There really is a Laffer Curve

As Italy swelters in temperatures of up to 40C, the country\’s marinas should be packed with bronzed sailors in expensive deck shoes tending to their gleaming yachts.

But Italian boat owners are feeling the heat not just from the sun this summer.

Thousands are weighing anchor and fleeing with their gin palaces to quiet corners of the Mediterranean to escape a tax evasion crackdown – part of efforts by the government of Mario Monti, the prime minister, to tackle Italy\’s €1.9 trillion public debt.

Tax yachts highly and yachts will disappear:

But yacht owners have a unique advantage over shops, restaurants and other businesses: they can simply sail their assets away on the open sea.


29 thoughts on “There really is a Laffer Curve”

  1. This has nothing to do with the Laffer Curve.

    These yachts are being removed from Italian marinas not because taxes on yachts are being raised (and they are moving to cheaper regimes) but because they are evidence of tax evasion and the yachters are hiding from tax authority investigation and possible criminal prosecution.

  2. I disagree with Shinsei67 above. The Laffer curve applies just as much to the black economy as it does to the legit one.

    Italy has a rate of tax evasion akin to Greece – i.e. shocking bad. This means that there are two levels of tax take in those countries, the official one and the real one. If we take the real tax levels and admit that this means that many have disposable incomes which are relatively high, so they buy goods and services, such as yachts. These yachts have a large service industry around them of marinas, shipwrights, boat-builders, engineers, suppliers of all kinds and so on.

    Now let us factor in Monti’s government who simply want to collect the legit levels of tax plus a bit more. The levels of tax in the real economy have now effectively risen. Whether the yachts were or were not an expression of tax evasion does not matter. The fact that they are now departing latin and Greek shores for more relaxed tax regimes is a direct expression of the Laffer Curve in action. That Italian businesses have suffered is a real consequence of real tax increases.

    There is a yotty situation closer to home which demonstrates another example of Laffer but on a smaller scale. This is where the EU has now decided that VAT and duty should be charged on all diesel fuel used on pleasure craft. There was some chuntering amongst UK yotties last year, but for once HMRC has decided to be sensible about this and re-interpret the rules in favour of the taxpayer. Basically, every dockside diesel facility in the UK has no ability to supply untaxed (white) diesel and so they have let it go for the moment. So far, so good.

    But, a lot of East Coast yotties like to go off to the other side of the North Sea, the Baltic and so on. In so doing, they will almost certainly be carrying in their fuel tanks, red untaxed diesel. The Danes seem to be fairly relaxed about this. The Dutch are sitting on the fence. But the Belgians, as model EU members, are threatening that any UK registered yacht entering Belgian territorial waters with red diesel in their tanks will be subject to large fines. I suspect that there will be many fewer UK registered boats in Belgian ports from now on.

    As I understand the situation at the moment, the French – ever mindful of the rumble of laden trolleys issuing forth from Carrefour and the like, along with the considerably and commensurately reduced freeboard of Brit yachts heading North across the Channel – have taken a thoroughly Gallic disinterest in the colour of diesel in the fuel tanks of those flying the Red Ensign. And how very sensible the French authorities are too.

    As an aside, large yachts in the Med represent a big chunk of valuable capital which is in a moderately liquid form. If I was a resident of a country whose currency or financial status is looking questionable, I would view a yacht as a useful means of transferring potentially dodgy local currency into definitely hard currency, by moving it quite literally offshore.

  3. @David Eyles

    These yachts moving offshore are clearly not responding to the Laffer Curve they are responding to a binary situation of flight or criminal prosecution.

  4. @Shinsei67

    Criminal prosecution from what? I suggest that it is flight from a tax regime which has altered, in this case retrospectively, from a low taxation situation (in real terms) to a high taxation situation (again, in real terms). Whether there are prosecutions pending or not, it does not really matter.

  5. David

    Why do we have red diesel anyway? Isn’t it time that anomaly (sorry, subsidy to farmers) was eliminated?

  6. Surely, with yachts, it is easier than moving them around? Just change the registry to somebody who has no interest in or competence to work with the Italian tax authorities? Or do we reckon they’re up to hunting down international chains of ownership?

  7. Bit difficult to deny you own a yacht, isn’t it? Aren’t there registries and stuff for these things?

    And in any case, if it belongs to your business or offshor etrust fund it isn’t yours anyway, you just get 100% exclusive use of it.

  8. The tsx-evasion argument in the article and shinsei is bs. A new tax on yachts eas introduced as part of the tax reform package, IMO mostly as a symnolic sign that they were taxing also the rich and not only “reducing pensions” of the poor

  9. ‘Why do we have red diesel anyway?’

    Because the tax on diesel is a road tax, to pay for using the roads. The clue is in the name DERV -Diesel Engined Road Vehicle. If you aren’t using the roads why should you pay road tax?

  10. Jim,

    Bollocks. Farm vehicles running on red diesel use public roads. Especially the A2 – which is why it is still classed as an A road despite being a four-lane motorway really. Farm vehicles are only banned from motorways.

  11. @Frances Coppola

    Red Diesel: Think about what diesel is used for. It is used to transport just about everything you own, whether by sea or by land; on roads, water and rail. It is also used for construction plant, forestry and to generate electricity. If you tax all of that, then you you raise the cost of everything. The exception is road transport on public roads, where it is taxed because the government want the revenue, so untaxed diesel is marked with a red dye so that it can be detected by HMRC.

    Now for tractors. Everything a farmer does is dependent upon diesel. If you tax farm diesel then you raise by a substantial margin, the cost of food. Is that really what you want? There may be a legal anomally in allowing red diesel to be used by agricultural, forestry and construction tractors on the public highways, but that is but a tiny proportion of the total of diesel used in the production of food. So your standard of living and your disposable income (and ultimately our national GDP) is directly related to the fact that your food bill is a small proportion of your outgoings, and you therefore have more wealth to spend on other things.

    I look at fuel duty and VAT on diesel from the other angle. If George Osborne had the courage (which he manifestly does not) he could reduce to zero all tax on diesel. If he were to do so the cost of transport would be dramatically reduced across the board. And that would be of huge benefit to our economy because the cost of just about everything would be reduced.

  12. Wasn’t there a story about John Kerry keeping his yacht in a state that taxed it far less than the one he was resident in?

  13. It used to be the case that you could get tax advantaged domicile status in Croatia almost regardless of how long you actually spent in that dump if you parked your yacht there. If that’s still so I’d be tempted to chug along to Dubrovnik.

  14. David @ 13. C’mon, by all means argue for lower fuel duty in general (I’m biased cos fuel is a tiny part of my expenses). But red diesel (or no tax on any diesel) is pretty hard to defend.

    1. Fraud – no idea how high, but I doubt 100% of red diesel is used in agriculture.

    2. If you have no duty on diesel, everyone switches to diesel.

    3. How much of the cost of anything is represented by transport costs, let alone the difference between high or low taxed fuel? I’m guessing bugger all – rhat’s why we import things from China, and why agricultural produce goes back and forth to central depots before going to supermarkets.

    4. Food prices – how much of our weekly shop is represented by diesel? How much is UK sources anyway? If you want cheap food, just import it from Brazil, Argentina, NZ etc.

    5. Virtually all damage to roads is done by HGVs and tractors. Make the bastards pay. Put UK farmers out of business (see imports above), build on their land, and save housing costs (more of a problem than food costs – there are more overfed ie fat people in UK than over housed).

    Might be an environmental angle as well, but it’s pretty irrelevant.

  15. Think about what diesel is used for.

    And there’s an argument that can be applied to any and all consumption taxes. Doesn’t make it wrong, of course, but it is difficult to single out red diesel as the clearly deserving resource.

    BTW – if I was going from the UK to Belgium, I might have a phantom stop in the Channel Islands to justify my tanks full of untaxed salad cream.

  16. Cruising around the (gorgeous) marina in Bodrum, Turkey I was struck by how many of the yachts were registered in the US. My casual survey made me think it was most of them…

  17. “I’m guessing bugger all – rhat’s why we import things from China”

    Uh, Western countries import things from China on container ships, not overland by truck.

    Water has been the cheapest means of moving bulk goods for thousands of years. Ancient Rome imported more of its food by sea from the Med than on carts from Europe, and when I emigrated I was charged more for bringing my stuff the last thousand miles from Vancouver to my house by train and truck than for shipping it from my house in the UK to Vancouver.

    The higher the cost of land transport fuel, the cheaper imported goods become in comparison. There are probably many things in the UK which are cheaper to ship from China to the nearest port and then by truck to the store than to drive in a truck from the other end of the country.

  18. ATQ – how much does the price of diesel affect me when I buy something? Let’s say an IPad and/or a pound of potatoes? I genuinely don’t know, but I suspect damn all. Happy to be enlightened.

  19. Edward @19, and another thing, I’m hazy on the “incidence” (thank you Mr Worstall) of diesel prices, but are you seriously telling me that those nice non-profit seeking hippies at Apple would pass on to me the benefits of any reduction in diesel prices? Same goes for those altruistic farmers and the well known bleeding hearts at Tescos.

  20. Diesel and petrol taxes are really a congestion charge, crudely applied. (Albeit Tim likes to pretend they’re a carbon tax.) It does make some sense to exempt agricultural vehicles from paying such a charge.

    It seems that number-plate recognition technology has now reached the point at which it would be practicable to employ a direct congestion charge – we’d have to make the registered vehicle keeper liable for it. I’d be in favour of doing that, reducing fuel duty to a level that makes sense as a carbon tax, and abolishing the agricultural exemption from it.

  21. Yes, scrapping fuel duty while adding the tax on elsewhere could work. Simply scrapping it could work if we also want more cuts in services to balance the books.

    I buy some stuff from suppliers, either get it delivered by van or truck. Free delivery – I daresay if there was a reduction in fuel duty I’d not notice any change in price I was charged to receive goods. One transit van delivering similar goods as I get can carry £10,000 – 20,000 retail value goods in one day’s deliveries. Fuel used would be tiny in comparison to value of goods – how much does the transfer of goods cost per item?

  22. @Luke #21

    the Apple prices would not change very much at all due to their position in the market as the overpriced option.

    Tesco is a different matter as they are fighting in what is pretty close to a free market for a share of said market. If they didn’t drop their prices, then you can bet your bottom dollar that they would lose out as the other major retailers did…

  23. Well, in NZ all diesel is sold “tax free” that is, it has no road tax applied. Anything that drives on the road and uses diesel must however pay a fee per km by way of a track able licence that must be displayed. Get caught without it = significant fine.

    Boats don’t pay because it’s a road tax, neither do tractors used off the road, but when driven on public roads have to pay. And the payment is based on weight class on the basis that it is the weight that damages roads and thus needs to proportionately fund the maintenance.

    Other taxes such as GST (VAT) do apply to all uses.

  24. Red diesel in the UK is for any vehicle which is *primarily* used off road. It is allowed to use the road for brief periods, such as to get from site to site, but that’s it. So tractors can use red diesel to get to the field from the farm. But they can’t use that tractor to go shopping from the farm.

  25. Worstall. There is no Laffer curve except at it’s extremities and my cat could work that out.

    Everething else is subjective to human decision making, not pretend mathematics.

    You really need to get out more.

    Yachters don’t give a shit about anything save themselves.

    If you think that’s vindication for your subhuman ideology then it’s no wonder you swim againat the tide.

    Though sadly you probably represent part of the tosspots that influence the failures of the economy over the last few decades.

    And you strut proudly, like a diseased peacock.

  26. What’s your vision, Worstall. Spell it out.

    i want to be able to assess how you will turn the UK around.

    No, not an equation, or a parrot of some cunting failure, what is your plan.

    Or are you too stupid and too hooked on such expressions as “teh gayers” and being a mysoginistic arsehole?

    Come on and match Murphy with a counter-vision so your cringeworthy delusionist nobodies can attempt to string a few words together that aren’t meaningless wankstains.

    As ever, I use the language of your friends.

    Nice friends.

    Someone recently insulted my intellect too. Sad and preposterous, even if I say so myself.

  27. Pingback: Real Life Example of Laffer Curve in Action |

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