What is wrong with tax avoidance?

I was on Channel Four News commenting on so-called tax avoidance yesterday evening, putting across some points that I think are important to the recent discussion.

I take the view that nothing requires people or firms to voluntarily pay more in taxation than the law requires.  Indeed, most try to minimize their taxes by offsetting their allowable expenses.  Firms have a duty to their shareholders to operate efficiently, and this includes paying no more tax than the law specifies.  This is tax minimization, not tax avoidance.

A firm like Amazon follows the rules of both the EU and the UK, choosing to locate in Luxembourg to take advantage of its benign tax rates.  The EU single market not only allows firms to do this, it encourages it by preventing other governments from imposing extra taxes on such firms.  Google similarly chooses to locate in the Republic of Ireland.  Locating in one EU member state and paying its taxes gives access to markets in all of them.  The single market was designed to ensure that.

Firms should not be blamed for minimizing their taxes.  The people who should be blamed are the politicians who maintain tax laws so intricate and complicated that firms have to employ expensive teams of lawyers and accountants to navigate them.  Taxes should be so low and so simple that people will neither seek nor need complex shelters.  That would bring in more revenue, if done right, as well as making tax liability more transparent. 

There is no level of tax that is somehow more 'fair' or more 'moral' than that stipulated by the law.  It should be the laws interpreted by judges that decide what is right, rather than the opinion of media commentators and politicians.  If law-makers do not like the present levels of taxes that are paid, they have the power to change the law, just as any firms that found the new levels too punitive would have the power to move elsewhere.

The whole discussion of so-called tax avoidance tackles the wrong agenda, in that the aim of it is to have government take in more taxation.  Instead of trying to increase what government siphons off from the economy, we should be looking at ways of reducing it in order to create the conditions for growth.  The whole debate is misconceived, pandering to envy of success, and can only harm the country's economic prospects instead of helping them.

Six reasons to reject minimum alcohol pricing

The government will announce today the launch of its public consultation into minimum pricing. These consultations tend to be something of a charade—the Home Office has already said “We will introduce a minimum unit price for alcohol”—but in case you should wish to respond, here is a non-exhaustive list of reasons why minimum pricing is a terrible idea.

It is regressive

All indirect taxation is regressive, but minimum pricing is carefully calibrated to be as regressive as possible by targeting drinks that are disproportionately consumed by people on low incomes. Doctors on six figure salaries can rest assured that the champagne at the British Medical Association Christmas dinner will not be affected and the House of Commons bar will continue to be subsidised. Cheers!

Evidence is non-existent

As we reported on Monday, the excitable predictions about how many lives will be ‘saved’ by minimum pricing are based on a single computer model which uses dubious methods and false assumptions to come to a preordained conclusion. The truth is that nobody has any idea whether the policy will reduce alcohol-related harm. The only certainty is the majority of ordinary people will be out of pocket.

It’s just the start

Even minimum pricing’s most optimistic proponents admit that ratcheting up the price of drink is not a ‘silver bullet’.  What they mean is that minimum pricing will merely be the start of a sustained temperance campaign in the mould of the anti-smoking crusade. If the medical lobby is allowed to get its hands on one of the key levers of competition (price), we can expect endless demands for the minimum unit price to move upwards. David Cameron has proposed a 40p unit price but the British Medical Association are already demanding 50p. Others want it to be 60p. Whether alcohol consumption goes up or down, you can be sure that the ‘next logical step’ will be to have a minimum price escalator. Think of the children!

And why not? The same dodgy evidence can always be used to justify higher prices. The Sheffield computer model predicts that a 40p unit price will reduce the number of alcohol-related deaths by 10 per cent. At 70p, it claims the number of alcohol-related deaths will fall by more than 60 per cent! The model doesn’t go beyond 70p, alas, but presumably once it gets to 90p all alcohol harm is abolished and at 95p the dead begin to rise from the grave. What are we waiting for?

The moral panic is bogus

Since 2004, Britain has seen the sharpest and most sustained decline in alcohol consumption since the Second World War. The statistics are striking—less than half of 16-24 year olds have had even one drink each week; the proportion of young men who ‘binge-drink’ has fallen by more than 50 per cent; overall alcohol consumption is only slightly higher than it was in 1980. These facts are rather inconvenient for nanny-staters and so they have ignored them and pressed on with a narrative of ‘booze Britain’ that makes for better headlines. Trebles all round!

It is illegal

It’s rare to find the words ‘good news’ and ‘European Union’ in the same sentence, but the good news is that minimum pricing is illegal under European Union law. Previous attempts to limit the free market in this way have been rejected by the European Courts, such as in this judgement from 1978. Referring specifically to proposals to introduce minimum pricing in the UK, the European Commission has said that they “have a problem with the compatibility of the minimum pricing plans under Community law” and that it “causes problems with the compatibility with the EU Treaty”. Several wine-growing countries have already complained that minimum pricing is anti-competitive and, although David Cameron has vowed to fight the European Commission for his right to pick our pockets, if the EU does not stand for free trade between member states it stands for nothing at all.

It won’t help pubs

Winston Churchill said that "an appeaser is one who feeds the crocodile hoping it will eat him last." A few of the pub chains have formed an unlikely, unseemly and unholy alliance with the forces of temperance in the hope that higher off trade prices will drag in some of the punters that the smoking ban drove out. This is a desperate gambit. Minimum pricing will not make beer any cheaper in pubs. It will merely make everybody a little bit poorer so they have less money to spend in pubs. On this occasion, Wetherspoons’ boss Tim Martin has called it right, saying that minimum pricing is “utter bollocks, basically.”

Video: Adam Darwin - Emergent order in biology and economics, by Matt Ridley

A 30-month agenda

Madsen sets out on his own site what should be the agenda for the second half of this coalition government.  In a speech to York University Conservatives he lists a programme that might reasonably be implemented by the coalition. It's radical stuff, starting with combining income tax and National insurance and moving on to allowing profit-making free schools and privatized universities, with a dash for gas along the way, and the removal of the cap on skilled immigration:

The first half has been dominated by the need to rescue the nation’s finances from the disastrous black hole into which Gordon Brown and his Labour government had sucked them.  The second half should stress essential reforms and a pro-growth agenda.  I set out a programme that might just fall within the range of what the coalition might be able to put through.

You can read the whole thing here (and it's quite short).

The minimal evidence for minimum pricing

In a new Adam Smith Institute report released today, statistician John C. Duffy and ASI fellow Christopher Snowdon assess the Sheffield Alcohol Policy Model, the basis for minimum alcohol pricing policy. Their findings are summarized here:

1. The Conservative Party and the Scottish National Party have both stated their intention of introducing a minimum floor price for alcohol, levied at around 50p per unit. Advocates of minimum pricing claim that the policy will significantly reduce alcohol consumption and the problems associated with hazardous drinking.

2. Estimates of how minimum pricing will affect health outcomes have overwhelmingly come from a single computer model—the Sheffield Alcohol Policy Model. This paper argues that the model is based on unreasonable assumptions which render its figures meaningless.

3. Amongst the problems with the Sheffield model is its false assumption that heavy drinkers are more likely to reduce their consumption of alcohol as a result of a price rise. Its calculations are based on controversial beliefs about the relationship between per capita alcohol consumption and rates of alcoholrelated harm. Its assumptions about the relationship between price and consumption have frequently been refuted by real world evidence.

4. The Sheffield model provides figures without estimates of error and ignores statistical error in the alcohol-harm relationship. Data is drawn from different populations and applied to England and Scotland as if patterns of consumption and harm are the same in all countries. When data is not available, the model resorts to what is essentially numerology. Insufficient data is provided for the model to be recreated and tested by third parties.

5. The model ignores the likely effects of minimum pricing on the illicit alcohol trade, it disregards the health benefits of moderate drinking and fails to take account of the secondary poverty created by regressive price rises. The decline in alcohol consumption seen in Britain in recent years has not led to the outcomes predicted by the model.

6. We conclude that predictions based on the Sheffield Alcohol Policy Model are entirely speculative and do not deserve the exalted status they have been afforded in the policy debate.

Download the report.

It's the other factors that get you every time

We're all well aware of Polly Toynbee's mantra that "We should be more like Sweden". I'm sure at least some of you will be aware of the various times I've made fun of that very mantra. What, you mean we should privatise the fire and ambulance brigades? Have a pure school voucher system? Charge people a (nominal) sum for a doctor's visit? Have a state financed and multiple providers health care system? Switch the national dish from roast beef to meatballs?

While I do have fun with making such japes there is an important underlying and usually unacknowledged point to be made. Sure, we can look at Swedish childcare and say that's not so bad (or is, to taste). Or births outside marriage and see that they don't cause the fall of civilisation. But looking at only such things andnot at the deeper structure of the society can make that a very dangerous method of comparison. As one of my favourite up and coming economists points out here:

In a responce to Ross Douthats thoughtful column, Krugman writes “In Sweden, more than half of children are born out of wedlock — but they don’t seem to suffer much as a result, perhaps because the welfare state is so strong. Maybe we’ll go that way too. So?” This is highly misleading. In secular Sweden, family traditions differ from those of the United States. Cohabitation (“samboförhållande”) is formally recognized and treated by the law as virtually identical to marriage. Swedish couples typically cohabitate, get children and only then get marry.

Statistics Sweden explains: “Living together without being married has long been common and majority of the children born in Sweden are born out of wedlock, but usually cohabiting, parents. Cohabitation can in many respects equated with being married, and young adults has been widely accepting of couples with children remaining unmarried. Despite this, most couples choose to married eventually.

Of the couples that are followed in this report and still lived together at the end of 2010, 73 percent married, while 27 percent were still cohabitating….About 10 percent of couples did not live together when the child was born, but most of these couples have lived together before or after birth. Approximately 3 percent of all couples never lived together and had a child outside of a relationship.”

There's a very large difference between couples living together and having children without a church or state sanctioned piece of paper and people being single parents from the get go. A society in which that true single parenthood is rare will be different from one where it is common. And this isn't to say that that true single parenthood is either good or bad: only that it is indeed different from non-married coupledom.

The point being that we cannot look at a socially extremely conservative country like Sweden and then import a system wholesale into a much more socially liberal one like the UK. Well, we can of course and to some extent that's what a large number of people are campaigning for. But it's not going to work the same way at all: because the underlying attitudes are different. And this doesn't just apply to the UK and Sweden either. We can't, wouldn't, import the US attitude to guns, imprisonment or race either.

Another way to put this is that sure, many systems to do many things work in many other countries. But the important thing to work out, before trying to adopt them, is why do they work in those societies? Only once we've done that can we even attempt to work out whether they would work in our own, rather different one. As an example I offer you this thought: Britain, and certainly England, has always been rather more individualistic than much of the rest of Europe. So why does anyone think that simply importing a foreign communalism will work here?

This rather kills the idea of planned development in Africa, doesn't it?

One of the odder little corners of economics is development economics. It seems to be where bad lefty ideas go to be imposed on poor people after we've found out they don't work for us. As an example I would offer some of the witterings of Ja Hoon Chang: he says that free trade might be a good idea for rich countries but not for poor. Much better that they have a benevolent government planning everything and fostering infant industry protection and the like. You might then mention the socialist calculation problem: but, but, economies are just too complex to plan, no one can ever have the right information!

To which a standard (not Chang particularly, at least not so far as I know) response is that well, rich economies are indeed complex. So knowledge is very difficult as you say. But poor economics are really simple so planning can be done. So Yah Boo Sucks baggsie me the job as Minister of Planning (or his highly paid expat adviser at least). Which is just lovely until you try to calibrate this idea against the real world:

Two years ago Ghana's statistical service announced it was revising its GDP estimates upwards by over 60%, suggesting that in the previous estimates about US$13bn worth's of economic activity had been missed. As a result, Ghana was suddenly upgraded from a low to lower-middle-income country. In response, Todd Moss, the development scholar and blogger at the Center of Global Development in Washington DC, exclaimed: "Boy, we really don't know anything!" Shanta Devarajan, the World Bank's Chief Economist for Africa, struck a more dramatic tone. In an address to a conference organised by Statistics South Africa, he called the current state of affairs "Africa's statistical tragedy".

It's worth reading the whole of that piece. Yes, I know it's about economics, I know it's in The Guardian, but it's still worth reading. Nigeria, for example, has spiffed up its statistics and is expected, as a result, to double its estimate of GDP. And this is the sort of information environment in which people say that economic planning can be done? One where we're missing 50% of the entire economy from our numbers?

Which leads to an interesting conclusion. They've already agreed that rich economies shouldn't be planned because the knowledge problem. But that knowledge problem is worse in the poor economies: only the rich ones have enough cash to splash on actually collecting even halfway reliable data. Therefore no economies should be planned.

Reviving Say's law

In an old piece for the Freeman, Steve Horwitz writes about 'Say's Law', named after the classical French economist Jean-Baptiste Say who coined it. Say's law is commonly — and, says Steve, wrongly — thought of as stating that 'supply creates its own demand'. That's a little nonsensical. In fact, what he said was that the source of demand is production: unless you have something to offer on a market, you aren't really 'demanding' anything else:

Hutt states this as: “All power to demand is derived from production and supply. . . . The process of supplying—i.e., the production and appropriate pricing of services or assets for replacement or growth—keeps the flow of demands flowing steadily or expanding.” Later, Hutt was to be somewhat more precise with his definition: “the demand for any commodity is a function of the supply of noncompeting commodities.” The addition of the modifier noncompeting is important. If I sell my services as a computer technician, it is presumed that my resulting demands will be for goods and for services other than those of a computer technician (or something similar). The goods or services competing with those that I sell can always be obtained by applying my labor directly, so I am unlikely to demand them. The demand for my services as a computer technician is a result of the supplying activities of everyone but computer technicians.

Read the whole thing.

The ratings agencies are quasi-governmental institutions, not market players

On the New Statesman blog today, David Skelton of Policy Exchange argues that “We must free ourselves from the tyranny of the credit rating agencies”. Citing the failure of the big three ratings agencies (Standard and Poors, Moody’s and Fitch) to anticipate the subprime mortgage crisis, he says that the agencies now “hold enormous power over democratically elected governments … often enough to force a government turn away from the democratic mandate on which they were elected.” Because they’ve been so badly wrong before, we should “stop thinking that their declarations should be decisive”.

I think Skelton has missed the most important point. He asks whether the "anonymous, powerful experts deserved the credibility and the exalted position they are given by the media and politicians?", apparently unaware of the fact that the ratings agencies owe their position not to media (or even politicians') trust, but to a complex thicket of US financial regulation.

As Professor Lawrence J. White of Stern Business School has written, it was “the regulatory structure that propelled these companies to the center of the U.S. bond markets”, and what has stopped them from going down following their colossal failure in 2008.

In 1936, financial regulators eager to impose discipline on the banking sector introduced rules that banned banks from holding bonds rated below BBB standard by one of the “recognized ratings manuals” – S&P, Moody’s or Fitch. In White’s words, “the creditworthiness judgments of these third-party raters had attained the force of law.”

Over the following decades, insurance regulators followed suit, so that eventually all fifty US states had rules requiring insurance companies to hold amounts of capital commensurate to the riskiness of their bond holdings as judged by the ratings agencies. Federal pensions regulators did the same in the 1970s.

Finally, in 1975, the Securities Exchange Commission (SEC) created a category of “nationally recognized statistical rating organizations” (NRSRO) to risk-rate the bonds that the SEC now required broker-dealers to hold. According to White: “The other financial regulators soon adopted the SEC's NRSRO category and the rating agencies within it as the relevant sources of the ratings that were required for evaluations of the bond portfolios of their regulated financial institutions.” The SEC only granted NRSRO status to four more organizations over the next 25 years, but by 2000 these had merged with the original three, once again leaving only three agencies on the market.

Whether through error or design, the NRSRO application process was remarkably opaque, with no formal application or review processes. As White argues, these regulations created (and continue to create) an enormous barrier to entry for any new ratings agency: “Without the NRSRO designation, any would-be bond rater would likely be ignored by most financial institutions; and, since the financial institutions would ignore the would-be bond rater, so would bond issuers.”

With the ratings agencies as insulated from competition as this, it is hardly surprising that they all made the same errors in the run-up to 2008. Nor is it a surprise that their market dominance has continued, despite that massive failure. It was only in 2006 that the SEC’s barriers to entry were reformed at all, and even then the reforms were limited, at best.

These facts are not well known. Jeffrey Friedman has argued that widespread ignorance of the ratings agencies’ status was a significant contributory factor in the subprime mortgage bubble – bankers were unaware that the ratings they were getting were not the product of a competitive marketplace (where risk-taking that turned out to be correct would be rewarded) but of a quasi-governmental oligopoly.

I may disagree with Skelton more broadly – when he accuses bond markets of holding governments to ransom, he is really just attacking them for being wary about who they lend to. And only governments relying on borrowing to fund spending could be forced to change policy to satisfy bond markets. But his assessment of the ratings agencies appears to miss the most important fact of all: that these agencies are creatures of regulation, not competition.

Milton Friedman on big business and big government

Thanks to Peter Twigg for bringing this excellent clip on the double threat to the people of big business allying itself with big government to my attention.