Ragging on Ritchie

Apparently I\’m funded to attack him.

That\’s the implication here.

No, I\’m not, sorry. Some things are done just for the pure joy of it all.

Utility maximisation as the economists call it.

Update….lovely comment over there:

This is absolutely fascinating Richard – if the attacks by right-wing “libertarians” (I’m putting that in inverted commas because if their objective is to eliminate dissent from anyone who doesn’t share their POV then they’re anything BUT libertarian) on your blog are part of the same pattern, it explains a lot.

There really is a certain logic fail here.

The original complaint is about a group voting down stories on Digg so that they never see the front page and thus never get any publicity or traction.

Apparently this is now the same as my drawing attention to Ritchie\’s views so that more people see them and are able to discuss them and consider them.

Giving something publicity is now the same as denying something publicity?

Sheesh.

No, this is not a dig at Ritchie, this is to praise Ritchie!

From the depths of the Google Cache and well timed screen shots being taken.

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Right, so in the comments there was then:

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Now the reason this is a congratulation to R. Murphy is that we can now see that he is in fact able to correct errors.

OK, delete them rather than utter a \”whoopsie\” but that is an improvement still.

So, nominations for any other errors that should be corrected?

Upon the incidence of corporation tax

Ritchie faces up to the fact that the incidence of corporation tax is a little more complex than \”companies pay it so there!\”.

Which is, it has to be said, an advance on his earlier thoughts on the subject.

The argument is whether the tax is paid by corporations themselves, their owners, their employees or someone else – for example their customers. This is an issue to which I will be returning quite soon – because it has some significance for the recent reviews on some aspects of corporation tax recently announced by HM Treasury. Suffice to say I take the view that all these outcomes are possible – which puts me in marked contrast to those from the political right who argue that corporations can never pay tax and as such should not be taxed (although they’re rarely quite so bold as to specify it quite like that – but there’s no doubt that’s what they seek).

No, the one set we know to not pay the tax are the companies themselves. For they simply cannot pay a tax: there\’s no \”there\” there to pay one. Both St Cable of Vince and Larry Elliott are with me on this one.

It must be some combination of shareholders, employees or customers.

As such it was good to see that the NYT blog was conditional in its conclusions. It said that if a corporation tax was charged in a closed economy then the charge would end up being paid by the owners of capital – whether by reducing the retained earnings of the company or by reducing distributed earnings.

This is true. In a closed economy the burden of a business profit tax will be carried by the providers of capital: shareholders in the case of a corporation, just as it would be partners in a partnership.

On the other hand in an open economy – one without capital controls and where trade is wholly or largely unregulated- then it is possible that the charge can be transferred onto labour.

Not quite. It\’s not quite just the legal restrictions upon the movement of capital and or trade. It\’s the actual openness…modified by all sorts of things other than legal openness. In a 100% open economy, one where national boundaries made no difference at all to how and where capital was invested and where adjustment was near instant to changing incentives then 100% of the burden would be (not \”can be\”) transferred to labour.

But we know there are many things which make, even in the absence of any legal restrictions, capital not entirely and wholly openly liquid. From Adam Smith\’s observation that merchants prefer the domestic to the foreign trade to language and cultural difficulties and so on.

Which is why all of the estimates of how much of the burden falls upon labour even in the most open economies are less than 100%. It\’s not just the law that matters.

We can also turn that around and point out that even where the law does insist upon a closed economy such taxation will not be 100% be borne by capital simply because there will always be those willing to break the law: as there were indeed back in the days of capital controls. Please note that this not is condoning the breaking of the law (despite my personal conviction that it is immoral of the government to tell people that they cannot take their own money elsewhere), rather, just pointing out that we do, when designing any system of anything, have to consider the effect of the scofflaws. As examples, the illegality of drugs certainly and prostitution possibly create vastly worse results precisely because of those scofflaws and the black markets that grow up around them than an acceptance of such damage and a controlled legalisation would do.

So, as I say, we need to consider, even if we do not approve of, the costs of law breaking.

But these are rather quibbles when we get to Ritchie\’s new idea:

The reality is that we do, of course, live in open economies. But the fact is that tax has, by and large, sought to create the environment of a closed economy whilst allowing free trade so that the benefits of tax being charged on capital can be secured at the same time that trade can take place. This was the underlying direction of travel of a great deal of tax policy for the last thirty years, and rightly so.

This is now in danger. The important combination of residence based taxation, controlled foreign company rules, the taxation of dividend income from overseas subsidiaries and the application of strict transfer pricing rules was not chance: it deliberately created a closed economy for tax. Dismantle any one of those elements and an open economy for tax is created. This appears to be the objective of the ConDem coalition government – and it is profoundly dangerous. It might remove forever the chance to tax capital.

Err, no. Do you see what he\’s done there? Yes, exactly, he\’s begged the question, a marvellous case of petitio principii. He\’s gone from \”taxing corporations in order to tax capital\” to \”tax capital\”.

The argument we\’re trying to explore is not whether we should tax capital it\’s whether taxing corporations is a useful method of taxing capital.

That may be what the Tories and the Orange Book Liberals want – because it ensures that a whole raft of funding for government is eliminated for good – but the result is either a massive increase in the taxation burden of ordinary people or a loss of well being on their part.

Which of course is nonsense: for we\’ve all already agreed that the open economy bit means that the burden of corporation tax is largely borne by ordinary people (some 70% of it is according to the CBO, more than 100% according to Mike Deveraux, someone who Ritchie will never agree with)….even under this \”closed tax system\” that Ritchie insists that we currently have.

My assumption is that he\’s preparing a report for someone or other and is desperately trying to find some logical justification for insisting that corporation tax really is paid by rich bastards so that\’s OK then, despite all the economists who talk about the economics of taxation disagreeing with him.

Aaaaand he\’s back!

Yes, Ritchie is back from holiday so we\’ve a bumper edition for you today.

First up, bankers:

We are told, perpetually, that bankers will leave the UK at the drop of a hat.

And i perpetually respond that they won’t – because London is the only place where they can make profits of the magnitude they do because they need the cluster of banks that operate in London to create their exploitative markets.

I think Our Ritchie could do with reading some financial market history. For example, on why the Eurobond markets are in London in the first place. You know, that US witholding tax on interest that was imposed, leading to hte entire market moving offshore?

Mark Field says:

The recent attacks on the zero-10 tax regimes reveal a worrying trend, in which the sovereignty of independent states to set their own tax rates is undermined and high-tax countries seek to export their high tax rates around the world.

And Ritchie says this is all rubbish because:

All the usual nonsense was put out on display – including defence of zero ten in Jersey and Guernsey even though the EU has declared it unacceptable.

That is, high tax countries are not exporting their high tax regimes, the sovereignty of independent states to set their own tax rates is not being undermined, because high tax countries have declared the sovereignty of independent states to set their own tax rates is \”unacceptable\”.

For our next logical trick we shall show that kittens are not cute because kittens are in fact cute.

On the size of the tax gap:

Although the TUC has argued that the tax gap created in UK Government tax receipts as a result of offshore centres is some £25 billion, the Deloitte report commissioned by the Treasury at the time of the Foot report showed that only £2 billion is potentially lost in tax leakage per annum.

In response to which we get:

First, there is no suggestion whatsoever in my TUC calculation that all the loss referred to arose offshore. Far from it in fact. So the claim in the context he made is wrong. Second, even HMRC dismiss the Deloitte claim in their October 2009 report as ludicrous. HMRC said in December 2009 that large business (most likely to work offshore) avoided at least £3.1 billion a year in tax – substantially higher than the Deloitte number, showing just how ludicrous the work of that firm was (and what a shocking waste of taxpayer’s money it was to give them the commission to do the work).

See what he\’s done there? My estimate was not all about offshore. HMRC\’s estimate was not all about offshore. But Deloitte\’s estimate was all about offshore. Therefore I\’m right and Deloitte\’s is wrong.

On the opening of Jersey Post to private sector competition:

So, to fuel tax abuse in the UK the local people of Jersey are to lose their postal service.

This is the madness of states captured by the financial services sector.

This is the madness of deregulation.

This is the abuse of ordinary people caused by big business determined to tax avoid.

It is this madness which is breaking down the structures of society.

And this is why it has to be stopped.

Entirely blind to the real reason for such competition: it\’s EU law that such postal monopolies must be opened to competition. Strange really, given that he insists Jersey must follow the EU on the zero ten tax thing but not on postal deregulation.

And on the Robin Hood Tax:

Yes – users will end up paying

Good, glad we\’ve got that sorted out. It won\’t be banks that pay it, it\’ll be everyone who uses the banking system.

2. True. It is meant to be a stamp duty, but one which is paid by banks so impacting their profit.

Eh? We\’ve just agreed that banks won\’t be paying it, users will be. So what is this about banks paying it? To directly contradict yourself from point 1 to point 2 is pretty good work really.

3. No, not at all. The tax can be enforced wherever the bank is located because it is on currencies

Which is the reason why the tax is illegal under the EU rules on the free movement of capital.

So good to have him back from his hols, isn\’t it? Where would we be without such clear analysis and logic?

Your economics lesson for the day

Here are two important cases where this distinction has important policy implications:

  1. Corporate taxes. I\’ve gone through this point several times (most recently here) and I\’ve compiled a reading list on the topic over here. If you assume that we are in a small open economy where capital flows freely, the supply of capital is relatively elastic. This corresponds to the first set of graphs, and so the result is that very little of the burden of corporate taxes falls on capitalists. Those who claim that owners of capital bear the entire burden are implicitly assuming – as did Harberger (1962) – that the supply of capital is perfectly inelastic. For large countries such as the US, the supply of capital is less than perfectly elastic, so the applicability of small open economy results can be problematic. But the empirical evidence for small open economies is pretty clear: the burden of corporate taxes falls mainly on workers.
  2. Payroll taxes. These include employer contributions to EI and C/QPP as well as Worker\’s Compensation premiums. But as a HRCD survey notes, long-run labour demand is more elastic than labour supply, so the ultimate effect of payroll taxes is to reduce wages: \”labour\’s share of the payroll tax burden in the long run is in the range of 87 to 100 percent.\”

If you\’re concerned about distributional issues, then this is an important concept. It\’s a mistake to go from noting that the statutory incidence is on a certain group of people to concluding that these are also the same people who actually pay the tax. Unfortunately, it\’s also a common mistake.

If only those campaigning to change the tax system actually grasped these points.

What joy

Nor can they abandon tariffs when these are easily the most effective mechanisms, and the cheapest, for ensuring that tax is collected on the limited range of exported goods they have to offer that are vital to their state income. And they also need tariff barriers to protect fledgling enterprises. If these impede the flow of capital to offshore centres, so be it. That is a price well worth paying. Put simply, development comes before the ideology of free movement of capital that secrecy jurisdictions espouse on every occasion.

Countries, economies, that are not developing through a shortage of capital should make sure that no one sends in any capital to aid them in developing.

Well, yes, that\’ll sort it all out, won\’t it?

No Richard, that\’s not what we\’re saying

We discussed if that gap could all be capital allowances as accounts and some of my critics imply – and he laughed at the implausibility of that. He knows – and said he knows  – that this is is also an issue of transfer pricing, of non-remittance of profits captured outside the UK, of genuine tax avoidance – which he admits exists – but towards which he takes a different moral stance.

We all agree that there is tax evasion: that there is tax avoidance. Even that there is tax compliance and tax planning.

What we are saying is that your estimate of the size of (with respect to corporation tax specifically, and if you make this error there we assume you make it elsewhere) tax avoidance/tax evasion is wrong because you have included in your numbers the entirely, even by your standards, righteous use of such things as capital allowances and others  (like the R&D credit) when even you agree that these are either tax planning or tax compliance.

It is the very method you are using to make your estimates, your look at the difference between headline tax rates and effective tax rates, which is at fault.

Think through this for a moment. If the current government goes ahead with lowering the headline rate and paying for that by scrapping some set of those allowances, as they claim they will, then the tax gap, as measured by you, will shrink.

Which really, really, isn\’t what you\’re trying to show, is it?

We get mentioned in Parliament!

Well, in passing perhaps. Ritchie is here in Hansard, in a speech from Stephen Timms. You can see which bits Ritchie highlights here and here\’s a bit that, strangely, he doesn\’t.

However, I am not entirely persuaded by his criticism, or that of my hon. Friend the Member for Hayes and Harlington, of the work of HMRC on the tax gap.

And more:

I believe that it is important, as the previous Government made clear was their continuing intention, to have the lowest rate of corporation tax in the G7. That is why we reduced corporation tax when we were in government, and when we come to debate the rate, as we will in a few minutes’ time, I will press the Minister to reiterate on behalf of the present Government the commitment that was made and indeed fulfilled by the previous Government—to have a competitive corporation tax regime.

And the Minister in response:

HMRC estimates that corporation tax avoidance by large companies amounts to £3.4 billion, and that such avoidance by small companies amounts to £0.3 billion. We have heard a lot this afternoon about the TUC figures produced by Tax Research UK and by Mr Richard Murphy in particular. As I understand it, his figure for corporation tax avoidance is £12 billion. I note that the right hon. Member for East Ham disagrees with Mr Richard Murphy’s estimate of the tax gap. Mr Murphy’s calculations on corporation tax avoidance are on the basis of the gap between the statutory rate, which was 30% at the time of the assessment, and the effective rate, which was somewhat lower. That estimate does not take into account those reliefs and allowances that Parliament has determined should be available, for example capital allowances, to the extent that they are more generous than depreciation treatment would allow. Mr Murphy has acknowledged that point and is considering it further.

Yes, you did read that criticism here first folks.

In addition, as far as we can see, no allowance is made for double taxation relief, which prevents a taxpayer from paying tax twice, in two different jurisdictions, for the same profits. The right hon. Member for East Ham referred to country-by-country reporting, and we continue to consider whether there is a practical way forward in that regard. If we are to have country-by-country reporting, however, double taxation relief becomes all the more important. As far as I can see—if I am wrong, I am sure that Mr Murphy will correct me in his lively and entertaining blog, as he follows these matters closely—the Exchequer cost of double taxation relief is £16.7 billion. It is not clear that that is taken into account in the distinction between the statutory and effective rates. Such a top-down approach does not work for corporation tax.

And yes, that was first pointed out by Christie Malry. Although as I recall, that\’s not an error from the Missing Billions report but from something more recent.

The Minister again:

The Government see the distinction between tax avoidance and tax planning, but those lines can be blurred, and sometimes use of the terminology is not as accurate as it might be. For example, I quote the “Missing Billions” report, produced for the TUC, which, after setting out a series of numbers leading towards the estimate for corporation tax avoidance, states:

“Much may be due to legitimate tax planning, but by no means all is. Some, undoubtedly, is due to tax avoidance.”

My, my, I wonder who it is that has repeatedly pointed to that line?

Oh, and the bit which is definitely us? Yes, that\’s the bad bit sadly:

I note from his blog that he has been on the receiving end of some unwarranted online harassment recently on account of his work.

Play the ball, not the man folks. There\’s entirely enough to work with without turning into sneaks and narks.

Now he\’s trying to write the laws

Yes.

It shall be the duty of the Chancellor of the Exchequer to appoint a committee of inquiry to report within 6 months on the practical action necessary to introduce a banking transactions tax.

What\’s one of them?

For the purposes of subsection (1), a banking transactions tax is a tax, charged at the rate of 0.005 per cent of the value of the transaction, on

Mhm, hmm,

foreign exchange dealings in sterling, and

Ah. Well, we can see immediately at least one thing that has to be done as a \”practical action necessary to introduce a banking transactions tax\”.

Repeal the 1972 European Communities Act.

To levy a tax on the exchange of currency within the EU would, you see, be a restriction upon the free movement of capital. One of the pillars of the Treaty of Rome that is and something that cannot be done without leaving the EU.

Now it is true, I\’d happily trade Ritchie\’s strange obsessions with liqudity in financial markets for being out of the EU. But I don\’t think he realises that that is the bargain he\’s asking for.

Yes, you know, him…..

So, someone does something which I do consider to be more than just a tad unkind.

Richard – a quick check with the Valuation Office Agency suggest you are not paying business rates on your Norfolk premises.

Is this tax planning, tax avoidance, tax compliance or tax evasion?

Either way, I’m sure one of the dreaded far right libertarians will be reporting it.

Apologies for being quite so public school about this but that\’s both being a sneak and playing the man not the ball.

No, that\’s naughty.

However, there really is something much more amusing about it all.

Ritchie is, as we all know, in the vanguard of the revolutionary movement to impose an entirely new definition of tax liability upon us all. Instead of us owing what the law says we should owe, what the law says in detail we should owe, he wants us to be subject to what the spirit of the law suggests we should owe.

So, on the subject of whether Ritchie should be paying business rates on his home office: the spirit of the law is really quite clear. Business rates apply to offices, this is an office, thus business rates apply.

However, that isn\’t what the letter of the law states. Here\’s the case that Ritchie himself refers to.

The Tully case, which turned into a major legal test case for home-workers generally, has now [2003] been resolved. Mrs Tully\’s spare room, complete with airing cupboard and ironing board, is once again officially restored to its original status as domestic premises. At the same time, much of the confusion over business rates liability for home offices has been cleared up.

\”Thousands of home-based workers can breathe a sigh of relief,\” says Alan Denbigh, executive director of the Telework Association and himself a home-worker. \”It relieves uncertainty. The fact that business rates could conceivably be levied and back-dated caused many people concern, even though in practice there were very few cases like this one.\”

The Valuation Office, the branch of the Inland Revenue which assesses property for rates and council tax, also seems satisfied with the outcome of the Tully case, which was heard at an appeal by the President of the Lands Tribunal. \”It was a very significant case. What the President has done is clarified and extended the law. It\’s given the Valuation Office a bit more of a steer,\” says Tony Eden, a policy officer with the VO.

The tribunal ruling – in legal terms, broadly the equivalent of a high court judgment – suggests that home-based working using furniture and equipment of a kind commonly found in ordinary homes can be treated as a normal part of the use of a residential property. This means that home-based employees in situations like Mrs Tully\’s are highly unlikely in the future to encounter problems with business rates. As well as employees, the ruling also helps many self-employed people, including authors and consultants with offices at home.

So, far from meekly accepting the spirit of the law, that spirit needed to be clarified into what the law actually said, in detail, so as to determine who was subject to business rates and who was not. And as Ritchie goes on to say:

And using those criteria these no chance at all my premises should be business rated. For the record:

  1. There is no external signage of a business at my house;
  2. I have no business visitors to the premises;
  3. The office is not suitable to receive business visitors because  it is not set up as an office;
  4. The room where I work is shared with my sons’ model railway – which takes up as much or more space as I do for my work – and they’re in here almost as much as I am  as a result;
  5. The same room also is host to gardening and other domestic equipment;
  6. Nothing has been especially adapted for business use (although it has been for railway use) the room is (apart from fitting railway baseboards) as it is when I moved in;
  7. I do – admittedly – have a business telephone line – but mainly for broadband use. I’ve recently pondered getting rid of it as almost no one calls it any more – modern willingness to call mobiles on all occasions has made it irrelevant.

In other words – there is no chance these are business premises for rating purposes. Which is why they are not recorded as such.

So, d\’ye see? We should all obey the spirit of tax laws, not attempt to rely upon the pettifogging details of what the law actually says.

Except when it comes to determining the liability to business rates of the home office of a mild mannered retired accountant in Norfolk it seems.

Oh aye?

In particular there is substantial evidence elsewhere that infant mortality, life expectancy, violence, trust, social capital and school bullying are all worse in more unequal societies.

Should have included that in your book then, eh?

Comment is Free to become Comment which is agreeable

One quite appropriate response would be to ban those identified to be users of such thuggish approaches to debate from Comment is Free, because free comment is the last thing these people want. As Climategate showed, intimidation is their goal. And that is something that should not be tolerated in democratic society – of which these people are not a part.

Is that censorship? Of course not.

Yes, you guessed.

The ever glorious Richard Murphy

No, really this is glorious.

So we\’ve a set of definitions, of tax evasion, tax avoidance, tax compliance and tax planning.

This is the ex cathedra pronouncement of what those words mean from Il Papa himself.

Fair enough, now let us take him absolutely at his word:

Tax planning

Tax planning is a part of tax compliant behaviour. It is not a part of tax avoidance. Tax law reflects the complexity of modern life and the multitude of choices and options available to all taxpayers when legitimately seeking to structure their affairs. This necessary offer of options within tax legislation creates the opportunity for choice on the part of the tax payer and means that determining the right amount of tax (but no more) that they seek to pay does necessarily requires the exercise of judgement on occasion.

So long as the exercise of that judgement seeks to ensure that the taxpayer makes choices that exercise options clearly allowed by law and that they do not exploit unintended loopholes created between laws then that process of a taxpayer choosing how to structure their affairs is the process of tax planning, which is a legitimate, proper and socially acceptable act.

As example, a taxpayer choosing to save in an ISA (Individual Savings Account) is exercising an option made available to them in law that is entirely tax compliant so long as all the published conditions for saving in that way are met. As a consequence no one can accuse a person using an ISA of tax avoidance. Those who say they are tax avoiding can safely be said to be wrong.

OK, now let us concentrate on the most important part.

People who use tax planning, who use options made available to them in law, as long as they meet all of the published conditions, are not tax avoiding. To accuse them of being so would be wrong.

Excellent. So, let us see if anyone has in fact accused anyone of using such legitimate allowances of using tax avoidance. Anyone? Bueller? Yes:

As a proportion this may be the highest gap of all. Much may be due to legitimate tax
planning, but by no means all is. Some, undoubtedly, is due to tax avoidance.
When this sum is added to the £12.9 billion of tax loss already calculated for individuals
it suggests that the total UK tax gap due to tax avoidance can be estimated at £24.7
billion, and rising.

And isn\’t that just precious. Richard Murphy\’s estimation of tax avoidance falls foul of Richard Murphy\’s own definition of tax avoidance.

Yes, I have left this comment there:

Fascinating stuff:

\”As example, a taxpayer choosing to save in an ISA (Individual Savings Account) is exercising an option made available to them in law that is entirely tax compliant so long as all the published conditions for saving in that way are met. As a consequence no one can accuse a person using an ISA of tax avoidance. Those who say they are tax avoiding can safely be said to be wrong. \”

OK. But who was it who did conflate the two?

\”As a proportion this may be the highest gap of all. Much may be due to legitimate tax
planning, but by no means all is. Some, undoubtedly, is due to tax avoidance.
When this sum is added to the £12.9 billion of tax loss already calculated for individuals
it suggests that the total UK tax gap due to tax avoidance can be estimated at £24.7
billion, and rising.\”

Who is it who has defined tax planning as being not tax avoidance but then includes tax planning in his estimation of tax avoidance?

No, I don\’t expect it to be published nor do I expect a coherent reponse.

Ooooooh! A gravy train!

Squeal like a stuck piggy for Timmy here!

Global Geo-Politics Net is carrying an important article by David Cronin highlighting the desperate need for a civil society campaign to counter the might of financial lobbying by banks and hedge funds. Besieged by legions of well-funded financial lobbyists (reinforced by columns of financial journalists acting as mouthpieces for the City of London and other offshore financial centres), politicians are fighting an uneven battle to protect public interest from endless lobbying to water-down regulation and protect tax privileges — and there are virtually no organised campaigns to oppose this relentless pursuit of self-interest. A cross-party alliance of European parliamentarians has issued a call for the creation of an international civil society campaigning organisation to work on systemic financial market problems in the same way that Amnesty International has worked on human rights issues and Greenpeace on environmental issues……The call from European politicians for civil society action should not go unanswered. TJN, for one, is keen to participate.

What a trough to get one\’s snout into!

The ultimate, the Brussels, gravy train.

Good Lawdy Miss Clawdy

Yes, I have left a comment there and no, I don\’t know whether it will get through. What I said was:

Richard: because we don’t know about the future, because we don’t know which technologies will be possible, which products of which new technologies people will want, we need to have some sector of the economy where experimentation takes place.

The market in short.

Precisely because we don’t know what the future holds we cannot plan for it: thus we cannot use government to do said planning for us. Moving 5% of GDP from the government, planned, sector to the unplanned, experimental, market sector is thus a very reasonable response to exactly your point: that we cannot forsee the future.

Other critiques are welcome in comments.