Quotation of the Day

Is from Alberto Mingardi, writing recently on EconLog about Theresa May's Tory Party Conference Speech:

"...I find it bizarre that so many people wonder about why people feel poorer - and nobody, even among the Tories, dares to say that perhaps taxing them a bit less would be a way--which is entirely within the power of governments, without entailing bold plans for driving the market this or that way--to make people less poor. This would seem a rather obvious policy choice, for 'conservatives.' But apparently it is not."

The Taxpayer as Insurer

This story has popped up on my social media recently.

There’s relatively scant details in the Daily Record article, or indeed in the online petition that’s been set up by the daughter of one of the homeowners affected.

Here’s my attempt to summarise what’s happened (please feel free to get in touch and correct me if I’ve gotten any of the details wrong – all of my information here is from second and third-hand sources, so who knows what details may have gotten distorted in transit):

The council (local government) in West Dunbartonshire built a bunch of houses several decades ago.  These are what is known in the UK as ‘council houses’, i.e. low-cost housing created for people who, for whatever reasons, find it difficult to find affordable private housing to rent or buy.  Tenants of these properties rent them from the local government, typically at below-market rates.

The central UK government passed ‘right to buy’ legislation as part of the Housing Act 1980.  This entitles tenants of council houses “the legal right to buy, at a large discount, the home they are living in”.  This discount was originally very substantial, at between 33% and 50% of the valuation of the property.  The size of the discount was reduced in 1997, and some of the rules surrounding ‘right to buy’ were changed in 2005.  For example, five years tenancy is now required to qualify for ‘right to buy’ and properties purchased under the scheme since 2005 cannot be immediately placed on the open market for sale, among other restrictions.

The houses in question started out as council houses, but were subsequently bought by their tenants at well below market rates under the ‘right to buy’ scheme.

A few years ago, in 2013, “a serious roof defect was discovered” in a number of these houses.  “Some of these properties have had roofs collapse, with several so defective that they have been deemed uninhabitable, others requiring new roofs to be built and many still to be surveyed.”

I don’t know the precise nature of the building defects, but they sound pretty serious if people’s roofs are falling in and homes are being rendered uninhabitable or deemed unsafe to live in.  A few of them have even been earmarked for demolition.

The specific example given in the article is that of one Mrs Mary Goldie, a 69 year old retired headteacher, who purchased her house in 2008 for £105,000 (~$206,000).  This purchase was not made under ‘right to buy’; the property was already under private ownership prior to Mrs Goldie’s purchase of it.

Mrs Goldie’s house has been rendered uninhabitable by the defects and she’s been forced to move out.  With the help of her family, she’s taken out a mortgage on another nearby property to live in.

The council have subsequently offered to buy Mrs Goldie's house from her for just £12,000 (~$17,500).

The response of Mrs Goldie’s daughter has been to raise a petition “to request financial support from the Scottish Government for the private homeowners of flat-roofed properties in West Dunbartonshire”.

I feel bad for this woman, I really do.  Her house has been rendered almost worthless by the extent of the defects and she’s spent most of her savings on securing somewhere else to live.  It is a nightmare situation for anyone to have to go through.

But, what I don’t understand is why are taxpayers being asked to foot the bill for this?  Surely this is a matter to be dealt with between the property owners and their insurance companies?  The petition states that the “insurance companies will not pay out anything”.  I don’t understand why this would be the case.  Surely this is exactly the sort of thing people take out insurance for?! 

The responsibility for maintaining and repairing a property lies with the owner of that property.  Property owners take out insurance to protect against catastrophe, that is, to cover substantial necessary work that they wouldn’t be able to afford on their own.

If the home(s) in question are still owned by the local government, then the responsibility for repairing them lies with the local government and/or their insurer(s).

If the home(s) in question are privately owned, then the responsibility for repairing them lies with the private owner(s) and/or their insurer(s).

I would happily sign a petition that asked for the government to assist the homeowners in dealing with their insurers and to put pressure on the insurance companies to pay out.  I refuse to sign a petition that basically amounts to the taxpayer acting as a private insurer.  I never agreed to insure these properties with my taxes.  And I don't expect Mrs Goldie or her daughter to pay for any repairs I might require on my house.

Taxes & Laffer Curves

I would like to expand slightly on my last post, with the following observation:

The purpose of taxes and tax policy should not be to "raise as much revenue as possible", i.e. to transfer as much money as possible from private individuals to the government.  Rather, the aim of tax policy should be to raise only the amount of tax necessary to fund the services which we collectively wish the government to supply.

This comes with additional caveats, such as publicly funded projects should be required to meet certain minimum criteria for funding, such as passing cost-benefit analyses.

Chris Dillow on Laffer Curves

Chris Dillow blogs on Laffer Curves over at Stumbling and Mumbling.

A slice:

"8. There are two contrary but tenable positions here.  One is "the revenue-maximizing tax rate might be high, but high taxes are undesirable because they infringe freedom."  The other is "The revenue-maximizing tax rate could be low, but high taxes are justified to reduce the adverse effects of inequality."  Both of these positions are rare - which makes me suspect that there's quite a lot of motivated reasoning on both sides."

My position is something akin to the former, i.e. "the revenue-maximizing tax rate might be high, but high taxes are undesirable because they infringe freedom."

Worthwhile reading the whole thing, it is short and contains a lot of clear insight.

The Bedroom Tax is not a Tax

Warning: This is a bit of a bugbear of mine, what follows is pretty much just a rant.

Disclaimer: Just to get it out in the open before I get any complaints about defending this unpopular policy: I am not a fan of the under-occupancy penalty, I think it is unfair to large numbers of people, many of whom will be among the most vulnerable members of our society (minorities, the poor, the sick and the disabled).  This post should not be taken as a defence of the policy, which I oppose.  This post is merely about the term "bedroom tax" which is an inaccurate and misleading way to describe this policy.  I think it may also be counter-productive for opponents of the policy to label it such, in much the same way as calling anyone who disagrees with your political leanings a communist, a Nazi or (most commonly) a fascist.

[Begin Rant]

Let me state explicitly and to avoid any ambiguity: the "bedroom tax" is NOT A TAX!

I'm talking about the under-occupancy penalty - to give it it's proper name - which is part of the Welfare Reform Act 2012.

So, if it's not a tax, what is it?  It is a reduction in benefits paid out to people living in council housing deemed to have "spare" or "unoccupied" rooms.  Some people may read this and think to themselves "what's the difference?"  I suspect that that's how the colloquialism "bedroom tax" came about in the first place.  Someone has equated a withdrawal of benefits to a tax.  And taxes are bad, right?  So, the bedroom tax must be bad!

Whilst I agree with the conclusion, it is not because of this argument.  The problem here lies in the first premise, that equating of a withdrawal of benefits to a tax.

From the perspective of an individual, a reduction in benefits and the levying of a tax may look the same and may have exactly the same consequences for the individual concerned.  For example, imagine Dave currently works part-time in a low wage job, he doesn't earn enough to pay Income Tax or National Insurance (Social Security) contributions.  He also receives some money paid to him by the government in benefits of some sort (e.g. Child Benefit, Working Tax Credits, Carer's Allowance, etc.).  Now, imagine the government alters the tax rules, so that Dave now has an annual tax bill of £200, but his benefit payments remain unchanged.  The effect of this is obvious: Dave is £200 per year worse off, he's going to have to cut back on £200 per year of consumption (or saving) or draw into any savings he may have.

Now, lets imagine an alternate scenario where Dave's tax bill (from Income Tax + NI) remains zero, but in this alternative universe the government reduces Dave's benefits payments by £200 per year.  What is the effect on Dave and his consumption?  The answer of course is exactly the same as in the previous scenario where Dave's benefit payments were untouched, but he was taxed more heavily: Dave is again £200 per year worse off and he's going to have to cut back on £200 per year of consumption.

This is, I suspect, where shallow thinking has led some to conclude that:

Reduction in Benefits = Tax

Therefore,

Under-Occupancy Penalty = Bedroom Tax

The problem with this equivocation is that taxes and benefits are not morally equivalent.  This becomes apparent if, instead of looking at it from the perspective of a single individual affected by the changes, we look at it from the much wider perspective of society as a whole:

If the government reduces the benefits it pays out to Dave, it must also reduce the amount it taxes Nick (all other spending remaining equal), since all benefits payments are someone else's taxes.  The government has no money of it's own, it merely shuffles money around between individuals.  This offsetting benefit to Nick exactly cancels out the harm done to Dave (in strict monetary terms).  Whether or not this is good or bad policy depends on the specific circumstances of Dave and Nick and crucially it requires a value judgement.  A similar story can of course be told regarding taxes, albeit the opposite way around.  If the government increases the taxes it charges Nick then it can increase the benefits it pays out to Dave.  Again, a value judgement is required to judge the merits of such a policy change.

The key difference is that a tax is the government taking money by force (or the threat of force - if you don't pay your taxes you can go to jail) from an individual who has rightfully earned that money.  A benefit is the government giving out money which it did not rightfully earn (whoever paid the tax to fund that benefit did).

Viewed in these terms then a reduction in benefit is seen to correspond to a reduction in tax, or in other words a reduction (however minor) in the coercive power of the state.

An increase in tax is precisely the opposite - an increase in the coercive power of the state.

From the libertarian perspective the former is unambiguously a good thing and the latter a bad thing.  However, that being said, policy changes that reduce the coercive power of the state still have to be weighed up against the harm that they inflict upon individuals.  In my opinion there is a long list of more desirable policy changes which could be made to reduce the coercive power of the state which I'd rather see implemented (e.g. university tuition fees and prescription fees in Scotland) and the under-occupancy penalty scrapped.

[End Rant]