Income Tax Chart 2014-15

This is an update to the charts I posted three years ago.

Tax:

Tax + Employee's National Insurance:

The changes from three years ago are:

- The personal allowance has increased significantly, to £10,000.  This has the side-effect of increasing the width of the trap at an income of £100,000, where the personal allowance rolls off.  All the other income tax thresholds are unchanged (in cash terms) except that the 40% rate now starts a few hundred pounds earlier.

- The top ('additional') income tax rate has been reduced from 50% to 45%.

- The minimum income for NI contributions has not increased in line with the personal allowance, creating a kink at the left hand side of the Tax+NI chart.


I'll repeat what I wrote last time: In a rational world, we would abandon the artificial distinction between Income Tax and National Insurance. We would determine an appropriate shape for the marginal tax curve - preferably piecewise linear and non-decreasing. And we would apply a multiplier to that curve to raise what revenue the government deemed appropriate.

Dies Mali

Economics is widely called "The Dismal Science", not least by its practitioners.  The term seems to apply naturally to a field which treats avarice as the key motivator in human affairs, contrary to our sense of our own personal high-mindedness.

I've been aware that the phrase originated with Thomas Carlyle, the 19th-century writer best known for his history of the French Revolution - he memorably and unflatteringly described Robespierre, known to his contemporaries as l'Incorruptible, and remembered today for his enthusiasm for political executions, as "the sea-green incorruptible".  But recently I learnt from Robert Dixon, via Derek Thompson and Chris Dillow, the context in which Carlyle came up with the phrase.  He introduced it, in contrast to the 'gay science'* of poetry, in his 1849 essay Occasional Discourse on the Negro Question (original here, more readably here, historical background here).

...the social science - not a 'gay science,' but a rueful - which finds the secret of this universe in 'supply-and-demand,' and reduces the duty of human governors to that of letting men alone, is also wonderful. Not a "gay science," I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.

Carlyle's subject matter was not economics but the use of slave labour on sugar plantations in the Caribbean, which had been banned in 1833.  He was being intentionally provocative - the essay was originally published anonymously, purported transcribed in an elaborate fiction by a Dr Phelim M'Quirk, and evoked a vigorous riposte, The Negro Question, from John Stuart Mill (original here, more readably here).  (None of this old-fashioned debate is ancient history: Mill lived long enough to be briefly godfather to Bertrand Russell, who was the grandson of the Lord John Russell, then prime minister, upbraided by Carlyle in his essay.)

By 1849 British sugar plantations in the Caribbean were struggling: slave labour was no longer legal, and the 1846 Sugar Duties Act had started the process of removing the preferential tariffs protecting the plantations from competition from countries where slavery was still legal, and from European sugar beet.  (At the end of his essay, Carlyle tacitly acknowledges the problem of competition by advocating the sending of gunships to stop shipments of African slaves to Cuba and Brazil.)   The former slaves, Carlyle complains, were unwilling to cut sugar cane for the wages on offer, preferring to work growing pumpkins for themselves.

The economists' solution to the problem of insufficient labour was to increase supply.  Plantation owners tried bringing in indentured labour from India - a practice strongly opposed by the anti-slavery movement - but Carlyle says the economists had recommended importing more (free) African labour.  He points out that newly arrived Africans preferred growing pumpkins just as much as did the original freed slaves, and that the only way to make them work on the sugar plantations would be to bring in so many Africans that they would otherwise starve - he makes a comparison with the Great Famine then causing mass emigration from Ireland.  But he doesn't admit the implication that the only thing that could make a man choose to work under the pay and conditions of a sugar plantation was starvation.

Carlyle's proposal was the Africans should be compelled to work on the plantations "with beneficient whip".  The economist on the other hand would say that sugar should be grown on the plantations only if it were profitable enough that an attractive wage could be paid.  The plantations might be protected by tariffs from competition from slave countries, but if they were unable to compete with European sugar production from beet, it would best to let the Europeans grow sugar for us and grow other crops in the Caribbean.  Pumpkins, if nothing else, had shown themselves capable of paying their way.  Whereas Carlyle seemed to be speaking for the owners of sugar plantations, the economist would have in mind the interests of humanity in general.

The true dies mali - evil days - were those of slave labour enforced by men with whips.  Economics might well follow Carlyle in calling itself the 'rueful science', but it's Carlyle's racism which was dismal.

__

*The Consistori del Gay Saber - "Consistory of the Gay Science" was an academy of poetry founded in Toulouse in 1323 to perpetuate the lyric school of the troubadours.  In the early 1840's Ralph Waldo Emerson described himself as "a Professor of the Joyous Science", and the term was revisited explicitly by E.S Dallas in his The Gay Science (1866).  Nietzsche adopted it for his Die fröhliche Wissenschaft in 1882.

How to fund drug research

Healthcare costs money.  To decide whether to spend that money, we have to go through the unattractive process of putting a price on life and health.  In writing what follows, I remain painfully aware that I am talking about human beings who love and are loved.
__

We have a bottle of pills which will improve a particular patient's health by an amount we value at $10,000.  The bottle of pills costs $100 to produce.  One way or another the patient has $100 to pay for it.  So he buys the pills, takes the pills, and the world is $9,900 better off.

But it doesn't work like that.  It costs a lot of money to develop a new drug - $1bn is a round-number estimate.  That cost is paid for through the price of the pills during the period of patent production.  Patents in the USA and EU last for twenty years, but much of that period can be taken up with testing and licensing.  (An extension of up to five years is available to compensate for the delay.) Let's assume that leaves ten years (another round number) for the drug company to make some money selling the drug.  And let's suppose the drug could benefit 10,000 patients a year.  That's 100,000 patients over the ten years; to get a billion dollars out of them you need to charge $10,100 for the bottle of pills.  Unfortunately, for half the patients there's no chance at all of their paying that much.  And you need to run a $1bn advertizing campaign to persuade the other patients and their doctors to use the drug.  So now you need to charge $40,100 for the bottle.  Which makes giving the drugs to the patient we started with a heavily losing proposition.

Sometimes we do unattractive, even inhumane things for sound economic reasons - devoting resources to where they can do most good.  But this situation is economic madness.  We have created a system where a transaction which would make the world $9,900 richer can't happen.
__

Let's clear our minds of any destructive obsession with the granting of patent monopolies, and think of a way to pay for the development of new drugs which will encourage the development of the new drugs we want without making it impossible to use them to best advantage.

First, we abolish all patent restrictions on drug manufacture - we allow any manufacturer to make and distribute any licensed drug, subject only to regulatory controls on quality.  Instead, we will award patent holders a share of a global drugs fund, according to how much good their patented drug is doing.

What's should be the measure of the value of a drug?  It should be how many people take it multiplied by how much they benefit.  And we should assess that benefit relative to the previous best treatment.  NICE in the UK uses the Quality Adjusted Life Year to measure as the basis for its decisions on what drugs to fund.  Personally, I'm not comfortable with the assumption that one person's life is worth more than another's just because they're in better health, and I'd be content to use unadjusted life years.  However, it's important that the measure we use should reflect the impact of side effects, so that a treatment which is as effective as another but with milder side effects can be properly rewarded.

In any case we assume that a year of healthy life is worth the same for everyone in the world, rich or poor.

We establish an international body to assess the expected life-year benefit of each drug in each class of patient, using published data.  We log the use of the drugs.  And we award benefit years to each patent holder accordingly.

There's one wrinkle, which is that the patent holder of the drug actually used gets only the marginal benefit value over the previous best treatment, and if that previous best treatment is still in patent its patent holder is assigned its marginal benefit over its previous best treatment, and so on.   The point of this is that the developer of a slightly superior "me-too" drug gets paid only for the drug's slight superiority.  (There's the complication that an alternative drug may be much better for a particular patient, perhaps because of idiosyncratic side effects: we would need a mechanism for the doctor to record this so that the benefits can be assigned appropriately.)

Now we need a big pot of money to feed all those billions of dollars to the patent holders.  That's not an impossible problem: global drugs spending is currently about a trillion dollars, of which about three quarters is spent on branded drugs, almost all of it in the developed nations.  The price of the branded drugs will fall precipitously once all drug manufacturing becomes generic, freeing up perhaps $700 billion a year of healthcare spending.  We just have to collect that up and distribute it to the drug companies according to their logged QALY contributions.

Individual governments would be responsible for gathering the money by whatever mechanism works best for them.  Initially, the amount would be assessed according to the savings in each country as prices fall.  Over time we would transition to a specified share of GDP from each country.

For distribution, either the money could either be treated as a pool to be distributed proportional to QALY contributions, or a price per QALY could be set, and funding managed to fulfil it.  The latter would be require more financial structuring, but be simpler for drug developers.
__

Who would gain and lose out of this scheme?  Marketing spending on drugs would fall dramatically - there would be little gain in promoting a drug unless its life-year contribution had been established, and little need to do so once it had.  So it would be bad for the marketing guys.

It would be very good for people in poor countries who are vulnerable to diseases not affecting the rich - sleeping sickness for example.  Because their lives would become as valuable for drug development purposes as anyone else's.

That implies that relatively less effort would go into developing drugs for the rich.  But that needn't be the case in absolute terms, because of all the marketing money being saved.  And the drugs being developed would at least be the ones with the biggest life-year benefits.  (I suppose it would be possible for opponents of this scheme to point to some useful drug which might not have been developed under it: it's inevitable that making the best decision a priori will occasionally result in an inferior decision a posteriori.)

Everyone everywhere would be able to get the drugs they need so long as they or their insurance or their national health service could cover the manufacturing cost of the drug.  In the UK we would no longer be making hard decisions about whether to fund a drug costing tens of thousands of pounds to extend the life of cancer patients by a few months - if the drug worked, we'd use it.
__

The big weakness is that we would be creating a body of experts whose decisions would determine the destination of hundreds of billions of dollars.  There could be a lot of money available to suborn them.  To make that harder, its decision making process needs to be open - , all the quality-adjustments should be published, all the criteria for an acceptable drug trial should be published, and all the (anonymized) trials data should be published,  so that every calculation is repeatable.

This body could use its power for good: one of the major weaknesses of drug research is that unfavourable results get buried.  By requiring all trials it considers to have been registered with it in advance, and by requiring all registered trials to report results, it can end the cherry-picking which bedevils drug research.

One of the defects of the current licensing system is that a patent owner need not seek a licence for all uses of a drug, so long as it is licensed for one use, and so can suppress adverse findings for an 'off-label' use - notoriously GSK withheld results suggesting that Paroxetine should not be prescribed to adolescents.  This scheme would end that - a drug's developer would not be rewarded for off-label uses, and would therefore be incentivized to seek to demonstrate the effectiveness of its drug for any widespread use.

____

Links

For a change I've left links out of the main text: I'll gather them here instead.

The cost of a new drug
Marketing spending compared with development spending

QALYs
Discussion of the EQ-5D QALY measure used by NICE

Global spending on drugs

US proposal for a Medical Innovation Prize Fund
Joseph Stiglitz on prizes instead of patents

GSK and Paroxetine
Bad Pharma by Ben Goldacre

Hell and high water

Voting is under way in the independence referendum in Scotland.  The media and politicians keep telling us how important a decision it is, so naturally I ask myself what they're lying about.  Westminster politicians of all parties have promised more devolution if the answer is 'no', whereas the (devolved) Scottish government intends to "work in partnership with the rest of the UK" if the answer is 'yes'.  What difference does it make which way the vote goes?  If the vote is 'yes' (the bookies are quoting 4 to 1 against that) there will be 18 months of negotiations to decide what actually happens, so we don't know.  But we can at least look at what the parties say...

An independent country is responsible for its own foreign policy and defence.  The Scottish government intends to stay in the EU and NATO: the only concrete change would be that "we would make early agreement on the speediest safe removal of nuclear weapons a priority. This would be with a view to the removal of Trident within the first term of the Scottish Parliament following independence."  There's no good alternative to Faslane as a base for Trident-carrying submarines, so if the Scots sticks to this, the logical choice for the (rest of) UK government would be to abandon plans to replace the current system, and plan to phase out the system from 2016.  They hate that option*, so they'll make continued use of Faslane a priority in the negotiations.  It's less important to the Scottish government, so I'd expect the roUK to win this point.

Scotland needs a currency: the Scots government says it will keep the pound.  No one can stop any country using any currency it chooses, so that's certainly possible.  Osborne says he won't agree to any sort of currency union, which means that Scotland would get no say in UK monetary policy, instead of almost no say as at present.  It could try to negotiate a seat for itself on the BoE's Monetary Policy Committee - I don't see why the roUK shouldn't agree to that, since the Scot could be outvoted 8-1.  But much more importantly, the Bank of England would not act as a lender of last resort to Scottish banks.  So if Scotland wants any sort of financial sector, it would need to set up its own central bank.  However, the Scottish government blithely claims that "The Bank of England, accountable to both countries, will continue to provide lender of last resort facilities".  I don't think Faslane is enough of a bargaining chip for it to win this one.

Scotland would get most of the oil.  That would make Scotland a bit richer than the rest of the UK.

Scotland would get some of the debt, and it would find itself borrowing to fund the debt at a slightly higher interest rate.

Sorting out the separation would be difficult and expensive.  And in the end, there would be more politicians and civil servants, costing more money.

Scotland would get its own team in the Olympics.

Scotland would no longer send MPs to Westminster.  The Conservatives won no MPs in Scotland in the 1997 election, and has won one in each general election since, with the result that Labour gets a net gain of about 40 MPs.  Without Scotland, the Conservatives would have a majority in the House of Commons, and the Liberal Democrats would not be in opposition as usual.  However, the overall result of most UK general elections would be unaffected.  Over time, one might expect the political centre to shift a little to the right as Labour strives to improve its electoral prospects.

Overall, independence would make some difference.  Arguments for it are:
- smaller states are more democratic
- it's a cleaner constitutional settlement that increased devolution, in which the role of Scottish MPs in Westminster would be questionable.
- if you don't want Trident renewed, you might get your way
- if you're a Scottish athlete not quite good enough for the UK team, you get to go to the Olympics anyway
- if you're a Conservative politician in the rest of the UK, you're more likely to get into government.
- if you're Scottish, your country gets the government share of future oil revenues

Arguments against it are:
- separating two countries is difficult and expensive
- if you want Trident renewed, you'll run into difficulties
- the Olympic ceremonies will get that bit longer, and the roUK will win fewer medals
- if you're a Labour politician in the rest of the UK, you're less likely to get into government.
- if you're in the roUK, your country loses the government share of future oil revenues.  And if you're Scottish, isn't it a bit tawdry to demand independence just because you've lucked into some mineral resources?
- we'd need to think of a better name that 'roUK' for the rest of the United Kingdom,
__

* Because having nuclear weapons makes politicians more important globally.  Or perhaps because they think Trident is needed to stop Putin invading.

Mens sana

Jessica Valenti, a feminist blogger, argues in the Guardian that "feminine hygiene products should be free for all, all the time".  I respectfully disagree that the best way to help poor people get what they need is to subsidize supply of some goods to everyone, but that's not what I want to write about.

This is the bit that struck me:

Women in the UK are fighting to axe the 5% tax on tampons (it used to be taxed at 17.5%!), which are considered “luxuries” while men’s razors, for some baffling reason, are not.

It seems to imply that men's razors are VAT-free, which is simply not the case - they carry VAT at 20%.  There are three VAT rates in the UK, the standard rate of 20%, the reduced rate of 5%, and the 0% rate. And some items are VAT-exempt, which is not quite the same thing as being zero-rated.  HMRC has a list of goods and services in the non-standard categories: the list mentions sanitary protection but not razors, which therefore are taxed at the standard rate.

EU VAT policy is discussed quite readably in this UK parliamentary document.  In summary, the reduced rate of VAT applies only to items selected by the UK from an EU-specified menu, and the zero rate applies only to items which the UK zero-rated before the 1991 VAT harmonization - including food, books and newspapers, children's clothes and shoes, public transport, and drugs and medicines on prescription.  The European Commission would like to abolish zero rating, and likes to see its continuation, principally in the UK and Ireland, as a temporary measure.

The much less readable EU documentation is mainly in the 2006 VAT directive : Annex III has the list of items eligible for reduced-rate VAT, and includes "protects used for sanitary protection", but has nothing about shaving.  Title IX of the same document specifies what goods and services should be exempt from VAT.  Chapter 4 of the document, containing "Special provisions applying until the adoption of definitive arrangements", contains Article 110 "Member States which, at 1 January 1991, were granting exemptions with deductibility of the VAT paid at the preceding stage ... may continue to grant those exemptions" ("exemption with deductibility" means a 0% rate).

So where has Valenti, who, to be fair, is not European, got the idea that men's razors are zero rated?  Searching the internet suggests that it's something that UK feminists just know, perhaps because they've read it on the internet, mostly in comments on online forums. This website thunders "We’ve discovered that men’s razors do not carry any VAT at all.  Lowered to 0% in 2001, they became exempt from any VAT."  How can one discover something which is not just untrue, but legally impossible?  This ePetition simply notes that "men's razors are tax free".  This article ("men’s razors are not subject to tax") announces another online petition, these two articles link to the petition ("the list includes men's razors"), but the petition itself, while having fun with the zero-rated status of crocodile meat (which is zero-rated because it's a food), doesn't mention razors at all.  It seems that the authors of the petition discovered their mistake, and quietly deleted it.

Nowadays it's quick and easy to check facts online - anyone who, like me, has in the distant past spent hours in libraries searching for some minor piece of information marvels at what one can discover.  And yet the internet seems to be used much more to spread misinformation than to get things right.

Meanwhile, shouting at George Osborne about this is pointless: he doesn't have the power to change EU VAT law - that would require the agreement of all the EU governments.  And most of the EU governments would like to abolish zero-rating altogether.

Minimum Unit Price

A study by researchers at the University of Southampton has come up with the dramatic result that the median heavy drinker is paying 33p a unit for alcoholic drinks, whereas the median low-risk drinker is paying £1.10, so that almost all the effect of a Minimum Unit Price of say 50p would fall on the heavy drinkers.  That's encouraging for proponents of minimum pricing, but it doesn't address the question of whether heavy drinkers would respond to a price increase by cutting down how much they drink or by saving money on less important things such as food, clothes and lodging.

I ask myself what they're actually drinking for 33p a unit or less.  Since I last wrote about this, the government has abandoned its plans for a minimum alcohol price (in England and Wales), but banned via the licensing laws the sale of alcoholic drinks below the level of duty+VAT.

Duty on alcoholic drinks is not simple.  EU rules insist that whereas duty on beer and spirits should be proportional to alcohol content (or degrees plato), duty on wine and cider should be proportional to the volume of drink (with provision for different levels of duty for various bands of alcohol levels, and for sparkling drinks).  I don't know why this inconsistency has arisen, but I guess it's because they did what the Germans wanted for beer and what the French wanted for wine.

Following these rules, the UK's current levels of duty per unit of alcohol are:
- beer up to 7.5% ABV:    18.74 p
- spirits:                             28.22 p
- cider 7.5% ABV:              5.288 p
- cider 8.5% ABV:              7 p      
- wine 15% ABV:              18.22 p
- fortified wine 22% ABV:  16.56 p

For cider and wine, the duty per unit is higher if the strength is lower than what I've specified, because the duty is charged per volume of drink not per volume of alcohol.

Adding in VAT at 20% gives the minimum permitted price per unit.  I've compared these prices with the cheapest I could find in a few minutes' searching the internet:

	Lager	7.5 cider	13% wine	Whisky	Vodka
Duty+VAT per unit	£0.225	£0.064	£0.252	£0.339	£0.339
Cheapest price per unit	£0.325	£0.20	£0.307	£0.375	£0.381
Margin	£0.10	£0.136	£0.054	£0.036	£0.042

It's remarkable how cheaply it's possibly to make alcoholic drinks and bring them to market, so long as you spend no money on advertizing (the cheap drinks are all brands I'd never heard of), take the cheapest legal options in making them, and use the lowest cost retailers (Aldi, Iceland...).  Cider seems to be the most expensive of these cheap drinks to make - the regulations (since 2010) require at least 35% apple juice, and apple juice - even if it's imported pomace from eastern europe - is not very cheap.  However the duty on cider is so low that it's still easily the cheapest way to buy alcohol to drink.

If the government wants to make very cheap drink more expensive, I have a simple suggestion for it: increase the minimum apple juice content of cider.  Comparing the margins, I guess that at about 80% apple juice content cheap cider would cost as much as cheap lager (the experts can work out the exact level to achieve this).  Manufacturers would then have a choice of making cider in the way television adverts imply it's made - out of apples - and getting the low rate of duty which, I suppose, was intended to support that traditional process, or making it, as they mostly do now, with less apple and plenty of added sugar, and have it taxed as "made wine" - at wine rates.

Incidentally, the Scottish parliament passed a law imposing a minimum price of 50p a unit in May 2012.  Following legal challenges by the Scotch Whisky Association the law has been referred to the EU Court of Justice, so it's still not been implemented, and isn't likely to be in the next year or so.