The Pin Factory Blog

The OECD is very worried about the erosion of different countries' tax base, they say. The acronym (everything needs a catchphrase these days) is BEPS - Fiscal Base Erosion and Profit Shifting. I guess the full acronym, FBEAPS, just wasn't so trip-off-the-tongue.

The target, of course, is international companies who choose to base themselves in low-tax countries even as they operate in high tax countries. Now I can see why people in high tax countries might get irritated when companies do this. And no doubt there are moral abuses of international tax differences. But it isn't against the law for companies to set up where they choose, nor to manage their affairs in such a way as to keep their tax burden under control. And, for the time being, it isn't against the law for countries to try to attract business into them by keeping down their taxes.

What would be the alternative? All countries getting together and adopting identical tax codes, so that no one location would be more tax-favourable than any other? That would put all of us at the mercy of high-taxing, high-spending governments. They could jack up tax rates as high as they liked, and there would be no escape. They already have huge power to do this, as most of us aren't mobile. International companies are mobile, though – and they are the only ones standing between us and tax tyranny.

It is not obvious, by the way, that companies automatically choose to locate where taxes are lower. Companies have to hire people, and their bosses have to live near their HQ, so what they actually look for is good value for money. If there is good healthcare, good education, and good infrastructure, those are benefits that they put into the equation along with the amount of tax they could be liable for. So the fact that they can shop around between tax jurisdictions puts a pressure on governments, not to be low tax, but to provide good value for money. Isn't that what we want?

A number of countries with few other things going for them have chosen to make themselves very favourable to companies with low taxes and with regulations that are not as labyrinthine as ours. I respect their right to do so. But I feel the high-tax, high-regulation countries in the world fear that competition and would like to kill it. We should not let them do so.

British MPs say that tax avoiders should be 'named and shamed' to discourage people from using legal loopholes to reduce their tax bill. It shows just how much of a careless disregard for the rule of law our politicians now have.

Let's get this straight. Evading taxes – fraud and lies to understate your income or your tax liability – is illegal, and people should be prosecuted for it. Tax avoidance is not illegal. It is arranging your affairs in such a way as to reduce the amount of tax that you have to pay. In one way or another, we all do this. Many of us pay into pension funds, which have a special tax treatment. Or we save in a tax-free Individual Savings Account (ISA). We put some of our assets into trust so we don't have to pay 40% on absolutely everything when we die.

Of course, many people come up with much craftier ruses than these. They set up all sorts of vehicles in order to minimise the tax they pay, or maximise their access to tax reliefs for things like business start-ups, research and development, or investing in particular industries. Some of these have little real substance and are designed solely to reduce the taxpayer's bill. That may be morally reprehensible, but it it not illegal.

So the MPs are saying that they are quite prepared to 'name and shame' people who may be stretching the spirit of the law but are obeying it to the letter. We all know people whose acts and lifestyles we might regard as odious and immoral in a hundred and one different ways. But providing they respect the law, our political and judicial authorities really have no right to single out any of those individuals and then vilify them and try to stir up public prejudice against them. Our authorities should enforce the law – the law that they themselves have created. Once we permit them to take action against law-abiding citizens they don't happen to approve of, then liberty will truly have disappeared in this country.

If our taxes are so high that people resent paying them (and remember that high earners now pay two-thirds of their income in tax and national insurance); if people regard their taxes as mis-spent (no shortage of examples there); and if our tax rules are so byzantine that people can find places of shelter within them – well, then our lawmakers have only themselves to blame. They certainly should not be picking on law-abiding private citizens. 

Summary: GDP fell by more than expected in most EA countries in Q4

What the chart shows: The chart shows the quarterly percent change in GDP in Q3 and Q4 2012 in the euro area and in its six largest members

Why is the chart interesting: That GDP would fall in most of the euro area in Q4 of last year was already expected before the news release on 14th February. In that sense, this is old data. But the falls were generally worse than expected, notably so in Germany, in France and in Italy (where GDP fell for the sixth consecutive quarter), and hence also for the EA as a whole. While early data for January show some recovery, notably in Germany, the numbers highlight the continued weakness of domestic demand in the single currency group. The strong euro is adding to the problems and a cut in interest rates to help weaken the currency is again becoming likely, although strongly opposed by Germany.

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

With reports of 1,200 unnecessary deaths in a single NHS trust – some in the most cruel and inhumane circumstances – you might think that the clinicians trades unions might be keeping their heads down. But no. The umbrella organisation for medial practitioner groups is now calling for a tax on fizzy drinks. To combat obesity, they say.

To micro-manage our lives, more like. The average person gets about 2% of their calories from fizzy drinks, so even if a tax did make people drink less, it would have no noticeable effect on the weight of the nation.

Sure, some people drink a lot more sugary stuff. Will a tax dissuade them? International studies show that to make a measurable difference, the tax would have to be very large. People have strong favourites when it comes to food and drink, and they don't switch easily. A small tax would change nothing, and would just be a stealth tax. A large tax, the international studies show, simply prompts people to switch to other sugary drinks that are not taxed.

There are of course already non-sugary and low-calorie drinks on the shelves. If people don't buy them, that is their choice. Better labelling and better education might help people make more informed decisions, but we should not be trying to micro-manipulate peoples lives and choices.

You can imagine the bureaucracy of it. You would have to set up a quango to work out which drinks are 'sugary' enough to be taxed. Shopkeepers would need to account for the tax on some drinks but not others. If the tax is to fund diet education (as campaigners intend), then the Revenue has to separate it, the government has to set up yet other bureaucracies to spend it and monitor the spending, and so on. The money would buy nothing except more civil servants.

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, and NHS clinicians on indexed-linked pensions, who are advocating it.

Campaigners claim, of course, that children are most affected by sugary drinks as they consume more of them than adults. Well, if we really wanted to improve the lives of our children, we might pay off the national debt that saddles each of them with a £17,600 bill to pay off.

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

There is a big difference between disapproving of how people run their lives and trying to run their lives for them. If I believe that someone is harming themselves, I will certainly tell them, explain why, and argue that they should change their ways. But if they want to live that way, I have no right to stop them.

And yet we listen patiently while political campaigners – and 'experts' who know nothing about economics – try to impose their own lifestyle standards on everyone else. 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. 

Is there anything more terrifying and dangerous to liberty than a 'moral panic'? I use the term in its sociological sense as the horsemeat saga fairly seems to fit the bill. One can almost write the script: a small finding, further investigations hit the front pages, the press become fixated and call for the heads of those responsible, government steps in, calls go out for a public enquiry and regulation or a toughening up of the rules and more spending on enforcement... In a few weeks the issue itself is largely forgotten except that the resultant regulations last forever. Worryingly, the scandal has also prompted attacks on international trade in food products and displayed the economic nationalism we see in this country with calls to eat only British meat.

The most puzzling feature of this particular saga and many others is the belief that additional regulation can solve the problem. In many ways, food was one of the first areas of the economy to be regulated under the Food Adulteration Protection Act of 1860, prompted by noticeably similar Victorian fears. In a curious and amusing echo of the banking crisis, we already have a regulator called the FSA, the Food Standards Agency (is the repetition of acronyms just coincidence, or a sign that we have so many quangos there aren't enough names?), which runs a Food Authenticity Programme. Although the FSA has been at the centre of the scandal, DEFRA also has powers in this area.

It is clear that there has been widespread adulteration of food products despite the presence of these institutions. Indeed, as with the banking crisis, it may be that regulation has encouraged it in various ways. Interestingly, a former bureaucrat at the FSA has suggested that the EU may be partially responsible owing to its ban on 'de-sinewed meat'. What is evident is that regulators will not prevent such events happening. Instead, as the ban on de-sinewed meat suggests, regulation will cause unintended consequences. Additional requirements for 'traceability' and more enforcement will increase costs for supplier which will be passed on and further drive up food prices for already hard-pressed low-income consumers, or it will promote cost-cutting and thus adulteration. Regulation will tend to drive smaller firms out of the marketplace, allowing room for monopolists to dominate the market. One should note that food industry lobby groups are usually happy to call for more regulation as well.

Surely, it would be better to allow a more competitive and de-regulated marketplace, where consumers could choose whether they paid additional costs to guarantee the quality of their products and where market innovations could find more effective ways of policing?  Why is it that, whenever a crisis such as this occurs, calls for more regulation emerge despite (i) the failure of existing regulation (ii) the evidence that regulation may actually have contributed to the crisis and (iii) the effect of regulation will allow monopolistic behaviours and ultimately harm the consumer?

Oh well, it never was going to be very long before our rulers revealed themselves, once again, as the drooling nincompoops we all know them to be. This time the insight into their incompetence comes from their much ballyhooed decision to "negotiate" a free trade agreement between the European Union and the US.

The European Union and America are to open negotiations with the aim of creating the world’s biggest free trade area worth €86bn (£75bn) within two years.

I have a feeling that the Telegraph sub got lost among the zeros there. £75 billion is more like the value of free trade between Dorset and Somerset. Aside from that, yes, a free trade agreement would indeed be a good idea. But why anyone with two brain cells to rub together would take two years to "negotiate" one is beyond me. Declare unilateral free trade and be done with it. For, as I don't need to remind you but someone does need to remind the politicians, the value of trade is the imports we get to enjoy, not the exports we make.

Exports are simply the dreary drudge work we do in order to be able to afford those lovely imports. So, for the EU to "negotiate" a free trade area with the US is very simple. Just stop taxing EU citizens who purchase American goods by imposing tariffs upon them. Similarly, for the US to have free trade with the EU just means lifting those portions of the US Customs code that tax imports from Europe. There, all done. Extraordinarily simple, easy to achieve and yes, it would make us all richer to boot.

There are two possible reasons why this obviously elegant solution doesn't happen. The firsty requires us to believe that politicians are intelligent. In which case they realise that if we all realised how simple such things are then we wouldn't need, and wouldn't be willing to pay for, the politicians who currently do these things for us. Thus something simple like free trade must be made into a seemingly complex problem which will take years of hard work to sort out. Having met a number of the denizens of Westminster I am not willing to believe that politicians are that bright.

The second possibility is that they really are too dim to understand this trade thing. Perhaps they're trapped in the centuries old delusion that it is exports that make a country rich, not the consumption of the imports that trade makes possible. Which is rather where we came in: that drooling nincompoops thing. Having met a number of the denizens of Westminster I am willing to believe that.

I'm afraid that I cannot conceive of any other reasons at all why they think it necessary to "negotiate" about free trade. Simply declare it and get on with it. For it really is the imports that are the gains from trade, so all we have to do to gain from trade is to allow imports unencumbered. We could wrap this up by teatime for goodness sake, what is this years of negotiation needed?

One of the standard tropes currently is that companies and corporates are just sitting on mounds of cash and not doing anything with it. And if you go and look at the balance sheets of the large corporations they most certainly are doing so. Quite why they are is a bit of a puzzle: and I was interested to see this as a contributary factor:

In addition, firms change: They hold fewer inventories and receivables...

Which brings me to one of my favourite tropes. There's a difference between structural change and cyclical change and it's essential that we note that difference. For example, we might note the relationship (whatever it is) between corporate cash holdings in 1980 and 1970 and subsequent corporate behaviour and then assume that the relationship will hold here in 2013. However, what if there has been some underlying structural change in the economy between 1980 and 2013?

And indeed there has been: we've got computing in a big way now.

It's long been said that we can see the impact of computers everywhere except actually in the economic statistics. We don't seem to be seeing the burst of growth that we would expect with the adoption of a major new technology for example. However, if you think about it, we can see the impact of computing in corporate balance sheets. For one of the things that the mass adoption of computers has caused (along with the shipping container) is just in time production. Everyone now holds very much less stock of anything. Of parts, of parts to make parts, of raw materials. Entire industries now operate on the basis that a customer has just bought something (the evidence being the bar code going through the till) so, about time to make another one then.

One of the things that really has been hollowed out of the economy is the piles of, months worth of usage there used to be, of stocks sitting around and doing nothing, just waiting to be used. Which is where those cash balances at companies come in: the money that used to be used to finance such stocks is now not doing so. Therefore it is sitting in bank accounts. At some point everyone will work out that this is a structural change, it's not just a turn of the cycle, and the money will be returned to shareholders. At which point we'll have corporates running on what we would, in the past, have considered to be a very capital light manner. Which is great, because it frees that capital up to go and do other things.

I don't claim that this is the only cause of corporate cash piles of course. But I do insist that it is one of them. That everyone now holds much less stock and work in progress is indeed one of the reasons why corporate balance sheets are brimming with cash.

Last week, Standard & Poor's, the rating agency, was sued by the U.S. Department of Justice (USDoJ) in a Los Angeles federal court for “knowingly and with intent to defraud, devis(ing), particpat(ing) in, and execut(ing) a scheme to defraud investors in (residential property securitisations) and CDOs, including federally insured financial institutions... and to obtain money from these investors by means of material false and fraudulent pretenses, representations, and promises and the concealment of material facts.”

Even to persons legally trained, this is weighty stuff. One of the most amusing ways I know to frighten an unschooled junior lawyer is to sit him or her down in front of a structure diagram of a securitisation, a jumbled mess of agreements, parties, cashflows, security arrangements, and hedging – and then change slides to display a CDO, a securitisation of securitisations, a stacked jumble of jumbles. (Instant fun.) Despite the visuals, however, such transactions are conceptually very simple: one takes assets that throw off a steady stream of income (such as residential mortgages), models the cashflows arising from them, and creates debt instruments which match the payments from the assets with the payments on the notes. Those notes or bonds are then sold, with the seller recouping the capital value of the assets in the present in exchange for investors' acquiring the future flows of income.

Continue reading.

Robert Halfon MP’s campaign to reintroduce the 10p tax now appears to have been a success. After David Cameron’s hint that it would be introduced in the next budget and Ed Miliband’s announcement today that Labour would reintroduce it after the election, it seems inevitable that it will be a part of the next budget.

Many in the free market movement have expressed their dismay at this. The CPS’s Ryan Bourne has argued convincingly that it would be better to raise the personal allowance more instead of introducing a new band of tax, primarily on the grounds of simplicity.

I agree with him, but I am still pleased that the government is going for the 10p rate. Where I differ is that I do not see the reforms as being a case of either/or. The personal allowance will be raised to £10,000 – as I argued in my paper Just Rewards last year, it should be pegged to at least the minimum wage level – but it seems unlikely to be raised beyond that.

George Osborne is unlikely to see a raise beyond £10k as being worth the reduction in revenue – raising the personal allowance was a Lib Dem policy before the election, and it would be hard for the Conservatives to claim special credit for raising it even further. This proposal essentially allows the Conservatives to claim credit for something – taxing low-income earners less – that they should have been for all along. The effect is basically the same.

I am not really convinced that the addition of another tax band will be significantly complicating. The length of Tolley’s Tax Guide, a rough but useful guide to tax code complexity, has doubled since 1997 – not because there are extra bands (you could fit a hundred different bands on a single page) but because of the number of special exemptions and loopholes created by government to favour certain groups over others. This, it seems to me, is the real meat in the tax simplification sandwich.

I would love to see a “simple tax” proposal to scrap all the complications in income tax but preserve two different tax rates, so that the argument over tax simplification former was not bound up in the (quite different) argument over whether we should have a single band of tax or not. (Incidentally, if you’re a tax expert and you might be interested in writing this, get in touch.)

It is hard to object in principle to the idea that taxing a billionaire causes less harm to him than taxing a hospital porter at the same rate does to the porter. Indeed, anyone who believes in a tax free personal allowance and a single flat rate of tax, in effect, is acknowledging that principle as well. This isn’t to say that the practical arguments for a single rate of tax – the incentive effects and the political impetus for lower taxes created by putting all taxpayers onto the same band – aren’t very strong, just that there are good arguments in the other direction, too.

There are good arguments against the 10p rate, but most are based on an assumption that the alternative would be a further rise to the personal allowance, rather than the status quo. Alas, because of the politics, I think it’s 10p or nothing. That’s why I’ll support it – it’s a flawed tax cut, but it’s a tax cut nonetheless.