UKC

So, if you listen to the media and both our political parties, the deficit is the big issue and we have to cut it as quickly as possible.

Reasonable economists that correctly predicted the impact of austerity post the financial crisis don't think that. They think that we're suffering from deficient demand that can be remedied by increased government spending and that cheap money and the resulting growth mean this will largely pay for itself.

Interested in people's thoughts on this? Particularly on what they're understanding of the situation is? Whether these alternative (and more informed views) have reached beyond academic economists and the blogosphere?

(nb the same economists think that we should cut the deficit eventually, just not now)

In reply to Donnie:

If economists could predict what was going to happen, they'd be rich and not economists?

There is something somewhere between the uncertainty principle and chaos theory that means accurate, nation scale economic forecasting would alter the economy to the point the forecast become invalid?

Many people who should know better don't understand exponential growth as applied to debt or population growth?

You can tell from these comments that I have little applied knowledge of macroeconomics and a lot of skepticism! To much?

My opinion is that, as a nation, we could survive being less wealthy in the short term and paying our debt down. This would need rebalancing to protect those in need. I would happily take a cut in "wealth" whatever that is, to see us free of debt. The long ten implications of being deeply in debt are far scarier - to me - than the prospect of paying it down. National debt combined with the insane situation with housing brings out the closet socialst in me.

In reply to Donnie:


Where are these people?

In reply to wintertree:


The thing is, there are somethings they know quite a lot about and some they don't. What to do when your in a recession, interest rates are as low as they can go and your still not growing is one thing they do know. When a financial crisis is about to hit is one they don't.


Er.. forecasts do affect the future so there's some circularity. Generally it's accepted that forecasting's a fairly hopeless pursuit. That's just because people have generally not been good at it. Not sure where chaos or uncertainty theory comes in...


Not sure what your point is. That people don't realise an economy that keeps growing can run a (small) deficit for ever? (If so, then yes - which is a sad reflection on our media and this nonsense comparing the economy to a household and a creditcard)


See my first comment - somethings it's good for somethings it's not.


This last comment makes me a little sceptical that you do have applied macroeconomic experience.
The whole point is that in the long term it would be better to spend more/cut less now... but the general population wouldn't know.

No ones suggesting being free of debt just getting rid of the deficit. Arguments are around how quickly. Cons say 2018, Labour say later, sensible macroeconomists say later still....

In reply to Bob Hughes:

Not on the news. Which is rather the point...

http://mainlymacro.blogspot.co.uk/ for one

In reply to Donnie:

The thing about economists is that there is always one to say "I told you so" whichever way things go.

In reply to Donnie:


Uncertainty - because the more you measure it, the more you perturb it, assuming you do anything with your measurements other than record them for bragging rights post-facto.

Chaos - because the economy is a highly nonlinear dynamical system and even relatively simplistic, deterministic models of the economy display regions of bifurcation and chaos in their solutions, and that's before the stochastic elements are included. Strange attractors abound.


No, that to many just don't intuitively understand that an exponentially growing debt is bad, especially when faced with an unpredictable energy supply going into the future and an exponentially growing population. In the long term, exponential growth of an economy is not sustainable without some transformative new technologies that economics can't predict or factor for. Growth must have limits, so borrowing against a growing economy is flawed in the long term.


The national household debt and the national pubic debt are surprisingly similar in magnitude. Both debts are about spending now on the assumption that we'll have the wealth to pay it of in the future. The future strikes me as an increasingly unpredictable place.


The bit where I said I have little knowledge? I thought that would be a dead give away that I don't have more than a scraping of surface knowledge...

My concern is that the sizeable and growing debt is going to be a worse and worse problem *if* we slide down the relative table of per-capita GDP internationally, or if our energy supply gets much worse. If we don't have the debt, we have certainty that it won't be a problem. At the moment it is a source of yet more uncertainty in any attempt to model the future. If, as you suggest, we can live with a small debt, we can also live without it. Longer term, borrowing against future growth is betting on future growth - and without some radical developments in energy and other resources, we're boned.

Mean time, back in the real world we're faced with wrangling, gnashing of teeth and indecision in just eliminating the defect, let alone in paying back the debt. I hope to god Putin doesn't turn the gas off flowing in to Europe, or one large scale power plant doesn't have a major, unexpected forecast, as otherwise our debt will become a millstone around our neck when our energy supplies crashes out of the first world club and fuel prices rocket.

In reply to Donnie:




What's important is that the balance sheet of the UK is actually very good. Our liabilities are a lot smaller than our wealth.
Currently total net wealth of the UK is at £7.3 trillion, or about £114,000 per head of population. Obviously it is very unequally spread.

So there is more than enough wealth, in fact there has never been more than today.

So basically the UK is very rich, never been richer, but our government is poor.

It is the same all over Europe.

We could in fact get rid of the deficit simply by taxing some of that wealth, a tax of 1% on the larger capitals, would be more than enough, but obviously this cannot be done at national level.

I suspect change in this direction is on the way, and more surprisingly, it's not going to come from Europe, but it's going to come from the US. There is currently a fairly big shift going on in economic thinking in the US.

In reply to Donnie:

The UK national debt is currently about £1.4 trillion. That is increasing every year because the deficit is currently running at about £100 billion (down from a high of £150 billion in 2010) but every year we run a deficit that £1.4 trillion debt gets bigger.
The problem with a huge deficit is that we have to pay interest on the debt, currently just over £50 billion per year which makes it the 4th largest item of government expenditure after welfare, health and education.
That's £50 billion a year we could spend on something better and it will go on increasing until we start running a surplus and start paying off the debt.

Its manageable debt at present which is why some argue we should take longer to pay it off but it will obviously cost more in the long run and it exposes us to greater risk in the event of debt interest rate rises and any further economic shocks which of course, nobody can predict with any accuracy.

In reply to Donnie:
Before I went out for a bike ride at lunchtime ( 40 miles) the deficit was said to be cut by a third, moving towards 40%.

Now home I just settled down to listen to Evan Davis talking about the Tory conference, where the deficit was apparently now said to be cut by 50%!.

(I just need to go out for a few more miles on the bike , and the deficit will be sorted)

What is the truth about this deficit?

In reply to Donnie:
I don't think there should be any debate about whether the deficit needs bringing down. Clearly it is costing us all a lot of money that could be put to good use, be that on welfare, infrastructure, education etc.

The questions surely are whether the balance of deficit reduction should favour more tax or less spending and over what period to apply the medicine.

The point that is consistently ignored is that the wealthy form a small constituency and even ridiculously punitive levels of taxation would yield a small return, whereas the alternative of raising income tax for the masses by only one or two percent would pretty much solve the problem.

So who is signing up to pay income tax at 24%?

In reply to BnB:

[...]


I remember seeing a piece by Paul Mason where he showed that the top earning 10% are paying about 50% of the total tax take - figures are from memory hence hazy, but the point is that the very wealthy do pay their way (at least the ones who are domiciled in the UK)


If it would solve the problem, I'd do it. When I started working I'm sure my tax was about that rate.

In reply to 999thAndy:

I already do. My rate of income tax has gone up 5% since the 2008 crash and and, as an employer, I pay an extra 1% of Employer's NI on on our payroll of £1.2m. That alone is an extra £12,000. For employing people!!

I'm not grumbling, just pointing out that it's all very well complaining that welfare is being frozen, but it is deliberately so that most people's tax bills can be suppressed.

According to HMRC the top 1% pay 27% of all the income tax. Amazing when you consider they are all supposed to be hiding their earnings away.

In reply to BnB:

The debate is about how quickly to bring it down - not if, when.

Yes, there should also be debate about how to do it - cuts, taxes, on who?

You should have a look at the distribution of wealth in the UK.

In reply to Jim C:


No idea - but More Or Less did discuss the deficit a few years ago and concluded that if the government did nothing, the deficit would half simply by the fact that the economy would eventually recover, tax receipts would rise and the deficit would fall.

It is also worth pointing out that many of the measures about the deficit being spoken about by politicians do not include capital investment, just the day-to-day expenses of running the country so we aren't being given the full picture.

In reply to Donnie:

That's why I'm happy paying a disproportional amount of tax, or had you missed that?

But you are comfusing wealth and income. The vast majority of wealth has been taxed already, and, in the case of inherited wealth, often twice.

Only when you introduce wealth taxes (like the mansion tax) can the two be confated.

My original point was aimed at those in the middle who see the solution as a choice between taxing the rich or freezing welfare. I would guess that a good proportion of contributors here fit that mould.

In reply to Donnie:


Why, are you proposing a tax on wealth instead of a tax on income? I would be interested to know what fraction of the wealth in the UK is rooted in a highly over stressed housing market. Put a tax on that and it might all come crumbling down.

In reply to BnB:


Not I - income tax rates are a political football, and there is no guarantee that the money won't be repurposed or used to hand out bread and circuses to get XYZ party re-elected.

I would sign up to an additional tax component that is legally limited to being used to directly eliminate the defect and start paying down the debt, and that is only allowed to be charged if the debt is being payed down by at an annual amount equal to at least 50% of the annual interest. Per person, that would be ~£234 per year. I would happily pay 4x that if it came with a legally binding promise that the debt is being eliminated.

Pay more now, or if anything changes for the worse, pay much more later. It seems like a no-brainer really. One gets the impression from the media that politicians are more interested in soundbites and re-election than actually weaning the UK away from debt. Certainly most of them could be retired on nice consultancy gigs long before the consequences of their actions hit home. It seems like a madness that the discussion is over how long we should take to even eliminate the deficit.

In reply to ByEek:

Which by definition means that the national debt would continue to rise, even if you believe the wildly optimistic assumptions of the BBC, which most people wouldn't.

Given that debt interest payments now exceed the amount spent on various major expenditure areas like defence, education etc, a continuing deficit which increases debt and hence increases the amount spent uselessly on interest payments would seem pretty silly, even in the unlikely event that you were actually able to halve it, it remains a deficit.


Critical would be the distinction (a bit fuzzy it is true), between the structural and cyclical deficit. When you say "politicans" confuse the picture, presumably you predominantly mean Gordon Brown and sidekick Balls, who called every short-termist vote-buying vanity project "investment", while going berserk on PFI project to buy "good things" off balance sheet.

Actually most of the information is available, you need to hunt for it and view public protestations of vested interest groups with the required level of scepticism.

In reply to wintertree:

The reason is simple, return on wealth is growing faster than labour incomes.
Typically return on wealth is about 5%, whilst wages have been stagnating or have even gone down.
If we want to make labour attractive it seems illogical to put most of the tax burden on labour.

In reply to Simon4:


I think you are confusing More Or Less which does pretty rigorous analysis of the actual figures behind the headlines and the BBC.


The deficit and debt are two completely different debates. But applying household finance logic to a country's debt is not meaningful as I understand it.


This is true. However, Labour only started where the Tories left off in the 90's and Cameron's bunch have continues the good work outsourcing all sorts of services in hugely lucrative contracts to incompetent companies like Sodexo and G4S.

In reply to RomTheBear:


Oh, I understand the motivation and the concepts, I was however curious as to what Donnie was getting at - do they think a wealth tax is the answer?


Indeed. As I said, how much of that "wealth" is in property? If it's a significant fraction, then a wealth tax may achieve nothing? Why? Because that "wealth" is a perceived wealth, based on what people are willing to pay for a commodity whose value is inflated by a very twisted market, and if that commodity suddenly attracts a big tax liability, then that perceived value, and therefore wealth, is going to evaporate. How much "wealth" is concrete vs "perceived"?


Join your thinking up a bit. Why do many people labour? To accumulate wealth? So what is a tax on wealth but an indirect tax on labour? Yes, there are other sources of concrete wealth, but taxing those is not a long term fix - if you start depleting unearned, concrete wealth it does not regenerate.

In reply to ByEek:



This comes up a lot. Could you explain why? I understand there are differences but the fundamental requirement not to live beyond your means seems to apply to both. If you do, one way or another, things will catch up with you.

In reply to Donnie:

Alot of economists and their organisation predicted gloom for the UK based on the so called austerity measures( think of the OECD report telling Osborne that he had got it all wrong). Yet here we are with good growth in the economy ( compared with Europe) and also the USA doing well ( they took big /fast hits with their banks).

So personally I am not convinced by any economist who argues that we should be increasing govt spending.

In reply to MG:


That kind of economic thinking, used to argue against cutting spending, seems as twisted and foolish as the financial engineering of default-likely debt that caused the crash.

In reply to BnB:

Perhaps it seems twisted and foolish because you have got it arse about face. It's used to justify cutting spending (where outgoings exceed income).

Edited to add an s.

In reply to neilh:

Wasn't the aim of austerity to have a balanced budget by the end of this parliament?

In reply to wintertree:

I disagree that taxing wealth "depletes" it. It doesn't, it's simply a form of redistribution. That wealth can be reinvested in schools infrastructure and so on which in turn generates more wealth.

The thing is that for most people labour does not allow them to accumulate any wealth at all during most of their lifetime, typically if you are in your 30s, earn an above average salary of 40K, and have a 300k mortgage and a 250k house, your net worth in -50K. Yet your income is taxed heavily, between 20 and 40%.

However someone who inherited a £2M house in London, and doesn't work, will see his net worth growing faster than your typical guy working his ass off on 40K, and yet will pay fairly minimal taxes.


This wasn't a problem really for most of the second half of the century. Population and the economy were growing fast, taxes were typically higher, people had many kids, therefore making past wealth less important.
As population stabilises though, and with the economy rarely growing above 3/4%, capital attracts wealth faster than labour generates it, resulting in growing inequalities and a big problem for governments, as typically they get most of their taxes from labour.

It's the famous Piketty's R>G concept which is causing so much concern to the IMF and the White House at the moment. I think wealth tax of one form or another will appear within the next decades, or we will be back to a 19th century type of society.

In reply to ByEek:


Debt is the total the government owes, and deficit is how much that increases per year..... I would not say they are 2 completely different debates!

In reply to RomTheBear:


I did not say that taxing wealth depletes it. I said that taxing "earned wealth" is a tax on labour in disguise, and that taxing "unearned wealth" depletes that "unearned wealth".

You rather make my point for me, by outlining a situation in which people can't accumulate wealth, yet they can inherit it. So with taxation on the passing of inherited wealth it won't be long (a couple of generations) before people do not have the same wealth to leave upon their death, because they are unable to accumulate it through work, and because the inherited component is taxed away after several rounds. Then how are you going to tax "unearned wealth"?

So it's not a long term fix.

An alternative view - a tax on earned wealth left to inheritance is no different to a tax on labour - you work, you pay - just at a different time.

You can't raid an empty piggy bank. In the long term, books have to balance.

In reply to Sir Chasm:


I was refering to the contributions that preceded the quotation, ie the post quoted within the post that I quoted (!!) and the conversation leading up to it. I'll accept the blame for the ambiguity as I guess it's too much to expect you to read throughly before accusing me of idiocy.

In reply to wintertree:


You seem to assume that somehow taxed wealth is "lost" to future generations, where in fact it is the very opposite, the point is that is it distributed though investment in education, infrastructure and so on, all of which increases labour productivity and therefore labour income. It's therefore a way to redistribute wealth accumulated in the past through work rather than blood lines.

The problem with relying on inheritance to fund future generations is that it concentrates most of the wealth in a few hands depending on who your parents are rather than through work. It undermines the principle of meritocracy and the value of work.

You are making the point that taxing wealth is equivalent to taxing labour from previous generations. This is true, but that's my whole point. We have to make current labour happening now pay more than simply reaping the fruits of labour done several generation before. That is, if you agree with the concept of meritocracy.

In reply to BnB:


Fair enough, I'll agree with you then.

In reply to Mike Stretford:


I am no expert here by a long margin. But from what I understand government debt is quite a different beast to that of the sort of debt you and I have on our house or car. See here for more info:

http://en.wikipedia.org/wiki/Government_debt

I think the general point being that so long as the government can meet all its obligations, debt is not necessarily a bad thing, especially if it is used for capital programs which in turn improve the economy and tax returns. It is all very much linked and intertwined.

Personal debt however is a straight cost on your bottom line. Borrowing money to buy a house will not have a knock on effect that you will earn more money as government debt may well do.

In reply to Sir Chasm:

Cheers

In reply to RomTheBear:

[...]
[...]

This sounds more like an argument for tax relief on mortgages, do you remember MIRAS?

In reply to RomTheBear:


No, I am assuming that it is "lost" as a source of accessible revenue. One can speculate about how efficiently that re-distributed wealth will increase or decrease the net productive capacity of the country ultimately helping the elimination of government debt, but that does not make unearned wealth taxation a sustainable solution to the deficit.


So you are proposing such a tax, not to reduce the deficit, but to rebalance the wealth in the UK in a way which you believe is more socially sustainable?

I don't think inheritance undermines the value of work anything like as much as the dramatically out-of-kilter housing market in the UK. I also think that a wealth tax might see that market rebalance in a way that benefits individuals, shafts plans to raise significant funds from a wealth tax and increases the probability of another housing bust. There are many different things that contribute to the problem with house prices, and a inheritance is well down the list.

In reply to ByEek:


To first part of the link repeats what I posted, and I posted it because it wasn't clear you understood the difference between debt and deficit.


You've picked a bad example.... what about buying a car so you can travel to a better job? Paying for a course to improve your earning potential? Buying a suit so you have a chance in interviews? They're decent analogies as to how Keynesian spending should work in a slump on a national level (which I understand thanks).

Our current problem is a unbalance economy and a large trade deficit. The last boom was based on private borrowing and we can't repeat that. There's no point throwing public money at the problem when it will probably inflate the housing bubble further and land us back in the shit. This in something I don't think economists like Paul Krugman understand about the UK economy (to answer the OP).

We need a more productive economy, which the above cited Simon Wren-Lewis understands, but I'm not sure he understands the fall is because the higher levels before the boom were'smoke and mirrors'. That's the problem with academic economists, they look at figure but they're too far from the coal face.

This is all in contrast to our large debt after WW2... it was simple then, we just had to export our way out of trouble.

In reply to wintertree:


Rebalancing the wealth distribution very slightly would reduce the deficit.
For example a 1% tax on capitals larger than £1M would eliminate the deficit.


You seem to mix many things there.

Nobody is suggesting an unproductive punitive tax on wealth. What is suggested here is a very low tax rate on very high capitals. This is now becoming an increasingly popular suggestion amongst academics and financial institution in the US.

As long as economic growth is lower than the rate of return on capital, capital will grow faster than incomes, and wages will grow slower and slower, making it very difficult for government to balance the books if their main source of tax receipts is labour incomes.

You can see this phenomenon happening right now. The main reason why the deficit is still higher than predicted despite all the cuts and employment rising, is that wages have stagnated and a lot of the newly employed have taken low paid jobs which don't bring any new taxes.

The simple fact is that if we want to keep funding government to a reasonable level and avoid deficit, we need to take the money where it comes from, and it is coming less and less from labour incomes.

In reply to ByEek:


But it is not without risks. Our economy is dependent on financial services. Factors outside our control (Euro crisis, China's economy) could have a strong negative influence on our economy, pushing up interest on UK bonds.... so just as our economy is hit, the cost of servicing our debt go up, viscous circle.

In reply to MonkeyPuzzle:

Not sure I follow what you are saying. Are you saying that we would have been better not having "austerity"? Or are you saying the economy is doing Ok even though the budget will not be balanced.

In reply to RomTheBear:


Not Sustainable. As the capital is decreased the rate charged to match the deficit would have to increase. Remember you are talking about "unearned wealth" here.


Here is the rate required for your 1% example, at points spaced every 5 years:
1.01% 1.06% 1.12% 1.19% 1.27% 1.35% 1.45% 1.56% 1.69% 1.85% 2.04% 2.27% 2.56% 2.94% 3.45% 4.17% 5.26% 7.14% 11.11% 25.00%

The rate taken from capital goes up, yet the loan is not paid down. Eventually you run out of capital. You could argue that capital also increases, but if you are taxing "earned wealth" instead of "inherited wealth" you are simply taxing earrings.


You mean take wealth directly from people to pay of the debt? Simply payinging the defect reduces wealth, does not reduce repayments, and is not sustainable. If you mean to repay the debt, good look confiscating a trillion pounds of wealth without driving the wealthy away.


Thanks for the laugh, I needed that.


Nonsense. If capital grows through paid labour, it doesn't matter if you tax the paid labour or the capital - it's the same. if capital grows through "appreciation" that growth is based on perceived wealth and not actual wealth. Taxing perceived wealth will reduce the value of that perceived wealth, because you are taking money from people, that they likely earned and are attached to - on the basis of over-wound perceived wealth in assets.

Let's reduce this to absurdity. Everyone in the UK is converted into a doctor or a farmer. As a result no more houses are built in the UK yet the population keeps rising. House prices rocket. Tax is needed to feed the doctors. Can we feed the doctors by taxing the ever-more over-wound housing market? No. Confiscating a room from someone's house does not allow the doctor to eat. Can we feed the doctors by taxing the produce of the farmers? Yes.

Academics and financial institutions can conflate wealth from actual work and wealth from perceived value all they want, but I don't buy it. As long as foreign parties are willing to exchange their actual work for perceived wealth, the fallacies in the argument lie silently, but if that day changes the consequences of the dilution will cease to be academic.

In reply to Mike Stretford:


True. But financial services seem to do ok regardless of the world economic outcome. As for government debt - it is still seen as a near 0% risk investment because the government always has the ability to raise taxes, lower spending or print money and take the hit on inflation.

I am not too worried about the amount of debt the government has. If you compare it to most other developed economies it is broadly inline with them. If we get stuffed, so does the rest of the world.

History shows various periods where countries have had to deal with hyper-inflation, collapses of currency, government defaults and other massive upheavals. There is pain, but life goes on.

In reply to RomTheBear:


So if you have a mortgage larger than the value of your house, you are in debt? That's obvious.

It is also the reason why people take great pains to avoid getting into that situation. It equates to about 8% of homeowners, and that's after a housing market crash.

In reply to wintertree:




You are forgetting two things :

- A wealth tax would apply, of course, only on net wealth. If you have a million pounds of assets and a million pounds of debts, your net worth is 0. Nobody suggests we should tax people with zero net worth.

- With an average rate of return on capital of 5%, taking 1% of that still leave the holder of that wealth in a considerably better position than someone who gets his income from labour.



Again, nobody is talking about confiscating huge amounts of wealth. Simply to take a thin layer of cream off the top of the cake.
Of course there is a risk that some assets would fly, that's why such tax as to be kept low and has to be automatic, as to make it more expensive to escape than it would be to pay.


No it's not at all, capital can grow through rent and not through paid labour. That is why the rate of return of capital can be higher than the rate of growth of the economy, in fact it has been the case for most of history.
It is very easy to see why, before the industrial revolution, growth was basically 0/0.1%. Yet profits from lands, property, and financial assets have always been at around 5%.
This was untrue only during the postwar period, because of very high growth, destruction from wars, and population increase.


In fact there is already a wealth tax in the US in the form of the property tax. It doesn't seem to have converted everybody in the US into a doctor or a farmer like you suggest.

In fact Switzerland - yes Switzerland - has a wealth tax on net assets, of around 1.5%. The country and their housing market doesn't mean to be in total disarray as you suggest.

In reply to neilh:

I'm saying that the stated aims haven't been achieved. It's fine to say that the economy is growing now, but the stated aim of the savings/cuts was to clear the deficit by the end of this parliament. We'll never know if the economy would have grown more, less, quicker or slower if more was raised from higher taxes and further investment, but for Osbourne to claim success for his financial plan is a bit disingenuous.

In reply to RomTheBear:



How am I forgetting that? I am stating that if you tax wealth away to balance a deficit, wealth reduces, the deficit does not. What has that got to do with your statement? To clarify - the fraction of capital one must tax increases, as the capital decreases. If you do this to pay the national defect, the size of the national loan/debt remains static, and then you run out of wealth to tax, and then you have a big problems. It is an exponential failure mechanism where what starts as a small "skim" explodes some time down the line.

Consider the long term / steady state implications of this - it is not sustainable.


Am I forgetting, or are you confusing? If that 5% return is in income generation, it is taxed. That is not a wealth tax, it is an income tax. Return on capital is income, and is taxed accordingly. If that 5% is appreciation of property value, it is not income until the asset is realised. If you wish to tax the appreciation in the mean time, then you are putting a concrete value on an intangible, and that can not be sustainable because ultimately you must extract concrete value from somewhere. Simply put - you can't feed people with the appreciation in value of an asset, and its a dangerous game to play when the value of the housing assets is so out of whack with most other things.


Beyond metaphors, do you understand mathematics?


Yes, and that rent is income before it becomes wealth, and that income is taxed as work, not as capital.


You're in a real muddle, aren't you? Are you talking about taxing income on capital, or taxing the perceived wealth embodied in that capital, or taxing the perceived increase in the perceived wealth embodied in that capital?

To put this in perspective, one would need to realise the value in ~15% of the perceived value of the UKs housing stock to eliminate the national debt.

In reply to wintertree:

?? how can you run out of wealth to tax as long as you tax it a lower rate than it grows ? Also "taxed" wealth doesn't disappear magically, it is simply moved elsewhere.

In reply to RomTheBear:


Right. You want to tax "unearned wealth" - that is wealth that is inherited or that results from appreciation in value (so does not embody increased primary production.) You also seem to be confusing appreciation in value of assets with income generated on assets. Not sure why I'm going through this again as you're not addressing the points raised.

Inherited wealth: As this is taxed away it is reduced.

Appreciation in value: Ultimately tangible quantities - food, water, power - have to come from your tax. If you tax perceived appreciation in value you do not realise any of these tangible quantities, unless you trade that perceived appreciation for tangibles from outside our system.

Return on investment: if you want to tax wealth that grows through income (rent), as your last message suggests, you are taxing the income (rent), and not wealth.


Wealth does magically disappear. Look at value wiped of stock markets, housing stock, currencies traded internationally. If you tax unrealised assets / wealth, you take real money from people based on their holding of assets that can magically loose money. Perhaps that is why appreciate not assets is normally taxed upon their realisation.....

Stepping way back, this belief that intangible wealth, subject to perception, can be converted into useful resources by taxation worries me. Not just intrinsically, but because people who should know better believe it. Every economy school should have "consider the steady state" written over the door.

In reply to RomTheBear:


Surely taxing wealth at a lower rate than it grows is called capital gains tax? Taxing wealth makes absolutely no sense. For example, I live in a house for which I currently own about 10%. That plus a small amount of savings is my wealth. If you were to tax it, sure, you can have my savings in cash (reluctantly) but with regard to my house I would effectively be giving the government a stake in the portion of my house that I own. Since the value of this is only realised if I sell the house, surely it is a pointless exercise?

And what about those exceedingly wealthy people who are only paper millionaires since all their equity is locked up in assets or companies?

In reply to wintertree:



It seems you are taking everything I say and push it to extreme. Nobody suggested that the national debt should be eliminated in one day.

If we had a net worth tax, like they have, for example, in Switzerland, Iceland or Norway, that would be enough to run a small budget surplus, which in turn, would reduce slowly our deficit.

In reply to RomTheBear:


It's not pushing it to the extreme. If the aim is do eliminate the debt, that is how much value needs to be taxed in the long run. If the aim is simply to match the deficit, then in the long run you must match actual productive capacity with the actual needs of those to whom we owe the debt, and that means taxing actual work one way or another, and not perceived wealth. Perceived wealth is not a gift that keeps on giving, actual work has to happen somewhere. As we have already discusses, actual work is taxed, sometimes when it is channeled through the return generated by assets.

You continue to ignore the problem of realising that value from "wealth" in a form that makes it useful.

I think wealth taxes are fundamentally misguided - strip it all away and in a steady state, long term situation, they are either an opaque tax on work and earnings, or they will deplete wealth. Considering a whole closed economy (The World), wealth ultimately only comes from work. Our housing assets are appreciating faster because of a net influx of wealth from elsewhere in the world, and that wealth is generated by work. So you could tax owners of insanely prices flats in Kinghtsbridge, but in doing so you are taxing work done by people half a world away.

In a closed system, in the long term, the books *have* to balance.

By all means propose a punitive wealth tax over a finite period to rebalance a society for ideological or practical reasons, but please do not believe that it is a *sustainable* way to generate more tax returns.


How does that wealth grow? By work, somewhere in the system. So by taxing the wealth you are introducing an opaque tax on work. Whilst we work being done outside the UK generating perceived wealth in the UK, there is a possibility for a net gain in the UK. The kind of inequality that this promotes and requires strikes me as something you would object to.

In reply to wintertree:


Why hasn't this happened already in the financial services industry?

It might be because the rate of return exceeds the charge.

http://www.which.co.uk/money/savings-and-investments/guides/different-types...

In reply to MonkeyPuzzle:

Or the reverse argument.The economy may have grown even quicker/stronger if they had lowered taxes and cut more even faster.

In other words if they had been alot tougher then maybe things may have improved earlier.

In reply to elsewhere:


Yes, but your link has nothing to do with taxing an asset, which is what I was discussing. If the asset is appreciating tangibly, as in your analogy/link, then the income that appreciates the asset is taxed. Taxing that income by less than the income is fine, and is what your link is about. Funnily enough I understand that...

My example was about taxing the *capital*, which is not the same as your example of taxing the *return*. Eroding the capital with no consideration to the rate of return may deplete the capital. Rom saying that it only takes 1% to match the defect is a fallacy, as that % rises over time as the capital depletes. Now, if there is an income on the capital that is not the case, but then tax the income, not the capital. The only reasons I can see to tax the capital are 1) you wish to tax it higher than the income - so my example holds or 2) there is no income, because it is an asset that is appreciating in perceived value and not through ROI - I have made separate arguments against that..., and it is also not something to which your link applies.

In reply to neilh:

Of course, but my point still stands; the stated aims weren't achieved, so why should we be patting him on the back for failing to deliver?

In reply to wintertree:

Ok but you seem to misunderstand me. I am not saying that wealth doesn't come from work. I am simply saying that the wealth is being channelled more and more through rents, and less and less through wages, in this situation it's difficult to see how basing the tax system mostly on wages can be sustainable.

Taxing concentration of wealth above a certain level is one way to remedy this problem, and many countries, including the US, already do it.

In reply to wintertree:
The link is about imposing a charge on the capital and an annual magagement fee or an annual tax on the asset value are exactly that.

If I have a £100 asset and I pay 1% to my investment manager I have £99.
Alternatively if I have a £100 asset and I pay 1% to the government I have £99.

What difference does it make to my £99 or its subsequent growth if the organisation taking that £1 is called HM Govt rather than XYZ plc?

Why does an annual 1% tax on capital erode capital in a way that a 1% annual management charge on capital doesn't?

>Eroding the capital with no consideration to the rate of return will deplete the capital.
No disputing that but I dispute that a 1% (ish) charge on capital is usnsustainable as that is the usual business model of the finacial services industry.

In reply to RomTheBear:


I agree entirely. I think the over-inflation of both the perceived value of houses, and the cost of renting, are growing problems, both socially and financially. I think the situation with housing desperately needs fixing. This is hard to do without hitting people who have a lot invested in housing. Tough.

But this should be fixed at source - legislation and house building in the supply of houses, and legislation and tax on renting and a reconsideration of the consequences of housing benefit - this should not be fixed by a punitive tax on wealth.

The circumstances you describe can be dealt with by taxing *return* on *wealth*. Taxing wealth directly is a different kettle of fish with a lot of other consequences. Given the long term view, it seems that inheritance is a safe point to tax wealth, but before then, all bets are off.


Another well needed laugh. The US tax system is not a shining light for an efficient, clearly purposed, effective tax system.

In reply to elsewhere:

Okay, I understand your point more clearly now, thanks.


1) You can decide to put your assets into a location with a management fee, or without. That is your choice. You presumably make that choice based on the likely return and risk. If HM government does it, you have no choice. Where-ever your assets are, there is a tax to be paid.

2) You can chose XYZ plc to allow you to realise the asset how you wish (within products offered), and the fee is taken from that asset. With HM government they'll take it from your earnings, not the appreciation of your assets, which may be appreciating in a non-tangible way which may crash by the time you come to realise them. They have no choice, as your asset may be a house, or an oil painting, that offers no direct way to tap its value for tax.

Anyone with a financial product can afford to pay a small fraction of its worth as a management fee - or as a tax. The same can not be said of anyone with an arbitrary asset.

Houses are not stocks and shares ISAs.

In reply to wintertree:


You seem to be focusing on the housing market, but although it's a sizeable portion of the economy, it's not the biggest.


I agree with taxing "returns from wealth", in fact this is ultimately the aim, but the reason why I am suggesting taxing large concentration of wealth directly is simply because these large concentrations of wealth are usually escaping all other forms of taxes on their returns and inheritance.


Then what about Switzerland, Norway, or Iceland ? They all have a wealth tax similar to what I suggest ?

The US has a property tax, which I agree, is not fit for purpose, for different reasons.


I understand your concerns about wealth tax ultimately forcing the liquidation of assets to pay for the tax, ultimately generating deflationary pressure. But it's not a problem as long as the tax is kept well below the usual rate of return on capital, and executed only on large capitals.

Which is exactly how it was implemented for example in Iceland, Norway, or Switzerland.

In reply to RomTheBear:


Indeed, but the bigger sources of wealth generate direct financial returns, and those returns are taxed. So they already factor in to your "tax on wealth" idea


If people are able to side-step existing taxes, how is a new tax going to help? Tighten up existing taxes. Inheritance tax in particular. "more taxes" is not the answer to problems with administrative burden, evasion and avoidance in taxation.


Yes, but any capital with a measurable return is, or should be, taxed on that return under current rules. So you are left with only a tax on intangible returns, and that is exactly where deflationary pressure is going to be a problem. We're particularly vulnerable to that given the insanities of our current housing market.

More generally, I don't fundamentally believe that a wealth tax can work in the long term, in a closed system, as all economic concepts embody work, and work has to be done and we choose to redistribute work via money and tax. A tax on stored money is - over a long enough period of time - a tax on work, there is no choice in the matter. So a wealth tax could be deployed a a short term financial rebalancing tool for social or practical means, but in the long term it is nothing but a sham, opaque tax on work. One that makes a really pretty political football.

I find it hard to see how - in the long term - a tax on wealth can be considered any different to a tax on work.

In reply to wintertree:



Well it's different simply because although you can see it as "tax on work" indirectly, my point is that it has the advantage to fall more on the owner of the capital, instead of falling on the workers.

As the workers are getting an increasingly smaller share of the capital on form of wages, they become less and less able to be raise significant amount of taxes, so you have to find it somewhere else.

In reply to wintertree:



Well I agree, and a wealth tax might not be the best solution, but how do you get money back in the hands of the workers if you don't do it through a redistributive tax system ?
Also you seem to focus on housing but it's only a small share of the economy, 20% at best.

In reply to RomTheBear:

Oops deleted my last message.


Because, as I've said, other than housing major sources of wealth pay tax on the income they generate.

If you did do if by a wealth tax, and we became dependant upon that, you would have created an incentive to maintain the status quo you dislike.

In reply to wintertree:


Well I disagree I don't think there is any major difference. If you own a million ponds in shares and that portfolio goes up in value 5% every year you don't pay any taxes on that. Same if your property price goes up.
Eventually you may have to pay capital gains tax on it when you sell or transfer, but that would still be generally a much lower level of tax than what you would have to pay if that revenue was in the form of a wage.

In reply to RomTheBear:

The unique characteristic of home ownership (not property investment) as a means of building capital is that gains are free of ANY tax at all. Oddly enough it does cost a small one-off duty to buy a home. It's a bizarre state of affairs.

How about simply taxing home sales to capital gains (making the broad generalisation here that most people only own one house)?

No need of for guesswork in establishing asset values, regular income for the state, (mostly) unavoidable and will depress the spread of home values so helping the young to compete on the property ladder.

In reply to BnB:



Wait but I think we are simply not talking about the same thing.
I am not suggesting that we should tax people who own only one home based on the value of their single home (apart from maybe higher value mansions)

I am simply suggesting that we tax wealth of people who typically have a net worth over several million pounds (be it in real estate, or shares, others) and who are currently paying a significantly lower percentage of tax than people whose only income and wealth are their labour and their one home, despite the fact that they have seen the value of their wealth rise much faster than the economy for the past decades.

98% of the population has a net worth below a million quid so what I am suggesting is not something that would affect many people.

The problem is that the top wealth owner in the UK basically escape entirely the whole tax system, if you look at the data from HRMC, there are no billionaires in the UK. But we know of course that this is simply not true, in fact we probably have more billionaires per head of population than any other country.

In reply to ByEek:


Eventually could be a long time and who knows what financial shocks we could suffer before then? Our debt/deficit etc isn't critical at the moment but one more major shock could quickly tip us past the point where debt to GDP ratios and such like become unsustainable and our borrowing costs rocket i.e we could find ourselves in the same situation as Greece or Spain but without Germany to come to our rescue.



Indeed, the £1.4 trillion debt doesn't include PFI projects and pension obligations.

In reply to MonkeyPuzzle:


That was the original aim but that was before our biggest trading partner, the Eurozone, went into meltdown.

In reply to neilh:




This is a great example of the media not explaining things to the public.

We've had a much bigger recession than we would have because of austerity. It would have been even worst except they silently eased off a couple of years ago and did some arguably irresponsible things to get the housing market going.

The US hasn't been as bad as the UK and Europe because they had less austerity.

Europe's been worst than the UK because it had more (and because of currency issues and monetary policy not being aggressive enough)

This is as close to fact as economics gets and intelligent educated people don't know... it's really sad

Hope you take the time to look into it and reconsider your views

In reply to wintertree:

Wealth or income distribution.... take your pick

Bringing the housing market under control wouldn't be a bad thing and it would only affect those that already own an expensive house.....

In reply to BnB:

Disproportional? All subjective really. But I'm glad your happy paying higher taxes than the less fortunate. So am I.

I'd be more on the taxing the rich side of things

In reply to pec:





It won't obviously cost more in the long run. There are costs to paying it too fast. Extreme example but, if decided to pay it now we'd crash the economy and that would cost more... So we should be trying to pay it in the 'optimal' time....

In reply to Donnie:


Nobody is suggesting we pay it off right now but paying debt off over a long period does cost more than paying it off over a short period but that does incur some short term pain. The debate is what is optimal.

In reply to pec:


I know no ones suggesting that, and I'm saying the debates about what's optimal and that reasonable economists think what the tories have done and plan to do is too quick.

It doesn't follow that a longer period necessarily costs more, which is proven by the example of paying it off really really quickly..

You mention shocks meaning that interest rates go up in future, equally they could mean deflation.

In reply to RomTheBear:

This is now becoming an increasingly popular suggestion amongst academics and financial institution in the US.

Hmmm, lets not let their Constitution get in the way of a bit of redistributive theory.

Art. I, §2, cl. 3: “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers . . . The actual Enumeration shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years . . .”

Art. I, §9, cl. 4: “No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”

Sixteenth Amendment (1913): “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Cheers
LD

In reply to RomTheBear:


If your portfolio goes up by 5% you do not have access to that gain in value. If you cash some off the portfolio in, you realise that gain and you pay CGT on it. If the unrealised value of an asset goes up and you tax someone, are you going to give them tax back if the unrealised value goes down? My house lost 30% of its value and is still repressed below its 2008 purchase price, can I please have some tax back on my negative increase in wealth? I don't mind if it's now or a Capital Loss Untax when I sell it...


So alter CGT. Once again you seem to think new taxes are te answer to evasion, avoidance and unfairness in the current system.

As far as I am concerned I am bowing out. You have produced good reasons for altering enforcement and/or rates of existing taxes, and I can infer arguments for addressing crazy house prices, and perhaps charging a form of CGT on first houses at their sale or remortgage.

I have seen no concrete evidence from you that a "tax on wealth" would address the deficit or the debt, only that it would make you feel better about the fact some people are really rich. If you want to take from the rich to give to the poor for social reasons, say it, but do not dress it up as a sustainable solution to the deficit.

In reply to pec:



It is easy to knock big numbers around and say they are bad. You mentioned that there was a point of no return with regard to the ratio of GDP to debt, pointing out Spain as an example.

http://en.wikipedia.org/wiki/Government_debt#By_country

However, Spain is on about 85% compared to our own which is actually about 79% (Wikipedia is a bit out). This suggests that Spain's problems aren't necessarily with the ratio, but other factors.

There is also a raging debate in the economist world about whether there is a limit to the GDP / Debt ratio and if there is, what is it? No one really knows.

In reply to ByEek:

Spain's problem's the Euro and Germany being dicks

In reply to Donnie:

I read the Economist or FT.Hardly media not explaining things.Maybe you should?So i will not be altering my views.

US is a far more flexible/dynamic economy that UK/ Europe and introduced savage cuts quickly ( firing people quickly , banks taking bigger hits etc).

In reply to wintertree:

Yes you do in fact have access to that value.
Because it increases your net worth you can now borrow money cheaply against that collateral, all you have to do is pay the interests.
When you die you pass your portfolio to your kids who will now sell you assets to repay the capital, without having to pay any CGT, nor inheritance tax.
You can this way live off the value of your increasing capital without ever paying one cent in taxes.

In reply to wintertree:

Well if you think that raising a new taxes doesn't help reducing the deficit I am not sure what is it you are suggesting instead.
Increase the current one on wages ? Doesn't seem like a good solution to me if we want to make work and wages attractive.

In reply to neilh:

Afraid that's exactly the media not explaining things, they're both publications with a certain world view written for people with that same view.

Although the FT do have Martin Wolf to add a bit of balance and he's been right all along.

If you plot austerity and growth since the recession for the US, UK, Eurozone (and Eurozone countries) there's a strong negative correlation between austerity and growth.(And there's little correlation between the size of countries pre crisis). The countries with less austerity had more growth....

You're a great example of a guy believing that they're informed and they're getting an objective balanced view when sadly they're not. Exactly the kind of guy this thread's aimed at, although I might have let myself down on persuading you to reconsider...

In reply to RomTheBear:


Are you not sure because you can't read, or because you are ignoring most of what I have written?


I would be interested if you have figures to suggest that many people do this, and pass the assets down generation to generation avoiding all tax, and if so, if there is sufficient wealth to be skimmed off to make any difference to our tax coffers. It is also not clear to me why the asset is not liable to either CGT or IHT - this sounds more like a problem with tax evasion than a need for a new tax. Further, how much hard cash are lenders going to lend against a fluid, unrealised asset? People borrowing heavily to do this are exposing themselves to a lot of risk?

As I have repeatedly said, the answer is to crack down on tax evasion, not to introduce yet more putative taxes.

Come back with hard numbers for how much capital is in the increasingly narrow class of assets you can argue the case for, how much you wish to tax that capital, and how that contributes to the national budget. Otherwise it just comes across as wanting to tax the rich for social reasons, and not to address the budget problems.

In reply to Donnie:

>

I was under the impression it was because UK is more reliant on trade with Europe than the US, and was cheaper energy/shale a factor ?

In reply to Donnie: Could you post some links to articles about the deficit by the ecomists you favour? The one link you've provided barely mentions it.

In reply to Donnie:


You might be mixing up cause and effect. The countries with less issues had less austerity, recovered quicker, more growth.

LD

In reply to Donnie:

Lots of people seem to be interpreting 'Austerity' according to mainstream perceptions. Check out Mark Blyth's youtube talk, it was a Google audience talk. Even better, read his excellent book.

Donnie, could you recommend a few blogs, please. I usually check out 'Naked Capitalism', the odd Max Keiser discussion and several left-leaning sites, each week, to compliment the MSM.

In reply to wintertree:

You still don't tell me why finding a way to tax the very rich who can currently bypass most of the tax rules is not helping to address budget problems.

Wealth tax is only one way to do it, but the main advantage IMHO, is that in the first place it would allow collection of data, I would even be in favour of a very low wealth tax maybe 0.01%, see it a simply a "fee" for the collection of the data. This could also be seen a a service to owners who can use this as proof of ownership, after all protection of property rights is a primary purpose of government.

Once you have this data you can start taxing properly, be it through a wealth tax, or other means if you don't like wealth tax.

But currently there are hundreds of ways the very rich can escape tax, simply because HRMC doesn't know who owns what. If you look at HRMC data, apparently we have currently no billionaires in the UK !

In reply to RomTheBear: You want the wealth tax in order to gather data (data you don't currently have) so you can have a wealth tax. Nicely circular.

In reply to Sir Chasm:

Well yes but we currently have no way to know who owns what, but we know for a fact that there is a big disparity.
If you look at HRMC figure of inheritance data, we currently have no billionaires in the UK, and there is a about a trillion pound missing, so there is clearly a problem somewhere.

If you don't like wealth tax call it a data collection fee, the first goal is to first have the data, and then we can start taxing fairly everybody.
It's pretty clear that our current system which is based mostly on wages is not going to work for ever in a economy where wages don't grow as fast as the capital.

Interestingly the IMF and and the bundesbank have come up with the idea of "one-off" wealth tax to fix the Eurozone governments debt problems.

http://www.ft.com/cms/s/0/a3ebc206-876d-11e3-9c5c-00144feab7de.html#axzz3Et...

In reply to MonkeyPuzzle:


Yes, yes but all sorts of things 'outside their control' got in the way of that, (so apparently they are excused.)

Snag is, I think that is what Labour said,
(it wisna me,a big boy came along and stole ma ball)

The Tories did not accept that, and claimed they could do it better than Labour
(and fix all the stuff that they said Labour stuffed up.)

The government can't really critisise others, and then put on their coat and use their excuses when they don't hit their own targets.
(But they have)

In reply to RomTheBear:



because wealthy individuals register property to foreign companies and so can avoid IHT and other taxes ?

In reply to Jim Hamilton:


You are of course correct by any empirical measure but your view does not coincide with Donnie's patronising domination of this thread so I have concluded that you must be wrong.

In reply to RomTheBear:




Why would people give you the data you don't have to enable you to take more money from them? What if the billionaires aren't the beneficial owners of the wealth, what if it's owned by companies?


Nothing lasts forever.



Did you read that? It's a proposal for countries "facing the the threat of bankruptcy" and imposed "in conditions of extraordinary national crisis". But, as Donnie has told us, the deficit isn't a problem, let alone a national crisis.

Oh, and "one-off"? Lol.

In reply to Donnie:

I base my view on running my own engineering company and exporting 95% of what I sell. 80% of that 95% is outside Europe. So I am probably more informed about what is going on in the world than most.

So what do you do?

In reply to Jim C:

Quite. Apparently a European crisis is less avoidable than a global one.

In reply to Sir Chasm:

What is your suggestion then ? I am perfectly aware that taxing wealth is far from perfect, but nobody seems to come up with alternatives.
It is clear that wages are not growing as fast as wealth does so putting most of the the tax burden on wages is not going to work for ever.

Funnily enough we have pretty much a fully automated and realtime tax system for wages with automatic exchange of information between employers and HRMC, but we are unable to do the same for capital gains tax, simply, because we have no automatic collection of data, there should be some sort of ledger of who owns what and then we can decide how we tax it.

In reply to Jim Hamilton:

Indeed, that's why we need global exchange of banking and ownership information.
But anyway you don't really need to hide too much to avoid IHT theses days in the UK (which is, BTW, a wealth tax) There are enough ways to avoid it completely,even on very large estates, through all the gifts and trusts.

In reply to RomTheBear:



Halfpenny tax on text messages and facebook likes, the kids will pay off the deficit in no time.


Well, no. We would only embark on that monumental (one-off) task if we'd decided to tax wealth. Because it would be ridiculous to do it speculatively, just on the off chance we might have a one-off wealth tax.

In reply to Sir Chasm:

Apart from that do you have any other constructive idea ?


This can be useful for capital gain tax and inheritance tax as well, which are currently relying of self-reported data.
It might seem monumental but in fact banks and other financial institution already it, otherwise how would they know what belongs to their customers ? it's simply a matter of sharing that information between banks and government.
And as I said, it can serve purpose for asset owners as well, as it would give them a paperwork-free way to prove ownership of their assets.

In reply to RomTheBear: Of course it's monumental, it's childish to pretend otherwise. You seem to think people hold their "wealth" in bank accounts, rather than pension funds (are you taking a chunk of those?), shares, property, paintings, wine, racehorses, gold, etc, etc, etc. And all for a one-off tax to solve a problem Donnie says doesn't exist.

In reply to Sir Chasm:

Every financial institution including pension funds know what their customer hold, they couldn't function otherwise, for real estate we already have registers.

In fact such system are already in place with almost 50 countries in the global exchange of banking information, when Switzerland joined the scheme the US recovered billions. if we can do it for banking it can be done for shares, real estate and pension funds.

Of course there is some effort needed but certainly beat having to investigate individual one by one, automatic exchange of information between financial institutions and government is a better, cheaper and less bureaucratic way to do it.

In reply to RomTheBear:

Okay I have been reading around to learn the economic terms for the concepts I have failed to communicate to you about capital assets being of a value largely unrelated to actual money, especially their apparent returns whilst not liquidised, and it not being wise or sustainable to raid them on a capital wealth tax.

Assets in the UK are highly geared, or leveraged in US terms. A gearing ratio of 15:1 for example would mean £1 appears 15 times over in assets due to circular lending/borrowing. So the money that appears in these assets you are concerned about is largely not real, and not available for tapping. If you tax assets geared by 15:1 at 1% you remove 15% of the wealth.

Perhaps half that wealth you are worried about isn't really there. Every now and then the world realises it and there are recessions and depressions, and then we delude ourselves again with all sorts of economists making all sorts of predictions.

It all comes down to physics. Work has to be done, and any redistribution must ultimately tap that source of work. Anything else is just increasingly fancy book keeping. Consider the steady state.

In reply to wintertree:



Well I agree some assets are overvalued, so any wealth tax would have to be very conservative when valuating assets. But there is a potential benefit of a wealth tax to this problem. By forcing the liquidation of some assets to pay for the tax it actually brings the value of inflated assets down to more realistic levels.


My fundamental point is that tapping that "source of work" on wages is not sustainable, because a smaller share of the wealth generated by this work is channeled through wages.

In fact we already have a wealth tax, inheritance tax is typically a wealth tax, unfortunately because we don't know who owns what and because there are so many loopholes it doesn't bring much.
Instead of taxing large estates heavily at the moment of death, which incentivise people to hide their wealth or find loopholes, it would probably be smarter to tax it at a very low level continuously. There is no fundamental difference really, it's just that a wealth tax would make it easier to get the proper information to the taxman in the first place and less painful to pay.

In reply to Jim Hamilton:


The European things does make a difference, but actually makes it more important to cut the deficit later.

Not sure about shale - it probably just contributes to how rich the US is - not to speed of recovery.

More generally, the relationships holds between European countries as well.

In reply to neilh:



I'm a (fairly junior) government economist and I've followed the debate closely since the crisis. I've looked at both sides of the debate, the predictions they've made, the consistency of their arguments and it really is as clear as these things get.

This is a case of standard text book economics working really well and being ignored.

With genuine respect, running a company that exports a lot probably doesn't give great insight into the effects on the economy of government spending/borrowing.

Apologies for being a bit patronising/rude by the way. I just feel quite strongly about the whole thing.

In reply to Sir Chasm:

That's not what I've told you.

The deficit needs to come down. It's just that they've tried to do that too fast - I say tried because in trying to do it to fast it didn't come down as quickly as they said it would.

Possibly incompetence, possibly shrinking the state and cutting welfare for ideological reasons.

In reply to BnB:


Yes, realise I have been a patronising. Apologies. I'll try not to be.

In reply to Dorq:



Yes of course.

Simon Wren Lewis on Mainly Macro, Paul Krugman at the NYT, Martin Wolf in the FT, Brad Delong, NIESR's blog. Noahpinion. Stumbling and Mumbling by Chris Dillow.

They're all fairly left wing in their political views, but very objective re the macroeconomics of this financial crisis and have been right in their predictions about the effects different countries and the EU's policies since the financial crisis.

In reply to Dorq:


Here it's interpreted as cuts in spending in real terms.

I'll check out the talk though.

In reply to Lurking Dave:


There's a few ways they check the causality direction - mainly that changes in policy within a country affect growth.

For example, in the UK the government eased up on the austerity when we went double dip and growth followed.

Second, countries that have been forced to implement deeper austerity because they're part of the Euro have done worst than other countries that had less austerity but similar or worse initial shocks - eg the UK.

It's also worth noting that they some of these countries were in surplus pre crisis - eg Spain.

In reply to Donnie:

I see the results globally of poorly run economies. You just do not sell there, nobody buys anything, nobody has money.So when you peel away at why a market collapse, you learn what to look at. So for example France is going to be a lame duck for the next few years as govt spending/borrowing is not good/out of control.Net result - you develop an insight - you have to- or else the company is not successful.

In reply to Sir Chasm:


That was a link to his whole blog. There's quite a few in there.

So, blogs to look at -

Paul Krugman, Simon Wren Lewis (Mainly Macro), Chris Dillow Stumbling and Mumbling, NIESR blog, Martin Wolf at the FT (paywall), Brad Delong. Pieria have a lot of good stuff.

I'll try to dig out some specific articles when I've a minute

In reply to RomTheBear:


I think being heavily geared and being overvalued are not the same thing. Being helevers geared means there is not as much actual money in a closed system as there is on the books. Being overvalued means someone believes others will pay more for an asset than they will, and that could include money from outside the system.

The kind of financial products you are interested in taxing capitally are probably built on highly geared money. Quite separately the assets within may also be overvalued. Combine the two and you have a real problem. I think...


I find that a much more sensible view than all this poorly thought out nonsense of a wealth tax. Take your fundamental point, and address it. Pay and rewards structured are broken - so fix them. Don't lock that brokenness in by then building a new tax on top of a consequence of the brokenness. That is bonkers logic.

In reply to Donnie:

Cheers

In reply to wintertree:


I really don't understand your point about "highly geared money" whatever you really mean by that. If it's leverage you are talking about it doesn't increase the net worth of an individual, in fact it reduces it so I am just very confused at which situation you are talking about.
If you are talkign about is for example companies using their profits to buy back their own shares thus inflating their price instead of investing in jobs and wages, then it's exactly what I am talking about. A higher share of the wealth generated goes into the hand of the owner of these shares through increased valuation, and less through wages/jobs, another example of why putting all the tax burden on jobs is not working.


I don't think its that pay structures are "broken", even though there are probably lots of inefficiencies in the job markets, it's more fundamental than that. Growth is lower than the rate of return on capital, so more of the growth is channelled through rents and returns and less through jobs and wages.

So you need to tax wealth at some point, it seemed to me that inheritance tax was a good way but it has been almost entirely eliminated and avoided.
So if you don't want to create any new tax fine stick with inheritance but to actually work it will require exactly the same collection of data and have the same effect, only it will be very unpopular.

In reply to RomTheBear:


Aha - so you acknowledge that a person with a loan and an asset (which could be money loaned out in turn) is geared or leveraged (same thing); yet you want to tax their asset in precisely that circumstance as you outlined earlier.

Their assets is geared - and the wealth embodied in that asset may be geared 10x over or more, meaning it isn't really there to be taxed - as you say "it reduces ... their net worth" (shortening a sentence etc.)


This is where you are fundamentally wrong in my view.

How can any wealth appear ("growth") without work being done? Money is just a tool for rebalancing work. If all work stopped, so would the economy and the growth of assets - indeed most people would die due to lack of food within a week or two. Fundamentally all growth *is* fuelled by the work that is done by man and machine. Everything else is just book keeping on top of that.

So if I understand your view, when most people do work, some of that energy is being diverted into growing the capital assets of the rich instead of those who do the work. How else can those capital assets grow? Magic?

So I repeat - why propose taxing the assets? Why not address the base of the problem, that initial distribution of financial reward for the work done?

Asset's don't grow by magic, but by the work of others. In concrete terms, an asset is only worth what someone can pay for it, if nobody works nobody can pay.

I still maintain that the problem you perceive would be caused by diversion of reward from primary work, and that if you tax the assets other people grow via diverting reward from primary work that you will be creating a tax that is either insignificant or significant. If the former, why bother? If the later - congratulations - you've made the country dependant on the diversion of reward from primary work to the pockets others, as we're reliant on the significant asset tax.

Nonsense logic.

In reply to wintertree:

But as I said I want to tax net worth.


If you asset has been leveraged ten times through borrowing, then you are not rich, you are simply very exposed and heavily in debt. I don't suggest we tax anybody in this situation.


Well this has been true for most of history, rate of return has never really changed, it's always been more or less 5%, even in period of zero growth.

I think you understand the rate of return on capital as the rate at which something is growing, which it is not.

Imagine you have a land producing grain. The owner lends it at a rate of 5% to a group of farmers to produce grain. They give each him 5% of the grain they produce, and keep the rest for their consumption. The grain that they give to the owner goes to his consumption. The population of farmers stays the same and the grain they produce is just enough for them to eat.

The growth rate of this closed system is 0%, yet the rate of return of the owner is still 5%.

This is easily demonstrable through empirical evidence anyway, we now that for example during the antiquity land and property was rented at about 5%, even though there was virtually no population or productivity growth at all.

In reply to RomTheBear:

It doesn't. It leaves the net worth unchanged. I have £100 in cash, no debt.=Net worth £100
I borrow £50. I have £150 in cash, £50 debt=net worth £100.


But the owners have spent money buying back the shares. So their net worth remains (other things being equal) the same and the capital they used to buy back the shares can be used by others to invest more efficiently.

On the subject of wealth taxes in general the reason that few countries have them and many have abandoned them is that they are almost impossible to collect. That. of course, is why government's resort to property taxes, because property is impossible to move and difficult to hide.

In reply to Postmanpat:


Yes OK but winter was talking about a situation where someone with 10£ of assets would borrow 100£, in that case you are in debt.



Well I agree, my point is that we should make it easier to tax wealth (whether it is inheritance or continuous, whatever you prefer) trhough automatic exchange of information.
After all if we managed to get pretty every employer small or large in this country to report salary information to the taxman, it is certainly possible technically to get financial institutions to do the same with the assets of their customers.

In reply to RomTheBear:


I have worked, saved, took out a mortgage and now own a house. Why would the 23 year old me bother doing any of those things if I'm going to be penalised for owning a house in 25 years time?

Taxing wealth just seems like an envy driven agenda, not a solution to our debt crisis. Reading the guardian today about the latest donor to UKIP, Aaron Banks whose company avoids paying UK taxes

From http://www.theguardian.com/politics/2014/oct/01/tory-donor-arron-banks-incr...

"Rock Services Ltd, of which Banks is a director, made a gross profit of £19.7m last year while paying corporation tax of only £12,000. The company deducted £19.6m in “administrative expenses”.

Abuses like this, perpetrated by people who buy political influence to make sure they get laws framed to suit themselves are a prime reason for our apparent inability to pay down the deficit.

In reply to 999thAndy:


You're not, it's not a serious idea, just a flight of fancy.





That's a lot of paper clips.

In reply to 999thAndy:

I think you didn't read the part where it said it can be done only on very large estates, worth over several millions.

I find it amazing that you are happy paying 40% taxes on your labour but find it outrageous that someone who inherits several million pounds without doing anything would have to pay something.

The point is simply to tax individual net worth when it accumulated in large quantities, nobody is talking about punitive rates here.

You can call it envy driven, but I think it's simply a necessity, unless you want to live in a 19th century type of patrimonial society where most of the wealth is passed on from generation to generation to the same few families.

In reply to RomTheBear:

But you still have a positive net worth. I own £10 of assets: net worth £10.
I borrow £100.
I now have £110 in assets and £100 in debt: net worth £10
Any change in my net worth is dependent on how the value of my assets changes.


Well yes, although there are obvious huge technical and jurisdictional difficulties in doing this and potential infringements of privacy. Your implicit assumption is that the State is benign and has a right to know everything about us.


In Panama? There are huge incentives for States to attract lightly taxed foreign owned assets and not to participate in international agreements.

In reply to Postmanpat:

Yes OK but it doesn't increase you net worth, which is what winter seemed to suggest.



Well if you want to tax people you have to share their financial information with the state it's pretty basic. We already share their wages information automatically, it pretty stupid that for the rest we rely solely on self reporting.

In terms of privacy I am more worried about GCHQ than HRMC.


Indeed, but you know what, it's in fact pretty easy to get tax havens to share their information. Simply because they are small.
For example as soon as their was a political will in the US to get Switzerland to share banking information, the Swiss gave in pretty quickly, despite a century long tradition of total banking secrecy.

In reply to RomTheBear:

Due to property prices being ridiculous in the SE many people will end up with a 'net worth' of several millions.

In reply to 999thAndy:


I don't see why that's a problem, as long as we don't tax the primary home.

In reply to RomTheBear:



Not really. The State still has the ability to investigate if it doesn't believe you. This represents a reasonable balance between the ability to collect taxes and the imposition of an over mighty State.


You should be worried about both.



I think you underestimate the ability of very rich people to hide their money. They simply won't stick it in a bank.

In reply to RomTheBear:


But that is what the "mansion tax" is doing.

In reply to Postmanpat:

How the state can investigate if there is no exchange of information ?

In reply to Postmanpat:


The mansion state is badly designed and doesn't solve the problem. Focusing wealth tax on real estate is just stupid, that's not where most of the wealth is anyway.

In reply to Postmanpat:

No I don't that's exactly why I suggest automatic exchange of information between financial institutions and governments, and a low tax on wealth.
The idea is that it has to be low enough and difficult enough to escape that it cheaper to pay it than to avoid it.

Currently what you get instead of a low continuous tax on wealth is a huge levy on inheritance, which is very unpopular and therefore is being eroded massively, is very easy to escape, and provides a massive incentive to hide capital.

In reply to RomTheBear:


It can use its statutory compliance powers or, ultimately, institute a criminal investigation which will enable them to obtain much of the relevant information.

In reply to Postmanpat:

Ok so what you are suggesting is to have a highly policed state instead of transparency.
If you look at wages, do you think we should revert back to people self reporting their wages to the state ?

After all why someone who owns only his labour has to accept total transparency whilst owners are entitled to privacy ?

I understand you concerns about privacy but I don't think that the solution is more opacity, it can be solved through anonymisation of the data, encryption and so on.

In reply to RomTheBear:


No, I'm saying that we already have a system that enables the State to investigate tax evasion. This is far preferable to giving it automatic knowledge of all our private financial information.


No, but because allowing the State access to one set of information is acceptable does not mean it should have access to all information.
Should we have CCTV in everybody's kitchen because we have speeding cameras?

In reply to Postmanpat:

Well it's obviously not working, there is about a trillion pound missing on the HRMC inheritance data.

Also people already give automatic knowledge of their financial information to private companies without their consent, Experian knows more about my financial situation than the state does.


Indeed, but you have to explain to me why it is acceptable to share automatically information on wages, but not on assets.

Privacy issues can easily be resolved though anonymisation and encryption, the point is that the state should have an efficient way to tax that is not cheaply avoidable.

In reply to RomTheBear:


Maybe they are not using their powers very effectively. Can you link to that number by the way?


Probably not unless you gave it to them. It basically knows what money you have borrowed and whether you kept up with the payments.


I don't. I simply work from the basis that the State should have the minimum necessary right to our information.

In reply to Postmanpat:


Well if would argue that financial information for tax purposes is pretty much the minimum necessary.

In reply to RomTheBear:


Which is yet another reason why a wealth tax is a bad idea.

Taxes seldom produce the outcomes the designers intend.Did you know that after the introduction of 7% stamp duty on £2mn+ property purchases such transactions fell by 29% whilst those on houses less than £2mn rose?

Where is that link to the missing inheritance tax?

In reply to Postmanpat:


Well that's exactly why having such targeted taxes doesn't work, people work around it.
That's why you need a broad and low tax on wealth instead of very high rates on very specific transactions. It has to be automatic, cheap and easy to pay.


http://www.taxresearch.org.uk/Blog/2014/08/11/hmrc-is-turning-its-attention...

In reply to RomTheBear:


I think we are decades away from being able to monitor wealth. People will still find ways of sheltering it. Do you know why all those awfully honest Swedish socialists own estates in Scotland? Fancy trying to work out where Roman Abramovich hides his wealth?


Bizarre methodology with no accounting for legitimate IHT avoidance or the wealth not held by those above the threshold or wealth held by foreigners. Murphy's usual back of the envelope stuff that the media then treats as reliable data. Not that i think HMRC has the vaguest idea of national wealth or IHT legitimately due.

In reply to RomTheBear:


Half a sec. I think you have gone a bit to far. As citizens, we do not exist to fund the state. The state exists to serve us and for that we pay them taxes. We come first, not the state. The idea that the state comes first and we exist to serve it conjures up images of a bleak Orwellian novel in my mind.

Sure, the system is not perfect. Perhaps our expectation on what the state should deliver are too high?

In reply to ByEek:


It's fairly amusing, people have been sharing their data on wages and real estate ownership for decades with the state for tax purposes. Is that Orwellian in your opinion ?

You can argue that tax is not necessary and that's fine, but don't tell me that it is possible to tax without the proper information.

In reply to RomTheBear:


It's impossible to police crime without CCTV cameras in every home but that doesn't justify doing it.

In reply to Postmanpat:

I don't think it's a good analogy, as long as we wish to tax to fund certain services provided by the state somehow you have to disclose to the state how much you earn/possess.

It's really amazing that you don't seem concerned that for those who own only their labour the state knows everything about their income, but for those who own huge amounts of capital they should be able to keep it entirely secret on privacy grounds.

In reply to RomTheBear:



Why should the the State know the contents of my bank account?

In reply to Postmanpat:

Well when you die they have to know your balance to know how much needs to be taxed or not taxed. It's pretty simple really.

Are you saying that we should give up all form of inheritance tax or other forms of wealth tax on the basis that it invades privacy? What about incomes then ? Should we eliminate income tax on the basis that the state shouldn't know how much I earn ?

In reply to RomTheBear:


Yes. But you are seem to be suggesting that the state should be able to see everything whilst citing that simple encryption and anonymisation would sort out privacy issues. I'm sorry but I don't want that level of scrutiny and I don't trust the government to do the right thing these days. If there is one thing government is crap at, it is anything to do with technology.

Politicians are very interested in what I think in the run up to an election and then as soon as they are in power, they set their own agenda. Information these days is power and I want the government to have the absolute minimum required to run a successful civilised state.

In reply to ByEek:

Well I would consider wealth information the bare minimum if we intend to have any wealth on tax such as inheritance tax ! How would you do otherwise ? tax everybody a flat fee ?

Really this privacy debate is a sideshow to avoid talking about the fundamental issue of tax evasion. Sure we can reinforce privacy in many ways but I think you are confusing getting better data with reduced privacy.

If the state needs to have information on me for tax purpose I prefer that it is accurate and with a proper oversight rather than inaccurate with no oversight.

In reply to RomTheBear:

How do you calculate wealth though? Surely it fluctuates minute by minute? The land registry will tell you I bought a house in March. However, it doesn't tell you anything about my wealth associated with that house, or its current value. What about companies or stocks?

Inheritance tax is easy to calculate. At a point in time (shortly after someone's death) you value and tot up their assets and then apply inheritance tax on their cash value.

In reply to ByEek:

Here you go then ! Here is one way to do it.

In reply to RomTheBear:


No I do not. I am wondering if you are deliberately and consistently misunderstanding to argue for the sake of it.

I am not a halfwit, I understand that rate of return on capital is income generated by that capital. We have been over this. Tax the income.

You seem unable to separate "return on capital" - something which can be taxed - and "growth of capital" - which other than by return, involves geared money and perceived worth. You keep insisting you want to tax the later as a tax on capital with your talk about wealth increasing through capital growth and not income. If the capital is growing through a concrete income, tax that. If it is growing in ineffable ways you just want to take concrete wealth from people because of perceived wealth and this has two fundamental flaws - the wealth you tax is not concrete and may evaporate or represent all sorts of clever book keeping that does not relate to actual work, and it's nearly unworkable in practical terms.

Frankly I can't tell what you want, other that some socialist social engineering through effectively a one time wealth redistribution, that may or may not have merits of its own, but that is in no way a sane or sensible way of addressing the defect in the long term.

In reply to wintertree:



I do, I think you are missing my point. My point is that because return on capital is currently much higher than growth, it means that wealth tends to accumulate more quickly through returns than from labour.

So it is a problem for the state as long as they tax mostly wages and not other forms of returns, or target wealth more directly.

Overall I think that taxing wealth directly when it accumulate above a very high level is more difficult to do but overall better because it doesn't discourage investment as much as taxing the returns does.

In reply to RomTheBear:

Only for those who meet the threshold and then at a one off moment in time. This is vastly different to a comprehensive State database of all personal assets.


No, but as I said above.I believe the State should have the minimum necessary data about us. Income is a convenient and practical way of taxing us and one of the least invasive of privacy because our employers know the numbers anyway.

In reply to Postmanpat:


Well nobody says that there should be a database with the assets of everybody, in fact 98% of the population has less than a million pounds in net worth so the vast majority of people are not concerned.


Ok so what do you with people who have typical wages but huge wealth, should they be exempt from further tax on the basis of privacy ?


Don't you think that you bank knows how much you have in your account ? or your pension funds knows how much you have ? It's the same situation. The goal here is simply to make sure that for people who have significant assets susceptible to be taxed they are reported automatically to the taxman, instead of this self reporting nonsense which is BTW a nightmare of paperwork.

In reply to RomTheBear:


So what you are effectively proposing is that once a year, an army of government officials are going to tot up the assets of everyone in the country and then take a slice of those assets in cash?

So how does that work if you assets are not monetizable or have loans associated with them? If my asset is a £100,000 gem stone or piece of art, how to you take a slice of that?

In reply to RomTheBear:


Prove it….


They should pay tax on the income from the wealth.


My pension fund doesn't know how much I have in my bank account and visa versa. Unless I choose to tell them.

In reply to RomTheBear:


So tax the return on the capital, not the capital. That is an income tax, not a wealth tax.

What is so god damned hard to understand about that?

You muddle this by talking about wealth that grows not through return, but the growth of that wealth is non concrete, my be geared or may be over-valued, and will eventually be cashed in, so tax it when it is cashed in and becomes concrete.

In reply to Postmanpat:


http://webarchive.nationalarchives.gov.uk/20120207221437/http://www.hmrc.go...

In reply to RomTheBear:


That's as reliable as the IHT based wealth estimates above!! Anyway, you have missed the point. That is just a top down analysis.

For the purposes of tax collection, on a person by person basis anyone can claim they are below the particular threshold but the State will need to have comprehensive data to verify this.

In reply to wintertree:


I know what you mean, but taxing the returns of the capital is exactly the same thing as taxing the capital itself. The typical capital returns 5%, if you tax the return 20% it's the same as taxing the whole capital 1%.

I just think that a wealth tax is better simply because a 1% tax on capital that has accumulated on a very high level is much more acceptable, progressive, a less likely to be avoided.

Still there is no way we can continue to put all the tax burden on wages, so chose whatever way you prefer but somehow you have to take the money where it is. I completely accept that wealth tax is not perfect but if you have any other ideas I'm happy to hear them.

In reply to Postmanpat:



Well, yes that's my point, currently there is no comprehensive data. I think that financial institutions should be made to share information with the HMRC on customers liable to tax.
Frankly it's better for everybody, less paperwork, less hassle.

In reply to RomTheBear:


Only if the return on the capital is monetary, and then you tax that monetary return. If it is appreciation of value and not financial return, it is not "exactly the same thing", not by a long way.


"No way" - that's big talk. Here's a way - fix house prices so that people can afford houses; wages go further. Here's another way - raise wages and reduce the diversion of money to capital assets. Fix the source of the problem. You previously claimed no alternatives were offered, here are two, although you've ignored them before.

I still think you want to confiscate and redistribute wealth to rebalance the economy - fine - say that but don't pretend it's a sustainable solution to the deficit.

In reply to RomTheBear:



Like the CCTV cameras in the kitchen, saves a lot of hassle.

Yours is basically a self serving argument: we should have a wealth tax, therefore we need comprehensive data. This is not an invasion of privacy because we need it to raise a wealth tax.

Slight strangely you don't trust the parts of the State there to protect us but do trust those that want to take our money. Personally I would be wary of both.

In reply to wintertree:


Appreciation of value of assets that have a monetary value is a financial return by all definitions I really don't see the problem.


Ok so tell me how you increase wages and reduce the diversion of money to capital asset in an economy with a growth rate lower than the rate of return on capital.


Well isn't that the purpose of tax and public spending ? To redistribute wealth ?

In reply to RomTheBear:


No. It's to pay for collective goods.

In reply to Postmanpat:

Again this stupid analogy, you still don't tell me why you think it's acceptable for the government to know what some people earn and not some others, everybody should be treated the same way regardless of where their income comes from.


We ALREADY have a wealth tax in the form of IHT. The only thing is that it should be made easier for government to obtain the proper data across all financial institutions around the world.

In reply to Postmanpat:


Yes, which in turns, redistributes wealth.

In reply to RomTheBear:


Yes, you don't see the problem. I almost give up trying to explain it. Say it's appreciation of value, not ROI. How the flying fudge do you extract tax from a bubble?

Answer another question of mine you have ignored. When taxing appreciation of value of an asset, will you flow tax in the other direction when the value of an asset depreciates?


No, to redistribute work. Wealth is meaningless without work occurring, and it is the work that makes things happen. Wealth is a lever to make people work, and to transfer work form one to another.

In reply to RomTheBear:


You are not talking about incomes.You are talking about assets.


Actually I am against that. But anyway, it is actually a tax on a transaction, not a simple wealth tax.

In reply to RomTheBear:


Yes, but that shouldn't be it's primary purpose.

In reply to wintertree:


Ok you seem to assume that most of the economy is a big bubble, of course there are bubbles but on average it isn't, otherwise we would have huge inflation.


Yes, if it depreciates during the same tax period in which it was taxed.


?? That's odd, so when you get your state pension or free NHS service is is redistributing work ? Weird.

In reply to Postmanpat:

Different debate, but if you find a way to redistribute wealth without the state in an economy where the return on capital exceed overall growth, I'm happy to hear it.

On way is access to education, if people can access the right skills and the right jobs they get more chance to access wealth. But then again wide access to education needs the state.

In reply to RomTheBear:


No. I think the component of assets that grow via appreciation, not ROI, is subject to regular bursts of unsustainable bubble growth and then collapse. It doesn't take a genius to see that bourn out in the economies of the last century now, does it?

>> > Answer another question of mine you have ignored. When taxing appreciation of value of an asset, will you flow tax in the other direction when the value of an asset depreciates?


Nice. So if my house rises in value for 8 years straight, you'll tax me in those 8 years. Then when it tanks 30% in value and it happens I need to sell it in that year, you'll leave me out those 8 years tax on what transpired to be an inflationary, un-real growth in value? What a dickish thing to do. Before you protest this is not a real example, 2008 called and it wants its housing value back.


Yes. I no longer have to work for my food or health care. Somebody else does. I could have all the wealth in the world, if the farmers stopped working I would starve to death pretty rapidly.

It all comes down to work. In the long term wealth only grows because of work. By all means seek to divert the growth of wealth away from rich elites far removed from the work, and towards the workers, but do it by rebalancing work:reward structures at source.

In reply to RomTheBear:




So, let's say I own shares in Sainsburys. This year they go up 30% and you tax me on that gain in value. Next year they go down 70% so that over two years I'm down about 60% but the State has taken net tax. That's fair?

In reply to Postmanpat:

Well yes !
It's the way it works on wages, if you have a job on 100k for 10 years and then find yourself with a job on 20K you don't get tax credit from the government from the taxes you paid for the ten years when you were on 100K.

Or maybe you think this is unfair too ?

In reply to wintertree:


Well I agree but then how you do that ? I am happy to hear your solutions.

In reply to RomTheBear:



AAAGGGGHHH! But you received the money!!!!! I never received any money from my Sainsbury shares.
The equivalent is not your example. It would be me paying paying tax when I'm on £100k pa and then having to pay back all the £100ks and and more but not getting a tax rebate.

Why can't you see this?

In reply to Postmanpat:

How does it matter ? If it went up in value then you effectively became richer.

it's the same with cash the currency goes up and down in value, nobody argues that we should not pay income tax on the basis that the value of that cash might fall later on.

In reply to RomTheBear:


Sorry I can't help you any more. I've given you the salary analogy. We don't pay tax on our cash holdings. We pay them on receiving cash.

I'm out.

In reply to Postmanpat:

Well you pay tax on cash income. If the value of that cash suddenly goes down the taxman doesn't give you money back to compensate for your loss. Tough, but I don't really see the problem with that.

In reply to RomTheBear:


INCOME!! That's the point. An unrealised rise in an asset value is not 'income" in any normal meaning of the term.

In reply to Postmanpat:

You can quibble about the word but I don't see how that changes anything to the general principle that tax applies to the value of income or assets at a certain point in time.

It's the same again with inheritance tax, You could have your Sainsburys shares from a deceased parent taxed at 40% and the next day after having paid the tax the share price falls and what you have remaining lost all its value, tough but that's the way it is.

If you want to argue that we should hand monies back to people who paid inheritance tax on assets that have subsequently lost their value fine, but dont tell me I don't make sense.

In reply to RomTheBear:


It's not a word it's a basic concept of finance: the difference realised and unrealised capital gains, and the difference between income and capital gain.


Because it's a transaction tax at the point of transaction


Sorry, but I don't think you're getting this at all , possibly because of an unfamiliarity with the concepts and the terminology(?)So I'll butt out

In reply to Postmanpat:

I get the difference but I don't see the logic as to why you would want to treat differently someone who gets richer through capital gain from someone who becomes richer through income.

In reply to Donnie:


Presumably "reasonable" economists can only be left of centre then.


One hypothetical example of something which nobody would ever actually do doesn't prove anything


I mean shocks like the banking crisis which got us into this mess, we weren't very well prepared last time, we're even less well prepared to cope with another.

Its interesting that you started this thread by asking a fairly innocuous question about what people's views on the deficit are as if you were keen to inform yourself more on the matter. It later transpires you're a government economist and you proceed to tell everyone who disagrees with you that they're wrong. Nice work.

In reply to Donnie:
I'm not going to read the replies at length as I'm a little short on time but...

1) People make the mistake of confusing state debt with personal debt. It's not the same and doesn't work the same. Personal debt is always constrained because the person does not control the framework within which the debt is raised. The state does.

2) Both the current debt, as a percentage of GDP, and the repayments on it, also as a percentage of GDP, are **naff all** compared to how it has been historically over the last several hundred years.

i.e. looked in a historical context, we are currently close to record low debt and debt repayments.

http://en.wikipedia.org/wiki/United_Kingdom_national_debt#mediaviewer/File:...

http://en.wikipedia.org/wiki/United_Kingdom_national_debt#mediaviewer/File:...

Plus, of course, a lot of our debt is backed by assets - specifically bank shares and mortgages.

i.e. people are worrying about nothing. However politically it really works as a way of persuading people that "austerity" is a good thing if screwing the populace is your political predilection..

In reply to RomTheBear:


I really, really don't think that you do. At all.


Wikipedia: capital gain is a profit that results from a disposition of a capital asset.

People who get richer through capital gain are treated the same - they are taxed on their income - it's CGT vs PAYE but a tax is made. There may be differences in thresholds and rates, but that is all addressable within the tax system. There are other problems, such as NI being charged on pay but not capital gains, and some structuring their income towards capital gains (or dividends) to avoid NI, but that is again addressable without your wealth tax.

You are repeatedly talking about taxing the perceived increase in the value of an asset due to appreciation. That is not capital gain. - go and read the wiki page - http://en.wikipedia.org/wiki/Capital_gain

Taxing perceived increase in wealth due to perceived appreciation of an unrealised asset is do-lally.


This is not an analogy to charging tax on an appreciating asset and then not giving tax relief when it depreciates. If you think it is analogous I honestly don't know what to say.

In reply to pec:

I did not get that from his post, he clearly IS informed of the economist's views, he was interested in the numpty view , so he asked us what WE thought

In reply to John_Hat:




[...]


Interesting, JH.

For anyone who agrees the future's bleak, like myself:

Something recent on public and private debt, their respective roles leading to crises:

http://www.nakedcapitalism.com/2014/10/exclusive-private-debt-strangles-gro...

And, from a leftwing site, reporting on mainstream worries:

http://www.wsws.org/en/articles/2014/10/01/gene-o01.html

And again from the left, critiquing a desperate policy of fighting fire with fire:

http://www.stateofnature.org/?p=7624

(I would like to read Hossein-zadeh's book, but it's about a hundred dollars!)

Jon

In reply to wintertree:



I know, but capital gain applies when you dispose of transfer of an asset.
I think it's better to tax at a low rate during the life of the asset instead of heavily at the point of sell or transfer. Cappice ?



FFS I know all that, what I am saying I that IMHO, a wealth tax is better than CGT simply because:

- it's harder to escape
- it doesn't discourage investment
- it can be kept low
- it can target capital only when accumulated beyond a certain level


That's only your opinion, many people think it's a perfectly reasonable way to tax, including the UK, through inheritance tax.


You say that without giving any proper justification, if you get richer through income or appreciation of your assets sure it needs a different mode of taxation but the argument that taxing appreciation is wrong because it could lose value is wrong. We tax income even though it might fall as well and we tax inheritance even though it might fall in value as well.
It part of the risk you take when investing in volatile assets.

In fact it exactly the same thing, the perceived value of my labour on the job market can fall or rise from time to time, the state certainly doesn't refrain taxing the value of my labour for that reason.

Anyway you seem to think that a wealth tax is idiotic or impossible yet it is applied in many countries, including Switzerland, and they don't have the reputation to be stupid with money or people who like to overtax.
Equally it is considered by the IMF (and even Donald trump !) as a possible way to reduce the debt. So unless they are total idiots its probably not as stupid as you think.

In reply to RomTheBear:


That is because your analogy is so wrong I didn't know where to start and hoped you would realise how grossly dumb it was. If my asset goes up in perceived value for 8 years and I pay your tax each year, then it returns to its original value, and I get no tax back, I have less actual wealth than at the start and the same perceived asset value. In your utterley different "analogy" my wealth never goes down, it always goes up. FFS Different, capiche, to use your words? If you wanted to fix your analogy, I would have to be paid £100k/year for 8 years and then -£800k the next year. It would still not be an inappropriate analogy because the pay is real, tangible, realised cash.


Option 1) pay a tax when an asset is realised using cash realised from the asset. No net asset gain in value? No tax.
Option 2) pay the same - or more - total tax, but spread over more years, using your own realised money and not that locked away in an unrealised asset. If the asset doesn't have a net gain in value due to, e.g. a semi-regular market crash, tough you're not getting all the other tax back. This tax compounds losses through market volatility.

Which would I prefer as an investor? 1!! I don't care if tax is bitesized or lumpy, as a hypothetical investor I'm a bit more clued up about these things. I do care deeply about the possibility of paying more tax in option 2 due to market volatility.


I never said don't tax it. I said tax it when it is realised. I think if you tax perceived appreciation but don't give tax relief on depreciation you are being deeply unfair, yes.

How do you tax an inflationary bubble?


I never said it wouldn't reduce the deficit - it would have to be one hell of a tax to reduce the debt, not the small levels you are discussing.

I said that it would not be a sensible, sustainable solution to eliminating the deficit because in the long term, wealth only grows through work, and by relying on a tax on wealth rather than a tax on work you are "locking in" the routes by which wealth grows other than by workers. Fix the source not the symptom.

If Donald Trump told you to build him a golf course, would you jump of a bridge?

You still haven't told me how wealth can grow without work being down somewhere. Unless it genuinely grows by itself, a wealth tax is just a work tax in disguise. I take your absence of a demonstration of how wealth grows without work, and your interest in a wealth tax, to mean that you think a more complex and opaque tax system is going to improve the evasion/avoidance you are concerned about.

In reply to Dorq:

I've read through - interesting.

Main issue would be that the first article really doesn't know what it is talking about. As in it is wholly wrong.

I'm not going to go into detail about the financial crisis, but it was not really triggered by either public nor private debt growing out of control, but by the return to "normal" times after a period of exceptionally bountiful times (early 90's).

One could argue that the bountiful times were caused by exceptional private debt, but that is certainly not the case in the UK. In the US there is a argument to be had, their private sector debt did balloon in the early 2000s, but mechanisms were in place to handle this.

In reality there were lots of interacting elements. I get mildly peeved when writers choose the 2007 financial crisis as a mechanism to "prove" that their particular hobby-horse was "The Cause", but its worth bearing in mind the adage "that for every complex problem, there is an answer that is simple, clear and wrong".

In reply to RomTheBear:

I've been following your argument with interest (pun intended) but I'm struggling to work out one thing: who are your proposing should decide your assets have

a)increased in value

and

b)by how much?

(assuming I haven't sold them, in which case we do know what they were worth, what I paid for them and therefore if I might be liable for CGT at present)

In reply to wintertree:


And what is the problem with that ? By any definition you temporarily got richer at some point in time, the increased value of your assets increased your ability to consume or save. If the value of those assets fall to zero later it is simply a risk you take.


Why does it always goes up ? If I earn a 100K year one and I spent this money on assets that have lost value or on rents that have not increased my net wealth should I got to the taxman and ask for a refund ?

In reply to John_Hat:





UK household debt reached nearly 170% of gross disposable household income in 2007 from 100% in 2000. In the US it peaked at 128% in 2007. It was and is a problem.

In reply to 999thAndy:




current valuation on the market - previous valuation on the market ?

But just to be clear wealth tax doesn't tax "increase in value" per se, it taxes the estimated value of assets that have accumulated beyond a certain threshold, a one point in time. So even if the value of you assets decrease from year one to year two, as long as you are above the threshold, you still get taxed.

Wintertree seems to see a fundamental problem with that, but I don't think there is (and in fact there isn't since this is what many countries who some forms of have wealth tax do, including the UK and the US).

In reply to RomTheBear:


I don't understand how this works. Let's say you buy a modest house < £100k, work really hard to pay off the mortgage and then get a lower paid job to take into account the fact that you don't have a mortgage anymore. At the same time, you impose a 1% yearly tax on assets, so every year the homeowner has to find £1k. But then, the area becomes a property hotspot and over the course of the next 10 years, the 100k house becomes worth in excess of a million. How is that a fair way of taxing people? The person living in a £1 million house isn't a millionaire.

I have a friend whose parents bought a very modest house (3 bed semi) in a very unfashionable area of London in the early 80's for £20k. It sold recently for £850k! They were no better off when they sold it in terms of income though.

In reply to ByEek:


Well that's why wealth tax, pretty much everywhere in the world where it is implemented, is applied only on individual with very high net worth and usually not on the primary residence.
The goal here is to make sure we don't make people sell their primary house to be able to pay the tax.

Incidentally it's what's happening in the US, they have a property tax on the market value of the property, they don't even take into account whether you haven't paid the mortgage or not, so sometimes people who are cash-poor but have very valuable houses have to sell their house.

In reply to ByEek:


As I understand it, this is almost exactly what happens with annual taxes being levied at a significant (several percent) fraction of property value in parts of the USA, such as Texas.

As I understand it, this leads to those less well off being utterly shafted. They buy a cheap house on a housing development, they pay it off, they build a family. Developers built a posh new estate next to their house, and their house price is deemed to have risen significantly. The taxes charged therefore rocket to levels they could never afford, and they are forced to sell. Guess who steps in to buy all the properties as the residents are taxed out of their homes? Survey Says: "The Developers".

But don't worry, I'm sure if Rom introduced such a system, the thresholds would be high enough that only the super-rich elites would be affected, not penniless paper millionaires. Of course, those super-rich elites have very good lawyers and accountants. I'd say this is probably an idea worthy of the "Child Support Agency award for a scheme costing more to administer than it returns in revenue."

In reply to wintertree:


Well it's exactly why it's much cleverer to have a low broad based tax on net wealth instead of something focused on real estate only.

In reply to John_Hat:

I agree that the first link is picking out particular events to explain each other, rather than the entire context. I haven't begun to read into 2007/8 in detail, mainly because I want to see it explained contextually, though I have plenty lined up.

Until I refine my thinking, I see it simply in this way: Capital moved away from labour/consumers, around the 70s, becoming international and financial. It had to move back in the form of deregulated lending bubbles, to keep the system going, by giving producers/consumers their own future earnings at a risk they would always bear.

Yanis Varoufakis's book, The Global Minotaur is a good, snappy read, if anyone is interested in post WWII and the Western crises.

In reply to wintertree:

Where did I say that ? My point is simply that owners get an increasingly larger part of the wealth being created, simply because the global growth of the economy is not high enough to balance the rate of returns on capital that are needed for it to work. So more wealth is channelled through rents and increased valuation and less through wages.

Also I don't see why you think a wealth tax is more opaque and more complicated than the current myriad of different taxes targeting dozens of different kinds of wealth and incomes of different sorts at different rates with all sorts of exceptions.

Now you can disagree with the concept of taxing net wealth, but if you have any other alternative I'm happy to hear them.

In reply to ByEek:
A continuous tax on housing would damp down that growth from £20k (modest mutiple of average income) to £850k (silly multiplier of average income) which would probably be a good thing as it would mean the 2014 version of your friend's parents might be able to live there.

Is it fair?
Fair is a matter of opinion as there is no universal agreement and an approximate attempt at fair is the very best we can propose.

In reply to elsewhere:




Well exactly I think this kind of tax can also have the added beneficial effect to slightly reduce bubbles by occasionally forcing the sell of over valuated assets in order to pay for the tax.

In reply to RomTheBear:

Domestic council rates, the replacement council tax bands and business rates now are all based on a value/valuation rather than a net wealth so taxing an asset value whilst ignoring income and without offsetting debts has an established role.

In reply to elsewhere:

Indeed, all I am suggesting is to do it in a better way by offsetting debts and do it more progressively at a lower rate on a larger base. Somehow it seems to be an outrageous idea.

In reply to RomTheBear:


That isn't what you started out suggesting, you started by suggesting a one-off tax on very wealthy individuals. Now you seem to be suggesting an annual wealth tax on a large base of tax payers. So not an outrageous idea, just a bit vague and unconvincing.

In reply to Sir Chasm:


No I didn't ! Read the thread again if you have the courage I simply mentioned the IMF 10% wealth tax at some point to show that this type of tax is being considered.

What was debated was always a low annual tax on net wealth, once accumulated above a certain level. As they have, for example, in France, Switzerland, Norway...

In reply to RomTheBear:



You, from 20:33 Tue "I am simply suggesting that we tax wealth of people who typically have a net worth over several million pounds (be it in real estate, or shares, others) and who are currently paying a significantly lower percentage of tax than people whose only income and wealth are their labour and their one home, despite the fact that they have seen the value of their wealth rise much faster than the economy for the past decades.

98% of the population has a net worth below a million quid so what I am suggesting is not something that would affect many people."

Make your mind up, do you want to tax a lot of people or only a few?

In reply to Sir Chasm:



Only a few ! Where did I mention taxing most people with this type of tax ? Where did I say it should be one-off ?

In reply to RomTheBear: Just a few posts up you said "progressively at a lower rate on a LARGER base". I've emphasised the LARGER because you seem to struggle to remember what your idea is.

In reply to Sir Chasm:

Larger base in the sense that it wouldn't affect only real estate (like a mansion tax or like a property tax in the US), but all types of assets.
That's the definition of "tax base" you may be confused with. It refers to the assets or income affected not who is paying it.

I am pretty clear about what the idea is, in fact it's not my idea it;s an idea that has been going around for a while amongst economists.

In reply to Dorq:

Fundamental flaw. Capital has been international and financial prior to the 70's.Think about it, when was the IMF/World Bank set up? That is just an simple example.I suspect 1770's or even earlier is a better date.

In reply to RomTheBear:


But I suspect it is a flawed idea. The wealthy will be able to hide their assets overseas or through complex legal mechanisms whereas the cash poor paper rich folks will get well and truly stuffed. I am afraid citing countries like the US in a conversation about progressive tax does not fill me with excitement.

In reply to John_Hat:



£40+ billion (more than the MOD spend ?) on debt interest payment a year and rising faster than other spending doesn’t seem like “naff all” to me ! Any comparison with the financial situation following the world wars is going to look favourable ?

In reply to ByEek:

The main problem about a wealth tax is that it needs a global effort to work to increase transparency of cross-border assets., this I don't deny and that's the main pitfall. But if the US and the EU get as it, which I believe they will do at some point, this is not impossible.


Well you know what, it was the Americans who implemented the progressive income tax on a large scale first, in fact they did so specifically because they didn't want to look like class ridden Britain looked like.

In reply to pec:


In this case, sadly they are all to the left of centre. Which is a bit damning on the profession as a whole.


In this case it does. It proves that are costs associated with paying quickly and that these costs may outweigh the costs associated with paying it off more slowly.


Interestingly, there's not that much of a link between being in surplus pre crisis and the impacts of the crisis. Spain was in surplus.

More generally paying it off more quickly doesn't necesarily mean your in a better position to deal with a future shock. For example, if you spend to restore growth and then raise interest rates your in a position where you can respond to a future shock by cutting rates. There's also less risk of deflation.


I'm not sure what being an economist has to do with this.

Lots of people responded not by saying, 'oh, I've not heard this', but by saying that I'm wrong. I've tried to explain why I'm not.

Admittedly I've been a bit patronising which is counter productive and just a bit rude. I regret that and I'm trying to be nicer now.

In reply to John_Hat:

John Hat! Thank you!

Best, Donnie

In reply to Donnie:


Nobody can say who is wrong or who is right, because nobody can predict the economy with enough certainty, even using the assumption that society, health and technology remain as they are now.

Throw in the effects of social change on a global level, unpredictable disease (just imagine a global flu pandemic) and unknown, transformative technological change occurring at some point - innovation can not be forecast - and the future becomes utterly opaque to even the most visionary thinkers and the most able numerical modellers.

I suspect diametrically opposed approaches to tackling the defect can both work, as long as they are well planned, well executed and are rapidly responsive to changes in the internal and external environment.

I remain highly skeptical of an economist saying they are right, or that another is wrong. It largely suggests that they have no real understanding of the complexity of their subject, or chaos theory, or the role of unpredictable innovation, or of sociology, or of a dozen other things.

In reply to wintertree:

No one can be absolutely sure what the best course of future actions is. But...

In this is a case you can be as sure as macroeconomics gets.

Some of the debate is about things that have already happened. People made predictions. One sides been proved right about these things.

We can be sure that the politicians (on both sides) and the media have misrepresented the significance of the deficit as compared to a lack of demand.

In reply to Donnie:

Is it not partly about confidence in the system. If government started addressing demand by spending, , then I suspect everybody is going to go" hear we go again, another boom/bust ".

Is it not better addressing demand in other areas - exporting/make sure £ is at the right level/earning money from all those foreign students who come here/etc etc.To me that is more sustainable than another round of governemtn spending to create demand.

In reply to Donnie:


A very important part of any very complicated, stochastic, dynamic, chaotic system is that a model which is retrospectively proved right about a past prediction is in no way guaranteed to be right about a future prediction.

The numerical weather prediction people understand this, and they have the luxury of modelling a system that is barely changing, where as the global economy undergoes constant and dramatic changes, both of the quantity of energy with in, and the methods by which that energy is exchanged.

In reply to Donnie:


>
Defining reasonable as "those that agree with me", as is your wont.

In reply to Donnie:




If you're referring to your earlier over simplified 'austerity kills growth' assertion then no, they haven't. There are examples and counter example (Estonia, Ireland), because other factor specific to individual countries come into it.


I think it's obvious that in the UK stimulus through public borrowing would have just inflated the housing bubble further. Until we have a sound strategy for a more productive economy there's no point throwing money at it.

In reply to wintertree:


indeed, most of the economists who have tried to predict the future always end up being proved wrong at some point, not always because their theory was incorrect but because the context in which these theories were valid changes.

I think it's really true now, most of our economic policies are based on a long post-war period of high catch-up growth, rising middle middle class, and high population growth. As these, in fact, fairly exceptional circumstances change, I suspect that we'll have to adapt our economic policy and models as well.

In reply to Postmanpat:

Actually, I'm agreeing with them. My political and economic views have come largely from the 2008 financial crisis and the debate around the correct response.

I had just graduated and was looking for a job as a first job as economist when the crisis hit. At the time I was fairly apolitical. I thought we'd been duped on Iraq so didn't like Blair and generally disliked the tories without much knowledge about their current policies. I new very little about the application of economics in the real world as per most economics graduates.

I started researching the economics of the crisis because I thought I'd be asked about it in job interviews. I listened to both sides and didn't have a strong view on who was right. I just learnt both arguments so I could repeat them at interviews. I actually got good marks at one interview for being honest that I really didn't have a clue who was right…

Since then I've followed the debate closely. A few things have become clear to me.

The media is heavily biased in favour of austerity. This isn't necessarily deliberate but it happens all the same. This means the publics sadly ill informed on the possible courses of action and the risks and benefits associated.

Both sides made predictions. Those on the delaying austerity side of things have been right.

Those on the delaying austerity side of the things are far more intellectually honest.

I hope you'll look into this in more detail yourself.

In reply to Mike Stretford:


I was over simplifying. Austerity kills growth when there's no other means of growth available. When monetary policy's been exhausted and when your neighbours aren't growing. i.e. now.

As I've said, the link is really clear. Even the IMF thinks that the multiplier is greater than one. i.e. a pound cut loses you more than a pound of GDP and takes considerably less than a pound off your deficit


Housing prices in the UK could be dealt with via a number of means that regardless of economic stimulus. Build more houses, loosen panning restrictions, expand greenbelts, tax unused property and land, tax second homes.

None of these things are brilliant. They're all far, far better than having a longer recession.

As an aside, the tories have been actively encouraging a housing bubble. Help to buy etc.

In reply to neilh:


Hi Neil

This argument was made. Basically it's that if we don't cut spending now borrowing costs would go up. For countries that print their own money this has been shown to be not true. Borrowing costs in the US and the UK have been at historic lows. Yields on government debt are actually negative (that's maybe just in the US but there v low in the UK too)

This means that there's a lot more room for borrowing.

Of course if we just kept borrowing higher and higher amounts, at some stage our borrowing costs would go up. We're just nowhere near that stage.


Basically, no. For two reasons. Fist, the idea is that government spending at this time creates more growth in total GDP than it costs. Even notorious non left wingers the IMF agree with this. Second, this isn't an either or question. It's not do other things to our economy to fix it or just spend more. You can and should do both.

And just to reiterate. We should cut the deficit. Just not so quickly.

In reply to Donnie:

I have, although I haven't looked at the figures closely for a few months. I believe that the jury is out and will probably always be out because you can't prove a counterfactual.

In the 2008-9 the markets wanted austerity so Osborne promised it thus heading off the risk of a calamitous rise in borrowing costs.
The "austerity" that was actually delivered was actually much less than portrayed but appeared tough because by ring fencing key areas like health the axe fell harder on other areas. Meanwhile it suited Labour also to exaggerate the extent of the cuts for political reasons.

So one could argue that the economy flatlined for a bit whilst the not very big cuts were made but it was successful in that it assuaged the markets. But we never saw the massive rises unemployment and falls in output that the critics predicted. The recently revised figures of course tell us that the recession was not as long as was previously thought.

And now we have a sharp drop (but not as big as targeted) in the deficit and the fastest growing developed economy in the world, ) Happy days….(albeit based on the tried and tested and unsustainable formula of kick starting a housing boom.)

I haven't read all your comments but presumably your argument is that a bit of fiscal stimulus in 2007/8 would have kick started demand and by doing that the deficit would have come down anyway. Well, maybe, but the markets considered that Brown had wrongly provided a pro-cyclical stimulus in the run up to 2007/8 and were not therefore prepared to countenance further stimulus when, post the bailouts, the deficit was already massively bloated.

So there are two counter factuals we cannot prove: what would have happened the coalition instituted real Callaghan type austerity , and what would would have happened if a Keynesian demand stimulus had been tried potential driving up borrowing costs and collapsing demand(although France gives us a clue).

What actually happened was a classic British muddle through whilst both parties played political kabuki for the audiences of markets, media and voters. What we are left with is still quite a high deficit and a lopsided economy at risk of ending in another bubble.

In reply to neilh:

Yes, of course it has. But 'globalisation', with the aid of computers and transport, has been about the regulation of the state (public) vs capital: Bretton Woods institutions began controlling a volatile international trade and money system and then became more and more about controlling a volatile international public (states) in the interest of transnational capital.

A graph on international capital flows for the last 100 years would be interesting, I couldn't find one. Technically, so much trade takes place within companies across borders, it is almost as if international trade has regressed.

Perhaps I should have said "transnational" instead of "international". What I meant was "free".

In reply to Donnie:

Yes, but the more you put off end buyers of government bonds by ignoring the deficit so the more money the government has to print in order to buy them itself, and as we are seeing already, this is a hard drug to come off.
There appears to be more room for borrowing because the government has effectively been borrowing from itself, which unless you are subscriber to MMS, is not not generally considered a sustainable option.

In reply to Postmanpat:

I think you're confusing QE to provide cheap capital to banks and keep the financial system afloat with selling government bonds to finance government spending. There's plenty of demand for government bonds in the UK just now. That's why yields are so low.

Even if you are effectively printing money to spend, you can do that effectively until whatever slack there is in the economy's taken up and inflation starts to run away.

*nb there are good arguments that we should be targeting higher inflate. 4 per cent instead of 2.

In reply to RomTheBear:


Who would do the valuation? A team of civil servants? Self assessment? As ideas go, I think this one needs about twice as much time in the oven as you've given it.

In reply to Donnie:


No I'm not. The BOE has bought something like £400bn of government bonds (mainly from the banks etc) since 2009. The aim was to encourage the banks to lend money to higher yielding investments, but in actuality it just meant that that the banks had more more cash and less bonds on their balance sheets and effectively a put option on their government bond holdings. So what did they do? Bought more government bonds.

We will see the real effect and real demand for government debt when the BOE cancels the put option.

In reply to 999thAndy:

How do you think they do in Switzerland, France, Noray, Iceland, where they already have such a tax ? And how do you think they do it for inheritance tax or council tax in the UK ?
You take market value and estimates and compute the bloody thing, it would be silly to think that with our huge financial sector we don't have the skills in the UK to value assets.
If it's automated thanks to automatic sharing of information between different financial institutions and the state all the better, but apparently it's a total violation of privacy according to some. Strange Norway or Iceland did not strike me as Orwellian States...

In reply to Postmanpat:
This may be a dumb question, but what would the consequences be of QE (printing money) to buy back or pay off govt debt?

To me it's dumping money into the system so it achieves the QE aim of being anti-deflationary but also reduces govt debt.

That's not what happened so I assume it's a bad idea from some reason.

In reply to elsewhere:




Well in theory if it's well balanced it shouldn't cause too much inflation and shouldn't cause too much deflation.
It has the pitfall of increasing wealth inequality though, as confirmed by the bank of England but maybe it's better than letting the economy go into recession. We'll never know.

http://www.theguardian.com/business/2012/aug/23/britains-richest-gained-qua...

In reply to Postmanpat:



So you're saying it's circular - QE provides the banks cheap money and this creates the demand for normal government debt to finance spending and that rates will go up when QE ends?

In reply to elsewhere:




I don't understand QE properly. I don't think it exactly the same of printing money though.

What I can say is why more money doesn't always cause inflation.

One, if it just increases the monetary base - ie bank reserves - not the actual money in circulation.

Two, if the economies depressed it can increase output by as much as it increases the money supply in circulation. In simple terms it's putting otherwise unused resources back to work, eg reducing unemployment.

One unemployments back down it starts to be inflationary.

Both have, I think, been happening.

In reply to Donnie:

Have you not tried to get an economist job at one of the big financiail institutions to try and learn a different perspective. Mind you the so called "top"HSBC economist I heard the start of 2008 got all of his predictions/views wrong...he thought it was a minor blip.....

In reply to neilh:

No. I'd hate that and they probably wouldn't have me. I don't particularly like my current job either. I'm interested in economics but actually doing it as job's frustrating. Actually planning a move to the merchant navy so I can have lots of time off to climb and things! Or possibly teaching English in Spain.

I read things from both sides though.

As I said in reply to someone else, I actually got interested in the debate because I was looking for a first job as an economist in 2008 and thought I'd get asked about it in interviews. Which I did.

It took me a few years to reach a firm view about which side's right.

The whole thing has actually made me quite interested in politics and economics. Before that it was just some shit I studied at uni to get a job. I've become fairly left wing (on the modern western scale of things) because of it. The media/establishment bias has been a particularly strong factor in pushing me that way. The idea that the deficit is the biggest problem facing us and must be tackled as quickly as possible is almost treated as a given - other views are hardly heard. It's close to the public being lied to...

An interesting thing is in the US, where the media's generally seen as being less objective (Fox news etc.) people with an alternative view actually get some air time. They hardly get any here.

In reply to Donnie:

Its a wee bit flippant to say you have a firm view about which side is right. I would try and get a a bit more balance in your views.People will respect you more.

In reply to neilh:
I don't think it's flippant to have a firm view about something you've read and thought about a lot for six years.

Even in macroeconomics, where you can never be totally sure, you can be sure that the evidence is strong enough in favour of one side of a debate that to take and act based on the other side is to be reckless with people's lives.

Also, balance is an interesting thing. It can be he says the earth's flat she says it isn't. Or it can weight views in some way. Giving more weight to experts, evidence and past performance. Climate change is a good example of the former. As is the austerity debate although for different reasons.

In reply to Jim Hamilton:


OK, £40bn is always going to be a figure where the words "naff all" don't work well.

Obviously don't forget that because of inflation latter years are always going to exceed early years in absolute terms - its a bit like the latest cinema takings being "the biggest EVER" - well, of course they are , ticket prices have gone up .

Anyway, I digress.

Looking at the graph the UK debt, as a percentage of GDP, has been above current levels for 95 percent of the last 400 years. For much of that time well above (as in multiples of) current levels.

Interest payments on UK debt (as % of GDP) are currently lower than more or less any time in the last 100 years.

The world is NOT going to hell in a handcart. Actually, we're fairly sorted.

The government are obviously telling us that the world is going to hell in a handcart, and we need to cut, cut, cut, but, erm, is it just possible that they may have a political reason for saying this?

In reply to Postmanpat:


Well, there will always be people that disagree. But that doesn't mean debates of this kind in economics are never 'won'.

Also, on smaller points - not it would have been better if we'd done x - these things can and are proven. People say assuming x and y then z. X and y occur and z does or doesn't happen. For example, in the US some people thought that when the second round of QE stopped rates would go up for whatever reason. Others said they wouldn't and gave reasons. Rates didn't go up.


That's debatable - as you say we can't prove a counterfactual - close to the advent of the crisis it may have been true. But it later became clear that borrowing a bit more now wouldn't result in inflation/high interest rates and yet policy continued as if it would.


It was less but not because of ring fencing which doesn't affect total cuts just their distribution. It was less because the tories eased up on it because they realised they needed to when we went 'double dip'.

Both the tories and labour have actually tried to portray the cuts as more. Labour focussing on the impact on people and the tories being very quiet on the fact that they eased up on them and the reasons for that.


Not unemployment, at least in the UK. But that's because we've had a fall in productivity instead.

The recently revised figures have changed how they count. They now include illegal stuff. Which is fine. Economic activity is economic activity. But in terms of comparing recessions to previous recessions and measuring based on previous understandings of what a recession it's pretty much as long as originally though. Although I understand there's been some revision that based on the previous way of measuring.


You need to compare economic performance over the years since the crisis. The recession was longer and worse than it needed to be. And, to date, can't be justified by higher growth now.

Growth now is a result of easing off on austerity.

Good point re the housing boom.

Also, if the tories actually go through with their proposed cuts after the next election we'll be plunged back in unless growth stays high and sustainably so.


It wouldn't have come down. It would just have been better to borrow a bit more now and cut a bit more later.

As I said above, the markets may have been wary of more spending shortly after the crisis. We'll never know (although they'd have been even more scared of no financial stimulous). But after a while it was clear that borrowing was and would remain cheap even with increased borrowing.


You can't prove it. But you can have a fairly good idea. To take the view that it's a fifty-fifty who knows type of a thing is, to me, ridiculous.

Austerity has worked in certain circumstances. It's never worked in the ones we had then or have now.


Agreed

In reply to John_Hat:


I wouldn't go that far. We've problems - lack of demand, ageing populations, growing world population and, therefore, competition for resources etc. etc. - it's just that, as you say, the deficit doesn't rank that highly among them.


Exactly

In reply to RomTheBear:


Fixed that for you. Admit it ROM your only desire is to penalise people for doing well, (having a million in assets,) so that you and your kind can use/distribute it as you see fit.

In reply to stroppygob:

Yawn... You know what your problem is, you live in the past, the Berlin wall has fallen you know, we should be able to have a quiet debate about taxes without having an angry man shouting "communists !" every two minutes.

Do you think a guy like Paul Krugman who advises a wealth tax is a "communist" ?
Do you think inheritance tax is "communist" ?

In reply to RomTheBear:


I'm not angry Rom, far from it.

I haven't ever used the word "Communist" here before, as far as I'm aware, let alone every two minutes.

You seem very angry for some reason. You know being angry is very bad for you, don't you?

I know the Berlin wall has fallen, I had the great pleasure of being there in the weeks following it.


It's not necessarily communist, I never said it was, did I? But it does penalise people for endeavouring to save and provide for their families, in the unhappy event of their death. Why do you like it so much?

In reply to stroppygob:


Your post at 23.12


Talk for yourself !



Because it prevents patrimonial accumulation of wealth along blood lines like we had in Victorian society and rewards work instead.
The problem is we are in a system where if all you leave to your kids is a couple of houses and a bit of cash after your death, you are heavily taxed, but if have billions to pass on you can find ways to pay pretty much nothing.

Inheritance was not so important when people had lots of kids and growth was high if you have five kids of course everything gets divided by 5, and if the economy is strong you can accumulate more wealth through work anyway, but if the world population starts stabilising and global growth stays low I fear that inheritance and blood lines will once again be more important than individual abilities.

In reply to RomTheBear:


Y-e-s I used it there, but I haven't ever used it her before, let alone "every two minutes" nor has anyone else you little liar...


I am. I'm not angry. Do you really think accusing people of being 'angry" is somehow productive or a good way of debating? It's not you know, you shallow git



But families like to provide for their younger generations,. What is wrong with that. You come across as ever so envious of other people's parents looking after them. Envy is nasty stuff, it eats you up inside.




Yes, and?



and you'll miss out? Diddums.

Enough of this jolly banter, I'm off to see Bill Bailey.

In reply to stroppygob:

Lol here it is !



Here you go, the old fashioned accusation of "envy". In fact I am lucky enough to have done fairly well and I have more possessions than I'll ever need so really I don't care.

I simply believe that a society where you can get rich through work is better than a society where the only way to get rich is through birth or marriage, is that envy ?

In reply to Donnie:


Basically, yes. It's not really the intention but has been the outcome.

In reply to RomTheBear:


It's a pretty poor vision for society and embodies the same broken thinking as some ideas on wealth tax.

Why is it poor? People can get rich through work, not inheritance, now. That person has to be motivated and capable; the barriers to that are genetic (birth), unaspirational or simply bad parenting and schools. How is your wealth tax going to fix parents who can't be bothered encouraging their child and spending time helping their child learn skills and aspiration?

Why is it really poor? A future where everyone can be happy and well provided for without being financially rich is in our grasp. What stands between us and this better future? The whole concept of richness. If the gross difference between cost of materials and house prices was cracked wide open by changes to planning, if half a dozen other things changed, what would be the need to become rich?

It is money, debt, joy-free consumerism and the vicious cycle these have with house prices that bring us low when we have enough work for everyone to have a baseline existence that affords them them the opportunity to be happy. We squander our resources, and we deny ourselves that happiness through endless crass consumerism, envy and hate. Your capital wealth tax idea (although it seems to change shape every few posts) locks in that need for distended wealth accumulation and panders to those who feel envy.

In reply to Donnie:


PArtly because "tapering" has been very slow and the economy not very strong.


I said "the risk of". Interest rates stayed low because the government pledged to reduce the deficit, the BOE bought government bonds, and the economy was flatlining. It never became "clear" what would have happened if these things hd been different (but see France).



Total cuts of 2.6% over 5 years are pretty much what was originally envisaged and are much less then eg.Callaghan's cuts in the 1970s and much smaller than those in places like Greece and Portugal. There was no significant U turn.In so much as they were front loaded, which is not much, the front loading was of capital expenditure cuts (as planned by Labour, because they are easily done and people don't miss what they never had), and tax cuts, because they are quick and easy to execute. Current spending cuts have been of a fairly steady trajectory which is what the academic research tends to approve of.I can provide the figures if you like.

The aim was to offset fiscal tightening with monetary expansion and this, together with specific measures to kick start housing,was what was achieved.


Well, that's the point I was making!
>


You are just relating an assertion,not arguing your case.


Well, this is what Balls et al have told us all along and have been proved wrong.


You need to justify this assertion by demonstrating why borrowing costs remained low.


This is on the same level as your assertion that all "reasonable" economists agree with you. It is a bad habit that you have: simply dismissing arguments supported and made by large numbers of informed and sometimes distinguished people as "ridiculous" or "unreasonable" simply because you disagree with them. The Krugman, Wolf, Summers view is still probably a minority, certainly in the City and Wall St.

In reply to Donnie:



>
The problem, as I think Krugman has identified, is that the cash injected into the banks is either being used to increase reserves (which somewhat ironically is another , contradictory, aim of the policy) or to buy government bonds. It has not been well used to lend "productively" hence the velocity of money has not recovered and hence no inflation.

The measures to stimulate the housing market were a quick fix to stimulate lending.