Sunday, 4 June 2017

What We Should Hate Most About Election Campaigns

If you're starting to feel fed up with the electioneering, it's probably because the party leaders are merely churning out litanies of insipid and meaningless phrases, with all the wit, erudition and charisma of a clapped out old moped sold to you for a fiver by a buck-toothed wheeler dealer called Terry.

For me, the worst thing about run-ups to general elections is that they provide a daily reminder of how politicians are trying to sell us things we shouldn’t want to be buying. Every day we hear lots about what politicians can do for us – create jobs, invest in the economy, make prices higher or lower – but the reality is, the best thing the government can do for us is to promise to do much less, and then stick to that promise.  So much so, that the government should only provide services that the market cannot provide (which, as I’ve argued in many previous blog posts, isn’t very much).

Let me explain why when the government provides things the market can provide we all lose out. This principle is what we might refer to as the deadweight losses of market interference, which basically means the costs politicians impose on us in what would otherwise be unimpeded economic transactions.

Suppose I am willing to pay no more than £12 per hour to have some work done, and the workmen at the lowest rates are willing to do the work for anything over £10 per hour. That being the case I should have success in finding someone to do the job.

But once the government imposes 20% income tax, things change, because now the most the workmen can earn from me is £9.60 per hour, which means they'd be unwilling to do the job for me. The minimum wage law, therefore, stops otherwise mutually beneficial transactions happening.

The same is true of VAT. If I can produce a bicycle for £100 and John is willing to pay no more than £250 for it, then a bicycle will be produced. However, once tax is introduced onto a good, things change, because the retailer takes responsibility for the tax, but passes it onto the consumer in the form of higher prices. If the cost of a bike is £100, and the selling price is £250, the retailer is only responsible for paying VAT on the extra £150, which means the price of the bike is now £280, and John no longer buys it.

The more the government interferes with taxes, the more sales they stop from happening by impeding the supply and demand equilibrium point between what will be mutually valuable to buyers and sellers. In short, government taxes cost the nation in terms of transactions that never take place and opportunities that never materialise. When politicians tell us how they will invest in our economy, what never gets acknowledged are all the intangible costs – the value that never gets created because of those deadweight losses.

It’s not easy to measure the deadweight costs of taxation, but I’ve done a bit of research on what expert economists think, and it is thought to be something like a rate of 30%. In other words, for every £1 raised in taxation you have to add on about 30% to the cost of doing something.

So a social care bill, a child’s education and medical expenses that cost, say, £200,000 over a 15 year period would have cost around £125,000 in the private sector. Not only does that mean the additional state-layered bureaucracy costs another £75,000 for the same level of services – it also means there was £75,000 worth of GDP not created in our economy as a result.

Given that the cost to the consumer in having money taken out of their wages and getting it back in the form of state-supplied services is approximately an additional third of the whole transaction value, we should not be too enamoured by politicians’ promises that they want to do more for us.

Finally, I'll leave you with this rather telling thought. In business, a lot of firms try to sell us extras we don't really need in the form of hidden fees - admin charges, extra consumables, additional packages and insurance add-ons, etc - which is a dead giveaway that these aren't things we'd often choose to buy if they were offered in a clear and transparent way. 

You might like to consider that taxes follow a pretty similar template in both their complexity and stealthiness, and that that probably tells you a lot of what you need to know about the kind of things politicians are trying to sell us, and the appetite we'd have for them if they were offered in a clear and transparent way.