Somebody really needs to explain the tax system to The Mail and Vince Cable

This is simply absurd from the Daily Mail:

Apple has paid barely 1 per cent tax on its UK sales, despite raking in £7.5billion here since the iPhone launched, a Daily Mail investigation has found.

Britain doesn't have a turnover tax on companies - VAT is paid by the consumer. Britain does have a profits tax and thus whatever the tax paid is determined by those profits, not turnover.

Sadly, Vince Cable gets worse:

Last night, critics said Apple's apparent determination to avoid contributing was a scandal that shamed international business.

Former Lib Dem business secretary Sir Vince Cable said: 'It's absolutely outrageous that the tax base doesn't reflect economic activity and is based on artificial declarations of profits.

'Taxation has become voluntary for these companies, and the tax base has got to change.'

As HMRC has pointed out more than once this is how the current profit tax system operates, it taxes profits where the economic activity which produces them takes place.

Consider what makes Apple's profits. It's not selling a phone after all. We can all go and buy some landfill Android for £20. The reason people buy Apple is some mixture of the brand, the design, the software and so on. All of which are "made" in California. And thus the profits from that are taxed in the US, as the national taxation regime, and in California, the local one, under whatever the rules in place for the taxation of profits there are. No, we don't get to whine about Bermuda, repatriation or whatever, that's all the US tax system, not us.

This is not some failure of the corporate taxation system, this is the very purpose of it. Profits are taxed to reflect the economic activity which produces them. This is what Vince wants, this is what Vince has, so why is he complaining? It couldn't be that he's just a politico on the stump, could it? 

The war on work

When Ed Glaeser writes for City Journal it's always worth reading - take his brilliant takedown of infrastructure spending. His posts are rare but valuable. His latest "The War on Work—and How to End It" is no exception.

In it he sets out how America could significantly increase employment from simplifying welfare to replacing the minimum wage with wage subsidies and fixing vocational educations.

Here are some of my favourite excepts:

We also need to make hiring workers less costly for employers. Temporarily cutting the payroll tax was one of the most constructive policies adopted during the Great Recession. We could enact a permanent payroll-tax reduction. The tax could be gradually phased in for workers once their hourly earnings went beyond a certain threshold. The payroll tax could be eliminated for workers who had been unemployed, at least for an initial period. The costs of reducing the payroll tax could be offset by raising the minimum retirement age for employees who hadn’t paid these taxes for enough years. Reducing mandated benefits, like health care, that employers must provide lower-income earners would help encourage work, too. Ideally, the reform of our health-care system will ensure that workers have health-care options that don’t unduly burden employers.

Making work pay needs one final, major policy initiative: wage support, which would replace the EITC. The EITC had the right overall idea, but it is cumbersome and indirect. Instead, the federal government could simply provide pay to increase the earnings of minimum-wage workers by a fixed amount—say, $3 per hour. Consequently, a worker paid $7.25 would take home $10.25 hourly, with the difference paid for by taxpayers. The subsidy could fall gradually as wages rise, and it could be targeted for specific groups—larger for returning veterans or the long-run jobless—and rise or fall with the level of aggregate unemployment. The phaseout might slightly slow private-sector wage growth, but the cost would be more than offset by the benefits of such a visible push toward employment. Such a program would be expensive, so it should be matched with spending reductions for other social services.

And

We should also improve the way that we do vocational education. (See “Vocational Ed, Reborn,” page 36.) Many vocational schools, like Boston’s Madison Park High School, have long been troubled. The most ambitious students avoid getting tracked onto a vocational path, and they—and their parents—want schools that focus on college readiness. Consequently, less fortunate or struggling students often get segregated into these vocational centers. The conventional teachers in many vocational programs often lack the know-how for teaching either high-paying blue-collar trades, like plumbing, or cutting-edge fields, like computer programming.

A more effective approach might be to keep students in college-readiness-oriented schools and experiment with out-of-school vocational training. Kids could be taught after school, on weekends, and during the summer by programs specializing in particular occupations. These initiatives can be evaluated swiftly—you can readily determine if a program has produced, say, good carpenters. The superior training programs can then be scaled up and bad ones shut down. Adopting this structure would mean that anyone could potentially compete to run the programs—trade unions, private providers, nonprofits—increasing the chances that some programs will excel. We should also be open to initiatives like Cambridge, Massachusetts’s “The Possible Project,” which has been training youths, many from poorer backgrounds, to launch themselves in the start-up economy. (I am currently working on a randomized control trial for the project.)

Read the full piece here.

How Japan gets it right on housing

Japan is often seen as an exotic oddity among the major developed nations. Though not as well known as manga or sushi, the Japanese housing market is no exception.

Japanese architects let their imaginations run free: just look at Reflection of Mineral by Atelier Tekuto. Designers in Japan are not held back by paying homage to history or a desire for extreme longevity. Buyers do not need extensive permission to demolish their house and construct them anew—so they do it a lot. And in spite of government incentives for durable housing, the disposable-home culture has boomed. Projects like Reversible Destiny Lofts indicate a willingness to move rapidly with the times.

Like many Japanese crazes you come across online, these hyper-modernist and experimental schemes are not typical across Japan. In rural areas machiya (traditional wooden housing) is far more common. The price of these houses is surprisingly low, and even falling. The country's population has begun to decline, and rural areas like Kyoto prefecture have seen emigration to the country's capital. The attraction of the hustle and bustle of Tokyo, not to mention its economic dynamism, has pulled resdients away.

In spite of this mass migration, rents property prices in Tokyo have barely changed, and apartments are getting bigger. Relaxed regulations have underwritten a free and elastic housing supply: when there a plot can be put to a better use than it current one, it is legally easy to knock it down, extend it up, or switch it to a new use. Both the relative lack of deference to historical preservation, and the cheap housing, are in stark contrast to the situation in London, San Francisco, or other major metropolieses.

This is creating a sharp divide between rural and urban Japan. Few actually demolish their empty houses in the countryside, due to waste disposal laws that the Japanese government is only now overturning. But there are still around 8 million unoccupied buildings in Japan, according to a government count — a far cry from the British worry about second houses and foreign ownership. Towns with large numbers of abandoned houses have been dubbed ghost towns.

Japan is yet further proof that reports of the death of the traditional city were greatly exaggerated. The job market in urban Japan is still sucking in workers: now 45% of Japan's entire population lives in just three city regions: Tokyo, Osaka and Nagoya. Herd mentality has furthered the divide: the greater the number of people living in an area, the more economic relationships they can have, the more they are paid, and the more stuff they can buy. On top of that, other young people move for fear of being left behind.

The economic disparity is widened by lower levels of "parasite singles" (パラサイトシングル)—those living with their parents well into adulthood—in cities. In Tokyo it is increasingly common for unmarried women to buy or rent flats on their own indefinitely—significant when the group has faced so much stigma for so long. This would be impossible without the low prices and wide choices that such a liberal supply affords.

Japan's housing market is full of contrasts—Tokyo's modern buildings versus machiya, disposable-houses versus ghost towns—but at both ends they've managed to do something the West seems incapable of: keep housing affordable!

Did Microsoft's antitrust prosecutions give us the iPhone? Um, no.

Tom Forth writes about the Microsoft antitrust case (which is my earliest memory of a competition lawsuit, and which I followed with interest as a child). Many of the responses to the EU’s Google ruling have compared it to the Microsoft case, including my own on this blog and in City AM.

He argues that the threat of more antitrust lawsuits were what drove Microsoft to effectively bail out Apple in 1997, when it was close to bankruptcy. Without the $150m injection of cash and commitment to maintain Office software for Macs that Microsoft gave Apple, we’d have had no Apple and hence no iPhone. Keeping Apple afloat allowed Microsoft to point to the existence of a viable rival – so no monopoly and no need for investigation.

It’s a good story, even if it’s a little strange to assume that without Apple, nothing like Apple or the iPhone could have existed – a sort of domino theory of innovation, where ours is the best of all possible worlds. (Tom acknowledges this point, but says he’s just not convinced by it. On Twitter he argues that the lack of competition in English bus services justifies his scepticism.)

But the story Tom tells is basically wrong – it’s the conventional folk history of what happened, sure, but it actually misinterprets the situation with Microsoft at that time. First, note that the $150m cash injection was a relatively trivial sum of money – the real ‘bailout’ came from promising to maintain software support for things like Internet Explorer and Office for Mac.

Microsoft was throwing its weight around in the 1990s. It was blocking the sale of alternatives to its software and demanding that Windows PCs be shipped with other Microsoft products too. But there was such an abundance of complaints that prosecutors decided to focus on what they saw as Microsoft’s most egregious crime: bundling Internet Explorer with Windows.

But this took Apple out of the picture. As Daniel Eran Dilger says:

By narrowing the monopoly case, prosecutors effectively took the majority of business between Apple and Microsoft out of the picture; the existence or disappearance of Apple would simply have made no difference in a trial that revolved primarily around Netscape's Navigator and Microsoft's Internet Explorer on Windows.

Microsoft didn't need to bail out Apple to pretend that the Mac platform was providing effective competition to Windows. Further, doing so would not really help its case, since the existence of the Mac did nothing to put Netscape on OEM PCs or to make it appear that Microsoft had not violated its 1994 consent decree.

Included in the findings of fact is a summarizing statement that demonstrates how little bearing Apple's Mac had on the outcome of the decision:

“Viewed together, three main facts indicate that Microsoft enjoys monopoly power.  First, Microsoft's share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows.”

In other words, bailing out Apple was irrelevant to the main lawsuit against Microsoft, including to the judge ruling on the case. (Dilger’s post is fascinating and detailed on this whole affair – I recommend a full reading if this case is interesting to you.)

In fact, antitrust was not the reason Microsoft decided to bother with Apple. 

Further underlining the fact that the agreement had nothing to do with antitrust violations, Microsoft demanded that Apple make Internet Explorer the default web browser on the Mac. If the company was at all worried about its monopoly case, such a deal would be an absurd way to create the appearance of an open market. 

Far from bailing out Apple to avoid the appearance of a monopoly, they were trying to use Apple to squeeze Netscape – a quarter of whom were Mac users – in the browser space even more! Microsoft’s bailout was for the exact opposite of what Tom claims.

The real reasons were to do with expanding Microsoft software usage to make money and to defuse impending lawsuits from Apple. Apple had amassed a large patent warchest and was reported to be planning to sue Microsoft for patent infringement and for using stolen code for its video processing on Windows. 

To head these off, Microsoft wanted to tie Apple users into its software more (Internet Explorer and Office) and give Apple a series of sweeteners to persuade it to drop the lawsuits. Bailing out Apple wasn’t relevant to Microsoft’s monopoly lawsuits. It was driven by a desire to be more monopolistic and to avoid being sued for intellectual property theft by Apple. 

Whether the actual Microsoft antitrust case was justified is a discussion for another post. A few points, though: I agree with Lawrence Lessig, one of the regulators behind and Special Master during the lawsuit, that history has proved it to have been misguided – the emergence of Linux shows that the operating system space can be competitive even if a dominant firm is being extremely aggressive in trying to destroy its competitors. 

In my previous post I explained why competition within a software platform doesn’t matter if there is or can be competition between platforms. And Thomas Hazlett has shown that antitrust lawsuits against Microsoft lowered the overall value of the computer industry – a sign that the enforcement has not been good for the sector as a whole.

But the folk story that Tom cites is widely misunderstood, and misses the real dynamics of why Microsoft helped to bail out Apple. I hope people aren’t misled by it.

Odd what The Guardian doesn't report about East Coast Trains, isn't it?

Or perhaps we might not be all that surprised. Stagecoach has announced its results and the bit that all are interested in is the East Coast Line. They're the private operator who took the line out of the Direct Management Organisation. That's when the government was running it directly and it was making a profit, thus a payment into state coffers.

This of course prompted cries that if a railway could make a profit in state operation, then renationalise them all!

Stagecoach says it has overpaid for East Coast rail contract as profitability plunges

Isn't that great? Well, perhaps not if you're a Stagecoach shareholder but for us taxpayers we've got lots of extra lolly.

Andy McDonald, the shadow transport minister, said the East Coast line – the scene of a dispute between Jeremy Corbyn and Virgin East Coast about overcrowding – showed privatised rail was “dysfunctional, broken and needed to be brought to an end”. The RMT union said re-privatising the line had been a “gamble doomed to failure”.

The normal sorts of comments from the normal sorts of people. But this is odd from The G:

The dispute raises the possibility that Stagecoach could end up paying something closer to the £235m that state-owned Directly Operated Railways (DOR) did in the final year of a franchise it took on in 2009, when the government seized control from National Express.

Erm, what? From the Stagecoach accounts:

As a result, Virgin Trains East Coast has amongst the highest customer satisfaction of any franchised rail operator. At the same time, Virgin Trains East Coast has continued to meet its contractual and financial obligations, including delivering around £525m to 29 April 2017 in premium payments to the taxpayer. This is around 30% more than the average monthly payments made by Directly Operated Railways when it ran the East Coast route. 

Privatisation means that we, we taxpayers, get more money from the line than when government ran it directly? Isn't that proof that privatisation of the railways works?

And might not The Guardian tell us so? For that's the one thing they manage not to mention, that the profit from the line for all of us is higher under this arrangement. Isn't that odd.

A teeny tiny bit of self-promotion

When I agreed to write this blog at the start of the week it was intended to be on the importance of detailed scrutiny of the Government during the Brexit negotiations - with a focus on a small but important issue at the UK-Irish border.

But today didn't go quite go to plan...

Instead of guiding the news to Adam Smith objectives I ended up becoming the story after making a light-hearted joke on Channel 4 last night.

So instead of a post on the intricacies of Border Inspection Posts you get a whole load of self-promotion!

The house was successfully divided. Good amounts of abuse and praise came my way on Twitter and then the papers caught it. The Telegraph picked it up straight away, Guido covered it, with other news pieces in The Sun, the Daily Mail, the HuffPo and the Evening Standard.

I'm now off for a weekend away - so all my love and a promise of a more detailed and relevant blog-post next time will have to do!

Matt

There's no outrage like a faux outrage

"Facebook rules do not protect black children from hate crime" reports The Times today.

A rather striking headline I'm sure you'll agree, but if you bother to read the article you'll see Facebook's rules do nothing of the sort.

From the article:

"ProPublica, a US journalism website, shed further light yesterday on Facebook’s criteria for removing posts by revealing some of the slides used when training censors.

One slide shows three groups: female drivers, black children and white men and asks: “Which group is protected from hate speech?”

The correct answer, according to Facebook, is white men. That is because both race and gender are protected categories, while age and driving status are not."

This is of course an entirely sensible policy. It's not, as the headline suggests, carte blanche for bigots to spew abuse at black children and female drivers. The question is merely designed to work out if Facebook's moderators understand what is and what isn't a protected group.

If a racist were to post verbal abuse that explicitly singled out black children, then the post would almost certainly fall foul of Facebook's rules by attacking a group on a protected charecteristic - race. The same would be true of a sexist sending nasty abuse to female drivers, it'd be covered by the protected charecteristic - gender.

It isn't the first time The Times has gone after a tech company on spurious grounds. In the past I've noted how they attacked Airbnb over supposedly secretive lobbying tactics. Of course, Airbnb were doing nothing of the sort. They simply invited some Airbnb hosts to dinner in Notting Hill and canvassed their opinions about the services. It's hardly cash for questions.

The Times is usually an excellent paper. I read it cover to cover every day, especially enjoying columnists such as Matthew Parris, Viscount Ridley and Rachel Sylvester. But it’s also becoming worryingly anti-tech in its journalism.

Architect of prosperity

As President Xi visits Hong Kong on the 20th anniversary of the 1997 handover from the UK, he might do well to reflect on the name of Sir John Cowperthwaite and what this quiet British civil servant did to make the former colony so prosperous. Which was largely leave the people to their own devices.

After the turmoil of the second world war, Hong Kong was called ‘the barren island’. It had few natural resources, its trade and infrastructure had been ruined, its income was a third of Britain’s. Now it is a world trading hub, its airport handling 60m passengers a year, its skyline soaring ever higher, its goods going all over the world, its per capita income now 40% more than Britain’s.

Part of the reason for that is that the small cadre of civil servants, like Sir John, whose job it was to run Hong Kong, fixed on the objective of making it economically prosperous, and knew that the best way to do that was to do exactly the opposite of what the home country was doing—with its nationalisations, controls, economic planning, high taxes, trade barriers, deficit spending, and all the rest. The Hong Kong administrators by contrast rejected the idea of government planning and spending to invest, believing that entrepreneurs knew how and where to invest, and how to manage their businesses, better than any government officials. They kept the government’s books balanced for nearly every year; they resisted high taxes, believing that low taxes would encourage private investment and would expand the long-term tax base.

Cowperthwaite was the most important person behind these policies, as a new book by Neil Monnery, Architect of Prosperity, demonstrates. He ran the trade and industry department after the war then became financial secretary in Hong Kong—effectively the colony’s Chancellor—until he retired in 1971. 

One thing the book demonstrates is just how hard it is for any government body to prevent itself from interfering in an economy—with the inevitably counterproductive results. Sir John, it shows, fought off many such attempts. There is a story that the British government, then pursuing a full interventionist policy, sent a group of civil servants over to Hong Kong to ask Sir John why he was not keeping unemployment statistics, and to make him do just that. Sir John, goes the story, put them on the next plane back home, explaining that entrepreneurs know the precise state of the labour market from day to day, never mind quarter to quarter, and that if he kept unemployment statistics, people would want him to produce some counterproductive intervention to boost unemployment.

The story is not true, but it is not far from the truth. Cowperthwaite had to fight over and over to resist ‘enlightened’ interference with the Hong Kong people’s lives and businesses, and to maintain his doughty view that economic statistics were a double-edged sword and you should only collect the ones that are really essential.

It’s a fascinating story of a remarkable but quiet man, and the astonishing economic results of his benign policy. Perhaps it is a lesson not just for President Xi, but for us in the UK too, as we drift on doing so many of the wrong things that have made us 40% poorer than Hong Kong.

The book is available on Amazon here.

Perhaps we should admit it outright, we're just unpatriotic

According to Polly Toynbee we're unpatriotic:

Patriotism – pride in the country – is undermined by every failure in the public realm. Since 2010, this government and its coalition predecessor have followed an ideology of cuts, intent on reducing the state to a pitiful 36% of GDP, far below any equivalent EU country. Leadsom, hear this: shrinking the state is the opposite of patriotism – a betrayal of country and people.

The EU country which is perhaps most equivalent to us - we share language, the Common Law and an awful lot of often fractious history - is Ireland which has a smaller state than we do and is also about as rich (no, ignore GDP here, we must use GNP). Of the OECD countries Switzerland is richer, also has a smaller state. That's probably because of he postcode lottery that Polly so bitterly decries. The central state at Berne deals with the peace, easy taxes and tolerable justice bit, everything else is done by the cantons in myriad different manners.

So it's at least not obvious that shrinking the state is such a bad idea.

But then the idea that patriotism is defined by the size of the state in the first place is trivially stupid, isn't it? We're entirely fine with the idea that how well the place is governed can be related to how patriotic we all are, but the idea that the amount of money defines it is ludicrous.

But then, you know, Polly. She always has insisted that it's not how we spend the money that matters, it's feel the width, see how much we are.

Basic Income 101

The July 2017 edition of Reason magazine contains a fascinating article by Jesse Walker that provides a comprehensive history of Basic Income: from the concept’s murky beginnings in 1795 to contemporary experiments in unconditional transfers and similar initiatives by governments and NGOs around the world. The ASI has championed the (virtually identical) idea of a Negative Income Tax since the 1970s, and the number of supportive voices for such schemes has grown significantly in recent years.

European countries such as Finland and the Netherlands are in the early stages of basic income experiments, but the most dramatic tests of the concept are being conducted in the context of poverty alleviation in the developing world. In the piece, Walker raises the example of GiveDirectly:

“Having moved from conditional to conditionless cash payments, GiveDirectly's directors started thinking about taking another step and experimenting with a full-fledged basic income—not just payments to a village's neediest families, but a long-term income for everyone in town, one set high enough for people to live on it. Other aid groups had already conducted experiments along these lines in India and Namibia; the results appeared to be favorable, but these studies were too short-term to draw firm conclusions from them, and the Namibian experiment had the additional problem of not being randomized.”

Walker also highlights that despite reasonable dissent (and inevitable ‘anything but the outgroup’ opposition) from across the ideological spectrum, there are currently a wide range of political positions that include elements of support for basic income — something that has been the case for several decades:

“As in the 1960s, the interest is coming from many different directions. Center-left wonks perceive the basic income as a more market-friendly approach to welfare policy. Radicals hail it as an alternative to the "neoliberalism" they associate with those same wonks, imagining a day when work is detached from income and we live in a world of postscarcity abundance. Silicon Valley figures hope it will help us survive the upheaval to be unleashed when artificial intelligence wreaks havoc on labor markets. Libertarians see it as a way to simplify the welfare maze into a cheaper and less intrusive single program.”

If you’re looking for an engaging, accessible, and detailed introduction to the basic income “movement,” look no further than Walker’s essay.