Thursday, 29 August 2013

Taxes on the stupid - and where the money goes

A fool and his money are soon parted and Marc Gawley has some great examples of offers designed to help the process along.

He also has a link to an article from Tim Harford (the man who gives geeks a good name) about insurance which is to similar effect. Although Harford doesn't mention it, PPI (it's my hobby horse and I want to ride it) was itself a great example of this. The products were probably every bit as pointless as mobile phone insurance, and a lot more expensive too. (But just because you have to be an idiot to buy something does not mean you have been mis-sold it - perhaps the contrary is more likely?)

The National Lottery is another example of what we might call taxing the stupid.

But I want to point out that there there is also a redistribution effect to these taxes - they tend to benefit sensible people with highbrow tastes. (More below.)

Let's start with the world of PPI and bank charges. The money taken from the stupid was not just profit for the banks - it also cross-subsidised the richer or more sensible customers who avoided overdrafts and wanted free banking. As the Supreme Court said in the bank charges case, "the system of “free if in credit” banking prevalent in this country involves a significant cross-subsidy (amounting to about 30 per cent of the banks’ total revenue stream from current account customers) provided by those customers who regularly incur charges for unauthorised overdrafts (a cohort, we were told, of the order of twelve million people) to those customers (a cohort of about 42 million people) who are in the fortunate position of never (or very rarely) incurring such charges." (The similar cross-subsidy linkage between PPI and free banking was mentioned by John Lanchester in his first article.)

No doubt insurance companies work in the same way: that mobile phone insurance is not just hurting fools, it's also helping keep down the premiums of more sensible customers.

There's also the famous example of the National Lottery. This takes money from poor people who have far-fetched dreams of wealth. Below are the recipients of grants it has made with the proceeds (I've taken the top projects in Westminster of any kind - click the link to check my figures):

Royal Opera House Covent Garden
Grant Amount: £78,500,000

Tate Gallery
Grant Amount: £51,357,700

Gilbert Collection Trust (Somerset House)
Grant Amount: £30,750,000

The Football Foundation
Grant Amount: £30,000,000

Corporation of the Hall of Arts & Sciences (Royal Albert Hall Development)
Grant Amount: £20,180,000

English National Opera
Grant Amount: £20,167,012

Royal Albert Hall
Grant Amount: £19,799,145

English National Opera
Grant Amount: £19,650,000

Tate Gallery
Grant Amount: £18,447,102

St Martin in the Fields
Grant Amount: £15,365,000

Imperial College Of Science Technology And Medicine
Grant Amount: £13,034,043

Government Office London
Grant Amount: £12,211,597

The Football Foundation
Grant Amount: £12,000,000

National Portrait Gallery
Grant Amount: £11,900,000

The National Gallery (Raphael's Madonna of the Pinks)
Grant Amount: £11,500,000

English National Opera
Grant Amount: £10,980,000

England and Wales Cricket Board
Grant Amount: £10,812,224

Somerset House Ltd
Grant Amount: £10,278,750

I could go on.

In short, if you like opera, Somerset House, the Royal Albert Hall, paintings, if you keep your financial affairs in order and if you do the maths on your insurance then you will likely be the beneficiary of a significant amount of redistribution of wealth.

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