Thoughts on Autumn, and tax...

There's an incredibly autumnal feel to the UK on the last day in August. Sunny, a good bit colder, while the first leaves are falling. Dartmoor is bright but wet. The mardle is much bigger than it usually is at this time of year. Most of the big shots in the central banking community are in Jackson Hole, Wyoming.

Here's a world to imagine...

In the UK, in 2008, pre-crisis, the top 10% of earners received £313bn in income, out of a total of £870bn. They paid income tax of £ 88.5bn, out of a total of £163bn.

In 2012, post-crisis, this same top 10% earned £293bn, out of a total of £ 873bn. They paid £85bn in income tax out of a total of £154bn.

What does this mean? Between 2008 and 2012, total income in the UK increased by £3bn, but total tax fell by £ 9bn. the top 10% saw its income fall by £17bn, but it's tax bill fell by only £3.5bn. The average tax rate on this group rose from 28% to 29%. The other 90% of the workforce saw a £23bn increase in incomes, but a £5.5bn fall in tax. And a tax rate that consequently fell from 13.3% to 11.9%.

This is 'just' the income tax side of the equation. total income in 2012 of £873bn, is only a little over half of the  £1.56trn in GDP. And £154bn in taxes is an even smaller fraction of the £687bn the government spent in the last fiscal year.

But what the data do show, is how a recession affects different groups.

The pre-tax income of the 'typical top 10% earner' if such a person exists, fell from £120,000 in 2008 to £113,000 this year. His/her post tax income has fallen from £86, 500 to £80,000. The 'average bottom 90%'  non-banking non-footballer, had a pre-tax income of £ 23,800 before the crisis, rising to about £25000 now. His/her post-tax income has increased from £20,600 to £22,000.

In any system where some earn more than others, and where there is a desire to ensure that a minimum amount of income as well goods and services (schools, hospital, roads, you name it) are provided to everyone, a major economic shock will increase the burden on the well-paid. Their incomes will fall and their share of the tax burden will go up. And so it is that in cash terms, 90% of the people employed are richer in cash terms than they were four years ago, even if they feel poorer, while 10% are without a shadow of a doubt poorer however you look at it.

Both sides of this argument are going to feel aggrieved. The well paid will reckon that they are already paying more, even as they earn less, and won't like to be told they must pay more to contribute their 'fair share'. The rest will see 10% of the population earning four times as much on average as the other 90% and reckon it is only right and proper they should carry the burden of any additional hardship. And then someone will talk about wealth.... I'm not sure I have a strong view on the morality of the issue and what is 'fair'. But I am sure that the outcome of recession will be further increases in the tax burden on the well-paid, because there is no alternative. You can only tax those who earn and there are clear limits to how much spending can be cut in a democracy where we are all used to the benefits of public schooling, health, and policing.  The answer is to grow the economy, because if total income is growing, you can more easily  provide a better level of service for everyone. But that's obvious in principle and elusive in practise!

http://www.hmrc.gov.uk/stats/income_tax/table2-4.pdf

UK jobs and GDP

Predictably awful UK industrial production data this morning - predictable because we have already seen the dire Q2 GDP data, which we blamed on the weather (a bit) and the Jubiilee (mostly). But here's a chart of annual GDP growth and annual employment growth. The red line shows year-over-year percentage gowth in workforce jobs, the black line percentage growth in real GDP. I may update it too look prettier when I have time. But the story is obvious - the lasst time we had this pace of job creation we had 3% GDP growth, not a recession at all.

I don't think the UK economy is powering ahead, but I don't believe the official GDP data, either.....

The bubble economy and the Olympics.

If you want to find out about asset bubbles, don't care for dry academic work and haven't read it yet, go and buy a copy of Tulipomania, by Mike Dash. GBP 5.99 for the Kindle version, apparently. I have already had one copy 'borrowed' and never returned.

The bad photo is of a great painting by Frans Hals,  which you can find at the Alte Pinakothek in Munich. Perhaps his most famous picture, of a Laughing Cavalier, is at the Wallace Collection in London. Closer and free to see. The one in Munich is of a cloth merchant, as is obvious from the sword he's holding. Looking at it, I was struck that this is a painting of an asset bubble. The rich people who bought tulips at silly prices also paid the Dutch masters to paint their pictures so they could show off their new found wealth. This one was painted in 1629, just when the bubble was getting monstrous. Hals' later work is more sober,  reflecting what happened after the bubble burst.

I don't know what it says about this era, that bubble-beneficiaries are more inclined to buy old masters than commission new work. Or they buy houses, super-yachts and football clubs.

The current asset bubble is different from is predecessors because it's truly global. That means it  changes shape and moves around the world. It started as a credit bubble, that spawned housing bubbles. The first of those burst spectacularly. The second too, in many places. But as central banks shovel newly-minted money into bond markets, so the bubble turns up in different places. The near-zero levels of Treasury and Bund yields are obvious examples. The Swiss National Bank can only keep its currency in check by allowing a Swiss asset bubble to grow.

But if asset bubbles all have one thing in common, it is that they widen the divide between "have's" and "have not's". Money is almost free but brutally rationed. Germany can have as much is it wants, Spain can have none. Apple could borrow as much as it wanted except it has ludicrous amounts of cash sitting round, unused, already. Hals' cloth merchant was part of a small elite that wanted to show off its wealth. And even today, you can see a country in recession produce sell-out audiences to the Olympics day after day.   Huddled over laptops, Londoners try to by more tickets, not put off for a second by the prices. In the last half hour, a few tickets have been out on for sale -  GBP 450 for Tuesday's athletics, GBP 150 for a ticket to the women's hockey final? GBP 1500 for a ticket to the closing ceremony? Snapped up in an instant!

The Olympics are a huge success on many levels, and the amount of money spent by spectators will be one of the positives, even if it takes time to turn up in official data that struggle to capture something quite so esoteric. Oxford Street, after all, is much quieter than usual.   I wish I could think of the equivalent incentive  for the like of Apple and other cash-rich companies to spend more. For the most part though, in our 'bubble-economy' the assets which will do best continue to be ones the newly-minted central bank money gets to most easily. So don't be surprised to see stock markets out-perform economic growth (or profits), and don't be surprised if the yields on 'safer' government bonds remain far too low to finance a pension safely.