Let’s face it – no-one likes paying tax! After all, to see your monthly pay decline by £1000 through taxation and national insurance has got to hurt. Yet, taxation and national insurance contributions are essential sources of government revenue to finance benefits and public and merit goods.
However, with so much attention given to the UK’s ‘culture of dependency’, many people are increasingly angry with having to pay so much in taxation to see it being spent by the government on individuals who in some cases choose not to work and at the same time seeing other rich people paying so little in taxation. The increase in the top rate of tax received a lot of coverage. Although it did make the tax system more progressive, there were many concerns that it would lead to lower growth, a lack of innovation and enterprise and increased tax evasion and avoidance, as the super-rich were being hit with phenomenal tax bills. The post on the 50p income tax available here is worth looking at again to think about the effect that taxes have on incentives.
The issue of tax avoidance is by no means new, but with a large budget deficit in the UK, tax avoidance by the super-rich has become something that everyone has an opinion on. The average household has seen its income squeezed more and more, as the government continues its efforts to cut the deficit. The fact that the super rich are avoiding sometimes millions in taxation, while the average household struggles to pay even the basic rate of tax, creates a rather contentious issue. The Chief Secretary to the Treasury, Danny Alexander, has said that the basic rate of tax could be cut by 2p in the pound if tax avoidance came to an end. He commented to the BBC’s Sunday Politics Programme that:
‘We have to make sure that everybody, especially the rich and famous, are paying their fair share of tax…These sorts of schemes that save wealthy people potentially tens of millions of pounds in tax, they are paid for by everybody else… If we could narrow the tax gap in this country by a quarter we could reduce income tax for every basic rate payer by 2p in the pound.’
This would clearly have some very positive effects on some of the poorest people living in the UK.
There is a variety of tax avoidance schemes available and the one receiving the most attention at present is the Jersey-based K2 scheme, which Jimmy Carr and others are thought to be using. The Public Accounts Committee will be reporting on the problem of using private companies to pay salaries, as a means of avoiding income tax and national insurance contributions.
If tax avoidance could be stopped, or at least reduced, then not only could basic rate tax payers benefit, but it might go some way to cutting the budget deficit, giving the government more flexibility in stimulating the economy. According to HMRC, tax avoidance and evasion cost the economy some £42 billion – enough to pay off one-third of Britain’s budget deficit.
The following articles consider the problem of tax avoidance and then try answering the questions on the issue of taxation.
Five-point plan to curb tax cheating by big firms and super-rich Guardian (27/6/12)
Stop tax dodgers or there will be ‘riots on the streets’, warns top lawyer designing new anti-avoidance rules Mail Online, Julian Gavaghan (26/6/12)
Danny Alexander describes aggressive tax avoidance as ‘morally repugnant’ Guardian, Patrick Wintour (24/6/12)
Basic tax ‘could be cut by 2p’ if avoidance ended BBC News(24/6/12)
Danny Alexander says tax avoidance ‘adds 2p in every £1 to basic tax rate’ Independent, Oliver Wright (24/6/12)
Make tax returns public, urges peer The Press Association (28/6/12)
Tax officials reveal scale of probe Financial Times, Jim Pickard (27/6/12)
Questions
- What are the key principles of a good tax system?
- Explain how taxation affects the incentive to work?
- What is the difference between tax evasion and tax avoidance?
- Using indifference analysis, illustrate the effect of a cut in the basic rate of income tax. How does it affect the decision to work more or less? You should consider the income and substitution effects in your answer and which rate of tax (if any) an individual is paying.
- Why is tax avoidance of such concern at the moment? Think about the current state of the economy.
- What are taxes and national insurance contributions used to pay for?
- To what extent do you think tax avoidance is a natural consequence of any tax system?
A recent post on this blog referred to what sounds a fascinating new book, What Money Can’t Buy: The Moral Limits Of Markets, by Michael Sandel. The Guardian also recently featured an extract from this book.
As the earlier blog post discussed, our lives are now dominated by markets. Economists typically believe markets are the best way to allocate resources as, if the market mechanism works correctly, the resulting equilibrium maximizes economic welfare as measured by the sum of consumer and producer surplus. In particular, all consumers that are willing to pay a price above the market price are able to buy the product.
Fundamental to the measurement of consumer welfare is the notion that consumers will be prepared to buy a product as long as their willingness to pay exceeds the price. It therefore follows that consumers are more likely to buy the product as the price falls and, if they do so, gain increasing surplus. However, the extract from Michael Sandel’s book provides a number of interesting examples which suggest that in some situations this might not be the case.
One example concerns the storage of nuclear waste in Switzerland. When surveyed, 51% of the residents of the small Swiss village of Wolfenschiessen, said that they would be prepared to accept the waste being stored nearby. However, somewhat surprisingly, this figure fell to 25% when the residents were told that they would be compensated for the inconvenience. Furthermore, the figure remained at this low level even when the proposed compensation was increased to over £5000 per person.
Sandel argues that this is because, once compensation is introduced, financial incentives crowd out public spirit. He suggests that:
putting a price on the good things in life can corrupt them.
For economists, this potentially has important implications for how we evaluate market outcomes and our belief that the market equilibrium is always the optimal outcome. Furthermore, it suggests that in some circumstances allowing the market mechanism to allocate resources may not be the ideal solution.
Articles
What money can’t buy – review The Guardian, John Lanchester (17/05/12)
Michael Sandel: ‘We need to reason about how to value our bodies, human dignity, teaching and learning’ The Guardian, Decca Aitkenhead (27/5/12)
We must decide on the way we want to live now London Evening Standard, Matthew d’Ancona (23/05/12)
Questions
- How is consumer surplus calculated?
- How does the market mechanism allocate resources?
- How would you explain the responses of the residents in the Swiss village?
- Do you think the Swiss residents would respond in the same way if the compensation offered was increased even further?
- What type of products and services do you think might be less well suited to being provided by markets?
Oil is a commodity like any other – its price is affected by demand and supply. Back in 2003, with the impending war in Ira and strikes in Venezuela, oil prices increased and continued to do so as further supply concerns developed in Saudi Arabia, Russia and Nigeria. This upward trend continued until 2008, when with the growing banking turmoil and demand for oil falling, the price began to decline. However, the crisis in Libya is only making matters worse. Its credit-rating has been downgraded with the potential for it to be lowered further and concerns are deepening about the country’s crude exports. As Libya is the world’s 12th largest exporter of oil, these supply concerns have started to push up oil prices once more.
With inflation rates already high and political turmoil pushing oil prices up further, consumers and firms are feeling the squeeze. These changes have also been reflected on stock markets across the world. Analyst, Michael Hewson at CMC Markets said:
‘Given the fact that we have seen massive gains in stock markets over the last few months, investors have been nervous about a possible correction for some time… The tensions in the Middle East with Libya imploding and concerns that the unrest could spread to Saudi Arabia could provide a catalyst for (this) correction.’
The disruption in the Middle East has caused companies such as Eni of Italy and Repsol YPF of Spain to shut down production, leading to output losses of some 22% of Libya’s production. As supply contracts from this region, prices will inevitably rise. However, the Saudi oil Minister has said that he is ready to boost production to offset any decline, but that at present there is no oil crisis. So, what can we expect to happen to oil prices in the coming months? It will all depend on changes in demand and supply.
Articles
Libyan crisis threatens to spark oil crisis Financial Times, Javier Blas and David Blair (22/2/11)
Libya protests: oil prices rise as unrest continues BBC News (22/2/11)
Oil producers, users sign charter as prices spike Associated Press (21/2/11)
Oil shock fears as Libya erupts Telegraph, Ambrose Evans-Pritchard (22/2/11)
Arab protests pose energy threat BBC News, Damian Kahya (22/2/11)
All eyes on Bahrain as Gulf tremors frighten oil markets Telegraph, Ambrose Evans-Pritchard (22/2/11)
Saudi Arabia seeks to calm market with words not oil Reuters (22/2/11)
Saudi Arabia says oil market needs no intervention Associated Press (21/2/11)
Peace in Bahrain is key to stopping oil prices from surging Live Oil Prices (22/2/11)
Data
Commodity Prices Index Mundi
Crude Oil Price Chart WTI
Questions
- What are the key factors that influence the supply of oil? How will each factor affect the supply curve?
- What are the key factors that influence the demand for oil? How will each factor affect the demand curve?
- Putting your answers to questions 1 and 2 together and using your knowledge of recent events in the oil market, explain the changes in oil prices.
- How are oil prices affected by OPEC?
- How have rising oil prices affected the stock market? What’s the explanation for this relationship?
- How might higher prices affect the economic recovery? Think about the impact on consumers and firms.
Ahead of Lord Davies’s report on Boardroom equality, he will be somewhat alarmed by the survey results carried out by the Institute of Leadership and Management, which found that 73% of women felt that they still face barriers to top-level promotion. Quotas are a suggestion to break down this barrier. As Sheelagh Whittaker, a non-executive directive of Standard Life said:
‘I am a big supporter of quotas. I believe that we will only have true equality when we have as many incompetent women in positions of power as incompetent men.’
However, others say that quotas are not the answer, as they don’t actually change the fundamentals. Forcing compliance for equality in the workplace is not the same as equality in the workplace. There are a number of other reasons behind fewer women in top level positions, including less confidence and ambition, a more risk-averse attitude to promotion, as well as more women than men aspiring to run their own company, rather than seek promotion within a firm. So does discrimination still remain in the workplace or are there other explanations for the fact that only 12% of FTSE 100 directors are women?
Women still face a glass ceiling Guardian, Graham Dnowdwon (21/2/11)
Female managers say classing ceiling intact – survey BBC News (21/2/11)
The ‘glass ceiling’ is all in the mind: women lack confidence and ambition at work says new survey Daily Mail, Steve Doughty (21/2/11)
Women hit glass ceiling while report rejects boardroom quotas Independent, David Prosser (21/2/11)
Poll: Glass ceiling still a barrier The Press Association (21/2/11)
Men not to blame for the glass ceiling The Australian, Jack Grimston (21/2/11)
Questions
- How are equilibrium wages determined in perfect and imperfect markets?
- Is it efficient for a firm to pay men more than women or to hire/promote more men than women?
- Illustrate the concept of discrimination against women in the labour market. Think about the effect on the MRP curve and hence on equilibrium quantity and wage. How does this affect the MRP curve for men?
- What are the other causes of less women being FTSE 100 directors besides ‘the glass ceiling’?
- To what extent would a quota be effective in achieving gender equality in the workplace?
- Are there any other policies that could be used to tackle discrimination of any kind? What are the pros and cons of each?
The owner-occupied housing market has seen widespread coverage. With house prices falling throughout the recession and problems accessing mortgages for many people, it is this sector of housing that has received most attention. However, it is rental homes that we’ll be considering here and a new strategy being adopted by landlords. As access to mortgages dried up, people instead turned to renting. Demand for rental properties began to increase, such that competition between potential tenants increased significantly. Not only has there been a substantial increase in rents – up by some 35%, but it has also led to a new ‘sealed bid’ strategy.
A strategy that is often used for purchasing houses is where potential buyers submit sealed bids and it is this approach which is now spreading to the rental sector, as demand and competition for properties increases. Potential tenants are required to submit a sealed bid, containing the amount that they are willing to pay to rent out the property and all this must be done within a deadline. Whoever submits the highest bid ‘wins’ the property and hence tenants are encouraged to submit a bid at or close to the maximum they are willing to pay. Landlords insist that they are not trying to force tenants to pay more, but that it is simply the most effective way of letting properties that are short in supply, but face significant demand. As the BBC News article states:
‘It seems that with the current state of the housing market, sealed bids will be here to stay – as long as many would-be renters are chasing a dwindling supply of good rental homes.’
Rental ‘gazumping on the up as demand rises Metro, Tariq Tahir (8/11/10)
’Bidding war’ for homes to rent BBC News, Nigel Cassidy (20/11/10)
Rental market’s now so hot tenants are having to make sealed bids Mail Online, Sebastien O Kelly (8/11/10)
Is the buy-to-let market on its way back? Seek4Media (20/11/10)
Gazumping on the rise as London rental soars Gulf Times, London Evening Standard (8/11/10)
Questions
- Using a supply and demand diagram, explain the trend we have seen in the rental market, thinking about the impact on demand, supply and hence on price. How does this explain why sealed bids have been used to combat the increased competition?
- Which factors have affected (a) the demand for rental properties and (b) the supply of rental properties? How is the elasticity of demand and supply relevant here in terms of the impact on price?
- To what extent is a sealed bid format fair on potential tenants? Who does such a strategy favour?
- How could this sealed bid strategy be an example of price discrimination?
- What is likely to happen to your consumer surplus if you have to submit a sealed bid?