HMRC, you had one job

It can be frustrating to state the obvious. But, typical to its nature, HMRC has forced me to do just that. In 2013, the average Briton had to work 150 days into the year to pay their total tax bill. Not until May 30th did UK residents stop working for the Chancellor and started earning for themselves

It’s simple, really. Brits earn the money, and HMRC arranges to have it taken away through a variety of different taxes—VAT, National Insurance, and of course, income tax.

It's a tough job the HMRC has—to tax and tax some more—but it’s probably safe to say the average earner has the harder job – to supply both the government with the funds it needs to run the country, and the funds she (and potentially her family) need to live on.

So it should be expected, at the very least, that the taxation process be as smooth and simple for the earner as possible; that those 150 days worth of earnings be transferred without fuss…

If only. From The Telegraph:

“Four months ago, HM Revenue & Customs admitted it had collected the wrong amount of tax from more than five million people in the 12 months to April 2014.

Since then, the taxman has sent those affected notification letters explaining how it would claw back or issue refunds for on average £300.

In an email leaked to The Telegraph, a select group of senior HMRC staff and accountants were told "thousands" of mistakes were made.

The recipients were advised to tell taxpayers who questioned their bills "not to repay any underpayment" of tax.

It said anyone who had overpaid tax should not cash any cheques they had received. Anyone who has already cashed a cheque will see the money potentially clawed back if a mistake has been made.”

Mistakes happen, sure. But such levels of incompetence, without any offer of compensation, can only be the work of the public sector.

In almost any exchange between a customer and a private business, over-charges and under-charges play out in the customer’s best interest. If a hotel or restaurant accidentally over-charges you, a refund is surely made (often with sincere apologies and some form of compensation for the trouble). If a grocery store under-charges you for fruit purchased, no letter comes through the post asking you to make up the sum.

But when HMRC makes not one bad calculation, but a series of wrong calculations for millions of customers, the inconvenience falls on the taxpayer, who will have to make up the difference calculated or wait months for her rebate.

Of course, taxation isn't a voluntary transaction, the taxpayer isn’t considered a customer, and the government’s a monopoly—so blatant incompetency shouldn't be a surprise at all.

The smoke and mirrors of prohibition

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On Tuesday, a review of 2 decades of research into the effects of cannabis was released and pounced on by the media, who then broadcast the fact that smoking weed is ‘as hard to give up as heroin’, doubles the risk of psychosis and schizophrenia, and acts as a gateway drug into stronger substances. As part of this reefer madness I took part in Sky News debate on whether the UK is too soft on cannabis. Usually, evidence a that prohibited item or action is harmful or more dangerous than previously thought would justify its prohibition. But this isn't the case when it comes to cannabis, or the 'war on drugs' more generally. This is because many of the costs associated with the use and supply of illegal drugs are exacerbated—and sometimes even caused by—the act of prohibition.

Some forward-thinking countries across the globe have experimented with policies of decriminalization and partial legalization. From the legalization of cannabis in Uruguay to the decriminalisation of drugs for personal use in Portugal, each is an example of viable, harm-reducing alternatives to prohibition. Unfortunately, there remains little political will to see such changes in the UK, where the narrative remains  that evidence of harm equals justification for prohibition.

Most advocates of drug control cite health problems caused by drugs and their impact in the wider community as their biggest concern. This explains why Tuesday's report (with stats like '1 in 6 teenagers who regularly smoke cannabis become dependent on it') made such good news fodder. Certainly we have to tackle health problems caused with drug use, but pushing supply underground and criminalizing users has got to be one of the worst ways of doing it.

For example, a key argument against cannabis legalization is that it has grown much stronger over the decades, thanks to the intensive breeding of strains with a high THC content. However, this 'skunkification' can be understood as an effect of prohibition. Given that the punishment for getting caught with x amount of marijuana is the same whatever its potency, dealers have an incentive to source something which is measure for measure stronger, and buyers have the incentive to buy it. Just as liquor replaced beer during prohibition, the bud 'arms race' makes sense within a framework of crude legislation and illegality. There's certainly demand for less potent weed, but given competition between dealers and the fact that suppliers would need to grow and shift bigger volumes to make the same amount of money, there's little incentive to supply it—especially in an industry where there's little capacity to advertise the product.

In contrast, a regulated market can offer anything from mellow hash to super-skunk, as evidenced by a visit to any of Amsterdam's coffeeshops, where information about product, advice on what to expect and stringent quality control are also the norm. Decriminalization and the marketing of less potent strains not only allows users to find what suits them best, but could potentially reduce the harms and mental health issues which have been associated with today's super-strong cannabis.

Risks associated with other drugs are similarly exacerbated by prohibition. In an underground market it's difficult (and expensive) to be exactly sure of what you're purchasing, there's few routes of recourse or warning others, and accidents happen. In the last few years 'ecstasy' pills containing PMA—a compound with similar effects to MDMA but with a far high toxicity—have been poisoning clubbers and were directly responsible for 17 deaths in 2012. In Portugal, the decriminalization of the personal possession of heroin alongside innovative public health programmes has seen the number of new HIV cases amongst intravenous drug users plummet from over 1,000 in 2001 to 56 in 2012, with the total number of drug-related deaths falling from 80 to 16 in the same period.

Whilst drug use will always carry health costs, money raised by taxes on substances like cannabis or MDMA could contribute to the public coffer, and fund research and treatment centres for users. It's also worth putting these harms in perspective; the risk of death from illicit drugs is minuscule in comparison with lack of physical activity or a poor diet. Most recreational drugs are far less harmful to us than alcohol and tobacco—and in the case of ecstasy, apparently no more dangerous than horse riding.  And whilst dependency on a drug is no good thing, dependency alone doesn’t necessitate harm, as the UK's casual caffeine addicts demonstrate.

 

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Source: http://www.nhs.uk/Tools/Pages/NHSAtlasofrisk.aspx

In fact, health isn't really the biggest issue when it comes to drug prohibition—crime is. It is staggering that we continue to expend resources every year maintaining a model which gives an industry worth hundreds of billions of pounds to cartels and criminal gangs who cause violence, fear and instability from Peckham to Michoacan. In fact, one of main reasons Uruguay legalized cannabis this year was to prevent a rise in organised crime there spiralling out of control.

Back home, the Home Office estimates that drug-related crime costs the UK £13.3bn a year. It's thought that between one third and a half of all acquisitive crime in the UK is drug-related, with three-quarters of heroin and crack users admitting to committing crime to fund their habit. However, dispensing with outright prohibition and instead treating addiction as a public health issue before ensnaring addicts in the criminal system can have significant benefits. For example, providing access to drugs like heroin in a controlled manner has been shown to significantly cut the level of crime users commit, and costs far less to fund each year than a prison sentence.

On top of this, the criminalization and subsequent marginalization of casual drug users is a catalyst for further criminality. From school expulsion to a criminal record, the sanctions imposed on individuals lead to lost opportunities and closed doors, particularly for the under-privileged. With other options ruled out, a further life of crime can be the most rational choice for some.

Decriminalizing drug use would also allow police to redirect their time and resources to more effective pursuits than booking stoners and stop and searches. Early indications post-marijuana legalization in Colorado suggest that crime is down 10% over the year and violent crime down 5%, thanks in part to freeing up police time for more serious offences.

There seems little reason for such a harsh and wasteful system as prohibition to still be in force across so much of the world. Of course, prohibitionists are also afraid of the 'normalization' of drug-taking culture and the message this might send (someone does, of course, have to do this). Many genuinely worry that legalization would lead to a spike in drug use, degeneracy and harm. Evidence from places like Portugal (where if anything, drug use has declined) simply hasn't hasn't borne this out, though. In fact, Release's survey of global drug laws concluded that a country's drug-enforcement policies have very little correlation with the levels of drug use and misuse in that country.

Libertarians and the curious can go one further, and ask if it would really be such a bad thing if drug use were to rise post-legalization. Some illegal drugs might make a good substitute for our legal ones: it's feasibly better if some people chose to stay at home and smoke a joint, or pop pills on a night out instead of drinking a bottle of vodka, scoffing kebabs and getting in fights. And there's also the important fact that's often overlooked in the 'sensible' drugs debate: that most people who've taken illegal drugs have enjoyed doing so. Pleasure is derived from them in the same way it is from alcohol, nicotine, chocolate and sex. Experiences with drugs will make some people's lives richer, and there's a strong case for allowing people to weigh up their personal costs and benefits to find this out.

Of course, this epicurean argument will never sit with Westminster politicians or the Daily Mail. But it shouldn't have to—the huge cost and the utter failure of prohibition should be enough to spark a genuine dialogue on alternatives.

In this respect, the UK seems caught in a strange place. A recent Observer survey found that 84% Britons think that the war on drugs is futile, and over half back the trial of Colorado-style cannabis legalization in this country. The Lib Dems also recently pledged to end jail sentences for drug possession. Yet just days after this announcement the mainstream media goes crazy for a 'definitive study' apparently equating cannabis with heroin, leaving it up to others to point out the that paper was a narrative review and thus not systematic, and was written by an author who wants to decriminalize cannabis and has called for liberalizing the international control system.

We'll never end up with a satisfactory solution to the drugs question until the media and politicians start discussing the topic with honesty. Perhaps the optimum solution isn't a libertarian paradise. But whatever it is, and whatever your political leanings—if you are concerned about the social cost of illegal drugs, it's high time to accept that prohibition has failed.

 

 

Surprise! If you set a target then people will game that target

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This shouldn't come as the greatest surprise to anyone ever but sadly it does to those who would plan our lives. If you set people a target for something then they will game that target. This is true whether it's of bankers vying for bonuses and pushing losses outside the bonus period, people making tractors where if you measure them by the tonnage they'll make heavy tractors and, in today's example, if you set car manufacturers mpg targets for their vehicles then they'll game the measurement of mpg:

Motorists are usually advised that smaller cars can travel more miles per gallon (mpg) than those with larger engines, making them cheaper and more environmentally friendly to run.

But manufacturers’ estimates of fuel economy, based on official laboratory tests, may not reflect the reality when the vehicles are driven on the road.

Tests on 500 vehicles, half petrol, half diesel, each driven for three hours on roads in Britain, found that the cars travelled on average 18 per cent fewer miles per gallon than stated in manufacturers’ specifications.

Emissions Analytics, a data company which measured the cars’ fuel consumption and emissions, explained that this was due to cars accelerating more and travelling at higher speeds on the road than in official testing regimes.

The test drivers are of course all practicing perfect economical driving while, and this problem is worse for very small engines, we real drivers give it a bit of welly to compensate for those very small engines. And of course this is a general fault with any and every target of this type. Showing, once again, that if you want to ration something (here the desire is to ration fuel consumption) the best way to do your rationing is by price. For price is the one thing that doesn't lie in these circumstances.

It's such a simple concept that it really is amazing that those who would plan our lives still don't get it.

Voters are very ignorant, and that should terrify you

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Voters are very ignorant about the basic facts of politics. This is where Americans fall when asked what the US government spends the most on: And here is how the money is actually spent:

As I've often asked before, how can we possibly expect voters to elect the right people if they know so little about the issues at stake? It's like asking a blind man to be your ship's navigator.

Governments have vast powers and responsibilities. Their reach is essentially limitless. And the people who decide what they do are hopelessly ill-informed about the world. Forget the Hayekian knowledge problem – the voter ignorance problem means democracies cannot hope to elect decent governments with the priorities and policies that the voters themselves would want if they were well-informed.

Elite rule might have been the answer, but elites are dogmatic, closed-minded ideologues. No, there does not seem to be any group we can rely on to rule. Voter ignorance should make us extremely reluctant to bring the state in to solve some problem we're having.

And before you tell me that democracy is the worst system we know of, apart from all the others: Are you sure?

Markets like women too

Last week I wrote about how markets militate against racism. It's a basic and over-worn point, but it seems to be forgotten regularly anyway. Here I shall make the same point, but with respect to women. It's a common view that women are paid less than men on average, even after you account for hours, experience, qualifications, industry, risks, pleasantness of job and so on (though they do account for a very large fraction of the gap).

But there are a few other factors that studies have only started looking into recently. One of those is exit. Women often exit the labour force earlier than men, trade down to more flexible or part-time jobs that don't pay as well. It might well be said that this is the product of socially constructed expectations about what different genders are expected to do and how they are expected to structure their lives—with one gender still doing more work outside the house and one still doing more inside.

But even if this is true, it is important to stress that this 'discrimination', which certainly doesn't seem to result in lower happiness for women, happens at the level of upbringing, schooling, and so on rather than at the level of employment. Firms are not to blame and indeed, recent research suggests firms are actually pretty pro-women.

For example, "Gender Differences in Executive Compensation and Job Mobility", published in the Journal of Labour Economics in 2012 (up-to-date abstract here, full working paper pdf here) finds that if you control for background (i.e. skills and talent) and exit (i.e. women staying in the workforce) women earn more than men and get more aggressively promoted than men.

Fewer women than men become executive managers. They earn less over their careers, hold more junior positions, and exit the occupation at a faster rate. We compiled a large panel data set on executives and formed a career hierarchy to analyze mobility and compensation rates. We find that, controlling for executive rank and background, women earn higher compensation than men, experience more income uncertainty, and are promoted more quickly. Amongst survivors, being female increases the chance of becoming CEO. Hence, the unconditional gender pay gap and job-rank differences are primarily attributable to female executives exiting at higher rates than men in an occupation where survival is rewarded with promotion and higher compensation.

Another paper, from July this year, finds that reservation wages (the lowest amount a person will take to do the job rather than remaining unemployed and taking nothing) explain the entirety of the gender wage gap that remains after you control for personal and job characteristics. This suggests, again, that the discrimination that is happening (if it is happening) is not coming from markets.

The economic literature typically finds a persistent wage gap between men and women. In this paper, based on a sample of newly unemployed persons seeking work in Germany, we find that the gender wage gap disappears once we control for reservation wages in a wage decomposition exercise. Despite a concern with reservation wages being potentially endogenous, we believe that the exploratory results in our paper can help one better understand what the driving forces are behind the gender wage gap. As the gender gap in actual wages appears to mirror the gender gap in reservation wages, there is a clear need to better understand why there are gender differences in the way reservation wages are set in the first place. Whereas a gender gap in actual wages could reflect either productivity differences or discrimination, a gender gap in reservation wages essentially reflects either productivity differences or differing expectations.

This just adds to a burgeoning literature finding that the reason men and women have different outcomes in labour markets is that they differ systematically in job-relevant ways. For example, men in the Netherlands systematically choose more competitive academic tracks. Even very narrow estimates of the risk-tolerance gap between men and women estimates it at about one standard deviation (implying the male and female distributions overlap 80%).

Again, this does not imply there is no discrimination in society—it just shows that it's not corporations, firms, companies, businesses, start-ups, market organisations who are doing it.

 

How lovely to see another statistical misrepresentation gallop by

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Sadly, Joan Smith has previous on this sort of thing:

So let’s go back to that report I mentioned earlier, and what it had to say about false allegations of rape and domestic violence. Starmer described them as “very rare” and went on to say something that might have been written with Gone Girl in mind. “In recent years we have worked hard to dispel the damaging myths and stereotypes that are associated with these cases,” he observed with a hint of weariness. Everyone who works in this area knows what he means, and foremost among those myths is the idea that victims can’t be trusted. It’s a favourite theme of the Daily Mail, which is always ready to clear its front page to highlight cases of men who have been acquitted of rape, without pointing out that false allegations are rare.

The figures are stark. Starmer asked the Crown Prosecution Service to look at a 17-month period, during which there were 5,651 rape prosecutions and a staggering 111,891 for domestic violence. In the same period, only 35 women were prosecuted for making false allegations of rape and six for false claims of domestic violence. The standout finding was that occasions when a suspect deliberately makes a false allegation of rape or domestic violence “purely out of malice” are “extremely rare”.

Oh dear. The number of false allegations that are prosecuted is not the same as the number of false allegations of rape that are made.

Sadly, the only two things we really know about false allegations are the following. The first is that they do happen: we've (a very small number of) people currently serving jail sentences for having done so. The second is that the vast majority of allegations are not false. Our problem is that we do not know the gap between that vast majority and the number that are definitely false.

As best we know the number of false allegations is in the 3 to 8% range of all allegations made.

The point of this is not to muse on the background of what should be done about allegations of rape. Rather, it's to point, in fact to jeer, at the manipulation of the statistics that is being performed. The number of prosecutions for making false allegations is not a good or reasonable guide to the number of false allegations that are made.

The NHS: bread and circuses

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Juvenal, as every schoolboy used to know, coined the term “panem et circenses” almost exactly two millennia ago to describe the way politicians bought votes with little regard for important issues of state. What goes around comes around: this party conference season has seen Labour, Lib Dem and Conservative Parties trying to outbid one another in their promises for the NHS.  I am not suggesting that the NHS is mere entertainment even if party conferences are.  The point is that NHS spending is becoming a bribe in the same way bread and circuses were.

Any amount of money can be thrown at the NHS, just as it could at the Roman games.  And consuming more increases the appetite for more again.  Somehow questions of value for money, compared with other ways in which our money can be spent, need to be honestly and realistically addressed.  Does a Health service need to pay for people’s life choices or how they wish to look?  Does it need to accommodate elderly, but healthy, people who have nowhere else to go?

Does it need to fund legions of lawyers, managers and compensation claims for real and exaggerated errors?  Harold Wilson started this problem in the 1960s when patients became customers and could suddenly claim.  Until then the only customer was the state and we all had to take our chances.

Emotional wool seems to cloud all NHS discussion.  As it is all free to us individuals, we, naturally enough, only want the best even when the merely good would be good enough.  For, roughly, the same treatment, big hospitals cost double cottage hospitals which double GPs.  Scale does have benefits for specialism but also diseconomies. Only the hassle of big hospital visits, and car parking charges. keep us local.

The cutting edges of medicine, technology and techniques always cost more but some means of rationing will have to be found.  Alternatively, alcohol, tobacco and fatty foods should be prescribed as bread and circuses were.  Dying younger would keep NHS costs down and morale up.

Why do people oppose immigration?

My Buzzfeed post on immigration generated a bit of traffic yesterday and a bit of disagreement, too. The most common objection to our approach to immigration is that it's one-dimensional—OK, we might be right about the economics, but c'mon, who really cares? It's culture that matters. This point was made to me a few times yesterday and there's definitely something to it. My first response is that I think people underestimate the public's ignorance of the economics, and hence the public's fears about immigration. This poll by Ipsos MORI (I love those guys) asked opponents of immigration what they were worried about—as you can see, their concerns are overwhelmingly about job losses and the like:

The top five concerns are all basically to do with economics, with the highest-ranking cultural/social concern getting a measly 4%.

Obviously this isn't the whole story. People might be lying to avoid seeming "racist", for example. But in other polls people seem less reserved—last year 27% of young people surveyed said that they don't trust MuslimsLess than 73% of the population say they'd be quite or totally comfortable with someone of another race becoming Prime Minister, and less than 71% say they'd be quite or totally comfortable with their child marrying someone of a different race. So the 'embarrassment effect' of seeming a bit racist can't be that strong, and clearly the ceiling is higher than 4%.

I reckon it's more likely that people have a bunch of concerns, of which the economic ones seem more salient. Once they've mentioned them, they don't need to add the cultural concerns to the pile. Either that, or we just believe people in the absence of evidence to the contrary.

That's why I think it's legitimate to focus on the economics of immigration, even if we concede that the cultural questions are important (and tougher for open borders advocates to answer). Persuading some people that their economic fears are misguided should move the average opinion in the direction of looser controls on the borders.

If we could put the economic arguments to bed we might be able to have a more productive discussion about immigration. If culture's your problem, then let's talk about that, but remember that the controls we put on immigrants to protect British culture come with a price tag. Maybe we'd decide that more immigration was culturally manageable if we ditched ideas like multiculturalism and fostered stronger social norms that pressurised immigrants into assimilating into their new country's culture. I don't know. (Let's leave aside my libertarian dislike of using the state to try to shape national culture.)

The point, for me, is this: the economics of immigration does matter a lot to people. Immigration is not either/or—we can take steps towards more open borders without having totally open borders. At the margin, then, persuading people about the economics of immigration should move us in the direction of more open borders. And that, in my view, makes the world a better place.

Longevity and the rise of the West

Did the Industrial Revolution happen because of improvements in institutions or because of improvements in human capital? A duo of new papers attack the question from an interesting new angle, looking at longevity, and finding that its rise precedes (by a good 150 years) the onset of the Industrial Revolution. The first, a 2013 study from David de la Croix and Omar Licandro, builds a new 300,000 strong database of famous people born from 2400BC to 1879AD (the year Einsten was born) and has four key findings (pdf) (slides):

  1. On average, before the cohort born in the 1640s, there is no trend in lifespans; they stay at an average of 59.7 years for 4,000 years
  2. Between the cohort born in the 1640s and Einstein's cohort, longevity increases by 8 years—this trend pre-dates the industrial revolution by generations
  3. This increase occurred across Europe, not just in the leading advanced countries
  4. This came from a broad shift, rather than a few especially long-lived individuals

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The second, published less than a month ago by LSE economic history professor Neil Cummins, makes use of an even more innovative source of data—a collaborative project between the Mormon Church of Latter Day Saints and individual genealogical experts. Apparently the LDS is a major collector of genealogical information:

‘Baptism for the dead’ is a doctrine of the church of Jesus Christ of the Latter Day Saints(LDS). The practice is mentioned in the Bible (Corinthians chapter 15, verse 29, TheHoly Bible King James Version (2014)). The founder of the LDS church, Joseph Smith,revived the practice in 1840 and ever since, church members have been collecting historical genealogical data and baptizing the dead by proxy. The church has been at the frontier of the application of information technology to genealogy and has digitized a multitude of historical records. Today they make the fruits of their research available online at familysearch.org. The records number in the billions.

The paper draws longevity statistics on 121,524 European nobles who lived between 800AD and 1800AD to establish that the West was rising even before the marked gains seen from the 1640s, and suggesting that the roots of economic development go very deep (much deeper than institutions).

The fascinating paper is saturated with insight-nuggets. Perhaps unsurprisingly, the top ten exact death dates in the periods are all battles:

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There's also extra support for Stephen Pinker's thesis of massively declining violence in society:

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And here's the overall result:

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Taken together, the papers seem to provide strong support for the human capital thesis, as against the idea that changes in institutions were key in allowing humans to escape from the Malthusian trap and see general rises in the living standards, for the first time ever.

 

It sounds like we've the possibility of a deal here

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These new figures do need to be taken with a pinch of salt, of course. But even so there does arise the possibility of an interesting deal:

Kevin Farnsworth, a senior lecturer in social policy at the University of York, has spent the best part of a decade studying corporate welfare – delving through Whitehall spreadsheets and others, and poring over Companies House filings. He’s just produced what is, as far as I know, the first ever comprehensive audit of the British corporate welfare state.

The figures, to be published in a forthcoming report, are astonishing. Farnsworth takes the financial year 2011-12 and tots up the subsidies and grants paid directly to businesses. They amount to over £14bn – that is, almost three times the £5bn paid out that year in income-based jobseeker’s allowance.

Add to that the corporate tax benefits, the value of the cheap credit made available to banks and other business, the insurance schemes run by the government to protect exporters, the marketing for British business laid on by Vince Cable’s ministry, the public procurement from the private sector … Farnsworth calculates that direct corporate welfare costs British taxpayers just shy of £85bn a year.

No, let's not try to pry into the accuracy of those numbers for a moment. Let us, for the sake of argument, take them to be true. And let us add one more piece of data. Corporation tax revenues run around £40 billion a year or so. So, if we are to believe these new figures it would appear that we've the possibility of a very promising agreement here. From our side the simple abolishment of corporation tax and also the abolishment of all that corporate welfare sounds like a great idea. And clearly those who believe that number for corporate welfare should also leap at such a deal. The Exchequer would be, by those numbers, near £40 billion a year better off.

The only problem with this deal is that those who claim to believe those corporate welfare numbers simply wouldn't take it. Meaning that they might not believe in them quite as much as they say they do.