Slapped wrist for Ritchie!

So, Ritchie says:

There’s a perverse untruth about the fiscal deficit that the likes of the Institute for Fiscal Studies and their acolytes, like Stephanie Flanders on the BBC, keep going on about. This untruth is that we had one before 2008. The truth is that if government had accounted like a company – on an accruals basis – there would have been no deficit recorded at all.

Some horrible little fact checkers decide to have a look:

The Treasury, however, disagrees.

A spokesman told Full Fact: “[Murphy\’s] article misunderstands entirely the way we account for public finances. We already use accruals accounting.

“It\’s also quite wrong about the payment of tax lagging by a year. Many taxes are paid much earlier and corporation tax, for instance, can be paid slightly in advance.”

Independent experts are also sceptical.

Andrew Gambier, manager of technical strategy at the Institute of Chartered Accountants in England and Wales, says that the Government uses a mixture of accruals and cash-flow accounting, with items such as Private Finance Initiatives and state pension liabilities covered by the latter method.

Mr Gambier said: “I think Richard Murphy\’s argument is a nice try, but it\’s overly simplistic. I\’m concerned about him simply shifting the income graph forward a year.

“Large, profitable businesses making more than £1.5 million profit a year have to make payments on account of their corporation tax liability so they are already on an accruals basis. Also, as corporation tax is a small proportion of overall tax receipts it wouldn\’t make much of a difference even if he were right – and he\’s not.”

Both the Treasury and the ICAEW say his argument is, umm, full of shite.

Ouch!

As Ritchie himself says in his own comments section:

And if you deny that you know nothing of tax, accounting or economics

Ritchie doesn\’t like this!

The more you study economics the more likely you are to be Republican and to hold free-market views.

How terrible, eh? The more you study astronomy the more likely you are to think the Earth is not flat, the more you study physics the more likely you are to think that gravity works, not the Earth sucks, the more you study medicine the more likely you are to think that conventional medicine has its points as opposed to Mail style Woo!

The more you study economics the more likely you are to conclude that this capitalism/free market blend has something to do with the fact that we\’re rich enough to be able to study economics.

Such a shocker when the study of a subject actually teaches you something about that subject, isn\’t it?

But the best bit is this:

The other questions were: 1) Mandatory licensing of professional services increases the prices of those services (unenlightened answer: disagree). 2) Overall, the standard of living is higher today than it was 30 years ago (unenlightened answer: disagree). 3) Rent control leads to housing shortages (unenlightened answer: disagree). 4) A company with the largest market share is a monopoly (unenlightened answer: agree). 5) Third World workers working for American companies overseas are being exploited (unenlightened answer: agree). 6) Free trade leads to unemployment (unenlightened answer: agree). 7) Minimum wage laws raise unemployment (unenlightened answer: disagree).

How did the six ideological groups do overall? Here they are, best to worst, with an average number of incorrect responses from 0 to 8: Very conservative, 1.30; Libertarian, 1.38; Conservative, 1.67; Moderate, 3.67; Liberal, 4.69; Progressive/very liberal, 5.26.

Isn\’t it fun that someone has just published a survey which shows that those leaning rightwards (which is what Republican means, there are some as wet as Francis Pym was as well as those more forcefully righty) are indeed more informed as to the basics of the interaction between economics and the real world.

And what does Ritchie say about, no, not this survey, but that the economically informed lean right?

But it does show just how biased, opinionated and thoroughly normative economics is.

I had to go and look up normative economics just to check that I wasn\’t having a brain spasm:

It is common to distinguish normative economics (\”what ought to be\” in economic matters) from positive economics (\”what is\”).

Umm, those questions there and their answers are not normative economics at all: they are positive economics. They are not describing what ought to be: they are describing what is.

Normative economics would be such things as: the rich ought to pay more tax, the workers should get higher wages….positive economics is, well, OK, maybe they should but in the real world there\’s a limit to how much you can tax the rich before either or both future growth is constrained or tax revenues fall. Maybe the workers should get more: but at least at some level minimum wages curtail employment. Wishes and shoulds are wonderful but we do have to test them against what is.

And so on etc.

That is, it is Ritchie who is the great advocate of normative economics and us proper liberals who are the great practitioners of positive economics.

But then he did say that he didn\’t pay attention to his economics lectures, didn\’t he?

Ritchie on accruals accounting for government

Now this is actually interesting from Ritchie.

If we do a bit of accruals accounting we can close the government deficit. That is, recognise tax revenue when it becomes legally due (ie, when people do the action which leads to a tax liability) rather than when it is actually due or paid, then there was no deficit under Brown.

Well, yes, sorta. Because of course accruals accounting means that you don\’t just recognise revenues in this manner. You also recognise liabilities in this manner.

Which means that we have to add into the mix the state pension liabilities accrued, the public sector pensions liabilities accrued, the PFI liabilities accrued and so on: things which would rather blow out that deficit instead of contracting it.

Odd thing for an accountant to forget really.

Or is he an economist these days?

We knew Ritchie would get this one wrong, didn\’t we?

Outrage at a billionaire not paying death duty:

Which in the current context is a sick joke.

And an appropriate epitaph for George W Bush’ s maladministration in favour of the rich.

Sad to see that a tax accountant couldn\’t realise that the estate was settled under a will written under previous tax law. All to spouse, foundations and so on, things which aren\’t taxable anyway.

Don\’t raise taxes says the TUC (and Ritchie?)

So, a new paper from the TUC. Written, I suspect, by our favourite retired accountant.

There\’s the usual blather about an entirely unimportant hobby horse. The no VAT on packages under £18 from the Channel Islands…..this is 0.1% of the VAT tax take, even on their figures, and 0.02% of the total tax take. Rounding errors really.

But this is cheering:

\”At present we argue that there is no economic justification for…tax increases….\”

Excellent, so, perhaps Ricthis would like to stop plotting all those wonderful tax increases he has up his sleeves then?

Part of the tax gap

As we all know, our favourite retired accountant tells us that there\’s a huge amount of tax being left unpaid. One of the numbers he uses to get to his sky high estimate is tax debts….taxes which everyone agrees are owed but which never quite manage to get into the Treasury\’s coffers.

First Quench Retailing, owner of the Threshers off licence chain, crashed into administration last autumn owing HM Revenue & Customs £24.7m in unpaid VAT, excise duty and National Insurance arrears, new documents reveal.

That\’s where some of it is and it\’s very difficult indeed to see how it could be any other way.

If we\’re going to have a system in which bankruptcy is an option, in which bad businesses get swept up and the assets redistributed to those who can make better use of them (and this is absolutely vital to an efficient economy, that this happens), then we\’re always going to have instances where tax goes unpaid.

Which means that we really cannot just run around shouting that if only we collected all our tax debts then there wouldn\’t be any deficit. Because there are always going to be instances when there is indeed a tax debt but simply no money to pay the tax debt.

I can\’t remember whether HMRC is still a preferred creditor or not: doesn\’t matter, for there will still always be instances where this happens, given that tax is paid in arrears.

Oh, and as to the mooted new law about not selling alcohol below cost:

As soon as First Quench collapsed a fire sale of assets – and stock – began. Thousands of customers flocked to its stores to pick up cut-price bottles of wine and spirits.

How\’re you going to deal with that laddies?

How wonderful

Our favourite retired tax accountant gets a mention in The Guardian today on the issue of tax avoidance, tax evasion, tax debts and the tax gap.

It\’s worth reading the comments there. A goodly proportion of them are about how, umm, interestingly creative, Murphy\’s estimates are.

Perhaps the message is getting through…..

It\’s the way he tells \’em

Guess who?

Now I wonder why they looked at the USA when the proposal being made here is that CGT be changed so that it is paid at the taxpayers highest marginal income tax rate.

Nigel Lawson did that in 1988. As a result we have a case study on whether it worked or not reasdilty available.

The stats are here.

The yield rose by 68%.

Odd that the Adam Smith Institute didn’t spot that.

Do, please, look at those stats.

1) They are not inflation adjusted.

2) Anyone remember what else happened in 1988/89? No? How about the peak of the Lawson Boom?

Yes, how remarkable, CGT revenues rose in a boom.

Now, let us have a closer look. CGT revenues in 1987/8, the tax year before the rise in CGT rates, were £1,379 million. In 93/4 they were £710 million.

That may be many things (for example, the effects of booms and busts upon CGT revenues) but it most certainly ain\’t an example of a sustained rise in CGT yields from a rise in CGT rates.

This just in

From our favourite retired accountant.

The government has announced the first round of cuts in government spending. At just over £6bn they represent just 0.8% of total forecast state spending this year, and by themselves are insignificant to the economy as a whole.

Any government could make savings of this amount as part of regular spending reviews on an ongoing basis and they would not be noticed.

How excellent, eh?

We could cut 0.8% of GDP from the government bill on a regular basis….every 6 months or so….and no one would even notice. It\’s easy! Hurrah!

So, all we need is a decade of that, we\’ll slice 16% off the burden and have fructifying going on in pockets everywhere. Finally, a suggestion from Ritchie that I can really get behind!

This is more of the usual though:

This belief in so called ‘supply side\’ economics has been discredited worldwide: there is no evidence it works.

The evidence being that when places like Sweden *, New Zealand, Canada and so on faced towering debt burdens and sluggish growth, exactly these sorts of supply side policies, market liberalisations, are exactly what dragged them out of the cacky.

But there\’s none so blind who will not see and all that…..

*The welfare system that had been growing rapidly since the 1970s couldn\’t be sustained with a falling GDP, lower employment and larger welfare payments. In 1994 the government budget deficit exceeded 15% of GDP. The response of the government was to cut spending and institute a multitude of reforms to improve Sweden\’s competitiveness.

Arguments that don\’t totally convince me

Until multinational corporations are required to have non-execs from outside business they will not be brought to account.

And don’t argue the skills aren’t possible. We run governments on this basis…..

I can\’t say that I\’m entirely convinced that bringing the standards of transparency, effectiveness and efficiency of government to multi-national companies is actually a step forward.

Ritchie of course disagrees.

On the economics of taxation

Guess which retired accountant needs to read up a little bit more on the economics of taxation?

Capital is an accumulation of property rights based on these and is not in itself wealth generating

That is why it should be taxed more heavily

The general consensus among economists is that returns to capital should be taxed more lightly than other sources of income precisely because the employment of capital is wealth generating.

And no, this isn\’t some neo-liberal baby eater consensus. It\’s how the achingly socially democratic Nordics operate for example. It\’s even the received wisdom at the OECD.

A tale of two charts

Ritchie gives us this chart:

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It shows the distribution of household incomes in the UK. According to Ritchie it shows that there is clearly and obviously a bias in favour of the rich, one which we should do away with by taxing them more and redistributing that money to the poor. Do note that this is post tax and post benefit systems (although not post government supplied services which will roughly double the incomes of those in the poorest decile).

Here\’s another chart:

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This shows the absolute standard of living of the poorest 10% in various countries. Yes, this is post tax and post benefits and makes attempts to include the value of government supplied services.

(By measuring at PPP and then translating those standards of living into a percentage of US median income we are able to get something which is truly comparable. The original underlying paper does indeed discuss such things as the more market based health care in the US against the free at the point of use most other places, differences in food prices and so on and still comes to this conclusion about absolute living standards.)

Well, as you can see, the absolute living standards for the poor in the UK, US, Sweden and Finland all seem to be around and about the same: between 35% and 39% of US median household income.

But as we can also see the redistribution in such places as Sweden and Finland leads to the top 10% of households enjoying only slightly above US median lifestyles while the UK and US systems seems to allow much greater than this.

So we would seem to have two systems of getting to the same end: that end being a certain lifestyle available to the poorest in the nation. We can have a very high level of curtailment of the living standards of those at the top and this lifestyle of 35-39% of the US median income. Or we can have much less curtailment of those lifestyles at the top and still have this living standard of 35-39% of US median income for those at the bottom.

Which you prefer, well, let\’s try and think through that. Which system provides the greatest amount of human joy and utility? The one where we take care of the poor and allow others to flourish or the one where we deliberately limit the flourishing and yet provide exactly the same standard of living to the poor?

Ritchie says limit the flourishing. I say provide the poor with the lifestyle while allowing the maximal flourishing possible consistent with doing so.

As Ritchie says:

That’s the difference between left and right.

That underpins what this blog is, in its UK context, about.

Well, quite, I think that is what his blog is about, it\’s also what this one is about.

Which version of the world, which socio-economic system, you prefer is entirely up to you of course. But I\’ll argue until the day I\’m dead that my preferred system is the only one which can possibly be called \”liberal\”.

Ritchie tells us all who really caused the crash

An interesting analysis really:

The reality is more significant. Ordinary people – the vast majority of people – were in reality priced out of some basics of living, like housing, by an elite. That elite – the holders of the vast majority of wealth – forced up the price of many assets – housing in particular. The result was people had to borrow more and more, and one income households had to become two income households and still borrow more and more, just to secure a roof over their heads.

So who were that elite?

On the evidence given there it was the local council planning committees.

The price of houses did not change at all during the boom: houses were, as they always are, at or around replacement cost. What did change in price was the right to build a house on a specific plot of land. A right that is artifically created and very much artifically limited by those planning committees.

The solution is therefore to change the method of allocating planning permission.

So, following Ritchie\’s analysis we get to burn the bureaucrats anyway.

Good Oh!

Oh dear

Yes, you can guess who this is from:

I wrote about short selling and the danger it causes a few days ago and the right wing blogosphere – blinkered to a man (are there any right wing women?) – led by Tom Worstall (as usual) responded with the usual clkaims that a) I had no clue on the issue b) there was no problem c) there were no consequences.

They are, of course, completely wrong. If you assume markets are efficient and allocate resources perfectly – as these bloggers do – then of course the outcome is always perfect. The reality is that markets are hopelessly inefficient much of the time – because they work on imperfect and not perfect information – and as a result the damage caused is substantial.

Dear Lord Almighty. Is there nothing this man cannot misunderstand?

The assumption that markets are efficient is not that they allocate resources perfectly. It is that markets process the information about what prices should be in markets efficiently.

Further, no one at all argues that markets work upon perfect information. Indeed, the assumption is precisely the opposite, that of necessity everyone always works upon imperfect information. \’Coz we\’re talkin\’ about the future, see? Which is inherently unknowable.

Indeed, if perfect knowledge of the present were possible then central planning would work. But, as has been pointed out in the socialist calculation problem, perfect information, perfect knowledge, even of the present is not possible.

So we do not, at any point assume perfect information: we assume exactly the opposite, imperfect information…and then go on to ponder what is the best method of processing that imperfect information to get as good a view of reality as we can….which turns out to be markets for they are efficient at processing such information as we do have.

Lordy be…..

Exploring Ritchie\’s logic

This is an amusing piece from our favourite retired accountant.

But this artificiality will not be the end of the problem. Copying the culture and failed policies of the Republic will be the biggest disaster for Northern Ireland. As the Republic has now resoundingly proven, building an economy on the basis of corporate tax rate competition does not work. That policy has virtually bankrupted the Republic. Why on earth would anyone want to replicate it?

Note the logic. Ireland had/has low corporate tax rates. Ireland had/has an economic collapse. Therefore Ireland\’s economic collapse came as a result of low corporate tax rates.

It\’s that last sentence there which is suspect. Suspect as in \”batshit crazy\”.

Ireland\’s problems came from being in the euro, meaning interest rates entirely inappropriate for a real estate bubble.

But of course for Ritchie the idea that the State doesn\’t take a substantial portion of economic activity is the cause of all troubles.

My lord the man has problems understanding markets, doesn\’t he?

Ritchie:

FT.com / Currencies – Bets against the euro hit record levels.

Short-term speculators have raised their bets against the euro to record levels.

Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed speculators extended their short positions in the euro from 103,400 contracts to 113,900 contracts, or $18bn, in the week to May 7.

With complete contempt for society as we know it the markets attempt to bring down the Euro, utterly indifferent to the consequences for democracy, ordinary people, peace or anything else.

And you wonder why so many of us want hedge funds regulated?

Let’s start with defending society as we know it as the opening bid and move on from there shall we?

He gets his answer in the comments:

That’s not how futures markets work. There is an equal amount of long interest. Some people may be long but there is an equal amount of “speculation” or it could just as easily be “hedging”

To which our favourite retired accountant says:

How do you know

Why is the FT wrong?

Because of the way that futures markets work. By definition for every short speculator there must be a long speculator. For where is the short speculator going to buy his speculation from if it isn\’t from somone taking the other side of the bargain?

Think on it a moment. A short position is simply a bet. I think the euro is going to fall!

OK, great, now how can you make money out of that? Yes, that\’s right, you\’ve got to go along to someone show thinks that you\’re wrong. Someone who is willing to put their own money where their own mouth is. Someone, in short (sorry) who thinks that the euro is not going to fall. So, this other bloke, you give him some money (the premium) and if you\’re right in the bet and the euro does fall then you get some of the other bloke\’s (the long) money. If it doesn\’t fall, he keeps your money.

In an option, at least. With a future it\’s a even simpler. If the euro falls he gives you money, if it rises, you pay him.

By the very definition of it being a derivatives market there must be, by definition, as many longs as shorts.

Otherwise, who would the shorts be betting with?

Knickers twisted

Ritchie and the Tax Justice Network are up in arms that FIFA (the soccer bods) demand that FIFA be free of tax.

This is extraordinary.

Take, for example, the case of South Africa. It has spent a fortune building facilities for the Wold Cup and it seems unlikely that FIFA will be allowing it any return at all.

This is straightforwardly abusive, and abusive in the private interests of an enormously wealthy elite.

Right around the world people should be profoundly disgusted at this abuse of developed and developing countries alike.

Extraordinary, eh?

Following Christian Aid\’s superb report on the use of offshore tax havens in football, we thought we would draw attention to something else unhealthy in the not-so-beautiful game. This is South Africa\’s Revenue Laws Amendment Act 20 of 2006, which football\’s super-wealthy governing body FIFA demanded as a price for allowing South Africa to host the World Cup.

What this Act does, in effect, is to ensure that this struggling African country cannot tax super-profits that FIFA earns.

Gosh!

All of which makes Ritchie and the Tax Justice Network look a little dim really. For international organisations routinely don\’t pay local taxes. It seems to be part and parcel of being an international organisation.

Here\’s HMRC on the tax arrangements for the Olympics in London:

Who is likely to be affected?
1. The London Organising Committee of the Olympic Games Ltd (“LOCOG”,
the company set up to organise the Games), the International Olympic
Committee (“IOC”), and non-UK resident competitors and support staff
temporarily in the UK for the Games.
General description of the measure
2. These measures will exempt LOCOG from corporation tax and will provide
powers for regulations to be made in relation to the IOC and non-resident
athletes and other persons temporarily in the UK to carry out Olympicrelated
business. The powers will allow provision to be made to ensure
that the IOC\’s revenues generated from the Games, income of non-UK
resident athletes from their performance at the Games, and income of
other persons temporarily in the UK to carry out Olympic-related business
will not be chargeable to corporation tax, income tax or capital gains tax.

Here\’s the World Bank on staff taxes:

Under a treaty concluded with the U.S. government when our headquarters was established, foreign nationals are exempt from federal and state taxes on World Bank Group income. U.S. citizens working for the World Bank Group are required to pay federal and state taxes on their salaries. To keep after-tax income in line for all staff members, our salary scale is on a net-of-tax basis; staff members who are liable for income taxes receive a tax allowance. All staff members also pay local property, sales, and other non-income taxes. These tax arrangements are similar to those of other international organizations.

Here\’s the IMF on staff taxes:

Tax Equalization Adjustments

The IMF strives to treat all staff equitably regardless of nationality, a principle which extends to tax treatment. The Fund\’s base salaries in Washington, DC, are paid net-of-tax. However, because some staff members are liable to income taxation on their Fund earnings while others are not, tax equalization adjustments are applied to two potential sources of inequity:

* Tax Allowance for U.S. Taxpayers
Although IMF member countries have agreed to exempt from taxation Fund staff who are nationals of other countries, they may impose taxes on their own nationals. As the United States taxes U.S. nationals on their Fund earnings, the Fund pays a \”tax allowance\” to staff members paid on a net-of-tax basis who are subject to U.S. national, state, or local income tax on their Fund compensation.

Here\’s the OECD on staff taxation:

Emoluments are exempt from taxation in most Member countries of the Organisation, including France.

Here\’s the European Union on the taxation of staff:

As a European civil servant, your salary is not subject to national income tax.

And don\’t forget, this non-payment of local taxation now extends to MEPs as well! Yes, really, since the euro-elections of last year MEPs no longer pay UK income tax on their salaries. They pay the special EU rate, something which saves them around £1,700 a month on their tax bill.

So, there\’s nothing extraordinary about this at all. International organisations routinely don\’t pay the taxes that the rest of us plebs have to pay. International sporting organisations routinely don\’t have to pay the taxes that us plebs have to pay.

Oh, and did you notice the bit where FIFA is a charity? Charities don\’t pay taxes either. As the Tax Justice Network doesn\’t pay the same taxes that the rest of us plebs have to pay….and nor does the Scott Trust (which as we know owns the Guardian).

I do look forward to John Christiansen\’s and Richard Murphy\’s next visit to the World Bank, IMF, OECD and or EU and EU Parliament (and of course Guardian newsroom) you know. I really do.

This is straightforwardly abusive, and abusive in the private interests of an enormously wealthy elite.

They will tell them that, won\’t they?

And send in a cheque for what taxes the TJN doesn\’t pay like the rest of us plebs have to?