Once And For All—Why Capital Levies Are Not The Answer


Mick Keen By Michael Keen

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Holy grail

Last night, when you went to bed, you left $40 on the kitchen table. When you woke up this morning, you found only $30—and a note from the government saying, “Thank you very much, we took $10 as a tax payment.” This is, of course, extremely irritating. To an economist, however, it’s close to an ideal form of taxation, since there is nothing you can now do to reduce, avoid, or evade it—the holy grail of what economists call a non-distorting tax.

(This doesn’t mean that you won’t react in some way. Being worse off, you may now work a bit more, or save a bit less. But any other tax raising $1 would make you even worse off, because it would change relative prices (a tax on your earnings would make working less attractive, for instance), and so take your choices even further from those you would make in the absence of taxation.)

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Union Jack: Be Nimble, Be Quick


By Ajai Chopra

The U.K. government should be nimble in its policy response if it looks as though the economy is headed for a prolonged period of weak growth, high unemployment, and subdued inflation. Currently, we don’t expect this scenario to happen. But if such a scenario appears to be in prospect, we recommend responding quickly with some combination of further quantitative easing by the Bank of England and temporary tax cuts.

The most likely scenario for the U.K. economy is that it will gradually recover, although it will face continued headwinds from a soft housing market, household and financial sector deleveraging, and ongoing consolidation of the budget. Against this, the economy should get a push from private investment and an increase in exports driven by the global recovery. Labor productivity may also rebound and improve competitiveness.

Led by these forces, the IMF is expecting a bumpy and uneven recovery in the U.K. and our updated growth forecast for the near term, taking into account the recent GDP release for the second quarter, will be published with the September World Economic Outlook. Over the medium term, we expect growth to accelerate gradually to about 2½ percent. Continue reading

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