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In the case of sugar, the nanny state really does know best

In the case of sugar, the nanny state really does know best

Boris Johnson created a furore last week by announcing that he was considering getting rid of the so-called sugar tax.

Was he right to question the levy, or does it serve a purpose?

Introduced in April 2018, manufacturers now have to pay more tax if their drinks contain a high amount of sugar.

The producers can still make high sugar drinks and pass the extra cost onto the customers, but over 50 per cent of them seem to have responded by reformulating and cutting back the sugar content of their products.

Now, we know that well-intentioned policies such as the sugar tax can have unforeseen consequences.

For instance, an important paper in the American Economic Review in 2006 by Jerome Adda and Francesca Cornaglia, then at UCL, examined the impact of the different tax rates on cigarettes imposed across various American states.

They found that the higher the tax, the fewer cigarettes were bought. But smokers compensated by both switching to brands with higher tar content and by smoking further down the stub.

If anything, higher taxes led to a more damaging health outcome.

There’s also the – admittedly less firmly based – anecdotal evidence of a rise in shoplifting in Scotland after the minimum pricing law on alcohol was introduced last year. The incentive to steal has certainly been created: a two-litre bottle of strong cider that could be bought for just £2.50 now costs at least £7.50.

On the sugar tax, however, Boris is not on such strong ground.

A 2013 study published in the well-regarded PLOS ONE journal found a clear positive relationship – using evidence across 175 countries – between sugar consumption and national diabetes rates.

Similarly, I published a paper last December in Palgrave Communications with Alex Bentley and Damian Ruck, two anthropologists at the University of Tennessee, looking at obesity and diabetes rates over time in the American states and counties (the subdivisions of the states).

The growth in obesity (and with it, diabetes) in America has been both rapid and frightening.

In 1990, Mississippi had the highest obesity rate of any state, at 15 per cent of the population. But by 2015, such a population would have looked exceptionally svelte – the lowest obesity rate was 22 per cent in Colorado, and several states had rates over 35 per cent.

In 1990, there was no correlation between household income and obesity or diabetes rates. Yet by 2015, a strong negative correlation existed both across the states and across the counties within each state. Poor people had become hugely and disproportionately fat.

The emergence of so-called food deserts – areas where the population has difficulty in accessing affordable and nutritious food – is an important determinant. The evidence also suggests that the growth of high fructose corn syrup in the food economy is another.

There is a definite role for public policy in combating obesity and diabetes. Both the products on the shelves of supermarkets and the content of those products are legitimate concerns.

Of course, the negative link between obesity and income suggests that relatively modest gains in alleviating poverty could yield substantial reductions in obesity and diabetes rates, and the temptation to mock the nanny state is always strong.

But in the case of sugar, nanny sometimes does know best.

As published in City AM Thursday 11th July 2019
Image: Carbonated drinks via  pxhere licensed under CC0 1.0
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Emojis are a better metric for wellbeing than traditional data methods

Emojis are a better metric for wellbeing than traditional data methods
HMRC’s programme to make tax digital continues to roll out.
Anyone with a small business will know about the imminent deadline of 1 April, when VAT returns become digital. Quick to seize an opportunity, several companies have developed software to ease the task. The digitisation of tax raises the wider issue of whether technology will help the Office for National Statistics (ONS) put together faster and more reliable measures of the state of the economy. The VAT returns potentially give the ONS real-time information. The current methods of constructing the national accounts – the picture of how the economy is doing – remain rooted in the twentieth century. Ron Jarmin, the deputy director of the US Census Bureau, writes in the latest issue of the top ranked Journal of Economic Perspectives that: “current measurement programs are not keeping pace with the changing economy, and current methods for collecting and disseminating statistical information are not sustainable”. For example, national accounting bodies such as the ONS and the Bureau of Economic Affairs in America still rely heavily on sample surveys for their information. Jarmin points out that surveys are encountering increasing problems. Response rates by both households and companies have declined substantially, increasing costs and threatening quality. The intellectual conservatism of outfits such as the ONS is illustrated by measurements of well-being, or happiness. Hailed as an innovation when David Cameron instructed the ONS to produce this in 2014, it is based purely on old-fashioned survey questionnaires. Economists in general are traditionally sceptical of survey-based approaches. The respondents, in the jargon of economic theory, simply state their preferences when answering a series of questions. Economists place much greater weight on preferences which are revealed by the actions which people take. In the 1980s in Britain, survey after survey showed a stated preference for higher taxes and more public spending. Yet in their actions at the ballot box, people kept electing Margaret Thatcher. They revealed a preference for the exact opposite. The online world is replete with revealed emotions. Indeed, the entirely new language of emojis has evolved to allow people to do this. Modern machine learning techniques can readily translate the text of tweets and blogs into a scientifically-based measure of wellbeing. And they can do so much faster and more reliably than the survey methods used by the ONS. Jarmin urges governmental statistical agencies to rely much more on digital information in general. He argues that material “generated from transactions, online interactions, sensors, the internet of things, and many other sources can be used to capture various aspects of economic activity”. He notes the massive increase recently in the number of economists working for tech companies in the US. Here, innovative methods of data collection and analysis are the norm. Statistical agencies such as the ONS need to show the same energy and move much more rapidly into the twenty-first century.
As published in City AM Wednesday 20th March 2019
Image: Berlin Wall by Jed Record via Flickr is licensed under CC BY-2.0
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Hyperbolic discounting explains why the French are revolting over Macron’s fuel tax

Hyperbolic discounting explains why the French are revolting over Macron’s fuel tax
Economists have long argued that an effective way of reducing carbon emissions is by increasing taxes on energy consumption. This year’s Nobel laureate, Bill Nordhaus, advocated a global carbon tax over 40 years ago. The scientific logic is impeccable. But the practical politics of it are fraught with difficulties. To say that energy taxes, and fuel taxes in particular, are lacking in popular support is to indulge in understatement. President Emmanuel Macron has just tried to increase the price of fuel in France by €0.04 a litre, and the centre of his capital has been put to the torch. But even we normally placid British, with no revolutionary tradition to compare to that of France, have form on the matter. Norman Lamont, then the Conservative chancellor, introduced the so-called fuel escalator in his 1993 budget. Fuel duty would increase each year by three per cent more than the rate of inflation. When Labour won in 1997, Gordon Brown put the escalator up to six per cent. By September 2000, however, enough was enough. Deliberately slow protest driving in towns and on major roads was combined with blockades of oil refineries. Whole swathes of the country were brought to a virtual standstill within a matter of days. In his pre-budget report in November of that same year, Brown announced that fuel duty would be frozen completely until 2002. Since then, successive chancellors have approached fuel duty, and especially the escalator, as one might a dangerous wild beast. Occasionally, they have summoned up the courage to give it a gentle prod, and increase fuel duty simply by the rate of inflation. But while the escalator may still exist in theory, in practice it has been abandoned. Of course, the events in France are driven by more than the now-withdrawn eco-tax on fuel. But it certainly acted as the key trigger to the demonstrations, which have enjoyed widespread support across the country. No doubt many of the sympathisers dutifully organise their recycling into the appropriate bins. The seeming plethora of extreme weather events this year will have encouraged this bourgeois sense of duty to do something about climate change. Yet when it comes to being required to part with some actual cash in the form of a fuel tax, which is a more effective way of curbing emissions, they become enraged. They know that climate change may well impose large costs in the future, but they are unwilling to pay a small cost now to help reduce them. Behavioural economics provides the key to understanding this seemingly paradoxical behaviour. One of its strongest empirical findings is that, when trying to compare future costs and benefits with those on offer now, people often use “hyperbolic discounting”. Translated, this simply means that they place far more value on small rewards or costs which are incurred now than on much larger ones in the more distant future. It is unlikely to comfort Macron to know that the French riots can be ascribed, in part, to hyperbolic discounting. But the rest of us might enjoy a good laugh.
As published in City AM Wednesday 12th December 2018
Image: Yellow Vest Revolution by Max Pixel under CC0 1.0
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Corbyn and McDonnell’s delusional tax plan would cut revenue and harm growth

Corbyn and McDonnell’s delusional tax plan would cut revenue and harm growth

The income tax system in the UK is highly progressive.

Not many people know that, to use a catch phrase attributed, rightly or wrongly, to the great actor Michael Caine.

The top one per cent of earners contribute 27 per cent of all income tax receipts. To put it in context, just 300,000 people pay nearly three times as much in total as the bottom 15m taxpayers. Despite all the political rhetoric about tax avoidance, high earners cough up a very large amount of money to the Exchequer every year.

Under the Labour government of the 1970s, the highest marginal tax rate was no less than 98 per cent. But the top one per cent of earners paid only 11 per cent of all income tax.

Jeremy Corbyn and shadow chancellor John McDonnell pledged in their manifesto to raise around another £15bn a year in tax from this group. In addition, corporation tax on profits would allegedly raise a further £19bn.

The realism of Labour’s costings as a whole was called into serious question at the time by people such as Paul Johnson at the Institute for Fiscal Studies.

A paper published in the latest American Economic Review produces strong evidence that it is purely wishful thinking to imagine that anything like these amounts could be raised. In the modern world, both skilled labour and capital are highly mobile. There would simply be movement out of the UK altogether.

The authors, Enrico Moretti and Daniel Wilson of Berkley and the San Francisco Federal Reserve Bank, carry out a very detailed statistical analysis of the impact of the different state income tax rates in the US on where highly skilled people choose to work.

Personal taxes vary enormously across the American states. In California, for example, the average tax rate arising on top earners which is due solely to state rather than federal taxation is eight per cent. In contrast, in Texas (and eight other states) it is zero. Over the period of the study – 1977 to 2010 – rates have also varied substantially within individual states.

Moretti and Wilson compile an impressively detailed set of data on individuals they describe as ‘star scientists’, defined as those scientists who are very prolific in generating patents. They examine the location decisions of some 260,000 individuals during the period they analyse.

Their conclusion is unequivocal: “we uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns”. Essentially, steep taxes drove away high-achievers.

Tax rates are important not just to individuals in choosing where they want to work. The different corporate tax rates levied by individual states affect where companies such as Microsoft and General Electric locate their most productive and innovative researchers.

There are of course many factors which determine where people and firms decide to locate. But the idea that innovative people will simply sit around en masse and wait to be fleeced is pure fantasy. There may be little chance of the current Labour leadership understanding the real world, but the electorate needs to.

As published in City AM Wednesday 5th July 2017

Image: Jeremy Corbyn and John McDonnell by Rwendland is licensed under CC BY-SA 4.0
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Less austerity will always mean more tax

Less austerity will always mean more tax

There is a great deal of discussion, following the election, of relaxing or even abandoning austerity.

There is an equal amount of confusion about this, because the same word is being used to describe two quite separate concepts.

The consequences of the government changing its policy on austerity are dramatically different, depending on which one it is.

One meaning of the word is what we might call “social austerity”. From any given pot of money available to a government, its supporters believe that, in general, tax cuts should be promoted rather than public spending increased. Opponents argue that public spending as a result has become underfunded. Local councils, education, and the NHS all need more money.

Social austerity can be relieved, as even the DUP and some Conservatives argue, by increasing spending appropriately, and funding it by increases in taxation. This was an important aspect of Labour’s manifesto, and the tragedy at Grenfell Tower has intensified the discussion around it.

The main risk is purely political. Are voters really and truly willing to pay more tax, rather than just wanting someone else to pay it?

There are some potential adverse economic consequences if the policy of higher taxation is pushed too far. Former French President Francois Hollande’s 75 per cent tax rate led to several hundred thousand skilled young people leaving France, mainly for the UK. If companies are taxed too heavily, they may choose to locate to another country. Both skilled labour and capital are geographically mobile.

But, within reason, social austerity could be relaxed without perhaps too many fears in this direction.

“Economic austerity” is quite a different matter. Opponents of this want to increase the gap between government spending and tax receipts – the so-called fiscal deficit. This is funded by issuing government bonds. So the deficit in any given year goes up, and the outstanding stock of government debt also rises.

Any relaxation of social austerity is paid for by higher taxes now. Any relaxation of economic austerity is paid for by borrowing more now.

But the debt has to be repaid at some point, and the interest payments on it must be met. So taxes in the future will be higher. Either way, less austerity means more tax.

John Maynard Keynes himself made it very clear that increasing public spending at a time of full employment would simply lead to more inflation. There are areas of the country where there probably are people registered as unemployed who genuinely do want to work – the Welsh Valleys, for example. But the rest of the UK is at full employment.

The number of people in employment is at an all-time high, at 32m. This has risen by 2.8m since 2010. Meanwhile the unemployment rate has fallen from 7.9 per cent in 2010 to just 4.6 per cent today.

Any major fiscal stimulus to the economy now would simply bid up wages, leading to higher costs and higher inflation.

The public mood on social austerity may have shifted. But the case for economic austerity is stronger than it has ever been.

As published in City AM Wednesday 21st June 2017

Image: People’s assembly by Peter Damian is licensed under CC by 2.0
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The UK could teach the Eurozone a thing or two about successful monetary unions

The UK could teach the Eurozone a thing or two about successful monetary unions

The Office for National Statistics (ONS) published last week some figures which show how a successful monetary union works in practice.

It is not obvious at first sight, from the dry heading: “regional public sector finances”.

The ONS collects information on the amounts of public spending and money raised in taxes across the regions of the UK. The difference is the so-called fiscal balance of the region.

Only three regions generate a surplus. In London, the South East and the East of England, total tax receipts exceed public spending. The capital has a healthy positive balance of £3,070 per head, followed by the South East at £1,667 per head.

Essentially, these two regions subsidise the rest of the UK. Public spending in the North East, for example, is £3,827 per person above the level of taxes raised in that region. In Wales, it is even higher at £4,545. No wonder that one of the first things Carwyn Jones, leader of the Welsh Assembly, said after the Brexit vote was: “Wales must not lose a penny of subsidy”.

The region which benefits most is Northern Ireland, which gets £5,437 per head more than it generates in tax. Scotland, to complete the picture, receives around half of that, at £2,824 per person.

There is a lot of debate around Brexit and the border between the North and the Republic of Ireland. There is even talk of reunification, but on these numbers the Republic would be mad to want it.

Essentially, the regions receive these subsidies because they are running deficits on their trade balance of payments. The exports of goods and services from the North East, for example, to the rest of the UK are much less than it imports. In balance of payments jargon, the subsidy it receives is a monetary transfer from the rest of the country, principally from London and the South East.

The ONS does not actually produce regional balance of payments statistics. But the fact that most regions receive these large transfers implies that they are just not productive enough to sustain their living standards by their own efforts.

All the regions are in the sterling monetary union. Those running trade deficits cannot devalue to try to improve their position. They must instead rely on subsidy.

Exactly the same principles apply in the Eurozone. The massive difference of course is that there is no central Eurozone government to make sure the weaker performing regions receive the necessary funding.

This is why President Macron and Chancellor Merkel announced they will examine changes to treaties to allow for further Eurozone integration. Even the hardline German finance minister, Wolfgang Schauble, said: “a community cannot exist without the strong vouching for the weaker ones”.

To be sustainable, a monetary union needs large transfers between its regions. London and the South East already put their hands deep into their pockets for the rest of the UK. Gordon Brown did get one thing spectacularly right. He kept us out of the Euro.

As published in City AM Wednesday 31th May 2017

Image: Euro sign by Alex Guibord is licensed under CC by 2.0
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