The Obscurer

People cleverer than I have been discussing the issue of a flat tax across medias both new and old recently. It is a subject that interests me, and although I don’t have a detailed knowledge of the ins and outs of the tax, I do have an opinion.

Simply put, the idea of a flat tax is to replace the current tiered levels of income tax, which increases from 10%, through 22% and up to 40% as income rises, with a single tax rate regardless of how much one earns. Instinctively I would expect to oppose such a move as it not a progressive system of taxation where the richest pay a higher proportion of their income in tax; but the matter is not that simple. Proponents of a flat tax tend to favour a higher personal allowance, of around £10,000-£15,000 rather than our current £4895; as the poorer one is, the larger proportion of your income is made up of the untaxed personal allowance, there is still a level of proportionality to the tax. In addition, with a simplified taxation system there are fewer places for the rich and their accountants to hide their wealth in a thicket of tax loopholes, and levels of compliance increase; this is another way in which the flat tax can in fact be considered fairer to the poor. An accountant friend of mine tells me that there are slim picking these day for those trying to avoid tax; but still, I do think that a flat tax has much to commend it, more than I initially thought I would.

Not surprisingly my pals at the Daily Mail also find the flat tax an interesting idea, although I suspect for rather different reasons to mine. I imagine that some of the things that attract me to the flat tax are the sorts of things that cause the Mail to have reservations, but we cannot always choose our allies and we certainly can’t choose their motivations. However, there remains a problem for the Mail.

When the Adam Smith Institute advocated a 22% flat tax with a £12,000 personal allowance its studies showed that no one would be worse off financially as a consequence. Unfortunately, such a system would accrue only £88 billion in revenues to the treasury rather than the £138 billion currently raised by income tax. Doubtless the ASI don’t see that as too much of a problem, believing that government takes too much money from us all in the first place. Secondly, it is argued that the greater economic efficiencies and incentives resulting from a flat tax will make up this shortfall in revenue (as people are not penalised for working harder and earning more money) and indeed they may do; but they may not. I know the ASI is interested in deregulating gambling (well, they are interested in deregulating pretty much everything, and so support deregulating gambling as a consequence) but to gamble with the finances of the country seems a bit risky to me.

The Economist then commissioned a study into the flat tax to see what would be the result if it was introduced at a level that was revenue neutral (ie. raised the same amount of revenue as is collected by the current system of income tax). It found that there could be a flat tax with a rate of 30% and a personal allowance of £10,000. Those earning less than around £20,000 and more than £50,000 were better off as a result of this change. Unfortunately for the Mail, the people in the middle-income group (earning between £20,000 and £50,000) would end up paying more in tax; these are the very inhabitants of “middle England” that the Mail claims to represent and who pays its wages, the same people who the Mail currently consistently complains are being clobbered by the government and its numerous stealth taxes.

So the Daily Mail will ultimately probably not charge the barricades demanding a flat tax, and if the figures above do accurately show how it would work in practice, then it looks a less enticing prospect than it does in theory.

But of course there is one way we could get a flatter (if not flat) tax tomorrow, and that is simply by combining income tax with the employees national insurance contribution. Then, rather than having an incentive-denting leap in tax rates from the standard 22% to the whopping top rate of 40%, we would instead find that our tax on income only rises from 33% (22% income tax, 11% NI) to 41% (40% income tax and 1%NI) at the top level. Perhaps if we did this, and publicised this “change” in our tax regime, then we would reap some of the benefits the ASI think will come from abandoning a system that so penalises those who work harder. Do you reckon?

I still think the flat tax has much to recommend it, especially when, as I have just explained, the current system is not as progressive as it is sometimes painted; even less progressive when you consider other taxes such as VAT and the Council Tax. I am still quite attracted to the theory; but at the moment I need to know a little bit more about the facts.

I wouldn’t describe myself as an economic illiterate, but my 2:2 in economics is a bit long in the tooth for me to consider myself fluent in the dismal science. Certainly, there are a hell of a lot of people out there who know far more about the subject than I ever will.

But the term “economic illiterate” is something I am getting heartily sick of reading in blogs and elsewhere. It suggests a degree of arrogance and smugness on the part of the writer who uses the term, a certainty that their view of the world is correct and that to disagree cannot be a difference of opinion, but due to a lack of knowledge on the other person’s part. Strange, since economics is a discipline famed for inspiring a wide range of conflicting views and opinions.

Theoretically you would imagine anyone could throw about the charge of “economic illiteracy”; anyone who reads an economic viewpoint different to their own and feels this view has been arrived at through ignorance. In practice the term is almost always used by free-marketeers to dismiss anyone who suggests something less than an entirely laissez faire model. Why this should be I don’t know. Perhaps those of a libertarian bent really do know more about economics than others; or perhaps they view economics more as a science, so that dissent from pure free market solutions is like dissent from the laws of nature. I have less faith that free markets can always provide us all with what we want, I don’t think that economics can be directly compared to the natural sciences, and I feel there are times when state intervention can be desirable, even if it may result in some economic inefficiencies.

A recent hot topic is of course the whole question of aid and the Make Poverty History campaign. Here the charge of economic illiteracy has been widely used to attack what are seen as its well meaning but naive proposals. The suggestion to double aid is often derided as just simplistic and woolly thinking, that it ignores economic realities and the situation existing in Africa. Funny then that many critics of Make Poverty History and Live 8 themselves seem to betray an extremely simplistic world view; that aid can never be effective; that it is just throwing money at the problem and will only find its way into the Swiss bank accounts of corrupt African regimes; that only trade and better governance can help the poor in Africa.

But there is no suggestion that aid should be thrown at corrupt regimes; the intention is for it to be targeted at specific problems, such as combating malaria, and often channeled through NGOs. Moreover, aid forms just a small part of the current campaign, alongside debt relief and trade reform (although we can argue over whether free trade or fair trade is the best way to go, everyone seems agreed that trade is a vital part of the long term solution). To characterise all African governments as corrupt is probably the most telling assumption of those who oppose Make Poverty History and its related campaigns; it is crass and ignorant to lump together the governments of Zimbabwe and, say, Ghana.

If those calling for greater aid are a group of economic illiterates, it is interesting to see that their ranks appear to have been swelled by none other than The Economist newspaper. The current edition includes a leader entitled “Helping Africa help itself” (subscription/registration required), which says,

The aid sceptics, some of them veterans of the industry, their palms calloused from many previous bouts of hand-wringing over Africa, have all the best lines in the debate. Everything has been seen before, they say, nothing has worked. But what do they mean precisely? Do they mean that the World Health Organisation should abandon its efforts to put 3m HIV-carriers on anti-retroviral therapies? Perhaps those already on the drugs should hand them back, lest they succumb to “dependency”. Should Merck stop donating its drug, ivermectin, to potential victims of riverblindness? Let Togo reinvent the drug itself! Perhaps, in the name of self-reliance, Tanzania’s government should stop giving pregnant women vouchers to buy mosquito nets. Get sewing, ladies!

No one should be naive about aid. It cannot make poverty history, and it can do harm. But to say that nothing works is wrong. Cynicism is only the most common form of naivety.

I couldn’t possibly put it better myself. I may not be fluent in economics – indeed I may leave myself open to the charge of being an economic illiterate – but to me The Economist is just talking plain old common sense.

My first venture into digital television was with the ill-fated on/ITV digital a few years ago. When they went bump (while trying to drag a few lower league football clubs with them) I wasn’t all that bothered; most of the channels we lost were rubbish (my wife missed E4, I quite liked Paramount for “Seinfeld“), but we kept the set top box, and still got the BBC digital channels, which were the ones we probably watched the most, and ITV2 was still there for the occasional Inspector Morse re-run. Then, when Freeview started, these channels were joined by some half decent offerings; UKTV History has its moments, the two music channels are okay for a change, Sky Sports News is occasionally worth watching. Basically, it does us fine.

Except the old ITV digital box started playing up; it was getting to the point where I had to pull the plug out of the wall at least once a day when the whole thing froze. Solution? The fantastic new DigiFusion FVRT100, with built in hard drive recorder. Basically, rather than having a separate set top box and video, you have a combined unit which records your TV programmes to a hard disk, so preventing the need to go searching for blank video tapes. It has two tuners incorporated into it, so you can watch one channel and record another; in fact, you can record two channels at the same time, and watch a recording, should you so wish. It also automatically records up to 30 minutes of the channel you are watching onto a temporary file; so you can “pause” and “rewind” live TV. This has become a real boon; when the phone goes in the middle of a programme you are watching, or if your nose tells you your son’s nappy needs changing…now! It’s a little marvel.

You may say that this seems very similar to the Sky+ box, and you’d be right; they are basically the same thing. There are a few differences I have noticed though, in purchasing a Freeview hard drive recorder compared to Sky+

• My box records up to 40 hours, compared to Sky’s 20 hours. Already DigiFusion are talking about bringing out an 80 hour version.
• With Sky, you get the box you are given; with Freeview you have a selection of different boxes to choose from; DigiFusion, Pace, Thomson and Humax all manufacture them. Humax are currently working on a Freeview TV with integrated Hard disk.
• You have to wait for Sky+ to be delivered and installed, at a cost; I bought my box from Currys, plugged it in, and I was away (although I dare say there are technical reasons why you can’t install Sky+ yourself)
• Sky charges a monthly fee for Sky+; unless you are already on one of their more expensive monthly packages. With my box there is nothing else to pay.
• The DigiFusion box is £40 cheaper. I think the Thomson box was cheaper still.

I know that this is a far from scientific comparison of the two systems, and I may have missed some benefits Sky+ has over a Freeview box; obviously you get far more channels to watch with Sky, and you can’t watch Premiership football on Freeview; but isn’t that what the pub is for? Also, I am not saying that Sky+ is rubbish, because it’s not; in fact it is because it is so good that I wanted the same thing for Freeview. What I find interesting in comparing the two systems though, in this regard at least, is how Sky seems to be acting in a way similar to BT, pre-privatisation, where it was a case of “Do you want a new phone? Well, we’ll tell you when you get it, and what it looks like, and when you will be connected.” Yet Sky is part of a massive private company; why would they act in a way I find reminiscent of a public monopoly?

Firstly, of course, in the market for a Sky hard drive recorder, they are a monopoly. Sky alone provides satellite digital television to the UK, and only they provide a hard drive recorder with an integrated satellite tuner. They do face some sort of competition, from Freeview, and cable, but if you want the range of channels that only satellite technology provides, and you want to record one digital channel whilst watching another, then Sky+ is it.

Secondly, I have a feeling that in many ways, large private companies actually have more in common with the public sector than they do with small private companies, at least in their day to day running. I hasten to add that this is just my little pet theory, likely to be contradicted at a stroke by a well placed statistic or two, but it is a theory based on my own observations having worked in the public and private sector, in large and small companies. Of course, private companies have a profit motive that is absent from the public sector, and this will affect their decision-making; but public firms do have their own financial considerations. Meanwhile, within large private companies, you can find vast swathes where the profit motive seems an irrelevant and alien concept; the senior managers who are interested in profits are often insulated and ignorant about how many areas of their business operate. Examples available on request.

People often talk about comparing the public and private sector as if it was a simple divide; Ruth Lea of the Centre for Policy Studies is typical when speaking to the Telegraph of comparing “the dynamic private sector to the wasteful public sector”, but I think this is a simplistic comparison, even if there is some truth in it. Similarly, Tim Worstall replied to my comment on his blog by saying that what he dislikes about the State is “the meetings, conferences, planning sessions and bureaucrats”, and he is right to dislike them; but they are far from the sole preserve of the public sector.

I would say that it is competition that makes the difference, rather than simply whether a firm is in the private or public sector; so, where Sky do not face any meaningful competition, their service suffers by comparison with a similar market where competition does exist.

I think that this illustrates part of my concern when people preach the virtues of the unrestrained free market. It works brilliantly well in many ways, at least where the actions taken to maximise profits coincide with actions that benefit the consumer, as they very often do. However, some people talk about the benefits of the free market and the benefits of perfect competition as if they were the same thing, when in most cases the free market throws up oligopolies and monopolistic competition. If we do just leave things to the free market, what is to prevent a gradual slide towards monopolies across all markets, and where will we stand then? Will we be much, if any better off than under a public sector monopoly; and if not, how can such a drift be prevented, other than by state action of the sort the OFT engage in, and which is so criticised by some proponents of the free market.

What is the answer? You didn’t really come here for an answer did you; I am certainly the wrong person to ask. I am just throwing ideas and thoughts about to see if they make any sense. Do they? I may have a degree in Economics, and so have forgotten more than most people know about the subject, but that is probably the problem; I have forgotten it, and I just carry about a little knowledge at a dangerously low level. I think all I really learnt at college was a cynicism and scepticism towards all economic theories.

I will tell you what I am not saying, however; I am not attacking the free market, and I am not arguing for a large state. Sometimes it is assumed that if you question the free market, or defend the state in any way, then you want politicians to organise everything for us, and for the state to tell us what we are having for tea. I don’t. I want the state to be as small as possible, and for taxes to be as low as possible, albeit I would like them to be more progressive than they are now. And it would be lovely to think that leaving everything to the market would solve all our problems, that some invisible hand will always be there to mop our brow and steer us back onto the right course when things get tough; but it seems a somewhat naïve view to me. I suppose I just think that market failure occures a bit more often than some people believe, and that the state may have to nip in now and then to help out more regularly than some would like.

Or perhaps I have just rambled on, at perhaps too much length, over reacting to what is just a rather fine piece of consumer electronics.