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Forget avoidance outrage: this is what we really think about tax

Forget avoidance outrage: this is what we really think about tax

Rather like a quantitative version of Hello! magazine, the Panama papers made headlines everywhere. Read all about the vast amount of money a particular celeb has got stashed away. Salivate, be titillated or be outraged, according to your fancy.

The story was covered heavily by the Guardian, the in-house newspaper of the metropolitan liberal elite. But the popular reaction was not quite what they were hoping for. Many people seem to regard the revelations contained in the Panama documents as just the way the ultra-rich and powerful are meant to behave. Rather like Conservative MPs and sex scandals, tax evasion and foreign dictators seem to go together quite naturally.

John McDonnell, the shadow chancellor, demanded an immediate and full public inquiry in the House of Commons. He could perhaps consult Yanis Varoufakis, one of his economic advisers, who of course was so successful in running the economy during his time as Greek finance minister.

Or the Left could more usefully ponder a fundamental principle in economic theory, the concept of so-called revealed preference. Economists attach relatively little value to surveys of opinion. This extends far beyond political opinion polls, though these serve to illustrate the point. In the 1980s, for example, survey after survey showed large majorities in favour of higher public spending financed by higher taxation. Yet the electorate consistently returned Margaret Thatcher to power when they had to make an actual decision.

Just because voters dislike tax avoidance by global companies and the super-rich, it does not mean that they themselves want to pay any more tax. We saw this in the general election last year, where there was a decisive swing away from Ed Miliband’s Labour to the tax-cutting Conservatives in the marginal constituencies of England and Wales.

Economists believe that it is only by their actions that people reveal what their preferences really are. Faced with a hypothetical question, their answers are unreliable, so we observe what they genuinely think by the decisions they make. The Journal of Economic Perspectives had a symposium on this question in one of its 2012 issues. The discussions are technical, but the top MIT econometrician Jerry Hausman summed it up neatly when he wrote: “what people say is different to what they do”.

The plain fact is that we have data going back over 50 years on the total amount of tax which governments are able to levy on the British people. Regardless of who has been in power, no government has been able to lift the percentage of national income which goes in tax above the 38 per cent mark. This includes all taxes: income, capital, corporation and the rest.

Politicians have to understand the wishes of the electorate if they themselves want to stay in power. Gordon Brown might have doubled the size of the tax manual when he was in power, but the tax take was if anything slightly low when he was booted out in 2010, at 34.9 per cent of GDP.

For all the fine sentiments expressed in surveys and the outrage over tax dodging, the revealed preference of the British electorate is to keep taxes low.

As published in CITY AM on Wednesday 20th April 

Image: Taxes by Got Credit is licensed under CC BY 2.0

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No more whingeing, please. The recovery is solid.

No more whingeing, please.  The recovery is solid.

Last month saw some very positive economic news. The US Federal Reserve raised interest rates for the first time in over seven years.  The Bank of England reported on the major stress test of UK banks which it launched in March 2015.  It concluded that “the banking system is capitalised to support the real economy in a severe global stress scenario”.

Yet much of the discussion on the economy remains tinged with various hues of gloom.  We expect John McDonnell, the Shadow Chancellor, to be living in the past.  So it is not surprising that he has launched a “fight against austerity” with Yanis Varoufakis, the former Greek finance minister.  But many commentators seem to find it hard to believe that the recession in the UK is well and truly over.

Some argue that the recovery has taken place, but that it is somehow “unbalanced”.   True, manufacturing is struggling, with highly publicised plant closures in what have become effectively commodity industries, like steel.  But the data from the Office for National Statistics suggests a virtually textbook example of a sustainable recovery.

The depth of the crisis was reached in the spring and summer of 2009, and we now have the initial estimates for the economy for the same period in 2015.  GDP as a whole increased by £100 billion, after allowing for inflation, a rise of nearly 13 per cent.  Companies spent an additional £32 billion on new investment in 2015 compare to the same period six years ago.  In percentage terms, this was by far the fastest growing sector of the economy, up by 26 per cent.   In contrast, consumer spending grew by only 10 per cent, less than the economy as a whole.  It has been an investment-led recovery, with the role of public spending being negligible.

From a historical perspective, the recovery profile is better than it was in the 1930s, the previous time there was a major financial crisis on a world scale.  The economic historian Angus Maddison devoted his life to constructing the annual national accounts of the developed economies going back to the late 19th century, and his work has widespread academic credibility.  Peak output prior to the Great Depression was in 1929.  In his sample of countries, only just over a half had regained this level by 1937.   This time round, taking the same group of economies, 80 per cent of them had a higher GDP than in 2007.

The only area which really continues to struggle is the Mediterranean economies in the EU.  In Spain, output is 4 per cent lower than in 2007, in Portugal it is 6 per cent down, in Italy 9 per cent and Greece has seen a drop of no less than 26 per cent.  The crisis exposed deep structural problems with these economies.

In contrast, GDP in the G20 economies has risen by 24 per cent since 2007, the last year before the recession began.  And they account around 85 per cent of world output.  The economic discourse has become disconnected from reality.

As published in CITY AM on Wednesday 6th January

Image:Yanis Varoufakis by Marc Lozano licensed under CC BY 2.0

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Who plays better poker? Cameron, Sturgeon or Varoufakis?

Who plays better poker? Cameron, Sturgeon or Varoufakis?

The gracious Palladian architecture of Edinburgh has often led the city to be described as the Athens of the North. If the referendum result had gone the other way, much closer parallels would have rapidly emerged. A high spending left-wing government, faced by a collapse in revenues with the fall in the oil price, would soon have faced the wrath of international capital markets. This could so easily have been the UK as a whole, as the recent politics of Aberdeenshire Council demonstrate. Until last month, the council was narrowly controlled by a motley collection of the unionist parties, embracing the Conservatives, Labour, and Lib Dems. This vignette shows that Labour would happily have worked with the SNP to form a government in Britain. But there are differences between Scotland and Greece. The Scots, for example, have shown themselves to be much more adept practitioners of the esoteric discipline of game theory. Varoufakis, former academic turned Greek finance minister, specialised in the subject. A sound knowledge of game theory can often be very useful. Chris Ferguson, for example, winner of no fewer than five World Series of Poker championships, teaches game theory at UCLA. The deluded Greek Trotskyist seems to have convinced himself that his theoretical knowledge would give him a decisive advantage in the negotiations with the troika of the IMF, the ECB and the European Commission. But he seems to have forgotten that the purpose of playing a game is to win. You win at soccer by simply scoring more goals than your opponent. But the concept of winning in a set of negotiations is often not as clear cut as this. One of the insights of game theory is that it is possible for both sides to win. To achieve this, the players might adopt strategies which signal their willingness to play co-operatively. The pay-off for both can be much higher over time than when they intend to, in the game theory jargon, defect. That is, make a move at some point which is intended to shaft the opponent. Nicola Sturgeon and David Cameron have manoeuvred themselves into a lucrative strategy of co-operation. The game began during the election campaign. The SNP needed to destroy Labour in Scotland. They trumpeted their intention to help Ed Miliband get into Downing Street. The Conservatives seized on this, and used the SNP bogeyman to frighten the voters in the marginals. The game goes on. Cameron needs to make some concessions to Sturgeon so she can boast about them to the Scottish electorate. But the SNP also needs to maintain a set of grievances, which is their raison d’etre. Neither side actually wants to redress them, so that both sides continue to gain and keep Labour out. Practical politicians are often much better practical game players than so-called expert theorists.

As published in City AM on Wednesday 24th June 2015

Image: Poker by Images Money is licensed under CC BY 2.0

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