Racing around in circles on tax

Lewis Hamilton has been in the headlines for his tax planning rather than his driving, named in the BBC’s “Paradise Papers” reports as having imported his private jet through the Isle of Man to save £3 million in VAT.

If you want an unintentionally funny tax story, do read the BBC’s piece on this. “It was still dark when the private jet began its descent. Inside, its decor was sumptuous…the island that the plane was heading towards hadn't yet woken up.” Melodramatic prose, private jets, fast cars, exotic islands, shadowy international finance – I think the writer must be angling for a job on the next James Bond script.

But once you cut through the purple prose and outrage, what this shows is the stupidity of governments trying to fiddle with the tax system.

Hamilton bought his jet, according to the stolen files, mostly for business purposes (presumably flying between race courses and training grounds), plus a minority of personal non-business uses.

VAT was invented by a Frenchman, so not surprisingly it has, at its heart, an elegant logic. Also, not surprisingly, that fundamental simplicity is overlaid by a huge amount of bureaucratic complexity.

But fundamentally, the way VAT is supposed to work is that someone in business charges, and pays to the tax authority, VAT on all their sales, their income. They can then reclaim the VAT on all their business expenses and business-related purchases. That way the net VAT paid by the business is on its “value added”, the difference between its sales and its purchases. That’s why it’s called Value Added Tax.

If the EU’s VAT system stuck to this basic principle, Hamilton would have been allowed to reclaim part of the VAT on his jet, the proportion that related to his business rather than private use. If he used it two thirds of the time for business and one third for private flights, he could have reclaimed two thirds of the VAT. Yes, there would have been a bit of wrangling with the tax authorities over which flights were business-related, probably some cross-referencing of flight logs and race schedules, but basically the same business-use principle that all self-employed people are familiar with when HMRC check their expenses.

But at some point some bureaucrat or politician decided that the basic VAT principle of reclaiming VAT on business purchases should be abandoned when it comes to aeroplanes.

Without, it seems, any good reason other than political envy, the EU decided that VAT reclaims would be prohibited for private planes, even when they were legitimately used for business flights, unless they were used solely by an airline.

So that’s how the VAT scheme used by Hamilton and others worked. His advisers set up an airline for him (charter flights count as an airline business, even though the airline’s only customers were Hamilton and his businesses); the aeroplane was imported into the Isle of Man, Hamilton’s company paid the VAT due, and immediately reclaimed it again because the plane was to be used by his charter airline company. There was a bit more complication, but that’s the fundamentals.

Now, did Hamilton do anything wrong here?

There certainly wasn’t anything illegal; everyone agrees that the law was followed to the letter.

But it’s also difficult to say that he “should” have paid that VAT and “should” not have been able to reclaim it. The jet was being used primarily for legitimate business reasons, and the basis of VAT is that businesses “should” be able to reclaim VAT on their business purchases.

Yes, Hamilton does, according to the leaked documents, also use the plane partly for his own private non-business flights. But what the outraged BBC journalists don’t mention is that he will have to pay his charter company for those flights, at the proper price, and that will be taxable income of the charter company, subject to tax in the ordinary way.

So what is the problem? Why is there outrage, other than envy at the rich and successful and a desire for the government to grab ever more money? Yes, an artificial scheme has been entered into, but only because the EU first put an artificial restriction on the business VAT reclaim.

One technicality has cancelled out another technicality, the law has been obeyed, and VAT has been paid and refunded as it was designed to.

This is essentially the same as the “flat tax” argument that I have been making in Adam Smith Institute reports for years. Rather than over-complicate the tax system, with hugely bureaucratic and interfering rules where some types of income get tax breaks and some don’t, and some types of expenditure get special tax allowances but others are penalised, let us just treat everything the same, have an easy system and keep the rates as low as possible.

It would have been far better to have a simple system where VAT just does what it is supposed to, without trying to use tax for social engineering. It would also show that the UK is open to business rather than merely trying to extract every last pound of tax.

A feast of classical liberal thought: Mont Pelerin Society in Stockholm

[This post was originally written by Edwin van de Haar on Notes on Liberty.]

Last week, Stockholm hosted a special meeting of the Mont Pelerin Society (MPS) on the populist threats to the free society. MPS meetings are held under Chatham House rules, which means I cannot report in any detail about the proceedings. Yet a few impressions can be shared.

I have been a MPS member since 2010, when my nomination was accepted at the end of the general meeting in Sydney. In those days the old rules still applied, which meant you had to attend three meetings before you could be nominated for membership. However, this strict rule led to the erosion of the membership base (the MPS was literally starving out), so the rules to join as a member have been made easier.

My first MPS meeting was in Guatemala City, in 2006. I had participated in the essay contest for young scholars which is always organized in the run-up to the bi-annual General Meetings. As a runner-up I won free entry to the meeting. I happened to be in the south of the USA in the weeks before, doing PhD research at the Mises Institute in Alabama, so could easily make the trip to Central America. Because I lived in Manila during those years, I could also easily attend the 2008 meeting in Tokyo.

I had are number of reasons for wanting to join the MPS. First of all, the quality of the meetings offer a great chance to listen to and speak with the leading scholars within current classical liberalism. Increasingly multidisciplinary (back in the old days the economists dominated), the programme committees of the MPS Meetings always succeed in attracting an impressive crowd of high quality speakers and commentators from across the globe. I always find this a great intellectual treat. Second, the meetings are characterized by extremely pleasant and open atmospheres. Everybody mingles with everybody, you can talk with everybody, no matter your age, or academic background. Thirdly, the meetings take place across the globe, so they offer a great opportunity to travel and see places. Although it must be added that even when you do not stay at the conference hotel, the meetings are never very cheap, so it remains an investment. Fourth, for a Hayekian like myself, it feels very good to be a member of the society founded by the master himself, which had and has such an illustrious membership, ever since its beginnings 70 years ago.

Besides the big one week General Meetings held every two years, there are shorter regional or special meetings in the other years. Last week’s MPS meeting in Stockholm was a special meeting, very well-organized by the Ratio Institute. The theme was discussed from numerous angles, through sessions on Russia’s foreign policy, the economic issue of secular stagnation, or the danger of political Islamism. Two sessions were focused on new classical liberal ideas to counter the threats. At the opening day there was a session for young scholars to present papers. This was of course also a way to attract new talent and interest in the MPS. And at the end of the second day there was something different: beer tasting while listening to Johan Norberg. A rather splendid combination!

The speakers and commentators were high level, including MPS chair Peter Boettke (George Mason), David Schmidtz (Arizona), Deirdre McCloskey (Illinois), John Tomasi (Brown), Leszek Balcerowic (former president of Poland’s Central Bank), Russia specialist Anders Aslund, German thinker Karen Horn, Jacob Levy (McGill), Mark Pennington (Kings College London), Paul Cliteur (Leiden), Amigai Magen (Hoover Institution), and the energetic Ralf Bader (Oxford). A lineup like this guarantees a number of new insights, solid arguments, and general intellectual stimulus. Many answers were provided, yet in true academic fashion, many questions remain.

While well represented in this program, International Relations are normally a minor topic at MPS meetings, and there are not many IR scholars around (nor are sociologists or legal scholars, by the way). Personally I am convinced that the future appeal of classical liberal thought also relies on taking into account world affairs. So there is a need to keep on writing and publishing about it, to expand the basis for thought, also in the MPS. To hear about the concerns and insights of other classical liberals in other disciplines helps my thought process, besides remaining up to speed with current classical liberal issues in general.

So it was a great meeting again, And for all you young scholars out there: if you are interested make sure to regularly check the MPS website (www.montpelerin.org) to see if there are opportunities to participate in one of the upcoming meetings.

Just think how wondrously we could regulate all markets

That California is moving toward legal recreational pot is excellent news, it’s an advance in human freedom and a reduction in the absurdities of the war on drugs. Yet there’s still something about the process which is turning brains to mush. For they’ve managed to organise matters so that the legal market is going to be more expensive –as much as 50% more perhaps – than the illegal one they hope to replace. That’s not quite how markets do work, greater expense leading to the replacement of lower cost suppliers. No, really, that’s not the human experience.

How they’ve done this is fun, they’ve decided that there could be a huge tax bonanza so they’ve decided to tax at all levels. Growers pay per sq foot of land they use, there’re huge ($100k) costs just to be regulatory compliant, then the state, counties and so on take their share of ever rising excise taxes. At which point cue the standard jokes about dope, dopes, the consumption of by and so on. All of which is most fun but not actually the important point here.

Rather, this is what all markets would look like if we really did allow the bureaucrats to specify all such markets. For note again what they’re doing. We’ve a thriving black market in weed in California, vast acreages under production up in the hills and there’s not been a noted shortage in any ‘ville or ‘burb in living memory. Costs are high as everyone involved risks substantial jail time for being commercially so. Further, there’s no rule of law, property rights are enforced at gun point at best. This is Ayn Rand red in tooth and claw and without even the sensible things which government can and should do to make markets work better.

Add the bureaucracy and we manage to make it worse? We manage to make it, as it is claimed, 50% more expensive? What an advertisement for the joys of all those tax leeches protecting us from ourselves and the vicissitudes of free markets, eh? 

That, fellow liberals (oh yes, we are indeed a liberals, see above about the legalisation decision, we're just from the classical arm of the movement) is the lesson we really should be taking from this. It is undoubtedly true, absolutely so, that government can make our lives better through judicious action. That’s why all societies have had the institution in some form or another. But that is not to say that judicious action insists that government must be doing something.

Rather more often what the government should be doing to make our lives better is simply one less damn fool thing that it does currently. California has an illegal and highly functional cannabis market right now. If we want to make that market legal then all that is needed is for us to proclaim it so. That is, stop government stating it’s illegal. And definitely, definitively, given their performance so far, absolutely forbid them from doing anything else like trying to plan or regulate that very efficiently functioning and extant market.

Better government can and often does mean less government.

How would a planned economy deal with this problem?

Matt Ridley leads us to an interesting question about how a command or planned economy works- or does not work of course.

Forecasting technological change is almost impossibly hard and nobody — yes, nobody — is an expert at it. The only sensible course is to be wary of the initial hype but wary too of the later scepticism.

One of the sillier critiques of free market economies is to look at the conditions for perfect competition, note that perfect information is assumed and thus declare that of course a planned economy is better as we cannot meet the necessary conditions for a market one.   

But, of course, if we don't know then how can we plan? 

Further, as Ridley points out, if we don't know what the new technologies will or can do then how can we plan what to do with them? This accords well with William Baumol's more formal investigations of invention and innovation. The state, planning, can indeed invent as can markets. But innovations are something the planned economy simply cannot handle while they seem to be the very essence of market systems. That is, innovation appears to be an emergent phenomenon from people playing around, as they wish, with those inventions. That playing around being something which a planned system cannot, by definition, do.

It might even be true that the State invented the underlying technologies of the iPhone, as Mazzucato has been saying, but it's still true that no state did nor has built a smartphone.

A harsh childhood, yes, but not exactly caused by relative poverty

We take it as a simple truism that we wish to alleviate poverty. This is why we so support this neoliberal globalisation stuff, these past few decades have seen the greatest reduction in absolute poverty in the history of our species. Yes, we know, we've pointed this out before.

However, what others call poverty is not quite the same thing. Take this for example:

I’m one of those formerly “poor people” vomited up from the gaping class wound at the heart of British society to offer “shocking”, “inspiring” testimony about the adversity they have since transcended. You might find me recounting the day my drunk mum chased me with a knife or see me on television looking very bored as I explain, yet again, that I managed to avoid smoking crack because somebody knocked on the front door as the pipe was being passed to me.

I’m one of structural poverty’s most comforting cultural tropes: the survivor who lived to tell the tale.

Not childhood experiences we'd wish upon anyone to be sure. But it's very difficult indeed to see what they have to do with what is claimed to be the cause:

The overriding emotion anyone should be feeling at news that in excess of a third of British children will soon be growing up in relative poverty is fear. The tidal wave of social problems racing towards all of us because of this unsustainable inequality has the potential to overwhelm society.

Yes, we do know that The Spirit Level blames such things upon inequality. We also know that Chris Snowdon has refuted, entirely, that contention.

But look at this in more detail, this specific example. Relative poverty is less than 60% of median household income (usually after housing costs, which we'll ignore for the moment). That median household income is, close enough, £25,000 a year in Britain.

So, the contention is that households with lower than £15,000 a year encourage knife wielding among drunken mothers. That £16,000 a year stops crack cocaine taking - or perhaps it increases door knocking, the point isn't quite made clear. These aren't contentions which accord with reality.

Apologies to those attempting to build this narrative, that inequality is corrosive of the fundamentals of our society, but it's just one of those things which isn't true.

This is making us angry now and you'll not like us when we get angry

Yet another report, yet another paper, insisting that Brexit will do bloodcurdling things to the cost of living in Britain. Based on the same flawed logic that has been abounding recently. The underlying assumption is that we'll be complete idiots and deliberately structure our trade policy so as to make us as poor as the current international rules will allow. Yes, obviously, there is politics involved here and it's not beyond possible that they really will do something that damn stupid but really, it shouldn't be a base assumption now, should it?   

Households face increases of up to £930 in their annual shopping bills if Britain walks away from Brexit talks without a trade deal, according to new research that reveals a disproportionate impact on poorer families and the unemployed.

Meat, vegetables, dairy products, clothing and footwear would be subject to the largest consumer price rises under a “no-deal” scenario, according to a study published in the authoritative National Institute Economic Review, adding to inflationary pressures that have already forced the first interest rate rise in a decade this week.

That study is here.

We have discussed this both here and elsewhere. There are two things that interact here, WTO tariff levels and most favoured nation status. Those tariff levels are the maximum that may be charged to all and any imports from other members of the WTO - pretty much the rest of the world. MFN status says that if we decide to tax ourselves less on what we decide to buy from foreigners - and do not for a moment forget that import tariffs are paid by us, the consumers of the imports - then we must charge to imports from all those WTO members the same rates on the same products. So, say, a zero tariff on imports applies to all imports from everyone. A 1% rate on cars applies to all cars from anywhere.

Thus a report that Brexit will increase living costs by the thick end of a grand a family is either nonsense, for we won't do it, or a very decent warning of what we shouldn't do. For why would we want to raise living costs by a grand a household? Quite, every time this calculation is performed, and it is being done repeatedly, it is just another proof of the basic contention about trade itself, the only rational stance to have is one of unilateral free trade. 

These multiple reports are being used to insist upon the terrible costs of Brexit. Instead we should regard them as warnings about the terrible costs of stupid trade policy. Don't impose import tariffs precisely because, as is being pointed out, they make us poorer.

The latest climate change prediction - sigh

The UN has told us, once again, that we're all going to end up boiling Flipper in the remains of the last ice floe.

When UN climate negotiators meet for summit talks this month, there will be a new figure on the table: 3C.

Until now, global efforts such as the Paris climate agreement have tried to limit global warming to 2C above pre-industrial levels. However, with latest projections pointing to an increase of 3.2C by 2100, these goals seem to be slipping out of reach.

As you know about us around here, we take no real view of the underlying science here - not because we agree or don't (either with it or among ourselves) but because we don't think that's the useful thing to be arguing about. A sufficient head of steam has been built up that they're going to do something so let's discuss instead what to do. All of which means actually understanding what it is that people are telling us when they talk about last ice floes and Flipper etc.

The truth here being that the UN has just said something of no relevance whatsoever to reality.

Their report is here. What they are not saying is that emissions are going to rise sufficiently to create this temperature rise. They are not measuring technological change - the obvious thing which is going to determine what does happen - nor the turnover of capital assets which emit, whether we're on RCP 8.5 (we're not) or RCP 2.6 (probably not as yet at least) etc. 

What they are saying is that governments haven't promised, through their Nationally Determined Contributions, to cut emissions sufficiently to avoid that 3C.

And? 

It isn't going to be governments making pledges in Paris which change the future anyway, is it? It is going to be technological advance and the associated actions of the aggregated 7 billion of us which will. And one lesson to take from that great economic experiment we call the 20th century is that markets and incentives work rather better at determining what does happen than the promises, pledges and predictions of governments when trying to manage an economy. Or even reality. 

As Bjorn Lomborg said near two decades ago - and boy doesn't he still get stick for having been right - in a world where solar power drops in cost by 20% per annum and is still doing so what a politician promises to do to the rest of us is really very small beer indeed.

Is GDP really a good measure of our productive world?

At the Mont Pelerin Society meeting in Stockholm, we heard an enthralling paper on the productivity statistics—and what’s wrong with them—by Diane Coyle of the University of Manchester, with comments by Christian Bjornskov from Aarhus University in Denmark.

Their comments are not published yet, so I can’t go into detail. But the problem is technological improvement. The problem for the macro-measurers, that is. For the rest of us, technological improvement is just great. Nathan Rothschild might have made himself a multi-millionaire, but he died in 1836 from a tooth abcess that today’s antibiotics would suppress in no time flat. You might envy Rothschild his big house, his servants and his coach and six: but he would certainly have envied our modern dentists.

All sorts of stuff is simply getting better. Kitchen appliances do what all those servants slaved on, and have become cheaper and cheaper and cheaper. Our homes and workplaces are cleaner, healthier and more environmentally friendly than those of 1836—or even those of 1936—but none of that gain in value is measured by the GDP figures.

The poor in particular have gained from entrepreneurial breakthroughs, the growth of new inventions and technologies, mass manufacturing, and other parts of the capitalist system. The prices of what poorer groups buy have plummeted more than most, while the quality of what they can afford has skyrocketed. Wages may not be rising fast for the poorest groups, but there are more fringe benefits as standard, and money buys a lot more than it did twenty, thirty, forty or any number of other years ago. So people who talk about ‘rising inequality’ are up a gum tree. The income figures greatly overstate inequality, because the poorest groups are so much better off than they have ever been in history.

For the same reason, we are understating productivity growth. The official figures show productivity rising remorselessly, then becoming essentially flat from 2008 until today. What’s the reason? Underinvestment? Cheap imports of goods and labour from a more globalized world? The financial crash?

Well, maybe a bit of all of those. But a significant effect is the exponential impact of digital technology. It has allowed us to do a lot, lot more without having to produce a great deal more. We can work miracles, even by 1980s standards. I’m beaming this article from Stockholm to London in seconds, whereas in the 1980s I’d have had to type it out, put it in the mail, and have it re-keyboarded back at the office. It’s astonishing, when you think of it.

The GDP figures essentially measure production—so they don’t capture this huge productivity improvement. Which gives us all sorts of skewed ideas about equality and productivity. Can GDP be long for this world?

Vaping after Brexit

Britain’s approach to regulating e-cigarettes was one of the best in the world, until the EU’s nonsensical Tobacco Products Directive (TPD) severely hampered the growth of this life-saving market. Thankfully, “Brexit offers an opportunity to return to a more liberal regulatory regime to the benefit of consumers and British businesses” according to a new report released today by the Institute for Economic Affairs. We will soon have the chance to become a true #VapeNaysh: something that we at the Adam Smith Institute are very enthusiastic about.

In Vaping Solutions: An easy Brexit win, author Christopher Snowdon begins by sketching a brief history of the search for safer smoking products, including the emergence of a new wave of smoking alternatives like e-cigarettes, snus, and heat-not-burn products. In the case of the UK, e-cigarettes have proven to be an especially appealing device that helps smokers quit while maintaining the pleasure of nicotine use (despite low awareness of the comparative benefits of vaping among consumers due to advertising restrictions):

By 2016, England had two million ex-smoking vapers who had given up smoking and a further 470,000 vapers who were using e-cigarettes as an aid to quitting (Department of Health 2017: 15). These figures were remarkably high in a country that had begun the vaping era with nine million smokers, but Britain has taken to e-cigarettes more enthusiastically than anywhere else. Five per cent of British adults are current users of e-cigarettes – significantly higher than the EU average of two per cent – and vaping prevalence among ex-smokers is exceptionally high at 14 per cent (the EU average is four per cent) (Eurobarometer 2017: 107).

Snowdon then addresses some common objections to liberalising e-cigarette regulation, starting with unfounded concerns about health risks and moving onto mythbusting the idea that they are a gateway to regular cigarette smoking. He concludes by highlighting the impetus for reform and general discontent with the TPD that exists across the British political landscape.

I’d also recommended reading the Appendix, which highlights the ridiculous provisions of the Tobacco Products Directive in more detail. For example, the tank that holds my e-cigarette’s liquid is currently illegal to sell in this country (I bought it in America). Why? Because it can hold 1ml more liquid than the EU has deemed to be necessary, presumably on the basis of reducing the risk posed by somehow accidentally drinking all of it. This is bad regulation and undoubtedly has a negative impact on public health:

Banning devices that can hold more than 2ml has led to the prohibition of a large part of the market for vaping devices, preventing consumers from using their preferred products and damaging the small and medium sized businesses that manufacture and sell them.

You can read the full report here.

What should we do after the Common Agricultural Policy?

What should we do after the Common Agricultural Policy?

I’m often amazed by how woolly the language used by groups like the National Farmers’ Union really is. Wacky ideas like “food security” (as if there is any conceivable scenario where Britain will be laid siege to by U-Boats) and farmers having some special “stewards of the countryside” connection to the land obscure the important facts. Taxpayers and consumers are rarely mentioned at all. Plain speaking about the costs and benefits of our current system is needed so we can think about what we’re paying for, what we’re getting, and how we can make sure taxpayers aren’t being stuck with a bill for something they don’t want or need.

This matters because after we leave the EU we’ll have to come up with our own agriculture policy, replacing the EU’s Common Agricultural Policy. (I will not discuss the Common External Tariff here for the sake of space.) Although agriculture is a small part of the economy, making up just 0.6% of gross value added, its environmental impact is quite important and the sector receives a large amount of money from the state – about £5bn every year.