Clausing, Saez and Zucman on corporation tax

There’s a new paper out from Kimberley Clausing, Emmanuel Saez and Gabriel Zucman on the corporation tax. It’s a quite lovely example of entirely missing the point.

Ending Corporate Tax Avoidance and Tax Competition: A Plan to Collect the Tax Deficit of Multinationals

A tax deficit is some amount of tax payment less than the trio think should be squeezed out of a company. The plan is that each country tax the profits of companies based in their jurisdiction. If business done elsewhere by that company charges less then the HQ company should be charged the difference. The difference between that home tax rate and that other, lower taxing, one.

This is akin to the British tax system up to just a few years ago. As and when profits were brought back to pay to investors as a dividend and the like UK corporate income tax was charged upon said profits minus whatever foreign tax had already been paid. The same was true of the American system. So it’s not entirely a radical suggestion.

However, what it is as a suggestion is remarkable in its ability to miss the point. They complain that the modern world has increased tax competition. This has lowered the rate of tax that corporations are forced to pay. They wish to reverse this while missing that this is rather the point.

Economically speaking corporate taxation - except that of resource rents - is a bad idea. It’s a tax upon investment and we like investment because it makes the future world richer. As we know we get less of what we tax so taxing corporations makes that future poorer - less investment.

Taxing corporations is politically most convenient. For everyone thinks yep, the company is paying. Yet we know this isn’t so - each and every tax empties the pockets of some live individual. Finding which one is known as the study of tax incidence. Corporate taxation could hit either the investors or perhaps the workers in that taxing jurisdiction. As is turns out, the smaller and poorer the economy the more it hits the workers and the less the capitalists.

Their demand is therefore that taxation should rise upon the poorer workers in the developing countries. This is not a good idea and thus the joy with which the sensible - or perhaps just aware - among us have regarded tax competition and the lowering of corporate taxation rates.

Recent years have seen corporate taxation rates fall which is a good thing. This paper debates who to raise those rates again - which is rather missing the point, isn’t it? That the competition and the lower rates are a good thing in themselves.

Do not believe that the polar bears are about to disappear

A new report tells us that the polar bears are all about to disappear as a result of climate change. Do not believe this report.

There is the usual point that we’ve been told about the decreasing numbers for decades as populations out there in reality explode. But we can go further with this new research. It is wrong, undoubtedly so.

Most polar bears to disappear by 2100, study predicts

No, that’s not what the study does say. Rather, if, then. If emissions run at some particular level then this is one of the possible - if you prefer, likely - outcomes. That does depend upon what the emissions level is of course.

Scientists have predicted for the first time when, where and how polar bears are likely to disappear, warning that if greenhouse gas emissions stay on their current trajectory all but a few polar bear populations in the Arctic will probably be gone by 2100.

No, it does not say “current trajectory”. It says if emissions are very much, hugely, greater than the current path then it might happen.

The researchers found that under a business-as-usual emissions scenario, polar bears will likely probably only remain in the Queen Elizabeth Islands – the northernmost cluster in Canada’s Arctic archipelago – at the end of the century.

This is not true. The error is in the definition of “business-as-usual”. From the paper itself:

Intersecting these thresholds with projected annual fasting periods under business-as-usual (Representative Concentration Pathway to 8.5 Wm−2 (RCP8.5)) or mitigated (RCP4.5) scenarios

RCP 8.5 is not business as usual. The one specific thing that it was necessary to do to avoid this scenario was to have fracking. For it depends upon the idea that we will run out of conventional oil and gas and thus turn back to coal. Vast amounts of coal, not just more than we used to use but for a larger portion of the very much greater future energy use. This is actually pointed out in the original models back in the SRES from the 1990s. If unconventional (ie, fracked) oil and gas come into use then RCP 8.5 simply isn’t going to happen. This is before we start to talk about solar power getting cheaper by 20% a year, windmills and all the rest.

RCP 8.5 is not BAU, it’s is hugely, vastly, worse than the path we know that we’re on.

We’re all in favour of the science of climate change. But we do rather insist that it be science. Incorrect, incorrect to the point of already having been disproved, assumptions are not science. Nor are the outputs of models starting from those known to be incorrect assumptions.

What puzzles here is that we do agree with the underlying thought, that climate change could indeed be a very large problem. It’s therefore necessary to use that scientific method to explore it. Why is it, therefore, that so many claiming to do so aren’t?

Book Review — How Innovation Works

“You voted so that you wouldn’t have to obey these EU laws that you can’t name?”, James O’Brien wheezes down the line at some hapless Brexiteer who forgot to do his homework. Fortunately for the hapless Brexiteer, a sufficient retort has now arrived in Matt Ridley’s new book, “How Innovation Works.”

Ridley’s book is not really about Brexit, mercifully. But he does, in the space of just a few pages, reveal the extent to which the EU suffocates the innovative process through its application of the precautionary principle, essentially a reversal of the principle of innocence until proven guilty. Through the precautionary principle, the European Union assumes an innovation or invention is dangerous until proven otherwise. And the result is damning: “Of Europe’s 100 most valuable companies, none was formed in the past forty years.”

Why is this important? Well, as Ridley explains, “innovation is the most important fact about the modern world, but one of the least well understood.” Innovation happens when people are “free to think, experiment and speculate” and prospers in an environment with investment, free trade, and relatively prosperous citizens. Innovation is unpredictable and gradual, based on a trial-and-error process with serendipity and luck usually playing a key role. And innovation is the “mother of science as often as it is the daughter”, with Ridley noting that “none of the pioneers of vaccination had the foggiest idea of how or why it worked.” 

Critically, innovation is different to mere invention in that it refers to the development of an invention “to the point where it catches on because it is sufficiently practical, affordable, reliable and ubiquitous to be worth using.”

Ridley covers a huge amount of ground in the book: from innovation in public health, food and transport, to low-technology and pre-historic innovation and even the fakes, frauds, fads and failures in innovation. There are inevitably examples missing, and glaring omissions will vary by the reader. 

How, for example, did Pret a Manger – based on the hardly novel idea of a sandwich and coffee shop for office workers – transform the “very grim” eating options which co-founder Julian Metcalfe confronted in 1980s London? Or why have we thus far failed to turn the enormous medical promise of stem cells into reality (hint: government regulation plays a leading role here)?

Ever the optimist, Ridley’s tale is an at times exhilarating depiction of the enormous strides the world has taken over the centuries. But he is no Dr Pangloss, for whom this is the best of all possible worlds. The best of all possible worlds is a long way off in Ridley’s estimation, yet eminently reachable if we cultivate and nurture the innovative process.

His clarity about our potential is matched, however, by the depth of his concern. Because while the ability of Western economies to generate innovation has become weaker, due to excessive red tape, entrenched interests, stagnating investment and even overzealous property rights, in China innovation is blossoming. 

As has become ever more manifest in recent months, “if the world is to rely on China to do its innovation, it will become an uncomfortable place.” The world will become increasingly dominated by an authoritarian country with a blatant disregard of human rights, and a country in which innovation will eventually be stifled to retain the monopoly power of the communist party.

If you’re a techno-optimist, this brilliant book will give you the ammunition needed to argue the case for innovation. If you’re a techno-pessimist, it will surely make you think again. Because if there was ever a time for unshackling from the bureaucratic strangulation which Ridley so cogently describes, that time is now.

We spend £4 billion and change a year on Public Health England

One of the tasks that we charge to Public Health England is to concern itself with, well, public health. Things like pandemics say. Or testing of the population for diseases. Public health. It being worth pondering what we get for our £4 billion and change:

Britain turns to Portugal for Covid tests that could prevent disease spread and deaths despite ban on travel to country

Outbreaks in the population and asymptomatic carriers could be detected far earlier for a fraction of the price if the UK adopted the test

Well, yes, that’s very nice. The tactic is simple enough, it’s pooled testing. Mix up the samples from 10 or 50 people, test and if negative then you know that all 10 or 50 are disease free. If positive then retest with smaller groups within that 10 or 50 until the infected are personally identified.

This is not to sneer at the University of the Algarve who have been doing this. The target of ire is in the UK:

Officials and scientists from the UK Science and Innovation Network met with Mr Marques and his team last month.

Note that that’s not anyone from Public Health England. But rather more than just this, the idea of pooled testing has been around for some time now. March at least. For £4 billion a year we might expect that one or another person within PHE might read the occasional blog on the subject but apparently not.

There’s also that contact tracing app. Ireland managed to get it right apparently:

Cheap, popular and it works: Ireland's contact-tracing app success

Irish-made app has more than 1.3m downloads, in stark contrast to the UK’s efforts

So that’s good news. How did they do it?

NearForm employs 150 people and builds software mostly for private clients.

They contracted it out to people who know how to build software.

Then Apple and Google came together and offered an app that would support public health apps and let Android and iOS phones connect even while locked. Their decentralised version held no data in a single official database, alleviating privacy concerns.

The Irish were among the first to grasp Silicon Valley’s offer in late April.

They used the only underlying structure - that from Apple and Google - which could possibly allow such an app to work. Rather than trying to cobble together something that couldn’t possibly work but would have the merit of being home grown. Oh, and cost £11 million or so rather than the £800,000 Ireland spent.

So, what do we gain for our £4 billion spent on PHE? If not the actual public health and pandemic stuff that we think we should be getting? Well, it’s now not possible to advertise bacon or butter on the Tube, supermarkets are about to be banned from selling us two pizzas for the price of one and the choccie biccies will be hidden around the back.

Aren’t we the lucky ones to have such an active and efficient bureaucracy at our beck and call?

Great big fat lies

It was Hayek who pointed out that a tax funded and politically run health service was going to lead to serfdom. Not, as he himself pointed out, because free at the point of use health care made you or us a slave but because that political involvement would lead to, well, political involvement.

Which it has and is:

This apparent conversion is welcome, but only if it results in a radical shift in the government’s approach, away from reliance on an ill-conceived notion of personal responsibility and towards recognition that much tougher regulation is required....

Obesity means that we must stop doing as we wish and must be forced into doing as they insist. Serfdom that is.

We need to see the compulsory reformulation of processed and convenience foods to reduce sugar and fat as well as salt levels, and, as the King’s Fund argues in today’s Observer, we need a comprehensive ban on junk food advertising, regulation to eliminate unhealthy food being sold as a loss leader by supermarkets and beefed-up powers to enable local authorities to maintain the area around schools as fast food-free zones.

The recipes of our food must be determined - enforced - by the illuminati, freedom of commercial speech be damned and given the way that schools are spread around urban areas - for the obvious reason that so are people and thus children - fast food banned from the cities.

There being various problems with all of this even after we ponder what right do these people have to rule our lives in this manner?

One in three leaves primary school overweight or obese,

That’s not true in the slightest.

it brings a huge cost of around £6bn a year for the NHS as obesity-related hospital admissions continue to rise.

Nor is that. To the extent that obesity does cause health problems it shortens lives and thus reduces the bill to the NHS of lifetime health care.

There is, also, the rather obvious point that the last few decades of government dietary advice seem to have been totally wrong and no one is all that confident that they’re right this time around.

But back to Hayek’s point. They are currently insisting that the NHS requires them to determine the price a supermarket may charge you for a pizza. No BOGOFs on junk food, recall? How far you must travel to buy a bag of chips - nothing near schools. They’re even insisting that the existence and needs of the health care system mean that they, the bureaucrats, should control the recipe books of the nation.

True, it’s not quite what Chekhov, Gogol or Tolstoy would have called serfdom but Hayek’s point is becoming more and more apparent, isn’t it?

How to make medical care cheaper

A couple of little lessons from a hospital chain in India - probably the world’s cheapest first class hospitals.

To American eyes, Narayana’s prices look as if they must be missing at least one zero, even as outcomes for patients meet or exceed international benchmarks. Surgery for head and neck cancers starts at $700. Endoscopy is $14; a lung transplant, $7,000. Even a heart transplant will set a patient back only about $11,000. Narayana is dirt cheap even by Indian standards, with the investment bank Jefferies estimating that it can profitably offer some major surgeries for as little as half what domestic rivals charge.

Those are prices that would make the NHS blush too and as the above shows it’s not just about lower prices for skilled labour in India. This chain is doing something different:

In the mid-1990s, Shetty began experimenting with a business school concept alternately called upskilling or task-shifting. The idea is for everyone involved in a complex process to work only at the top of his qualification, leaving simpler tasks to lower-paid workers. In a hospital, this might mean that the costliest staff—experienced surgeons—enter the operating theater only to complete the most difficult part of a procedure, leaving everything else to junior doctors or well-trained nurses. Then they move to the next theater to perform the same task again.

The division and specialisation of labour taken a step or three further forward.

By working at this pace, the average Narayana surgeon performs as many as six times more procedures annually than an American counterpart.

Hmm.

The Shettys see further savings coming not from any single reform, but from thousands of little tweaks at every stage of treatment.

And that’s how productivity advances. Not grandiose leaps into the future but shavings at the edges but at every edge.

The big question being, well, how do we get this concentration upon doing things cheaper - because cheaper means it is possible to do more - into our own health care system?

The answer being that we need to copy the incentive structure this chain operates under. It’s working in a market and trying to make a profit while doing so. Even as government takes over more of the financing it is still working in that market which provides those incentives.

Hey, perhaps we should try it?

We'd better get building those spaceships then

A new - another - report telling us that we’ll all have to stop eating like we desire to:

Another six planets needed to eat like most meat-loving countries

Well, that’s if we all wish to eat like the Argentinians do. From the report itself:

Dietary choices in G20 countries are destroying the planet.

Global adoption of current G20 food consumption patterns by 2050 would exceed the planetary boundary for food-related GHG emissions by 263%. This would require between one to seven Earths to support.

We’d better get building those spaceships therefore.

The point being that the existence of an economy, of a civilisation even, is so that we humans get to do more of what we humans like to do. That these eating patterns are common across the G-20 tells us that they’re fairly basic humans desires. Very different cultures, different historical paths, but once anywhere gets rich enough to be able to do so it eats in this manner.

We the people like doing this, our aim is that we the people get to do more of being we the people. Thus spaceships, not rationing.

Spaceship here meaning actual steel ships only in partial jest. For there is the alternative method we’ve been using for some 8,000 years now. Which is to use technology to create new Earths right here right now. This goes under the more common name of “agriculture”.

Every time we increase the productivity of some part of the food production system we’ve done just that, created more land. If this acre could, formerly, support 2 cows and now 4 then that means we need half the amount of land to have 4 cows. Or, obviously, we can have 8 on our original two acres. This is the process we’ve been following since Ur of the Chaldees. Making the land more productive, thus allowing ourselves to either use less of it for the same output or to enjoy greater output.

There is no obvious limit to this increase in productivity, Sure, we can all think of hard limits - say, the level of insolation - but we’re nowhere near any of those at present. In our immediate technological future we can see low methane cattle, lab grown meat just to take two examples from the current newspapers. Either and both and the myriad other experiments being conducted are all usefully described as building spaceships, or at least creating new Earths to feed us.

Without agriculture the carrying capacity of the Earth if we’re all hunter gatherers is perhaps 10 million souls. OK, maybe 50, we’ll even grant 100 million if you really insist. There are rather more of us than that presently and we are producing enough food for all even if distribution is less than perfect.

We know how to build those spaceships, we’ve been doing it for millennia. We’ve found new Earths. The general name for the process being “industrial agriculture” so the solution is a bit more of that, isn’t it?

Goodbye from Julia

As my time at the ASI draws to a close all I can do is feel extremely grateful. Despite knowing that I wanted to spend my gap year at the ASI for a while, I wasn’t able to appreciate just how great the opportunity is. You would think a global pandemic causing the country to lock down for months on end would put a damper on things but I don’t think I could be happier with how I have spent my gap year.

The gap year internship is a fairly unusual experience. I have been able to help the ASI with its work and feel like a truly valued part of the team. I have now helped to research any number of topics and helped to sort out countless footnotes to the point where university seems like it will be a breeze. 

Working at the ASI is different from working a typical office job and that is not just because the office opens at 10. Where else could I say that I believe we should be able to sell our organs and be met by understanding nods. Everyone at the ASI is great at ensuring you are able to back up your claim however whacky it may be. I am even surprised to find people who share my questionable taste in music and interest in languages.

The work that you do is a healthy balance between pouring drinks for TNGs and writing comments for newspapers, between logging RSVPs and writing blogs for a range of sites, between franking parcels and speaking at events, even travelling to foreign countries.

While your friends may not understand what exactly it is you do (get ready to explain what a think tank is endlessly), they will appreciate the tiktoks, insta stories and memes you make for the ASI or other social media posts. And if you’re lucky, even a Telegraph Snapchat appearance.

Spending your gap year at the UK’s best domestic and international economic policy think tank (University of Pennsylvania) doesn’t mean sitting in a stuffy office in Westminster all year. The ASI went to Manchester for Conservative Party conference. We travelled to Gibraltar and Morocco for our AGM. And Matthew Lesh and I were able to pop over to Madrid to speak at LibertyCon (not bad for a year in which we couldn’t travel in the latter half). The ASI was even flexible enough to allow me to take time off, when a friend that I had made through the ASI encouraged me to volunteer as part of one of the Prime Minister’s operations teams planning his and other cabinet ministers’ visits across the country. Upon returning to Westminster on election night it was great to reunite with my colleagues knowing I had a once in a lifetime opportunity to contribute to achieving a more liberal government.

Throughout the lockdown, the weekly Zoom staff meetings have meant that we still feel like a team even while apart so don’t let remote working put you off. I cannot recommend a gap year at the ASI highly enough.

The Adam Smith Institute’s Gap Year programme is open to applications now.

This is an interesting justification for higher wealth tax rates

There are, of course there are, those who just want more people to be paying more in tax. Which brings us to this interesting supposed justification for higher capital gains tax rates:

It said the Treasury was likely to suffer steep falls in capital gains tax (CGT) receipts over the next two years as property and other assets slump in value, adding further pressure on Sunak to increase tax rates to fill the gap.

Those rich people are making less money therefore they should pay more in tax?

As is so often true it’s possible to invert the argument to see if it sounds ridiculous. So, let us do that. Imagine a roaring economy with capital gains mounting up as far as the eye can see. Would we - anyone in fact - then accept the argument that capital gains taxes should fall?

To ask the question is to know how such a suggestion would be received. Thus the initial claim is invalid as well. Some people just want MOAR TAX and any excuse will do that is.

Adam Smith's Anniversary

If you had been standing on this spot in the late eighteenth century, you would have seen a plume of smoke rising up from this house here. It was Adam Smith’s executors burning his papers, just as he directed before he died on this day in 1790. 

Though it seems odd to us—and is a great loss to later generations—that was quite normal among prominent people at the time. They did not want to be judged on their personal letters and their sketches of half-thought-out ideas. 

And Adam Smith was a prominent person. He had risen to fame in his mid-thirties, having published The Theory of Moral Sentiments, a book that tore up the ethical theories of the time and explained morality in terms of social psychology. It landed him a plum job—personal tutor to the teenage Duke of Buccleuch, with a salary of £300 a year—for life!

That income gave him the freedom to research and write his next book, published 17 years later—Smith never did anything without a great deal of deliberation. This was The Wealth of Nations, his revolutionary work in economics, for which he is best known today. 

Smith loved discussion and debate with friends. In that July of 1790, during one of many such evenings at his home in Edinburgh, Smith felt tired, and retired to bed, saying—so we are told—that the discussion would need to continue in some other place. 

He died a few days later and was buried under a generous but restrained monument in the churchyard near his home.