What will be the effect of raising tax allowances – the threshold at which people start paying income tax? The Coalition government in the UK has a policy of raising the threshold to £10,000 by 2015/16. As a step on this road, the present plan is to raise the threshold from £7475 in 2011/12 to £8105 in 2012/13. The Liberal Democrats, however, are urging the Chancellor to raise allowances more quickly.
The government maintains that raising the personal allowance is progressive – that it will give relatively more help to the poor. New research by the Institute for Fiscal Studies, however, casts doubt on this claim. The IFS demonstrates that the benefits will be unevenly distributed, with the greatest benefits going to middle-income families where more than one person works but where no-one earns the higher tax rate. The poorest people – those earning below the threshold – will gain nothing at all.
Read the following articles and the IFS report and establish just who would benefit by a rise in the tax threshold and whether or not the move could be described at ‘progressive’.
Articles
Tax move ‘benefits better-off’ Independent, Joe Churcher (9/3/12)
Raising tax threshold would benefit rich more than poor, says IFS MyFinances.co.uk (11/3/12)
Rise in income tax threshold would help the rich Financial Times, Vanessa Houlder (9/3/12)
Budget 2012: raising the personal tax allowance threshold isn’t fair Guardian blog, Heather Stewart (9/3/12)
IFS report
A £10,000 personal allowance: who would benefit, and would it boost the economy? IFS, James Browne (March 2012)
Questions
- Define the term ‘progressive tax’.
- For what reasons might raising the personal tax allowance (a) be progressive; (b) not be progressive?
- How does eliminating child benefit for any families where either parent earns the higher tax rate affect the progressiveness of raising income tax thresholds?
- What additional measures could be taken to ensure that raising tax thresholds was progressive across the whole income range and for all households?
With the fall of communism in eastern Europe between 1989 and 1991, many hailed this as the victory of capitalism.
Even China, which is still governed by the Chinese Communist Party, has embraced the market and accepted growing levels of private ownership of capital. It is only one or two countries, such as North Korea and Cuba, that could be described as communist in the way the term was used to describe the centrally planned economies of eastern Europe before 1990.
But whilst market capitalism seemed to have emerged as the superior system in the 1990s, may are now questioning whether the market capitalism we have today is fit for the 21st century. Today much of the world’s capital in the hands of big business, with financial institutions holding a large proportion of shares in such companies. And the gap between rich and poor is ever widening
The market system of today, is very different from that of 100 years ago. In fact, as John Kay agues in his article “Let’s talk about the market economy” below, it would be wrong to describe it as ‘capitalism’ in the sense the term was used in the debates of the 19th and early 20th centuries. Nonetheless, the term is still used and generally refers to the market system we now have. And it is a market system that many see as failing and unfit for purpose. It is a system that coincided with the bubble of the 1990s and early 2000s, the credit crunch of 2007–9 and the recession of 2008/9, now seeming to return as a double-dip recession
With the political and business leaders of the world meeting at the World Economic Forum at Davos in Switzerland on 25–29 January 2012, a central theme of the forum has been the future of capitalism and whether it’s fit for the 21st century.
Is there a fairer and more compassionate capitalism that can be fostered? This has been a stated objective of all three political parties in the UK recently. Can we avoid another crisis of capitalism as seen in the late 2000s and which still continues today? What is the role of government in regulating the market system? Does the whole capitalist system need restructuring?
It’s becoming increasingly clear that we need to talk about capitalism. The following webcasts and articles do just that.
Webcasts and podcasts
Davos 2012 – TIME Davos Debate on Capitalism< World Economic Forum (25/01/12)
Can capitalism be ‘responsible’? BBC Newsnight, Paul Mason (19/01/12)
Capitalism ‘nothing to do with responsibility’ BBC Newsnight, Eric Hobsbawm (19/01/12)
Are there alternatives to capitalism? BBC Newsnight, Danny Finkelstein, Tristram Hunt and Julie Meyer (19/01/12)
America Beyond Capitalism The Real News on YouTube, Gar Alperovitz (27/12/11)
The future of capitalism CNBC, Warren Buffett and Bill Gates (12/11/09)
Capitalism Hits the Fan (excerpt) YouTube, Richard Wolff (2/1/12)
Panel Discussion “20 years after – Future of capitalism in CEE” Erste Group on YouTube, Andreas Treichl, Janusz Kulik, Jacques Chauvet, and media Adrian Sarbu (24/2/11)
The Future of Capitalism: Constructive Competition or Chaos? YouTube, Nathan Goetting, Tony Nelson, Craig Meurlin and Judd Bruce Bettinghaus (24/1/11)
Capitalism in Crisis Financial Times, Various videos (24/1/11)
Bill Gates: Capitalism a ‘phenomenal system’ BBC Today Programme, Bill Gates talks to Evan Davis (25/1/12)
Capitalism (See also) BBC The Bottom Line, Evan Davis and guests (28/1/12)
Articles
Meddle with the market at your peril Financial Times, Alan Greenspan (25/1/12)
The world’s hunger for public goods Financial Times, Martin Wolf (24/1/12)
When capitalism and corporate self-interest collide JohnKay.com, John Kay (25/1/12)
Let’s talk about the market economy JohnKay.com, John Kay (11/1/12)
A real market economy ensures that greed is good JohnKay.com, John Kay (18/1/12)
Seven ways to fix the system’s flaws Financial Times, Martin Wolf (22/1/12)
To the barricades, British defenders of open markets! The Economist, Bagehot’s Notebook (26/1/12)
Community reaction to doubts about capitalism in Davos CBC News (26/1/12)
Capitalism saw off USSR, now it needs to change or die The National (UAE), Frank Kane (26/1/12)
Words won’t change capitalism. So be daring and do something Observer, Will Hutton (22/1/12)
A political economy fit for purpose: what the UK could learn from Germany Our Kingdom, Alex Keynes (20/1/12)
Debate on State Capitalism The Economist (24/1/12)
Questions
- How has the nature of capitalism changed over recent decades?
- Can capitalism be made more ‘caring’ and, if so, how?
- What do you understand by the term a ‘fair allocation of resources’? Is capitalism fair? Can it be made fairer and, if so, what are the costs of making it so?
- Can greed ever be good?
- How does the ‘Anglo-Saxon’ model of capitalism differ from the European model?
- What do you understand by the term ‘crony capitalism’? Is crony capitalism on the increase?
- John Kay states that “Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital.” Explain what this means and what its implications are for making capitalism meet social goals.
- In what ways can governments control markets? Have these instruments and their effectiveness changed in effectiveness over time?
- What are the costs and benefits to society of the increasing globalisation of capital?
- To what extent was the financial crisis and credit crunch the result of a flawed capitalist system and to what extent was it a failure of government intervention?
- Why is it important for the success of capitalism that companies should be allowed to fail? Consider whether this should also apply to banks. How is the concept of moral hazard relevant to your answer?
Disagreements are hardly an uncommon occurrence during Prime Minister’s Questions and today the key issue up for debate was UK unemployment. Figures released show that in the 3 months to November 2011, UK unemployment rose to 2.685 million – an increase of 118,000. The ONS said that unemployment now stands at 8.4% – the highest figure in well over a decade.
However, the increase in unemployment is not as high as it was in the 3 months previous to that, which is possibly an indication that the labour market is slowly beginning to recover and the government’s labour market policies are starting to take effect. The government claimed that cuts in the public sector will be compensated by growth in private sector jobs, but the evidence from the ONS did little to back this up.
The labour market is crucial for the recovery of the UK. Jobs mean income and income means consumer spending. If the job market remains uncertain and more people enter unemployment, consumer spending is likely to remain weak for some time. Chris Williamson, the chief economist at Markit:
The increase in unemployment, plus job security worries and low pay growth for those in work, means consumer spending may remain very subdued this year, despite lower inflation alleviating the squeeze on real incomes that caused so much distress to households in 2011.
One area of specific criticism leveled at the Coalition was the extent of youth unemployment, which reached 22.3%. Ed Miliband said the government had cut ‘too far and too fast’ and that it will be remembered for standing aside and doing nothing ‘as thousands of people find themselves unemployed’. The figures are clearly concerning, but the Coalition maintains that policies designed to tackle the labour market are beginning to take effect and over the coming months, the economy will begin to see a decline in the unemployment rate. The following articles look at the unemployment crisis.
Articles
UK unemployment rises to 2.8m Guardian, Heather Stewart (18/1/12)
Leaders clash in commons over jobless rise BBC News (18/1/12)
UK jobless rate hits new 17-year high Financial Times, Brian Groom (18/1/12)
Unemployment rise: reaction The Telegraph, Louise Peacock (18/1/12)
Unemployment total rises by 19000 The Press Association (18/1/12)
Politicians give cautious welcome as quarterly unemployment falls by 1000 in Wales WalesOnline, Claire Miller (18/1/12)
Employment Minister: unemployment is too high The Telegraph (18/1/12)
Chris Grayling: ‘Unemployment figures are complex’ BBC News (18/1/12)
Data
Unemployment in graphics BBC News (18/1/12)
Data Tables: Labour Market Statistics Excel Spreadsheets ONS January 2012
Questions
- What type of unemployment is being referred to in the above articles?
- Explain the mechanism by which a recession will lead to higher unemployment.
- Using a diagram to help your explanation, analyse the impact of a fall in aggregate demand on the equilibrium unemployment rate and wage rate. What happens to unemployment if wages are sticky downwards?
- What can explain such different stories of unemployment between Scotland, England and Wales?
- What policies have the Coalition implemented to tackle the rising problem of unemployment? On what factors will their effectiveness depend?
- Why is the UK’s job market so important for the future economic recovery of the UK?
Child Benefit is a universal benefit, which means it is awarded on the basis of having a certain contingency (a child!) and not on the basis of a contributions record or an income test. It is for this latter reason that the equity and efficiency of child benefit has come into question.
Is it really equitable or a good use of money for a family earning £200,000 per year to receive child benefit of £20.30 per week for the first child and £13.40 each week for every subsequent child? Do these families really need the money, or would it be better spent on education, healthcare etc? This question became even more pertinent with the growing budget deficit facing the UK and the Coalition’s policy of cutting the deficit and hence cutting government expenditure.
Child benefit was one of the benefits targeted by the Coalition. It would be removed from higher rate tax payers. Those earning more than £44,000 would no longer be eligible to receive it. For some this seems like a good policy – the benefit is being targeted at those who need it most – it is becoming more vertically efficient. However, for others this presents a problem, not least because it looks at individual income and not family income. If there is a 2 parent household, with each parent earning, say, £40,000 then total household income is £80,000. Yet, this family is still eligible to receive child benefit, as neither of their incomes exceed £44,000. However, a 2 parent household, where one person works and earns £45,000 and the other only works part time and earns £5,000 would not receive child benefit, despite their total household income being only £50,000. This policy, unsurprisingly, faced criticisms of inequity and that middle income households would be the ones who saw their income squeezed and were made significantly worse off.
Amid these criticisms, David Cameron has admitted that there is an issue with the threshold and those facing the cliff edge of becoming a higher rate tax payer and losing the benefit. The Chancellor is unlikely to be in favour of any significant changes that will reduce the projected £2.5bn savings the policy will make. Although the policy still looks set to go ahead, following the Coalition’s defeat in the House of Lords concerning cuts to welfare and Cameron’s desire to retain the loyalty of Conservative supporters, we may still see some revisions to the initial proposal. The following articles consider this highly charged issue.
Webcasts
Child benefit cut will go ahead, says Osborne BBC News (13/1/12)
George Osborne: child benefit plans will go ahead The Telegraph, Robert Winnett (9/5/11)
Child benefit cut to hit 1.5 million families, says IFS BBC News (13/1/12)
Articles
Osborne sticks to child benefit cut The Press Association (13/1/12)
Middle-class parents could keep their child benefit after all Independent, Andrew Grice (13/1/12)
Welfare payment cap poses ‘real risks to children’s rights’ Guardian, Randeep Ramesh (11/1/12)
Universal child benefit has had its day Mail Online, Janice Atkinson-Small (13/1/12)
Questions
- What is the difference between a benefit such as income support and child benefit?
- Define the terms horizontal and vertical efficiency and horizontal and vertical equity.
- To what extent does child benefit (as a universal benefit) conform with your definitions above? Would the new means tested child benefit meet the objectives of horizontal and vertical efficiency and horizontal and vertical equity any better?
- Why are middle-income families and women likely to be the most affected by the proposed changes to child benefit?
- Why is there a growing pressure on the Coalition government to rethink the proposal?
- If child benefit is removed from higher rate tax payers, should other benefits be changed to compensate some families for their losses?
There is a growing consensus amongst the political parties in the UK that something needs to be done to end the huge pay rises of senior executives. According to the High Pay Commission, directors of FTSE 100 companies saw their remuneration packages rise by 49% in 2010. Average private-sector employees’ pay, by contrast, rose by a mere 2.7% (below the CPI rate of inflation for 2010 of 3.3% and well below the RPI inflation rate of 4.6%), with many people’s wages remaining frozen, especially in the public sector. (See Directing directors’ pay.) In 1979 the top 0.1% took home 1.3% of GDP; today the figure is 7%.
But agreeing that something needs to be done, does not mean that the parties agree on what to do. The Prime Minister, reflecting the views of Conservative ministers, has called for binding shareholder votes on top executives’ pay. The Liberal Democrats go further and are urging remuneration committees to be opened up to independent figures who would guard against the cosy arrangement whereby company heads set each other’s pay. The Labour Party is calling for worker representation on remuneration committees, simplifying remuneration packages into salary and just one performance-related element, and publishing tables of how much more bosses earn than various other groups of employees in the company.
So what measures are likely to be the most successful in reining in executive pay and what are the drawbacks of each measure? The following articles consider the problem and the proposals.
Articles
Parties draw up battle lines over excessive executive pay Guardian, Patrick Wintour and Nicholas Watt (9/1/12)
David Cameron’s plans for executive pay may not end spiralling bonuses Guardian, Jill Treanor (8/1/12)
Executive pay: what would Margaret Thatcher have done? Guardian Politics Blog, Michael White (9/1/12)
Businesses tell the PM he’s wrong about ‘fat cat’ pay Independent, Nigel Morris (9/1/12)
Directors’ pay is not the Government’s business The Telegraph, Telegraph View (9/1/12)
I’ll end merry go round of bosses’ pay, says David Cameron Scotsman (9/1/12)
Find a place at the table for public interest directors Scotsman, leader (9/1/12)
Cameron vows executive pay crackdown Financial Times, George Parker (9/1/12)
Q&A: Voting on executive pay BBC News (8/1/12)
Will shareholders crack down on executive pay? BBC News, Robert Peston (8/1/12)
Why didn’t investors stop high executive pay? BBC News, Robert Peston (9/1/12)
Report
Cheques With Balances: why tackling high pay is in the national interest Final report of the High Pay Commission (22/11/11)
Questions
- Why has the remuneration of top executives risen so much faster than average pay?
- What market failures are there in the determination of executive pay?
- What insights can the theory of oligopoly give into the determination of executive pay?
- Compare the proposals of the three main parties in the UK for tackling excessive executive pay?
- To what extent is it in the interests of shareholders to curb executive pay?
- Why may it be difficult to measure the marginal productivity of senior executives?
- To what extent would greater transparency about pay awards help to curb their size?
- What moral hazards are involved in giving large increases in remuneration to senior executives?
What will be the effect of raising tax allowances – the threshold at which people start paying income tax? The Coalition government in the UK has a policy of raising the threshold to £10,000 by 2015/16. As a step on this road, the present plan is to raise the threshold from £7475 in 2011/12 to £8105 in 2012/13. The Liberal Democrats, however, are urging the Chancellor to raise allowances more quickly.