Dynamic scoring of taxes

This is one of those things where I simply cannot understand why anyone is complaining.

The current method of assessing the impact of tax changes on the real economy is relatively primitive. Six years ago, a senior Conservative politician complained that Treasury officials assumed, in effect, that any change in tax rates would lead to an “exactly equivalent” change in revenue. He called for greater sophistication in tax impact assessment, saying that the current system “fails to take into account the broader economic consequences of tax changes. It is difficult to know exactly what those dynamic effects are – how big they are, and when they impact on tax revenues.”

That politician was George Osborne, and it appears that his enthusiasm for what is generally known as “dynamic” tax impact assessment may finally be getting somewhere.

Well, yes, of course.

If we put up fuel duty then we do want to know what the effect on demand is going to be. We know that in the short term at least fuel demand is inelastic. So it won\’t drop much: but the very reason we\’ve got that fuel duty escalator is to reduce demand in the future. So our predictions of revenue should include that.

Similarly with booze and fags taxes: demand is inelastic which is why we an tax them so highly. But it\’s not entirely inelastic, not with the personal import option, so we should indeed measure the change in demand and thus the yield of the tax. New York City recently found that a rise in the cigarette tax reduced total revenue for example.

And of course, if we\’re doing this with tax rises then we should be doing it for tax cuts as well, no?

So why would anyone complain at all about dynamic scoring?

Friday afternoon musical fun

I\’ve been taking a lot of music lessons just recently. Becoming quite the multi-instrumentalist.

I\’ve quite nailed the vocal line from Jessica, have the drum part to Eruption down pat and even the lead guitar part in Birdland sorted.

I think I\’ll move on to the Hammond organ part in Freebird next unless anyone has any better ideas?

Apple and Foxconn

I see they\’re still trotting out the suicide nonsense:

Wang Ling was 25 years old when she ended her life on 7 January 2011 by jumping from her brother\’s high-rise flat, days after being dismissed from her job as an engineer at Foxconn\’s Longhua factory. An employee of over six years\’ standing, she had recently been diagnosed with schizophrenia.

It would be easy to dismiss Wang Ling\’s case as a tragic exception, were it not for the fact that she was the 15th Foxconn employee reported to have committed suicide since the beginning of 2010. There have been at least two since.

Yes, 17 suicides is 17 tragedies.

However, the firm has over 1 million workers. In a country where the average suicide rate across the whole population is 20-22 per 100,000 per year.

17 per million over two years, 20 per 100,000 per year.

There are a number of qualifications one can make to these suicide numbers it is still extraordinarily hard to make the case that this rate shows that conditions in Foxconn are worse than conditions in China generally.

Polly does the static fallacy again

The coalition agreement promised \”limiting donations and reforming party funding in order to remove big money from politics\”. Sir Christopher Kelly was duly asked to find a solution, which he did back in November. Donations would be capped at £10,000 per individual, Labour must sign up trade union members as individual subscribers and the state would contribute more. This formula produced the most equal outcome for all parties, with sacrifices evenly distributed and a strong incentive to recruit more party members. State funds could be allocated per vote cast in elections, though Helena Kennedy\’s Power Inquiry came up with something better: voters could tick a box on their ballot paper to allocate their share of state funding to a party of their choice.

That might well be the most equal outcome for extant parties. But this is to commit the usual lefty fallacy of assuming that such matters are static. It\’s a fundamental misunderstanding of how markets work. And yes, of course, politics is indeed a market.

The prime mover in markets is not in fact competition. It is, rather, the possibility of competition. And that possibility of competition relies upon the ease of entry (and exit) in the market.

It doesn\’t for example, matter that Google has 99.9999% of the search market (not that it does of course), only that Google act as if someone is about to enter the market with a new search engine and thus eat their lunch.

It is the same with political parties. If we assume that there will, forevermore, be two and a half UK political parties then state funding is just fine. But if we think properly, and assume that it is the possibility of a new party emerging which keeps those two and a half even vaguely straight, then state funding is the worst possible answer. For it makes that entry (and also that exit) that much more difficult. We\’re entrenching monopoly positions rather than doing what we ought to, which is ease entry requirements so as to undermine those monopoly positions.

There is also the clinching argument: why in fuck should more of our money be extorted from us to pay for bastard scum politicians?

A question to which there is no answer, is there?

Adventures in Government incompetentcy

The backlog of fuel deliveries caused by yesterday\’s panic buying could mean a wait of up to three days for supplies to be replenished after motorists filled up over fears of a strike by tanker drivers.

Entirely and totally down to the government being so damn stupid.

It just doesn\’t make sense to have such idiots trying to run the important parts of our lives, does it?

How about that: David Cameron as the advertisement for the Minarchist State?

@richardjmurphy *still* doesn\’t get friggin\’ tax incidence

Dear Lord this is pitiful:

Now, at the meeting at the Social Market Foundation I attended this week HMRC director Judith Knott confirmed that HMRC have accepted another key element of right wing tax dogma – which is that companies can’t pay tax and only people do. She explicitly questioned as a result why we have a corporation tax.

Well it’s an interesting idea. So let’s explore it for a moment.

First, imagine there wasn’t a Marks & Spencer when you went into a store marked M&S. That’s what you’re being asked to believe. You’re being told M & S and all other companies are just make believe. You’re told they’re just a bunch of shareholders. Except that’s not true. You don’t contract with the shareholders. You do contract with M&S. And you do that because there would be no M&S without there being a limited liability company. No one would have taken the risk of creating M&S but for that limited liability. So not only is it not true there is no M&S, the reality is that the company called M&S facilitated something no person would have done. It’s real therefore. The claim that company is just an agent for its shareholders is wrong; it’s something much more than that, and its limited liability form has an impact for beyond anything that the shareholders would do, so it is an entity in its own right, and not a mere agent. That makes it taxable in its own right. It has profits all of its own, not due to anyone else that should be taxed – and the existence of retained reserves in almost all companies is sure indication of that fact. Denying this – as Judith Knott did – is simply an excuse not to tax a form of capital that has been captured by the management of these companies for their own gain.

Second, no one knows who a company represents. Most of the time a company has no idea who owns it. Some people own the shares in companies for fractions of seconds. How would we attribute profit to them to be taxed? Others hold their shares through other companies. How far do we have to go to find a person? Others record their ownership in tax havens to seek to avoid or evade tax. Why should we encourage them to do so? And how do we tax ownership where no person can be identified as having ownership rights – as in a discretionary trust? The argument that only people are taxed is simple to roll out – and impossible to apply. Knott should know that and yet she offered this glib explanation when there is in fact one excellent reason why we must tax companies – which is that they are by far the cheapest and most effective agent to tax to ensure that their owners, whoever, wherever and whatever they might be, are taxed to at least some degree on the income they derive from the company.

Knott would, presumably, rather lose the income to tax havens or tax avoidance: that’s the only reasonable interpretation of her adopting this trite argument that looks good on a blackboard at the Oxford Centre for Business Taxation and whose real world application is to encourage tax abuse, the shifting of the tax burden from capital to labour and from rich to poor and which will mightily increases the income and wealth gaps; all of them aims I am sure Oxford’s Centre is delighted to share. You would not consistently fail to point out the flaws in the argument if you didn’t believe in those consequences that have to flow from promoting it if that was not the case.

Look, I\’m sorry, but Edwin Seligman published on this in 1899 at which point all economists went \”Oh yes, how obvious\”.

The argument just isn\’t about whether a corporate structure exists or not, nor whether there is a legal ability to tax such a corporate structure.

As I have explained innumerable times over the years Ritchie is just being pigheaded in his refusal to understand the actual argument.

All taxes, by definition, mean that someone\’s pocket gets lighter. The study of tax incidence is \”whose?\”.

We do this all the time: do onsumers really pay VAT? What about income tax, is that really on wages (largely, yes)? How about employers\’ NI? Does that come off the wages of the employee or off the profits of the employer? Now I know that Ritchie agrees with the general view on that NI because he\’s said so. It depends upon hte various elasticities and the general iew is that some to all of employers\’ NI actually comes off the worker in the form of lower wages.

All we\’re doing in looking at the tax incidence of corporation tax is trying to work out whose pocket get lightened by it? Sure, we can see the money leaving the company but so can we with employers\’ NI? What happens next is what we\’re trying to work out.

And again, we\’ve got a general view. The more mobile capital is the more it is the workers in the form of lower wages who pay it. The less mobile capital is the more it is the shareholders in the form of lower returns. All of this isn\’t in doubt, it\’s, as above, one of those things economists have looked at and gone \”Oh Yes, obviously!\”.

We can have lovely arguments about how much, what the elasticities are: even Adam Smith pointed out that even in a world of perfect theoretical capital mobility we won\’t in fact have perfect capital mobility (this is where the one and only mention of \”invisible hand\” in Wealth of Nations comes in).

And do you know what really bugs the shit out of me? If Ritchie actually understood al of this it would be something helpful to his own arguments. He\’s said often enough that he thinks that capital is too mobile. That it ought to be more constrained. And tax incidence is actually a great argument for him to be using: look, we want to constrain capital mobility so that we can tax capital returns rather than workers\’ wages bearing the brunt of corporation tax.

But he\’s so insistent that cdorporations themselves must be taxed, so ignorant of the underlying economics, that he misses this open goal.

I see that private school applications are down

Pay children to attend top private schools, Government told
Dozens of top private schools are calling on the Government to provide state subsidies to allow bright pupils to be admitted irrespective of family background, it emerged today.

The actual idea is pretty good, effectively, give them back the tax they\’ve paid for the State school system if they\’re not using it.

But it\’s still rent seeking.

Update: Re the Latin. My slightly strange experience was to go from the RAF School in Naples straight into the maw of Prep School. First Latin lesson I\’m told to stand up and translate something on the fly from a language I\’d never even seen before. And boy did having a Pozzuoli accent (hey, Latin is just Italian without the jesticulations), something closer to Catalan mumbled through a mouthful of pizza than anything else, cause confusion.

But what really got me was the Cambridge Latin course. It\’s all about this family that live on the side of the Bay of Naples, Baia, and then at the end of year one, while they\’ve gone to Pompeii it blows up and, well, everyone else wa doing the verbs n\’ stuff and I was going, hmm, there\’s good swimming just where they are now. And yes, used to go picnicing at Cumae where they are now, and that Sybil\’s Grot was just over the lake from us and got badly bombed in the war…..that Temple of Jupiter is where my mate Adam jumped in and cut his foot on a dumped car.

Beginning of second year and the remnants of the family had turned up in Bath….the Worstall familial home before and after Naples. We used to have Dolphins swimming club in the Cross Bath which is fed from the Roman plumbing of the old Baths……

Never did learn buggery of the language but still, nice of them to place it all in geography I knew about.

Is this the economics they teach at SOAS? George Irvine spouts nonsense

The economist\’s notion of public goods has lost currency in this age of commodities, not just in the EU but particularly in the Anglo-Saxon world. Unlike today, two generations ago, economics undergraduates were taught that such goods were different from soap flakes and hamburgers. Public goods and services are things which need to be supplied – or at least regulated – by the public sector because they are by their very nature collective.

No, that\’s not the definition of a public good and it really would behove a Professor of Economics to get it right. Public goods are by nature non-excludable and non-rivalrous. Those two mean that it\’s very difficult to make money out of them: thus they will be undersuppplied in a pure market system. That is the argument for State intervention: yes, there really are such things as market failures and yes it really can be a good idea to intervene in them. However, we only get to call on the public goods argument when we really are talking about public goods.

These days, however, the distinction between \”public\” and \”private\” has become blurred, and among mainstream economists the consensus appears to be that because the private sector is more efficient than the state, we should limit the public role almost entirely to that of supervision. In Britain, for example, the railways were privatised and an \”internal market\” was created within the national health service on the grounds that this improved the efficiency of service delivery for \”customers\”.

But public supply is not equal to a public good. That\’s a very naughty shading of the meanings.

We can say that certain parts of the health care system are very definitely public goods. The herd immunity and protection from epidemics aspects of vaccination perhaps. This does not prevent granny\’s hip replacement from being rivalrous or excludable.

And train journeys are definitely both.

This still leaves open other arguments for wanting public provision of such goods, but they\’re not public goods and so we cannot use the public goods justification.

Do note also that there\’s nothing in the public goods argument that states that such goods must be publicly provided. Only that there should be intervention. I\’m quite happy that the NHS provides vaccinations. But we could still solve the public goods part of the problem by subsidy to private doctors (erm, actually, with GPs, that is the way the NHS does it) or perhaps a law mandating a full set of vaccinations by a certain age. I don\’t say that these will be better or worse than the current system: only that they would solve the public goods aspect of it all.

Indeed, there are some politicians who – as followers of the economist Friedrich Hayek – would abolish all forms of state supervision or control, and a few who would abolish all taxation.

That ain\’t what Freddie von H said and you know it. Jeebus, strawman or what?

Anti-state ideology goes back a long way, but its major driver in the last century was doubtless the Reagan-Thatcher revolution and, at a global level, what became known as the Washington consensus, ie, the rightwing orthodoxy associated with the IMF and the World Bank.

The, err, right wing Washington Consensus? Dang, it\’s just a short list of stupid things you shouldn\’t do in order not to screw up the economy.

The consensus as originally stated by Williamson included ten broad sets of relatively specific policy recommendations:[1][8]

Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
Redirection of public spending from subsidies toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
Tax reform, broadening the tax base and adopting moderate marginal tax rates;
Interest rates dictated by market forces;
Competitive exchange rates;
Trade liberalization: liberalization of imports, with particular emphasis on elimination of tariffs;
Liberalization of inward foreign direct investment;
Privatization of state enterprises;
Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
Legal security for property rights.

Legal security for property rights is just so right wing isn\’t it? So is directing spending to primary education and primary health care.

Among others, economists such as Anne Krueger and Jagdish Bhagwati helped popularise the notion that civil servants are really \”rent-seeking\” bureaucrats whose contribution to society is nil.

No, the point is that sometimes civil servants are such and that when they are then their contribution to society is negative.

Duck houses for MPs comes to mind.

This does not prevent other bureaucrats, or even the same bureaucrats at other times, being not rent seeking and also great additions to the joy and gaiety of the nation. The point is that we must learn to distinguish between these two and attempt to prevent one and encourage the other.

Market fundamentalism, the best-known US apostle of which was Milton Friedman, was developed inter alia by Thomas Sargent into rational expectations theory, which argued that markets contain all available information and are populated exclusively by fully informed consumers and producers for whom all future risks are calculable.

That\’s not rational expectations either. Which actually is that humans are not systematically wrong but randomly so. Further, this is a modelling assumption which is appropriate for some models and not for others. Just as the model that we\’re all delighted to do something for the benefit of our neighbours is. Child drowning in pond will motivate most of us (except modern police under elfnsafety rules) to wade in altruistically. Baking the bread for free in Padstow for some fucker in Newcastle to eat for free less so.

As a Professor of Economics should know, modelling assumptions do depend upon what you\’re trying to model.

Although there are some circumstances in which it is sensible to privatise, there are many good reasons why wholesale privatisation should be shunned. The first and most important reason is that abolishing universal free access to public services will make us less equal.

That is not a public goods argument, is it now?

By analogy, a major reason for providing universal healthcare as a public service is that decent medical treatment should not be a privilege reserved for the few.

Nor is that.

The same public logic holds for education. Universal literacy may be instrumental to developing a skilled workforce – a notion much loved by Tories – but the real reason we value education is because it is a necessary (though insufficient) component of a well-functioning democratic society. Education is not a commodity to be purchased according to individual preference; it\’s central to the meaning of civilised society.

Indeed, Adam Smith argued that universal literacy was such a public good. And as ever, Adam was right. But we have universal free at the point of consumption State education and we don\’t have universal literacy. So while there\’s a public goods argument for intervention there doesn\’t seem to be a good one for State provision given that it doesn\’t actually solve our public goods problem.

It used to be argued that publicly owned industries are necessary in the case of \”natural monopolies\”; ie, where long-term economies of scale in production make for \”monopoly profits\”. It is only fair that government – through ownership or regulation – captures such revenues for the public benefit.

That\’s actually not quite the argument. Rather than the capturing of such monopoly profits it is that either they should be so captured or they should be regulated so as not to exist.

Also, because natural monopolies (eg, water, energy, transport)

Water may well be a natural monopoly, as is energy distribution. But there\’s absolutely nothing at all about energy generation that makes it a natural monopoly and very little about transport that makes it so.

typically require very large initial capital outlays, often the state alone is in a position to finance them.

And that\’s pure bollocks. You can raise the money to build a power plant, a toll road, in an afternoon in The City. Further, one of the major arguments in favour of the privatisation of the utilities was that for political reasons the Government wasn\’t willing to invest sufficiently in them. Capital expenditure since privatisation has been vastly higher than it was before.

What has happened in recent decades to many public utilities is that, having been established and run by the state often with a strong element of public subsidy, they have been sold to private interests at knockdown prices on the grounds of fiscal rectitude (and with the blessing of the IMF).

Conveniently forgetting that most of them became public utilities through the nationalisation at knockdown prices of privately created firms and infrastructure.

For example, we didn\’t build the NHS hospitals in 1948. We took over those already extant. No doubt someone will be able to tell me when the NHS did first build a new hospital.

Another reason for preferring public provision is where \”external\” costs or benefits exist. A contemporary example of such an externality is where an industry damages the environment. A private company might want to cut down swathes of forest to grow crops for biofuel, disregarding the long-term environmental impact. Such companies typically have short-time horizons – they must make profits for shareholders next year, not next century. Government needs to step in to take the long-tern environmental effect – or any other form of market failure – into account.

Sure, externalities. They again are an argument for intervention: but they are not an argument for public provision.

In short, arguments favouring private over public provision are not just theoretically flawed, but typically favour the few at the expense of the many. The pendulum has swung too far to the right: it\’s time to stand up for public provision.

Perhaps it is and perhaps it isn\’t but by God you\’re going to have to come up with better arguments than this drivel.

Danny Dorling, Social Geographer

But perhaps not Danny Dorling economist.

Hundreds of thousands more jobs could be afforded if there were a little more austerity among the rich, a report just published by IPPR shows. It would not take a near-halving of top salaries – just a slight and gradual reduction of income inequalities would make huge savings every year. This is what occurred in the UK between the mass unemployment of the 1930s and the near full employment that lasted into the 1970s. Cutting high wages would allow employers to take on many more employees.

Over the last 30 years, pre-tax income inequality in the UK has increased massively, as it has in the US. Britain has seen massive rises in the incomes of those at the very top of the income scale, leading to increased overall inequality, fewer people earning enough to survive without tax credits and far more young people having to live on benefits because there are fewer jobs than a slightly more evenly distributed payroll would deliver.

Umm, OK, it\’s fine to look at the distribution of incomes in the economy.

But it is something of an error to only look at that distribution: we also want to know what is the effect of the distribution upon growth. Dorling\’s assumption here seems to be that we can change the distribution without changing the growth rate.

And maybe we can and maybe we can\’t but isn\’t that the very question that needs to be answered, rather than simply making the assumption that we can?

Sadly, the actual paper won\’t download for me so I can\’t see his argument in detail.

That paper has now been sent to me and yes, he really does just say that if we take £160 billion or so more in tax off the high income earners then all that will happen is more equality.

He doesn\’t even consider, for a moment, Laffer Effects or anything like them. Geographers doing economics: not a pretty sight, eh?

Spiked on rare earths

Well, yeah, sorta.

Only ultra-scarce yttrium, which is used in precision lasers and to stabilise rockets, may present a problem.

It\’s not actually that rare. And it\’s also a hell of a lot easier to find and refine than the lanthanides are. If you seriously wanted a few tens of tonnes, hundreds of tonnes, on a regular basis this could be set up and running for $10 to $20 million. As opposed to the $300 million that a new supply of the lanthanides would cost. That\’s using current technology mind.

That points to the second major deception going on in the ‘China takes all’ dystopias that surround rare earths. The West only relies on China for current production. As the MIT team notes, despite their name, rare earths are not that rare. Though toward half of the world’s reserves are in China, significant quantities also exist in the US and the former Soviet Union. Used up at the current rate, the world’s reserves should last about 870 years – against a figure for, say, copper of 34 years. As the authors of the MIT paper note, known reserves for rare earths are ‘not expected to be constraining in the next 25 years’.

It\’s also necessary to emphasise that \”reserves\” here does not mean total available stocks. It\’s a technical mining term being used. These are the amounts that we know where they are, we\’ve mapped them, done at least the initial drilling to prove the resource and we know that we can extract them with current technology and at current or likely future prices.

Just as an example, total resources of terbium (which we like very much for CFLs) are of the order of 20 billion tonnes in the Earth\’s crust. I don\’t know what actual usage is at present but I\’d be absolutely amazed to be told that it\’s more than 100 tonnes a year globally. Pretty surprised if it was over 10 tonnes in fact.

The real question of course is why is the US getting into a tizzy over this? It\’s not a real problem, so why? Well, I\’m afraid that it\’s all really about US domestic politics and rent seeking. Seeing the beginnings of a moral panic (The slant eyes will kill US industry! It\’s just a new variation on the old Yellow Peril stuff) the usual suspects have piled in to demand that government must spend money to solve the problem. That money to be spent on those urging the government to spend money of course.

I could even tell you which Congressman is running it and who he\’s using as his merkin and who is paying for the campaign.

In October 2010, the German government approved a new strategy designed to secure the supply of rare earths and other key commodities; and this year, German industrialists have formed an alliance to get hold of rare earths and German chancellor Angela Merkel has signed a deal with Kazakhstan to obtain supply.

And they are an interesting bunch of people. Saw some of them last week. They\’ve still not quite got the real point, which is that it is not RE mining that needs to be bucked up, it\’s RE separation that does. And that a few millions spent there on new technology would solve the problem completely. But as is, I\’ve found, generally true here in Germany the scientists and engineers understand economic arguments very well indeed and those scientists are now convinced. Whether the politicians will be I\’m not sure.

Amusingly it would be possible to make Hartlepool the Rare Earths capital of the world. Sadly, despite the hundreds of billions that the government is prepared to spend on fucking windmills, there\’s not that couple of million available for basic research on how to make fucking windmills.

Another idiot Lib Dim

Sharon Bowles, the UK Liberal Democrat MEP who chairs the EU parliament\’s economic affairs committee, also proposed that \”golden hellos\” should be clawed back if performance fell short.

Dear Lord, you\’d think these people would be able to understand their own arguments, wouldn\’t you?

And the argument here is that a bonus encourages people to strain too much, to take on too much risk in order to get the bonus. It might be true and it might not be but that is what the argument is.

So, in the case of a golden hello, does someone take more risk in order to earn it? No, obviously, they don\’t. But if that golden hello can be clawed back? Then yes they might.

Golden hellos actually solve the problem of excessive risk taking……

And as for this tosspot:

Belgian Green Party member Philippe Lamberts said he could not find any evidence that the remuneration policies at banks such as Deutsche Bank or Societe Generale \”correspond to any real value creation\”.

\”I am getting fed up of people saying this issue is populist and we should not go into that. Variable salary cannot be bigger than fixed salary,\” he said. \”Don\’t tell me you need two-fold, three-fold, five-fold variable salary to do good work. This is false,\” he said.

Remind me why we handed over the power over what a private business in London (or Bath, Bristol or Birmingham) can pay its employees and how to some Gaia worshipping loon from Flanders? Is this really essential to stopping Germay invading France. Again?

Is this really sensible No 10?

Motorists should consider stockpiling fuel for strike, suggests No 10
Motorists should consider stockpiling petrol in case a strike by tanker drivers disrupts supplies, the Government has suggested.

Hmm.

There\’s a possibility that this would actually cause the shortage that it is hoped can be averted.

It depends upon the relative sizes of the two diferent storage systems. For it is said that the fuel tanks of all cars on the American roads hold more fuel than the wholesale distribution netowrk itself holds. So, if every car goes and fills its tank to the brim then we exhaust those wholesale reserves.

Now I don\’t know if that little factoid is actually true or not: but it would be very interesting if it were, wouldn\’t it? For it would mean that No 10 calling for stockpiling will create the very shortage we wish to avoid.