The Pin Factory Blog

The fact that governments intervene in one area gives them an excuse to intervene in another. The demand that all car passengers, including those in the rear seats, should be compelled to wear seat-belts was justified by the observation that taxpayers supported the National Health Service, so if a passenger was injured in an accident, it would be a cost on us all. Laws banning smoking, and this week's proposal to put a tax on sugary drinks, are other examples that use the same justification.

Now the universities minister David Willetts is causing a stir in academe with his plans to force through open access. At present, academics do their research and try to get it printed in various academic journals. The more prestigious the journal, the more the paper is scrutinised through peer review, so getting printed in a good journal is some indication of quality. It is a costly process, and the leading journals can be quite expensive for libraries to buy, but at least the research that does get published is reasonably reliable.

However, Willetts takes the view that, since since we have a taxpayer-funded university system and a taxpayer-funded set of research councils, anything the academics produce rightly belongs to the public and should be made immediately and freely available – what is called 'open access'. The universities will not have to pay to get articles processed, and their libraries will not have to pay for the expensive journals, but they will have to pay to make the research available.

So it is quite probable that many of today's journals, and the learned societies that sponsor them, will simply disappear – which may help explain why a dozen of them have written to the government to complain about the idea.

Many academics have already opted for an open access policy (a policy practiced by the Adam Smith Institute too), since they want to get their work and ideas out to a wide audience. But often, papers are put online without proper editing – because the authors are not professional editors – which means that mistakes creep in (something that can be potentially dangerous in, say, medical or engineering research papers online). And the research goes up without proper peer review that might expose fundamental errors.

Academics will find that it is their university colleagues, not anonymous expert peers in the field from all over the world, who decide what goes online – but university jealousies can be very bitter.  If there is no effective peer review, it will be hard to know which research is reckoned to be reliable and which is not. All papers that go public will have to be treated as potentially suspect. Mind you, in economics, some of us came to that conclusion many years ago. Perhaps David Willetts would be better employed making sure that research projects were a proper use of taxpayers' money, rather than bullying his university employees about how they present it.

A Taxpayers’ Alliance report released today finds that the government has raised taxes 299 times since May 2010, and only cut taxes 119 times.

I’m not surprised about the direction of changes to the tax code, but the sheer number of tax increases is really quite amazing. Eight years ago, George Osborne said he was in favour of “simpler and flatter taxes”. I’m not sure what happened to that.

It’s staggering to see how many of the new taxes have been designed to shape people’s behaviour. Almost everyone in British politics assumes that they have the right to impose ‘good behaviour’ on the great unwashed. As a result, we get rises in alcohol and tobacco duties, and this week’s proposals for a tax on sugary drinks. This is very muddled – pleasure is entirely subjective. One man’s binge drinking is another man’s pleasant Saturday night out.

One of the big appeal of flat taxes is not that they eliminate the different bands of income tax, but that they get rid of the thousands and thousands of pages of exemptions and special rates that complicate the system, pervert incentives by encouraging inefficient economic activity, and create deadweight losses in the shape of high costs of complying with complex tax codes.

You could, theoretically, have a ‘sort-of-flat-tax’ that kept two bands and a tax-free personal allowance, but got rid of every special tax and special exemption, with the savings going towards a raising of the personal allowance. That might be more feasible than a true flat tax with a single tax rate, but would still have most of those advantages. Unfortunately it looks as if we’re going the other way.

"Wherever producers have secured any power, they have used it to limit production, to enhance prices, and, in a word, to rob the rest of us. Power in the hands of producers has never been employed except to limit the wealth of the whole community. No force known to economic science or to experience, except the force of competition, has ever done anything to keep producers in order, and without competition they have always contrived to limit their production and to diminish their contribution to the commonwealth."

Publisher Sir Ernest Benn (1875-1954), Why Freedom Works

A campaign group – you know, one of those bodies that sounds official but isn't, and is stuffed full of folk on the public payroll – wants to put a 20p tax on bottles of fizzy drinks. It's to combat obesity, they say.

No, it's about micro-managing our lives, which 'experts' always believe we are unable to manage for ourselves.

The average person gets about 2% of their calories from fizzy drinks. Sure, some people drink a lot more. But will a 20p tax dissuade them? No, it is just a stealth tax at a time when we are over-taxed already. People have strong favourites in soft drinks, and studies show that the tax needs to be a lot higher to make people switch. Even then, they just switch to other sugary but untaxed drinks.

Proponents say the tax would raise £1bn that could be spent on diet education for children. I doubt if any of the money would actually get to that destination. Just think about it:

Presumably some soft drinks will be hit, some not (as there are low-calorie alternatives on the same shelves). The Department of Health will want to set up a quango to decide which should be taxed. Then shopkeepers, who are struggling enough at the moment, would have to separate taxed from untaxed drinks and account for the tax. Then send it to the Revenue, which has to account for it and then send it on to the Treasury, which has to earmark it and send it to the Health and Education departments. They will each need a bureaucracy to decide how to spend it, and another bureaucracy to run the programmes, and a third monitoring bureaucracy to make sure that the money is spent properly. All the tax will really buy is £1bn-worth of bureaucracy.

If we really want to help our children, a better way might be to get bureaucracy out of our hair and pay down the national debt, which saddles every newborn with a £17,600 bill.

Denmark introduced a 'fat tax' a year ago but it was so unpopular that they have now scrapped it. It was supposed to hit things like crisps and chips, but actually was applied to meat, yoghourt, even gourmet cheeses. North German supermarkets did a roaring trade as Danes shopped abroad to escape the tax. Specialist businesses selling meat or cheese were badly hit.

And as our report The Wages of Sin Taxes notes, a tax on soft drinks hits poor families the hardest. Groceries, food and drink, is a much larger part of their budget. But it would not make a scrap of difference to the middle-class campaigners who are advocating it.

It's soda today, what's it going to be tomorrow? Chocolate? Cake? Cheese? Bread? Milk? Spare us, please, to get on with our own lives.

When you calculate the depressing effect of company taxes on incentives and economic growth, you can see why businesses resent them – and indeed do their best to avoid them. The point was brought home to me when I re-read Why Freedom Works by Sir Ernest Benn (1875-1954), a successful publisher (and uncle of the Labour politician, Tony Benn).

One trouble with corporate taxes is that companies that make a profit see themselves taxed, while companies that make a loss have to bear it. Benn imagines three companies, each with a capital of – let's make the numbers easy – £100m. Two make a 10% profit of £10m, the other makes a 10% loss of £10m.

It is the 10% profits that politicians look at when thinking about the impact of corporate taxes. It seems a juicy enough return to be taxed. But just a moment: in reality, the £300m invested by the three companies actually produces total profits of just £20m – a rate of return of just 6.66%. Taxing this rate of return seems rather meaner.

And it gets worse. The net profit of the three companies is actually just £10m (£10m+£10m-£10m = £10m). So in fact the £300m capital has produced a net return of only £10m – just 3.33%. Taxing that looks positively perverse. After all, business does not guarantee anyone a job or a return for life. There are ups and downs, profits and losses all to be borne. If entrepreneurs figure they are likely to succeed just two-thirds of the time – which is optimistic – their successes will need to earn enormous profits for them to carry a tax burden like that and still have some reward left for their efforts.

Yet the entrepreneurs who stumped up the £300m capital for these three businesses actually get rather less than the £10m in total profit. By the time they have lost half their income to income tax and national insurance, their net return is £5m (£10m after tax)+£5 (£10m after tax)-£10m (untaxed), which is a total of...er, nothing. It makes you wonder why anybody does it, really.

So maybe it is not so surprising that entrepreneurial companies try to avoid the UK's corporate taxes. Or, which is easier, elect to move abroad and trade somewhere else.

Summary: The growth of deposits in US banks continues to accelerate. The numbers imply healthy broad money growth, eventually translating into activity.

What does the chart show: The chart shows the thirteen-week (ie, three-month) annualised rate of change of deposits in US commercial banks. The red line is total deposits, the blue is large time deposits (ie, deposits in excess of $100,000) and the green line is other deposits. The thirteen-week annualised rate catches the most recent trends, but can be volatile.

Why is the chart interesting: Broad money is a leading indicator of economic activity. Broad money consists of the bank deposits of the private non-bank sector (ie, households and non-bank companies) and of cash. But of these two, cash is just short of 1.1 trillion dollars, while deposits total some 12.3 trillion dollars and are therefore vastly more important. Since early December, deposits have grown by double-digit rates. This is a clear indication of continued healthy, if not spectacular, US activity in 2013. The threat of the fiscal cliff is very much a myth.

Chart and comments provided by Stein Brothers (UK), www.steinbrothers.co.uk

You will no doubt have seen the news that a number of the eurozone countries have decided that they will have a Robin Hood, or financial transactions, tax. Given that the continentals are getting one we've obviously got the cries from the campaigners that obviously we must too. Sure, they've been saying all along that we should: and I've been saying all along that we shouldn't. And I'm now using the introduction of the tax to insist that we still shouldn't have one.

But I am even more correct than usual at this point. The very fact that they are getting this tax means that we really shouldn't have one now.

The basic case for the tax is that it will shrink finance, reduce price volatility and also at the same time raise a huge sum of tax money. The basic case against it is that it will shrink finance, raise price volatility and won't raise a bean: indeed, it will shrink the economy so much that total tax revenues will fall. You can read the detailed arguments here.

Of course, you could just say, well they would say that, wouldn't they? Those in favour are still in favour, those against are against.

But let us all be properly honest here. None of us actually knows what the effects of this tax are going to be. Oh, we can predict, we can work from theory, look at the effects of other such taxes. But no one has actually tried this particular experiment as yet. So there's uncertainty about everyone's predictions. And what is it that we do when we're uncertain? Well, if we can, we conduct an experiment.

And very fortunately, we have this experiment being conducted for us. All we have to do is observe it. Those eurozone nations will be in the tax and we and others will not. We should therefore be able to test and see whose predictions are in fact correct.

Most of the effects will be very difficult to measure. Will it shrink GDP? Well, what would it be without the tax? What would revenues be with a larger GDP but without the direct ones from the tax? We're well into Bastiat territory and trying to measure the unseen. But there is one that should be easily measurable: price volatility.

Those in favour of the tax say that "excessive" trading increases price volatility. The tax will reduce the amount of trading and thus volatility. Those against the tax say that reducing liquidity will increase price volatility. Thus the tax will increase volatility. And since we will have some markets which have the tax, others which do not, we should be able to see which holds: an increase or decrease in price volatility? Do, please, recall that this was the original argument in favour of the tax, to reduce said volatility.

We obviously need time to do this study, we need a few years' data. Which is why we really don't want to have such a tax ourselves as yet. We need to remain the control. So that we can actually find out whether the tax is a good idea or not.

In essence, that the continentals are going to have an FTT is exactly the reason why we shouldn't have one, not yet at least.

Another day another gaggle of idiots demanding that the world be run in their image. This time it's Christian Aid and the usual fellow travellers launching a campaign called "If".

Their basic observation, that's there's enough food that pops out of the fields of the earth to feed us all, is entirely true. Further, that despite this enough food there are those who go hungry, to the point of malnutition and starvation is also true. Thus it is also clearly true that it is desirable than we do something about this.

Excellent, but something must be done does not mean that this is the something that we must do. Their something(s) are that we should collect more tax, spend more in aid, bash the corporations and well, you've heard the list often enough, you can complete it.

Other than the obviously sensible idea that we should stop putting food into cars this is, I'm afraid, just the usual wibble. And what makes it so extremely annoying is that we've had a couple of reports recently telling us what actually does need to be done. Just last week it was IMechE and some months back Oxfam I think it was. They noted that food waste in this world divides into two. There's us people in the rich world who find food so convenient and cheap that we don't even bother to grind up the potato peels into nourishing gruel. Quite the shame on our society. In the poor parts of the world that's not the problem at all: anything not actually rancid that makes it into a poor household is going to get eaten.

There the problem is that up to 50% of the food rots or is envirmined between the field and the consumer. Our food waste could be solved by a good recipe for turnip scrapings. The poors' food problem could be solved by....well, by what? Well, by the same darn system that makes food so cheap for us. The commodity suppliers that do the trucking of food around, run the grain elevators, store the potatoes. The food commodity markets that allow the risks to be spread from farmers and consumers to speculators. The supermarkets and the industrial processing companies that extract every possible calorie and then present it to us in rat and roach free surroundings.

In short, what the poor world needs is a food industry as we have a food industry. One that gets the crops from the fields to where mothers can prepare it for their children without it rotting or being eaten by animals and bugs along the way.

So do they suggest that this is what should be done? The people who know how to solve the problem should be offered access to go and solve the problem? Do they heck:

If we force governments and big corporations to be honest and open about their actions that stop people getting enough food. Transparency and accountability are vital in the global food system. Decisions that can affect millions of people are made behind closed doors, without the participation of those affected. Corporates and governments must be more transparent about their affairs so that citizens can hold to account powerful players in the food system.

It's not that biig corporations aren't transparent. It's that big corporations who know how to do these things aren't there. Often aren't allowed to be there (as in India).

I'm all for solving problems like aiding the poor in gaining access to food. But I really do wish these campaigners would just bother to read what others have been trying to tell them on these very subjects.

After all, we are continually told that it's industrial agriculture and supermarkets that are making us all fat. And isn't that what we're trying to achieve? That the poor also gain an opportunity to get fat? So why aren't we recommending industrial agriculture and supermarkets as the solution?

I assume politics has something to do with this stupidity.

Just when you think it's safe to return to David Cameron, he bites you in the leg. That is what UK business leaders are thinking right now, after his warning to international companies to 'Wake up and smell the coffee' – a phrase that is supposed to remind us of Starbucks, the fact that they manage to pay very little tax in Britain, and how unpopular that is.

Well…corporation tax. Even Starbucks pays plenty of other taxes: business rates, value added tax, employer's national insurance, and all the income tax that is stopped out of their workers' salaries – though I've probably missed out import tariffs and a dozen others.

But Mr Cameron can't have it both ways. You cannot say you favour tax competition and then complain when you lose out from it. Nor that you believe in being part of an open Europe, for that matter. Companies are perfectly entitled to base themselves anywhere they like in the EU, and operate in any other part. If Britain's taxes are too high, they will simply base themselves somewhere else.

High taxes are forcing big companies out of Britain and small companies out of business. That point was made to me yesterday by a small-business friend who now says that he is doing two-thirds of his business online or out of offshore companies. The reason? The likes of Amazon, now selling not just books but all kinds of goods and indeed now services too, have an instant 40% tax advantage due to their foreign domicile. High-Street shops, with all their overheads and then their local and national government taxes, cannot compete with that.

This trend can only accelerate as more and more business is done online, through companies that hardly have any real domicile at all. People might complain about them not paying UK taxes, but they still buy their products, because they are so much cheaper. Mary Portas will not save the High Street, nor will trying to pursue international companies for any loose change that HMRC can screw out of them. But turning Britain into a tax haven might just do it.

It's time to wake up and smell the competition. The UK needs to make itself so attractive in terms of taxation and regulation that businesses actually start elbowing each other to move their operations here. Then we might see some recovery and stop whining about tax avoidance.

Yesterday I argued that we are facing a crisis of government that is leaving its mark on everybody. Today I want to mention some more hoof prints left on society by government.

"Crony Capitalism" is a description of an economy in which success in business depends on close relationships between business people and government. Crony Capitalism occurs when business people seek regulation and the massive cash flows held by government.

This rent seeking occurs through self-seeking behaviour by those competing to receive rents generated by government decision making. Rent-seeking includes lobbying for positions and contracts and campaigning for policies that create rents. Rents are revenues paid to favoured companies or individuals for services rendered. Rent seeking is endemic in crony capitalist systems today. When rent-seeking and payoff become more important to producers than the delivery of goods or services to customers, it causes markets to eventually fail. 

In his seminal 1971 paper, "Theory of economic regulation", Nobel laureate economist George Stigler observed that regulation by the state is a more important source of rents, benefitting incumbent firms and individuals at the expense of potential competitors (this rent is sometimes referred to as gains from "barriers to entry").

Moreover, Stigler suggested that regulation is sought by the regulated industry - and is designed and operated primarily for the industry's benefit. Consumer activists Mark Green and Ralph Nader largely concurred, writing in 1973, "the verdict is nearly unanimous that economic regulation over rates, entry, mergers, and technology has been anticompetitive and wasteful". 

Remember the recent horror when Ford announced they were closing their Transit production facility and transferring it to Turkey, having just received a £10million handout less than one week before they announced the closure. Explicit subsidies to corporations foster inefficiency and uncompetitiveness in private and public enterprise. 

Often the government does not even have to provide cash. An endorsement of a company is enough to carry massive benefits to the recipient. Some UK banks have 'Too Big To Fail' status bringing them massive implicit subsidies. These same banks reap massive profits because of their TBTF status and the additional risk they carry because management knows government can always bail them out if it all goes wrong. 

Government creates moral hazard when one party to a contract takes advantage of asymmetric information to act in a manner inimical to the interests of the other party. Looking at UK banking again, we see moral hazard created through asymmetric information provided by government passing TBTF status to some banks and excluding others. The government then wonders why distortions in the banking market create a lack of competition and embarks on generating more regulation to fix the problem. Many industries face moral hazard where government involvement means government sponsors excessive risk taking or poor management while taxpayers pick up the tab if things go wrong. That kind of moral hazard is not just harmful, it is wrong.