Perhaps James Daley could be encouraged to learn some economics?

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This rather surprises us even if, perhaps, it shouldn't. That a man can reach a senior management position, reach middle age in fact, without having the first clue about how products are priced by those who sell them. James Daley, used to be of Which?, is railing about credit cards fees being charged.

But the likes of Ryanair and Easyjet are still charging 2pc. While British Airways charges a fixed fee of £5 a ticket – which can amount to a double digit percentage on cheaper shorthaul flights. The reason that companies have been getting away with this is that no one is enforcing it. Strictly speaking, it falls to the under-resourced Trading Standards. But consumers are also in their rights to challenge companies in the courts. I’m seriously considering doing just that. I’ve spent several thousand pounds on flights over the past few years – and I’d like to challenge the airlines to justify the excessive credit card charges that they’re passing onto their customers.

This is all about credit card fees that airlines and others are charging us to purchase things over their websites. And Daley has entirely missed the underlying point here. Companies do not charge us on a cost plus basis. Nor should they: we would not like a world in which they did. Suppliers of whatever it is charge us the maximum they think they can get away with: the greatest price consistent with profit maximisation. And that's how it should be too.

If we had a static economy this would not be true: but thankfully we do not and we would not want one either. The point being one that Adam Smith noted, we actually want people to make excessive profits. For, as he noted, capitalists are both greedy and observant. They'd like to be making more than the average level of profit: and they will note when someone comes up with a plan to do so. They will then invest in that area producing that excess profit and the resultant competition will bring that profit down to average again.

And yes, we want this to happen in a non-static economy: because that's the thing that advances it by stopping it from being static. Some new technology comes along, and a new technology can be anything from a smartphone to the idea of unbundling the package that used to be air travel into the seat, the meal, the drink, the luggage and yes, even the paying by credit card and then charging for each separately, and if it works then people will copy it. Ryanair started, Easyjet followed and we're at the point now where almost all short haul carriage uses this model. Because profits are higher through using it and given the amount more we all fly so is consumer surplus. We're all better off as a result of this new technology.

This system is dependent not upon regulation of prices, not upon set margins for certain actions, but upon being able to gouge the customer for as much as said customer thinks whatever it is is worth. For it is the excess profits from doing exactly that which foster the competition that makes this new idea, new technology, near universal.

When people have alternatives, whining about the fee for one method or another of doing something is simply economically illiterate.

And yet these people are able to influence the legislation we all live under? Sheesh.

Applications for Freedom Week 2016 are now OPEN!

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Freedom Week is an annual, one-week seminar at Sidney Sussex College, Cambridge which teaches students about classical liberalism and free market economics. It is open to over-18s who are currently attending or about to start university. The event is jointly run by us and the IEA and will be held July 4th - 9th.

The week is entirely free to attend: there is no charge whatsoever for accommodation, food, tuition or materials.

If you are lucky enough to be successful in your application, you will spend the week immersed in talks from some of Britain's leading thinkers. Seminars will cover the foundations, history and underlying economic principles of classical liberalism, as well as discuss cutting-edge research and contemporary debate from within the movement.

As if that wasn't enough, there'll be as many evening activities as you can handle, including a BBQ, a drinks reception, several dinners in the College, trips to local pubs and a seriously fun pub quiz. Attendees will also be able to try their hand at ‘punting’ on the River Cam, and will have ample free time to explore Cambridge.

Still not convinced? Let our website cinch it for you: all this information and lots more can be found here.

Competition for the few highly coveted places is intense, so get your applications in ASAP before someone else does!

Remembering Rand

Ayn Rand (1905-1982) was born 111 years ago today, in St Petersburg, Russia. Through, in particular, her hugely influential novels such as The Fountainhead and Atlas Shrugged, she was (and still is) responsible for more young people becoming interested in the ideas of individual and economic freedom than any other author. One can see why. Rand offers young people a philosophy which reminds them of their own worth, gives them heroic models to aspire to, and provides a coherent world view that seems to answer all their questions. In the novels, the key protagonists are ambitious, purposive, independent and strong – ruthlessly self-interested and yet deeply moral. The morality of self-interest conquers all, she insists. The altruism that philosophers and clerics teach us is destructive and contrary to reason. It has consigned us into obedience to mystics and bullies who claim to know what is good for us. It is evil because it destroys and diminishes human life, instead of promoting it. Human life is the standard of morality, and your own life is the purpose of morality. You should not consent to be a sacrificial animal for others, but be confident in standing up for your own interests, and acting on them.

But that does not mean doing whatever you like. Though you should strive for your own happiness rather than serving other people’s, you need to be clear what happiness is, of what things are really important to you. Rather than indulge every passing whim, you need to take a long-term view of what is actually in your rational self-interest.

To Rand, what marks out human beings is their reason: their ability to understand the world by forming and organising logically consistent concepts based on their perception of reality. We betray our species and our selves if we do not use this powerful tool of knowledge.

Capitalism is usually regarded as immoral because it is not altruistic. But Rand believes that its basis in self-interest makes it the only moral system in history. There is no need for force to make people conform to some altruistic ideal. Indeed, the one rule of capitalist morality is that nobody may initiate the use of force. Instead, rational self-interested individuals get along by freely trading with each other, without any need for compulsion – benefiting not just themselves, but their trading partners in the process. The basis of capitalism is not conflict, but collaboration, between self-interested people. That is precisely why reason and freedom from compulsion have been associated with happy and prosperous times; while attempts to create some altruistic paradise have instead produced misery and squalour.

Gosh, what a wonderful idea legislation about mandatory technology is

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Some may recall the fuss that surrounded the banning of incandescent light bulbs here in the European Union. Our view, driven by the detailed industry knowledge of one of us*, is that this was something that could be taken care of by the market unadorned. If these compact fluorescent bulbs were all they were cracked up to be then people would adopt them voluntarily. And if they weren't then why should they be forced to? That was not the general view and the ban came into effect variously between 2009 and 2012, dependent upon the power rating of the bulb. Sadly, it was not in fact possible to simply swap bulbs: in order to get reasonable lighting effects many had to upgrade or alter, at some capital cost, their lighting systems as a whole. But still, no matter eh, because in this dim and flickering future of the CFL we'd all be saving so much money on electricity that we'd be happy anyway.

It's even possible that that could have been true. Except the CFL is now a redundant technology and everyone who did adapt their systems is going to have to do so all over again:

By the end of the year, GE will cease production and sales of compact fluorescent lights (CFLs), the manufacturer announced this morning. Moving forward, the company's focus will fall entirely on halogen incandescents and on high-efficiency LEDs.

"CFL's kind of been the light bulb that everybody loves to hate," explained John Strainic, chief operating officer of GE Lighting, citing the history of complaints about CFL dimmer compatibility, brightness delay, and quality of light. Strainic says that the industry has come a long way, but admits that the perception of inferior performance lingers. "Ultimately, LED offers a better solution at a comparable price."

Amazing, eh? The technology becomes redundant a mere four years after we're all forced to use it. The current replacement one, LEDs, was simply not ready for prime time those short few years ago. So aren't we lucky that we all got to be forced into this technological dead end for those years. Just what would we do without those Wise Solons telling us all how to light our own homes?

Other than, you know, being richer, freer and able to make the useful and important technological leap from incandescent to LED without having to mess around with CFLs in the interim?

The lesson from this being that when politicians try to mandate the technology we must use they should be met with a volley of that Anglo Saxon invective which so enriches the English language. And we do, so much that it hurts, look forward to the studies on how much this lunacy has cost us all, that forced investment in a technology to be superseded in less than the claimed lifetime of one of those CFL bulbs.

*No, no direct impact here, the interest is in halogens, the fourth technology not affected by any of this.

Corporation tax vs. sales tax

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I was on the Today programme this morning, at the ungodly hour of 6.15am, making the case for scrapping corporation tax and replacing it with a sales tax. This has come onto the agenda because Lord Lawson, chancellor under Margaret Thatcher, and great shifter of tax from incomes to consumption, suggested the idea. I also made a similar argument in City A.M. last week. Why might we want to scrap corporation tax? Corporations are legal fictions; the burden of the taxes they pay must come out of the pockets of their stakeholders. In fact, it comes out of their employees' wages and their shareholders' returns. In itself this is not a huge problem, but we have a huge weight of economics research telling us that we must not tax capital.

Why might we want to switch to a sales tax instead? Well, unsurprisingly given where I work, I'd probably prefer no tax hikes at all. But, presuming we have to raise revenue somewhere, then the goal is to minimise the distortions in the system. Taxing corporate profits discourages profits—the most reliable guide a firm is doing its joband discourages corporatesthe backbone of modern capitalism.

Sales taxes shift the burden away from successful, desirable economic activity and towards less successful or unsuccessful firms. And note that if firms have a future, investors will plough more and more money into them despite making tiny profits or even losses. This does not change that.

They also go some way to resolving public discord over the corporate tax burden. Since it seems impossible to get over the point that it's pension funds and Google staff who lose out if Google is squeezed (Google might be a bad example because it seems that in this case it's paying the amount required by both the letter and the spirit of the law), maybe this more transparent levy would satisfy popular demands.

Certainly taxing firms on their profit but based on their sales in a territory (rather than where they create value, as in the current system) would create horrendous disincentives—driving many firm subsidiaries out of the UK.

The main objection is the same objection as people give to VAT: sometimes it's unclear whether a sale is made in the UK or not; smaller firms find it costly to keep up with. These are legitimate but dwarfed by the costs of distorting investment under the current system.

The real problem is if a 'sales tax' becomes a revenue tax, and falls on intermediate transactions as well as final sales—this would discourage any subcontracting and push firms to become giant vertically-integrated behemoths. But I am optimistic: with a bit of pushing, sometimes reforming civil servants and politicians will do the right thing.

Why taxes and snooker rules are not that different

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Pretty much anyone with even the sketchiest understanding of economics knows that a competitive market is the mother of all driving forces for efficiency. In fact, Kenneth Arrow and Gérard Debreu have a mathematical proof called the Arrow–Debreu model which shows that if the conditions are propitious in terms of a competitive free market there will be a general equilibrium between total supplies and total demands reflected in a set of prices. Obviously there are all sorts of reasons why the reality isn't the case, and that's largely due to all the ways in which politicians interfere with the natural mechanisms of prices (taxes and price controls are two prime examples). Like others at the ASI, I am not unfriendly to some form of government - but one of the primary rules of thumb is that in most cases an interference in the market that upsets the natural price mechanisms created by supply and demand is an inefficient interference.

For a more generalised indicator about when it is likely to be bad to interfere in the market in terms of negatively affecting people's behaviour, consider the game of snooker as an analogy. I used to play in two types of snooker league: the open league and the handicap league. In the open league both players would start the game on zero, and the best players had the best chance of winning. However, in the handicap league, based on a points system conditioned by past results, better players would give inferior players a head start in an attempt to narrow the gulf in ability and make the frames more evenly contested.

The handicap league works because even though the points are differentiated at the start of play, both players are still incentivised to try their hardest and play to the best of their ability. A handicap snooker league in which poorer players were given more of a chance by the better players being compelled to deliberately play below par would be no fun for either player.

The snooker handicap league can provide a pretty good illustration for when governmental interference in the market is good and when it is not. Policies that cause the participants in the market (snooker players) to waste opportunities (play below par) are likely to be bad policies, whereas any policies that cause as few wasted opportunities as possible (in a way that's similar to handicap scoring) are less likely to be bad policies (note: pretty much all taxes and price controls cause some loss of efficiency, so that's why I said 'cause as few wasted opportunities as possible' rather than 'cause no wasted opportunities').

To translate that in market terms, taxes or price controls that change behaviour in a way that diminish efficiency are undesirable. A price control on renting apartments is going to negatively affect property development and create a shortage (which ironically makes renting apartments more expensive). This is the snooker equivalent of making players play below their best ability. On the other hand, taxes like inheritance tax or savings tax or consumption taxes on goods to which consumers are relatively price insensitive, while not without some behaviour-changing costs, are more like the snooker equivalent of handicapping - they don't greatly diminishing anybody's drive to perform well. And let’s not forget, some taxes, such as taxes on negative externalities like pollution and congestion are taxes that can change our behaviour for the better.

The upshot is, whenever you consider a tax, a price control, a subsidy, or any other kind of government involvement in the market, it is good to consider whether it is a solution akin to adjusting the starting scores in a handicap snooker match, or whether it is akin to asking some snooker players to perform below the best of their ability. The closer that government involvement is to the latter, and the farther away it is to the former, the less good for society it probably is.

People are still very confused about the Google tax story

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As a masterpiece of tripping over your own argument we think that this from The Observer takes some beating:

Recent wrangles between the European Union and the US on tax show how difficult achieving international consensus can be when competing interests are at stake. But it is possible: the EU is the most successful example ever of international co-operation.

Opinions obviously differ on how good the EU is at international consensus. But to use this argument when we are discussing Google's tax affairs does take some sort of chutzpah, possibly even ignorance:

Last week, the government chose to play both David and Goliath. George Osborne declared the deal UK tax authorities struck with Google to cover a decade of tax liabilities “a major success”, despite the fact that some estimates suggest this may represent an effective tax rate of just 3%.

The 3% number is nonsense of course. It is calculated by looking at the revenues that Google gains from sales in the UK and then applying their global profit margin. But if that's the sort of nonsense that people wish to use then why not humour them. And then ask, well, what rules are they that allow such a tax rate?

The rules that allow this are of course the European Union's own Single Market rules. Which give an absolute right for a company in any one EU country to sell in all EU countries and pay tax where the company is resident, not where the sales take place.

Some success in international co-operation and international consensus then. The organisation which is being praised is the one producing the initial problem being complained about.

Our own view is as we've said before. Corporations used to be a useful proxy as a place to tax the returns to investors, even with the unfortunate side effect of some of the economic burden falling upon workers. They are clearly no longer such a useful proxy so we should give up the pretense. Just abolish corporation tax altogether and simply tax people in their incomes and or consumption. At which point tens of thousands of tax experts have to go do something useful with their lives.

Such a pity, eh?

There's a declining marginal utility to government just like there is to everything else

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We are perfectly happy to agree with the idea that government is a good thing to have. We are not, after all, anarcho-capitalists around here. However, we are at least economically informed, and are aware that there's diminishing marginal utility to pretty much everything. And thus, inevitably, there's also diminishing marginal utility to more government. Thus we have no objection to this basic statement from Noah Smith:

There’s a good argument that quality of government in North America, Europe and Japan improved dramatically in the 19th and early 20th centuries. Government became steadily more participatory and less predatory. Bureaucracies became more professional. Spending on infrastructure dramatically increased, funded by taxes. Public services such as urban sanitation -- which Gordon counts among the Great Inventions, but which is dependent on government efficiency -- curbed disease and improved health dramatically. Health and safety regulations helped as well. Public education greatly increased the skills of the workforce.

Libertarians often portray the state as a parasite, but there is a good argument that big government -- and, more importantly, good government -- was responsible for a significant amount of the growth in developed nations between 1870 and 1970.

That kind of improvement was probably a one-off.

We wouldn't, perhaps, emphasise it in quite that manner but the underlying idea is to us clearly true. Some part of the improvement in life over the past century or two was indeed because government became less predatory, more efficient and so on. However, we would also insist upon thinking about Maslow's Hierarchy (as Smith does in part) a little more with reference to government. Maslow's point being that some needs or desires become satiated and then our ever increasing wealth gets turned to sating other and different needs and desires. And we are really pretty certain that our need and or desire for more government has been sated.

Note the important point at the heart of Maslow's thinking: it is that at any point of income or wealth we have superior, normal and inferior goods. A superior one is where if our income (or wealth) increases then we will spend a greater portion of that new income on that good than we have previously being paying of our total incomes. Normal goods claim the same proportion of that extra income, inferior ones less than that average rate. And given that, the real point is that all goods are, at some income level, superior, normal or inferior. Yes, even including government and or governance.

We're entirely happy with the idea that at some level of income more government is a superior good. Medieval government was lucky to get hold of 5 perhaps 10% of the economy in any one year and yes, we do think that rather more than that devoted to a basic welfare safety net is entirely reasonable. But note again that at varied income levels absolutely everything becomes a superior, normal and inferior good over time.

All our contention is is that at this level of income government is an inferior good again. As our incomes rise we should be spending a smaller portion of our incomes on it. We've beaten the big problems that more government can beat: so, let's have less of it into the future as a portion of our incomes.

While we have our sympathies with Guy Fawkes, apologies, this just won't work

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There's a great deal to like about this idea. Given that the Palace of Westminster needs billions in repair work, why not simply abandon it and stick the politicians in a series of rabbit hutches in Barnsley. Or, perhaps, Bradford. Rather joyous to contemplate in fact. However, sadly for our fantasies, we don't think it will work:

No matter how much those who have worked there love the rodent-infested, mock-Gothic fun palace, perhaps the time has come to let it go. And if we’re getting radical – and this will please the Chancellor – why not go whole hog and avoid the punishing costs of building in the dead centre of the Capital by relocating elsewhere?

The reason is this:

The Palace of Westminster has been a Grade I listed building since 1970 and part of a UNESCO World Heritage Site since 1987.

We most certainly can't knock down a Grade I listed building and there's very serious limits on what can be done to change it internally, too. Given the laws that have, err, been passed in that Palace there's not really anything we can do with that Palace except leave it pretty much as it is. Maybe with a spruce up, yes, but even trying to change the internal layout of rooms would almost certainly be verboeten.

That is, the choice is not between saving money by abandoning Westminster and locating elsewhere, it's between repairing Westminster (no, you cannot simply leave a Grade I listed building to collapse) and sticking the politicians back into it or repairing Westminster and paying a further fortune to stick them elsewhere (recall, the Scottish Parliament did not exactly come in on budget).

So, nice idea but not one that really passes the public expenditure test. We've got to repair that building anyway and we can't really use it for anything else. Joyous as it would be to have the Commons in, say, Radstock, and the Lords in, possibly, Scunthorpe.

People just still aren't getting it about Google's taxes

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There are any number of people saying things akin to this about Google's tax affairs. And sadly all of them are exactly and precisely wrong:

But Jeremy Corbyn said experts thought it amounted to an effective rate of about 3%, in contrast to rates of corporation tax of above 20% over the last decade.

The Labour leader pointed out that most people did not have the luxury of personal meetings to discuss their tax affairs. “Millions of people are this week filling in their tax returns to get them in by 31 January,” he said. “They have to send the form back. They do not get the option of 25 meetings with 17 ministers to decide what their rate of tax is.

“Many people going to their HMRC offices or returning the [form] online this week will say this: ‘Why is there one rule for big multinational companies and another for ordinary small businesses and self-employed workers?’”

About lobbying: well, what does anyone expect will happen? The more arbitrary and political the treatment of a company is the more lobbying will be done to influence the politics. But the thing which is exactly wrong is this idea that Google is exploiting some set of rules available only to large and or multinational companies. That is precisely wrong: completely the opposite of reality.

What it is actually doing is saying that it sells its advertising into the UK from Ireland. The tax treatment of those advertising sales is thus up to the Irish taxman, not the UK. Maybe it shouldn't be this way, maybe it should, but that is the way that it is. And under the usual treaties (OECD standard ones, and also current EU law) that really is the way it is.

So, why is it this way?

Because international tax law accepts that we would like to have small companies taking part in international trade and also that it's possible for the demands of the tax authorities to be too high to allow them to do so. A UK company which makes the occasional sale in Germany say: or India. Do we think that they should then file a German, or Indian, tax return? Try to pull out the profit that was made on perhaps 0.5% of their turnover just for that one tax authority? Prepare accounts according to the standards of every country they ever ship a package to?

No, obviously, we do not insist upon that. It's as plain as the idiocy on a tax campaigners' face that we're not going to insist upon that: not if we're to allow small companies to take part in international trade.

So, how do we organise it? We have a definition of when a company is "really" in a particular taxing jurisdiction. Essentially, when there is a "permanent establishment". No, don't worry how that is defined: just accept that there's going to be some cut off point. You're a big company with a big presence, cough up locally. You're a flea bite on the economy? This economy is trivial to you as a company? Well, why not just account for profits and pay taxes at home then?

Note again: we do not insist that the current rules are right. Only that there is always going to be some approximation to this system in any international taxation system. We simply are not going to insist upon a German tax return for the two man UK company that ships a model train steam boiler to one customer in Germany. And thus we must have a distinction.

What is it that Google is doing? They are claiming that their Irish Google, the one that sells all the advertising, is in fact an Irish company with no such permanent establishment in the UK. Is this thus special rules for multinationals, for large companies?

No, obviously it isn't. This is a tax simplification set up for small companies. And Google is claiming it by claiming to be a small company. This is a tax simplification available to absolutely every Irish company that sells into the UK. It's one that applies to every French one selling into the UK, to German ones selling into Romania and to all UK companies selling everywhere. As long as you don't have a permanent establishment where you are selling then you pay your tax at home.

Whether it should be this way is another matter. But we really do think it's important to point out that Google is not exploiting some loophole only available to large companies. It's actually using one that was designed for small companies and applies to all small companies. And it's also one that just about every company that does any international trade at all uses at some point or another. Even the largest global exporter does not have a permanent establishment in every tax jurisdiction. Finally, the tax system just wouldn't work at all, not and allow small companies to conduct international trade, if something like this were not in place.

Exploitation? Loopholes? Abuse? Unfair? Could be any of those things according to your own opinion. But let's get it right about which loophole is being exploited to produce possibly unfair abuse. Unlike, you know, all the tax justice campaigners. This is a small company exemption, not a large company one.