Knowing and Making

This article on pensions from the Economist made me wonder about something. It used to be that people in the UK were compelled to buy an annuity on retirement with their pension savings. Well, almost compelled - if they took it out as cash, they'd have to pay tax on the lump sum. So if I saved for ten years at 22% tax relief, and I then withdrew the sum, I'd have to pay 22% tax on the withdrawal. Fair enough - the idea of pension tax relief is to encourage people to build up an income which would stop them having to draw on state benefits in retirement. If I can withdraw the cash, as if it were a standard savings plan, then the tax treatment should be the same as if I'd saved the money outside of a pension. But could this be used to game the system? What if today - with top tax rates at 50% - I think that the income tax rate is higher than its long-term average. Then I might save in a pension now, intending to withdraw later when tax is cut back to 40% or lower -...

While I would love it if this idea came true, doesn't it sound a little like special pleading? Tax breaks on market research, proposed by...three companies which spend money on market research. Oh but wait - they also have the support of "accountancy groups near Henley-on-Thames". Hmm. Don't accountancy groups also make money right now from the existing tax breaks on technological research and development? Why yes. Is market research a good thing? Yes, just like jobs and apple pie - not famously the subject of a lot of tax breaks. There is one good argument though, not clearly made by the article: research has a positive externality. Research allows us to test more innovations, and innovations by one party - whether successful or not - tell the rest of us something about what to try in the future. That's a good thing - but only if (like the patent system) people have to disclose the results of their research. Maybe we should offer tax breaks on disclosure  of...

I have no objection in principle to higher taxes on banks. But the IMF's surprising proposal (outlined by Robert Peston here ) may not quite be taxing the right thing. If the goal of the tax is to pay for the externality imposed on taxpayers by bank behaviour, that's fair enough. In line with the principles of Pigovian taxation , the tax should fall on the activities which impose those costs. That way, it's fair and also creates the right incentives, to shrink those activities if they do not benefit society enough to justify them. The first part of the IMF's tax seems to fit this principle. Peston doesn't explain what this "flat rate" would be levied on - I assume it isn't literally a flat rate, otherwise Goldman Sachs or Citigroup would pay the same amount as the Cheltenham Building Society or the Third State Bank of Des Moines. Presumably therefore it will be in line with the recent Obama proposal: a percentage levy either on total assets or on r...

Just a hypothesis here, suggested by Chris Dillow's reference to Baran and Sweezy: ...tends to generate ever more surplus, yet it fails to provide the consumption and investment outlets required for the absorption of a rising surplus and hence for the smooth working of the system. Since surplus which cannot be absorbed will not be produced, it follows that the normal state of the monopoly capitalist economy is stagnation (p108). The essence of the market is that surplus goes to those who produce it: this is a stable situation because it gives the producer an incentive to produce more surplus. But perhaps modern economies of scale and scope lead naturally to ownership, or at least control, being concentrated in the hands of a small number of people: control can't be spread more broadly because of the rational ignorance of the crowd. Sharing a growing amount of wealth among a smaller number of people means that - as Baran and Sweezy suggest - those in control are no longer sign...

This quite clever proposal from Cavallo and Cottani sounds plausible at first but my immediate reaction is: how can it work? The idea is to eliminate payroll taxes in Greece and instead raise VAT to 25%. This is meant to increase competitiveness while reducing distortions in the economy. It feels like a magic solution - which naturally makes me suspicious. If the economy really needs a devaluation, then how can they miraculously solve the problems without one? But then I realise that magic really can happen . A devaluation is only a nominal change - it simply breaks people's money illusion and affects relative prices. In fact, a devaluation requires no real actions at all, although it does change the pattern of of future real demand. All the benefits of a devaluation can, in principle, be achieved through the coordinated individual choices of all the agents in the economy. Of course such coordinated choices are highly implausible, which is why devaluation is a good short...

From Lydia DePillis , via Andrew Sullivan : It turns out that shoppers are now taking extreme measures to avoid paying that extra nickel—even schlepping groceries in their arms if they didn’t bring a backpack. The fee may drive people crazy, and the Journal may grumble about “bureaucracy,” but it actually seems to work: Stores report giving out half as many bags as they did before they started charging for them. And the reason seems to be rooted in how our brains operate... And this is why micropayments will be really hard to implement.

In an intriguing example of pricing an externality, Barack Obama has announced a plan to tax American banks based on their reliance on the wholesale finance markets. On a related subject, Nick Rowe has a neat analysis of finance as magic - the magic of borrowing short and lending long, sharing risk and creating liquidity. To make this magic work in a more stable fashion, it's understandable that governments would want to encourage banks to move from wholesale to deposit finance. Assuming it works, what are the effects of this move likely to be? The coordination game between multiple owners of capital will work better, for two reasons. First, because no individual will have as much power as they do now. Second, because the more finance is provided by millions of depositors (instead of a few hundred managers of wholesale capital) the more statistically predictable their behaviour is likely to be. Even when there are herd changes in depositor behaviour, the movement of a larger...

Consumerology reports a study by David Hardisty, Eric Johnson and Elke Weber at Columbia which randomly offered participants various choices between different pricing options for airline tickets. The main distinction was between a surcharge described as a "carbon tax" and an identical charge described as a "carbon offset". The tax was unpopular - no real surprise. But when people were asked if they supported making the carbon offset mandatory - which is of course exactly equivalent - the response was highly favourable (around 2 points more positive on a scale from -3 to +3). Not only was the "mandatory offset" more popular, but it was regarded identically by Democrats and Republicans. The tax, on the other hand, was strongly disliked by Republicans while Democrats made no distinction between taxes and mandatory offsets. Thus the entire effect appears to be due to Republicans' attitudes to tax. This is an example of a well-known cognitive bias ca...

Robert Peston's column today got me thinking on a tangent. If the state incurs liabilities (let's say while rescuing banks), there are a few ways it can pay them off. One is by selling assets that it acquires along with the liabilities. For example, if it acquires a 70% stake in Royal Bank of Scotland, it can sell it into the private sector for (let's say) £20 billion. This might offset some or all of the liabilities it has covered. Another is by increasing taxes. In one sense, this is exactly the same as selling assets: it takes money from the private sector into the public sector. The difference is in the distribution. When selling assets, the money comes from those people who choose to buy the assets. When taxing, the money can come from whoever you like. A third is by walking away. After all, the state's liabilities are unenforceable except by the state itself. Thus the state can simply ignore its liabilities (as Argentina did a few years ago, and most developed ec...

Via Stephanie Flanders, the IMF starts to give us a way to estimate the return on investment of recent financial bailouts from various countries. Apart from anything else, this may help to silence some of the complaints from people offended at us "giving" money to banks to "bail them out". There are two different ways to calculate ROI: first, what is the cost and benefit to the state as an entity, and second, what is the cost and benefit to the economy as a whole. Note that the 'cost' here does not refer to the entire cost of the crisis in lost economic output or reduced asset prices - because most of that is a sunk cost and our decisions can have no impact on it. It refers to costs specifically incurred by explicit decisions taken to rescue financial institutions. In the case of the UK, the cost to the state (according to the IMF) of the bailouts is about 9% of GDP or £130 billion. The return will include: Whatever is gained from selling off government sta...

One of my themes in the last few weeks has been the credibility of UK fiscal policy and how it can be rescued now that the rules of the last ten years have been clearly broken. If your husband has an affair, before you believe his assurances of renewed fidelity, he needs to give you a good reason to think it will be different next time. If this is his second or third sin (after those drunken incidents in the 1970s and early 90s) he needs to be extra convincing. Alistair Darling is in the same position. So how will today's announcements go down? Will anyone believe them? There are five criteria it has to meet to be credible. The first step is that it must have content - there needs to be something concrete to actually believe. Something simple that nobody can forget. "I will never see that woman again" is a good one, and "We will reduce borrowing every year and eliminate it by 2015" comes in a reasonable second place. Marks: 4/5 The second is to make it plausible...

One of the main expectations from this afternoon's pre-budget report is of a temporary cut in the rate of VAT. If true, what effects will this have? Creating extra work for accountants and software developers . This would be the first change in VAT since 1991, and the economy is a lot more complex and automated than it was then. My own programmers are on standby to update and check all our clients' systems if the change goes ahead. We are hoping to have a few days' or weeks' notice of the change so that we have time to do this. Accountants, similarly, will have some extra work to check that their clients have changed the rate they apply and correctly dealt with invoices which might straddle the effective date of the change. Administrative overhead for retailers . There will be work for retailers in changing prices - and particularly in reconsidering non-granular price points such as £1.99 or £5. Many retailers may not reduce prices but will increase profit margins inste...

I have carried out a brief survey of some of the main UK broadsheets and their predictions about the pre-budget report. A consensus is emerging today (Monday) but Sunday's papers are a bit more diverse: Newspaper Prediction Recommendation   BBC (Nick Robinson) Friday 21st 1% of GDP (£15bn) fiscal boost: deferring tax rises on cars, small business and income tax; tax cuts for the lower paid; bring forward government spending BBC (Robert Peston) Friday 21st Deferred VAT rise to 22.5% in a couple of years Observer Sunday 23rd VAT reduced to 15% Big tax cuts on low paid, rises on high earners; extra tax on bonuses Sunday Times Sunday 23rd 2.5% VAT cut; extend £120 income tax rebate; defer road tax and corporation tax rises; three months grace on repossessions; increase public capital spending; expand SFLGS Increase support for manufacturing Sunday Telegraph Sunday 23rd 2.5% VAT cut; reduce empty buildings tax FT Monday 2...