The confusion of Will Hutton

We’ve Will Hutton telling us that we really need to be taxing corporations more. For they’re paying less in tax on their profits than they used to and this is what ails our State. Sadly, what has really been shown is Will’s confusion in reading GDP figures.

If companies in Britain paid, proportionally, as much tax as they did in the last year of Mrs Thatcher’s prime ministership, the country would be £30bn better off.

Well, no. Moving money from one account to another does not make “the country” better off. It might make the Treasury better off, this is true, at the expense of making investors in companies worse off, but this is not the same as the statement that it will make the country better off. For, as we might all have noticed, living as we do in a place where there are things outside the state, the State and the country are not the same thing. But then we get the more detailed confusion:

Nor is that where the bending of the tax system – and the state – to accommodate companies’ chosen behaviour stops. Over the same years there has been a monumental bidding down of wages as the share of company profits has risen by 6%, in terms of GDP, with wages falling by a commensurate amount.

This is a basic schoolboy error and one that’s embarrassing for someone who was a Governor of the LSE to make. GDP is not made up of the wage share plus the profit share. there are more components than that: most notably the taxes paid upon consumption and the taxes paid upon employment. And a couple of us have been pointing out what has actually been happening over these years. The wage share has indeed been falling. But the profit share has not been notably rising. The difference explained by those two tax shares, on consumption and employment, rising. It’s is not that the capitalists have been stealing the crusts from the workers’ mouths, it is that government has been.

But we will admit that this produced a guffaw:

What is striking about the international system is the variety of tax regimes, wage and profit shares – and the lack of convergence, as the IFS’s exhaustive review of the tax system, led by Nobel Laureate Professor James Mirrlees, pointed out. There is plenty of scope for redesigning our tax system to make it fairer, increase its yield and refashion the bargain between companies and the state if we choose.

That’s the Sir James Mirrlees of optimal taxation theory fame? Whose major contribution to taxation theory is that we should not be trying to tax corporations or capital returns, but instead should be taxing rents and consumption? And this is what is called in evidence to underpin the clai9m that corporations should be paying more tax?

It is to laugh, eh?

Wikipedia: Another answer to the tragedy of the commons

The tragedy of the commons is an oft-cited theoretical example by those who advocate government intervention. It postulates that, without regulation and intervention, public goods that everyone has an interest in using will actually not be provided (or at least not efficiently or to an optimal quantity) if contributions are voluntary. The logic is that everyone’s dominant course of action is to essentially just refrain from contributing because, if one contributes and others don’t, then the public good is not provided and their payoff is worse than if they don’t contribute and the public good is not provided. Additionally, if they don’t contribute and the public good is provided, the individual’s payoff is higher than if they do contribute and the public good is provided. In this sense, a society full of rational, self-interested individuals (as this scenario represents it) could actually lead to a harmful or sub-optimal outcome for society in the long run.

However, Wikipedia is a prominent, empirical illustration of how the tragedy of the commons does not always hold since the website runs purely on private donations. Periodically, the site’s owners ask for donations to maintain it and keep it running ad-free. They claim that if everyone who read their plea paid £3, then fundraising would be over within an hour – nice in principle but not everyone pays up in practice. Some, inevitably, end up contributing more than others and many don’t contribute monetarily at all.

The following chart lists the percentage of donators corresponding to each reason for donating to Wikipedia, according to Wikipedia.

Wikipedia1

Conversely, here are the reasons cited for not donating:

Wikipedia2

Of course, one might argue that the knowledge found on Wikipedia is unreliable. However, a study published in Nature found that Wikipedia “is about as accurate on science as the Encyclopaedia Britannica”. Of course, Encyclopaedia Britannica attempted to refute the study. Access to a vast store of monitored, reviewed information via Wikipedia is an incredible asset to humanity and this asset is made possible entirely through voluntary contributions (whether this be in terms of time spent editing or money contributed) rather than through the coercive dictates that people are so often subject to.

Furthermore, it’s interesting to note that if you were to, hypothetically, replace “donating to Wikipedia” with “tax” in the second bar chart, you might find a lot of people agreeing with the affordability, with unwillingness to pay tax based on principle or their belief that it would not be used properly. Similarly, people may want to contribute time to society rather than pay money to preserve it.

In our rapidly changing world, voluntary contributions to fund public goods may become feasible sooner rather than later.

How are your taxes spent

HM Revenue & Customs recently sent me an annual tax summary for 2013-2014.  This is an interesting document as it shows how my income tax and national insurance contributions were calculated, and how my money was spent by the government.

We know that the only certainties in life are death and taxes, but we often treat taxes in abstract and do not think about them in absolute and concrete terms.  This new document provides a detailed monetary breakdown of how my taxes were spent excluding indirect taxes such as VAT and other duties.

A quick calculation of my contribution produced the following percentage breakdown:

Welfare 25%
Health 19%
Education 13%
State pensions 12%
National debt interest 7%
Defence 5%
Criminal justice 4%

85% of my taxes were eaten up by the above categories.  The balance was spent on transport, business and industry, government administration, culture etc. all less than 4% of the total.

I was stunned that welfare payments accounted for 25% of my total tax burden and that national debt interest accounted for 7%, higher than spending on defence at 5%.  It should also be noted that state pensions accounted for over a tenth of my personal contribution.

We all have to individually decide if we are happy with the way our hard earned cash is spent.  As Thomas Sowell said we all need to think what is the fair share of the money that I have earned that you are entitled to.   But what the tax document maeks clear is that if the government is going to successfully reduce the national tax burden on the hard working people and families, then tinkering around the margins is not going to make one iota of a difference.  Besides reducing the level of national debt, the only way forward is to tackle the top four categories that accounted for 69% of my taxes.  This requires political will that may or may not be there.

Is this a fiddle in the Autumn Statement?

As we all know, knowledge is local and dispersed. A corollary of this is that you, the readers collectively, will always know more on any specific subject than one single writer on this side of the software. At which point to ask you a question.

We’ve got the BBC telling us that public spending is going to fall to levels not seen since the 1930s. This does seem unlikely: although if we could get government back to the sort of levels of interference in our lives of the 1930s that would be both nice and an achievement.

The Office for Budget Responsibility (OBR) says spending on public services is heading for an 80-year low.

In its report accompanying the Autumn Statement, it projected that spending by central government on public services was going to fall from 21.2% of gross domestic product (GDP) in 2009-10 to 12.6% in 2019-20.

As a proportion of GDP, that would probably take spending on public services to its lowest since the 1930s.

That report is here.

Note that this isn’t public spending as a whole: this is nothing to do with pensions or the welfare state or other transfer payments. This is solely what is spent upon public services, not money shuffled from one citizen to another.

And the question is, how important is that word “central” in that calculation?

For example, just imagine we moved NHS funding from its current system to the Swedish or Danish one? There it is, respectively, the counties and the communes that raise and spend the taxation that pays for the health care systems. That money simply doesn’t flow through the national treasury nor the central government (which is why Denmark’s standard national income tax rate is 3.76% and the top one 15%). We can all think of reasons why this might be better (local accountability, greater efficiency) and possibly some that it might be worse (postcode lottery!). But it’s not obvious that there’s either less or more government spending on public services in either system: but there’s obviously a huge difference (as much as 10% of GDP) in central government spending.

So, of this reduction in central government spending on public services how much is a reduction in government spending on public services and how much is just the movement from central to some other level of government spending?

We could argue that the Scottish and Welsh NHSs, for example, are covered by the Parliament and the Assembly, therefore aren’t any longer central government. There’s a change coming in the allocation of business rates. As was these were all collected centrally and then apportioned. The new system will see some being retained locally and spent locally: if that a reduction in central spending but not in public spending? As things become devolved do they fall out of central spending but still remain public spending?

In other words, how much of this reduction is not really a reduction, just changes in the budgets that the spending is coming from?

Over to you: and let there be more light than heat.

Gabriel Zucman’s latest very interesting paper

There’s much huffing and puffing about the information in that above chart. The capitalist bastards are taking an ever growing share of the economy and something must be done! And then along comes Gabriel Zucman (he’s the third of the Parisian economic trio, along with Emmanuel Saez and Thomas Piketty) to try and tell us that this really is a problem and something must be done! Except the evidence that he shows us tells us that it’s not the problem that it is usually identified as. Here’s his latest paper:

Measuring the costs of tax havens to foreign governments is fraught with
difficulties. However, balance of payments data and corporate filings show that
US companies are shifting profits to Bermuda, Luxembourg, and similar countries
on a large and growing scale. About 20 percent of all US corporate profits are now
booked in such havens, a tenfold increase since the 1980s. This profit-shifting is
typically done within the letter of the law and thus would be best described as tax
avoidance rather than fraud.

There’s certainly profit shifting going on but it’s not profits being shifted out of the US and into those tax havens, not to any great degree at least. The IRS isn’t dumb enough to allow that at any great scale. What is happening is that US based corporations are making larger profits from their foreign activities and then parking them in those tax havens.

Yes, really: the way that US profits as a share of GDP is calculated is that all profits made by US domiciled firms are counted as part of US GDP. So, Glaxo’s profits in the US (and the associated underlying economic activity that generates them) are part of US GDP. Apple’s profits in the US, and the associated underlying economic activity in the US, are part of US GDP. But, crucially, Apple’s profits in Europe, but not the underlying associated economic activity in Europe that generates them, are also part of US GDP. So, if Apple’s European profits rise then US GDP rises by the amount of those profits and the capital share, or the associated profit share, of US GDP also rises by the same amount. But, of course, that means that the profit share of US GDP rises: but that’s purely an effect of the way that we calculate the numbers. Nothing has flowed from labour to capital in the US economy. The workers aren’t getting any less of the portion of their labours.

Simply, foreign profits of US corporations have risen. This means absolutely nothing at all to the US domestic economy in the sense that while, because of the way we measure it, the capital (or profit) shares are rising, there’s simply no effect at all on the division of spoils inside the American economy.

Zucman is also showing that this is a significant effect. At least two whole percentage points of GDP.

Of course, Zucman is also telling us that this is terrible and that something must be done! On examination however it seems to be largely of no import at all. So, Apple is increasing its European profits. This is bad because?