In praise of Standard Chartered and their advice on African tax avoidance

The perenially enraged over at Action Aid are today enraged about the way in which Standard Chartered bank gave advice on how to avoid (legally, of course) certain corporate taxes upon investments in poorer African countries. We, in contrast, would like to congratulate Standard Chartered on their public spiritedness in advising people on how to avoid certain corporate taxes in poorer African countries. And we do so on the basis of a point made by Joe Stiglitz.

The outrage is here:

One of Africa’s most high-profile banks – Standard Chartered – publicised the advice of a Mauritius-based financial company on how to avoid tax in some of the poorest countries in the world, a new ActionAid report states.

The FTSE-100 bank which operates in 15 African countries published the advice in its Standard Chartered Insights 2013/2014. The publication is aimed at company treasury departments.

The tax avoidance advice – which is entirely legal – can be used to avoid potentially hundreds of millions of dollars in tax in some of the poorest countries in Africa. It suggests structuring investments through Mauritius in order to avoid capital gains tax and withholding tax.

You can hear the frothing at the mouth as they shout in rage at this, can’t you? However, this outrage is entirely misplaced, presumably as a result of their ignorance of how corporate taxation works.

The most essential thing to grasp about it is that the company itself is never bearing the economic burden of such a tax. It is always some combination of shareholders and workers. In an entirely autarkic economy it will be the shareholders, capital if you like, which will carry 100% of that burden. In a more open economy the workers pick up some of that burden. For taxing capital in an economy where capital can leave, capital decide not to enter, means that there will be less capital in that economy. Capital plus labour is what raises productivity and thus wages, meaning that less capital means lower wages. As the economy becomes ever more open, and smaller relative to the size of the global economy, then the burden on the workers increases.

It never quite reaches zero on capital as Adam Smith pointed out in his one Wealth of Nations use of “invisible hand”. Even if people can invest abroad without penalty some will still prefer to invest at home and thus led, as if by that invisible hand, benefit their fellows. For us, here, this means that the impact of corporate taxation on capital will never be zero.

Which brings us to Joe Stiglitz’s point. Which is that the burden of a tax can be over 100%. What people lose from the tax being levied can be greater than the amount raised from that tax. That’s one of the failures of the Robin Hood Tax of course.

But now to the case at hand. As an economy becomes smaller relative to the global economy the workers carry more of the tax burden. Poor African countries have economies the size of a modest English town: they’re small therefore. And given that we are talking about foreign investment here they are entirely open to the global economy. So, the burden of any capital taxation is largely going to fall upon the workers in those poor African economies. And that burden can be (and we would estimate will be) higher than the tax collected.

Meaning that, if you’ve advised people to dodge that corporate taxation and the investment thus goes ahead, that you’ve just raised the wages of some of the poorest people in the world. For note that the effect isn’t upon just those workers in the investments made. It’s upon all of the workers in the economy where the investment is made.

Advising people to invest in sub-Saharan Africa through Mauritius thus raises wages in sub-Saharan Africa by whatever effect on investment happens now it’s free of those corporate taxes. All of which strikes us as a bloody good idea.

So why is Action Aid so spittle flecked at the very thought of it? We assume it’s just because they’re ignorant of how corporate taxation works. Which leaves us with only one last question. Why do they expend so much effort telling us how the tax system should work when they’ve no clue about how it does?

Housing in London

In The Green Noose, Tom Papworth has argued persuasively for loosening the green belt. Another way to goose up the supply of housing in London would to deregulate the construction aspect of provision.

We welcome competition in local government, so let HMG pass legislation encouraging London Boroughs to bid for time-limited privileges. The idea would be that the first (as it might be) eight out of thirty-two London Boroughs would obtain the full extent of incremental rates on new housing arising, if they bid for temporary relief from taxes and regulatory restrictions.

New construction is already exempt from VAT, so the targets would be to suspend officious HMRC registration of subcontractors, so as to reduce labour costs; taxes on capital gains, profits and dividends arising out of qualifying developments, so as to incentivise developers and investors; and suspending stamp duty on associated property transactions, so as to cheapen costs to purchasers.

This is however likely to be less effective than deregulation of land-use and construction practices. As to land-use, we would advocate suspending

  • Height restrictions, protected sight-lines, listings, change-of-use consent and the whole paraphernalia of JNCC restrictions;
  • The rights of occupants of collectively owned properties to form blocking minorities refusing market compensation (this is with a view to easing the consolidation of building lots); and
  • Judicial review of compulsory purchase and planning decisions.

To conclude on this score, we would argue for a presumption of planning approval unless a reasoned refusal is delivered within fourteen days; developers’ access to an appeals tribunal with a presumption of summary reversal; and stricter tests for reasonability and timeliness in the exercise of neighbours’ rights, including local impact, party-walls and natural light.

Finally we turn to construction practices. These are hamstrung by obsolescent and intrusive restrictions by way of building and fire regulations. It’s an open secret that the latter are honoured in the breach, with new residents removing smoke-detectors and door-closers and demolishing corridor and lobby walls as soon as they can. As to building regulations, these are largely a cloak to defend time-expired practises and uncompetitive suppliers. Instead, let developers show that their proposals comply with best practice in the form of building codes elsewhere (eg. Vancouver, Melbourne or Chicago).

To those who argue that this encourages builders to resort to regulatory arbitrage, our answer is “why not?” More competition in local government!

To be serious about inequality for a moment

The Office of National Statistics has just released figures on incomes in the UK. Giving us that interesting little chart above. Do note that that is income of those who are in the tax system. And also that it does not include the impact of the benefits system. So this doesn’t include subsidy to housing or anything like that.

And then have a look at the global rich list. Where you can plug in an income and the country to which it refers and see where that income in that country puts you on that global rich list. The reason you must add the source country is because they are calculating using PPP adjusted currency rates. That is, they’re taking account of how much things cost in each country. So this isn’t really a comparison of incomes, it’s a comparison of living standards.

And here’s the astonishing thing. That bottom 1% lifestyle in the UK is still among the top 20% globally. The UK minimum wage puts you well into the top 10% (almost top 5% in fact). And a little over median wage puts you into the global top 1%.

To repeat, this is not assuming that things are cheaper in other countries. This is after we convert to the prices you’re paying at Morrisons.

We’ve nothing at all against those who would campaign about either poverty or inequality. But we would like to take this little opportunity to remind all that by any historical or global standard we here in the UK, yes even the relatively poor by local standards, are living pretty high on that income scale. And that feeds in to what we think is the important point about what we might want to do about inequality or poverty. Let’s concentrate on that global picture, not gaze at our own navels. Encouraging poor country growth wit the aim of abolishing absolute poverty seems to be so much more productive to us than worrying about whatever gap there might be between the top 20%, top 10% and top 1% of the global income distribution.

President Obama: the ultimate poverty hypocrite

Americans are experiencing buyer’s remorse. Last summer CNN found that 53% of those polled would choose Mitt Romney to be president today, over the 44% who chose Barack Obama. And with Obama’s approval ratings fixed these days below 50%, I suppose it’s only human to get a bit testy with those you’re compared to:

President Obama poked fun at former rival Mitt Romney and leading Republicans on Thursday, saying the GOP’s rhetoric on the economy was “starting to sound pretty Democratic.”

At the House Democratic Caucus retreat in Philadelphia, Obama noted that a “former Republican presidential candidate” was “suddenly, deeply concerned about poverty.”

“That’s great! Let’s go do something about it!” Obama added in a not-so-veiled jab at Romney.

What’s not particularly smart, however, is to frivolously attack someone’s track record on poverty when your own record looks abysmal:

A few ugly facts about the Obama Presidency:

  • Median household income has slumped from $53,285 in 2009 to $51,017 in 2012 just up to $51,939 in 2013.

BN-DV798_income_G_20140725164636

  • In comparison to his three previous successors, this fall in median income looks even worse:

20140927_USC762

  • Real median household income was 8.0% lower in 2013 than in 2007.
  • Nearly 5.5 million more Americans have fallen into poverty since Obama took office.
  • Obama oversaw the first time the poverty rate remained at or above 15% three years running since 1965.
  • Home ownership fell from 67.3% in Q1 2009 to 64.8% in Q1 2014; black home ownership dropped from 46.1% to 43.3%.
  • Labour force participation rate fell from 65.7% in January 2009 to 62.7% in December 2014.
  • The federal debt owed to the public has more than doubled under Obama, rising by 103 percent.
  • 13 million Americans have been added to the food stamp roll since Obama took office.

Obama has been very successful in painting a picture of himself and the Democrats as the ‘Party of the Poor’, and did an even more sensational job convincing 2012 voters that Romney’s riches and successes put him out of touch with the middle-class America. But in reality, the president’s policies have pushed millions more people into financial stress and poverty.

And he’s still causing damage; even his latest State of the Union address called to raise taxes on university savings accounts and still cited fake unemployment numbers, as if this somehow helps the double-digit workers who have given up looking for jobs.

Perhaps the president really thinks his increased federal spending will pay off for the poor. Maybe he really believes that multi-millions more on food stamps is a saving grace instead of a tragedy. But regardless of intention, the facts speak for themselves.

Obama’s talk on poverty is cheap. And his mockery of Romney cheaper.

 

A new ASI project: book reviews

One can never read too little of bad, or too much of good, books: bad books are intellectual poison; they destroy the mind.

~ Arthur Schopenhauer

The Adam Smith Institute is on the look out for young liberal thinkers to review political, philosophical and economic books! If you are a student and would like to review an important new book-length contribution to the humanities, get in touch.

After we’ve sent you the book, express your critique in 1000 words and submit it to sophie@adamsmith.org to be a part of a new ASI reviews publication we are launching.

We welcome reviews on recent works tackling everything from private schools for the poor to the causes of social mobility, to be edited and compiled together by the ASI research team.

Here are some books we think would be good choices—we are very open to any other suggestions: