Has Osborne been reading TheMoneyIllusion?

Last year I suggested that Britain’s problems are partly supply-side:

Cameron is a fan of the Swedish center-right government, and would like to move the UK in that direction.  But he will probably fail.  British voters have no stomach for the savage inequalities of Swedish-style laissez-faire.  They won’t tolerate public money going to for-profit schools or health care.  Instead, Cameron has signed on to increasing the top rate of income taxes from 40% to 50%.

A few weeks ago at The Economist: By Invitation I proposed replacing income taxes with a progressive consumption tax:

Of course there are practical problems with any tax regime. People will try to shield wage income by calling it “capital income”. To prevent this all income earned by corporate employees as part of their job should be treated as wage income, including earnings on their firm’s stock and options. Likewise, those who work for financial firms such as hedge funds should pay wage tax on any and all income received that is in any way associated with their employment. All income to the self-employed should be treated as wage income, and investments in capital goods can be expensed.

Even with every possible safeguard, there might be some wealthy people who are clever enough to avoid taxation. If this were a serious problem, we could have a wealth tax on luxury consumption (mansions, yachts, private jets and other luxury goods).

It looks like I owe Cameron and Osborne an apology.   Some commenters had told me that the British people were turning against the rich, and that it wasn’t politically possible to role back Gordon Brown’s disastrous big government policies.  Today we find out that they plan to do exactly that:

UK businesses and Conservative politicians have been lobbying for an end to the 50 percent tax rate on income above 150,000 pounds ($235,500) a year since it was brought in two years ago.

They may be about to get their wish, as UK Chancellor of the Exchequer George Osborne is preparing to remove the tax in next Wednesday’s Budget, according to a report in the UK newspaper The Guardian. . . .

“It is widely accepted that it actually brings in little revenue and maybe acts as a deterrent in attracting – or keeping – top talent to the UK; but scrapping it would be a high profile move and politically contentious given the ongoing message that the government is putting across that we are all having to make our fair share of sacrifices to improve the public finances. So the Chancellor would have to offset this by raising other taxes on the wealthy,” Howard Archer, chief European and UK economist at IHS Global Insight, wrote in a research note. . . .

And what are those “other taxes?”

As always with a UK Budget, plenty of the measures have already been reported in the press. Reports say not to be surprised if the basic income tax threshold is raised, if those higher up the tax spectrum are hit by a tax on more expensive houses, or a further cut in tax relief on pension contributions, or if the Chancellor announces a new 100-year bond.

Lower MTRs on income and higher taxes on fancy mansions.  It’s like a dream come true.

Off topic:  An old friend from my hometown of Madison told me that he heard my name on CNBC this morning (around 10:00.)  I couldn’t find the video, but he indicated that Kelly Evans said something to the effect that the PPI number was high enough for the Scott Sumners of the world.  If anyone else can confirm, please let me know.

He has a bike shop that sold nearly 1000 bikes over the past week in a special sale.  The average price of the bikes was about $1000.  I asked; “can’t you buy excellent quality bicycles in the $300 to $500 range.”  He said yes, but people want top quality, especially those who shop early in the year.  I conclude that either a lot of the “one percent” live in Madison, Wisconsin, or recovery winter is for real.  BTW, anyone shopping for bikes in Madison should go to Budget Bicycle Center, there’s a good reason why they sell so many bikes—they are the best.

But there really should be a luxury tax on bikes over $1000.

PS.  I will be very busy with grading and travel over the next few days, so I may be slow to answer comments.



30 Responses to “Has Osborne been reading TheMoneyIllusion?”

  1. Gravatar of Morgan Warstler Morgan Warstler
    16. March 2012 at 08:07

    I think it is healthy to point out how Matty’s column here:


    Run so counter to his support for NGDPLT.

    We like NGDPLT precisely because when we have supply shocks that drive up inflation costs, the bumps up NGDP and we then

    “can throw a lot of people in credit-sensitive industries out of work”

    What he misses if that under NGDPLT, anoth SUPER OBVIOUS solution presents itself.

    Instead GUT public employees, so we can keep the rates down and keep the private sector employed.


    Very few understand what NGDPLT really means, and for whatever reason Scott Sumner doesn’t want to crow about eh very best parts.

    Also, Matty is an idiot.

  2. Gravatar of Britmouse Britmouse
    16. March 2012 at 08:40

    Call me a sceptic, but I’ll believe it when I see it, normally Osborne’s leaks don’t go to the Guardian first. Even if it happens, Mervyn King has a lot of work to do, UK nominal wages are nearly in deflation. At least we’re not Spain…

  3. Gravatar of dwb dwb
    16. March 2012 at 08:50

    The average price of the bikes was about $1000. I asked; “can’t you buy excellent quality bicycles in the $300 to $500 range.”

    yep, $1000 is about average for a new mountain bike. {dont read too much into the sales, the weather is very warm and so this is the season most people get back in the saddle. }

    I just paid $1500 for my new one (I rode the old one to death, i mountain bike probably 50 miles a week 50 weeks a year at least, broke and replaced every component until the frame busted… yes the frame). ok i bought a 2 yrs ago model on clearance but it was unused on sale from $2300. good deal, nice components.

    yes, you can get a nice quality bike for $500. much nicer than when i was in college (i.e. disk brakes and a nice fork).

    the funny thing is that i have some friends who do races on single speeds… a friend of mine races on a cheap aluminum single speed (not carbon!!) and still comes in top 5… moral: 90% of biking is in the legs, not the bike. He jokes that the reason to get a lighter bike is to make it easier to carry it up the hills (he passes a lot of people up hills, including me). Seriously – bike: 25-30 lbs, person: 170??? its easier to shave 5 lbs off the person.

    so why would i pay so much for a bike?? I could rationalize that i am paying up front for nice components that will wear better (and I am hard on the bike) or i could rationalize that if i’m going to ride so much i deserve a nice horse… but lets face it, because i can

    and yes, i am adamantly opposed to taxes on my bikes. lol. unless they go to improving trails.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. March 2012 at 08:54

    The average price is $1,000 at Madison’s Budget Bicycle Center! Sarah Fluke should count her blessings.

  5. Gravatar of Left Outside Left Outside
    16. March 2012 at 09:31

    There remains a sizeable constituency in favour of land value taxation, the mansion tax is really only something on its way to that.

    I’m much more in favour of raising the tax threshold (currently about $10,000 or so, £7,500) than cutting the top rate as high MTR at the bottom always seem a bigger deal to me than those at the top, but simplifying british taxation and making it more consumption/land based would be lovely.

    Especially since I don’t own any land.

  6. Gravatar of Tommy Dorsett Tommy Dorsett
    16. March 2012 at 09:31

    Scott – Evans was weighing on the interest rate debate (treasury yiels recently moving a bit higher) on CNBC and mentioned you in the context of the level of growth still being too low vs trend. Thus rates likely remain low (although the recent small rise makes since if recovery winter is indeed for real). At least that what I thought she said.

    Maybe the Fed is finally getting a bit of traction here? 5-6% NGDP would sure be better than sub 4%…….

  7. Gravatar of Left Outside Left Outside
    16. March 2012 at 09:32

    My last bike was bought for £300. It was stolen.

    …Broken Britain.

  8. Gravatar of Jeff Jeff
    16. March 2012 at 10:21

    Scott, Here in the Bay Area paying $1000+ for a bike is commonplace. And the people who pay that much for them are not necessarily those with a lot of disposable income. If you’re serious about your bike you won’t even consider a $300 bike. You really can’t get a good one at that price. I don’t know if I would necessarily call it a luxury item any more than a good laptop is luxury item when you can get a tablet for $400.

  9. Gravatar of ssumner ssumner
    16. March 2012 at 10:46

    Morgan, If you target NGDP, then you ignore gas prices.

    Britmouse, I had assumed they were a relatively reputable paper. But I guess we’ll find out soon.

    The weekly data is interesting, but hourly wages are even more signficant.

    dwb, Maybe it’s my age, but 1000 bikes from just one store in a modest sized city in one week, at an average price of luxury bikes, seems pretty impressive to me. I agree that with your comment “because I can” That’s true of all sorts of luxury goods. It’s why a set of luxury taxes would raise revenue without much impact on utility—luxury is all in the head. Those $300 bikes are great bikes, compared to what I rode.

    Patrick, The Fluke comment went over my head. Did I miss something in the news.

    Left Outside, My bike was stolen as well–back in 1968. I agree about land taxes.

    Tommy, Yes, and check out my new post, on that very subject.

    Jeff, I don’t agree. Anyone spending $1000 for a bike has “a lot of disposable income” in my book. I thought the “99%” were supposed to be suffering in this country. And you certainly can get a perfectly fine bike for $300 to $500. Go to Budget Bicycle Center if you don’t believe me.

    I agree a bike racer would need to spend more, but not someone who only wants to do cycling for enjoyment.

  10. Gravatar of Brito Brito
    16. March 2012 at 11:41

    “Britmouse, I had assumed they were a relatively reputable paper.”

    Can’t speak for Britmouse but I’m going to give that a big fat no.

  11. Gravatar of Wonks Anonymous Wonks Anonymous
    16. March 2012 at 11:45

    “when we have supply shocks that drive up inflation costs, the bumps up NGDP”
    That doesn’t sound right. A negative supply shock (lower supply -> higher price) should decrease output/NGDP. A positive demand shock (higher demand -> higher price) will increase it. That’s one of the big differences between an inflation target and an NGDP target. Public sector unions should be gutted because they don’t provide very good value to taxpayers, not because of some cyclical price fluctations.

  12. Gravatar of dwb dwb
    16. March 2012 at 11:51

    I thought the “99%” were supposed to be suffering in this country.

    thats why they had to wait for the sale!!


    incidentally, you dont have to spend $400 for a bike. you spend $400 for a *nice* bike.

    which brings me too… more interestingly, on the subject of inflation (see link below), check out the bike on page 497 of the 1988 sears catalog for $149.99 (item #9). You can find virtually the same bike online at sears (“Huffy Men’s Bike Rival ATB 26in”, look it up) for…. $149.99.

    and the helmet (36.99) and lock (21.99) are about the same price today too.

    inflation, what inflaion??!!


  13. Gravatar of dwb dwb
    16. March 2012 at 11:52

    … sears catalog: http://www.sears.com/shc/s/p_10153_12605_080W031632760001P?prdNo=1&blockNo=1&blockType=G1

  14. Gravatar of Morgan Warstler Morgan Warstler
    16. March 2012 at 11:58

    Morgan, If you target NGDP, then you ignore gas prices.

    wrong. wrong. wrong.

    What Matty is arguing for is not counting / ignoring gas prices AT ALL.

    But, under 4.5% NGDPLT, real inflationary forces (like gas) can eat up our allotted growth for the year.

    News reports will say, “Oil price surged to $200 per barrel today, causing NGDP prediction markets to force an unexpected reduction in the monetary supply.”

    Please correct your error. It doesn’t help Matty’s grasp of the plan.

  15. Gravatar of Morgan Warstler Morgan Warstler
    16. March 2012 at 12:05

    Wonks, who said anything about lower supply?

    I’m talking about 7B other people wanting to consume as much oil as we do.

    You are crazy if you think NGDPLT doesn’t make it far clearer to everyone involved:

    1. private sector RGDP is the only real positive.
    2. we need to reduce regulations to increase supply of commodities.
    3. paying public employees less is good (unless they become productive) because it frees up NGDP – perhaps right when we are pushing to past the cap.
    4. then when things slow down, let the futures market pay off the winning bettors.

    Right now things are too confusing, under this simple target that counts everything and has a HARD CAP, we’ll quickly be reminded what is important and what isn’t.

  16. Gravatar of Morgan Warstler Morgan Warstler
    16. March 2012 at 12:07


    Think about what happens to your consumption of food, if I force you into a daily calories cap of 1800.

    It dramatically changes your attitude and consumption.

    Scott’s plan is that brutal, don’t kid yourself.

  17. Gravatar of marcus nunes marcus nunes
    16. March 2012 at 12:12

    Question asked 10 years ago: “Where do you think France´s “Silicon Valley” is located”? You´re wrong if you answered “The Loire Valley” or any other. Correct answer: The London-Dover corridor. Why? Because while in France MTR are 60% in England they are 40%. And the London-Dover corridor is the closest to “Mama´s foie gras” that you can be and still pocket a 50% “profit”!

  18. Gravatar of W. Peden W. Peden
    16. March 2012 at 12:22

    Marcus Nunes,

    Are you seriously suggesting that people respond to income taxes at all? I was under the impression that 90% (nominal) tax rates in the post-war period had disproven that reactionary nonsense. We can have a 95% top rate of tax and incentives won’t go down at all; in fact, as in the 1950s, it will certainly increase growth AND make people wear hats again.

    Clearly the French Silicon Valley is located near Dover because the weather is much better at the English channel than in more southern parts of France and because the White Cliffs of Dover colour-coordinate with blue-sky thinking.

  19. Gravatar of marcus nunes marcus nunes
    16. March 2012 at 12:48

    W Peden
    Yes, the “color coordinate with blue-sky thinking” clinches it!

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    16. March 2012 at 14:21

    Before folk get all enthusiastic about land taxes, may I point out it generates a major incentive to restrict the availability of land for housing, driving up the price of land-for-housing (and rents). It is a game Australian state governments have been playing very enthusiastically. Land taxes without restrictive zoning are very different from land taxes with restrictive zone.

  21. Gravatar of dtoh dtoh
    16. March 2012 at 14:58

    If you’re a serious cyclist, you would have a hard time finding a suitable bike for under $1000.

  22. Gravatar of RebelEconomist RebelEconomist
    17. March 2012 at 01:17

    Yet another post that hints at the danger of NGDP targeting.

    I agree that Britain should shift taxation from income to consumption and wealth, and a land value tax offers a wonderful opportunity to tax something that is relatively lightly taxed in the UK – property. Besides raising revenue with less deadweight cost than income tax, in the densely populated UK, a land tax could also usefully improve the efficiency of land use. A “mansion tax” would at least move in the right direction.

    But it will not happen. Why? Because one of the key economic activities in the UK is acquiring and defending housing wealth. Every time a big recession strikes the UK, the authorities backslide on their promises in an attempt to mitigate the bust, and this time has been no exception. Besides the BoE backsliding I have described here before, we have had various government schemes to prop up the housing market, including this week’s scheme for state guarantees for mortgage downpayments. The result has been that, relative to, say, the US or Ireland, house prices have not fallen much in the UK, the cultural idea of “safe as houses” has survived, and our vulnerability to a future fall in house prices has increased.

    What has this got to do with NGDP targeting? Well, with the British authorities now having exhaustively exploited the flexibility that the existing inflation target allows without becoming embarrassingly incredible, I would not be surprised to see NGDP targeting adopted in the UK, not for Scott’s theoretical reasons, but as a stealth measure to relax monetary policy and allow a bit more inflation to relieve the stress of misaligned house prices. I suspect that Scott won’t care if he wins the argument, but Britain cannot afford to feed its preoccupation with housing any more, lest it end up like Ireland. Proponents of NGDP targeting should think more about its commitment technology aspects both in introduction and operation.

  23. Gravatar of ssumner ssumner
    17. March 2012 at 05:38

    Brito, Thanks for that info.

    Dwb, Good examples. I noticed that when I was young the price of manufactured goods like cars seemed to double every 8 years or so. $4000, then $8000, then $16000. But after the 1980s the prices seemed to almost stop rising. And for many manufactured goods the prices went down. Admittedly there is a quality issue for some of the imports, but lots of goods are higher quality than before. Cars used to have crappy paint, for instance.

    But the inflationistas insist it’s out there somewhere, like dark energy.

    Morgan, Your problem is that you use terms like “brutal” with glee. That won’t win over progressives.

    Marcus and W. Peden, Nice satire.

    Lorenzo, Good point.

    dtoh. I don’t agree. All you get is a few less pounds, due to some extra alloy parts and a few holes drilled here and there. Unless you are a competitive bike racer, $400 will do fine. And there weren’t 1000 competitive bike racers buying 1000 bikes in one week from one store in Madison, Wisconsin. Not even close. I’ve seen the bikes in his store—even the average ones today are far better than what I rode in the 1970s (and I’d ride as much as 100 miles in a single day.)

    It’s like saying you can’t get a great car for $22,000. A Camry is basically a Lexis, with a few less luxury features.


    “I suspect that Scott won’t care if he wins the argument,”

    No, I’d rather lose the argument than win on that basis. If it’s a political expedient, it will be dropped later.

  24. Gravatar of Negation of Ideology Negation of Ideology
    17. March 2012 at 06:23


    I think you make a good point about NGDP targeting making societal choices more explicit. But I suspect you’re engaging in wishful thinking if you think it will move us more toward small government. I think it will actually increase the demand for redistributionist policies if it seems to people that every dollar of NGDP that does to the rich is exactly one dollar less for someone else. The current argument against it is that “it’s not a zero sum game.” Of course, it’s still not a zero sum game(life never is), but I suspect NGDP targeting makes it seem more like it is.

    Now, I’m not opposed to reasonable redistributionist tax policies so it doesn’t bother me. Rich people benefit the most (economically) from government enforcement of property rights and contracts, so they should pay the bulk of the costs of government.

    As for wasteful programs, you may have more of a case. Conrad Black at National Review often uses the following example. Suppose Paraguay passes a law that every citizen has to buy two poems from their neighbor for $100. The increased velocity would make Paraguay have the largest GDP is the world. I’m not sure if Mr. Black is correct, but I think if they had NGDPLT then all the extra spending on worthless poems would crowd out useful spending on things people actually want. If NGDP targeting makes people undersand the cost of useless regulations, that’s another argument in its favor.

  25. Gravatar of RebelEconomist RebelEconomist
    17. March 2012 at 08:42

    “I’d rather lose the argument than win on that basis.”

    Well then you had better start advocating an NGDP target that does not offer an immediate relaxation of monetary policy as it is adopted. For example, a NGDP growth target of 4% (or even 3.5% if the 1.5% trend growth estimate mentioned in your previous post is realistic), or if you prefer a comparable level target, one with an initially short time horizon that keeps the policymakers on a short leash. 5% is like leaving a chocolate cup cake in front of a hungry toddler in an empty room.

  26. Gravatar of Dtoh Dtoh
    17. March 2012 at 22:22

    You said;
    “dtoh. I don’t agree. All you get is a few less pounds, due to some extra alloy parts and a few holes drilled here and there. Unless you are a competitive bike racer, $400 will do fine. And there weren’t 1000 competitive bike racers buying 1000 bikes in one week from one store in Madison, Wisconsin. Not even close. I’ve seen the bikes in his store””even the average ones today are far better than what I rode in the 1970s (and I’d ride as much as 100 miles in a single day.)

    It’s like saying you can’t get a great car for $22,000. A Camry is basically a Lexis, with a few less luxury features.”

    Some of it is alloys. But the big weight reduction comes from using carbon fiber. Wheels alone can run $1,000.

    Yesterday’s luxury is today’s necessity. Very few things are needed including the Camry or the $400 bike. Your definition of luxury seems to be something that increases someone else’s utility.

  27. Gravatar of Dtoh Dtoh
    17. March 2012 at 22:25

    Oh and BTW, calculated at the minimum wage, what is the opportunity cost of your blogging. Bet it’s a lot more than the cost of a good (luxury) bike.

  28. Gravatar of Peter Peter
    18. March 2012 at 18:04

    I thought you didn’t like taxes on capital Scott and here you are advocating a land tax! More seriously, land taxes can hurt when a recession hits because the land values take a while to slide back to the new level and the tax keeps getting levied at the old rate.

    I guarantee you that a $1000 road-riding bike is barely adequate for someone whose exercise and recreation includes lots of road riding. But at $3000 you’re just showing-off your wealth! My new bike was a solidly middle-class $2000 ;-).

  29. Gravatar of Jim Glass Jim Glass
    19. March 2012 at 00:20

    Only one jurisdiction in the USA has ever tried to impose a *real* land tax — one that genuinely tried to separate the value of land from that of improvements on it (as opposed to various split-rate pseudo versions of the tax, which just allocate a percent of total value to land).

    That was Pittsburgh, circa 2000. The result was a disaster, it resulted in a tsunami of appraisal protests, appeals, and lawsuits which collapsed the system, which was promptly abandoned, even though the legal mess wasn’t cleaned up until years afterward.

    Land tax is attractive in theory as land is inelastic in supply so the tax should produce minimal deadweight cost. But as Homer Simpson observed, in theory Communism worked.

    The practical problem with it is that it is appraisal based, and appraised-value based taxes dwarf all other kinds of taxes *combined* in their administrative, appeal and litigation costs. Appraised values are subjective so every single one can be argued. (I serve on the boards of corporations owning real estate in NYC, and we litigate the assessment of *every* property *every* year — standard practice the industry). Also, because land is inelastic in supply it is highly volatile in price — complicating appraisals further and greatly enhancing the motivation to appeal assessed values. And of course appraised taxes are rife with corruption — both property owner and property assessor have a clear incentive to benefit by adjusting the assessment in exchange for cash payment or some other “consideration”. A few years back NYC had a *billion* dollar property tax scandal with assessors taking bribes going further back than the records went. I don’t think anyone’s ever heard of a *billion* dollar tax scandal being perpetrated by payroll tax administrators or income tax auditors.

    Land tax, great in theory, but one of those things where there’s a big difference between theory and practice.

  30. Gravatar of ssumner ssumner
    22. March 2012 at 17:03

    Dtoh, Maybe we agree and are just looking at things differently. I keep hearing about “the 99%” How average middle class Americans are suffering. Obviously if middle class Americans can buy $1000 bikes they don’t deserve our sympathy. Do you agree, or not?

    Peter, I oppose taxes on capital income. A land tax is not a tax on capital income. On bikes, see my previous answer.

    Jim Glass, A property tax hits both land and houses. So we have lots of land taxes. But that is a good point.

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