We all owe a significant debt to Richard Murphy

We have, we have to admit it, at times been less than respectful of the ideas of Richard Murphy, the noted tax campaigner. We certainly thought that his genesis of Corbynomics was worth a giggle or two at the time. But here we have to admit that we all owe a significant debt to him. For it has been a most vexing question, this one of well, just what actually is tax avoidance? 

Tax evasion we know about of course: that's whatever is illegal. Avoidance though is a blurry area. At times it has seemed that the definition is anyone paying less than the respondent, say Richard Murphy, thinks people should be paying. Fortunately we now have clarity in this matter.

As background Richard Teather, a long time friend of ours here, had a look at Oxfam's rather tortuous process of claiming Gift Aid at the IEA blog. It's obviously not tax evasion as we're not hearing the clang of prison doors closing on the perpetrators. But it does look very like avoidance: a complex process with no economic or business justification other than to claim a tax relief. Others have been accused of tax avoidance on less evidence than this.

Thus confusion and Richard Murphy has come to our aid here and that's why we owe him our thanks. For he has given us a written in stone definition of what actually is tax avoidance:

So the test for Oxfam is whether or not the government intended, or knowingly permits, the arrangements that Oxfam uses. 

Which is excellent. Because this equates to our own definition of tax avoidance. Avoidance not actually being a thing or a state, but something a little quantum. There are two states: there is obeying the tax law and not obeying the tax law, being tax compliant and tax evading.  Tax avoidance is that uncertain state before we open the box to see if the cat has died. And here the test is not the dead cat but whether the arrangements have been looked at and found not to conflict with the law. Avoidance collapses down to the state of tax compliance.

This is extremely useful of course. Starbucks and the royalties to Holland, margins on coffee beans to Switzerland. Both have been looked at by HMRC, both are within that law, both are thus tax compliance, not avoidance. Boots loading up on debt: entirely legal thus not avoidance. Vodafone and the CFC rules: legal, not avoidance. David Cameron and the Panama fund: wholly and absolutely legal and thus tax compliant.

And of course Amazon, Google, Facebook and Uncle Tom Cobleigh selling into the UK from Ireland and other points:

Non-resident trading companies which do not have a branch in the UK, but have UK customers, will therefore pay tax on the profits arising from those customers in the country where the company is resident, according to the tax law in that country. The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works. 

Which is why we really must thank Richard Murphy. Because we've now got a strict measure of what tax avoidance is, one we can all agree upon. If HMRC looks at it and says that's fine then that is fine. It is not avoidance.

And so thanks to Richard Murphy. There's pretty much no tax avoidance going on, only some criminal amount of tax evasion and the vast majority of the economy is entirely tax compliant. And, of course, if we cannot believe the noted tax campaigner, inventor of country by country reporting and the Professor of Practice in International Political Economy at City University on such a point then who can we believe?  

Startups fail for the same reason markets succeed

In the current jargon a unicorn is a private company, usually venture capital backed, which has a valuation above $1 billion. They are what everyone wants to create, what all lust after investing in. However, it's also interesting to look at what happens at the other end of that success scale:

It’s a common adage in Silicon Valley that 90% of startups ultimately fail. To understand why that’s the case, a pair of researchers meticulously pored over 193 blog posts—startup postmortems, if you will—written by founders examining what went wrong.
...
But taken as a whole, the insights from the research project are intriguing. For the failed startups analyzed in this study, the factor most often cited by founders, even more often than running out of cash, was that their business models weren’t viable.

It's not obviously true that we wish such adventures to fail. But that reason so many of them do fail is precisely and exactly why markets work so well in making us all immensely richer over time.

Times change: technology changes, desires change, fashions do. At any one time there's a certain technological space therefore and that shape and size of that space changes with the passing moments. We thus want some system of sorting through the possibilities to see which do in fact add value. Which options take scarce resources at their current prices and then add value to them, that added value being what we call making us all richer? 

Well, another name for finding something that does ad such value is finding a viable business model. For if you are adding value to those resources then you're making a profit. Which is indeed what we generally describe as a viable business.

Any such system of sorting through the possibilities must have a method of rejecting those that don't add value: we might also terms this as closing down those experiments which don't have a viable business model.

That is, exactly how those failing start ups fail, by not having that viable business model, is precisely how the system of market experimentation makes us all richer. Because we're exploring all the new opportunities of the greater technological space and rejecting those that don't add value.

Child Benefits and Immigration

I am not sure why we are paying parents more than £712 p.a. per extra child when they have two already.  When the population is shrinking, encouraging the birthrate makes sense but when the population is expanding as fast as it is in the UK and we have pressures on schools, housing, roads, trains and the NHS, to name but five, why are we doing this to ourselves?
 
Most of UK population growth is due to children born here rather than net migration from within or beyond the EU.  Yet we are besotted with the migration issue which might even determine the outcome of the EU referendum.  What would be the ideal population size for the UK?  And how should we achieve that?
 
It is not as though destiny forces these extra children on parents who therefore need our help.  They have a choice in the matter and there is no shortage of products to assist them.  They decide to have extra children to please themselves, no matter how much they burden, and even annoy, the rest of us.  Any grandparent knows that, whilst one’s own grandchildren are wonderful, everyone else’s are dreadful and the world would be a better place without them.
 
Limiting the number of children per family receiving state benefit is not a new idea.  When the French did it, it proved too successful and they had to revert. The UK growth is too fast for that to be a problem here.
 
No doubt the loony left will tell the rest of us that large families have a “right” to child benefits for all, that it is a fair and necessary transfer from wealthy families, typically with few children, to the poor.  But children typically cost more than £13.70 a week to rear so actually large families make themselves poorer, especially when there is only one working parent.
 
Part of the reason for large families is cultural and imported with the parents or grandparents.  For most people in the world, notably India and Pakistan, children are their pensions.  But we have adequate pension provisions in this country and there is no need also to pay for these extra children.  And there are plenty of reasons why the Chancellor should stop doing so.

Counterfactuals matter

Alex Tabarrok at Marginal Revolution has a really great post on car safety in India, which illustrates a major problem with attempts by government to protect consumers by regulating unsafe products out of existence.

According to the Global New Car Assessment Program, 5 out of 7 new cars made for the Indian market lacked airbags and would fail basic UN crash tests. Tabarrok quotes Global NCAP Secretary General David Ward "Global NCAP strongly believes that no manufacturer anywhere in the world should be developing new models that are so clearly sub-standard".

But demonstrating that a product is unsafe is not sufficient to show that regulating it would make people safer. As Tabarrok shows, counterfactuals matter:

Let’s take a closer look. These cars are very inexpensive. A Renault Kwid, for example, can be had for under $4000. In the Indian market these cars are competing against motorcycles. Only 6 percent of Indian households own a car but 47% own a motorcycle. Overall, there are more than five times as many motorcycles as cars in India.

Motorcycles are also much more dangerous than cars.

The GNCAP worries that some Indian cars don’t have airbags but forgets that no Indian motorcycles have airbags. Even a zero-star car is much safer than a motorcycle. Air bags cost about $200-$400 (somewhat older estimates here a, b, c) and are not terribly effective. (Levitt and Porter, for example, calculated that air bags saved 550 lives in 1997 compared to 15,000 lives saved by seatbelts.) At $250, airbags would increase the cost of a $5,000 car by 5%. A higher price for automobiles would reduce the number of relatively safe automobiles and increase the number of relatively dangerous motorcycles and thus an air bag requirement could result in more traffic fatalities.

Substitution effects are basic economics, but regulators often ignore the fact that consumers responding to incentives will switch to cheaper and often (less safer) alternatives.

Take the European Union's recent Tobacco Products Directive:

Cartridges and tanks of e-liquid will be limited to 2ml, a incredibly small amount, and refill containers to 10ml, completely preventing bulk-buying and outlawing the products users find most convenient. The maximum strength will be 20mg, ruling out high strength varieties that most closely approximate cigarettes.

The regulators who drafted this law hope to see the public's health improve as vapers switch to safer, lower strength E-Cigarettes, but it could very likely have the opposite effect. As E-Cigarettes, which are 95-99% safer than traditional cigarettes, become weaker and less convenient, consumers have less of an incentive to switch from tobacco to e-liquids. 

Likewise, attempts to improve public safety by banning low-risk tobacco products like Snus have backfired spectacularly.

Or take for instance, Austin, Texas. Its City Council imposed onerous regulations on private ridesharing companies like Uber and Lyft with the stated aim of protecting the public from unsavoury drivers. One of the key sticking points was a finger-print background check requirement that went far beyond what was expected for standard Yellow Cabs.

Uber and Lyft responded by going Galt. They left Austin altogether. What happened next shouldn't surprise anyone. The Drive reports:

Though the city frightened voters with terrifying depictions of a plague of Uber-rape, it’s now come out that people with sexual assault convictions, and even drunk-driving arrests, are actually allowed to drive cabs in Austin, few questions asked. "If you have ever been convicted of theft at any point, you could never get a chauffeur's permit,” a city council member told a local news station. “That just seems like too much.”

Then there are the opportunists who are actually thriving. I talked to one driver who seemed to be enjoying himself in this bizarre ecosystem of random auto-barter. Because of his “local media presence and history of bartending in the city,” he immediately scored an under-the-table gig providing two to three rides a day to executives from a prominent entertainment company, as well as whatever else he could cadge up on Facebook.

Attempts by government to protect the consumer too often fail to consider the counterfactual, if policymakers and regulators took substitution effects seriously, many regulations wouldn't see the light of day.

Fighting for control of our purse strings

The UK’s Crown Prosecution Service says that a new law is needed to stop terrorists and other criminals using Bitcoin-style digital payments for illicit purposes such as money laundering.

Really? We have more than enough laws already, and a quick way to cut crime would be to scrap two-thirds of them, but that’s another story. But the thinking behind this particular proposal is clear: our authorities feel that, because of technical innovation, they are losing control of money, and want to reassert it. Hence all the dire talk to bolster this new power grab. "Shock horror: Drugs are being traded on the ‘dark web’” – that sort of thing. Of course, if drugs were legal (even if regulated, like alcohol) this would not be a problem. (Yet another story.)

But the CPS proposal is another thin-end-of-the-wedge issue. Sure, we all want a way of dispossessing scumbags who pile up secret funds to finance terrorism or to conceal gains from fraud and corruption. But should the authorities be allowed to barge into everyone’s accounts, Bitcoin or regular, as they please, or on some fishing trip, or on the allegations of someone with a grudge? No.

In the early days, many authorities wanted to close down Bitcoin and other digital payments entirely. Again, the excuse was that criminals would use them. Pardon? Since most of the world’s crime is done in regular currencies, that arguments would put the entire boards of the Federal Reserve, the Bank of England and the European Central Bank in the slammer. A neat idea, but not exactly justice.

I remember decades ago, before cellphones and stuff, when Citizens Band radio came out – to the delight of long distance lorry drivers, who could not talk to friends while on the road (and warn others of police patrols). There were appeals to ban it in Parliament, on the grounds that criminals could use it to plot robberies (I’m not making this up). Well, we might as well have abolished telephones and letters (and while at it, heliograph or any other communication device). Again, it was fear of the technologically new.

The Feds say they have cracked the iPhone codes, though MI6 boffins still seem to be scratching their heads. Again, there have been demands to open up the codes so the authorities can snoop at will. Do we really think their snooping will stop at bad guys? Or will junior officials just not be able to resist prying into the text messages of a few celebs that the Sunday tabloids have interest in?

Apple was right to resist the Feds’ legal challenge, on the grounds that people’s privacy and people’s security are intimately bound up and too important to be given over to government politicians and officials. I think the same is true with money, of any kind. One of the joys of cash is that we can use it without the government keeping a track of our spending: after all, control people’s spending and you control their lives. Let’s keep it a private and secure as we possibly can.

New paper: Nothing to Hide

Today marks the release of a new paper by Nicholas Cowen of Kings College London: Nothing to Hide: The case against the ban on extreme pornography. In it, Cowen makes a robust case against the current prohibition on acts that are legal to perform—and yet not to record—show it to be expensive, dangerous, and illiberal.

Read the paper here.

Can you trust Treasury forecasts when they struggle with basic arithmetic?

The Treasury are playing a key role in the referendum campaign. They have published two reports which explicitly campaign for remain. The first looked at the long term impact. The second report published yesterday, looks at the immediate impact. Both reports are all doom and gloom. They claim our economy will quickly be pushed into a recession and we will be £4,300 poorer in the long term.

Like the Government’s referendum leaflet (which cost £9m to publish), this analysis isn’t balanced. It is openly designed to promote Project Fear. It also cost taxpayers’ money to produce. Civil service staff are being diverted to fight the remain campaign. These are vast resources which aren’t at the disposal of the other side, essentially circumventing the funding limits. A team of 20 treasury wonks would cost around £1m a year. 

Experts often make errors. From Corbyn’s recent election as Labour Leader, to the 2015 Tory majority or 2007-8 financial crisis – the establishment often get predictions horribly wrong. Philip Tetlock, a professor of political science at the Wharton School of Business is one of the world experts on forecasting. From 1984 to 2003 he tested 284 experts from government, economics and wider academia. On the 28,000 predictions they made, they were "roughly as accurate as a dart-throwing chimpanzee". We have little reason to believe the Treasury predictions are any better.

As a concerned taxpayer, I submitted an FOI request to the Treasury. We have a right to know how much this all costs. I asked them how much they are spending on the EU referendum and in particular for staffing numbers. Their (late) reply speaks for itself. 

“It is not possible to identify full time equivalent staff numbers involved in the production of HM Treasury’s analysis because of the range of staff who contributed on an ad-hoc basis from across the Department. We have not yet received the publication invoice.” Information Rights Unit, HM Treasury.

It is not possible to count up the team involved. But it is possible to predict the next 30 years to the nearest pounds and pence, complete multivariate macroeconomic modelling, and work together as a pan department team to quickly turn this around into 290 pages of reports. Either they can't do basic arithmetic or they are hiding the amount they are throwing at the campaign.

Naturally I have asked for a review, and will be writing to the information commissioner in due course. Having worked for the government in various forms, I know that they have this basic data. If the number is so great as to defy a count, they could ask HR.

Whilst people may have provided support on an ad-hoc basis, this is true of most organisations, projects and reports. They could still count the number of authors and core team members involved. They could even estimate the wider support. If the treasury is incapable of approximating the number of staff involved in an internal project, what can be said for assumptions used in their reports?

290 page reports aren’t conjured out of thin air, a team would have been created, or existing teams would have taken on the task. Often departments have to approve a business case and set aside funding before diverting resources to a major project. 

The Treasury’s forecasts have been criticised from many angles – their poor forecasting record (consistently missing borrowing targets), use of fishy assumptions, focus on grabbing headlines and use as ‘independent statistics’ whilst being instructed by a biased government. Either way, the public has a right to know the facts, including how much taxpayers’ money is being spent on promoting remain.

More Government meddling in the railways

Last week was a mixed week for competition in the railway industry. On Thursday 12 May the government’s Office of Rail and Road (ORR) made its decision on applications from three different operators for new services on the East Coast Main Line (ECML). Shortly after that, the Competition and Markets Authority warned new Northern rail franchise operator Arriva that they were investigating 44 cases where the franchise duplicates the company’s existing bus routes. The two stories combine to paint an interesting picture of struggling competition in one of Britain’s most heavily over-regulated industries.

Britain’s franchised rail system is often referred to as being privatised, but little could be further from the truth. Most services are set out in government franchise specifications, with operators winning contracts with obligations to provide services over a network of routes at given frequencies. The infrastructure they run on is owned by the virtually public Network Rail, whose permission is required in order for operators to launch any new services beyond those set out in the original specification. 

However there is another class of operator alongside the specified franchises. Open access operators, as they are known, propose completely new services outside the franchised system. Although countless proposals have been made, only two such operators currently run long-distance services on the British rail network: First Hull Trains and Grand Central. 

Both of these provide services from London along the ECML to new destinations away from those served by the East Coast franchise. Stops on the main line are limited to a few major interchange points, due to the fact that open access applications are judged in part by how much revenue they abstract from the franchised operators. On a network privatised to introduce the benefits of competition, applications have been repeatedly refused precisely because they would cause competition.

Latterly the ECML has been subject to a number of new applications. First Group and Grand Central owners Alliance Rail both wanted to introduce new London-Edinburgh services in competition with incumbent franchisee Virgin Trains, with Alliance also applying for new routes to Cleethorpes and West Yorkshire. Virgin had a host of new services they sought to add to those required by the franchise, including extra Edinburgh trains and new routes to Harrogate and Lincoln. 

The ORR elected to approve all of the proposals made by Virgin, while dismissing Alliance Rail’s extensive plans on the grounds of value for money and revenue abstraction. First Group’s limited proposal of five trains a day from London to Edinburgh was approved, but not without concern over its effect on the Virgin franchise. 

The decisions made here seem curious and inconsistent. While Virgin’s new services to Lincoln and Harrogate connect those cities to London and the south, Alliance’s similar services to West Yorkshire and Cleethorpes are rejected for revenue abstraction and the cost of providing new infrastructure for tilting trains, despite the clear benefits brought to these communities. 

Meanwhile Virgin’s extra Edinburgh services seem to deliver little in comparison to Alliance’s proposal, which would have cut the journey time between the two capitals. First’s approved proposal creates a kind of budget train, a single-class low-fare alternative more likely to attract passengers from coaches and airlines than from the competing rail service.

Competition between different modes of transport is always going to exist in any system, and the unrelated decision by the Competition and Markets Authority on the same day to investigate monopolisation of routes between Arriva buses and the new Arriva Rail Northern franchise is even more irregular. 

Rail franchises and buses have been run by the same operator on the same corridors in countless cases before, such as the entire section of the Midland Main Line from Luton to Leicester, without drawing any attention from the CMA. Furthermore, these concerns should have been brought up during the awarding of the franchise, not after its commencement.

Both of these announcements highlight how the rail franchising system is a disjointed mess of conflicting regulation, and the benefits envisioned in the 1992 privatisation plan have been all but lost under overpowering government control and intervention. 

With a return to nationalisation clearly offering no real prospect of change in what is already a heavily regulated industry, it seems the better option would be to move towards a deregulated approach, with open access services coming first. Operators could compete on the busy corridors and respond to passenger demand, leaving government, or preferably local authorities, to contract only those essential services left unprovided. Only then would true competition be possible. Only then would the needs of the passenger come before the needs of the state.

Apply now for the 2016/17 John Blundell Studentships

Applications for this year's John Blundell Studentships are now open. These are grants for students starting or continuing postgraduate research at a UK university in the 2016/17 academic year, who have themselves made a tangible contribution to the classical liberal movement and whose work will help to further the cause of classical liberalism around the world.

Full details are here. Applications close at midnight on Saturday June 18th, 2016. 

There's nothing so absurd that someone won't propose it

For example, we are bombarded with information, much of it incorrect, about food and diet. At the edges this bleeds off into the truly absurd:

However “civilised” we may now consider ourselves to be, biologically we are much closer to our stone age ancestors. There is a major mismatch between our modern urbanised world and our “paleolithic genome”, the genetic material encoded in our DNA, which supports an ancient hunter-gatherer lifestyle.

Put simply, urbanisation – which began with the advent of farming – is bad for us. Studies of skeletal remains in cemetery sites show that when the Romans introduced town life to Britain 2,000 years ago, they also introduced us to scurvy, rickets, osteomalacia, Reiter’s syndrome, gout, ankylosing spondylitis, rheumatoid arthritis, psoriatic arthritis, septic arthritis, tuberculosis, osteitis, poliomyelitis and leprosy. And today, the most common causes of death in half of our urban populations are obesity, cardiovascular diseases, type 2 diabetes, atherosclerosis, high blood pressure and various cancers. It is a sobering thought that all these conditions are rare or non-existent in non-urban societies, such as the tribal communities in Kitava, Papua New Guinea.

Certainly we agree that much about humans doesn't make sense unless we understand our own genesis. We really are apes who got lucky with that intelligence thing. But we do rather like the idea that we should apply that intelligence.

The diseases which tend to kill our urban populations today are those of age. Kitava?

Kitava has 2,300 inhabitants and the life expectancy at birth is estimated at 45

Err, yes.

And the Kitavans are also farmers and do not lead a hunter gatherer lifestyle nor eat like such.

That human intelligence is precious because it's so rare.....