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Child Benefit and the Deficit

Child Benefit is being withdrawn from middle income households. There are three issues I want to address from this decision. The first is the argument in regards to fairness per the one/two income households. The second relates to the principle of universality and the third issue relates to the sort of language being used by all parties about what has happened.

The changes in child benefit are as follows:

One income of less than £50,000: This family keeps the full child benefit, which for two children is £1,752 a year.

One income of more than £50,000: Can keep some benefit but must repay 1 per cent per £100 earned over £50,000. For someone earning £54,000, for example, the charge is £700.

Two incomes, both less than £50,000 each: Although the couple’s joint income is over £50,000 they keep all their child benefit as neither one earns over the threshold.

Two incomes, one more than £60,000: Because one partner earns over £60,000 they must either stop claiming or repay the full £1,752 through a tax charge.

Clearly, one income households are going to lose more money than dual income households providing the dual income household doesn’t contain an income earner over £60,000.

What hasn’t been discussed, is a much bigger issue that affects the same people. Dual income households are going to take advantage of the way personal tax allowances and tax rates are structured. 

For example, if a household has a single income earner of £60,000, around £20,000 of that income will be taxed at 40% (taking into account the higher rate tax threshold). Their overall rate of tax on the full £60,000 will be around 24%. In comparison, for a household with two income earners of £30,000, given the basic rate allowance, their combined rate of tax on the full £60,000 will be around 14.5%.

The difference between the two households is around £6,000 p.a. – a matter that should put into perspective the c£1,700 loss from child benefit that might also affect single income households. 

Ultimately, the extent to which this is fair is a matter of political taste, but it is surprising how this more important difference in the way the tax system is working hasn’t been brought out by politicians or the media. It seems unreasonable for women who chose to stay at home and look after their children are to be penalised to this extent – the government appears to be signalling that this choice is going to become more expensive. There is also a disincentive effect for those people who are currently earning c£50k to go the extra mile and increase productivity.

The second issue I want to discuss is the matter of universal benefits. Whilst it seems reasonable in the context of a modern welfare economy to treat patients equally in respect to the NHS, or treat pupils equally in a State education system, it does seems a little odd that we pay significant sums of money in tax to be given some of it back by the State. The cost of collecting and then redistributing to millions of people who are above a certain income/ wealth threshold has to be a waste of money. The better proposal would be for the State simply to reduce the higher rate tax rate and not provide benefits to those over a certain level of savings and/or income. The notion of universality in respect to transfer payments such as child benefit, pensions, winter fuel allowance etc is an expensive way of giving people their own money back minus the exorbitant administration charges. I am not aware of the data on this, and it is probably unavailable but I imagine for every £1 a higher rate tax payer has to give to HMRC to pay for their share of universal transfer payments (i.e. the old child benefit, pensions etc), they probably receive back less than 5p in transfer payments value back. In other words, it would be better not to take the £1 in the first place. This argument relates only to the amount of tax taken for the purposes of funding transfer payments to those over a certain level of income/ wealth.  

In short, the idea of having the State take money it doesn’t need to give it back to the people who don’t require transfer payments only benefits those administering the system. It can make no real economic sense and should be eliminated. Those arguing in favour of universal benefits either have not thought it through or are concerned that the money saved from not distributing universally will be squandered elsewhere (a view I have considerable sympathy for). This leads me to the third point.

On the 7th January, David Cameron commented on the withdrawal of the child benefit:

“This will raise £2bn a year. If we don’t raise that £2bn from that group of people, the better off 15% in the country, we would have to find someone else to take it from.”

Whilst it is true that the withdrawal will save around £2 billion per year, the second part of the comment isn’t necessarily true. It doesn’t need to be taken from others if it isn’t spent in the first place. For those on “the Left” who think that it really does need to be taken for “schools and hospitals, for doctors and teachers and nurses etc”, they would struggle to provide an answer for public spending for Simon Burns:

http://www.telegraph.co.uk/news/uknews/road-and-rail-transport/9784037/Rail-minister-under-fire-for-use-of-official-cars.html

Simon thought it was a good idea for him to spend £80,000 p.a. of tax payers money for him to get to work in the morning and for someone to take him home. A great, well timed story to come out on the same day as the reduction in child benefit.

I don’t doubt that Simon has to get in. Everyone of the 20 million + UK workforce has to get in and no doubt many of those people have confidential information they work on (or could work on) whilst they commute. 

The point being made here is that whilst I may agree with the withdrawal of universal benefits such as child benefit – the squandering of billions of pounds in profligacy can’t be justified. For those that think Simon is unusual, think again – he is but the tip of the iceberg.

The deficit in the UK could be dealt with by addressing massive government overspending on vanity projects, vanity transportation, factious and questionable “initiatives” and a general focus on the important things. One only has to look at QUANGOs such as the Specialist Schools and Academies Trust (SSAT) to see that the additional billions of expenditure allegedly in education has had no impact on the success of schools, but funds a huge number of people in non-jobs pretending to add value and filling in self-evaluation forms to evidence their contribution. The sort of “projects” these people involve themselves in would be enough to make Simon look like a model of fiscal responsibility. The SSAT are known for their enjoyment of hiring out central London venues such as Chelsea Football Club for their outings.

Government spending needs a root and branch reform to spend tax payers money where it counts and only where it counts. We don’t need to spend £80,000 p.a. to drive Simon to work each day and we don’t need billions in the education system in any place other than schools and teachers. A back to (spending) basics policy would eliminate the deficit within a year.

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Employees and Employers

There are essentially two types of working people in a modern balanced economy such as the UK, they are employees and employers (or alternatively entrepreneurs). The purpose of this note is to sharply distinguish them in order to draw conclusions about how policy ought to reflect reality. The essential difference I would like to draw relates to risk.

For the purposes of this piece, employees are people that work for a business, NFP or the government in all of its guises, employers are those that own it. Of course there are many who are employed that employ others, but I am distinguishing between those that take business risk and those that do not.

Employees are engaged by employers to perform a particular role. The nature of the engagement is set out in contract, whether formally or informally (occasionally this might be a verbal contract or alternatively contract terms are established through custom and practice).

Outside of the risk of dismissal, either by way of redundancy or by other means, the employees risk is limited. They do not have to become concerned about having to pay into the business to keep it alive should it find itself in trouble nor do they have to fear about the consequences of bankruptcy save for their potential loss of wages – for which the government provides a guarantee against loss. Of course, this is not to belittle the consequences of dismissal or redundancy – it is simply to point out that the consequences of business failure have a worst case scenario limited to having to find alternative employment.

Employers, on the other hand do not have that privilege. If a business goes wrong, the employer will face the full consequences of that failure subject to its own limited liability status. If they have invested their own money into the enterprise, they will lose it. If they have taken out a mortgage to create a start up, they will lose it. If the business doesn’t perform and there is no money to take out in drawings, they will not earn any money. If they have offered a personal guarantee against debts, their debtors will pursue them personally for the money in the event of failure. The employer is responsible for ensuring all bills get paid, the employer will ensure that all suppliers are paid, the employer will ensure the staff get paid even if there is insufficient income to cover the costs, if the employer is sued, the employer will have to paid the debt. If the government make hiring staff or employing staff more expensive, the employer must pay, if the government insist on forcing employers to pay pensions to employees, they must bear the cost, regardless of what that might do to their ability to earn a living from their own enterprise.

In short, opening a business in the UK is risky for the employer. If the business is successful, they will pay exactly the same tax as the people they employ unless they choose to leave their money in the business or take dividends from their company.

This seems asymmetrical. Clearly the risks are not identical but the tax contribution on an income tax basis is.

Whilst many politicians sit around discussing “fair share”, are they taking into account the “fair share” that relates to the risk of the enterprise? Does fairness allow for the failing employer to claw back past paid income from employees? Of course not.

The current benefit in the UK for starting up a business relates to relief on the sale of the entity – in the form of Entrepreneurs Tax Relief, but this relief only applies on the sale of the business. Whist it is running there is no such benefit.

It seems that during a period when the UK would benefit from new businesses, we need to be thinking about how we might get people to start up. We need innovators, risk takers, entrepreneurs and business people.  The risk/ reward ratio therefore needs to be addressed. We need for it to make sense for people to start a business – that isn’t going to come from thinking about tighter regulation, higher costs (in the form of compulsory pension provision).

Policy makers need to think carefully about making it easy to set up, not difficult. When the government decides on increasing regulation, they are cutting their own throat – handing competitive advantage to those we have to compete with. They slow growth, increase unemployment, and cause a net increase in economic misery. When the government introduce compulsory pensions next year – they should listen out for cheers from our competitors as business increases its outsourcing to foreign countries.

There should be serious and significant tax breaks for start up – in particular given the risks we are asking people to make. It is too often forgotten that more or less all of the UK’s income is created by private enterprise – they are the ones who pay for the teachers, doctors, nurses, civil servants, local government staff, politicians, roads, army, police and everything else. It is too often forgotten by those campaigning for gold plated pensions and pay rises in the public sector, greater benefits, housing allowances for those living in Chelsea, Hampstead and other expensive boroughs, that this has to be funded by the private sector at some stage. The lack of understanding from those demanding more as to where the money has to come from needs to be addressed.

The real entrepreneurs in the UK are not highly paid bankers or Civil Servants, they are staff – employed by others. The real entrepreneurs are those who accept risk. The real battle is therefore to distinguish between the Fred Goodwins and Bob Diamonds of this world from the Philip Greens and Richard Bransons. They are not the same and they shouldn’t be confused. The current political dialogue  is too simplistic in its rich/poor analysis when the real divide is between those who are prepared to stake their own money on an enterprise and those that stake others money.

The difference between giving and taking

There seems to be a confusion in the current political dialogue which needs to be cleared up. 

When politicians refer to tax – they are talking about taking from people, without the requirement of consent and if necessary by force with threat of imprisonment.

When politicians refer to benefits – they are talking about giving money to people they have collected from tax payers.

The idea that tax cuts can be considered as giving is wrong. Those politicians who re-state this (Ed Balls, Ed Milliband etc.) are either confused by what is going on or lying.

Note the use of Ed Ball’s language in his conference speech of 2012:

“A Chancellor who in six months’ time will raise taxes for pensioners on the very same day he cuts the top rate of tax for the very richest – a £3 billion tax cut, giving £40,000 a year to a millionaire.”

We must insist on clarity in political debate, otherwise it can lead to poor outcomes. Ed Balls is expressly stating that the Chancellor will be giving £40,000 per year to millionaires, the reality is he will be taking 45% of their income as opposed to 50%.

Hello world!

This blog is intended to provide libertarian insight for those interested in policy.  Politicians have the capacity (some would say tendency) to move away from the rule of law, expand their mandate and ultimately degrade into tyranny. These thoughts are there to give some pause to that tendency. Whilst the government retain the ability to control, tax and imprison us for breaches of law that it alone can determine, we should always remain vigilant in respect to its actions and intentions.