Alabama introduces complicated hourly tax system

 I've been very intrigued by a newly introduced tax calculation in Alabama.  

A lot of the information I've found about it comes from law firms, who are no doubt explaining it in order to encourage businesses to hire them to make sure that they are compliant. 

How does it work? 

As well as any federal income taxes, Alabama charges income tax at 2% to 5% on a progressive basis. 

Don't rely on my simple explanation here as legal advice, but here goes!  

The new law proposes that workers who are performing more than their contracted hours, which in turn are over 40 hours, will not pay the Alabama income tax on that income. 

So the workers will only pay federal tax on their overtime work. 

They will still pay the Alabama tax on their standard hours, but not on their overtime.  

So their tax rate will still be 5% on some of their earnings (say if they work 39 hours), but then drop to 0% for earnings representing overtime hours.

So for someone who works 45 hours they would have 40 hours of earnings at the standard state-tax-rate and 5 hours of earnings that are state-tax-free.  

Benefits of the system 

The advantage of the system is that workers will face a lower marginal tax rate when offered overtime work than they would do normally. 

This can be achieved without lowering the standard rate of tax (5%) which would of course completely erode the tax revenues. 

I think from Alabama's perspective the aim is a form of tax competition - set up your business here and your workers will be more likely to accept overtime work. 

I expect there is also an expressive element as well - "hard workers shouldn't pay more tax as a result of their striving." 

But in economic terms, the aim as I've noted above could be framed more technically in terms of marginal tax rates. Progressive tax rates discourage high earnings, whether that comes from working more hours or from doing higher-paid work. 

Disadvantages of the system 

It might seem to be a lot of trouble to go through to provide a 5% reduction in marginal tax rates. If the system was applied on federal income tax it would of course be much more impactful, but Alabama can only change its own state tax rules, not those of the US government. 

There will be compliance issues in order to assure that the system is not being abused. Firms will have to do extra reporting, and be expected to apply the new tax rates to their workers (and not just claim and pocket the tax refund themselves). Hence why law firms are offering their assistance. 

Even though employers take on the administrative burden of income tax, the Alabama state tax administration will presumably have extra costs as well. The tax authorities are going to have check the claims by employers to make sure that they are not fraudulent.

The state needs to know a) How many hours workers are contracted to work and b) how many hours they have actually worked. If they have this information they could apply my hourly averaging system (see below).   

Another concern is that this might concentrate work into fewer hands - employers will hire fewer employees and work them longer hours. This seems a strange thing for a state to subsidise. Surely they would want to have more workers employed overall? Presumably the thought is that other firms will set up in Alabama and have their overworked Alabamans provide goods to other states. 

Why not go all the way? 

This Alabaman system is very interesting to me because it is trying in a very crude way to do the thing that my Hourly Averaging system is doing: to tax people who work more hours at a lower rate than those who work fewer hours. 

If the aim is to incentivise work then why not go all the way and impose an hourly average tax calculation? 

The Alabama system does not incentivise part-timers to increase their hours. Or incentivise the early-retired to return to work. 

My proposal is that everyone should have their lifetime income divided by their lifetime hour credits. These hour credits represent the number of hours the person has worked (or been excused from working if they suffer ill-health). This average is used to determine that person's lifetime tax rate, which is in turn used to work out their tax rate on their most recent portion of income. At each point the person will have paid the correct lifetime amount of tax and received the correct  

Such a calculation can be fully progressive - low earners who work long hours at a low wage will have a low tax rate (perhaps even negative with an hourly subsidy). High earners who work short hours  (say a part-time lawyer) would have a higher tax rate. 

Everyone has an incentive to work more, with one difference. 

I proposed a maximum number of hour credits, beyond which point people do not get any further reduction in their tax rate. This is an optional part of the system, but I proposed it for a few reasons:

1. To avoid incentivising overwork 
2. To reduce the potential for fraud
3. To avoid incentivising the concentration of work within each enterprise. A long-hours option for some and few/no work options for others. 

The maximum hours proposal is not key to the system but I think it is a good idea. Alabama are sort of doing the opposite here - Alabama are only applying the hourly tax reduction ABOVE a high threshold. 

Will 2024 be the year Hourly Taxation starts to gain traction? 

I will be watching the Alabama system with interest! 

If a Conservative state can make hourly taxing work then I don't see why my progressive version cannot be seriously considered. 

The potential administrative issues are the big barrier to the implementation of my hourly tax proposal (along with ideological opposition from free marketeers and top-down-statist socialists, and concern about international tax competition).  

Will 2024 will be the year in which hourly taxation finally gets taken seriously? I certainly hope so! 

Givenergy Inverter Error: Electricity Meter Com Fail

 I had a problem with my Givenergy Inverter and I thought I would share my solution as I could not see anything about it online. 

It wasn't a huge problem, but it was a little annoying when you are an energy geek like me. 

Essentially, the inverter stopped providing data to the cloud and therefore I could not see what was happening on my givenergy webpage or the phone app. 

It was disconcerting as I could not see what was happening and whether the battery and solar were working or not, let alone how they were performing. For all I knew they had shut down and it might have been dangerous. 

What caused the error?

I think the error occurred when I turned off the lighting circuit next to this one in order to change some lightbulbs (see photo). 

I later realised that I wasn't getting any readings from the inverter.

What form did the error take?

There was no data being received about the energy going in and out of the meter. 

Looking into the reports on the web portal, there was a new error "Electricity Meter Com Fail." 

The inverter lights were on, which was reassuring, but the circle of light in the middle was yellowish, which I later learned indicates a communication problem. 

I could not see any advice about how to fix this issue online and so I tried a few things.

Eventually I went to bed defeated as it was nearly 1am and I wasn't getting anywhere.  

In the morning I continued to look up the problem and what it might be.  

I was getting battery data but not solar and grid data. I found the smart meter device to check if it was exporting. (I never use this device because the inverter provides much more useful data via givenergy). 

Simple solution

I believe I solved the problem by doing the following:

• Pressing the set button on the electronic meter in the consumer unit. I did this last night and it did not achieve anything. 
• However, today I also held down the button for a few seconds. This seemed to get the device to go through some sort of process and afterwards the readings resumed. 

So there you go - as simple as pressing the button on there to get it to reset itself. 

Phew! 

So the system was seemingly working throughout. I only missed about 18 hours of data collection on the solar generation and grid import/export but the electricity company will have been measuring my import and export so the data is just for my own records. 

However, it was quite a worry that there was a problem with the system over the weekend and that I might have to contact givenergy or my installer to get advice, possibly facing a callout charge or something. 

All in all, it has worked out fine, but I wanted to save others the stress by suggesting what might be a simple solution to a frustrating and disconcerting issue.  

Cars in 2045: Offsetting Petrol/Gasoline costs with Carbon Capture and Storage

Why should we switch our entire fleet of cars over to Battery Electric Vehicles over the course of the coming decade? 

Isn't that going to be a huge pain? 

Shouldn't we just let people carry on using petrol cars? 

Well, let's try and work this out. 

Net zero future

We are in 2040 or 2050 and in urgent need to get to net zero because we have done so little about climate change up to that point. The global temperature is now on average 2 degrees over the pre-industrial average and still rising. 

Finally the governments of the world agree they have to achieve net zero after all by belatedly charging the full cost of carbon pollution. But how much will that add to the cost of petrol? 

I've tried to work this out, based on rough current prices, but I'm happy to be corrected if I've got something wrong. 

Invisible pollution caused by burning petrol/gas

We can't sense CO2 of course, but burning a litre of petrol apparently produces an astounding 2.4 kg of CO2! 

Furthermore, we have to add in the emissions involved in producing the petrol in the first place. I will estimate this to be an extra 0.72kg at present. 

But maybe that amount will come down if refineries and oil tankers use renewable power in the future? So let's assume pollution from petrol production has improved to 0.6kg per litre. 

This makes a nice round number of 3kg of CO2 per litre. 

Offsetting the CO2 pollution

What are the options to offset this CO2? All the cheap options - growing trees and plants and so on - will be long used up by this point. Let's say the airlines have already bought all these up and there is no land left for this. 

This leaves Direct Air Capture of Carbon and Storage (DACCS). It is hard to predict how much DACCS will cost in the future. It is completely unproven technology. Plus we don't have places to reliably store all the carbon produced, but let's ignore this for now and assume we can use it for something or put it back in the wells which we emptied of oil and gas for the same cost as getting that oil and gas out. 

At the very least the DACCS machinery would need to be powered with spare renewable capacity, since powering it with fossil fuels would mean you would also have to "CCS" those emissions, which would require burning more fossil fuels, which would require more CCS. So you need to build extra renewables to cover this usage. Let's assume you've overbuilt renewables and run the DACCS machine whenever there is a surplus. 

Nobody has any idea how much this will cost, but the IEA believe - no doubt correctly - that some CCS will be inevitable and have provided some estimates. Optimists say it will be $100 per tonne. Pessimists that it would be $350. I'm pessimistic myself, but let's consider those two scenarios to get an idea. 

Do we want to continue to using petrol and "DACCS" it or do we want to switch to BEVs? Let's consider the extra cost of capturing the carbon from petrol. 

Cheap DACCS cost of offsetting Petrol

DACCS cost per tonne of CO2: $100

DACCS cost per kg of CO2: $0.10

DACCS cost per litre of petrol: $0.30 (£0.25 at current exchange rates)

Expensive DACCS cost of offsetting Petrol

DACCS cost per tonne of CO2: $350

DACCS cost per kg of CO2: $0.35

DACCS cost per litre of petrol: $1.05 (£0.86 at current exchange rates)

Conclusion

As I've said, I am pessimistic that DACCS will come down significantly in price. It will probably end up somewhere in between those two extreme guesses. 

There is also the issue of what you do with all this carbon. I've added in some costs to transport it, but transport it to where? Presumably to make some E-fuels or something. Then the question is whether you should also DACCS the e-fuels as well? Or should the user of those e-fuels be responsible for that? 

Either way, imagine that the cost of petrol, whatever it would be in 2045 or 2050 (when peak oil might have hit anyway) is supplemented by a DACCS charge of fifty pence or more. 

BEVs are already cheaper over their lifetimes than petrol cars due to their lower fuel, running and maintenance costs. 

How much do you value your petrol car over the BEV alternative that you would pay this premium? Let's face it, few will. Petrol cars will be historic curiosities. There will be plenty of enthusiasts. However, they will be seen as inefficient, wasteful, dirty and polluting compared to normal cars (BEVs) 

My courses for adults in 2023-4

My courses for the next academic year are now available to book. 

Click here for the latest version of the list of courses I am teaching, in date order. 

However, I thought I would list them here, so I can do so by format. 

Online Courses 

Political Philosophy: An Introduction (flexible online)
Flexible course with 24/7 discussion forums. Runs every term.
I am almost always the tutor on this course. 

Ethics: An Introduction (flexible online)
Flexible course with 24/7 discussion forums. Runs every term.
Mostly taught by other tutors, but sometimes I am the tutor.

Justice: Who Should Get What?
Mondays 3 - 4pm (UK time)
15 Jan - 25 Mar 2024 

The Ethics of Capitalism
Thursdays 1 - 2pm
18 Jan - Thu 28 Mar 2024 

Equality of Opportunity and the Ethics of Discrimination
Wednesdays 3 - 4pm
17 Apr - 26 June 2024 

Political Economy of Taxation
Thursdays 1 - 2pm
18 Apr - 27 June 2024 

In recent years I have also taught online courses over the Summer as well - look out for these in the new year.

Weekly Classes (10 weeks) in Oxford

Can Businesses be Ethical? What would this mean?
Fridays 2:00-4:00pm
29 Sep 2023 - 1 Dec 2023 

Can we achieve Net Zero if we are still addicted to Fossil fuels?
Tuesdays 7:00-9:00pm
23 Apr 2024 - 25 Jun 

Summer Schools (Oxford)

Ethics of Capitalism - Sat 3 Aug - Fri 9 August 2024 

I hope you will be able to join me on one or more of the above, and that you will tell anyone you know who might be interested! 

Open Access Journal article on the duties of migrants to their past countries and the implications for taxation

 I'm very pleased that my paper: Duties in an International World: The Importance of Past Residence and Citizenship

Has been published in the open access journal Problema. 

This clarified my view, hopefully explaining and justifying my approach to the topic of international taxation that I had presented in earlier work. 

Essentially the idea is that people who leave a country and make a life elsewhere still owe something back to their earlier states. Their subsequent states of residence should honour this by sharing revenue as determined by a fair international formula. An exception arises for refugees who have been forced to flee.  

After publishing this article I attended a talk by Wolfgang Schön which made me think I have not covered this topic enough and should have said more about the duty of reciprocity, which is probably doing some work here. 

Anyway, I hope that some people find this paper interesting and useful and I look forward to reading reactions and responses to it. 

"Tax Freedom Day" is complete nonsense

Apparently the Free Marketeers have declared today (June 18th) to be "Tax Freedom Day" in the UK.

The idea that people have been working for the government up to this point is really powerful - the nonsense of it all got me thinking of a completely different way of approaching taxation. 

Why not think of a "Tax Freedom minute" within the hour? This led me to develop my hourly averaging proposal, explained in my book Rethinking Taxation. 

Calculating "Tax Freedom"

If you do want to work out how much of your time goes to the government/society and how you get for yourself, then it would not just be be very difficult to do, it would actually be impossible. 

Think about it: 

• How much does anyone "contribute" to society? 
• How much does anyone "benefit" from society? 

If you want to use market prices for one you'd have to do so for the other as well. What is the value of the resources that each person receives over their life, from their families, government, employers and investment gains? I'll come back to this. 

When it comes to contribution things are even harder. 

• Someone who follows the law (and its spirit) is contributing to society, while someone who doesn't is not. 
• Someone who tends their garden thoughtfully and picks up litter benefits others, someone who litters and pollutes egregiously detracts.

How can you put a number on all these forms of contribution? 

Nagel and Murphy in their book The Myth of Ownership, showed this this whole line of thought is based on a simplistic everyday libertarianism. We assume that our gross income is in some sense ours as if we live in an imaginary libertarian economy. 

But we don't live in that economy. We live in our economy, in the real world. 

Tax isn't the only kind of contribution. However, it is an important one and everyone should be happy to pay their taxes out of a sense of reciprocity. 

Benefits received 

Of course, as I indicated earlier, what this "calculation" also misses is that we all benefit from government spending, past and present.

The government provides all sorts of goods and services that benefit us all. 

Some people, as is right, get more from the government than they put in. 

Children aren't going to be contributing, but all being well they will grow up and contribute later on. 

Some older people might not be contributing, but they will have done earlier in life.

If this was an honest exercise it would attempt to account for all the benefits that people receive over their life. 

It isn't an honest exercise, it is just libertarian propaganda that makes no sense. 

Net contributions?

Even if you think it is possible to calculate someone's tax contribution, and that it would be meaningful (which it isn't), the number would vary hugely from person to person.

Some people will get more than they contribute in ways that are right. We should want proper systems in place to support the vulnerable in society and not just abandon them.

Is it forgivable to spread nonsense?

You can criticize the supporters of "Tax Freedom Day" for being selfish, which is probably right. 

Or you can criticize them for being unrealistic ideologues, which is fair. 

But most importantly, they are also just talking nonsense in thinking that the numbers are in any sense meaningful.

People have got a right to be selfish, they have a right to believe and propagate nonsense.

It is a free country after all. 

The rest of us have a duty to see through it all. 

Advice for getting solar systems in the UK

 A few people have asked me for advice about getting solar panels since I posted about our newly installed system. 

There is lots of general advice out there, and installers will of course look at your particular situation. 

For instance, Artisan Electrics has a video with good advice on the topic, which mentions a lot of the practical considerations. 

There are lots of things to think about, like what roof you have and whether it is in the shade at all. Having some shade isn't a dealbreaker (you can always get a micro-inverter for each panel), but you could have a look at your roof at different times of the day to see whether any nearby trees or rooves cast shade.  

Essentially, you want to get an MCS approved installer. They have to abide by high standards and only MCS installed systems can generate export payments. You certainly want to get paid for your excess if you are having a large system installed.  

I found the sales people generally quite useful for reviewing the options and coming up with a proposal they believe is in your financial interest, based on their own assumptions. 

However, there are a few things that installers might not flag up to you.  

Future proofing? 

As I mentioned in my previous blog, the focus tends to be on covering self-consumption. This is because you can be sure that you will save money on your electric bill if the solar (or solar and battery) covers that. 

After all, the export payment rate has been very low in recent years, so there has been little incentive to use your roof to supply the grid. 

However, there is no way to truly work out the payback time for a solar system - it depends on too many unknown future factors. How much will your electricity bills be in the future? What will your demand be? What will the export price be? Nobody knows for sure - certainly not me!  

Higher rates in the future?

However, that might not always be the case. New tariffs like Octopus' Flux tariff are offering rates several times that of the longstanding (but paltry) Standard Export Guarantee. However, these higher rates aren't guaranteed and the entire tariff might be withdrawn at any point. 

Nevertheless, if you look at all the plans to build solar farms and the controversy raised about them, it seems like using rooves is much less controversial. If all rooves were covered in solar and every house had a battery it would really help the country continue to run on clean energy through windless days after all. 

I certainly can't guarantee what export rates will be in the future, but I expect that if you've got a battery you will be able to use this for energy arbitrage - buy when the price is low and sell when it is high. 

Higher electricity consumption in the future?

But the other reason to think beyond your current use is that your use might increase in the future. 

Obviously, we are all looking to get more energy efficient as time goes on. LED lightbulbs use a fraction of older types for instance. 

However, that is just part of the story. The other side of net zero is that we need to electrify energy previously provided by fossil fuels. In the UK that means that your car, heating and hot water will be electric (the latter two ideally with a heat pump). 

These will require a lot of electricity to replace the petrol and gas. The usage won't necessarily perfectly line up with solar production - your car might be out in the middle of the day in the summer and your heat pump will be working much harder in the colder winter months when the solar production is much lower.

Nevertheless, having your own generation to assist in these things will be useful, and the case for a home battery and solar will increase the more that your activities are electrified.

More or less? 

Overall - my feeling is that you can't really have too much solar generation (unless you have a REALLY huge roof that could fit loads of panels).    

Of course, you can add to your system later. There is a case for getting something to start with and building from there. However, a lot of the cost of installing a solar system is the labour and scaffolding rather than the number of panels (which are about £200-£300 each)

I am glad I pushed for a slightly larger system (16 panels when a lot of the quotes were for 20), though I now wish I had budget for an even larger one. 

Too small an inverter? 

I've given one reason why you might be pushed towards too small a system. 

One thing to be aware of is that the regulations have created an incentive for installers to install smaller inverters, which might also push them to recommend fewer panels for your system.

The inverter is the crucial part of any solar system - it converts the DC power from the panels to the AC power used in your house and the grid. 

When installing the system it is necessary to inform the local Distribution Network Operator (DNO). There is a process to do this. 

For a smaller sized inverter (under 3.68kw) it is only necessary to inform the DNO of the installation (G98). 

Over 3.68kW?

For a medium or large inverter the installer has to seek approval (G99). Any decent company should include this service. 

However, this process takes time and the outcome is not guaranteed - you might be told that the local network cannot cope until it gets upgraded in the distant future, or, that your own supply line needs to be upgraded (though this is unlikely unless you are having a lot of panels installed). 

More importantly, as well as time spent on the process, it also costs money - companies have to pay to go through this process. 

For this reason, it is conceivable that companies would push customers towards a smaller system, of around 12 panels or fewer, even if they would do well to get a larger one. 

Essentially, this regulation has created an incentive for installers to propose solutions of a particular size. I expect that many people will end up with systems sized at this level because of this regulatory quirk. 

Fortunately, although I wasn't really aware of this issue when I ordered my system, I did notice that a 5kW inverter had some advantages of a 3.68kW one AND was virtually the same price. I therefore mentioned this to my installer, who agreed to install the 5kW. 

This was a risk for the installer, but I have got a much more appropriate system as a result. 

Plus, if I do add a few more panels in the future the inverter will be able to process the higher peak energy created, which a smaller one wouldn't manage. 

Final thoughts

Overall, I am a huge advocate of solar systems for climate mitigation reasons, but they also make a lot of financial sense.

There is a lot of good advice out there from people who know their stuff. There are several You Tube channels on the topic such as Gary does solar and Tim & Kat's Green Walk. 

Most installers will give you good advice and consider the relevant factors. 

However, I wanted to flag up a few things that might lead installers to push people away from using their roof to its ideal solar potential.