A new paper, "Labour supply and marginal tax rates" by AJ de Bruin from the Erasmus University in Rotterdam, investigates the effect of labour income taxes on the supply of paid labour for several Western countries over the last two decades.
For the countries with the best data, namely France, Italy, the Netherlands and the United States, the paper finds labour supply elasticities of approximately 0.43, 0.2, 0.15 and 0.18 respectively. This means that the amount of paid labour would increase between 1.5 percent and 4.3 percent in the selected countries if the tax pressure on labour income was reduced by 10 percent (i.e., a reduction in the marginal tax rate from 40 percent to 36 percent). Moreover, the structure of the models shows that the time required for such an effect to materialise in the respective labour markets would be between one and two years.
So – cut income tax rates; increase labour supply, grow the economy and get back a large part of the lost revenue. Simple, really.
James Lee, chairman of the Maidstone & Tunbridge Wells NHS Trust, has resigned following the Healthcare Commission’s report on an outbreak of C. difficile there that has claimed over ninety lives. The Telegraph have seen his letter to Alan Johnson. He wrote: "We had to be concerned about finance because this trust has been struggling with a state that is pretty close to bankruptcy. We knew that the Treasury was pumping money into the NHS, but quite frankly none of this seemed to be getting to the ‘coalface’."
He added: "It has become clear to the members of my board that the NHS is run on the basis of command-and-control. I personally have never experienced such centralised or detailed control. I doubt whether it can ever work. This way of managing things is fundamentally incompatible with the whole concept of independent trusts with non-executive directors."
In some ways Lee is quite right. His letter exposes the extent to which the NHS is managed by diktat from demanding politicians. Hopefully Lee would support a new system with managers of decentralised services held to account by customers who can vote with their feet. I worry that he would rather just not be held accountable by anyone.
In other ways he is passing the buck. While the Trust may have been under financial pressure you only have to look at their Annual Report for 2006-07 (PDF) to see that they had a questionable sense of priorities. It shows that the number of nurses fell by 123 while the number of admistration and estates staff only fell by 65. While hospitals do need to be organised and the Trust’s estate would obviously need planning, particularly with a new hospital on the way, it appears that these staff were prioritised over the front-line staff who were needed to prevent the horrors discovered by the Healthcare Commission.
Lee is right that the Maidstone & Tunbridge Wells NHS Trust’s problems are driven by broad problems beyond the Trust itself but for him to be so unwilling to accept personal responsibility for such a tragedy taking place on his watch is deeply unimpressive.
While it’s great news that, in Britain, tax cuts have become fashionable to talk about again, we don’t yet have a plan from any of the main political parties to reduce the overall burden of tax. The Conservative conference announcement was very welcome, but on paper at least, it was revenue-neutral. Last week Alistair Darling used the language of tax cuts, but increased taxes overall.
So it’s refreshing to see that the Australian government is cutting income tax again. Over the next three years, A$34 billion of tax cuts will be enacted by 2010, in three ways:
1. Rate cuts: the top rate will be cut from 45 per cent to 42 per cent, while the second highest rate will be cut from 40 per cent to 37 per cent.
2. Threshold increases: the 30 per cent rate will kick in at A$37,000, up from the current A$30,000; the 40 per cent rate will kick in at A$80,000, up from A$75,000; and the 45 per cent rate will begin at A$180,000, up from A$150,000 at present.
3. Low income tax offsets: the low income tax offset will increase from A$750 to A$1,500, increasing the effective tax free threshold for people on low incomes from A$11,000 to A$16,000.
These tax cuts come on top of a phased reduction in income tax year-on-year since 2000. Between 2000 and 2006 the four income tax rates were reduced from 17, 30, 42 and 47 per cent to 15, 30, 40 and 45 per cent. At the same time the 30 per cent threshold was raised by a quarter, the 40 per cent threshold was raised by a half and the top rate threshold was tripled.
These tax reduuctions, coming after a reduction in the main corporation tax rate from 36 per cent to 30 per cent, have stengthened the Australian economy. Growth has averaged 3.6 per cent over the past decade, the national debt has been paid off, tax receipts and public spending have grown consistently, and unemployment has fallen to a 30-year low.
It’s no coincidence that an election is coming up – John Howard clearly sees tax cuts as a way to reverse his standing in the polls. Hopefully because John Howard has a consistent record of cutting taxes, this latest announcement won’t be seen as too little, too late. As his election guru, Lynton Crosby, who worked for the Conservative Party in 2005, said: "You can’t fatten a pig on market day." Tax reductions need to be explained to the electorate well in advance of an election.
Philip Stephens has an interesting piece in the Financial Times on whether the terms of political debate are changing in favour of lower taxes:
"The politics of the 1980s were defined by a view that tax cuts were good and public spending wasteful. The public realm was neglected in favour of individual aspiration. New Labour finally changed that argument. For the past decade, spending has been seen as virtuous, tax cuts selfish. Tony Blair’s genius was to cast economic competence and social justice as natural handmaidens.
The vital insight was that, even in the 1980s, voters instinctively favoured high spending on public health and education. But they did not believe Labour would spend their money wisely. Instead they would likely pay higher taxes without improvement in public services. Only by overturning such scepticism could Mr Blair win.
"The Conservatives’ problem since been a mirror image of Labour’s earlier travails. Voters have at once doubted their ability to deliver tax cuts and feared that the price would be neglect of vital services.
"The big political question now is whether there has been a shift in the terms of trade. Has the country begun to decide that much of the money poured into public services since 1997 has indeed been wasted? And is it coming round to the idea that Mr Cameron could reduce taxes without neglecting schools and hospitals?
"In truth, neither side knows the answer. Hence Mr Cameron’s cautious insistence that he will match Labour spending plans. Mr Brown’s response is to say that the Tory sums do not add up. He may be right. But debates about the arithmetic will not be enough if the government loses the argument that taxpayers’ money is being well spent."
It does indeed seem clear that the terms of debate are changing. The increase in capital gainst tax announced in the Pre-Budget Report last week has encountered well-founded opposition from those who will see an 80 per cent increase in the tax rate they pay for business assets held for over two years. But the sheer ferocity of the response from business groups and many others, including the BBC Dragon’s Den programme, is something we have not seen for a number of years.
On the day that Labour were elected in 1997, the then head of the CBI, Adair Turner, appeared on the BBC and said that the business community would be happy to pay higher taxes. How times have changed for the better!
Gershon efficiency agreements in preparation
It’s been a while since we blogged the government’s ludicrous Night at the Opera Gershon "efficiency" cuts (see many previous blogs eg here). But they popped up again last week both in Darling’s Pre-Budget Report, and a report from The Public Accounts Committee. And the two perspectives were somewhat different.
According to Darling’s version, everything’s absolutely tickety. The Gershon programme has already delivered "annual efficiency gains of over £20 billion… and is on track to deliver the goal of £21.5 billion by the end of March 2008". Moreover, there have been "gross reductions of over 79,000 civil service and administrative and support related military posts towards the target of 84,150, with over 13,000 of these reallocated to frontline roles" (para 3.28).
But according to the PAC, things are very far from tickety. Based on the most recent NAO probe (see this blog), only one-quarter of the reported cuts are "reliable". The rest are almost certainly a figment of the commissars’ fertile imagination.
So on that basis, of the claimed £20bn savings, real savings are about £5bn.
Always remembering of course, that even those "savings" have probably only been achieved at the cost of a deterioration in service quality. For example, the PAC found that "savings" at the Department for Work and Pensions had increased the average time taken to process Jobseeker’s Allowance claims from 11 days to 16 days. And the Department of Health, while reporting over £1 billion of efficiency gains from reducing the average length of time patients stay in hospital, had taken no account the fact that emergency readmissions had risen consistently.
One of the slipperiest concepts is the so-called non-cashable savings, which are meant to comprise reassigning people and resources from the dark back-reaches of the bureaucratic quagmire to work on "the front line". Here’s a nice chart Darling produced to demonstrate how successful they are at squeezing "administrative" functions.
The only problem being (apart from the obvious point that most of the "savings" are still to come) that the definition of what comprises the front line and what comprises admin is a tad hazy. For example, the PAC discovered that HMRC includes "managers, administrative support and IT staff that are employed in any of its business units" as being ‘front line’.
In other words, the fall in admin costs is complete bunk.
The whole Gershon nonsense remains an exercise in rearranging deckchairs. But what we taxpayers should be really angry about is that all over Whitehall there are people being paid by us to work on it.