Anatomy of a panic over corporation tax

The current furore over who is and who isn't paying corporation tax is taking on the attributes of a moral panic. Not just that people arre panicking over the morals of it all, but that they're entirely ignoring the evidence as they do so. As examples I offer you two stories from the Mail on the subject. First up is Starbucks and the dastardly manner in which they pay no tax because they make no profit:

Starbucks’ UK sales during the year rose 4 per cent to £413.4million – the biggest increase since 2008. But the company made a loss of £30.4million – after paying £26.5million to overseas subsidiaries in ‘royalty payments’. It also paid £1.8million to other Starbucks companies as interest payments on loans made between divisions.

That the Starbucks brand has a value is easy enough to show: the company has franchisees around the world and they pay a royalty for the use of the brand. We can also consider the differencee in trade you'd get if you opened a caff called "Fred's" as opposed to one using the Starbucks brand. We all understand that traffice and trade are going to be different. That value of the brand should righteously be paid for. However, let's ignore that and also the intercompany loans. Add them back in: Starbucks UK is still making a £2.3 million loss.

Why Starbucks isn't paying the corporation tax due on its profits is thus explained: it's not making any profits that it has to pay corporation tax upon. But such is the moral panic that people are still shouting at them.

As to where the money is going that is simple enough. Try reading Ricardo on rent....or if that's too much for you, read Tim Harford's first chapter in "Undercover Economist". Which uses London coffee shops to explain Ricardo on rent. The competition for the land and or sites which get a lot of passing thirsty traffic is such that rents soar and the landlords get all the money. Which they are indeed taxed upon as rents are one of those things that you really cannot shift about in and out of a tax jurisdiction. Starbucks isn't paying tax this is true: but the economic activity of coffee shops is, it's just through the landlords.

The second is about the water companies:

Britain's privatised water firms have ‘abused’ loopholes in the law to dodge more than £1billion in tax since the election. A dossier of shame reveals nine water companies, seven of which are foreign owned, have racked up operating profits totalling £10billion since 2010 but paid just £541million in tax. This equates to a tax rate of just 5.3 per cent. Corporation tax on operating profit is normally 23 per cent.

The heinous crime they're accused of is to subtract interest on borrowings before calculating their tax bill. Which, given that interest is a specifically allowed expense isn't all that heinous a crime. They then apply the various rules that Parliament has passed to deal with the costs of investment (capital allowances and the like) and so they make no profit. Given that Parliament has specifically put these rules into law it's a little odd to claim that they are therefore shirking their tax duties. Most especially as everyone has been shouting to the skies that they must invest more in their businesses in order to upgrade the quality of the water itself, treat the sewage more carefully, fix the century old leaky pipes and even, because of climate change, start building some more reservoirs. All of which is capital investment that they need to borrow money to do thus attracting the necessity of paying interest and having capital allowances.

They're doing exactly what everyone and the law tells them to do and yet people are still shouting at them.

Richard Murphy, of Tax Research UK, said lax UK rules meant avoiding tax was ‘as easy as taking candy from a baby’ for multinationals. ‘There are several serious problems with the system which leads it wide open to abuse,’ he said.

Well, yes, obviously we were going to get a quote from that fabricator of this current moral panic. But look again at what the Mail seems to believe the tax system does:

Corporation tax on operating profit is normally 23 per cent.

There is no world in which it is feasible to have a profits tax levied upon operating profits. It must be upon net profits, after the deductions of the cost of doing business. But here we have one of the leading newspapers of the country spouting nonsense to the population. This is indeed a moral panic, one in which all evidence is simply ignored. We'll be back to burning witches soon enoiugh, you mark my words.

The pain in Spain

Yes, yes, I know that this Keynesian explanation for everything is all the rage at present. If only we artificially pumped up demand then everything would be just tootsie and fruit loops once again. However, hard as it may be for some to understand there really are structural problems in economies as well. For example, Scott Sumner tells us about Spain:

Note that during the depression of the early 1990s (when Spain still had its own currency) their unemployment rate rose from 16% to 24%. I don’t recall if they devalued during that cycle, but they certainly had the ability to devalue. And of course what’s striking about that period is not so much that Spain’s unemployment rate rose by 8 percentage points, but rather that it only fell to 16% at the peak of the previous boom! To say Spain has structural problems with its labor market would be an understatement.

We can see the evidence right there: even in boom times the Spanish unemployment rate was uncomfortably high.

And it isn't just Spain either: most of Southern Europe (which, in this formulation, includes France) is suffering from the same problem and we see a little bit of it here in hte UK. Simply the ever increasing regulation and thus rigidity of the economy means that the "natural" rate of unemployment keeps rising. Ratchet by ratchet with each turn of the business cycle wheel.

This isn't a problem that can be solved by Keynesian means: this is one that calls for reform of the supply side of the economy. All of which is really just a prelude to one of my favourite points about said economy and its structure. Yes, there are most certainly cycles in it and it could well be that certain actions will help smooth out the swings in such cycles. But that isn't the end of the job at all: it's also necessary to look hard at the underlying structure and to see whether there are, perhaps as a result of our smoothing exercises, structural problems that also need resolution.

The poverty we can relieve

The Joseph Rowntree Foundation (JRF) has a new report out today that takes a look at living costs for the poor and the cost of achieving a 'socially acceptable standard of living' in modern Britain. The report continues their excellent approach to poverty measurement, which looks at the cost of a basket of goods that most people would consider necessary to have a decent standard of living.

This approach is very reasonable, and does a good job of contextualising domestic poverty without being led to the sort of absurdities of straightforward relative poverty measures, which, for example, "improve" every time someone wealthy goes bankrupt or leaves the country. The JRF’s method is quite a neat combination of the best elements of relative and absolute measures of poverty.

It's important to remember that poor people in the UK are still very rich by global standards. But that's not to say that their problems aren't still important and worth trying to solve by allowing more wealth to be created. There are some things we can do to help people in poor countries, such as removing barriers to trade and migration, which would also be good for poor people in the UK, but that shouldn’t stop us caring about relatively less poor people in the UK.

The JRF is right to highlight the fact that rises to the cost of living hit the poorest the hardest. I think it's probably a mistake, however, for anyone to assume that benefits cuts are the main causes of the living standards squeeze for the poor. They might be a factor in declining or stagnating incomes (not as much as the overall economic climate, though), but they don't explain why the cost of living is rising so rapidly.

Paradoxically, things like 'affordable housing' requirements can actually end up hurting people in need of affordable housing. They disincentivise higher-end developments and cause the demand for those homes to be pent-up in the existing housing stock – so, in other words, instead of building new houses for the rich, existing affordable homes are converted to accommodate them, reducing available units for people who need cheaper homes. Liberalizing the planning system so that supply can meet demand would do a lot to reduce the cost of living for the poor.

I also think it's crazy and inhumane that we tax minimum wage workers so much. A full time worker on NMW earning just under £13,000 a year will have to pay more than £1,300 of that in tax. That's a scandal.

And of course a lot of the problems facing people on low incomes are due to the overall economic climate. If Mark Carney really does implement a nominal GDP target, the resulting economic recovery and job creation will mitigate some of the worst problems facing people at the bottom of British society.

Osborne plans to scrap benefits for wealthy pensioners—he should be scrapping the pensioners themselves

Don’t jump to conclusions: I’m not advocating a purge of the elderly. Rather, what I’m saying is that the government should get rid of its concept of a pensioner, and all the benefits which go with that. There should be no division of law-abiding adults into "working-age" and "pensioners": they should have exactly the same rights.

Of course, "pensioner" just means someone who is receiving a pension. The state definition of a pensioner as a person over a certain age completely ignores the huge variation amongst individuals. ‘Pensioner’ conjures up an image of a frail old person in need of help. While it’s clear that some pensioners are dependent on others, many are not, and it’s illogical to treat them all the same based on an arbitrary definition. One area of difference is employment: some 70-year-olds, say, are much more able and willing to work than others. If a 70-year-old is able to work, why should she be treated differently to a 30-year-old working man? And if a 30-year-old is unable to work why should she be treated differently to a disabled 70-year-old? One’s age does not itself indicate one’s need for state assistance.

A response to this would be to say that the elderly are more likely to be dismissed from their job, due to age discrimination. But I believe such dismissal or ‘compulsory retirement’ should be completely up to the employer: it is their right to employ whoever they want. Also, calling it compulsory retirement is misleading – the dismissed employee is free to take up another job. I think employers should be much freer to fire employees of any age. This would make companies more willing to take a risk in hiring people, as they could be fired if they were not suitable.

The state also ignores the varieties in wealth amongst pensioners. Only now are ministers moving to scrap benefits such as free TV licences and winter fuel allowances for wealthy pensioners. To me it seems crazy to have been handing out these benefits at all: the whole point of redistribution is to take from the wealthy and give to the poor. Taxing the wealthy and then subsidising their TV licences and bus travel is simply a waste of money. At least Osborne and co. are finally moving in the right direction.

The main justification for the benefits of state pension age (at least for poorer pensioners) is that pensioners’ lower income means they cannot afford to pay for as many goods and services as a working person can. But this lack of money is partially caused by the whole scheme. Subsidising bus fares and TV licences costs money, paid for by taxes. If people were taxed less, they would have more money, and would be able to save to pay for these things themselves, if they so desired. Also, over time, a smaller state would lead to easier business, more wealth, and cheaper goods, further easing people’s dependence on the state.

The other injustice the government causes through its ‘pensioner’ classification is the state pension, paid for by National Insurance. This is another example of the state being unwilling to leave the individual to make their own choices. If I want a pension I should be left to sort it out for myself directly through a provider or my employer. If a company requires that its employees pay into a pension pot, that is fine—if I don’t want to contribute to the pension, I can choose not to take the job. But to force me to put my own hard-earned money into a pension, with the promise of greater reward in the future, is simple coercion.

Finally, the name ‘National Insurance’ is deceptive. It is income tax by another name (around 8.5% for the average wage).  It is used to pay for more than the state pension: for example, it also funds Maternity Allowance. It is yet another example of how the government takes our money dishonestly: ministers can raise National Insurance contributions and say that income tax has stayed the same.

The government’s pension age should be scrapped, and all the pensioner-benefits with it. Currently, people are taxed heavily only to be given benefits back later in life, when it would be more efficient to leave people to provide for themselves. The state pension scheme is coercive, and National Insurance is a deceptive tax which should be abolished.

Think Piece: Good and bad arguments against positive discrimination

The US Supreme Court has just left one Texan affirmative action scheme in place, but it has recently busted schemes elsewhere. I discuss what libertarians should think about positive discrimination and affirmative action.

Many of the arguments libertarians make against affirmative action/positive discrimination do not hold. For example, it neither needs to interfere with equality before the law, nor does it need to imposed by state coercion. And in its favour, affirmative action may be one way to overcome some of unjust forms on inequality in our society. On the other hand, it is clearly not even close to the best way of dealing with unjust inequality. And some evidence suggests that these schemes actually hurt those they are designed to help. But without sufficient evidence perhaps the best short-term approach is to allow universities to experiment with their admissions process, so they can among them discover the best approach.

Read the whole thing.

Good and bad objections to positive discrimination

The US Supreme Court has just left one Texan affirmative action scheme in place, but it has recently busted schemes elsewhere. I discuss what libertarians should think about positive discrimination and affirmative action.

Many of the arguments libertarians make against affirmative action/positive discrimination do not hold. For example, it neither needs to interfere with equality before the law, nor does it need to imposed by state coercion. And in its favour, affirmative action may be one way to overcome some of unjust forms on inequality in our society. On the other hand, it is clearly not even close to the best way of dealing with unjust inequality. And some evidence suggests that these schemes actually hurt those they are designed to help. But without sufficient evidence perhaps the best short-term approach is to allow universities to experiment with their admissions process, so they can among them discover the best approach.

The supreme court on 24th June effectively decided to leave a Texan affirmative action programme in place. The programme had two main provisions: (1) guaranteeing any pupil finishing in the top 10% of their year group a place at a publicly-funded university in the Lone Star state; and (2) allowing university administrators to consider race and diversity as part of their admissions criteria.

Both elements work as positive discrimination tools. Guaranteeing places to relatively—as opposed to absolutely—high-achieving pupils should mean that at least some of the effects of school quality are subtracted out. And allowing authorities to take into account race means that deprivation or oppression experienced mainly or exclusively by non-whites may also be factored out. How do we judge whether this is bad or good?

Many libertarians would object that a system of affirmative action either because it violates equality before the law or because it interfered with people's free interactions, and could only come from state involvement. But neither of these claims necessarily hold.

Though it may not necessarily be true in the specifics of this US case, in general we'd generally expect and require that equal application of law took circumstances into account. For example, years of domestic abuse would rightly be considered an extenuating circumstance in a case where a parter accidentally went too far in self defence. Similarly equality before the law in schooling may require taking into account the statistically likely backgrounds of applicants.

The alternative seems less equal, since getting top A-levels at a tough inner-city comprehensive is surely more difficult than at a highly selective school, even given similar parental support. And in still-discriminatory societies people of colour usually have more difficult lives, even past their general social deprivation, and thus we might expect lower grades, even for an equally talented or conscientious student.

The other libertarian objection may have slightly more force. It would be rational for universities that either sought to maximise wealth (through boosting bequests) or academic prestige (through the best students or best research) to neuter out factors that affected school-level performance but would not affect university or later career performance. The factors listed seem like obvious examples of these. But affirmative action may have to go further, not simply aiming for top potential, but also for those who due to their unfairly poor circumstances have lower potential. It would seem to have to go this far if it wanted to attain the goal of fully accounting for circumstances, as some circumstances may reduce potential as well as reducing results in lower tiers of education. In effect, with affirmative action we want to act as if people had never been hampered with worse starts, even if at the university level we want to "leave in" differences in natural talents.

Thus it might be that state pressure would be necessary to get universities to consider more than just student potential. But this is far from certain; the University of Michigan's scheme, which gave 20 automatic points (out of an 100 needed for guaranteed admission) to underrepresented ethnic minorities. It was ruled unconstitutional but while it was in place it was chosen freely by the university. If chosen upon freely then surely libertarians should laud the schemes as admirable voluntary attempts at distributive equality through free association.

But there's a more telling objection to affirmative action: it causes more harm than it does good. In his barnstorming dissent to the judgement, (black) conservative justice Clarence Thomas points out many of the bad effects of the scheme. In his 2007 memoir he said "As much as it stung to be told that I'd done well in the seminary DESPITE my race, it was far worse to feel that I was now at Yale BECAUSE of it." And in his very readable judgement, along with pointing out the similarity—despite their apparently inverse goals—between segregationist and pro-slavery arguments and pro-affirmative action cases, he listed the negative impacts positive discrimination can have on those it's supposed to help.

Thomas cites a 2003 book which claims that "it is a fact that in virtually all selective schools…where racial preferences in admission is practiced, the majority of [black] students end up in the lower quarter of their class." And, according to Thomas, this upward shifting does not result in higher proportions of black or Hispanic students in higher education on average. Instead, minority students go to more selective schools than they would have otherwise attended, which he believes explains their relatively poor performances. This, in turn, pushes them into less challenging schools within those universities, he says, citing figures showing disproportionately high numbers of blacks and Hispanics study social work or education.

Worst of all for Thomas is that—in our flawed society (which won't be changed by this policy alone)—positive discrimination "stamps blacks and Hispanics with a badge of inferiority". One feature of race is that it's often outwardly identifiable, meaning any black or Hispanic student could be seen by others as owing their place to affirmative action, even though most of them in the particular case in question did not gain their place due to the system. He quotes a black student: "I was never able to be as proud of getting into Stanford as my classmates could be…how much of an achievement can I truly say it was to have been a good enough black person to be admitted, while my colleagues had been considered good enough people to be admitted?" This ties into the ideas Elizabeth Anderson explores in her classic essay "What is the Point of Equality?". She imagines a government grant to the less attractive—would they be grateful for the money or would they be deeply hurt by the elevation of subjective preferences to official dictum?

Such concerns, especially packaged with the litany of practical issues and inconsistencies highlighted by Thomas and Prof. Mark J Perry make the issue more difficult, and give us reason to question whether the system is the best means of achieving our genuine concerns about equality. If we can achieve more desirable policies to improve distributive justice like a universal basic income and a negative income tax, then we should definitely not try and engineer equality at the level of the university. In a system with overall distributive justice, differences in education are down to different choices and shouldn't trouble us.

In sum, we can conclude that though neither of the main libertarian arguments against affirmative action hold, it may nevertheless be an undesirable scheme because it actually hurts those it intends to help. But a diverse system is surely preferable to a one-size-fits-all set of admissions policy, and that suggests we'd want to leave universities to decide whether or not they implement positive discrimination for themselves.

Adam Smith and distributive justice

Many libertarians are sceptical about the idea of social justice, citing Hayek's argument that social justice is a mirage. Indeed, recently David Friedman had a debate with Jason Brennan, John Tomasi and Matt Zwolinski of the Bleeding Heart Libertarians blog over whether the concept even had a clear meaning. My own view is that social justice is just justice writ large, with particular focus on distributive issues like equality, priority and sufficiency.

Many classical liberals were deeply interested in questions of distributive justice, including Adam Smith, who made his name as a moral philosopher, and often focused on the damaging effects mercantilist and other interventionist policies had on the worse-off. Barry Stocker has recently posted the text of three very interesting talks he gave in Istanbul on the subject of Smith and distributive justice. Stocker highlights the ways in which Smith laid the blame for unjust distributions of society's goods at the state's door:

The cause [of unjust distributions] is largely the activity of the state rather than the results of markets being left free of state legislation and government schemes. Smith sees injustice as resulting from collaboration between merchants in the same sector, but sees this as more the consequence of state intervention than of free commerce. The state enabling, encouraging and even requiring enterprises to form corporate bodies (such as local chambers of commerce in Britain) in the same sector is the biggest reason for merchants conspiring against the public. That is the source of the famous quotation about merchants conspiring against the public, though that quotation is often used to support demands for increased state regulation.

And Stocker also highlights how Smith's concern for social justice did not translate into calls for redistribution; he believed that a good overall institutional structure would generate desirable distributional outcomes:

One of the problems with Smith commentary is that admirable scholars and political theory thinkers, like Rasmussen and Fleischacker, who are disposed favourably to a theory of redistributive justice see it in those elements of Smith which express a wish for distributive justice. There is distributive justice in Smith in the sense that he favours the distribution that emerges from freedom in economic activities, and in the state measures he favours to benefit the poor rather than the rich. However, that is not the same as the kind of belief in a predetermined pattern of distribution of justice which Rawlsians, or egalitarian liberal favour, at the extreme a completely flat distribution as argued for by G.A. Cohen and which is in the basic assumptions of Habermas‘ thought on norms, ethics, and discourse.

Read the whole things: 1, 2, 3.

Globalization drives cultural diversity

Donald Boudreaux recently reposted this 2010 essay on the impact of globalization on culture. Globalization is not about 'just stuff', he says, it's about increasing diversity by allowing different parts of different cultures to mix:

A century ago, there were no internationally franchised restaurants in Paris, France or, for that matter, in Paris, Texas. A century ago, residents of neither Omaha, Nebraska nor Birmingham, England could find sushi restaurants near their homes; today, sushi restaurants are all over the Western world. A century ago, blue jeans were not the international fashion that they are today. A century ago, the typical man's business suit worn by New York lawyers and London bankers was not widely worn in Africa and Asia, as it is today. In many ways, global commerce has indeed made the world more homogeneous.

But look more closely. While the differences between Paris, France and Paris, Texas are fewer than they were in the past, the cultural richness of each of these places today is far greater than it was just a few years ago. For a resident of Paris, Texas, circa 2010, the richness of the cultural smorgasbord available to him or her right at home is vast. A Texan can stay in town and dine on Vietnamese, Italian, or Greek food—or on barbeque. A Texan can listen to German symphonic music or medieval chants or Irish dance music or Edith Piaf—or country and western. A Texan can buy French neckties, English raincoats, and Italian scarves—and cowboy boots. Likewise a Parisian can choose croissants or New-York-style bagels. A mere century ago—even thirty years ago—the cultural diversity of both places was much less than it is today.

It's easy to be annoyed at the 'touristification' of a place like Thailand, but what that really means is more people get to experience somewhere they would only be able to imagine visiting fifty years ago. Perhaps it's no coincidence that this complaint usually comes from the people who can most easily afford foreign holidays and expensive exotic meals in their home cities. I'm tempted to say that they should check their privilege.

Boudreaux's piece is worth reading in full.

Don't hate the players, hate the game

I usually agree with Mark Littlewood, Director-General of the IEA, so I was surprised by his piece in the Mail on Sunday this weekend. Mark proposes a public register of everyone claiming benefits of any kind – pensions, disability living allowance, jobseeker’s allowance, and so on. This strikes me as a very bad idea indeed.

Mark’s aim is to increase public awareness of benefits claimants who are receiving much more in benefits than most people would think reasonable. This, he hopes, will increase the public’s appetite for welfare cuts. Actually, I think people overestimate how much money individual people on benefits get, but the proposals are undesirable for other reasons.

Mark says that “This wouldn’t be a matter of ‘naming and shaming’ anyone. After all, if you are legally entitled to a particular benefit, what is there to be ashamed about? Anyone ashamed to claim money from the State maybe shouldn’t be claiming it.”

In my experience, most unemployed people are profoundly ashamed of being unemployed. Removing their privacy, exposing them to gossiping neighbours and their children to bullying classmates, will just make that even worse.

And Jobseeker’s Allowance only accounts for a small proportion of the welfare budget. These proposals would also include people on disability benefits for socially stigmatized mental illnesses and physical disabilities that they would like to keep private.

Mark says that Britons “are far too reasonable to start taking up pitchforks and burning torches and assaulting imagined benefit cheats.” I am less sure. This is, of course, the same country that saw a paediatrician being hounded by vandals who confused the word “paediatrician” with “paedophile”.

These proposals would humiliate people on benefits and rob them of their privacy. They don’t deserve it. Many (probably most) of them are dependent on welfare because of the state itself, and it is senseless to make their lives even more difficult instead of tackling the real causes of their poverty.

If you think that unemployment is largely caused by government mismanagement of the economy, it makes no sense to humiliate people for being out of work. If you think that government welfare has crowded out private charity, you shouldn’t blame people forced to rely on government disability benefits. If you blame planning regulations for the high cost of housing, you should focus on those regulations before you cut off the money that mitigates the problem for a few poor people.

I wish the only problem today was the government’s unwillingness to cut spending. In fact, that spending usually exists to relieve much bigger problems that can’t be found on the Treasury balance sheet. Often, those problems are state-made.

To me, this is one of the key messages that ‘bleeding heart’ libertarians need to get across to other free marketeers. Cutting back the state is a bit like a game of Jenga – if you blithely pull away the supports that people rely on before you take away the causes of that reliance, you’ll only end up making things worse.

The rise and fall of the Gold Standard

George Selgin, prominent monetary theorist and blogger at Freebanking.org, who recently gave an excellent talk at the ASI on "good deflation", wrote a history of the gold standard in the USA, explaining that there is no one narrative or theme throughout the history, with the fortunes of gold rising and falling with the times. While he pokes holes in some of the common garden arguments against a return to gold he also has his own reasons for distrusting a new regime founded on the yellow metal:

The claim that the real price of gold has become too volatile to allow that metal to be relied upon as a standard, for example, overlooks the extent to which gold’s price depends on the demand for private gold hoards, which has become both very great and very volatile precisely because of the uncertainty that fiat money regimes have inspired. The claim also overlooks the tendency for a metal’s price to become more stable as it becomes more widely adopted as a monetary standard.

Nor is it the case that there is not enough gold in the United States to support a new gold standard. According to Lawrence White, the Treasury’s gold stock, assuming that it is indeed what the Treasury itself claims, would at an official gold price of $1,600 per troy ounce be worth almost 20 percent of 2012 M1, making for “a more than healthy reserve ratio by historical standards.”

There are, however, some more compelling reasons for doubting that a return to gold would prove worthwhile. One is the prospect that any restoration of the convertibility of dollars into gold might be so disruptive that the short-run costs of the reform would outweigh any long-run gains it might bring. A second compelling reason has to do with the specific disadvantage of a unilateral return to gold. Here, once again, it must be recalled that the historical gold standard that is remembered as having performed so well was an international gold standard, and that the advantages in question were to a large extent advantages due to belonging to a very large monetary network.

Finally and perhaps most importantly, it is more doubtful than ever before that any government-sponsored and -administered gold standard would be sufficiently credible to either be spared from or to withstand redemption runs.

Read the whole thing.