The moral case for high taxation

This post is about the moral case for high taxation and makes no reference to any of the practical concerns associated with collecting large amounts of tax. it is not specifically an attempt to articulate the moral case for high taxation of the rich based on some notion that the rich have more money and therefore they should pay more tax. Although, I do agree with that premise.

The moral case for high taxation goes something like this. Suppose for example you are the owner of a bakery. You could argue that there are four different groups of people who have a legitimate claim to the value that is created by your baking. These groups are as follows

1. Your customers

Your customers claim the value generated by your bakery through the simple mechanism of paying for your bread but paying a price for that spread this is lower than the value of that bread to that specific individual customer. We know that the customer is deriving value from the transaction because if the money in their pocket was worth more to them than the loaf of bread that they purchase then they would simply not purchase the bread in the first place.

Nothing controversial there.

2. Your suppliers

By suppliers I mean everyone who sells services to you or provides you with a product that you need in order to make your bread. This would include your employees, the company that supplies you with flour, the electricity company that heats and lights your premises and many other organisations that provide the things that you need in order to make and sell bread.

The amount of value that the suppliers derive is based on the difference between the price you pay them for their services or products and the cost to them of providing those products or services. Again, nothing controversial here.

3. You

As the owner of the bakery and therefore the one who supplies the capital and perhaps some of the management expertise you also have a legitimate claim to the value created by your bakery. In a highly libertarian model of the world the value you create is simply the difference between the price you charge for your bread and the cost of supplying that bread. And while most people recognise that you should pay some tax on that value the basic idea is that the wealthy is yours and the state takes it from you to help to pay for services that the government provides. There is considerable disagreement over how much that tax should be. My argument is that that tax should, at the margins, be extremely high. Or, more precisely, the morally correct tax rate should be extremely high. A bit later on I'll discuss why I don't think it's necessarily a good idea to charge the morally correct rate of tax. But, for now I'm arguing that the reason why the morally correct rate of tax is very high is that there is a fourth group who have a legitimate claim on the value that you create.

4. Civil Society

You see, your bakery only exists within the context of an ecosystem of companies, people, networks, rules and behaviours. This ecosystem creates a context in which an effective entrepreneur can create a large amount of value. The question is, how much of that value is really attributable to the entrepreneur and how much is attributable to civil society. This is quite a hard question because there are two ways of looking at it.

The first way to look at it is to say that a given entrepreneur has a legitimate claim on large amounts of value because that value would not exist if it were not for the entrepreneur. This is true. However, this ignores the second way of looking at the same situation and in this view if the same entrepreneur were to operate with the same degree of skill and hard work in a society that did not provide such an effective ecosystem then the entrepreneur would make much less money. Put bluntly a brilliant baker is going to make a lot more money in central London than they would do if they were in North Korea. From this point of view, the huge additional value that the entrepreneur creates only arises because the entrepreneur operates within that ecosystem. And therefore civil society has a legitimate claim to a very large chunk of the value created by the entrepreneur.

If the entrepreneur doesn't like it. They could always go somewhere with with no real civil society and see how much money they make. It's a fairly safe bet that most of them would choose to live in a country with very strong civil society because that's where they can make the most money.

It's as if the entrepreneur is a miner in a goldmine. Effective entrepreneurs are just good at mining gold. But, the amount of gold in the mine and the ease with which it can be reached has nothing to do with the entrepreneur and everything to do with the strength of civil society. Sure, those who are best at mining the gold should receive more of it. But the real value is in the ecosystem that puts the gold there in the first place.

Civil society, doesn't really belong to anybody or, you could say it belongs to everybody with equal shares attributable to everybody. Therefore, a very large proportion of the wealth created by the should be given to society in general and the mechanism that society chooses to facilitate this transfer is the tax system. After all, everybody else that supplies the baker makes a profit when they supply the services. Surely civil society should be able to charge a very high price for the service that it provides to the entrepreneur.

So there you have it, entrepreneurs exploit the brilliant ecosystem created for them by civil society to generate large amounts of value. Entrepreneurs should pay a very high price for the right to operate within that civil society. After all, if they operated in a civil society that was far less effective they would make far less money.

The reality of course is that this if very high tax rates were to be charged the amount of wealth created by entrepreneurs would be reduced. If you like, one of the things that makes a well run civil society such a good generator of wealth is the fact that it chooses not to collect all of the value to which it has a legitimate claim.

What this means in practice is that the rate of tax should be set in such a way that it maximises tax revenue in the long run. The idea that those who generate wealth actually deserve to keep the amount of wealth that they do keep just does not hold water. The only justification for allowing entrepreneurs to keep large amounts of wealth is because, in the end, that generates more tax revenue and more value for civil society as a whole.

Pay For Rail Improvements In London By Facilitating Electronic Money

I live in London. And, when I travel on the London transport rail network I use something called an Oyster card. This card, allows me to check-in at the station where I join the network. And then, I check out using my Oyster card when I leave the network. The system charges of my Oyster card the cost of the journey. I don't have to wait in line to buy tickets. Neither do I have to make sure I have enough change or cash.

Now, supposing London transport extended the ability to charge money to an Oyster card by allowing newspaper vendors at stations to charge an Oyster card. Pretty soon, other vendors will also start accepting these cards for small payments. Not long after that shops and businesses in London, realising that just about everybody has an Oyster card will begin to accept them as a way of making school cash payments.

Pretty soon, even people who never travel on London transport will start carrying an Oyster card. And then shortly after that shops and businesses outside of London will also accept Oyster cards. After all, many people who work in London commute from outside.

After a while, London transport will be able to sell the whole Oyster card business to a bank for a significant sum of money. This can be used to pay for improvements to the rail network.

Free Mobile Internet

so, I live in the UK. And we are just in the process of rolling out 4 G mobile Internet. This technology promises extremely high speeds for its users. No doubt this speed will come at a price. But I'm not talking about paying for mobile Internet access. I'm talking about free mobile access.

It occurs to me that our government has missed a trick here. I guess, that they have auctioned off the spectrum to the highest bidders. This is what any normal economist would tell them to do. However, they are a government, and that they should not always act like a profit maximising organisation.

Supposing, the UK government had incorporated a public service requirement into their conditions for rewarding access to spectrum. Such a public service requirement might simply require any operator to provide free access to their network. Albeit, at a very low speeds. the speed would have to be sufficiently low that the service could not be used to carry VoIP phone calls. Such a proposal would open up the mobile Internet to a large number of people who would not pay for it without cannibalising the customers of the network provider.

Costs could be controlled by allowing the network providers to agree amongst themselves which of them would provide the public service Internet access for a given area.

Such a move would have wide benefits for society as a whole. And, might well benefit the operators as they may well find that once people experience the joys of the mobile Internet at low speeds, they then decide to upgrade to a faster speed.

Corporate Responsibility for Libertarians

There's been a lot of comment about corporate pay and other anti-social corporate behaviour in the press over the last few years.

There has been precious little comment as to what to do about it. Here's an idea based on the following unashamedly libertarian principles.

1. Companies should be run in the interests of their shareholders.

If I buy an interest in a company with my money then it only seems fair that that company should work for me. It is no different to saying that if I buy a new phone then I should be able to use the phone as I please or that if I buy a house then I should be able to live in it.

I also think that companies should have due regard for the interests of their other stakeholders. Companies that ignore the interests of their customers, suppliers and employees aren't going to be very successful. But, and this leads on to point 2, that is what I happen to think.


2. It is not the business of government to tell shareholders what their interests are. 

Only shareholders know what their interests are. And this is the crucial bit. The interests of shareholders are not the same as the interests of the companies that they invest in. In fact, given that the beneficial owners of most of the big companies are normal people who are investing in pensions and ISA's and the like, the interests of the many companies' shareholders are aligned with the interests of society as a whole.

So why do companies seem to act primarily in their own interests and not in the interests of society as a whole?

My best guess is that, by law, they have to. In law companies have a duty to their shareholders which amounts to 'make as much money as you can while staying within the law and acting in accordance with some non-statutory codes of conduct'.

So the problems arise from government telling companies what their shareholders interests should be rather than getting companies to actually listen to their shareholders. Fortunately we are now in a position in which getting companies to listen is practical it works like this.

Change the law so that

a. Any company that wants to carry out investment business in the UK must allow each of its customers to register a proxy voter who can use the voting power associated with their portion of the investment fund to influence the companies in which their fund manager is invested.

b. Politicians and Political Parties (and anyone else for that matter) can put themselves forward as a proxy voter.

c. Customers can choose to have a 'super proxy' instead. A super-proxy is a proxy who can nominate another proxy.

Imagine a country in which ordinary investors could use their voting power to give, for example, the Labour party the power to appoint the Directors of large corporations. What would that do to excessive corporate pay, or other corporate anti-social behaviour.

It's time to get companies to act in their shareholders' interests and time to give shareholders their voice.

Defining Standards in the NHS

but haven't we had too much of government standards and targets and all that?

To be honest I'm not entirely sure. But this post is not about that kind of standard. This post is about standards for 'interoperability'.

So, what do I mean any why is this important.

We use standards for interoperability all the time. If you buy a DVD it will play on a DVD player because someone, somewhere has defined a standard for how DVD players read DVD discs. Provided both the disc and the player meet the standard then the disc will play in the DVD player. Or consider the keyboard on which this is being typed. It's a standard qwerty keyboard on my laptop. All keyboards work pretty much the same way so I can pick up any computer and type into it with the same degree of accuracy (or, in my case error) without having to learn a new keyboard layout.

Ok, so this is all very interesting but what has it got to do with the NHS?

Well, the answer goes something like this.

Suppose, for a minute that the government defined a standard for the electronic recording of entries on a patient's medical records. The standard could be very simple. Let's say that every entry on a patient's records had to contain a date and time of entry. The NHS number of the patient. The name of the patient. A code identifying what was done or was test was carried out (e.g XRays would have a code, prescriptions would have a code) and then some kind of document or image or text that describes the entry in more detail. For example, for an X-Ray we might just have an image of the X-Ray picture.

Now suppose that the health minister decreed that, from a certain date, all equipment purchased by the NHS had to comply with the standard. So, for X-Ray machines that would mean that if you went to get an X-ray done the machine would have to send a message to the central hospital computer saying "hey, we did an X-ray for this patient, here's their NHS number and name and here's an image of the X-Ray". The hospital computer would then say "right thanks for that I'll update the patient's medical records OR maybe I'll pass this information on to the place that stores the patient's medical records".

Suddenly, lots of stuff starts to become possible that wasn't possible before. Let's say you need to go to the hospital to get an X-ray done. The hospital updates your records saying that an X-ray is needed and what sort of X-ray it is. They might offer you an appointment but you might want to get the X-ray done somewhere else that is more convenient, may be a private clinic. So, you go to the private clinic, you give the clinic access to your medical records. They can see what kind of X-ray you need. They do your X-ray and then they send the "hey we've done an X-ray" message. Your medical records are updated. The doctor who wants to see the X-ray can be told that the X-ray that was requested is now done and the doctor can see the image of the X-ray. The doctor can take appropriate action based on what they see.

Guarantee the borders of Third World countries.

So this idea looks a bit mad. What we do, is we use British troops to guarantee the borders of certain selected Third World countries. This policy, will save us money.

First off, we need to make sure that we select countries that do not have any serious border disputes. Then, we say to this country, "we will guarantee your borders and in return we expect you to spend very little on your Armed Forces". Instead those countries can spend money on health, education, infrastructure and all the other things that governments should be spending their money on. The country concerned, would continue to have Armed Forces. These would be professionally trained, well-equipped, and deployed throughout the world on UN peacekeeping missions. They would take the place of British troops engaged in such missions.

We get to save lots of money on our international aid budget. This is because the value we create by guaranteeing the borders of the country is so large that it dwarfs any amount that we could generate by spending our own money on aid to that country.

But it gets better than that. If other countries join in and guarantee the borders of other Third World countries. then we can dramatically reduce the amount of money spent on arms in the Third World and redeploy that money to helping those countries and the people who live in them.

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.