Economic Nonsense: 9. International agreement on tax rates would benefit everyone

International agreement on tax rates would hurt everyone except those who collect and spend taxes.   Governments have little restraint on the degree to which they can take the money earned by their citizens and spend it on overblown projects designed ultimately to buy votes and secure their re-election.  They meet some resistance as they increase their tax take, but people can do little except grumble.  Very often there is little difference between the major political parties, or between the tax rates they levy while in office, so democratic restraints are minimal.

The one effective restraint is the ability of people to move to another jurisdiction.  This is especially true of modern economies which place considerable value on the talents of high-achieving individuals.  Government is restrained on what it can tax them by their ability to move.  When faced with punitive tax rates, they can relocate to somewhere more favourable.  High earners in France, and those with aspirations to become so, began to leave the country in significant numbers when faced by government plans to levy a top income tax rate of 75%.  Similar effects have been observed elsewhere.

What is true of individuals can be true of companies.  They, too, can choose to relocate to areas where tax rates are friendlier.  The Republic of Ireland found its low 12.5% rate of corporation tax attracted companies to base themselves within its borders.  High rates of corporation tax elsewhere added to Ireland’s attraction.

Those who support high taxes dislike this restraint and many of them call for international harmonization of tax rates.  The aim of this is to make it pointless to relocate, and to remove the one curb on over-large and over-costly governments.  They dislike what they call ‘tax competition.’  But relatively low taxes on high earners and business constitute a business-friendly environment and are conducive to economic growth.  Those who call for harmonization are in effect saying they do not want any countries to be more business-friendly than others.  Denied an escape to less oppressive tax regimes, people become the helpless prisoners of rapacious governments.

Economic Nonsense: 5. Taxes should be increased to fund necessary spending

Taxation changes behaviour.  Taxes on goods and services makes them more expensive, and in most cases people buy fewer of them as a result.  Taxation on incomes makes work less attractive, motivating some people to do less of it.  Taxes on business usually fall on those who buy the products of those businesses, often reducing demand to below the level it would reach without taxation.  Taxes that people regard as unfair or oppressive will often lead people to take steps to avoid their burden.  Taxes on inheritance lead people to dissipate their wealth early, or they break up the capital pools that enable heirs to invest.

Dynamic models of the economy try to take account of this.  Doubling the tax on tobacco products, for example, does not yield twice the revenue.  It might lead to twice the smuggling, though.  Vast increases in the duty on alcohol does not raise revenue in proportion, thought it does lead some drinkers to move down to cheaper booze.  Some tax increases actually yield less revenue because of the behavioural responses they trigger.

Arthur Laffer famously noted that a 0% tax on incomes yields no revenue, as does a 100% tax.  The graph line that links those two zeros is the Laffer Curve, and it has a peak somewhere whose rate yields the most revenue.  Even this moves as people adjust to the new status quo.  If a 50% rate of income tax is lowered to 40%, it is highly likely that it will soon bring in more revenue.  The rate reduction makes work more attractive, so people do more of it.  It also makes complex and expensive avoidance schemes less necessary, as people opt just to pay the lower rate tax instead.

When the economy in question had adjusted to the 40% top rate, however, more revenue might then be raised by lowering it to 35%.  The optimum revenue-raising rate depends on the status quo to begin with.  In many cases it might be appropriate to lower taxes to raise more revenue, rather than to hike them.  It is never likely that higher rates will yield more revenue in proportion to the increase.

The Green spectre

I was reading the other day that The Green Party Is The Second Most Popular Party For Young People. This popularity surge is probably not that surprising really – we see increased environmental awareness in younger people these days, and it’s often the case that a vote for a minor party means a vote that expresses disenchantment towards the mainstream parties.

However, many prospective Green voters would surely be thinking about being a little more circumspect if they saw Andrew Neil’s Sunday Politics interview with Green Party leader Natalie Bennett, which stands out for me as one of the most alarming exposures of ill-conceived economic policy I’ve seen in a long time. It’s rare to see a leader having her party’s policies torn to shreds without even the smallest ability to defend them or balance them up – instead simply getting in a jam each time and responding with “I would urge your viewers to go our website and see how the figures are worked out.”

Alas, that’s the reality, though – their policies are indefensible – economic moonshine of the worst kind I’ve seen. Not only are they inimical to successful human progression and increased prosperity, they are antithetical to even the basic truths you’d learn about in first year economics.

Their proposed wealth tax is simply a pipe dream. Bennett claims it will generate between £32 billion and £45 billion, when the reality is that wealth taxes in other European countries generated only a fraction of that. Add to that the proposals for import tariffs, business subsidies, increased minimum wage, price controls, and the kind of Piketty-esque redistributive taxation that would be almost certain to hamper innovation, and drive much of our best talent out of the UK, and there is a good case to made that with The Green Party in their current form, we have, in terms of the economy, perhaps the most dangerous fringe party of them all – a party whose policies would severely compromise the global benefits of innovation, trade, competition and the free market of supply and demand far more than all the other parties would.

A vote for the Green Party actually gives every indication of being a vote for negative growth, as they look to free humankind from what they perceive as the disaster of its Promethean economic advances. While it’s true that in some cases people willingly vote for one of the smaller parties because they are disenchanted with mainstream politics, it’s also true that as the landscape begins to shift, and dissection of the minor parties’ policies intensifies as more look to get their feet in Westminster’s door, surely very few people could actually bear to envisage what the country would be like if The Green Party’s policies were ever made manifest in any kind of sphere of political influence. At the very least Natalie Bennett’s car crash defence of the Green policies on Sunday Politics should elicit the well known spectre: ‘Be careful what you wish for’ young people. Or to use a famous Shakespeare line:

Take but degree away, untune that string,
And, hark, what discord follows!

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?

Never mind the quality of the Green New Deal just feel the width

The Green New Deal has another of their little reports out. Essentially saying the same as all of the previous ones. Print more money to spend on all that Caroline Lucas holds dear. But it really does have to be said that the level of economic knowledge that goes into these reports is not all that high. We’ve for some years now had the egregious Richard Murphy shouting that we should just collect all hte tax avoided and evaded in order to beat austerity. He not realising that collecting more tax is austerity. For it reduces the fiscal stimulus as it reduces the budget deficit.

And of course, there’s a similar gross error in this latest report:

No Need to Repay QE
Since QE involves a central bank putting new money into circulation by creating e-­‐money and using it to buy assets, this will not increase Europe’s debt levels according to the originator of the term ‘quantitative easing’, Professor Werner, Director of the Centre for Banking, Finance and Sustainable Development at the University of Southampton. He states that since the central bank
can simply keep the assets on its balance sheet then there is no need for taxpayers to pay or to expand public debt. The assets should simply stay on the central bank balance sheet.
Furthermore, this debt, which would be owed by the government to the central bank would not have to be repaid, as Adair Turner, the former Chairman of the UK Financial Services Authority has made clear.
In the European context, the EIB is the European Union’s bank, owned by and representing the interests of the EU Member States and so the debt that the EIB would incur through Green Infrastructure QE would also not have to be repaid.

Well, according to that first paragraph I’ve no need to repay my mortgage as I used the loan to buy an asset. But leaving that aside note the deep appreciation of matters economic on display here.

QE is the central bank creating money to purchase assets. Therefore the EIB can and should do this. But the EIB is not a central bank with money creating powers. It’s an EU development bank that borrows on the usual capital markets for funding. The EIB simply cannot do QE because it’s not a central bank.

We might not expect any more insight than this from a combination of Caroline Lucas, Richard Murphy and Colin Hines. But Larry Elliott has always been rather more sound than this: is he still with this group or has he left in disgust?