Taxing Status - there is such a thing as a free lunch

Well, very nearly free.

This is a post about a revolutionary and quite brilliant way for government to raise large amounts of money with little or no real cost to taxpayers. I should say, at the outset, that I didn't come up with it. My understanding is that the idea was proposed originally by Keynes in the 1930's. But, I'm no historian.

Before we get to the exciting stuff we have to introduce a fairly simple concept in economics. The concept is called 'positional goods'. A positional good is a thing that confers status on its owner. The value that the owner gets from owning the good comes primarily from the fact that it is better than someone else's (ie gives them a higher 'position'). Many goods are like this.

Take cars for example. People buy BMW's, not because they make great cars but because they make better cars than Ford or Volkswagen. Or more precisely, because people think they make better cards than Ford or Volkswagen. Owning a new BMW confers a status that you don't get from driving a 2 year old VW Polo (like I do).

So, what would happen if we put a tax on expensive cars (like BMW's)?

Well, we would raise some tax revenue for the government.That;s a good thing.

We would make BMW's more expensive and that's a bad thing ..... but wait a minute no, in fact we wouldn't. A £50,000 BMW would still cost £50,000. Remember the price of a BMW is based on what the buyers can afford.

Ah but the BMW wouldn't have quite as many features and that is a bad thing. Well, not really. This is where this whole 'positional goods' thing comes in. The buyer doesn't really care about the lost features.The buyer only cares that someone else can't afford a car with as many features as this one.

So, in this scenario the government gets lots of extra money (good thing). The BMW owner loses some features in their car (but no one really cares that much).

I propose that this is implemented in the UK in the form of an annual tax based on the list price of a car. In the UK this is called Road Tax (or vehicle excise duty).

Define a baseline level of car price at which you can buy a safe, reliable car. Say £10,000. Apply a fixed annual tax of £100 per year for all cars with a value up to £10,000.

Charge an additional 1% of value for the next £10,000.

An additional 2% for the next £30,000.

Ad additional 3% for the remaining amount.

The tax would have to allow for depreciation (a one year old car is worth more than a 2 year old one).

This would mean that the owner of new car with a list price of £100,000. would pay £2,300 in tax in the first year. In the second year we might say that the car is now worth only £80,000. Accordingly the year 2 tax would be only £1,7000.

I have nothing against the designers and manufacturers of high status cars. But I fail to see why we should pay them large sums of money to help us convey our status to our fellow man when we can use the money for something useful instead without diluting the status message.

Comments please.

Freemium in the Education System - Admissions

There is considerable scope for the application of Freemium principles to education. As with healthcare, the principle is well established in small ways. For example, parents can opt to pay for music lessons that take place during the school day.

I propose that this principle is applied to school admissions. Such a proposal would have to based on the following principles which I consider to be reasonable and fair (even if they are a bit disturbing).

1. All children should be offered a place at a state funded school that is within a reasonable distance of where they live. This school place must be free (subject of course to the normal caveat about parents paying through their taxes).

2. No child should be granted privileged access to the state education system based upon where they live. Privileged access, for the purposes of this post, is defined as 'granting a child's choices of school a higher priority than that of another child'.

This means that if you live next door to the best school in the country you should have no more right to attend that school than if you live 3 miles away. This principle must be subservient to principle 1. So if you live next to the best school in the country but your next nearest school is 25 miles away then natural justice suggests that you should not be forced to travel long distances to get to school, so you are granted a place at the school next door.

This is all well and good but if a school receives 500 applications for 180 places then how do you decide who gets a place.

This is where Freemium comes in. All children get a free state education but if you want a 'premium' experience (ie you want to get your child into your preferred school) then you pay a premium.

From this comes principle 3.

3. Parents who wish to have privileged access to the state education system for their children should compensate the children whom they are disadvantaging. This compensation would take the form of a payment to the school the 'disadvantaged' child ends up attending.

The amount paid would be determined by auctioning places at preferred schools to the highest bidder(s).

Such an approach will raise furious objections from those affected among those objections will most likely be .....

A. It is unfair as the rich get access to the best schools. This is true. The problem with this objection is that it is also true today with the current system. The rich buy houses in the catchment area of the good schools and pay a premium for the house. They then get the all the benefits of access to superior education and then they can sell the house later and get most of their premium back.

The system remains in place indefinitely. Nothing changes. The poor and disadvantaged lose out.

In contrast, this proposal contains the seeds of its own destruction. Suppose a portion of the payment (say half) is placed in a trust fund which pays a regular income. Over time, the income of the less preferred school will rise. Eventually the difference in funding will be enough to ensure that the schools are equally preferred.

B. Why should parents have to pay to get their child into a good school? Good question. There are two responses to this

i) Parents don't have to pay to get their child into a state school (see principle 1)

ii) Parents already pay today but the costs are hidden.

Parents pay money to estate agents and solicitors and removal firms and mortgage companies and the government (don't forget stamp duty!) to secure a house close to a 'good school'.

They go through the stress and aggravation associated with a home move. It is widely reported that this is one of the most stressful things you can do. They also incur the opportunity costs associated with the fact that if they didn't have to worry about catchment areas then they would be living somewhere else that was more suitable.

I like solicitors and estate agents as much as the next man (honestly I do) but I fail to see why they should be paid considerable sums of money to facilitate the distribution of school places.

C. By funnelling money to 'failing' schools this proposal rewards failure. This is a good objection. It represents a real problem with the proposal.

It can, however, be mitigated as follows.

a. Ensure that a proportion of the funds are held in trust. That way, if a school really does have poor leadership then they will not be able to spend all the funds in a bad way.

b. Ensure that the trust is independent of the head teacher and the local education authority (LEA). The LEA will like having the extra money available but they won't like the fact that an alternative power base is being created in their backyard.

Finally, and most importantly, it will create a HUGE constituency in favour of sorting out failing schools. If you are a parent the reason for wanting change is obvious. But, even if you are not, the value of your house still depends upon the quality of the schools in the area. But instead of it depending on the quality of the best schools it now depends on the quality of the worst schools. You only get to sell your house at a premium if all the school in the area are good.

If I'm honest, I don't really like the proposal much. I would much rather live in a world where everyone lived near a pretty good school that gave them a good start in life. But I don't and that makes me sad. If this proposal is adopted then one day, maybe, I'll be a bit less sad and bit more happy.

Freemium in the NHS - GP Appointments

Freemium principles have been applied in the NHS for some time now. The most obvious example is that patients can pay for a private room in a n NHS hospital. They get the same treatment as other patients but they also get more privacy. In modern business speak a 'better customer experience'.

So why not apply this principle elsewhere in the NHS. For example why not charge for the most popular GP appointment slots. This can raise serious amounts of money without adversely affecting the most vulnerable.

Supposing GP's were to charge, say £10 for appointments between 8 am and 9am.

Suppose that each GP manages to sell 3 appointments per day (on average) on each of 200 working days. Given that there are about 30,000 GPs in the country that gives an annual revenue of about £180m.

That's about 0.1% of annual government spending or £1 in every £1000.

Not much, I know but it's not that difficult to implement.