Why are tax campaigners campaigning to make the poorest of the poor poorer?

Most here will know that my favourite blood sport is hunting Richard Murphy and his buddies in the Tax Justice movement. But even I am appalled at the latest demand from them: that multinationals should be forced into paying more corporation tax in poor countries. They make this demand because they are willfully blind to the most basic point about corporation taxation: the incidence of said taxes. Here's what is said:

Corporate taxes are incredibly important to many developing countries. When many in their populations are too poor to pay any taxes and when corruption undermines much of the local tax base from commerce (and this fact has to be recognised at present) then the revenues to be earned from multinational companies form a significant part of the tax base of these states. In that case the base erosion that is now well documented due to transfer mispricing out of these countries on royalties, management services, interest, insurance and other charges levied on an intra-group basis, usually from tax haven subsidiaries within the same multinational entity, is of massive concern to these states and forms a major part of the illicit flows that prevent the provision of adequate services by many governments, undermining democracy and blighting many lives over succeeding generations.

We have argued for fundamental reform on behalf of these countries.

They're arguing that the poorest of the poor should be pushed further into poverty as a result of their determined ignorance about that tax incidence. We've known for well over a century now that companies do not actually bear the economic burden of taxes levied at the company level. It is either the workers, in the form of lower wages, or the investors, in the form of lower returns that do. This is not an arguable theoretical point: it's just a truth about this particular universe that we inhabit. No, don't worry about why for the moment, simply take it as being one of those truths.

We also know what it is that influences who carries the burden, workers or investors. The mobility of capital and the size of the economy of the taxing jurisdiction relative to the size of the world economy. The precise splits are argued about, volubly, but but all economists are agreed on those two basic points. It's some combination of the workers and shareholders and the smaller the economy and the more mobile capital the more it is the workers, the less the investors.

One more interesting point: Atkinson and Stiglitz, back in 1980 or so, showed that the burden could in fact be greater than 100%: the loss to workers and or shareholders could be greater than the sum raised in revenue. And yes, the smaller the economy and the more mobile capital the more likely this is and that this burden will be on the workers. So, what do we know about these developing economies where we are told that companies really must cough up more corporation tax in? In fact, that multinational companies must cough up more tax in? Quite: we know that these economies are very small compared to the world economy. That's why we call them developing economies: because they're small and poor ones.

Further, given that we are specifically talking about multinationals, the capital we're talking about must be perfectly mobile. It is outside investment going in: not domestic investment pondering whether to leave or not. If we piece all of this together then we get the ugly reality. The truth is that the burden of higher corporate tax on multinationals in these poor countries will be upon the backs of the workers. Those workers being, by our very definitions of poor and developing country, the poorest of the poor. These are the people we actually want to help and here the "Tax Justice" campaigners are insisting that their wages should be driven even lower. And as Joe Stiglitz has pointed out, their wages could be driven down by more than the actual revenue raised.

This is not, I would submit, a sensible way of improving people's incomes: imposing a tax which we know will reduce those incomes.

As above I usually take my pursuit of these people as a rather jolly blood sport. A day out with the hounds and if the odd vulpine gets harmed well, no matter and that's not really the point of it all: it's the jolly day out that is. But then we find them proposing something quite as barmy, even evil, as this. They simply will not listen to what they are being told about the incidence of corporate taxation. They just don't want to believe that it's not either the company or the evil capitalists who bear the burden of these taxes. As a result they ignore that their recommendations will grind the faces of the poor even more firmly into the dust. At which point the pursuit of their errors become less a jolly day out and more of a necessary duty.

If you want to raise wages in poor and small economies then you want more multinationals to invest in those poor and small economies. Trying to tax said multinationals more so that they invest less and thus depress wages just isn't a good method of raising living standards in these places. We want to tax less, not more.

The good news about world poverty and globalization

On my own website today I draw attention to the Economist story about the progress of world poverty between 1990 and 2010. I point out that:

"World poverty has halved in two decades. The measure used is the $1.25 a day of consumption that is the average poverty line for the 15 poorest nations. This figure shrank from 43 percent in 1990 to 21 percent in 2010. This was not achieved by redistributing wealth from richer countries, but by having wealth created in poorer ones by economic growth."

The ASI responded to the "Make Poverty History" wristbands that celebrities popularized in 2005 by pointing out that the slogan did not indicate how this might be done. It implied redistribution, with more aid to flow from rich countries to poorer ones.  We produced our own wristbands that read, "I buy goods from poorer countries," and sent them out free to anyone who asked for one.  We gave away many thousands. 

Our point was that poorer countries become richer if we open our markets and buy their goods.  It is this, rather than aid, that has made a difference to the lives of a billion people over those two decades, and can change the lives of the billion still to be lifted from poverty.

Free markets for sustainability!

I expect we're all wearily familiar with the population prodnose. Those who comment (most often seen at Comment is Free but they do spread themselves around a bit), endlessly, along the lines that "this is the problem that cannot be mentioned, the rising population". And who then go on to suggest the compulsory sterilisation of anyone a little browner than they think people ought to be. With rather fewer fascistic overtones we get similar stuff from people like Johnny Porritt and the Optimum Population Trust. There's just too many people, too many of them are peasants who won't do what Baronets tell them to and it's all just appalling.

Very strangely indeed it's largely these same people who insist that there must be a plan to deal with this population thing. Despite the fact that population is one thing that free markets deal with very well indeed thank you very much. As Ron Bailey over at Reason points out:

The crucial point is that increasing economic liberty correlates with increasing life expectancies, and thus falling fertility rates. As data from the Heritage Foundation’s Economic Freedom Index shows, average life expectancy for free countries is over 80 years, whereas it’s just about 63 years in repressed countries.

The causal chain is as follows: economic freedom increases wealth: increased wealth leads to longer lifespans. Longer life spans for women reduce fertility rates (I know, you might think it works the other way: but it doesn't). Therefore economic freedom reduces population growth.

And there we have it: we don't need grand plans to sterilise everyone a racist wouldn't like to bring home to mother for tea. We don't need to pressure the peasantry into doing what an Old Etonian thinks they ought to. We just have to leave people to get on with it themselves. People generally like economic freedom, they certainly like increased wealth and longer lifepsans and the end result of all three is that population growth falls, falls to below replacement rate and thus the gross population falls over time.

No plans, no pressure, no coercion, just free markets and the rule of law saving the planet. Great, eh? Now if only we could get the population prodnoses to understand this....

We shouldn’t subsidise the new political class

In 1911 MPs began receiving a salary. By paying MPs it was hoped the general population could independently enter politics, rather than simply leaving it dominated by a wealthy elite.

MPs compensation has since betrayed this vision. The system now supports a new political class. In the 1970s MPs' salaries were comparable with average UK income, today they seek triple the average, putting them in the top 2% of earners. Not to mention the abuse of expenses or even illegal activities by some of this political class.

Hence the rise of professional career politicians. Consider Victoria Fowler, Labour’s 22 year old Parliamentary candidate. Her (now-deleted) Wikipedia page cites her running the Warwick Speakers (a student society) and two years experience as a councillor, to justify a potential starting salary of £77,000. Glancing over Liberal and Conservative lists, she is not alone in the political class. Many pursue power with a bland CV of nothing more than work in Parliament, brief Party Research Department experience or a token career in PR. The narratives about working class links or special expertise are common but seem to have little bearing on reality.

The solution is simple. MPs should have their pay fixed around average UK salary. After all, there are many perks, like a £5.8m subsidy for food and booze in the Commons, and prestige from the post too. Perhaps they could continue to receive a second home allowance, or basic temporary accommodation to allow them to attend debates. Travel expenses, only from the constituency to Westminster when supported by just cause, such as a vote, might be reasonable.

Rather than cutting the number of MPs and supporting politics as a full time career, MPs should be part time. Politicians should understand real world working Britons as workers themselves. They should bring genuine specialist expertise, not just the skillset of a student hack. This might reduce time for legislation, though the MPs of past debated in the evenings after work and were not supported by a modern Civil Service. Why must every government create more laws anyway? What of simplification and repeals?

MPs should take a pay cut. We need more parliamentarians from the real world rather than the rising political class. MPs should be part time, and driven by a desire for public service not the raw pursuit of power and a fat cheque at the expense of their constituents.

A letter to the Archbishop of York

The Most Reverend & Right Honourable Dr. John Sentamu, Archbishop of York

The Office of the Archbishop of York

Bishopthorpe Palace Bishopthorpe, York YO23 2GE

21 July 2013

Your Grace,

I note from today's Observer that you are concerned about the Living Wage. I write to make a point that I suspect the usual suspects will not make to you. The importance of understanding that the living wage is calculated as a pre-tax number.

We here at the Adam Smith Institute agree that the Joseph Rowntree Foundation is indeed measuring poverty in the correct manner. We derive this from Adam Smith's comments on a linen shirt: it is not a necessity. However, if one lives in a society where being unable to afford a linen shirt means that you are regarded as poor, then in that society, if you cannot afford a linen shirt you are indeed regarded as poor. The JRF numbers are gathered in a similar manner: what do focus groups think people should be able to do in order to be regarded as not poor in this time and place? Add up the costs of those things and we reach that living wage. This is a much better definition of poverty than the more usual reference to some percentage of median income.

However, it is absolutely vital to understand that those numbers are pre-tax. The importance of this is as follows: if it were not for the amount that government takes from such meagre wages then the minimum wage would indeed be, to an acceptable level of accuracy, that living wage.

An example to make this clear. Assume 37.5 hours a week of work for 52 weeks of the year. At that living wage of £7.45 an hour this is a gross weekly income of £279.40 (I round slightly) or £14,527.50 a year. We are all agreed that this is not a large sum.

From this sum the recipient will have to pay employees' national insurance. This starts at £109 per week and is charged at 12%. £20.50 per week in such charges, or £1,063.30 per year.

There is also income tax to pay. This starts at £9,440 this year and is charged at 20%. £1,017.5 in such taxation.

We can see therefore that the net income from the living wage is some £12,446.70 a year. This is not greatly different from the gross income on the minimum wage: £6.19 an hour for 37.5 hours for 52 weeks is £12,070.50. Or if we wish to bring that back to a rate per hour, the difference between the post-tax living wage and the pre-tax minimum wage is some 19 pence per hour.

Unfortunately it does not stop there. There is also employers' national insurance to pay. Some insist that it is actually the employer who carries the burden of this tax. Almost all economists disagree, insisting that it is the employee who does in the form of lower wages. Indeed, we have it on the word of an expert of great eminence, Richard Murphy of Tax Research (who is funded in part of the Joseph Rowntree organisations, just to show his impartiality on this point), that it is indeed the employees who carry the burden of this tax. The calculation is slightly complex, but it's reasonable enough to claim that it is a further 13.8 % of those wages (it isn't, it's 13.8% of the total wages including the employers' NI but let us keep the maths simple) meaning a further £20 to £23 a week deducted from those wages. Or a further £1,196 a year.

If we add all of this together we find that the living wage of £7.45 an hour actually provides a lower post-tax standard of living than the minimum wage of £6.19 an hour free of taxation would provide. That latter would provide £12,070.50 a year to live on. By no means a great sum but still larger than the £11,250.7 that is available from the living wage after the politicians have taken their very much more than tithe.

It is indeed possible to play with these calculations, to make them more accurate. But the same end result will always come out. The current minimum wage, free of income tax and national insurance, would provide a higher standard of living than the proposed living wage under the current taxation system.

It is for this reason that I have been proposing for some years now, in fact ever since the first JRF calculations on the living wage were published, that the personal allowance for both income tax and national insurance be raised to the full time full year minimum wage. This would, at a stroke, raise that minimum wage to a higher standard of living than the proposed living wage. With the advantage that we only have to convince the Chancellor of the Exchequer of the righteousness of this path, not millions of employers across the country.

I look forward to the results of your investigation into low wages and am convinced that you will come to the same conclusion that we have. The shockingly low disposable incomes of the working poor in this country are not the result of any meanness or avarice on the part of employers: it is simply that the government taxes the working poor too much. Given this, that we can convert the minimum wage into something better than the living wage simply by ceasing the political depredations upon the pockets of the populace, I assume that your conclusion will be that the personal allowance, including that for national insurance, should be substantially raised.

After all, it's not really a particularly complex point. If you want people to have more money then tax them less.

yours sincerely,

Tim Worstall

Senior Fellow

Adam Smith Institute

London SW1

If big government doesn't provide more public goods then what's the point of big government?

At the heart of the argument about having a government at all is the idea that there are some public goods that would be underprovided in a pure market system. We thus need some communal (and at times, involuntarily communal) organisation to tax so as to provide these public goods to us. At every stage closer to sanity than the anarcho-capitalists we agree with one or other of the classic examples. National defence is better organised through taxation: we tried the market system once and ended up calling itn the Wars of the Roses. Public health, in the true sense of public health like vaccination, is a public good and there's excellent reason to think that taxing everyone to make sure that everyone is vaccinated is a good idea. The reason being that herd immunity that we get from a lare enough portion of the population being vaccinated.

However, that there are good arguments in favour of the existence of government at all does not mean that those same arguments support having any level of government at all. Which brings us to a fascinating paper looking at the relationship between big government and the provision of those public goods:

Theories explaining government size and its consequences are of two varieties. The first portrays government as a provider of public goods and a corrector of externalities. The second associates larger governments with bureaucratic inefficiency and special-interest-group influence. What distinguishes these alternatives is that only in the former is governmental expansion generally associated with an increase in social welfare. In the latter, the link between government size and public goods provision (or social welfare) is negative. We study the empirical significance of these competing claims by examining the relationship between government size and a particular public good, namely environmental quality (notably, air quality measured by SO2 concentrations), for 42 countries over the period 1971–1996. We find that the relationship is negative, even after accounting for the quality of government (quality of bureaucracy and the level of corruption). This result may not prove conclusively that the growth of government has been driven by factors other than concern for the public good, but it creates a presumption against the theory of government size that emphasizes public good provision.

I'm still perfectly willing to agree that there are public goods. And that there are public goods that only government can provide. But as above, this does not mean that this justifies any amount of government. For past a certain size the government turns out to be not very good at provision of those very public goods that are the justification for it in the first place. Quite why we can argue about: my theory would be that when government tries to micromanage inequality say, or concerns itself with the voluntary activities of consenting adults, then it's taking its attention away from what it actually exists to do, provide us communally with those things that cannot be, or only will badly be, supplied by individual action.

I'd thus suggest the Worstall Measurement of government. There are things that must be done, there are things that must be done that only government can do. So let's limit government to only those things that must be done by government: where it is both necessary that they be done and also that the coercion of either the law or taxation is necessary for them to be done. Everything else we'll get on with ourselves: you know, as those free people we are?

As everyone now seems to agree it's time for Plan Worstall

Quite astonishingly we now have both the OECD and the Tax Justice Network in agreement with each other. Cats will lie down with dogs and it is the end of times. What they're agreein on is that the current international corporate taxation system is no longer fit for duty. The system builds upon steps first taken in the 1920s and changes in the way the world works since then have made the basics of the system just not workable.

However, they're both coming up with the wrong solution to this problem. To find the correct solution we need to go back to some basics. Yes, we do need government therefore we do need tax revenue to fund it. While it would be lovely not to have to tax economic value creation we can't raise enough cash for the amount of government we seem to want without doing so. So, great, we need to tax economic activity.

Both the OECD and the TJN seem to think that that must mean that we tax companies. But we know very well that the economic burden of corporate taxation does not fall upon the company: it falls upon some combination of the shareholders and or workers. The only reason we've ever taxed the companies themselves is because they were a convenient place to tax. Now, as the OECD and TJN are stating, they're not a convenient place to tax.

So, why the insistence that we must find a new way to tax companies? For that's not what we want to do at all: we want to tax the economic activity, yes, because we need the money. But why tax inconveniently where we know the real burden doesn't fall? Why not just tax where we do know the real burden falls: on the shareholders and the workers?

At which point I suggest that we simply abolish corporation tax altogether. Tax corporate capital gains and dividends just like income from any other source and be done with it.

Of course, there have also been people who actually know what they're talking about who have looked at this question. The Mirrlees Review for example. But no one's paying any attention to anyone who actually knows about the subject, far better to have baseless speculation from the ill informed like me. At least I assume this passion for the involvement of the ill informed explains why people are talking to the TJN.

With Jesse Norman as a Tory MP why bother having a Labour Party?

Jesse Norman weighs in on this thorny question of whether and how much companies should pay in tax.

The issue of taxation is never far from the headlines, and doubly so in times of austerity. So it’s hardly surprising that the likes of Google, Starbucks and Goldman Sachs have come under fire in recent years for under-payment of tax.

Details, schmetails, but Starbucks doesn't make a profit in the UK, even after you add back in those royalties and interest payments. So no tax is possibly due.

For many of these firms, tax is effectively optional. In avoiding it, they are using their size to advantage themselves over purely domestic competitors – as anyone who has tried to compete with Amazon can testify.

That's even worse: in 2012 Amazon made a global loss: what tax is anyone talking about that can be due from a loss making company?

So, again, how much tax should these companies pay? Patently, the law cannot answer that question. But neither can economics. For economics sees companies merely as bundles of contracts, which allocate different financial incentives to shareholders, directors, managers and employees.

Facepalm. Coase on The Theory of the Firm. No, the whole point about the existence of companies is that they are not merely bundles of contracts: if that's all they were they wouldn't exist and we'd have bundles of contracts instead.

But a politician being ill informed and unaware of the finer points of economics is hardly new so why am I complaining? Well, really, it's about this part:

First, the law. The Companies Act 2006 requires directors to promote the success of the company, but with regard to six factors: the likely long-term consequences of a decision; the interests of employees; relationships with suppliers and customers; the firm’s impact on the community and the environment; its reputation for high standards of business conduct; and the need to act fairly between shareholders. The effect is precisely to prevent managements from automatically pleading a duty simply to maximise shareholder value.

Well yes Jesse: but you're a Tory MP, not a Labour one. You're not there to defend the idiocies of the past Labour Government you're there to try to correct them. This part of the CVompanies Act was deliberately brought in to try and appease the more drippingly social democratic parts of the Labour Party. Rather than now stating that this is the aim and purpose of a company you're supposed to be shouting from the rooftops that they got this wrong. The point and aim of a company is the enrichment of its shareholders, nothing else. You should be agitating to get the law changed to reflect reality, not accepting the fantasies of your predecessors: otherwise what's a Tory for if not to be a reactionary?

Alternatively, if we're to have Tory MPs being so drippingly wet what's the reason for the existence of the Labour Party any more? Who would need them?

Dearie me, oh dearie, dearie, me, do we have to have fools running the country?

Sigh:

Backing a report by CentreForum, the think tank, Sir Ian said that “many companies, especially the private equity infrastructure funds, have paid out excessive dividends to their owners”. He advocated the introduction of “some form of dividend control”, whereby “payments of dividends above those assumed by the regulator when setting price limits, would be accompanied by reductions in the tariffs paid by customers”.

No, absolutely not. Sir Ian has clearly forgotten what happens when you place those sorts of detailed restrictions upon regulated companies. They'll inflate their capital base, play around with loan interest, pay the management more: whenever you try to micromanage like this you'll find people gaming your micromanagement.

What we actually want to happen is how we did this regulating of prices immediately after privatisation. We set a target for prices (RPI plus or minus something, depending upon the industry) and then let everyone rip with capitalist glee as they slashed and burned through their overstuffed workforces. Or as I suppose I should put it, increased productivity to the benefit of all. They did indeed make vast profits in doing so. Now if we had just left them alone for all time this would not have been a good solution: but we didn't. We told them that their pricing regulatory structure would be reviewed after some years. And then, that's where we got them. Because we revised the regulated prices to take account of the productivity improvements they'd already made. And quite deliberately made sure that in the next period they lost those excessive profits they'd made in the first.

There's good reason to manage affairs this way as well. Sir Ian doesn't know what an "excessive dividend" is, nor do I. Nor do either of us have a clue as to how to increase the productivity in these companies and thus their profits. So, what we do is set prices (they are natural monopolies after all, we're not going to leave them alone entirely), then let them make as much money as they can for, perhaps, 7 years. They know how to increase their own productivity and so they do and they increase their profits. But we don't let them keep those for all time: we now reset after 7 years and see if they can do it again.

We're giving them the incentive to become more efficient and profitable: but the regulation of how much more grossly, fatcatterly, profitable they become lies in the reset of the regulated prices, not fiddling with dividends and rates of return inside the regulator period. For that fiddling removes the incentive for them to become more efficient, y'see?

We did in fact get the price regulatory process correct the first time around. We didn't set the right numbers, no, not at all: but we did get the process right. Go make as much money as you can for the next regulatory period. And the more you make the tighter the next set of regulations will be. This is the correct mixture of the necessary regulation over monopolists and the drive for greater efficiency.

I'm afraid that this really does make me laugh

I agree that this shouldn't make me laugh of course. Abortion is such a serious subject that let us simply ignore that this story is about that subject. Instead, let us look at what Texas has just done:

Requirements for wider hallways, janitor closets and back-up generators will likely be the downfall of Amy Hagstrom Miller’s abortion business in Texas. Texas lawmakers last week approved a law requiring that abortion clinics become hospital-like outpatient surgical centers, with detailed rules for how the buildings are designed. Owners of the state’s 36 clinics, including five run by Miller, would need to spend millions of dollars to comply -- adding features such as showers, single-sex locker rooms and special airflow systems -- or either relocate or shut down.

As I say, leave aside the specific subject itself and look at the tactic that has been used. For one can trace through American politics and law making a definite strand of those who insist upon more regulation and those who insist that excessive regulation kills businesses.

We could think of the Americans with Disabilities Act (ADA) for example, something that insists that all public (by which they mean private business premises as well) must be disabled accessible. Which might be just fine but it is also true that there will very definitely be expenses connected with conforming to such regulations. And the businesses that complain about those have been told to just suck it up and stop complaining. Or we might look at the insistence that restaurants must provide calorie counts on the menu. Perhaps that cost is trivial but it is still a cost which the regulators have happily forced upon such businesses. There are, of course, myriads of such regulations and costs.

And what has me giggling here is that the positions are reversed from their general set up. Being against regulations because of the costs to business is, in the US, generally a "right wing" view. As is, to a very large extent, being anti-abortion. Being pro-regulation whatever the cost is a more lefty position, as is being more pro-choice. Here it is, largely, the right imposing those regulations upon something supported by the left: and my, aren't they shouting about it?

It isn't, of course, a principled stand by the righties: not a bit of it, it's a tactic to do down their perceived ideological enemies. But I'm afraid that I do still find it amusing, it's a sort of political ju-jitsu. You like regulations, well, here, have some regulations.