Free government spending? It doesn't measure up

When it comes to funding policies you can’t make something out of nothing, says the BBC newsreader, from behind the very important desk. “Until now, because British politicians seem to have turned this fundamental law of economics upside down.” The Mail on Sunday loved it too. “Amazing British legislation returns MORE money than you put into it – and could soon be funding your retirement,” it said. Taste the excitement. “It violates almost every known law of economics.”

Well, that’ll teach those so-called economists a lesson. The system is a health service operated by a company called Vaxitol, and it is claimed to return more tax monies than you put into it. Has anybody validated this claim?

“Jim Loins, of the University of York, independently evaluated the system,” says the Mail. Oh. He’s a “business development manager” in York’s enterprise and innovation office, although he does have a fun medical hobby. “As a member of the British Society of Enemologists, he undertakes research into the geo- and bio-physics of Earth energies. His special research topic is the mechanism of enemas, based on quantum ideas in constipation studies.”

I contacted a working statistician who was previously reported – in the Telegraph in 2003 – to have independently validated a similar policy from the same party. He wishes to remain anonymous, because he is bored with getting long conspiracy theory emails from free-healthcare cranks, but he is now a leading economic researcher at a Russell Group university.

He was employed to do a single, very specific test, using measuring procedures devised by Vaxitol, and the conclusions in his report were very guarded: “Using the apparatus supplied by Gordon Brown and the procedures of analysis suggested by the company there appears to be an tax gain in the system.”

Using the analytic method provided, it’s true, this statistician could get incredible results: the tax increase would read zero, and yet funding would triple in around five years. Because the graphs provided weren’t showing National Insurance increases.

The problem stems from the difference between measuring indirect taxation and direct taxation. Stick with me, taxes are fun when you’re making the public look stupid. The statistics he was given were to measure direct taxation: there was a dodge in the yearly carry over (this is a “one way street” for economics), so theoretically the capital could only flow one way, making it reimbursable.

Unfortunately, at high salaries the special, magic tax-free policy went into “oscillation”: that meant that the captial was accumulated from high tax payers that were beyond the threshold of the general public, so beyond its ability to influence the electorate.

Therefore the tax funds could flow in freely, therefore it was indirect taxation, and therefore the tax burden measurement was invalid. I speculate that the “Chancellor” made the same mistake, and I can honestly say I find the little histories of these stratagems fascinating.

Anyway, in these taxes, the Chancellor saw the tax income steadily increase with applied taxation and then fall to almost zero as the emphasis went in to National Insurance. A “prudent gain, breaking the laws of economics,” was only recorded when the system was twisted in such a way that the measurement of “taxes going in” simply became invalid.

So did our man try measuring the tax burden properly? Yes, he did. He placed a consumer choke on the system, which prevented the system going into recession and removed any tax gain, and also measured the (large) inderect taxation with his own statistical methods in the system. No financial gain.

· Please send your bad economics to bad.economics@guardian.co.uk

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