Smart cards and food stamps

Ian Duncan Smith is according to a Daily Telegraph report looking at giving 120,000 families their benefits through smart cards. Never mind that the 120,000 is a zombie number with no relation to what is being talked about, this is just a bad idea. No matter how priority items are defined this is a bad idea. I’m going to just address two reasons why this is such a bad idea.

Firstly it means that all of those who have their benefits administered through this scheme will be labelled as benefit claimants whenever they shop. This stigmatises the card’s users even though they have done nothing wrong (again look at how the troubled families’ statistic was created). There’s been a strong suspicion that violence against disabled people is rising because they are viewed as undeserving benefit claimants. How do you think people will react when they see people using cards that don’t just label people as benefit claimants but specifically as what the government has defined as the worst of the worst of benefit claimants? If you look at how the troubled families are selected mental illness plays a large part in the selection criteria. I didn’t think it was possible but somehow the government have actually managed to increase the stigmatisation of those with mental illnesses. Even if they do manage to come up a better way of selecting these “troubled families” it will almost certainly still be about the characteristics of one family member but end up stigmatising the whole family.  

Secondly they are trying to create a system that can’t be bartered with and that is doomed to failure. You can’t resell the cards like you can sell food stamps, however you can still sell on the food. But realistically it’s not food that will be the flaw of the system. It will be electronics. If electronics are included then they are incredibly easy to sell on with very little value lost. If they are not then the families involved are effectively excluded from a large part of modern life. A mobile phone is almost essential for someone seeking a job. It’s just not possible to be searching for a job whilst sitting at home by the phone (especially if you can’t buy a computer).

It took me less than ten minutes to think of these really simple problems with the scheme. I guarantee you there are more. But even beyond these practical problems it is an immoral policy. These families would be stripped of their liberty because of their poverty and that is abhorrent. 

When is a curve just a scribble on graph paper?

A theoretical curve
The theory of the Laffer curve is extremely simple. When you set taxes at 0% of earnings you will take in £0 and when you set taxes at 100% you will take in £0 because no one will work if they get none of the proceeds, and in between these two a curve will exist with the optimal tax rate for gaining the optimal amount of revenue. This seems to be a pretty solid theory but it presents no information on what the curve would actually look like.

The Laffer curve and psychology
A lot of the conversation around the Laffer effect centres on whether or not people would bother to put in extra effort for minimal returns. If that were the case then the Laffer curve could look identical for benefit withdrawl rates as for tax rates. I’ve yet to encounter a country which has their tax and benefit systems that closely aligned. In this country it would mean a marginal tax rate of 65 to 95%, making out of work benefits at destitution levels, drastically increasing levels of in work support benefits or some large shift in-between. This would also put the curve into the realms of sociology and psychology, potentially being able to test the rate at which humans are willing to except returns for their effort. But this curve may be different for different people depending on their current level of happiness or income. However, even if we were able to determine a universal “psychological Laffer curve” it would not be adequate to address taxation policy. The options for people (especially high earners) are not to either do the activity or not but also where to do the activity or what to make that activity look like for tax purposes.

The tax rate and the shape of a society
Extra considerations beyond motivational psychology mean how effective a certain tax rate is depends heavily on the conditions of a society and how it compares to other societies. If a person is working in a country solely because of that country’s tax rate then the Laffer curve for that country would peak far earlier. If the Cayman Islands had a 40% tax rate they would see a huge drop in their tax revenues. There are other considerations aside from the tax rate which causes people to choose to work there. A business needs infrastructure in order to deliver products or services and it needs people to buy these products and services. The debate around tax rates often assumes that what makes a good economy is low tax rates when this only the case it offers limited infrastructure, a limited market and a permissive view to tax avoidance. This means that if we want to find the optimal Laffer tax rate for our country we would have to compare it to other comparable society’s in terms of their existing infrastructure, tax laws and market.  The same is obviously true across time as well. You will get more tax revenue from a lower tax rate in an economic boom than you will from a higher tax rate in a recession because the economy is smaller before tax rate has been taken into consideration.

A dearth of evidence
All the points above should be reasons to take all existing evidence on the shape of a Laffer curve with a massive grain of salt. Of the research that does exist a large amount either fails to take into account the differences between societies or measures an incredibly short period which doesn’t take into account simple factors such as deferred earnings. It is blatantly obvious that if you can afford to choose when to claim your earnings and to pay your taxes (and rich people can) then you will choose to pay less taxes. This does not mean that you would have moved your earnings to another tax jurisdiction if the option to pay less in the current jurisdiction was not available or that you would have chosen not to do that work at all. There also has, as far as I’m aware, not been any research on the effects of anti tax avoidance legislation on Laffer curves.

The HMRC scribble and the 50p tax rateJust when you think that the Laffer Curve can’t get any further from being good evidence based policy, it gets worse. In the last budget the government scrapped the 50p rate of tax for people in the top income bracket. Part of the HMRC document used to justify that change uses a Laffer Curve.  You now might be asking yourself which of the dodgy bits of evidence did they use to justify their particular Laffer curve? The answer is none. Their graph does not actually have a single data point on it. The only justification for the information in the graph is that the government believes that a 45p tax rate is optimum. That would be a legitimate statement if that was all they had said, but it wasn’t. They tried to pretend that their best guess shot in the dark was based on theory and evidence by invoking the “Laffer curve” and creating a graph. You cannot have a competent debate about what is best for the economy if you lie about what you are doing or pretend there is evidence where there is not.