What horrors, oil companies only pay profits tax on their profits

The National Audit Office has released a report which is bound to cause a certain amount of wailing. For it states that oil companies operating in the North Sea only pay profits tax upon their profits.

British taxpayers face a £24bn bill for tax relief awarded to oil and gas companies removing hundreds of North Sea wells, rigs and pipelines, the UK public spending watchdog has said.

The National Audit Office (NAO) said the figure would climb if companies collapse and are unable to pay for cleaning up their operations, leaving the government to pick up the tab.

As you can see that’s not quite exactly how The Guardian is reading this. The report is here.

What is actually being said is as follows. Those rigs out there in the ocean, they’re long lasting but not eternal assets. At the end of their life they need to be cleared up. That clearing up cost is part and parcel of the entire cost of the building operating and, yes, removal.

It’s also true that, at least as best we can, we tax the profits of an activity over the whole cycle of that activity. For, clearly enough, it’s only over the entire lifespan that we can actually work out what is the profit from having done it. The first few years of anything are a pouring in of money and thus losses, we carry those forward to offset against profits when they are indeed made. These oil platforms being a little different in that there’s this bolus of costs at the end as well. But, obviously enough, the profit from having exploited the field needs to include the costs of getting rid of the rig just as it already does the building and placing of it.

Yet the need to stuff the government’s maw with revenue means that that’s not quite how we’ve taxed these companies over the decades. We’ve looked at the costs and revenues per year, not over that entire lifecycle. Now those end of life costs are coming due and sure, companies can count them as costs and deduct them in the calculation of what profits they’re making which can be then taxed.

That’s all these “tax credits” are. Just another cost which is deducted from revenue before profits, thus profits tax, are calculated. Further, we can’t actually have a tax system that works any other way. Well, not a fair nor efficient one at least.

There will, of course, be cries to the Heavens about these subsidies to the capitalists who’ve been raping Gaia and all that. Yet all that is happening is that costs are being deducted from revenues before profits are calculated to be taxed. Given that this is how we work out what are profits that are then taxed why the complaining?

Happy birthday, Peter Tatchell

Today is the birthday of Peter Tatchell, a long-time campaigner for human rights, civil liberties, and rights for LGBT people. Obviously the ASI does not go along with his left-slanted views on the economy, neoliberalism or free markets, but on the issue of his human rights campaigns, he has shown both bravery and consistency. He was injured while trying to make a citizen’s arrest for human rights abuses of Zimbabwe dictator, Robert Mugabe, when he was beaten by the latter’s bodyguard thugs. He was injured by neo-Nazis in Moscow while campaigning for gay rights there.

He has consistently supported free speech, even of those he profoundly disagrees with. He wrote in the Guardian, "The best way to tackle prejudice is by presenting facts and using reasoned arguments, to break down ignorance and ill-will," and he made the contemporary threats to free speech in Britain the subject of his lecture to the British Humanist Association.

Since 2011 he has been Director of the Peter Tatchell Foundation, working to protect and secure the rights of individuals, communities and nations, both domestically and internationally. He has spoken vociferously against the “no platform” policies of some university groups, and has been himself been no-platformed and the recipient of death threats in consequence.

He has spoken on human rights and freedoms at the ASI, and found a welcoming and supportive audience. As someone consistent in his campaigns for free speech and for people to be free from violence, oppression and intimidation, he has become a national figure, widely respected. On this day we salute him. Happy birthday, Peter.

Cutting the size of the State is the only viable solution here

Two different recent stories which together show that we’ve really not much option other than cutting what the State does, cutting its activities and ambitions. For as far as we can see we’re at capacity in the economy, we’ve still got a deficit, the tax burden is at a peak - even using Keynesian economics this is a time to be fixing the roof while that Sun shines.

From today’s Telegraph:

Unemployment lowest since 1970s, but deficit edges up slightly

We also know that the employment to population ratio is at its highest since those ‘70s. There simply isn’t some reserve army of the unemployed, we’re using that resource in its entirety. Or at least, in what we usually think of as its entirety, we’re at full employment by any of the usual measures.

From the Times a little ago:

Britain is on track this year for the highest tax burden since 1969-70, at 34.6 per cent, according to forecasts released by the Office for Budget Responsibility alongside last month’s budget.

The State is abstracting from the economy, for its own desires, more of everything than it has done for many a decade. Increased taxation isn’t really an option therefore. And yet we’re still running that deficit.

There’re no unused labour resources lying around unproductive, what does happen is being taxed at high historical levels, we’re in deficit - yes, the only solution to this is a reduction in that Sate, in its appetite for our money to gorge upon.

A Keynesian might say the justification is to provide that fiscal room for government to increase spending again come the next recession. People like us might say that cutting spending’s just a good and useful thing to be doing whenever. But we are getting to the same answer anyway we do our analysis.

That no one in politics is talking or thinking this way just goes to show the truth of that old adage, the more united economists are on a point the less attention everyone pays to them.

Reefer Madness 2.0

Loyal readers will remember that we examined The Times journalist Alice Thomson’s claims about Colorado’s experience of recreational cannabis legalization back in 2016—and they were found wanting. Fast forward to 2019 and nothing has changed, with Thomson penning an article in The Times yesterday arguing that the backlash against cannabis culture has begun: citing arguments from former New York Times reporter Alex Berenson’s new book Tell Your Children: The Truth About Marijuana, Mental Illness, and Violence.

Of course, the past century of cannabis criminalisation and moral panic across the globe has been one long “backlash against cannabis culture”. Berenson’s book is the latest instalment in this long tradition, albeit from an ostensibly liberal perspective. His argument? “Marijuana causes psychosis. Psychosis causes violence. The obvious implication is that marijuana causes violence.” Much like their predecessors, Berenson and Thomson misrepresent the weight of evidence. But serious critical engagement in the legalisation debate is always welcome, so, without further ado, let’s dive in…

“Nic is a clever, kind, athletic 12-year-old when his father finds marijuana in his backpack. By the age of 18 he has moved on to crystal meth and heroin. He steals from everyone, including his little brother’s piggybank, he prostitutes himself, lives in a park, overdoses, nearly has his arm amputated after an infection and almost dies from a cocaine overdose...the one trait [mentally ill criminals] had in common was that they had all smoked pot...Richard Kirk, who shot his wife while in a psychotic state after eating marijuana candy to alleviate back pain…”

Though they make for harrowing reading, these anecdotes give no reason to suggest that cannabis use causes violence. I’m sure both Thomson and Berenson would both agree with this, but it’s worth making crystal clear. That was an easy one!

“The first four states to legalise marijuana for recreational use were Alaska, Colorado, Oregon and Washington. All have seen an increase in murders and aggravated assaults since 2014, with police reports showing in many cases a clear link to cannabis use.”

There’s nothing revealing about this observation either. An increasing rate of murder and aggravated assault post-legalisation is better evidence than anecdotes, but still doesn’t cut the mustard. Correlation does not by itself imply causation, even if (as Berenson does) you compare trends to the national average. If it did, one could point to Oregon’s murder rate dropping by 11.6% in 2016-17 (ten percentage points more than the US average) as evidence that cannabis legalisation strongly depresses murder rates. Or simply point out that besides aggravated assault in Colorado, Berenson’s increased violent crime rates aren’t far off the national trend.

But any pro-legalisation advocate worth their salt won’t do this, because it’s a shoddy argument for any position. Serious analysis would compare post-legalisation U.S. states to their counterfactual no-legalisation counterparts (based on a weighted average of states that closely follow their crime trends) and examine their violent crime rates. When Professor Benjamin Hansen from the University of Oregon did just that, he found that “the homicide rates in Colorado and Washington were actually below what the data predicted they would have been.” Berenson has since criticised some of Hansen’s data and comparison group choices, which Hansen has duly responded to finding similar or null results. After further exchanges, Berenson is now “done debating the fake state model” but Hansen’s work remains credible. So a more robust approach suggests that cannabis legalisation doesn’t seem to have a significant effect on violent crime rates.

Other high-quality research suggests that cannabis retail dispensaries lead to reduced crime in the neighborhoods where they are located and medical marijuana legalisation alone reduced the violent crime rate in Mexican-border states by between 5.6% and 12.5%. There’s plenty more evidence that the link between liberalising cannabis laws and violence is not what Berenson claims. He appears to want to have his cake and eat it—we can’t be sure whether legalization has caused more violent crime, but we can apparently be sure that it hasn’t.

“The cannabis being bought, [Berenson] suggests, is far more potent now. In the 1970s and 1980s when his generation was smoking, most marijuana contained less than 2 per cent of THC, the chemical responsible for its psychoactive effects. Today, it routinely contains 20 to 25 per cent THC. It’s the difference between a sip of beer and a tequila shot.”

Cannabis does indeed appear to be increasing in strength in the U.S, UK, and Europe: it has been for decades. There are a number of factors driving this increase, but prohibition is certainly among them. Criminal penalties give suppliers an incentive to grow less cannabis while delivering the same experience for users; if you have lower amounts of cannabis to hide or transport, you’re less likely to get caught. This was part of the reason that high-strength alcohol dominated Prohibition-Era drinking culture: people drank beer before, moonshine during, and beer after.

To what extent has this translated into higher overall levels of THC consumption? It’s still an open question; research from the Netherlands has found that cannabis users with a preference for stronger joints adjust their THC intake by inhaling less smoke, though not at a level that fully compensates. If policymakers want to shift cannabis users onto lower-strength products, legalisation provides the opportunity for a graduated tax on THC levels: set at levels that compete with the black market. It would also allow governments to mandate minimum levels of CBD, which research suggests may protect against adverse psychological effects from THC intake. As we put it in our 2016 report The Tide Effect:

“Regulation would allow for both the THC and CBD content of cannabis products to be quantified, quality controlled and clearly communicated to consumers, provided alongside extensive and comprehensive health information [as it is in Canada] which could then be built on by wider and deeper medical research.”

Such measures are based on a reasonable application of the precautionary principle, but the question of whether and to what extent cannabis use causes schizophrenia and other psychoses is far from settled. And yet...

“The US National Academy of Medicine reported that “cannabis use is likely to increase the risk of developing schizophrenia and other psychoses; the higher the use, the greater the risk”.”

At first read, this passage from the National Academies report—a comprehensive review of scientific evidence on the health effects of cannabis—seems like a big problem for pro-legalisation advocates. We know that recreational legalisation leads to a modest increase in overall use of cannabis and it would therefore follow that it will lead to increased incidence of psychoses. Ergo, legalisation is a disaster.

Not so fast. Firstly, the above excerpt needs to be viewed in the context of the report. As one of its authors has pointed out, “we did NOT conclude that cannabis causes schizophrenia.” This does seem to be stretching things somewhat; it’s hard to argue that saying “cannabis use is likely to increase the risk of developing schizophrenia and other psychoses” is not a claim about causality. But the rest of the chapter in question makes no such claims about causality, instead focusing solely on the moderate to strong association between cannabis use and psychoses (interestingly, the report also found an association between cannabis use and improved cognitive outcomes in individuals with psychotic disorders). Once again, correlation does not necessarily equal causation and like the ‘cannabis cures cancer’ crowd Berenson massively overstates his case. As Vox’s German Lopez puts it:

“Maybe psychosis or psychotic disorders lead to marijuana use, or a third factor — say, genes or environment — leads to psychosis and marijuana use. It could be a mix of all these factors. The conclusion [of the report], if there is one: “This is a complex issue, one that certainly warrants further investigation.” In other words, we don’t know yet.””

Secondly, increased overall use under legalisation is a crude metric of harm caused by cannabis use. It’s also important to focus on changing patterns of use: especially if, as is often stated, the mental health effects of cannabis vary by the age of users. The old pro-legalisation adage that “drug dealers don’t ask for ID” is backed up by hard evidence; teen marijuana use falls or remains the same after legalisation.

Thirdly, and most importantly, increased overall use is a terrible measure of the harm caused by different approaches to drug policy. Berenson and Thomson are both guilty of downplaying or outright ignoring key arguments in favour of legalisation, instead only focusing on the debate around mental health effects of cannabis use. Yesterday morning, arch-prohibitionist Peter Hitchens started a petition “for an inquiry into the correlation between marijuana use, mental illness and violence.” I’d support this as well, but it should be part of a Royal Commission examining the wider costs and benefits of changing our approach.

Consider the worst-case scenario: cannabis turns out to cause psychosis and a regulated market with measures to prevent youth use, educate consumers, and shift consumption to safer cannabis fails to achieve these aims. We’d need to weigh up the hypothetical harm caused by cannabis-induced mental illness and its consequences against the very real harm currently caused by criminalisation, from labour trafficking and child exploitation to gang violence and (as Berenson mentions) the real ‘gateway effect’ of drug dealers selling more harmful drugs alongside cannabis. We’d need to consider the fact that criminal convictions for possession of a class B drug can ruin someone’s life chances, hurt employment opportunities, and damage their mental health. We’d need to examine how cannabis users substituting for powerful synthetic cannabinoids (children of prohibition) such as Spice may lead to more mental health harms. We’d need to factor in substitution effects between cannabis and alcohol. And we should also remember the fact that cannabis is, for the overwhelming majority of its users, an enjoyable consumer product: one that causes less harm than many existing legal products that nobody sane thinks we should make illegal.

Our approach to cannabis is at a crossroads. One option is to double-down on prohibition and fully enforce our current laws: which Peter Hitchens happily admits are “in some ways tougher than Singapore’s” on paper. Or we could go back to the drawing board and agree on a set of goals: minimise underage use, do as best for people with mental health problems as possible, minimise crime, and make sure that if people do smoke cannabis it's safe – and work out the system that gives us that.

Rather than rubbishing recreational legalisation, commentators like Thomson should look again at the evidence. The best alternative to our failed approach is legalising and regulating cannabis for recreational use, which will take back control of the unregulated market from criminals, protect children from exploitation, free up police time to focus on violent crime, shift current users towards safer consumption patterns, and let adults make free, informed decisions about their lives. We’ll be making that case at length in a research paper this year, so stay tuned!

Apple’s game changer

On January 24th, 1984, Apple unveiled its Macintosh, two days after its famous Super Bowl commercial directed by Ridley Scott had portrayed a dystopian, grey conformist future, with a female athlete smashing the giant screen with a hammer throw. The ad was aimed at IBM’s dominance of the home and business computer market, and the Macintosh was the first mass-market personal computer that featured a graphical user interface, built-in screen and mouse.

It was the first of a series of Apple challenges to conventional markets by the introduction of innovative products. Still in the future lay the iPod, the iPhone, the iPad and the iMac. The approach provides an illustration of the way in which innovation can challenge complacency and displace market leaders. People who attack the market dominance of brand leaders fail to appreciate their vulnerability. Many of the big names that once seemed so dominant are now remembered only for their downfall. Failure to adapt to changing technology or changing tastes has brought down many one-time giants, ranging from Woolworths to Pan American, and from Blockbuster to Kodak, together with many, many more.

Most of the top names of the FTSE 100 of half a century ago are no longer with us, and the average age of an S&P 500 company in America is now 20 years, down from 60 years in the 1950s. Churn and change characterize the market, rather than continuing long-term dominance. In November Jeff Bezos predicted that Amazon will one day go bankrupt, and told the firm to “stay hungry” to postpone that day.

The market system thrives on the “creative destruction” that new ideas wreak on established players and practices. It is what makes us richer by providing products and processes that meet more of our needs. Apple has been a trailblazer in this respect and has earned its accolades.

All hail our Glorious NHS and Proton Beam Therapy

We have glorious news on the tractor production front - the National Health Service now offers proton beam therapy. This is indeed good news and not worthy, in itself, of the sneering we’re giving it. And yet it’s also true that the very same NHS was a pioneer of the technique, 30 years ago. Further, the only reason we’re getting it now is because of that competition so derided. This isn’t thus a story about how leading edge technology is being brought to us by our Wonder of the World, but how monopoly limits and delays technological adoption.

A 15-year-old boy has spoken of his excitement at being among the first to have NHS proton beam therapy in the UK.

Mason Kettley, who suffers from a rare brain tumour, began treatment on Tuesday - five years after the parents of Ashya King sparked an international manhunt when they took him abroad in search of treatment.

Until last month, NHS patients were sent as far away as the US for treatment, if specialist doctors said it was required.

Now the Christie Hospital in Manchester has begun offering the highly targeted treatment, with Mason the fourth case to undergo it, and the first to speak publicly about it.

We wish him and the others that will follow a good recovery and a long life. And yet, and yet. The world’s first hospital based proton beam treatment centre was mere miles away from this one, the Clatterbridge cancer centre. In, umm, 1989.

And what did happen in the Ashya King case? The NHS said, well, we don’t offer that treatment. There was even legal intervention to try to ensure that the lad did not receive it elsewhere. Which he did, a charity funded centre in Prague offering it seemingly - so far at least - successfully.

So, what is it that we expect to see from a monopoly? A certain lack of leading edge technology as the incentives and impulses from competition don’t demand its adoption. What did we see from the NHS?

Quite, and what did happen? That private sector in the UK competition didn’t do it but the political embarrassment of that foreign impelled action and investment. Which gives us two economic lessons for the day.

The NHS may be, is, many things. But as a monopoly it’s going to be well behind that leading edge of the available technology. We also see one of the values of imports - yes, that treatment of Ashya was an import of health care services - in that they provide the competition which improves home grown monopolies by breaking them, even at the margin.

Just think how much better off we’d be if we didn’t rely upon the imports for this driving of technological change but had the competition at home to impel it?

Rent controls are the last thing London needs

Matthew Lesh, our new antipodean Head of Research, demolishes the case for Sadiq Khan’s new rent control policy. They discourage new investment and new building. They cause deterioration of existing housing. And inflated prices for newcomers will do little to persuade the world that London is Open.

Robert Nozick – philosopher of liberty

Robert Nozick died 17 years ago on January 23rd 2002. He was a colleague at Harvard of John Rawls, and it was partly to counter the latter's "A Theory of Justice" that he wrote his most famous work, "Anarchy, State and Utopia."

The book is a thoroughgoing defence of liberty and the minimal state, a state that limits itself to protecting individual rights of life, liberty, property, and contract, and denies the use of state power to redistribute income, to make people moral, or to protect them from harming themselves.

Following Kant, Nozick sees humans as ends in themselves. They have rights that are not given to them or earned, but are theirs simply because they are human. Against leftist and redistributive ideologies, he asserts that any state with more extensive powers than those necessary to maintain those rights would violate the natural rights of its citizens. The state is, in effect, a "night watchman," with powers limited to those necessary to protect citizens against violence, theft, and fraud.

Redistribution of goods can only take place, he says, with consent. The state should not have the power to regulate its citizens' economic activity, to redistribute wealth in the name of greater equality, or to provide social services. There should be no price controls or minimum wage levels, because these would violate the natural right of citizens to dispose of their property, including their labour, as they wish. Similarly, the minimal state should not establish public education or health, financed by taxation, because that would violate the right of its citizens to buy those things for themselves, and would subject those required to pay the taxes to a form of "forced labour."

For Nozick, distributive justice is incompatible with the rights of individuals. He takes these rights as given, with no need to establish how they come about. Because we all have these rights, it cannot be justified to sacrifice, or make suffer, anyone for the general good of others. Coercion can only be justified to protect the citizenry from abuse by others.

Modern states are far from the utopia spelled out by Nozick, but the principles that underlie his work are a timely reminder that states have to justify their actions, and take due regard of the rights of their citizens. Because they have coercive power does not justify their use of it. Because they can does not imply that they should.

These little details that Brexit reveals

An interesting headline here. One that reveals just that little bit more of what the European Union stops us from doing in the name of protecting domestic producers. Which isn’t, as we all know, quite the way we should be running an economy, we want to be protecting, exalting even, the interests of domestic consumers:

Warning only 60 lorries allowed to cross Irish border in no-deal Brexit - 13,000 crossing a day

Need for permit would sign death certificate for Northern Ireland industry

The background here is that duly licenced lorries from any EU country can cross those intra-EU borders whenever. This is as it should be of course. But there’s a permit system - limited, just like many taxi systems as to the number issued - allowing only a few non-EU licenced lorries to do the same. As the NI/Eire border will now become an ex-EU one that permit system comes into play.

Yet as we know from our Uber/Taxi interface the permit system itself is a conspiracy against consumers. And it’s only when we consider Brexit that this similar scheme to disadvantage consumers to the benefit of producers becomes visible.

Views around here, as elsewhere, on Brexit itself differ. But isn’t it interesting how many of these little conspiracies against us we’re discovering as a result of the process?

The Victoria Era – a testament to free trade

Queen Victoria's reign ended at her death on January 22nd 1901, 117 years ago today. During her reign of nearly 64 years, The UK's population nearly doubled, but there was no Malthusian trap of extra numbers lowering living standards. On the contrary, her reign saw unparallelled increases in prosperity as free trade became the norm. The 1846 repeal of the Corn Laws, shortly after her accession, was the capstone of the policy of cutting duties and tariffs begun earlier by William Pitt.

Britain's Industrial Revolution was in full swing, with the railways opening up the country to trade and commerce. The goods poured out of the factories onto the trains for shipment across the country and to the ports for export. Britain's naval supremacy, added to its industrial might, underpinned international free trade and the Pax Britannica.

Imports were allowed in unconditionally, save in a small handful of cases, and the UK relied on market advantage for its exports. British goods were shipped across the globe. Disraeli coined the expression "Workshop of the world" in 1838, the year of Victoria's coronation, referring to British manufacturing and industrial capacity. It remained true throughout her reign.

The policy of free trade brought the wealth that paid for public buildings, medicine and modern city sanitation. Increases in productivity were boosted not only by the railways, but also by a string of inventions that included the telegraph and gas lighting, and by increased education. Britain could afford to abolish child labour and to pass Factory Acts to improve workplace conditions and safety.

Free trade worked then, as it does now, by allowing countries access to cheap goods that leaves them with resources to spare for other things, including investment. Support for it in the modern era is mixed, with the EU imposing a Common External Tariff to boost domestic production at higher prices. It makes EU citizens poorer than they would be without it. Similarly the US tariffs on steel and other goods make their citizens pay more for them. They further make US production that uses those raw materials more expensive and less competitive.

As the UK prepares to reach trade deals with countries across the world, it would do well to take on board the lesson of the Victorian era, that free trade brings prosperity and opportunity.