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Mind the GAP!

Let it never be said Samizdata does not listen to its public. I am sure the sainted editors would prefer me to add at this point that we reserve the right, however, to listen carelessly and ignore your views if it suits us. Be that as it may, I was at the Adam Smith Institute’s Tax Freedom Day celebrations this evening, and one of our readers, having said some very complimentary things, made a rather brilliant suggestion that I am now going to steal.

Inflation, we are told, is at a long-term low, because of that nice Mr Brown’s prudence. My friend points out however, that part of Mr Brown’s prudence has been prudently to exclude from many of his more interesting taxation devices, the items forming the Retail Price Index. He proposes a new index, of all those items whose prices the Chancellor controls because their consumer price is largely duty, or because they are practical necessities for most people whose price is directly set by the government. The latter are excluded from RPI by definition and the (plausible) suggestion is that such prices have risen very fast indeed.

The Gordon Adjusted Price (“GAP”) index would explain where your money goes, and why so many people find their pockets emptier despite notionally higher incomes and low inflation. It might make visible some of those hidden taxes. I have a hunch that the cost of living is actually falling in Britain, but the cost of government more than takes up the slack. Is it true? The GAP might provide a measure.

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10 comments to Mind the GAP!

  • Gordo replaced the RPI as the main measure of inflation with the EU approved CPI. This excludes council tax and house prices. It also uses geometric averaging instead of the more normal arithmetic averaging.

    The CPI is usually about 0.75% below the RPI which means his real growth calculations come in higher. Plus it allows the Bank of England to keep interest rates lower.

  • Yesterday (5th June), somewhat unusually, I was reading the Guardian. There was an article by the economics editor, Larry Elliott, on page 30: Brown not crediting Bank with his respect.

    Attached were graphs of interest rates and inflation since the mod 1970s.

    The thing that sprang out at me was that inflation has been steadily between 0% and 5% since the late 1980s, and interest rates have been somewhat stready around 5% since 1994. Certainly, the “good” period seems to much predate the influence of our beloved prudent Chancellor.

    Best regards

  • Laughing Cavalier

    What is killing us all is the cost of housing, driven in part by the Soviet style planning process and the fact that since El Gordo stuffed the stock market with stealth taxes in the pension funds those who could afford it have had no choice but to put their money into property.

    Add to that the skewing and fiddling of the price indices (how many cheap DVD players to you have to buy per annum to bring the rate of inflation down to the Chancellor’s figures?).

  • abc

    The Conservatives said that they will carry on in much the same vein over the weekend in regards to house prices and low interest rates. What a nice vote winner. No wonder the young refuse to vote. I’m afraid your lob-sided democracy is in danger of falling over.

  • George L.

    What a letdown. I thought you were writing something about the Glock Auto Pistol cartridge (G.A.P.), but instead it’s some economic stuff. Oh well.

  • Mike Lorrey

    I’ll note that the US Census Bureau has announced that the state of New Hampshire now has the lowest per capita state and local tax burden in the US. If you count in the average per capita federal tax burden, we come in second, apparently because we have a higher average income here than South Dakota, so more of our people are in a higher tax bracket.

  • guy herbert

    No suggestions for items where the GAP exceeds RPI?

  • As I mentioned, council tax has far outpaced inflation.

    So have house prices, in a large part thanks to government restrictions on building (not all Gordon that one).

    Moving house is also more expensive due to a massive increase in stamp tax.

    The stamp tax also applies to trading shares which is responsible for a shift from speculating to spread-betting (sucking short-run liquidity out of the market).

    The Tobin tax has driven up the price of trading currencies.

    Can we count the cost of “buying” a pension? You certainly get less for your money with Brown’s £6bn a year tax (compounded) and his new rule requiring everyone over 75 to buy an annuity (pushing up the price).

    Another less obvious tax on investments is a change in the rules governing pension funds that increases the proportion of wealth that must be held in bonds. That has allowed Gordon to keep borrowing on the cheap without sending mortgages sky-high.

    Well that should get the ball rolling…

  • guy herbert

    I don’t want to seem ungrateful for your otherwise helpful sugestions, but I’m not sure any government has been mad enough to try and introduce a Tobin tax, and I’m very sure Gordon hasn’t.

    An interesting question is whether the GAP should attempt to measure compliance costs.

  • You’re right. I checked and found quite a lot of governments have passed measures supporting the Tobin tax… if everyone else passes it. Perhaps it was some kind of resolution like this that I had heard about.

    Maybe you could have several definitions of the GAP ranging from the narrow GAP – which would just be actual revenues – to the broad GAP – which could include all the costs (dead weight losses etc…) – with several levels in between.