The Tax Justice Network makes another unsubstantiated claim

The Tax Justice Network has just told us, once again, that countries lose gazillions in tax revenue to tax dodging. However, their claim is not in fact true. Specifically, this is not true:

We focus now on the long-term estimates of the revenue (in per cent of GDP) lost by each country i in period t as a consequence of profit shifting through tax havens in 2013, i.e. 𝐿𝐿𝑖𝑡. 

They are not measuring long term revenue anything. For they are not measuring the effects of the corporation tax rates they look at.

Imagine, for example, that a country had a corporate profit tax of 100%. There would be little to no corporate activity leading to profit to be taxed. The country would be dirt poor in fact. Thus there would be little revenue.

Equally, a tax rate of zero would encourage activity like billy oh. And revenue would be gained from other taxes instead, like the consumption of the workers now gaining higher wages, even perhaps their income tax.

This is, of course, the Laffer Curve argument and just like that argument it is something which is true at some level of taxation. Lower rates will increase revenue, higher rates reduce them.

We're not insisting that current rates are either above or below that revenue maximising level, not right here and right now we're not. But we do insist that failing to even consider the point means that no estimation of long term revenue losses has in fact been made.

We'd also point out that going over that revenue raising rate is easier than many think. The combination of three things made it probable that the UK corporation tax system in the UK in the 1970s managed this. High inflation, a corporate tax system which did not rebase costs on that inflation and relatively high tax rates meant that corporate capital wasn't even earning enough to cover depreciation in some of those years.

It really is necessary to consider the wider effects, not just do sums as the TJN has done. But then, you know. This is the same researcher who insisted that Zambia was losing squillions in revenues by comparing the price of tens of thousands of tonnes of copper in that country with the price of 10 kg samples of copper in Switzerland. Experimental design might not be the strongest suit here.

Save the environment — don't buy local

Those who encourage us to buy locally often do so with the view that reduced transport distances will result in less CO2 emissions. Seems simple, but what such people neglect is the fact that the majority of emissions associated with getting products (particularly food products) from producer to consumer are not from transport. Rather, the majority of emissions come from production.

A paper published by Christopher L. Weber and H. Scott Matthews in 2008 found that the Greenhouse Gas emissions associated with food are dominated by the production phase which…

contributes 83% of the average American household’s yearly footprint for food consumption. Transportation as a whole represents only 11% of life-cycle Greenhouse gas emissions, and final delivery from producer to retail contributes only 4%.

Production is less energy intensive when it takes place in optimal weather conditions, on large scale farms with machinery and fertilizer to make things incredibly efficient.

Not too long ago, DEFRA released a report saying that the carbon footprint of Spanish grown tomatoes is smaller than that of UK grown tomatoes. Clearly something very similar is happens in the UK.

It might also be worth mentioning that food (especially food that must travel long distances) is generally transported in bulk, increasing efficiency. Further, the majority of food miles are from the supermarket to fridge, which will not change, even if your food is produced locally. Plus, food from far abroad is often cheaper than local alternatives. In this way, globalisation is saving you money, and saving the environment.

Another paper in 2000 revealed the exact same thing applies with flowers. Economists Vringer and Blok compared the energy use associated with Dutch and Kenyan cut flower production. Air freighted Kenyan roses transported to Europe were found to have a lower total energy footprint than the Dutch grown roses.

So perhaps this mother’s day, we should aim to buy both food and flowers from as far afield as possible, because we don’t just love our mothers, but we also love the environment.

This doesn't bode well, does it?

Clearly, a would be Labour Chancellor is going to have rather different views on a just or reasonable taxation system than ourselves. But we are usually able to agree upon history. That seems not to be the case with John McDonnell:

It was under Osborne’s watch that the bank levy, introduced by the last Labour government to claw back some of the astronomical returns major banks had been making, was phased out, in his first budget after the 2015 election. 

No, that's not what happened at all. Alistair Darling imposed a tax upon bonuses. That was an idiot piece of lashing out. Osborne imposed the bank levy. This was an excellent piece of taxation.

Too big to fail banks enjoy an implicit subsidy from the rest of us. If they totter they will be rescued - that's what we mean by too big to fail, they're too big for us to allow them to fall. This is both a potential cost to us and also a subsidy to their profits for that insurance means they can borrow at finer rates. The solution is simply to charge them an insurance fee in the manner that, say, the FDIC charges banks over the pond for that guarantee upon deposits, as is also done here.

The tax was also calculated correctly. It was upon bank liabilities - what they owe to others, or, as we can also think of it, upon deposits. For a bank over a certain size, that too big thing, tot up deposits which are not already covered by various insurance schemes already being paid for. Apply a risk weighting - at sight deposits are riskier than long term bond issues for example. Charge that insurance fee.

This is, in essence, a Pigou Tax on being too big to fail.  It is excellent taxation.

Of course, Osborne, as is his wont, then messed it up, firstly by targeting the revenue yield rather than the behavioural change desired, then by getting rid of it in effect but then, you know, perhaps people who yearn to be journalists aren't quite the right choice as Chancellor.

But back to McDonnell. It's clear that we'll have differences with his plans for the economy and tax. But we really would hope that a Shadow Chancellor would know his history, especially of one of the few good taxes that have been imposed in modern times.

Brexit gives us a chance to try the world's most effective anti-poverty programme

It's hard to predict what Britain's relationship with the EU will be like once the dust settles in April 2019, but the odds that free movement will continue in its current form are slim. I think that's real shame; as Sam Bowman points out, EU migration has been incredibly beneficial to the UK. EU migrants haven't lowered wages or increased unemployment, they've simply helped us pay down our eye-watering debts (by about £1.5bn a year).

The Government instead seem to prefer what they call a "bespoke immigration policy" with different rules applying to different sectors. In other words, a centrally planned labour market. That'd be a bitter disappointment: it'd mean increased bureaucracy and slower growth for Britain's businesses.

But, as the saying goes, every cloud has a silver lining. It gives us a chance to enact the most effective anti-poverty policy ever discovered.

One sector with a particularly pressing need for low-skill migration will be agriculture. Farmers rely on cheap, seasonal labour. If they can't get it many will be forced to close as they lose out to foreign competition. Most countries rely on seasonal migration programs, indeed Britain itself had one targeted at Romanians and Bulgarians as late as 2013.

But as much as farmers benefit from access to seasonal migrant labour, it's the migrant workers themselves that see the biggest benefit as a new study from the Centre for Global Development's Michael Clemens and Hannah Postel shows..

They looked at a program that loosened regulations in the wake of the Earthquake in Haiti to allow more Haitians to get seasonal worker visas. Clemens and Postel compared Haitians who got seasonal visas to those who were unsuccessful. The results were staggering.

Haitian migrants saw massive income increases. On average they saw their incomes multiply by around fifteen times. And they didn't just spend that on themselves, they helped those stuck back in Haiti by sending remittances. In fact, they were able to double their families annual income in a matter of months.

The paper's authors point out that these results are unprecedented. No other aid programme comes close to producing income benefits on this scale.

It's certainly proved to be a much more effective program than the many recovery projects targeted at Haitians. Haiti received $13bn in humanitarian aid after the 2010 Earthquake, but the results have been dismal. An NBC News report in 2015 found that five years on, there were still 85,000 Haitians living in displacement camps.

Migration beats traditional aid projects for three main reasons.

  1. It goes straight to those who need it. A significant chunk of foreign aid is eaten up by overheads (29% on average according to Bill Easterly). Now that wouldn't be a problem if the aid itself (the other 71%) was effective. But too often it's not spent well. It's rare for a project to raise the incomes of the poorest by more than £1 for each £1 spent. It's different with migration, all of a seasonal worker's earnings end up in a Haitian household where nearly 85% is actually spent in Haiti. And once it's spent it Haiti it spurs on even more productive activity.
  2. It's not a free lunch, it's a paid lunch. We're fond of saying there's no such thing as a free lunch, but in this case it's one better. We're not just lifting people out of poverty for free, we're actually benefitting from the exchange. These jobs simply wouldn't exist in the absence of seasonal migration programs. Locals wouldn't do it at a competitive wage - so farmers would have had a choice automate the jobs or lose out to foreign competition. When Haitians come to the US, they'll be spending and paying taxes boosting the local economy.
  3. It delivers massive financial flows to the developing world. The big reason though is scale. Because a person's productivity varies massively based on where they are - compare an Uber driver in London to a rickshaw driver in India - moderately opening up to migration can deliver gigantic financial flows to the world's poorest. As Clemens put it once, we're leaving "trillion dollar bills on the sidewalk".

These schemes certainly have their critics. Many argue that workers are liable to be exploited on seasonal programs – some have gone as far to say that they're close to slavery. But Clemens and Postel spoke to the Haitians who got visas. They replied that they wouldn't change the program if they could and the only concern they had was that the program would be cancelled and they wouldn't be able to work in the US.

Given the current appetite for greater migration control, it's unlikely that we'll see the level of expanded migration that Clemens and myself would like. But, we can take action at the margin.

New Zealand shows the way. They amended their seasonal worker program to encourage greater migration from Tonga and Vanuatu. That boosted incomes of Tongan and Vanuatuan migrants by factors of 12 and 8 respectively. That's miles better than many (if not all) of the aid projects DFID currently funds and again, free. Let's take New Zealand's lead and use Brexit as an opportunity to try out the world's most effective anti-poverty policy.

A Capital Idea - turning nominal ownership into real ownership

A Capital Idea - turning nominal ownership into real ownership

By giving capital funds to everyone, they would provide something which the poorest third a currently lacking – a capital pool that grows over time and could provide a cushion against some of life's contingencies.  Each account would be the property of the owner.  Instead of dying with them as many pensions do, it would be a heritable asset whose full value could be passed on to their children or to other heirs and successors.

Friedrich A Hayek (1899–1992)

F. A. Hayek, who died 25 years ago today, was one of the most important liberal thinkers of all time. He wrote not just about economics (for which he won a Nobel Prize), but also politics, psychology, and the history of ideas.

He was a good friend of the Adam Smith Institute, and spoke at many of our seminars, where his great wisdom was apparent. Often our participants would be discussing some difficult subject, getting tied in knots: whereupon Hayek would rise, cut straight to the heart of the matter, and provide the answer.

Hayek’s 1944 The Road To Serfdom, which showed how easily the ideas of social democracy could (and did) morph into totalitarianism, brought him popular fame. Soon after, he founded the Mont Pelerin Society, an international forum that kept liberal ideas alive during the bleak times after the Second World War. Its ideas influenced a whole generation of intellectuals and informed the policies of Margaret Thatcher (1925-2013), Ronald Reagan (1911-2004) and the new Eastern European leaders who emerged after the fall of the Berlin Wall.

His life as an economist began when he was hired by Ludwig von Mises. In 1927 they set up an institute to explore business cycles. They concluded that these cycles were caused by central banks setting interest rates too low — encouraging excessive borrowing, investment and spending. But low rates also discouraged saving, and when funds dried up, investments had to be abandoned and people were thrown out of work. It explains much of our present predicament.

In the 1930s, Hayek came to Britain, becoming professionally famous through his disputes with Keynes, who wanted government spending to kick-start the economy. Hayek countered that this would bring only inflation, disruption and debt.

But Keynes won the day, and Hayek turned more to social and political philosophy. His key insight was the concept of spontaneous order. Human and animal societies, he observed, show obvious regularities. Yet nobody planned the society of bees or the rules of human language or the operations of markets. They evolved spontaneously, and endured simply because they were useful.

But they are also complex and devolved. We tamper with them at our peril — as evidenced by the dismal failure of economic ‘planning’ behind the Iron Curtain.

We did not design the market system. We stumbled upon it. When people traded, prices emerged: and prices contain all the information needed for the system to work. We do not need to know why people want more of something, or why not enough was being produced: a rising price says it all — and draws effort and capital into serving those wants.

Hayek saw freedom as critical to spontaneous orders. When we force people to act in preconceived ways, we disrupt the delicate workings of society. And if spontaneous social orders are to evolve and strengthen, they need new ideas, not preconceived ones.

Freedom, to Hayek, meant minimising coercion, including state coercion. The state should be limited to preventing people breaking the rules by which society survives and prospers. But to prevent state power being abused, we need a rule of law that restrains government officials just like the rest of us. 

Hayek saw justice as the rules that enabled the social order to work. We could not invent justice: we had to discover it through trial and error. What people call ‘social justice’ was quite different — not a set of rules but a preconceived social outcome. Achieving that outcome meant treating people differently — and once we began to do that, there was no obvious stopping point on the road to serfdom.

 

Eamonn Butler is author of Friedrich Hayek: The Ideas And Influence Of The Libertarian Economist (Harriman House).

Is a nearby pharmacy worth 2% of annual income?

As ever when budget cuts are considered the current beneficiaries are screaming blue bloody murder and insisting that they're only talking about the public good not their own wallets:

Nearly 300,000 people, many of whom are elderly and live in rural areas, will have to travel five miles more to collect their medicines because of a Government subsidy cut.

The study by the House of Commons library laid bare how much further the ill and sick will have to travel for medicines if pharmacies close because of a cut in a vital subsidy.

The news comes as campaigners will today start a four day challenge in the High Court against the cuts.

That's not quite what the study does say:

297,384 people would see increases of more than 2½ miles but less than 5 miles.

68,376 people would see increases of 5 miles or more

Note that this is all people, not just the elderly, nor even those needing prescriptions.

But to the money. So, those 300,000 claimed, the savings will be £200 million. That's £600 odd per person per year.

Median income is in the mid £20 thousands these days, so why not call that 2% of annual income for those affected? Which gives us the question, is having a nearby pharmacy worth 2% of annual income? 

No, we don't know either but we do think that's an interesting way of phrasing it.

Eight reasons to legalise cannabis

I was asked to speak on a panel this morning to give the case for cannabis legalisation, and found it a useful exercise in tidying and focusing my thoughts. My overarching point was that, if it does happen, it’s probably going to be because of a fundamental shift in public opinion of the kind that’s taking place in some parts of the United States, so at this stage it’s most useful to consider how we might want to approach decriminalisation or full legalisation. Still, the broad case for cannabis legalisation is worth making, and I tried to do so.

  1. Fundamentally: because it’s an enjoyable consumer product that causes less harm than many existing legal products that nobody sane thinks we should make illegal, and the harms that it does cause are best dealt with by cannabis being a legal product.

  2. 2.1 million people use cannabis a year, 6.5% of the UK population (according to the Home Office Crime Survey for England and Wales). That’s an awful lot of people who are de facto criminals, and even a broad estimate of the proportion of ‘problem users’ is relatively small – and there’s not much reason to think that the drug being illegal is good for problem users anyway.

  3. The law isn’t predictably or consistently enforced – arrests for possession of cannabis in England and Wales have dropped by 46 percent since 2010. Cautions dropped by 48 percent and charges fell by 33 percent as of 2016. This is mostly because funding has been cut, targets have changed and stop and search is being used less. Other than possession with intent to supply, it's not a priority for most police forces. Having a law on the statute books that is capriciously enforced makes an ass of the law in general.

  4. Prohibition increases the supply of stronger and potentially more harmful types of cannabis – as Sam Dumitriu put it, prohibition created skunk. Suppose we treated alcohol the same way we treat cannabis: very quickly the most widely available stuff would be strong spirits, because they are a much more concentrated way of delivering alcohol than beer or wine. By imposing effectively a blanket additional cost on drug supply, drug prohibition encourages the most concentrated drugs to dominate the market. Most cannabis users and would-be users that I am aware of would prefer to buy less strong stuff, but find it difficult – because the market is not being allowed to function properly.

  5. Most revenues from drug supply goes to criminal gangs, creating financing for other (more harmful) activities & violent side-effects such as turf wars. Taking the cannabis supply chain out of the hands of people willing to kill and putting it into the hands of organisations like Boots would reduce violence, and make the suppliers legally accountable to their customers in the event of fraud.

  6. Legalisation could produce benefits to the government of £750m–£1.05bn in tax revenues and lower criminal justice costs. I’m not too excited about this, because a revenue-hungry government might well put the tax up to a level that’s so high that black market cannabis is still attractive to users. This has been a problem in Colorado – regular users are still buying from their (untaxed) black market dealers, who can undercut the legal market, so some of the benefits we hoped for haven’t materialised.

  7. The public probably isn’t as opposed as you think. Polling results differ wildly depending on how we frame the question. Polls that stress the regulated nature of a legal market produce majorities or near-majorities in favour of legalisation or decriminalisation; polls that just ask the question straight show majorities or near-majorities against. That suggests to me that opposition is fairly soft and the big question is how reform happens and how the debate is framed. In the US, the polling evidence suggests that people have very specific things in mind (street consumption, teenagers’ access to the drug), which we might be able to craft a regulatory framework to avoid.

  8. Cannabis is a much less dangerous alternative to many 'legal highs' that attempt to synthetically reproduce the effects of drugs like cannabis. These are mostly illegal, in fact, under the absurdly expansive Psychoactive Substances Act, along with things like hangover-free alcohol, but a simpler way of moving people away from them would be to make drugs like cannabis that we have more experience with and knowledge of easier to get hold of.

As for how we do it, I’ve written elsewhere about the need to regulate cannabis as a consumer product and not act as if the 2 million people who use it are all addicts in need of a treatment programme (a very small fraction are, in fact). I also argued here that decriminalisation is a bit of a dead-end for reform, and going for full legalisation is a better idea. Charlotte Bowyer reflected on the first year of Colorado’s legalisation back in 2015, and Volteface’s Dr Henry Fisher and I comprehensively fisked a really poor piece in the Times about the Coloradan experience a few months ago. And here’s The Tide Effect, the ASI and Volteface’s joint publication about the history of cannabis prohibition in the UK.

The neoliberal man

The cover of a soon to be released ASI paper features a Hong Kong market at night. Which is rather fitting, for Hong Kong could easily be described as the most neoliberal country in the world — a paragon of neoliberal success.

The story of Hong Kong’s growth is both long and fascinating, and could not be done justice in a mere blogpost. But there is one man who is worth mentioning, who has much responsibility for making Hong Kong into what it is today, and yet is all too often forgotten.

John J. Cowperthwaite is not likely a name that you will remember from your history lessons. In fact, it is not likely a name that you will remember at all. He is arguably one of history’s most unsung heroes, and that is a great shame, for he was absolutely instrumental in not only taking Hong Kong’s economy from strength to strength after the Second World War, but also in showing the world that laissez faire economics is workable and brings results.

Milton Friedman said “it would be hard to overestimate the debt that Hong Kong owes to Cowperthwaite”. But he was by no means a self-important man. He had a reputation for being shy, and as an appointed civil servant, he owed no favours to anyone. He arrived in Hong Kong in 1946 as the Assistant financial secretary, with instructions to “come up with a plan for economic growth”. But he came up with no plan, and yet the economy grew. It grew astoundingly. In the decade that he was financial secretary, wages rose by 50% and the percentage of those living in poverty in Hong Kong plummeted from 50 to 15%.

What did this son of a Scottish tax collector do to propel so many into prosperity? The answer is that he didn’t do anything. When a British executive approached Cowperthwaite to ask him to develop the merchant banking industry, Cowperthwaite politely palmed him off and told him that he had better find a merchant banker. Similarly, when a legislator suggested to Cowperthwaite that the government should prioritise the development of promising industries, Cowperthwaite refused and asked how the government could possibly know which businesses had potential and which did not.

Cowperthwaite flat out refused to collect most economic statistics, from fear that doing so would give bureaucrats and legislators an excuse to meddle in the economy. Of course, this caused upset in Whitehall, and when they commanded a group of civil servants to go over and see just what the hell was going on, Cowperthwaite sent them home as soon as they arrived. Yet still from 1945 to 1997 Hong Kong ran a surplus every financial year – surprising all involved because the surpluses were not planned. Rather, they arose as a result of the market being left free. 

It was slightly unfair of me to state that John Cowperthwaite “didn’t do anything”. For though his success was largely down to his non-interventionism, ensuring that there was no intervention was backbreaking work. People were always trying to tinker with the economy. But Cowperthwaite maintained: “in the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.”

Today Hong Kong has a GDP per capita at 264% of the world's average, which has doubled in the last 15 years. The World Bank now rates the “ease of doing business” in Hong Kong as the best in the world. It has no taxes on capital gains, interest income or earnings from abroad. Its overall tax burden is just half of that of the United States. Its people are rich and its government small, and for this reason, it makes a fitting cover for our latest paper, but for this reason also, we should be thankful to John J Cowperthwaite. 

As we've been saying for some time now

There is both a certain hysteria about us all being fatty lardbuckets and also a true outbreak of us all being fatty lardbuckets at present. The obvious question is why? For only once we know why this is true can we attempt to do something about it.

Various bits and pieces of thinking are put forward. It must be because food is cheap therefore we're all eating more. Or our grotesque modern consumption of sugar. Or fizzy drinks, or, well, something! That we eat fewer calories than our forefathers, less sugar than in the past, means that those three explanations can't really be true even given their popularity within political circles.

As we've been muttering for some time now we think it is ubiquitous central heating:

Opening your bedroom window at night to allow in a cool breeze could be simple, if chilly, way of preventing obesity and Type 2 diabetes, an Oxford University academic has suggested.

Professor of Endocrinology Ashley Grossman said there was mounting evidence that cooling the body even by just a couple of degrees was beneficial for health.

Of course there's some burble about climate change in this report just to be fashionable but still:

A recent study by Maastricht University Medical Centre in the Netherlands advised turning the thermostat down to between 15 C and 17 C for a few hours a day to keep weight down.

The experts claimed that because we spend so much time indoors, often in overheated homes and offices, our bodies do not naturally burn calories to keep warm. Temperatures closer to what it is like outside might be more beneficial to health.

Simply being colder raises the metabolic rate - the speed at which calories are burnt - by 30 per cent,

We base out thinking on the point that the major energy usage in a mammal is body temperature regulation. Now that we've automated much of that the imbalance between calories in and out has widen - thus we all get fat.

Now that we've identified the correct cause we can design a solution. The most obvious would be to plunge the entire population into fuel poverty so that we have to cool our homes. Fortunately we have government departments working on that already what with those green energy plans so we're sorted, aren't we?