“There is a great deal of ruin in a nation” — But how much? And where is it?

When the Chancellor raises National Insurance, are the effects the same everywhere? We don’t know.  But we ought to — regional inequality in the UK is so stark that comparisons to reunified Germany bear out. If fiscal policy plays a role in this, we need to know ‘how much’ and ‘where’[1].

There’s very good reason to ask for answers: long-established economic theory holds that governments will create poverty through taxation on economic activity:

All economic principles must be tried and proved at the margin. On marginal land there is no surplus above non-land costs, hence there is no taxable capacity of any kind. Any tax on marginal land, or people, or buildings, or outputs on marginal land, renders it sub-marginal[2]

We all know these marginal places. You might even live in one — a seaside town or run-down part of the city that is often described as… ‘teetering’: places where economy activity is patchy and poverty, endemic.

The difference between marginality and sub-marginality in these places can be, literally, vital. A tax rise on labour or consumption may barely be felt in a Chelsea or Didsbury[3]; in Blackpool, activity that would have taken place, does not take place. The location falls into sub-marginality, or, more plainly put: poverty is created. In many of our shuttered, boarded-up and deserted streets — this dynamic has already played out. So let’s undo it.

We can encourage this by using a data tool known as dynamic scoring.

Originally proposed by American conservatives, the deadweight, or economic, cost of proposed tax rises on the real economy would be measured (‘dynamically scored’. And so — if we imagine the motives correctly — deterring fiscal activism from Democratic Party lawmakers before it even happens).

Paradoxically, progressives should welcome this proposal; the tool’s original proponents overlooked something important: different taxes have different effects. Indeed, we can expect this dynamic scoring tool — rooted in real world data — to nudge our tax system toward redistributive channels. This is because taxes on rents, such as land value or ‘super-profits’, do not hurt the economy and the poor like taxes on economic activity — such as VAT and NICs — do.

But let’s not stop there: the Office for Budgetary Responsibility should develop this model to be a spatially-adjusted — measuring the effects by geography. If a government wanted to raise VAT again, we would want to know not only the total economic cost but, crucially, — in which specific parts of the country economic activity will be curtailed the most.

In theory, we could even level up Britain without the need for the massive fiscal transfers used in Germany — simply by changing what we tax in the first place. In practice, fiscal transfers will be necessary — but using tax bases that do not hurt the economy.

$3 Trillion a year lost in America

A new paper from preeminent economists in America describes how America would be $3,000,000,000 richer per year with only a partial shift to land taxation. That’s extra output equivalent to almost the entire UK economy.

It’s good to have money Data

Money is so important, economics students don’t learn about it (actually true).  Fortunately, the policy world is getting better at understanding money: Vince Cable, as business secretary, (and president of ALTER) ensured that Britain’s high street banks now publish local lending data. This has proved an important tool in understanding how well (or poorly) our highly-concentrated banking sector is serving our regions. This is particularly crucial given how much we rely on commercial banks to provide most of our money. This data is helping new municipally-backed regional banks such as Bank North come forward. Getting money into our provinces need not be the preserve of government alone; Germany is ahead of us here, with a nationwide network of local banks underpinning its strong industrial base.

Adam Smith and the ruin around us

Smith understood that nations themselves destroy much of their own potential themselves:

“There is a great deal of ruin in a nation” – Adam Smith[4]

But good data and good theory can limit bad policy and remedy the ruin — let’s have more of both.


[1]  There’s also much we don’t know about the effects of spending explicitly designed to counter regional inequality — as reported recently by the National Audit Office — but for the purposes of this article, we’re sticking with the causes of inequality

[2] On the Principles of Political Economy and Taxation, David Ricardo, Chapter 11, 1821, as outlined in The Philosophy of Public Finance, Mason Gaffney, p. 188: https://masongaffney.org/publications/G44Philosophy_of_Public_Finance.CV.pdf

[3] Ample land values may dip slightly in accommodating additional cost, but economic activity can continue — summarised as the ‘All Taxes Come from Rent’ (ATCOR) theory, for more see The Philosophy of Public Finance, Mason Gaffney: https://masongaffney.org/publications/G44Philosophy_of_Public_Finance.CV.pdf

[4] Written in correspondence, putting into perspective the British losses accrued in the American Revolutionary War

* Toby Matthews is a member of Action for Land Taxation and Economic Reform (ALTER), an affiliated group of the Liberal Democrats. Join us here http://libdemsalter.org.uk

Read more by or more about .
This entry was posted in Op-eds.
Advert

5 Comments

  • Brad Barrows 4th May '22 - 6:47pm

    Be careful – there is a big difference between claiming that governments “will” cause poverty and claiming that governments “may” cause poverty by the taxation of economic activity. Applying taxation to production of something that does not generate a rate of return may push it blow viability, but applying taxation to an economic activity that is generating a healthy rate of return merely reduces the rate of return.

  • @Brad Barrows — I am very much saying they will and I am proposing they measure it. That is the point of the piece. Thank you for your feedback.

  • The inefficiency and inequity of the current tax system was clearly analysed by the late James Mirrlees
    His influential work on taxation culminated in a report for the Institute for Fiscal Studies that bears his name – the Mirrlees Review of 2010. The review accepted the failures of current tax systems, arguing that “the UK system imposes unnecessary costs on the economy … reduces employment … discourages savings and investments, and distorts the form that they take”.
    Economists like james Mirrlees have long argued that governments should make more use of property taxes to both address inequality and reduce the deadweight impact of taxes on the productive economy. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes Levying the land

  • We’ve been told the NIC increase is supposed to deal with our historic low productivity, by making capital investment more attractive, which must be true to some extent.
    Redistribution of income and ultimately wealth via regional tax variations sounds interesting, but would be complicated, possibly prone to error, and likely to attract tax dodgers.
    More damaging to equality, surely, is that huge amounts of cash are borrowed from the future by banks, purely to give prospective home-owners the right to cement their place on the upper rungs of the wealth ladder, or to put it another way, to cement non-owners onto the bottom rungs. Home ownership provides work for lots of people, including skilled manual workers, but it skews our economy towards capital investment in bricks and mortar instead of more creative industries, and is one of the main reasons we have a large and widening gap between the rich and poor.

  • Peter Chambers 7th May '22 - 9:16pm

    Thanks for this useful and concise piece on political economy.

    It mentions a complex and data-driven policy. However that could never be implemented while our Masters require that the economy be simple enough to be managed by the dimmest son of an Old Etonian. This is an old problem, and we thought we had managed it using the Enlightenment. It is not a good campaign slogan though.

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

To have your photo next to your comment please signup your email address with Gravatar.

Your email is never published. Required fields are marked *

*
*
Please complete the name of this site, Liberal Democrat ...?

Advert



Recent Comments

  • Joe Bourke
    The war in Ukraine has brought the issue of European security to the fore. The governments and peoples of Sweden and Finland, having carefully deliberated their...
  • Martin
    Lorenzo: Abortion is not eugenics and is no more eugenics than is contraception. Eugenics is the attempt to apply selective breeding to humans. It is an att...
  • Jeff
    The British government have indicated a possible workaround if Erdogan refuses to change his mind. It has signed a separate “mutual assistance” treaty wi...
  • Lorenzo Cherin
    David I think I gave it more as an example of where it happens, to relate it to the question Martin put. I am not saying the woman ought to be prosecuted or ...
  • Charley HastedCharley Hasted
    The line here is 'does this disability hurt the disabled person or the people around them more' imo. Haemophilia, Huntington's, etc unarguably cause more pai...