be an element of supply and demand for part time work in economies which have become more tertiary in nature, but it is used both as a way out of admin and as a tool against workers themselves, pitting them against each other for a marginal lifesyle supported by the state. The source of the very low productivtiy rate in the UK, and the very high number of people in work but in reciept of benefits is here.
We need to introduce new employment laws alongside a pro-rate social cost rate per hour. Workers should have the right to ‘permanency’ as in a contract of work which rewards their loyalty and specific skill investment with better terms for in particular, tenure of employment. It is fine for employers to still have part time staff with some way of avoding zero hours abuses, and temporary staff on defined contracts, but then there is a draw from those better employers who want to reward loyalty. Already there is talk of a revolution mediated by mobile apps, where even accountants are hired in on zero hours contracts.
That last phenomenon will be devastating for the economy when more employers become in-contractors , heaving more people on to top up benefits and out into abject poverty. In the long run it will prove inflationary as workers with scarcer skills are able to extort high hourly rates as they become used to negotiating each hour and trying to make a living playing hard ball with in-contracters. We only have to see the effects of underemployment today and what it costs, or the social unrest that a shift such as this will cause as it has down through history, when security of tenure of labour lead to the whole union movement in the first place.
Flexibility must always be there, you cannot say to a small cafe that they need to employ people 37 hours a week and pay a pension, but you can make the cost per hour pro rata the same as the cost of a full time, permnanent employee and remove that discrepancy which drives employers to utilise more part time statff than they otherwise would need to. I would go so far as to make employers do morre of the administration for part time workers to unload the banks and make it even more atttractive to consider full time, on contract workers. Then work really does pay because, ahem, it is paying all the time. The state makes a big gain by having fewer transient and marginal workers to pay benefits to, and some of the saving is passed onto the employer in lower ‘social cost’ per hour- for a 37.5 hour week that is, 37.5 times as much as a one hour saturday or breakfast helper would cost, or even a lower multiple.
Minimum national earning levels are a bit of a red herring in Scotland, and maybe suit the oddities of the Finns better. Moving people into more solid work as a culture for it, is far more preferable for those employees, the tax man and quite likely those employers will also find productivity gains from staff who have that good old 9 to 5 franchise with work, and dont shuffle in for two hours back shift, worried about paying their bus fare home or if they have worked too much for benefits that week.
Once again we see in these top up benefits, the Neo Liberal influence on the left, who dare not interfere with what looks like market mechanisms and demand for part time workers in a ‘dynamic’ economy, when in fact it perverts the market and affects producivity in GDP as a net result. Combined with go-to-china, the Democrats and other social dems around the old west have generated the large scale social dissatisfaction which lead to change via trump and brexit. Work does not pay anymore for a large proportion of the work force.
Property – A Farier Market Via Which Mechanisms?
Here I shall wrap up where I almost started. We have in the western property markets by in large a sickness of capital investing in extracting gains and profits from housing we all need rather than in making our lot better via investing in productive systems and companies. This is also a generation shift thing, with the baby boomers able to lever second, third, multiple properties in the buy to rent sector, or just having a dormant summer house lying there 8 months of the year.
Housing cost inflation is the single thing which makes the actual agreed economic measure of retail based inflation calculation so laughable. We could endure CPIs of nine percent a year for three years without it actually hurting us much, we spend so much more on housing from our incomes. We spend also more money for a lot less property, will make on average less capital gains than the baby boomers and many of us will die with mortgage arears it is feared. Average age of first ownership goes ever upwards it seems, reaching towards 37 in London and the SE.
We all know this is a problem, yet a large proportion of the older electorate benefit from the capital gains the over heated, under supplied market delivers to them and polticians dare not go there with significantly higher taxation.
Very simply we need to look at removing any incentives for second properties for individuals and tieing more housing into the affordable bracket, while also removing green belt in central Scotland. We also need to look at taxes on secondary properties and a degree of rent controls, especially for ‘social tennants’ the state has to foot the bill for. Why subsidise a ‘market rent’, that is an oxymoron.
Once again punitive taxes on mansions this time, may be a side show. If yes you want to stop Russians laundering money or the super rich avoiding tax somehow by owning a country pile with farm estates, then tax higher. The shift though is quite small, and it is actually higher paid public employees who will end up paying the brunt of rates rises in Scotland I believe.
There we have a little pot boiler for you which looks at some of the pragmatic and some of the radical based on my own experiences and opinions.