The effects of abolishing corporation tax

As you all know I'm a great believer in pushing that corporation tax rate right down to zero. In simply abolishing the tax in all its forms. One of the arguments against this is that, well, whadda about the revenue to pay for schoolsnospitalsncouncilouses? And the thing is, I'm not entirely sure that there's actually all that much revenue in corporation tax. Here's a prediction about dividends for this coming year:

Stock market investors are in line for windfalls after research showed that Britain’s biggest companies are expected to pay out a combined £72.4bn in ordinary dividends this year. Businesses listed in London’s benchmark FTSE 100 and mid-cap FTSE 250 will lift their dividends for the current financial year by 4.5pc, according to financial data firm Markit. The total payout is expected to rise to £89.3bn once special dividends, including Vodafone’s $23.9bn (£14.6bn) shareholder reward, are taken into account.

Note that this is only listed companies, this does not include any private companies paying dividends: something which a lot of them do of course. That £80 billion odd has already paid corporation tax at what, 25% say? Do note that most of the dodges about corporation tax fail when it comes to money available to pay dividends: all that offshore stuff just doesn't work. So, given that the £80 billion is a net figure, add in a bit for private companies and we could guess that perhaps £30 billion, £35 billion has been paid in corporation tax upon these dividends. The recipients of those dividends then get a tax credit on what has been paid already (higher rate taxpayers have to cough up more).

Over here we've got the total recepits for corporation tax:

Comparing the last two years available, total CT liabilities were broadly equal, rising by one percent to £43.8 billion in 2011-12, from £43.2 billion in 2010-11.

And some £9 billion of that was the offshore oil and gas sector. Which isn't, really, corporation tax that's a tax on the Ricardian Rent of the oil being found under British waters. Something that should most certainly continue.

£44 billion minus £9 billion in Ricardian taxation gives us pretty close to that £30 - £35 billion which is simply the advance taxation paid upon those dividends. And it really makes no difference at all whether we tax that at the level of the dividend recipient or the company.

All of which means that if we were to abolish corporation tax and then tax dividends simply as the income they are then there wouldn't actually be much difference in revenues to pay for the schoolsnospitalsncouncilouses.

Agreed, this is very much back of the fag paper stuff and I'm sure that other people have more accurate information on this. But wouldn't it be wonderful to be able to simply abolish a tax without any great effect upon the public revnues? Oh, and with the effect of no company ever again being able to do any tax dodging at all as there would be no tax for them to dodge? Plus all those accountants and lawyers have to go off and do something productive.

I like it as a plan. So where and why am I wrong here?

The twelve days of state bureaucracy: 8-12

Day 8

Dearest Grandmama, eight noise abatement officers arrived saying that the noise of my neighbours' protest and the various inspectors' cars coming and going was in clear breach of official guidelines. They served me a compliance notice. I will write more tomorrow.

Day 9

Dearest Grandmama, the au pair and I made the mistake of bringing out tea and cakes in an attempt to make peace with the neighbours, it is the season of good will, after all. Now nine food safety inspectors are here, saying that out kitchen does not comply with hygiene regulations for the provision of food to the public. I will write more tomorrow.

Day 10

Dearest Grandmama, ten Home Office people broke down the door today, saying they suspected that the au pair might have been working here illegally. I've spoken to a lawyer and we hope we can get her out of the detention centre soon. We had the workmen come back to repair and repaint the front door. I will write more tomorrow.

Day 11

Dearest Grandmama, eleven EU inspectors arrived today. We convinced them the au pair was Bulgarian and therefore had a perfect right to be working here, but one of them noticed the name of the house and told us that we had to change it from Green Acres to Green Hectares. They also quizzed us on what colour the front door had been painted. I will write more tomorrow.

Day 12

Dearest Grandmama, today twelve court officers turned up to serve me with a European Arrest Warrant. We had been reported for painting the front door in a colour called Burgundy Red, Unfortunately this name breaches of EU local origin protection regulations. Anyway, I'm in prison myself now in Burgundy, and will have to sell the house, including the partridge and the pear tree, to pay my legal bills.

Still, it was a very kind gift, and at least it has taught me a lot about regulation these days. Please address any future correspondence to my lawyer.

Bitcoin is a win-win for liberty

Depending on who you ask, cryptocurrency is either: (1) the future or (2) stupidity.

Some early adopters claim that 1 BTC could reach $40,000; others ask whether BTC will become “Gold 2.0”.

The ASI's own Tim Worstall (among others) disagrees, pointing to the fact that a cryptocurrency can effectively be created out of thin air—“with no scarcity comes no value”—and likens BTC, whose rivals (wow) multiply, as akin to that of “the Golgafrinchan B Ark using leaves as money. They...have to burn down the forest to stop inflation.”

This view is wrong. Cryptocurrency is not presently scarce: there are perhaps hundreds of cryptocurrencies with active userbases, many of which are actively traded. Yet despite being functionally identical to BTC some are near-worthless (1 DOGE = $0.00035) while others are prized (1 LTC = $24.00). Why, then, is 1 BTC worth $760?

The answer, of course, is that cryptocurrencies aren't money, but rather “more of a payment system like Visa than a currency like the dollar,” and ones with some unique characteristics at that: low transaction costs, increased anonymity, and a distributed network architecture. This alone has value.

BTC also benefits from its “first-mover status (which) grants it some advantage over its competitors in the form of network effects,” with its value deriving, “at least in part, on the number of other users willing to transact.” (Luther, 2013).

In this respect its lead is commanding. As for its closest analogue, credit cards, network effects in respect of these have resulted in there being “only three major credit card companies in the world… (and as such) cryptocurrency network externalities are likely to be high.” Though cryptocoins are obscenely easy to mint, the dominance of a few large players will mean joke currencies become increasingly difficult to trade.

As yet, cryptocommerce has only been adopted by small, distinct groups of individuals (libertarians, internet denizens, and black marketeers (Luther, op. cit.)). For each of the above, crypto serves a distinct purpose and success or failure has a distinct meaning. For those who see crypto as a creature of politics (as I do), at this early stage, it should not matter what a particular cryptocurrency is worth from time-to-time. It matters only that a few are (1) capable of holding value and (2) are actually used.

The value of the eventual frontrunners will undoubtedly bear a relationship to black market demand – as put by one commentator, “if Bitcoin succeeds, it will be because of the War on Drugs and other policies that increase demand for a quasi-anonymous, internet-transportable currency,” exactly the kind of disruptive function the crypto-anarchist manifesto predicted in 1988.

Crypto therefore presents states with a dilemma: repress it, or compete against it. Choose the former, and cryptocurrency will serve as a check on state power. Choose the latter, and it will have been a powerful catalyst for reform.

Either way, liberty wins.

Apparently I'm a hyper-neoliberal

It rather surprised me, last week, that I was described by an American magazine editor as a "hyper-neoliberal". I'm really not quite sure what that means but I assume it's because I agree with points like this:

PLAN A The government subsidizes the incomes of low-wage workers. These subsidies are financed by increasing taxes on middle- and upper-income Americans.

PLAN B The government again subsidizes the incomes of low-wage workers. But under this plan, the subsidies are financed by taxing those companies that hire low-wage workers.

This is Greg Mankiw discussing the difference between raising the incomes of the working poor through some form of public payment (ie, tax credits, the EITC, whatever) and a rise in the minimum wage.

To be sure, the minimum wage isn’t exactly a system of taxes and subsidies. But its effects are much the same as those of Plan B. Unskilled workers earn more, and the businesses that hire them pay more. The main difference between the minimum wage and Plan B is that, under a minimum wage, the extra compensation is paid directly from the business to the worker, rather than indirectly via the government.

And for me this is the clinching point:

First, fairness: If we decide as a nation that we want to augment the income of low-wage workers, it seems only right that we all share that responsibility. Plan A does that. By contrast, Plan B concentrates the cost of the wage subsidy on a small subset of businesses and their customers. There is no good reason this group has a special obligation to help those in need.

I've said this a number of times before and it still remains true. There is indeed the market price of whatever it is, in this case low skilled labour. And it's entirely possible that we, as a society, communally, decide that we don't like that price. Say we think that the price of cigarettes is "too low" (leave aside how we determine too low or too high here). We tax them and that tax benefits us all in that all of us share in the public goods financed by that tax.

We might also decide that the price of low skilled labour is too low. We desire it to be higher. Precisely because it is all of us making that decision (again, leave aside concerns about majoritarian tyranny here) therefore it should and must be all of us dipping into our pockets to pay for it. We should no more insist that investors in the sort of business that employs low wage workers pays that extra wage that we desire than we should insist that smokers, or tobacco companies, get that extra tax raised as we fix that too low price of ciggies.

They're societal interventions thus it must be society that pays or collects on them.

Whether we should have a wages top up, or taxes on ciggies, is entirely another argument. This logic, assuming that we're going to have them, still stands. Societal decisions need to be paid for by society, not by some subset who can be stuck with the costs of our desires.

In this analysis I am joined, as above, by Greg Manikiw, ex-head of the Council of Economic Advisors, economic advisor to Mitt Romney (about as wet a Republican candidate as we've seen in many a decade) and also by the UK's only thinking Marxist, Chris Dillow.

And for thinking this way I am called a "hyper-neoliberal" by an American magazine editor. I still don't quite know what that phrase means but I think it's more a commentary on the political inclinations of the US journalistic caste than it is about me or the real world.

A little note for our Robin Hood Tax friends and the World Development Movement

You will recall one of the arguments put forward by the Robin Hood Tax crowd: that lots of speculators in futures and options markets drives up prices. This has also been put forward by the World Development Movement, another group of teenage trots only lately out of their mothers' basements. The problem with this idea, as has been endlessly pointed out, is that future prices can only affect current, spot ones, if there is a rise in inventories. And that's not something we've seen in recent price booms.

And here is Craig Pirrong, fresh from the mendacious hit job the NYT did on him, to explain why in more detail:

Back in the 1990s and early 00s, gold prices were low. Very low. $300 and below. Back then, the hue and cry was that prices were artificially low because . . . wait for it . . . producers were massively short because of hedging programs.

Well, if producers were massively short that means that speculators were massively long. So if speculators drive prices, why weren’t gold prices stratospherically high in the late-90s early-00s? After all, supposedly in 2008, and the last couple of years, the massive long speculative positions were inflating prices. Why didn’t the massive long speculative gold positions a decade ago inflate gold prices?

Flipping things: If short commercial positions were depressing gold prices a decade ago, why didn’t they depress oil prices in 2007-2008, and over the last couple of years? Hence the danger of superficially examining net positions and claiming that one side of the market is inflating (or depressing) prices: an equally legitimate argument is that the other side of the argument is depressing (or inflating) prices.

But the point is that neither argument is legitimate: both are equally illegitimate. Derivatives positions net out to zero. Derivatives are in zero net supply. Looking at one side of the market, and ignoring the other, makes no sense.

In the absence of changes in physical stocks driven by those future prices, futures speculation simply will not change current, spot, prices.

Worth adding I think my favourite mistake by the WDM on this point. They looked at grain prices in 2008. Wheat and corn (maize) moved a bit. Rice moved massively. OK: but they used this as proof that futures and options speculation really does change spot prices. Failing to note that the futures market for rice is very thin and small while those for wheat and corn are vast and deep. Thus the grains with more speculation in them had lower price rises: not exactly a confirmation of their thesis.

The effect of rising consumerism

We're all aware of the standard critique of consumerism: that we shouldn't in fact want more at all. We should be happy with our lot, accept that there are limits and, you know, just sorta vegetate with what we can currently do and make. However, as Virginia Postrel points out, that's not really how the human race works:

Rising expectations aren’t a sign of immature “entitlement.” They’re a sign of progress -- and the wellspring of future advances. The same ridiculous discontent that says Starbucks ought to offer vegan pumpkin lattes created Starbucks in the first place. Two centuries of refusing to be satisfied produced the long series of innovations that turned hunger from a near-universal human condition into a “third world problem.” Complaining about small annoyances can be demoralizing and obnoxious, but demanding complacency is worse. The trick is to simultaneously remember how much life has improved while acknowledging how it could be better. In the new year, then, may all your worries be first world problems.

We only ever moved out of the caves because someone thought that house sharing with a hungry bear was unsatisfactory, only ever invented the car because of the rising tide of horse dung, it's the very things that we find unsatisfactory currently that drives the vast wave of innovation that has been sweeping us along these past few centuries.

And the real strangeness of this is that while we might indeed be desiring more transport, or food, or communication ability, whatever it is, that innovation manages to bring us that more at the expense of using fewer resources. Smartphones are, obviously, using fewer resources than trying to run Facebook on semaphore flags. So contrary to the standard story it is our very consumerism that reduces resource use via the mechanism of innovation.

Excellent advice to all budding politicians everywhere

Don Bourdreaux has some excellent advice for buddfing politicians of all flavours and stripes:

If you really wish to serve your fellow Americans, stay in the private sector where those with whom you deal pay you voluntarily – that is, in ways that prove that you are serving them well. In politics, you’ll be spending money taken from others forcibly, so you’ll have precious little reliable feedback on whether you are helping or harming your fellow Americans.

Quite.

Indeed, it's one of those well known little secrets among economists that people value what politics brings them at less than the cash that it costs politics to bring them to them. Even the US Census agrees that poor people value Medicaid at less than it costs to provide it, food stamps at less than their face value. They'd rather have the cash than what the politicians think they should be getting. Over here the same is true of housing benefit: everyone would far rather have the cash. Thus even the welfare state is value destroying.

And in the private sector, in the absence of politicians deliberately creating a rent seeking opportunity for you, you will only be able to extract from people what they think your actions, activities and services are worth. Less in fact, for there will always be a consumer surplus: so you know that your activities are creating more value than you are receiving.

It's true that we do actually need a government, thus we need people to be part of it. But think about what that government is really tasked to achieve: finding a method of making sure the bins are emptied. And that's no life for a bright and ambitious thing like you. Get off into the private sector and create some value rather than being in politics where you shanghai it at gunpoint then destroy it. And this applies even more, not less, if you have the public good at heart.

Well, yes, markets do work you know

hollandparkcomprehensive.jpg

It would appear that the fact that markets do in fact work is getting through even into our educations system. For which, of course, great thanks and hurrah!

Parents who move house and shell out for private tutors are paying as much for their child's education as those who send them to private school, says a top headmaster.

The cost of a good education is the cost of a good education. And we're two, maybe three, possible methods of achieving that aim.

The first is simply to gird the loins and go and pay for one out of post tax income. We can see the money going out for that and boy, doesn't it sting.

The second is to move to an area where the State, remarkably, is actually able to provide a good education out of those taxes already paid. But such areas have higher house prices (it's very noticeable indeed that house prices, the prices of houses that people with children might like to live in, vary by school catchment area) and thus more must be paid for a house in such areas. We can still see the money rolling out here and boy, doesn't it sting.

The third is of course home schooling. In which case we don't see the money rolling out: but we do rather see it not rolling in as one of the possible two household incomes is likely to be sacrificed to produce it. Given that there's no tax wedge here this might in fact be the cheapest option.

However, all three are substitutes for each other and there's really no surprise at all that close substitutes have roughly the same price. Because, you know, markets work and close substitutes tend to converge in price.

It is absolutely vital that you deploy your consumerism responsibly

I thought this was rather good from Julian Baggini in The Guardian: although it does have one terrible error in it:

You might dismiss this kind of ethical consumerism as mere gesture. Waving my right-on debit card as a badge of honour as I pack my Fairtrade chocolate into a canvas tote bag can look like a poor surrogate for revolution. This is part of a knowingly superior narrative of impotence that tells us our day-to-day choices can't lead to meaningful political change. "The system" is inherently corrupt and to believe we can affect it by our choices is to buy into the very myth of consumer power that late capitalism promotes in its own interest. It is to believe that virtue can be bought, when the vice of the system is precisely that it puts a price on everything, including a clear conscience.

But this narrative is wrong. It portrays capitalism as though it were a kind of entity with a will of its own, whose only desire is to maximise profit. In fact capitalism is amoral, not immoral. It doesn't care for right or wrong, only for what people demand. If we demand goods and services at the lowest price, capitalism will provide them, and damn the social and environmental consequences. If, however, we demand Fairtrade bananas or recycled toilet paper, capitalism will provide them too, as it demonstrably has done.

These are not things done by capitalism: they are things done by markets. Where there is choice then it is indeed possible for people to have a choice on how, with whom and upon what they spend their money. A capitalism without markets (ie, monopoly capitalism) would provide none of those choices: just as any other economic system without the choice offered by markets would not allow the consumer to express their preferences. Capitalism and markets are simply not the same thing at all and it is markets here that Baggini is praising.

Other than of course he's precisely spot on. If you want things to be produced in a certain manner then it's up to you to spend your money so as to encourage producers to do their production in that manner. You not only can but you ought to express your moral choices in the way you decide upon who to buy from. I tend to buy from factories located in poverty stricken hell holes as that's the best way to alleviate poverty we've yet found. Agreed, others might differ on this: but it's still true that you should deploy your financial firepower to make the world a better place by your own lights.

It is, after all, vastly better to light a candle than to curse the darkness and every pound spent on your moral goals brings them that one pound closer.

Perhaps we don't want a crash social housing building program

bricks.jpg

Yes, we know, there's somewhat a shortage of housing in the UK, that's what makes it so darn expensive. But it could be that we still really don't want to have that government led emergency social housing building program that so many are calling for. Over and above the fact that simply issuing more planning chitties is the answer, there's also the point that perhaps we just don't actually have the material to build houses with:

Brick stocks in the UK have reached the lowest level on record as merger mania grips the sector.

Stockpiles of the vital building blocks dipped to 323m at the end of October, down almost a third from 500m in 2012, after stocks of more than 1bn were recorded in 2009, according to monthly reports from the Department for Business Innovation and Skills, and the Office for National Statistics.

Apparently every brick that will be made in the next three months has already been sold.

Of course, there's also another way of looking at these numbers. If the building supply industry is operating at full capacity then that must mean that there's rather a lot of building going on. If that's true then whatever it was that we needed to do in order to solve the housing problem has already been done.

Might even be the effects of the government insisting on issuing lots more planning chitties over the past couple of years, eh?