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June 26, 2007

Polly Again

Yes, it's on about wealth and inequality again:

The OECD, hardly a leftist outfit, notes that wage inequality is rising steeply in 18 of 20 developed nations it monitors.

Yes, indeed, it is. It's also true that Concept 2 inequality, the weighted average of inequality between nations (and, if we look to the dissident on this subject, Branko Milanovic, Concept 3  is at times as well) is declining. A short hand way of explaining this is that globalization is increasing inequality within the developed economies (and quite possibly within the developing) while closing the gap between the two sets. There's also a fairly simple explanation for why there is the increase in inequality in the developed countries: it's the exports, stupid. That small percentage of people able to compete and win upon the global stage are now more able to do it than they were only a decade ago. This applies to City bankers as much as it does to Tiger Woods or Stephen Spielberg. Instead of taking 10 cents each off the citizens of their own countries, they can take ten cents each off 6 billion people. 

So here are reasons why it does matter. For a start, house prices have gone mad, partly because too much money is chasing too little property, not just in Mayfair but in places like Doncaster, where City tycoons are buying up whole buy-to-let streets.

Soo, the wealthy provide housing for the poor renters to live in....this is something bad? And if there is a shortage of housing then the solution is to build more (and also to stop knocking down perfectly good stock as well but don't tell John Prescott that). The solution to that being a change in the planning system, which is the bottleneck in the current English system. Perhaps loosen up the Green Belt regulations? You know, abolish that subsidy to landowners within them?

All parties want more upward social mobility (though none mentions that some might need to come down the ladder to make room).

I agree that political parties seem not to want to make this point. But your favourite pendant blogger has indeed done so.

Set a tax band starting at £100,000 - and maybe another for the supersonic. Earmark the revenue for new opportunities for left-behind children.

Hypothecation of revenue? No, not a sensible idea. Leave aside whether a higher tax rate would be a good idea, whether it would in fact raise much extra revenue or not. Just assume that it will raise £ x. That is, we've raised the tax rate in order to achieve some desired modification of post tax income inequality. That's how we're setting that tax, yes? Right, what's the connection between that rate and the amount of money we independently think we should be spending upon left behind children? None. Not only a little, or a small connection, but none. Similarly, if we decide that we want to raise £ x to pay for those children, what is the connection between that amount and the tax rate we desire for the inequality reasons? None again.

I've deliberately left out all of the stuff about dynamic or static scoring (people's behaviour will change in the face of new tax incentives, so you don't realy know how much you'll raise anyway) and whether using tax rates for such social engineering is a good idea or not: but hypothecation of revenues simply is a bad idea itself.  Raise the money where you can (even if you are doing it for social engineering reasons) and then spend it where you must.

Bring in a wealth tax for more expensive properties: in America owners of expensive property pay 0.88% every year. Allocate it to helping others own property.

Excuse me? There's a Federal Property Tax now is there? I think you'll find that property taxes are City and County based: thus there are hundreds and thousands of different rates. Willing to be corrected here but I'm not aware of any Federal rules, so you can't actually say "America" here. Again with the hypothecation...and err, how exactly will this help anyway? Aren't we stating that there's too much money chasing the housing stock, that's what is pushing up prices? Taxing one part of the market to subsidize another part doesn't change that total amount does it?  Except for that part raked off by the bureaucracy in administering the scheme.

In fact, given the usual effects of taxation and subsidy, taking money from those in expensive houses will, ceteris paribus, lower the price of the expensive properties. Subsidizing smaller and cheaper ones will raise their price. Is this what we actually want to do? Lower the price of housing for the rich and raise it for the poor?

Make all tax returns public documents like wills, as some countries do, to help catch tax loopholes. To stop inheritance tax avoidance, make all gifts taxable.

Tax returns public? Meh. Whatever. Make all gifts taxable? Wondrous. That birthday present to my (step) grand daughter now has to be declared? It's already true that if in total her presents are over £3,500 a year (and they're nowhere near) they must be declared: we're going to do this for the £50 trainer bicycle? The £ 2 packet of bonbons stuffed into her to keep her quiet while shopping?

A drink bought in a pub is a gift: we need tax returns for this? Only a journalist used to boozing on expenses would suggest such a thing.

For those with nothing, Brown promises affordable housing. So help everyone who wants to become an owner, middle-class first-time buyers and social tenants alike: a home is a bank for credit, help for children. Ownership bestows respect and independence. End buy-to-let mortgage tax breaks to burst the bubble.

Look, replacing buy to let buyers with owner occupiers does nothing to change the total demand for housing. You'll not burst a bubble that way. Further, there are no specific "mortgage tax breaks". There's just the simple usual ones for off-setting the costs of an asset against the income from that asset. The interest you pay to buy something, whether it's a flat, a car used in a business or a factory can be set off against the income that you generate from that asset before you calculate the profit upon which you pay tax. You're attacking the very basis of debt financing there Polly: not really a very sensible thing to do.

The minimum wage must rise faster than inflation, with an end to the undervaluing of women's jobs.

First you have to prove that "women's jobs" are undervalued. Something a tad difficult as there is no possible measure of what a job is "worth" other than the price it gets in a free market.

None of this is difficult or economically risky if there is the public will.

Ouch. Let's ignore reality and do it all by the "Triumph of Will". Worked so well last time out, didn't it?

June 26, 2007 in Economics | Permalink


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I am amazed, super article, well done.

The only bit you missed out was that we are now at the stage where the housing bubble is going to burst.

House prices will fall over the next few years from 6x earnings to 3x earnings (the same as the bottom of the last three 18-year cycles, for example 1995) at which stage it is high time to introduce Land Value Tax (to replace COuncil Tax, SDLT, IHT, CGT and the TV licence fee) which will ensure that house prices stay low and stable.

And you could have been more explicit about scrapping CAP subsidies, but hey.

Posted by: Mark Wadsworth | Jun 26, 2007 9:47:51 AM

"It's already true that if in total her presents are over £3,500 a year (and they're nowhere near) they must be declared"

Eh? Declaring gifts? Where did you get that from?

You're not thinking of the inheritance tax free gift threshold are you? Your gifts are included in your estate if you die, subject to several exemptions, but you don't have to tell the tax man. Of course, Polly would like you to submit a public inventory and transaction list every year (with exemptions for Guardian columnists, naturally). But they haven't got Polly's Powers yet.

"End buy-to-let mortgage tax breaks to burst the bubble."

Silly bint. I love how being taxed on profits turns into "tax breaks" in this febrile atmosphere. If you want to burst the bubble, Polly, how about simply proscribing landlords. It's about as logical and fair.

"None of this is difficult or economically risky if there is the public will."

Ah. She does.

Posted by: Kay Tie | Jun 26, 2007 10:12:53 AM

As to the American federal property tax, no. There is no such thing. Property taxes are indeed levied at the city and county level. Not only that, but they are very susceptible to the size, but especially the location, of a property. If you live in a larger, more expensive (and more valuable) house, you will pay more. If you live in a modest house, but in a desirable area, you will also pay more.

Posted by: Chris | Jun 26, 2007 10:15:23 AM

'There's also a fairly simple explanation for why there is the increase in inequality in the developed countries: it's the exports, stupid.

I thought it was due to a financial boom and increased borrowings.

Posted by: james C | Jun 26, 2007 12:00:24 PM

I don't know why she has missed out the equity market. First time buyers of equities can only get a yield of 3.6%. This is unfair since people who bought in 2003 when the market was 4000 are getting almost twice that. Gordon Brown needs to destroy the capital value of the existing asset base in order that first time buyers of equities can get a decent yield and climb on the equity ladder. It's only fair.

Posted by: MARK T | Jun 26, 2007 12:50:16 PM

Mark, i think the crash will start in the autumn. The introduction of hips plus rate rises could be the thing that pushes them over.

How are people affording to buy? Interest-only? 30 year terms? Faustian deals?

Posted by: Tim almond | Jun 26, 2007 6:21:06 PM

Polly's article is a litany of interference, kludges and distortions upon previous distortions and interferences.

True to form.

Posted by: Roger Thornhill | Jun 26, 2007 6:47:39 PM

It is illogical in the extreme to tax gifts by dead people, but not to tax gifts by living people.

Of course, I don't have quite the same solution as Polly...

Posted by: Sam | Jun 26, 2007 11:49:53 PM

Good article but I thought you missed an open goal on the second last quote:

"The minimum wage must rise faster than inflation, "

You raise the minimum wage those above it will require a similar raise so that they don't end up with the stigma of having been caught in it, the "inequality" forces more raises and the whole thing pushes up inflation so the NMW has to rise again making the whole thing tend towards infinity after a short while.

Just a thought.

Posted by: RfS | Jun 27, 2007 9:17:25 AM