Will our Corporate Tax Cuts get Trumped?

Theresa May's decision to pledge that Britain will have the lowest Corporate Tax Rate in the G20 is undoubtedly good news. If we're to make a success of Brexit (another thing Theresa May has pledged), then preserving and building upon Britain's competitive tax code is essential. But, I suspect Theresa May hasn't quite grasped just how significant Trump's tax cuts will be.

Most of the media has focused on the headline tax cut from the absurdly high 35% to 15% in the tax plan on Trump's campaign website, but this is misleading. First, very few US corporations actually pay that 35% rate. There's a labyrinthine set of exemptions and deductions that mean the average US corporation pays a much lower effective rate of 12.6%. Trump's plan funds his headline tax cut through eliminating almost all (except the R & D tax credit) of these distortionary exemptions from the current system. This means in effect US corps won't be paying substantially lower taxes, even if they'll benefit from less distortionary and more efficient tax code.

Second, and more significantly Trump's tax plan isn't necessarily the tax plan that'll be put forward in the House of Representatives (where Speaker Paul Ryan and Ways and Means Chairman Kevin Brady hold the cards). The Ryan-Brady plan dubbed "A Better Way" differs from Trump's framework in a few key ways (for even more detail read Cameron Arterton and Lisa Zarlenga's excellent overview).

First, they cut the headline rate by much less. Under the Ryan-Brady plan, the headline tax rate only falls to 20%.

Second, they border adjust it. That means that imports are taxed, but exports aren't. To readers of this blog, that might sound worryingly mercantilist - but as AEI's Alan Viard points out it won't have this effect. Such a reform does however resolve some of the transfer pricing problems that plague modern corporate taxes.

Third, and this is the big one, the Ryan-Brady plan proposes unlimited immediate expensing of all wages and new capital investments (tangible and intangible). This turns the Corporate Income Tax into what economists call a business cash-flow tax. This isn't just tinkering with rates, this is fundamentally changing the structure of business taxation in the US. It removes entirely the tax burden on capital and shifts it to consumption. Economists generally believe that taxes on capital are excessively harmful because capital is incredibly mobile and even low capital tax rates translate to incredibly high taxes on future consumption. As my colleague Ben Southwood points out, even though it's meant to raise taxes from wealthy investors, it ends up leading to much lower wages for ordinary workers.

In essence, the Ryan-Brady plan turns one of the most inefficient taxes into one of the most efficient. Typically, Republicans (and libertarians) oppose such moves because they think making taxes more efficient will encourage the Government to spend more and only a painful, inefficient tax code will put the brakes on out of control spending. As Will Wilkinson points out, that's bunk. The Ryan-Brady plan breaks with that dogma.

What does that mean for Britain? Well, cutting corporation tax just ain't good enough. Theresa May and Phillip Hammond need to be more radical if they don't want to be Trumped by the Donald. Let's abolish corporation tax and replace it with a simpler, more efficient business cash-flow tax.

Trial and Error

Trial and Error

Karl Popper is rightly esteemed by those of a liberal persuasion for his many contributions to the cause.  In The Open Society and its Enemies – volume 1 he took issue with Plato.  He showed that although Plato claimed to be seeking just and virtuous rulers, his Republic resembled the totalitarian warrior state of Sparta with detailed control over every aspect of its citizens' lives.  The point, said Popper, was not to choose the best rulers, but to prevent bad or incompetent rulers from doing too much damage.

In volume 2 of The Open Society he took issue first with Hegel, then with Marx, showing that their ideas must lead to coercion and that they contain the roots of totalitarianism, a theme he developed in The Poverty of Historicism, where he countered the socialists' claim that history is moving in their direction toward an inevitable goal.  

That employment law comes from the EU doesn't mean that employment law must come from the EU

It is entirely true that much employment law currently comes to us via the tender ministrations of the European Union. This is not, however, the same as the statement that only the European Union can deliver employment law. Which is the logical mistake that is being made here:

One could be forgiven for wondering what the Independent Workers’ Union of Great Britain (IWGB) – a small trade union that represents mainly low-paid migrants and workers in the “gig economy” and relies on crowdfunding to help finance its initiatives – is doing intervening in the UK’s most important court case in recent history.

The starting point for understanding why the IWGB has an interest in the Brexit case is this: the UK leaving the EU represents potentially the biggest assault on workers’ rights and migrants’ rights in a generation. Indeed it is difficult to overstate the degree to which working people depend on employment law that originates in Brussels.

To name just a few examples: your right to paid holiday; your right not to be discriminated against because of your age or sexual orientation; your right not to be sacked or have your wages reduced when a company buys out your employer; your right to be consulted when your employer wants to make you and your co-workers redundant; protection against unfavourable treatment towards you if you work part-time; and equal pay for men and women.

It is entirely so that many, even all, of these things come to us as a result of the beneficence of the Parliament in Brussels. But that's rather because said Parliament and system has been insisting these recent decades that it should be they which have the right to legislate upon said subjects.

That is, said laws come from there because we are members of the EU, not because only the EU can deliver such laws. We are really rather sure that Canada, Australia, New Zealand, Norway, Switzerland, all have very similar laws and all of them are entirely unblessed by being members of the EU.

Indeed, we're old enough to have long memories and not old enough to have no memories at all. The UK has had equal pay for men and women since the Equal Pay Act 1970. Which is not just before Britain joined the system but before the EU itself even came into existence. Holiday pay as a legal requirement for all has existed since the Holiday Pay Act of 1938 - not just before EU membership but even before Rossi and Spinelli started scribbling their manifesto on Ventotente.

It's entirely true that much law in the UK today is derived from the EU. But that's because EU membership has meant that the EU is the body which defines much law in the UK. There's absolutely nothing at all to stop us retaining, altering, amending, adding to or abolishing any of these laws and or rights as we wish post-Brexit.

The EU, that is, is only the mechanism by which these things exist currently, not the only, nor possibly even the best, way that we can make them exist.

We're against the Magnitsky Amendment, a horrible piece of law

What was done to Sergei Magnitsky was appalling - that is not an excuse for a terrible piece of law. But that's what is being proposed as the Magnitsky Amendment. As Margaret Hodge (and it would be she pushing such a nonsense, wouldn't it?) explains:

Our amendment places a duty on ministers to ask the High Court to place a designation order on people who were involved in, or profited from, the worst human rights abuses. Once an individual is subject to a designation order, the enforcement authorities will have a duty to freeze their British assets.

Seems fair enough, freeze the assets of the evil ones. Except:

More than £100 billion is laundered through Britain each year but only £100 million — a fraction of the amount — is frozen. The Magnitsky amendment will close gaps in the law. Individuals and NGOs can also take matters into their own hands and apply for designation orders, sending a clear signal that inaction by the government and enforcement authorities is not acceptable.

The specific point being made is that anyone breaching the Section 1 of the Human Rights Act 1998 rights can be subjected to such an order.

Such as the right to family life, the right to freedom of religion, free elections, even religious education. Thus, for example, those who would abolish religious schools in the UK could have their assets frozen. Officials from countries which regard a Muslim embracing another faith as the crime of apostasy could have their assets frozen. All Cuban government officials could have their assets frozen as a result of the absence of free elections for 55 years which we admit would be fun to see.

And any Tom Dick or Harry can apply for such an order to be made. 

No, this is not good law. If it does pass there would be a terrible temptation for us to start organising cases against those who do breach some of those rights. Cuba first perhaps. Closely followed by HMRC attempting to insist upon payment of disputed tax bills before a court has ruled upon the issue. But however much fun we might have with it it would still be bad law. Thus it really should not be passed into said law.

For this rather comes under the general rubric about power and the law. You never, ever, want to put into the law something that you don't want your enemy or rival using against you and yours. And we really would have fun using this.

What did anyone think would happen to social care with the national living wage?

This is very bad apparently, really, terribly bad:

The cost of social care rocketed over the last year, even as the proportion of services ranked good or outstanding fell, according to a new analysis.

Social care services directory TrustedCare.co.uk found that the price of a week in a care home jumped by almost a quarter over the last year, from an average of £557.86 a week to £686.32, while the cost of a nursing home rose more than a third from £692.17 per week to £924.82. The price per hour of care visits also rose, from £15.01 to £17.02.

The analysis was based on data from providers registered on TrustedCare, as well as calls made by its researchers to more than 100 services in each English county over the last four months.

Social care in the UK is provided through a mixture of individuals and government payments. However, concerns are growing over the system’s ability to cope with an ageing population and pressures on local government and NHS budgets.

TrustedCare’s researchers also looked at data from the Care Quality Commission (CQC), which regulates and monitors social care, and found a 9% drop in the proportion of services ranked as either good or outstanding from 88.9% in 2015 to 79.8% over the past year.

Social care is one of those things where a very large portion of the costs is the minimum wage - and also where a very large portion of the people doing it make minimum wage.

Therefore a rise in the minimum wage is going to bite here and bite hard. And when a minimum wage level does bite there are only four options. Profits, prices, productivity and people.

We raise the costs of performing some activity - something has to give to pay for that. In the public sector there are no profits, thus they cannot take the strain. No one has offered these services more money so public sector prices cannot change. Productivity of course cannot be changed because after years of austerity and decades of pressure on the public sector it all works as productively as possible. There simply is no room for improvement as every Labour party member and every union official tells us.

Thus what we do get - a rise in that portion of the costs carried by the private sector and a decline in either the number of people providing the service or the time in which they have the ability to provide it.

The thing is this is obviously what will happen when a wage rise in this sector is mandated. So why the Hell is everyone surprised when it does?

But what about that Cuban health care, eh?

We're not the only people to have muttered that there seems to be something not quite right with various of the statistics about Cuba floating around out there. For example, the World Bank estimations of the economy seem to have the place about as rich as Croatia, even near the Czech Republic. And when we hear that Cubans are struggling to find a plate of beans and rice a day that just doesn't seem believable. Or that the island is richer than Costa Rica, again, not something really according to other evidence.

Or take that vaunted health care system with its incredibly low infant mortality rate. Well, yes:

Normally, the ratio of late fetal deaths to early neonatal deaths should be more or less constant across space. In the PERISTAT data (the one that best divides those deaths), most countries have a ratio of late fetal to early neonatal deaths ranging from 1.04 to 3.03. Cuba has a ratio of more than 6. This is pretty much a clear of data manipulation.

They're lying about the numbers that is. And even the World Bank doesn't believe the World Bank's GDP numbers:

Out of 30 countries, Cuba is the 25th, with Guatemala, Guayana, Nicaragua, Honduras y Haiti behind.

Out of 12 Caribbean islands, Cuba is the 11th, with only Haiti behind.

On the one hand, we have World Bank’s estimate, that WB itself doubts. On the other hand, we have estimates from Ward-Devereux, Maddison, and UNCP. These three sources seem to approximately coincide on what the actual Cuba GDP is. This triple coincidence, versus the questionable values from WB, would make us choose the former values, and so accept that Cuba is a poor country within Latin America.

What everyone does seem to forget is that all such statistics are provided to the international bodies by the domestic government. And Cuba is a communist dictatorship, recall? 

As the system unravels, for unravel it will, we will find that ever more numbers are simply outright lies.


We simply do not understand this enthusiasm for minimum alcohol pricing

It's rather Chris Snowdon over at the IEA who is the policy wonk to talk to on the issue of minimum pricing for alcohol. The general view seeming to be that the public health wallahs have got the bit between their teeth and they're not going to listen to anyone else on the matter at all.

For us, over and above the more normal points about being liberals, so therefore everyone gets to do what they want to do even at risk to their own health, the bit we cannot understand here is the insane economics of the proposal

New evidence commissioned by the government from its own health advisers has concluded that ministers should introduce minimum unit pricing of alcohol to tackle the grim medical, economic and social toll of drink-related harm.

The in-depth study has found that drink is now the biggest killer of people aged between 15 and 49 in England. It accounts for 167,000 years of lost productivity every year and is a factor in more than 200 different illnesses.

It leads to such huge harm that the lost economic activity it produces, through early death and disability among workers, is more than that for the 10 most common cancers combined, the review found.

Its publication, by Public Health England (PHE), is an embarrassment for ministers because it says they should embrace a policy that they have rejected due to an alleged lack of evidence.

Assume, as we don't, that these dire predictions of looming disaster are correct. And also ignore the point that if people wish to drink until their livers explode instead of surviving to drool the last years of their lives away in a nursing home well, that's up to them. Let us follow the argument to where raising prices will reduce intake - we are really very sure that this is the way demand curves work, that people buy less of more expensive things (something the minimum wage fanatics would be advised to understand).

We are thus going to, deliberately, make alcohol more expensive. Why would we do this with minimum pricing and not tax rises? For consider the effect of the two.

A tax rise raises the price. And the tax then flows into government coffers enabling either more spending or, if people are being sensible, less taxation of other nice things. Seems like a reasonable result.

Minimum pricing raises the price that a manufacturer must charge. But it does not increase said manufacturers' costs in the slightest. Minimum pricing thus fattens the profit margins of the producing industry. And what possible public purpose is served by making one specific industry more profitable?

That is, even if all of the lead up to, the logic supporting, something must be done about booze pricing, minimum pricing is still the wrong answer. So, why is it that so many are gaga for it?  

If we were in a more corrupt country than Britain is we would assume that PHE was in fact a false flag operation paid for by the manufacturers of cheap gut rot - yes, some of us have lived and worked in places where that would be the logical assumption. Britain isn't that corrupt, it's, amazing though it may seem, one of the least corrupt places on the planet. Thus PHE are simply in error, victims of some strange groupthink perhaps.

But why is it that their solution involves fattening profit margins not the Treasury?

And here is Chris Snowdon on the subject:

At least taxes have the virtue of financing government expenditure. Minimum pricing, by contrast, is a deadweight cost. It raises prices and clobbers the poor while benefiting no one. That is why governments of both left and right have quite sensibly rejected it.

Quite is. So why is minimum pricing so bloody popular?

Shelter commits Worstall's Fallacy once again

One of us has been banging on about this so often and for so long that it has been termed Worstall's Fallacy. The point being that we cannot decide how much more we must do about something until we account for what we already do about that thing.

For example, the American poverty numbers are calculated before taking account of much of what is done to reduce poverty. Only cash income is considered. But much American poverty alleviation is delivered through the tax system (the EITC) or goods and services in kind (Medicaid, Section 8, Snap and so on). The published official poverty rate is thus around 14% of the population, the number after alleviation more like 4% or so.

We cannot then go around shouting that 14% in poverty is terrible thus we must spend more on the EITC, Snap, Medicaid and Section 8. It may well be true that more should be spent - possibly even less - but the relevant number to be looking at is the 4%, after the effects of what is already done.

And so it is with Shelter's estimations of how many homeless people there are in the UK. They tells us there are 250,000 unfortunates in that position:More than a quarter of a million people are homeless in England, an analysis of the latest official figures suggests.

For the very first time, Shelter has totted up the official statistics from four different forms of recorded homelessness.

These were:

national government statistics on rough sleepers
statistics on those in temporary accommodation
the number of people housed in hostels
the number of people waiting to be housed by social services departments (obtained through Freedom of Information requests)

Temporary accommodation, hostels, those are things we do about homelessness as most of us understand the word - that rough sleeping. This is to commit Worstall's Fallacy, to count as not yet done the very things we are doing to solve the problem.

It's entirely true that hostel living isn't as desirable as a safe and secure home to call one's own. But it's an entirely viable solution to rough sleeping, or homelessness.

The importance of the fallacy is that only by proper measurement can we work out what the next step in our solution should be. Absent serious mental health or addiction problems (and the occasional expression of choice) the problem of rough sleeping is largely solved. For we do have those hostels and people don't have to sleep on the streets, something that was not true say two centuries ago.

What we don't have is those safe and secure homes that all can call their own. And thus that is the problem that should be concentrated upon. And fortunately we know the solution there, blow up the Town and Country Planning Act and successors.

Well done students but you've entirely missed what Martin Shkreli did

An interesting report out of Australia:

A group of Australian high school students have managed to recreate a life-saving drug that rose from US$13.50 to US$750 a tablet overnight after an unscrupulous price-hike by former hedge fund manager Martin Shkreli.

The Sydney Grammar students reproduced the drug, Daraprim, used to treat a rare but deadly parasitic infection, in their high school laboratory with support from the University of Sydney and global members of the Open Source Malariaconsortium.

Dr Alice Williamson, a postdoctoral teaching fellow with the university’s school of chemistry, said she could not stop dwelling on the story of Shkreli, who acquired Daraprim last year through his company, Turing Pharmaceuticals, and almost immediately and exorbitantly hiked the price. The drug is used to treat malaria and to prevent toxoplasmosis infection in people with HIV.

OK, well done those students.

“I couldn’t get this story out of my head, it just seemed so unfair especially since the drug is so cheap to make and had been sold so cheaply for so long,” Williamson said.

“I said ‘Why don’t we get students to make Daraprim in the lab’, because to me the route looked pretty simple. I thought if we could show that students could make it in the lab with no real training, we could really show how ridiculous this price hike was and that there was no way it could be justified.”

Which is to entirely miss what Martin Shkreli actually did. The drug is indeed simple enough to make, it's long and well out of patent and yes, perhaps it should be a $1 a tablet or whatever. As, to some level of accuracy, it is here in Europe and elsewhere in the world. So, it wasn't a patent and it wasn't making the drug that allowed the price rise.

Instead, it was and is the near insane rules that the Federal Drug Administration places upon the manufacture of drugs. Which is why the price rose in the US and did not and has not risen elsewhere.

Shkreli wriggled his way through the regulatory system - it's the regulatory system at fault therefore. The solution is thus a change in the regulatory system, not demonisation of Shkreli nor students making the drug in labs. Because however many Australian or other students show how easy it is to make in a lab the FDA won't allow Americans to take it.

Fix the FDA therefore, nothing else.

Good news from New Zealand

Alex Tabarrok at Marginal Revolution has drawn my attention to an unequivocally excellent bill set to pass with cross party support in New Zealand.

“The Bill effectively removes what is known to be one of the single greatest barriers to live organ donation in NZ,” Mr Reid says. “Until now the level of financial assistance (based on the sickness benefit) has been insufficient to cover even an average mortgage repayment, and the process required to access that support both cumbersome and demeaning. The two major changes that this legislation introduces – increasing compensation to 100% of lost income, and transferring responsibility for the management of that financial assistance being moved from WINZ to the Ministry of Health – will unquestionably remove two major disincentives that exist within the current regime.”

Readers of this blog will no doubt be aware that when there is a chronic shortage of something (as is tragically the case with kidneys) typically the price will increase, and this will incentivise new production. Of course, with kidneys that's not allowed to be the case. It's illegal almost everywhere (not Iran). In fact, it's even worse than that - donating a kidney is extremely costly, it means taking nearly a month off work. Many otherwise very altruistic people simply can't afford to donate, this bill will help them donate. It's not a full incentive, but it does mean that people don't have to go into debt to save a life (or ten thanks to the work of game theorist Alvin Roth). 

Interestingly, how compensation is framed seems to play a lot of the role in whether or not lawmakers get on board. In Iran, they're not buying kidneys but "rewarding altruism". In New Zealand, the bill got support because it was framed as compensating donors for lost wages rather than for selling their kidney.

This is objection to sales is typically based on two plausible but wrong objections.

First, some (particularly religious objectors) argue that allowing money to change hands commodifies the human body. The problem is that this is based on an incredible simplified form of Kantianism. Kant objects to people being treated as merely a means to an end– the merely is the key part. We can't go throughout our day without treating some people as means to an end - e.g. bus drivers, shop assistants, and call centre workers. What matters and is morally problematic is when those people are merely seen as means to an end and not as autonomous individuals.

But it's clearly not the case that by buying and selling kidneys we turn people into mere commodities. For example, take pets. Many beloved family pets were at one point bought and sold in pet shops, but they clearly haven't become mere commodities. 

Second, some object that poor people will be exploited under this system. But, this too is easily dealt with. Exploitation typically is a result of desperation, but it's the buyer and not the seller who's the truly desperate one. Perhaps, sellers might be pressured into the decision in order to pay off a debt collector knocking on the door. If that's the case, then simply legislate that donors have 6 months or more to back out of the decision, that rules out those caught out in a moment of desperation. Others feel uncomfortable that sellers will be mostly drawn from the poorest groups in society, but this shouldn't worry us. The solution here is not to ban poor people from making money from their non-essential organs, but to tackle the underlying poverty through policies that boost the incomes of the poorest.

I'm a little pessimistic on the prospects of proper compensation for kidney donors making its way into law. But, New Zealand's experience shows that gradual reforms can succeed. Hopefully, these reforms will, as economic theory and Iran's experience predicts, save lives. And if they work, maybe that'll be the first step to more experimentation with compensating donors.