Everyone seems to be searching for a roadmap for the Euro-crisis. A precedent to guide policymaking and financial decisions would give some assurance that feasible outcomes are available. I have argued elsewhere (here, here and here) that there are examples for individual countries to follow. But what of the eurozone as a whole?
With luck, precedent for the precarious situation the 17 members of the euro-club face is available. Across the pond, the United States of America once faced a similar challenge.
After the revolutionary War, the US was faced with a band of individual member states (emphasis placed on the “States” aspect of the USA). The Articles of Confederation allowed each state the exclusive right to tax its population. The Continental Congress was given the right to issue paper money – “Continentals”, as they were known.
Individual states refused to give the Continental Congress the ability to tax, nor did they consent to sharing their tax revenue with it. With no ability to raise funds through taxation, the Continental Congress turned to the only fund-raising means available – issuing new Continentals. The phrase “Not worth a Continental” predictably resulted, as hyperinflation set in.
This course of events prompted Alexander Hamilton and his Federalists to argue for a stronger central government, with the ability to both tax and issue debt. The ratification of the U.S. Constitution in 1789 was the culmination of this drive.
This is the situation roughly analogous to what the eurozone faces today.
Each of the 17 member states has the ability to tax but not to issue currency. The European Central Bank has the ability to issue currency, but not to tax. Some countries can no longer remain solvent through increasing taxes alone. Two solutions result:
Allow individual states the right to issue money.
Allow for a centralized fiscal agency to collect taxes for redistribution within the eurozone.
Option 1 amounts to a breakup of the currency union. Option 2 is currently the more popular option. By having a fiscal union with one tax-collecting agency, transfer payments can solve country specific insolvencies. (Of course, longer-term issues remain, but that is for another article.)
Is such a solution as efficient, or equitable, as we are led to believe?
The longevity of the United States suggests that fiscal union is not such a bad idea for a currency union. But important differences exist between the eurozone’s future and the US.
First, with no central fiscal agent for the eurozone there is no central spending required, unlike with the Continental Congress. Each eurozone member state funds its own activities. For example, there is no joint military that requires funding, as is the case with the United States. Hence, there is no threat that the ECB would hyperinflate the euro to fund its fiscal activities (as it has none). This was decidedly not the case with the Continental Congress.
Second, has the centralization of fiscal power been beneficial to the US? The longevity argument is not as strong as one might think. America has, after all, defaulted explicitly on its debt four times in its history. It has evaded insolvency numerous times by inflating its liabilities away. But such an action is default by another means. It has taken from the citizens in the form of an inflation tax to pay for its excesses.
Third, with a central fiscal agency, the US Congress has continually seen a strengthening of its role and scope. New agencies to displace the rights of the individual states have become the norm. The bill to fund the increase in federal activities has risen commensurately. The cost of a centralized fiscal agency in the US has been paid with increasing taxes – whether explicitly through the income tax, or implicitly through the inflation tax.
If the eurozone finds itself amidst a crisis set off by too much government spending (an insolvency crisis) does anyone seriously think the solution is a centralized fiscal agency with the incentive to increase its own indebtedness?
As the United States’ own history demonstrates, calls for a centralized fiscal agency to complete a currency union are misplaced at best and damaging at worst. If history is any guide, fiscal consolidation will result in increased indebtedness on a supranational level. This indebtedness is solved in one of two ways: increased taxes on the member states, or increased inflation. Neither of these seems like a welcome option.
One significant issue arising in the crisis has been the size of some European underground economies. Politicians seek measures to increase public revenues as public budgets come under strain. As large segments of European, and especially southern European, economies are hidden in the underground, large amounts of otherwise taxable incomes are likewise hidden.
Chapter 4 my new edited collection, Institutions in Crisis: European Perspectives on the Recession, grapples with the issue of these underground economies. With over a quarter of Greek economic activity only unofficially undertaken, we see that in some countries the issue is significant. Indeed, the average underground economy for the PIGS (the PIIGS excluding Ireland) is 21.7 percent of GDP, almost three times the size of America’s, and double that of Germany’s.
Two important questions must be answered. First, what explains the size of these underground economies? Second, how can we integrate them into the official economy?
There are two general reasons why economic activity seeks to be underground rather than official. On the one hand high, tax rates prohibit otherwise mutually beneficial economic activities from occurring. Movements into the underground try to evade these taxes and thus allow trades to be made (for those of you who can remember your first-year economics class, this is a way to reduce those triangular deadweight losses of taxation). On the other hand, regulations add a potentially complex and costly web of rules that entrepreneurs must abide by. In some cases it is only possible, or at least easier, for a firm to operate in the underground instead of the official regulation-abiding economy.
When looking at the general range of underground economies in Europe it does not take long to discern which effect is stronger. Europe is well known for its plethora of taxes, as well as its high marginal tax rates, but there is no clear relationship between taxes and the size of the underground economy. High tax Scandinavian countries, for example, seem to enjoy relatively small undergrounds. Some southern European countries, Spain for example, have relatively low tax rates and large undergrounds.
The answer lies in the distinction between different interventions that Murray Rothbard made in this economic treatise, Man, Economy and State. Binary interventions are those where one party becomes subordinate to the intervener in the transaction. Labor taxes, for example, cause a firm to hire labor at a different price than it originally would have, and under the constraints placed on it by the government imposing the tax. Triangular interventions, in distinction, are those that place both parties to a transaction subordinate to the intervener simultaneously. Testing requirements on drugs subordinate both drug producers and consumers to the government imposing the regulation – no transaction can take place regardless of the desires of the relevant parties.
Northern European countries, despite their high tax rates (a form of binary intervention) enjoy relatively low levels of triangular interventions. Low levels of simple regulations make entrepreneurial undertakings relatively pain free. Business owners can comprehend the binary interventions as an additional cost of business, and proceed cognizant of the fact that they face a minimal level of complex and uncertain regulatory burdens. Consequently, there is not much reason to operate in the unofficial section of the economy. (Keep in mind that although one can save on taxes by doing so, there are costs – the lack of a clearly defined and enforceable rule of law being the foremost.)
Southern European countries, in distinction, are well known for the bureaucratic boondoggles they are. Triangular interventions abound. Complex and uncertain labor laws make firing (and subsequently, hiring) employees a costly or impossible ordeal. Unable to navigate the regulatory burdens endemic in these economies, entrepreneurs hide in the underground. By saving on the expense of the difficulties of complying with complex regulations, entrepreneurs are able to outweigh the added costs by working in less official conditions.
As this problem is most acute in the PIGS countries, it has become an issue as politicians search for means to bolster government revenues. By reallocating economic activity to the official sector, taxes will be able to be collected and government coffers replenished. Calls for more frequent auditing and increased fines have come to the fore. Such solutions are misplaced at best, and will exacerbate the problem at worst.
Increased audits and fines for the “guilty” will doubtlessly decrease the size of the underground economies. This added risk and cost of underground business will incentivize some entrepreneurs to withdraw, or at least curtail, such economic activity. It is doubtful that this will translate into increased official economic activity. Entrepreneurs in the underground are there because the conditions in the official economy are not conducive to business. High taxes and complex regulatory structures drove them out in the first place. Without a change to either of these two facets (primarily the latter), we should not expect any increase in official economic activity.
In my book I spell out one additional reason why EU politicians should not be overly keen on minimizing the size of their underground economies. As unemployment rates have increased, the various undergrounds have been able to cushion part of the blow. Working conditions in the underground economies are certainly not as desirable as in the official one, but the unemployed have few choices. Lacking growing employment opportunities in the official economy, a lack that I stress is caused by excessive and uncertain regulatory burdens, removing the underground options available will only serve to further impoverish the burgeoning unemployed masses.
This paper by Alberto Alesina and Silvia Ardagna provides very good empirical research to confirm that what we expect a priori: that deficit cutting sets up a strong recovery, while deficit spending funded by tax increases does not. The abstract nicely summarises other aspects of the paper, and it is worthwhile for anyone to read who is involved or interested in public policy.
We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.
To ask the Chancellor of the Exchequer how much debt interest has been paid on Government securities held by the Bank of England and its subsidiaries in the last 12 months.
Mark Hoban (Financial Secretary, HM Treasury; Fareham, Conservative)
In the 12 months to end September 2010, the Bank of England and its subsidiaries have received the following interest on holdings of UK Government debt securities:
£ million
Banking Department
187
Issue Department
282
Bank of England Asset Purchase Facility Fund Ltd
8,527
Total
8,996
That’s right – the Treasury paid the Bank of England about £9 billion in debt interest.
The time for a six-month update on the figures is soon approaching, so I wondered what TCC readers thought…
Is this just the left and right hands of the State passing money to and fro and should bonds held by the Bank of England be written off? Is it vital those bonds are held so that QE can be “reversed” or is that like, as Mises put it, reversing over the man you just ran down in your car?
Mises also refers to the fact that deflation can never repair the damage of a priori inflation. In his seminar, he often likened such a process to an auto driver who had run over a person and then tried to remedy the situation by backing over the victim in reverse. Inflation so scrambles the changes in wealth and income that it becomes impossible to undo the effects. Then too, deflationary manipulations of the quantity of money are just as destructive of market processes, guided by unhampered market prices, wage rates and interest rates, as are such inflationary manipulations of the quantity of money.
This morning we have announced the formation of the new TaxPayers’ Alliance and Institute of Directors (IoD) 2020 Tax Commission.
…
At the moment policymakers are trying to work out how to deal with the deficit, and at the TPA we’ve done a huge amount of work on how we can cut spending, and a previous joint project with the IoD set out £50 billion of potential savings. But those of us who think that we are better off leaving money in people’s pockets, having low taxes that reward the hard work and investment that is and will be the basis of our prosperity, need to go beyond TINA. Our pitch to the public can’t just be about dire necessity, in the face of the very real threat that Britain could have moved from the status of secure safe haven to the next Greece/Ireland/Portugal. We need a plan and to show why tax reform should be a priority once the economy and the public finances are recovering.
The Tax Commission boasts many familiar names, including Cobden Centre founding fellow Anthony J. Evans. For more information, visit 2020tax.org.
Shortly after taking office in May, Britain’s new chief secretary to the Treasury discovered a note from his predecessor, Liam Byrne: “I’m afraid to tell you there’s no money left.”
Tomorrow, to help address that mounting fiscal crisis, Chancellor George Osborne will release an emergency budget. It is expected to include an array of spending cuts and tax hikes to reduce the £156 billion deficit he inherited from the previous government. In all likelihood, it will call for a dramatic increase in the capital-gains tax.
Such a move would be disastrous for the economy. Raising the capital-gains tax would discourage Britons from creating new businesses, and scare off investors. The government should instead focus on leaving money in the hands of entrepreneurs. It is their hard work that’s going to create the jobs and wealth needed for full economic recovery.
(a subscription is required to view the whole article, but a free trial is available)
For readers seeking further analysis of the Capital Gains Tax proposals, I recommend this post by Steve Baker.
I have just listened to the Budget Debate and quite frankly am growing more and more tired of the political point scoring arena that Parliament has become. It was unbridled electioneering, totally populist and I am sure none of us are fooled.
The implied nonsense that Belize are now cooperating with UK tax authorities to ensnare Michael Ashcroft when he has done nothing contrary to current tax laws was pathetic. Do they think we have forgotten that the Labour Peers Paul and Cohen are also non-domiciled for tax purposes? To use the Budget which should present a sober look at the Nations books for such gerrymandering is an insult to the shareholders/electorate they purport to serve.
I therefore exercise my right to express an opinion and to look objectively at how the current ‘management’ are looking after my interests; after all I have been obliged by them over the years to contribute lavishly to their misguided vision for our wellbeing!
Quite simply if this was an AGM and I was a shareholder with voting rights I would back a motion to sack the lot of them based on performance. In that sense I cannot wait for the forthcoming election to register my vote of no confidence. I am particularly unhappy at the parlous state of our benefits-driven society. The Conservatives are at least offering some reasonable solutions to tackling the welfare state thanks largely to the excellent work undertaken by Iain Duncan Smith’s think tank the Centre for Social Justice. The Party are undoubtedly more compassionate than they were in the Thatcher era and, unlike Lord Tebbit’s solution for the unemployed “get on your bike and find a job”, contemporary caring Conservative Policy prime facie is to ride alongside!
I watched Channel Four News last night and was captivated by John Snow interviewing some of the good folk of Luton; a large number of his interviewees stated that they wouldn’t vote. How many times do politicians need to hear that people don’t bother voting because of the mess they have made of our democracy before they listen to vox pop and try to understand our frustrations with politics and politicians? Our Cobden Centre colleague Douglas Carswell MP sets out the reasons why people have disengaged in ‘The Plan’ the book he co-authored with Daniel Hannan MEP. They correctly deduce that voter apathy is mainly due to the inability of politicians to effect change. Carswell quotes doorstep comments such as “you’re all the same”, “it doesn’t matter how I vote, nothing changes” and “you make promises but you never deliver”. Carswell and Hannan go onto unpack the route that led to this apathy and make some sound policy recommendations to effect rapid change but, sorry chaps, this is not rapid enough for me so I have decided to go one step further motivated in part by the following:
(updated)Approximate UK Income Tax receipts £146bn versus welfare payments £196bn. However well the Chancellor spins these numbers this shareholder ain’t happy!!
Benefits saved Tax and NI gained per person returning to work >£8000 per annum (source CSJ). ((NI – National Insurance is a clever idea that helps citizens save for benefits, retirement and other social needs. It is run by the Government in much the same way as Bernie Madoff ran his quaint little investor scheme except, as it is run by the state, it is entirely legal. Therefore none of the people running it will be held accountable and go to jail for 150 years when the shareholders realise that all of their money and more is being spent straight away and not invested for their future benefit.))
NHS cost per capita £860 per annum this doubles for the unemployed perhaps because they constantly need to prove they are sick to continue receiving benefits as well as the inherent problems some genuinely face to their wellbeing by being unemployed. For a thorough evaluation, read the CSJ reports.
Pure and simple, ‘helping one another’. do you remember that old-fashioned and now outdated idea ‘neighbourliness’?
It is entirely correct that a caring, prosperous and civilised society should look after those unable to fend for themselves but when in 1945 Atlee’s Post War Labour Government began implementing the recommendations of the 1942 Beveridge report they weren’t up front about this creeping socialist agenda that has led to an unacceptable reliance on state handouts sadly not by the deserving in society but the most devious who often exhibit brilliant cunning and guile at exploiting our overly complex system. Oh that those talents could be harnessed elsewhere for good! Others newly unemployed soon see how they work the system and join their ranks. “Up to three generations of some families have never worked and are entrenched in economic dependency” this is oft rolled out, well known and needs proactive solutions. We can trust some politicians like Iain Duncan Smith, Philippa Stroud, Steve Baker, Douglas Carswell and Frank Field amongst others to make their voices heard in the corridors of power but we should not sit back and wait for them to legislate a way out of this mess.
I have come to the conclusion that instead of raging at the machine we should attempt to solve our own problems in our own communities and not rely on politicians and the state.
Why? Simply because problems like unemployment are corrosive not just to those going through the process but to communities, society in general and we as ‘shareholders’ cannot afford to fund it anymore.
This thought process and the closure of my own business due to the downturn allowed me the time to set up a Job Club in my home town Edenbridge, then neighbouring Oxted, now Richmond Borough and soon Sutton. I have also founded a charity GB Job Clubs to train and resource other volunteers to set up clubs in their own communities. This was all inspired by a Conservatives Social Action seminar on ‘How to Start a Job Club’ in March 2009.
Remember David Cameron’s speech to the Open University on May 26th 2009 advocating localism? The Conservatives have been very proactive in encouraging social action as this doesn’t require legislation or an election to implement. Iain Duncan Smith encapsulated this when he said,“Our approach is based on the belief that people must take responsibility for their own choices but that government has a responsibility to help people make the right choices.”
Well said Sir, however, I come from the viewpoint that the Government is not there to provide everything for us; if we take control of our own destinies then we might actually wrestle some control back from the state who continue in their desire to nanny us from cradle to grave. If we serve ourselves more and rely less on state provision we can shrink Government, yep that’s right fewer politicians, dismantle quangocracy, reduce red tape oh boy the list goes on! Maybe in time we can insist on a reduction in the funds we are required to invest to keep UK Plc afloat!
I recently compared notes with some fellow Job Club leaders and between our six clubs discovered that we had helped 105 folk back to work over the last six months. If the cost/saving benefit is £8000 per annum per person we have saved the exchequer and more importantly ourselves as tax payers/shareholders £840,000 per annum. That is the result of only six Job Clubs run voluntarily at little or negligible cost to anyone. That’s right there is hardly any cost involved in setting up and running a Job Club and we don’t want ‘government funding’ or put it another way some of our tax bucks back! Why not? It would probably require our application and subsequent performance to be assessed by one of those quangos or an army of civil servants wrapping us up in red tape and emasculating our ability to deliver.
GB Job Clubs now has 25 ‘Get Britain Working’ inspired Job Clubs listed on the Directory page of its website, www.gbjobclubs.org. If the success rate of our six clubs is replicated in all 25 , we would save ‘ourselves’ £3,500,000 per annum. How about 500 clubs up and down the country each succeeding to get just one person per month back to work that equates to a saving of £48,000,000.
Now I like numbers like this and, as a shareholder, they excite me! Detractors will point out that finding people jobs is reliant on the economy and that £48m is a drop in the ocean in an overall spend of £185bn. I know, but every single person we have helped is worth much more than money. We are seeing lives transformed by opportunity and communities in a small but visible way impacted by helping one another and this is undoubtedly great for social cohesion. This can spread like a virus. Just imagine that, instead of aspiring to be in gangs and earn illicit money from delivering drugs, the new role model is someone in a community who has set up his/her own business and can legitimately employ someone.
I have used GB Job Clubs as a launching pad for a microfinance and mentoring project named the Jericho Programme where we incubate small ventures in communities up and down the country. The first pilot scheme is now underway in Edenbridge where we have backed two heroes from the Job Club to start their own garden maintenance business. It takes guts to wean yourself off state support especially when you have three children as is the case with one of our entrepreneurs but they are going for it with gusto. All it has taken is encouragement, support from a mentor, a small loan for equipment, a van donated by the local council and the goodwill of a community. Cobden Centre founder Toby Baxendale has joined me in funding six such projects in the UK and once we can prove they work we will set about raising funds and recruiting fellow mentors to empower these latent entrepreneurial heroes that exist in our midst.
We can’t cure all our problems ourselves but we must take more control of socio-economic issues where we are able. We will reap great dividends and that has got to be great news for all shareholders!
Via Sean Corrigan and Toby Baxendale, “The tab from LEH/AIG so far? Around about $2 trillion if we look at trend US federal debt trajectory before and after that fateful weekend”:
See also this video, “Stop Spending Our Future”:
Could it be time to stop and question the ethics of all this deficit spending, quantitative easing and tax?
I see the panel of economic experts that is the acting industry have latched onto the Tobin tax, now re-branded the ‘Robin Hood Tax’. Never mind that Robin Hood fought against unjust taxes by tyrants: the modern day bogey man is the banker.
Now funny thing is, I do agree with a lot of the sentiment expressed by the morally indignant of Primrose Hill.
Yes, the financial world has grown out of all proportion to the real world
Yes, the rewards for participation in this job seem ludicrously high
Yes, bankers have been bailed out by tax payers and are now furiously spinning the wheels of casino capitalism faster than ever before.
Yes, we should do something about it.
But. Not this.
Firstly, why financial markets are important. The good that these things do is provide a price on the future. They allow us all to insure ourselves against the unknown, whether that be a fixed rate mortgage to buy your house, or a bond issue that allows a company to grow.
Financial markets provide sellers for the shares you want to buy, insurers for risks you want to avoid and lenders when you need to borrow.
Attack the market, and you attack its ability to do this job efficiently. The price will be paid by you.
It is said that the market will absorb the Tobin/Hood/Luvvie tax. Anyone who says this clearly underestimates the ability of a bank to pass on its increased costs. You will either pay directly by higher fees, or indirectly, as the cost of everyday things get more expensive.
And more expensive they will be as the Luvvie tax will infect its way through the whole system. At every stage of production, financial markets are used to quantify and reduce costs. Commodity futures allow manufacturers to fix input costs, freight derivatives allow shippers to control cash flow, forward foreign exchange allows import/export companies to insure against wild market swings, credit insurance allow insurance against default and so on and on.
But surely a tiny transactional tax would pass unnoticed? Well, it may seem tiny, but to many market participants this Luvvie tax will be huge. What people fail to understand is that a regular and competitive price in many instruments come from institutions that are prepared to turn over huge volumes in order to make a net margin often much smaller than the Luvvie tax. In one fell swoop, you make a huge proportion of this trading unprofitable, therefore you take away the ability of the market to provide a price. It’s always the way of ill thought out taxes: unintended consequences. Some arbitrary decision is made, and a myriad of economic activity suddenly becomes futile.
So what? Who needs them? Well, you do. Every time you want to invest in your pension, you will (indirectly) need to buy a bond or some shares. Where do you think the seller comes from? Charity? No, it is the myriad of active traders that act as the buffer between ‘real’ buyers and sellers of these things.
In the end, you will pay by being poorer as a pensioner, by paying more interest on your mortgage and by generally being gouged more by the banks.
And so, we turn to the banks. The true villain of the piece.
The problem with financial markets is that banks are allowed to actively participate in this trading game. It would be less problematic if banks used the markets merely to reduce their risks, but this is not what they do. They see markets as a lucrative opportunity to enhance their profits, and they seize it with both hands.
Why is this bad? Because they punt their customer’s demand deposits. They take the money set aside to pay your gas bill, multiply it up tenfold, then wade onto the casino floor. What allows them to do this with some level of (misplaced) confidence is the myriad of legislative favours, monopoly rights, tax payer protection and political pressure arrayed to support them.
Here at the Cobden Centre, we’ve bleated on time and time again about how fractional reserve banking conjures money out of thin air, but it is worth repeating. You deposit £100 of notes and coin in your current account, and this becomes the property of the bank to do with as they wish. You sign it over to the bank, who lend most of it out. £100 of cash, becomes £197 of purchasing power. Whomever gets £97 loan, deposits it at their bank, and the same happens again and again.
Are you happy that the £100 you think is being safely held aside for your weekly food shopping is being used to fund £1000 of credit default swaps? I thought not.
At the end of the day, what consenting adults do in the privacy of their own bedrooms is of no concern to you. What hedge funds do with their willing clients’ money does not concern anyone but the investor. What pure trading companies do with their retained capital is of no worry to you.
The problem is the banks. An the best way to put a stop to their nefarious influence is not by taxing them and innocent parties. Not by robbing pension funds. Not by forcing you to pay higher fees to manage your financial affairs (as you surely will). No, they way to deal with the problem that banking has become is simple:
Last year two police women (WPCs) were discovered to have a reciprocal child-minding arrangement. It was initially declared unlawful. Child minders who receive payment for their services must be registered with Ofsted. And receiving payment is not restricted to receiving money. Anything of value counts, including “free” minding of your own child. These unregistered WPCs were wrongdoers.
Public outrage at the absurdity of preventing friends from looking after each other’s children caused Ed Balls, the Secretary of State for Children, Schools and Families, to intervene. He declared that reciprocal childminding was not a kind of payment after all. The WPCs congratulated him on this small victory for common sense.
Which just goes to show that the common sense of WPCs cannot be relied upon. For, despite Mr Balls’ great powers, he cannot by mere proclamation stop reciprocal childminding from being a kind of payment. His decision simply exempts this barter payment from the tax that Ofsted’s rules and registration fees impose on childminding when other forms of payment are used.
If one of those WPCs quit her police job but offered to continue minding her friend’s child for £50 a day, Ofsted’s requirements would reimpose themselves. The child may be cared for by the same person in the same place, but the introduction of money to the deal would bring with it the state’s administrative and financial burdens. Mr Balls’ “common sense” intervention thus encourages a barter economy in childcare.
This is a silly thing to do. Because money is a better method of payment than barter. While the WPCs barter, they can consume the value of the childminding work they do only in the form of childminding for themselves. This means that they will restrict the amount of childminding they supply to the amount they want to consume. If they paid each other in cash, this restriction would disappear.
As all economists know, money increases the opportunities for trade. Limit its use and many potential transactions will not take place; valuable goods and services will not be produced. And, when they are, they will often be produced by the wrong people.
For where money-based exchange is restricted, people must produce a wider range of goods, either for their own consumption or to increase the chance of having something they can swap for something they want. This is unfortunate, because the more things you do, the worse you will be at them.
In short, discouraging the use of money constrains trade, which limits the division of labour, which leads to inefficiency. Politicians ought not do it. Yet they do it all the time. They impose burdens on activities when done in exchange for money that they otherwise leave alone.
Consider the minimum wage. I am not allowed to pay someone £4 to spend an hour shopping for me. According to our government, that would be unfair, even if my employee agreed to it. Yet I am free to add an hour to my own shopping by walking to a distant supermarket in search of a £4 saving.
I am also allowed to spend an hour cooking my dinner, even if I would be unwilling to pay someone more than £3 to do it for me. Contrary to what you may have read on the Directgov website, working for less than £5.80 an hour is not illegal in Britain. It is illegal only if the payment is made in money.
Taxes have the same effect. Since most are levied on money-based transactions (with the notable exceptions of poll and property taxes), they inhibit trade and, hence, the division of labour. And the greater the rate of tax, the greater this malign effect.
Suppose, for example, that you are willing to pay up to £10 an hour to have some work done, and that the cheapest qualified labourers are willing to work for anything over £9 an hour. Then you should find someone to do the job. But if incomes are taxed at 20 per cent, the most the labourers can earn from you is £8 an hour and they will be unwilling to take on your job. You will have to do it yourself or go without.
Britain’s enormous regulatory and tax burdens on trade lead to an excess of do-it-yourself. People with neither talent nor inclination cook, garden, teach, drive and shop, to name but a few of the more common amateur activities. They are thereby drawn away from doing things they are better at and enjoy more.
What is the cost of such restrictions on the division of labour? Terry Arthur of the Institute of Economic Affairs has estimated that, at current tax levels, the cost is two thirds of every pound of tax collected. In other words, the marginal cost of transferring a pound from private hands into the coffers of Her Majesty’s Revenue is 67 pence.
Mr Arthur may be wrong, of course; estimating such “invisible”, deadweight costs is notoriously difficult. But even if his estimate is three times the real cost, the implications are profound. Taxes, minimum wages and the other regulatory burdens the government places on money-based commerce are far more costly than politicians and voters seem to realise.
Indeed, most do not recognise this cost at all. Some lament the futility of a system in which people are taxed only to receive their money back in the form of government provided services, such as education and healthcare. But they fail to see that the spinning of this money-go-round creates a terrible economic drag.
Alas, there is no prospect of an end to this waste, even if politicians understood it. When invisible costs are incurred for the sake of visible benefits, a politician will never consider them too great.
