Friday 27 April 2012

Likelihood of voting by age

A graphic from today's Financial Times:

That means there are about 13.5 million people aged 18 - 40 who are unlikely to vote, i.e. there are nearly three million more young people who can't see anything worth voting for than there were people who voted Conservative at the last General Election. There's everything to play for here!

Wednesday 25 April 2012

Who's never had it so good?

A rallying cry of older generations has always been that "you" have had it so good. Sure, there are some people who have never had it so good, but who exactly?

Traditionally, the Tories were always the part of landowners (homeowners, in a modern context), who want house prices and rents to be as high as possible - who have clearly achieved this, as the amount of GDP going into rents and house prices has nearly doubled in the last sixty years.

And originally, the Labour party wanted to nationalise everything, which clearly doesn't work, so they settled for second best and want high taxes on everything to fund a large government sector - and they have clearly achieved this as well.

The two positions, portrayed as 'right wing' and 'left wing' settled their differences long ago and the major parties push both agendas at the same time. Landowners have always been happy with high taxes, as long as those taxes are on earned income and not on the rental value of land and the proceeds are spent on pushing up rents and house prices, and there are plenty of leading 'socialists' who happen to own large houses or buy-to-let portfolios.

The question is - if the unproductive sectors - landownership and the government are winning, they who is losing out?

Sixty years ago, workers and businesses kept 60% of their earned income after paying tax and rent (or mortgage), but this is now down to 46%, with established homeowners and the government enjoying or collecting more than half of GDP. Homeowners will bleat that their homes don't generate a cash income, but this is not much consolation to a generation which has to pay 18% of its income just for somewhere to live:
Sources: Nominal GDP and total taxes from the Public Sector Finances Databank.
Total rents derived by multiplying average house price x 5% x number of dwellings plus one-fifth for commercial and farm rents.
Average house price as published by the Nationwide.
Number of dwellings as published by the DCLG.

How can we reverse this so that people starting out in life today have the same chances as those who started out a few decades ago? That's easy! If we assume that 36% of GDP is a reasonable amount for the government spend or redistribute, then all we'd have to do is to shift the burden of taxation off earned income and collect tax from the rental value of land instead by having National Domestic Rates as well as National Non-Domestic Rates (also known as Business Rates).

If half of the 36% of GDP that goes in tax were collected from the rental value of land and only half from earned income, the result would be that workers and businesses would keep 64% of their earned income, i.e. they would be over one-third better off than now (they currently only keep 46%).

Wednesday 18 April 2012

Good work by the Pensioners' Party

Exhibit One, from The Guardian:

The pain that quantitative easing has caused pensioners and savers should be offset by government compensation, a report by MPs has said. The Treasury select committee recommends that the Bank of England provide an estimate of "the overall benefit and loss" to those groups as a result of the money-printing operation

"Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with 'draw-down pensions', and those retiring now," it said in its report on the budget. "The Bank of England has argued that some of those effects may be mitigated by the increase in asset prices stimulated by quantitative easing. While the aggregate of savers and pensioners may have received some benefit from higher asset prices, there will be many individuals who will not have benefited."

Ultimately of course, the purpose of QE was propping up and bailing out banks. To achieve that, the government had to push down interest rates. All QE boils down to is the government replacing long-term borrowing at higher interest rates with short-term borrowing at lower interest rates; so superficially the taxpayer makes a saving, but the commercial banks were allowed to bank a large part of these savings up front. This has the added bonus, from the banks' point of view, that low interest rates push up house prices, and if house prices are high, banks can trick people into borrowing ever larger amounts of money.

Presented like this, it doesn't sound too attractive, but the banks have harnessed the forces of Home-Owner-Ism. High house prices make us all poorer in the long run (and the banks correspondingly richer), but a large part of the electorate love the idea of high house prices because it makes them feel richer. Who are these people?Chart from the Intergenerational Foundation

Yup, it's the the Baby Boomers born since 1945. The people actually old enough to have fought in World War II don't own that much housing (bearing in mind they have next to no mortgage debt and the figures above show net housing equity after deducting mortgage debt); the Boomers couldn't give a shit about their children taking on crippling mortgages and aren't too fussed about how little their parents have to live on either - they are rubbing their hands in glee at all their lovely inheritance.

So fair enough, the pensioners have been done over, but at least they are organised enough to ask for handouts. But what are the chances of the Treasury select committee pointing out that people aged 40 and under are being done over as well, working out what they've lost in terms of interest on whatever deposits they have saved up, and more to the point, all the extra money they will have to pay out to be able to buy a house at today's inflated prices? And what are the chances of the Planning select committee (if there were such a thing) pointing out that NIMBYism has also driven up the price of housing?
Exhibit Two, a sob story from The Daily Mail:

Walter Harper has lived in his beloved home for two decades — but last July he was forced to put it on the market.
He shared the Luton bungalow with his wife and, after she passed away, his partner, and has watched his grandchildren play there. But he is being forced to move because he owes £110,000 on an interest-only mortgage that he can’t afford to repay. Instead of spending his last days in the house he loves, he will be forced to rent elsewhere.

Mr Harper, 69, first put his house on the market for £230,000. He has dropped the asking price by £20,000 and even if he gets this, he will still lose half of the money paying off the bank. These are savings he desperately needs, as rent is going to cost him almost £9,000 a year.

If he bought two decades ago, at the age of 49, the house can't have cost him much more than £50,000. The article says he had an interest-only mortgage, but why has it crept up to £110,000? A bit of mortgage equity withdrawal, perchance? And yes, his pension lump sum only turned out to be half what he'd been promised, but it still paid out £34,000, meaning he would left with a very modest £16,000 outstanding on his mortgage, which is still a fantastic deal, seeing as the mortgage he was paying was probably a lot cheaper than renting and he's made a £150,000 windfall, tax-free gain on the house.

But for some reason, The Daily Mail see this as a hard luck story (although he doesn't get much sympathy in the comments), while having no sympathy with somebody who's starting out today who's expected to magic a £40,000 deposit out of nowhere and then pay off a £160,000 which will cost twice that by the time it's paid off.

Again, mortgage equity withdrawal is the banks' secret weapon - a lot of the Boomers will be disappointed to find that their parents have already spent it all on themselves. Remember: in the end, the bank always wins (until I'm in charge).

Sunday 15 April 2012

Voter turnout by age group

1. It has often been pointed out that voter turnout at General Elections has fallen since 1945:Data from here.

2. At the 2010 General Election, the Conservatives won 36% of all votes cast (10.7 million out of 30 million) but only 23% of all potential votes (there are about 46 million registered voters). Source BBC.

3. Turnout is even lower at local elections, at around 40% according to the Electoral Commission. Assuming that each winning candidate won half the votes cast, that means that winning candidates only won 20% of all potential votes.

4. The threshold for winning an MEP seat in European Parliament elections is even lower as MEPs are elected on the basis of multi-member constituencies. The South East region returns most MEPs (ten) and Labour won one seat with 8.2% of the votes cast. Wales has four MEP seats, and UKIP won the last seat with 12.8% of the votes cast. Turnout nationally was very low (35%) so that means Labour won an MEP seat in the South East region with only about 3% of the total potential votes. Source BBC.

5. Most of the fall can be attributed to people aged 40 and under not voting at all, only about half of people aged 40 and under bother to vote: Chart from here

6. The UK population pyramid (from here) there are 19.4 million people aged 18 to 40, of whom about half (9.7 million) didn't vote in the 2010 General Election, in other words, there were nearly as many 18 to 40 year old non-voters as there were Conservative voters .

Saturday 14 April 2012

Youth unemployment

From The Guardian:

Next week's unemployment figures are likely to reveal another increase in the number of young people who have found themselves out of a job as a result of the UK's non-recovery.

But it's not just the shocking tally of more than a million unemployed 18 to 24-year-olds that should worry us. Jonathan Portes, director of the National Institute of Economic and Social Research, points out in a new blogpost that there has been a very sharp rise in the number of young people who have been claiming unemployment benefit for more than a year. There were just 6,000 in 2008, but that has increased by more than eight times to just short of 50,000.

Portes argues that this can't be explained by the weakness of the recovery alone; it coincides with the deliberate winding down of Labour's future jobs fund, which was providing subsidised work for more than 41,000 young people in July 2010 just after the coalition came to power, and only 900 by late last year. At the same time, the government has slashed the number of young people receiving a government training allowance, from almost 25,000 in mid-2010 to 4,200 in October 2011.

Yes, in most recessions it seems to be young people who are most likely to be affected by unemployment, as it is always harder finding a job than simply not losing one. Many of each recession's fresh generation of jobless never quite manage to get back into work, so each recession adds another layer of jobless people, so each successive recession hits a bit harder and the residual number of unemployed goes up each time.

The Guardian is quite wrong to imagine that this is all down to the government scrapping the "future jobs fund" or "government training allowance", it is the whole tax and regulatory system which is geared up to keeping the economy running at well below the optimum and thus keeping unemployment painfully high - and it just so happens that young people are most likely to be affected, as per usual.

Saturday 7 April 2012

National Domestic Rates

1. Economists down the ages have all established that taxes on the rental value of land are the 'least bad' taxes because they have no negative impact on economic activity and do not push up the price of goods and services; reduce business activity and employment; or eat into truly earned income or truly private wealth.

2. On a moral/philosophical level, taxes on the site rental value of land are actually just a user charge for the net benefits which accrue to the owner of any site because of what 'everybody else' is doing (or not doing) in the vicinity. If the owner chooses to rent out land which he owns, then he can collect the value of those benefits from the tenant as rent. Quite clearly, the benefits which accrue to the owner of a flat overlooking St James's Park, London are far greater than the benefits to the owner of a flat overlooking St James' Park football stadium, Newcastle; and more benefits accrue to the owner of that flat than to the owner of one overlooking the town gas works. The owner of each home has absolutely no input or involvement into creating this value, and so it is truly unearned income, the owner is benefiting from national wealth - and it is the rental value of this wealth which we could claw back to pay for national expenditure.

3. The UK already has a system of taxing the rental value of commercial land and buildings, called National Non-Domestic Rates ('Business Rates'), this is flawed in that it taxes the rental value of the owner's own improvements (the buildings) as well the rental value of the site (the total rental value minus a reasonable return on bricks and mortar) but this is a minor issue. The only major change we would make to National Non-Domestic Rates is that undeveloped and derelict sites would be subject to the same tax bill as similar developed sites in the area to encourage development.

4. There is no reason why we can't reintroduce such a system for residential land and buildings and reduce taxes on earned income accordingly. By taxing incomes to pay for public services and reducing taxes on residential property, older generations (and landowners and banks) have ensured that there is a one-way flow of wealth away from young people and the productive economy towards themselves. Although the middle aged pay as much, or possibly more, income tax than young people, most of that spending flows back to them in terms of higher house prices.

5. Young people end up paying twice over - they pay for the cost of public services via income tax and then they pay again for the value when they rent or buy a home. The purists argue that the best kind of tax is Land Value Tax, "a tax on the annual site-only rental value of each plot of land, assuming optimum permitted use", which is a bit of a mouthful. In practice, it does not matter what we call it, and neither does it really matter how accurately it is calculated, provided it is broadly proportional to the value of the extra benefits which each home owner or landlord receives by owning land at that particular location.

6. At its simplest, we could just work out the current rental value of all homes using HM Land Registry's database of fourteen million sales since 2000 (the experience of Wales and Northern Ireland where revaluations for Council Tax/Domestic Rates were carried out in 2005 shows that this can be done quickly, cheaply and accurately), multiple prices by 4% for gross rental value and deduct a few thousand for annual running costs. We then allocate each home to a 20% wide band, staring with Band A (for homes worth £50,000 - £60,000) on which the annual NDR bill is (say) £1,000 a year all the way up to Band Z (for homes worth over £5 million) on which the annual NDR bill is £200,000. The median bill would be £6,000 - £7,000 and three-quarters of homes would have a bill of £9,000 or less.

7. The total revenues which could be raised in NDR at that level would be £220 - £250 billion a year, which is enough revenue to replace National Insurance and Value Added Tax and reduce income tax/corporation tax to a flat ten percent (combined with other tax changes).

8. An issue that a tax reformer always faces is that people do not realise how much tax they actually pay - the marginal rate on earned income, once you include benefit withdrawal is far higher than fifty percent. With a system of NDR and a flat income tax of ten percent, an average first time buyer couple on a median income buying a median home would end up paying about £8,000 less in tax every year.

9. By the same token, those people who have ridden the house price bubble and earn a low income compared to the current value of their home would end up paying more in tax, but so what? We are expecting no more of them than they currently expect of younger people. And yes, we are aware that the Baby Boomers will squeal about the "asset-rich, cash-poor" but this is crocodile tears because they are looking forward to inheriting the houses their parents live in and want it to rise in price as much as possible.

10. So we could either exempt pensioners, in which case 'everybody else' pays a bit more, or even better, why not pass the legal liability to paying the tax to those who stand to inherit it, with any unpaid balance to be rolled up and repaid on the death of the current owner?