50p tax rate

There is quite a lot of debate about whether or not to get rid of the 50p tax rate that was introduced recently. This 50p tax only comes into effect if you earn more than £150000. One argument for getting rid of this is that it doesn’t bring in much income. I did a quick calculation using an approximate income distribution and as far as I can tell it brings in about £30 million, so not a substantial amount of money. The argument for scrapping it is that it doesn’t bring in much and it might be discouraging investment.

If you go to the Wikipedia page for the UK’s income distribution and page down to the section on Taxable Income you see a table showing the number of taxpayers in various income bands. 300000 people earn between £100000 and £200000. The 50p rates only affects those earning above £150000. If half of these people are earning over £150000 then about 150000 will be paying 50% (instead of 40%) tax on between 0 and £50000. Those at the top of this income bracket will therefore pay about £5000 more than they would if the 50% tax bracket was removed. Not a huge amount considering their high incomes. There are 89000 people with incomes between £200000 and £500000. The 50% tax rates means they pay between £5000 and £25000 more than they would if the top rate was 40%. A lot of money, but no more than 5% of their total income. There are only 22000 earning more than £500000 (6000 of whom earn more than £1000000).

For those on incomes of £1000000 or more, the 50% rate means that almost 10% more of their total income is paid in tax than would be the case if the top rate was 40%. This is both a lot of money and quite a large fractional increase, but I don’t really care. It doesn’t effect a lot of people and they’re not exactly left destitute. The last 30 years has also seen the income distribution become quite skewed in favour of the highest earners. To have a viable economy, you need consumers and if the majority of the population are getting an ever decreasing fraction of the total income, the number of people who have disposable income decreases and the economy falters (unless you lend these people money and then everything crashes horribly a few years later when they start to default on their payments). I believe we need to try and redistribute income more evenly, not necessarily because it is fairer, but because it’s the only way to sensibly provide people with money to spend. They only way I can see this happening is to have a tax system that discourages paying really large salaries.

Those proposing to remove the 50p rate will argue that this high rate discourages investment. The problem I have with this argument is that this is a tax on income, not on capital gains. The people being taxed are employees of others, they’re not the entrepreneurs or the investors. In a sense it doesn’t really make any difference to the investors and business owners. If anything, paying their highest earning employees slightly less may be of benefit to them and to us. I think the 50p rate sends the right message and I hope they don’t decide to get rid of it anytime soon.

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STFC Rutherford Fellowship quotas

STFC has introduced a new Fellowship scheme, called the Ernest Rutherford Fellowship scheme, which is essentially just the old Advanced Fellowship scheme with a new name. There will be about 12 Fellowships awarded and the Fellowships will last 5 years. To apply for this Fellowship, the applicant needs support from a particular institution and each institution has a limit (quota) as to how many applicants they can support. In our case it looks like we can support 2 applicants.

A few days ago we discussed the applicants who would like us to support them. There are many more than we can support, and so it is a difficult decision to make as many are very good. Personally, I find the whole quota idea very unsatisfactory. These are meant to be personal fellowships that, ideally, go to the strongest candidates who apply. They do have to have support from an institution and so the suitability of the institution does play a role, but the strength of the individual candidates is (I believe) a primary factor. Having a quota just feels slightly wrong.

I don’t really know why I object to there being a restriction on how many applicants each institution can support. Very rarely will an institution get more than one, so if you support the strongest candidate that you could get, then it doesn’t really affect your chances of getting a Fellow. Also, it would be terrible if a few institutions snapped up all the top candidates without telling them. As far as I’m aware, there is an intention to spread the Fellows around the country so if one institution supports too many strong candidates, some of them may lose out by being the weakest of a strong bunch. Alternatively, too many may go to too few institutions, which would be unfortunate in terms of trying to spread these Fellows through the community. I also seem to be alone in my criticism of this quota.

As I’m writing this, I’m starting to feel that maybe I’m wrong about disliking the quota. Maybe it is better to only allow each institution to only support a few candidates. Maybe it forces institutions to think long and hard about who they’d support and to take it seriously. I think that my objection is based on the sense that the quota is really intended to reduce the number of applicants and hence make the process more manageable and I just don’t like the idea that we may be preventing people from applying simply to make things a little easier. I would be interested in anyone else’s views.

Should we try to understand the riots?

I wasn’t going to write anything about the recent riots in England as a lot has already been said, most of which probably doesn’t really get it right. There are a huge range of different views, from the BNP’s objectionable attempt to regard these as race riots to Compass’s recent statement that equates the looting of the rioters with “looting” by the banking sector. As much as I have sympathy with Compass’s general ideology, I’m somewhat uncomfortable with their recent statement. There may be a moral equivalence between how the banking sector behaves and the behaviour of the rioters, but there is clearly no legal equivalence. The rioters were clearly breaking the law and deserve to be punished, while the banking sector has (as far as I’m aware) not broken any laws.

A recent comment on twitter did, however, capture exactly how I feel about the riots. To write in my own words (I was going to say summarise, but you can’t really summarise a tweet); nothing can excuse or justify the actions of the rioters but we can, and should, attempt to determine the reasons why such riots have occurred. What I’m finding irritating are those (Theresa May, Boris Johnson, etc.) who keep repeating that the rioting and looting is simply criminal behaviour, pure and simple. Strictly speaking they may be correct, but what precisely are they implying by such a statement. Are they suggesting that a small fraction of the people in any society are simply programmed to behave in this way. They are just waiting for an excuse and there is little we could have done to avoid it. If this is the case, why does it typically occur in socially deprived areas and why are most of those taking part from socially deprived backgrounds. Surely if it’s genetic, those involved would be equally likely to be from any background. Alternatively, they could be suggesting that there will always be people in any society (however equal or unequal) that will feel disadvantaged and every now and again will get sufficiently disgruntled to start looting and rioting. It’s possible, but I’m not sure there’s any evidence to support this.

All that I know is that there is strong evidence showing that after 60 or 70 years of the UK becoming more equal, the last 30 years has seen the UK becoming more and more unequal. The rhetoric of the coalition government has also been extremely negative. They keep talking about the need for austerity measures and the primary way that the deficit will be reduced is through cuts that will largely effect the poorest in society. I can’t claim that the rioting is a direct consequence of this but it does seem quite likely that there will be a sector of society who feel that their lives will be getting worst and that feel increasingly disenfranchised. This does not, in any way, excuse the actions of the rioters but may begin to explain why such rioting has taken place. In a sense, I hope this isn’t the case as it might suggest that more and more of these riots will take place and things will get worse before they get better.

EPSRC studentships

I’m somewhat uncertain about how to react to the news that EPSRC is cutting the number of studentships by about 30%. If you’ve read some of my earlier posts you’ll know that I feel that we may be producing too many PhD graduates. This isn’t because I don’t believe that PhDs are useful, it’s because I’m not sure it’s necessary to have as many PhD graduates as we currently have. It’s also because there are, in my opinion, real problems with the academic career structure that is exacerbated by the large number of PhD graduates.

Many who start a PhD do so because they would like to end up doing independent research. The main way to do this is to become an academic in a university. The fraction of PhD students who can, realistically, achieve this is now very small. Some argue that this doesn’t matter because those who don’t become academics go into industry and do very well. This is absolutely fine and I have no problem with someone doing a PhD and then choosing to go into industry. A concern I have, however, is that it can still be very disheartening for those who had hoped for an academic career and didn’t realise how difficult it was to do so. We also have to be careful that we don’t discourage, because of the difficulty of having an academic career, potentially excellent researchers from starting a PhD in the first place.

The other concern I have is that some feel that PhDs should become degrees in which people are taught research skills. I sat through a meeting recently where a concern was expressed that our PhD graduates typically were not competitive internationally. Someone then responded by saying that this didn’t matter as their PhD students were snapped up by industry. That’s great, except that in my opinion a PhD from a top UK university should typically allow that person to compete for research jobs anywhere in the world. They don’t have to do so, but it should allow them to do so if they so choose. If this is no longer then case, then our PhDs are no longer degrees in which students learn to undertake independent, world-class research. I think this is a crucial aspect of a PhD, otherwise we’re wasting everyone’s time.

The solution, in my view, is to expand the number of degrees. If we introduce a research Masters degree, students could learn, in a year or two, very useful research skills that will translate very well into industry. The tops students could then go on to do PhDs and the rest could go out into industry where they could contribute greatly. This would be more cost effective and those going into industry would do so a year or two earlier than they would do if they’d done a PhD and probably with most of the research skills they would need. If the cuts to EPSRC studentships was an attempt to rebalance the system, I might be quite pleased. However, it does seem to be purely a cut because of a reduction in their budget and does not appear to be based on any sense of attempting to produce a sensible system that will address issues relating to the academic career structure without reducing the number of research trained people going into industry. Admittedly EPSRC is a research council and doesn’t have any say in the structure of degrees at UK universities. It’s unfortunate, however, that there doesn’t appear to be any attempt to try and use this as an opportunity to address issues with the degree structure and career structure in UK universities.

Wealth creation

There’s been a lot of discussion recently about creating wealth and I’ve generally felt that the concept is not well-defined or well understood. It has, however, taken me some time to start writing about this, largely because I’m not sure I can explain my thinking as well as I would like. I tried discussing this with my wife who has studied some Economics and she didn’t quite understand what I was getting at, so possibly my thinking is very muddled, or even completely wrong.

One of the interpretations of wealth creation is that a company makes a product that costs a certain amount to produce and if they then sell this produce for more than it cost, they’ve created wealth. I would argue that this is simply making a profit. It doesn’t necessarily imply creation of new wealth. This company could simply be capturing part of an existing market, so their gain means someone else’s loss. However, if this product is sold overseas then that would bring new wealth into the country. If all the costs of making the product also remain within your country then you essentially win twice. You’ve kept all the costs internal and recovered all the costs plus profits by selling to an external economy. However, this still doesn’t necessarily increase the total global wealth.

Creating wealth, as far as I can tell, implies something more than simply making a profit. If one considers a society in which everyone basically subsists, everyone spends all their time looking after their shelter and growing or collecting their food. If someone then develops a tool (plough, scythe, etc) this makes food production easier. Now people can grow more food than they need and can use the excess to pay the person who makes and repairs the tools. Someone else then finds a way to make bricks more easily so that houses can be built more cheaply. People can spend more time farming and can use the excess to pay people to build/extend and repair their houses. To me, this type of thing is wealth creating. The amount of food has remained constant, but new products have been added which have made various things easier and cheaper and essentially added wealth to the society. If this continues then one can start adding entertainment and other luxuries and an economy develops.

To a certain extent the same must apply today. People in a developed society (like the UK) have a certain amount of income/wealth, some of which is spent on necessities and the rest could be regarded as disposable income. Some will have only enough for the basics and have no disposable income (although the credit crisis appears to be largely a consequence of trying to lend these people some disposable income). To create wealth, it seems to me, that you need to increase the amount of disposable income in society. An obvious way to do this is to reduce the costs of the basics – food, accommodation, energy. This will increase the amount of disposable income, but also increase the number of people who have disposable income that can now be spend on new products. My basic argument is that wealth creation requires a development that makes something that society needs/uses more efficient and consequently cheaper. This frees up wealth that can be used on something new and consequently – in a sense – increases the total wealth.

There seem to be a few consequences of this. It becomes increasingly difficult to create wealth in a developed society as you have to introduce efficiencies into an already efficient system. This is presumably why parts of the developing world are growing so fast. It’s much easier to introduce new innovations into such societies and these innovations can have a large impact. However, some of the things that may well be potentially wealth creating in the developed world are things like education and healthcare. Having a well educated and healthy workforce gives you an advantage compared to countries whose population are not as educated or healthy. The proposed changes to both Higher Education and the NHS, could therefore be very counterproductive. It also seems that the general view that the public sector soaks up wealth, while the private sector generates wealth is simplistic and possibly completely wrong. It may well be that the basic resources provided by the public sector are a fundamental part of creating new wealth. By definition, the public sector does not create a profit but that does not mean that it can’t effectively create wealth (by providing valuable resources for the private sector).

Additionally, there must be a point at which giving more money to fewer people is counterproductive. We do need (I believe) to reward those who are innovative and those who takes risks. However, we also need to ensure that these people don’t continually soak up all the excess wealth. It seems to me that wealth creation implies making things more accessible within one’s society so that more and more can afford these products. This requires some balance between the profits of enterprise going to the wealthiest and this money being fed back into society. Investors do need and deserve some return on their investment but it seems as though wealth creation requires that spending power of the general population also has to increase with time. There is an argument that there is a trickle down effect so that the wealthiest ultimately trickle their wealth down to the rest. As far as I can tell, however, there is no real evidence for this.

I don’t really know if there is any merit it what I’ve said above, or even if it really makes sense. It just seems to me that the term “wealth creation” is thrown around without those using it having a good sense of what it really means and that such people generally confuse “making a profit” with “wealth creation”. This is not to suggest that a company making a profit doesn’t also generate wealth, but simply that making a profit doesn’t necessarily imply the generation of new wealth. It also seems that wealth creation is something that applies to society as a whole and not just to a few individuals. A viable, growing economy would seem to require a situation in which the number of people with excess wealth (i.e., disposable income) increases with time. Currently, it feels like the reverse is happening. People are spending more and more of their income on basics and have less and less available for what might be regarded as luxuries. To me wealth creation implies the reverse and unless we can reverse the situation it seems fairly clear to me that we won’t be able to really generate new wealth.

EPSRC again

Seems like my concern (in an earlier post about EPSRC Fellowships) regarding EPSRC’s research funding philosophy is not completely unfounded. In an article in the Times Higher Education it is reported that EPSRC starts to impose order on its universe.

The basic idea seems to be that EPSRC will specify, quite specifically, what they are willing to fund. They also appear to be explicitly regarding themselves as “sponsors” of research, rather than “funders” of research. I must admit that I don’t quite know, at this stage, what the distinction is. I do, however, have a concern than funding councils like EPSRC will start to feel that they should decide what research needs to be done and regard university researchers as “contractors” who carry out the specified research. I think this is a very dangerous policy to follow as it seems highly unlikely that it will lead to the breakthroughs that we ideally would like. Furthermore, if senior EPSRC people are ultimately the ones to effectively decide what research should be done, why have they decided to become administrators rather than remaining active researchers. If they are this brilliant, they would never have willingly given up their research careers.

The other issue I have is that I don’t really feel that the taxpayers should be funding research that industry could be doing. If something is likely to return a profit in the short to medium term, then industry should be funding the research. The taxpayer should fund the research that we can’t reasonably expect industry to fund. It is this research that is very difficult to specify in advance. I’m not suggesting that research councils should never fund industrially relevant research, simply that research councils should tend to fund work that will have long-term benefits or that will have societal benefits that industry may not value as immediately valuable. I think EPSRC’s current policies are potentially extremely damaging and I hope they rethink them soon.