The absurdities we're told about taxation

That some desire to have more taxation and more government is true. And, if we’re honest about it, that’s an opinion that people may have, are entirely entitled to hold, even as we vehemently disagree with it. We’re against the idea that more of life be decided by those who can kiss enough babies to get elected, even as we agree that some modicum of government is necessary to enable the babies to grow up to vote.

That doesn’t excuse gross misinformation being used to make the case:

The G7 helped to build this low-tax world. Are they really ready to change it?

Mark Blyth

We’re not in a low tax world. As Parliament has been told tax is some 35% of GDP. This is higher than the usual since the war - before which the burden was much lower - and has only been exceeded during one of the regular economic crises which shrink the GDP part of the calculation. We’re simply not in a low tax world.

In the early 90s, governments started buying into an argument about capital mobility, taxes and welfare states: in a world of global capital, investors will seek the best returns they can get globally. If those returns are reduced by “distortions” such as taxes, investment will flow to countries that tax less. Consequently, those expensive and expansive welfare states that neoliberal economists had always targeted had to go. Funding them through taxing the wealthy and corporations would lower investment and employment, so the story went.

This is not an argument, it’s a truth - derived as it is from Adam Smith and one of his only three mentions of the invisible hand. We can also derive it from very simple observations of tax incidence, taxes will always fall on the less mobile factors of production. Further, it says nothing about whether to have an expensive or expansive welfare state - it just says that it will be counterproductive to try to finance it from the more mobile factors of production. Which is why those Nordics don’t try to finance their expansive and expensive welfare states by the taxation of corporates and capital.

That is, it isn’t a normative argument about what sort of polity to have. It’s a positive one about if you wish to have a certain polity then it is necessary to finance it in this particular manner.

There’s even a neat proof of the fact that the taxation of mobile capital does work this way. For what is the solution being suggested? The global taxation of that capital - or at least of tax rates - meaning that capital mobility doesn’t change the tax rate faced. One would only propose this as a solution if it were true that capital mobility were not just an argument about taxation but a truth concerning it.

But then there’s this which steps well over the line of acceptable propaganda:

Governments across the Organisation for Economic Co-ordination and Development (OECD) used this argument to cut taxes on both individuals and corporations. The UK’s corporate tax rate fell from 34% to 19% between 1990 and 2019, while the US’s rates fell from 35% to 21% over the same period. But rather than those reductions leading to an explosion of investment in both countries, investment levels actually fell, as the tax-savings made were taken as profit and pushed into asset markets. In the UK, gross fixed-capital investment fell from 23.5% of GDP in 1990 to 17% in 2019. In the US, it fell from 23.5% to 19%.

Definitions matter. Gross fixed-capital investment being:

Fixed assets are produced assets that are used repeatedly or continuously in production processes for more than one year. The stock of produced fixed assets consists of tangible assets (e.g. residential and non-residential building, roads, bridges, airports, railway, machinery, transport equipment, office equipment, vineyards and orchards, breeding livestock, dairy livestock, draught animals, sheep and other animals reared for their wool). The European System of Accounts (ESA95) explicitly includes produced intangible assets (e.g. mineral exploration, computer software, copyright protected entertainment, literary and artistics originals) within the definition of fixed assets.

Value creation, in this modern world, depends ever more on those intangibles. The measure being used, of fixed-capital, assumes that ARM Holdings wasn’t investment, Windows, Amazon’s website, e-Bay, and on and on aren’t investment. Amazon’s warehouses are but not the rest of it. An absurdity of course.

Mark Blyth is a political economist at Brown University.

By the argument Blyth is using building a new gym at Brown is investment, everything that happens in the classroom, being an intangible, is not. But then at Brown, with Blyth, that might actually be true.

We entirely agree that there are different visions of the future we should be striving for. But we would like to at least try and insist that the evidence presented to argue for one or the other be evidence, be observations about the real world. For without that stricture we end up somewhere on the spectrum from being misleading through propaganda to casuistry which really, we do insist, isn’t the way to run the world.

Josh MacAlister needs to base public policy concerning children's homes on better evidence than this

If there’s a problem out there with the way government gets something done then appointing someone to have a look into the problem seems rational enough. But it does, obviously enough, depend upon who is appointed. Someone who believes mutually contradictory things before breakfast might not be the best choice. As with Josh MacAlister and this investigation into the provision of children’s home places:

Josh MacAlister, the head of the government’s review of children’s social care, will warn children’s homes bosses they must cut “indefensible” profits and improve the experience of young people in care or run the risk of intervention.

Rising levels of wealth are being made off the back of soaring children’s home fees and people are rightly concerned that private homes are making an estimated £250m a year in profits from the care of vulnerable children, MacAlister will say in a speech to the Independent Children’s Home Association on Thursday morning.

That is possible, we agree. Whether it’s true or not is another thing but it’s certainly possible.

MacAlister, who has welcomed the Competition and Markets Authority’s investigation into the children’s care market announced in March, is concerned that some heavily debt-laden private children’s care companies are at risk of collapse, with dire consequences for children in care and the local authorities that fund them.

That is also possible, that the providers of these homes are so laden with debt they’re about to go bust. Again, whether it’s true or not is another matter but it’s possible.

What’s not possible is to believe both things. It is not possible that the operators are making super, lovely, excessive, profits and also that they’re about to go bust. Someone needs to have a word in Mr. MacAlister’s shell-like to point this out. At least try to be internally consistent in your analysis perhaps?

As to where this idiocy comes from that’s simple enough, as one of us has pointed out before. It’s a report from Revolution Consulting which looks at the operating profits, not net profits, of the care home providers. That is, it looks at the excess of revenue over cost before accounting for mortgages, interest upon them, depreciation or maintenance of buildings and so on. You know, things that are a considerable portion of costs concerning anything with the word “home” in it. By using Ebitda as the measure it, in effect, looks only at the current account, not the capital. Which is, as a measure of profitability, absurd.

We’re fine with reports looking into problems with the way government does things. We do think it would help if those appointed were competent.

We struggle with The Economist's definition of a city's liveability

According to the Economist Intelligence Unit it is Auckland, in New Zealand, that is the world’s most liveable city:

The Covid-19 pandemic has shaken up the Economist Intelligence Unit’s annual ranking of most liveable cities, propelling Auckland to top spot in place of Vienna, which crashed out of the top 10 altogether as the island nations of New Zealand, Australia and Japan fared best.

We rather struggle with this as we’re entirely certain that we’ve seen piece after piece detailing Auckland’s terrible problem with anyone finding housing in it:

The Demographia International Housing Affordability Survey rates housing affordability using the "median multiple", a measure of median house price divided by median household income.

Authors Wendell Cox and Hugh Pavletich ranks as affordable cities where the median price is up to three times the median wage. Areas are classed as moderately unaffordable when the ratio is up to four, seriously unaffordable between four and five and severely unaffordable when the ratio is more than five times income.

....

Auckland, at nine times income, was severely unaffordable, and up from 5.9 in 2004. The country as a whole also ranks in this range, with a ratio of 6.5. Auckland is the seventh-least affordable city of the 91 major housing markets surveyed.

Perhaps liveable city is meant to be defined as one people can’t afford to live in. Or possibly that which makes it liveable by the EIU’s criteria is what makes it so ghastly expensive to be there. Or even, it is necessary to have an entirely absurd planning system in order to meet the EIU’s definition of liveability.

Our struggle is really that we just find it difficult to think of a place where median housing is near ten times median income as being liveable. Certainly, we’d not suggest it as somewhere to emulate.

This is how technologies end, with a whimper

The Guardian carries a story about one of the last typewriter repair shops in Goa, India:

It started as a sideline to the main business of the store, but now it is the main earner for Luis Francisco Miguel de Abreu as he struggles to maintain one of the last typewriter repair shops in this Indian state.

Inside the shop, several typewriters sit in various states of repair, looking much like museum pieces. There is a Hermes, a Remington and a Godrej Prima, from the Indian manufacturer that was the last company in the world to make typewriters.

One of the things that caught our eye was that manufacturer, Godrej and Boyce, for one of us worked with them - tangentially - back in the early 1990s on the leap to an entirely new chip architecture for computer workstations. That form of chip didn’t work out but we do think it fun that G&B was still making typewriters up to 2011, as The Guardian tells us. There’s a lot of overlap as technologies replace each other that is.

Further, old technologies never truly die. They might become insignificant in the general scheme of things but true death never does quite happen. It might end up being only the period movie business that will still use typewriters but it’s never actually going to end. As with Prince Phillip being a continued user of the services of buggy whip manufacturers.

It’s also true that the old technologies can sometimes still be the appropriate ones. We’ve been assured that this story is true, perhaps the most effective and efficient piece of foreign aid ever - a batch of manual typewriters. Madagascar had, as is obvious in an ex-French colony, a rigorous and complex paper based bureaucracy tracking land ownership. Typewriters are language based, different keys and keyboards are used for different vernaculars. These do also wear out, they’re mechanical devices after all.

At one point is was noted that no one could transfer land in Madagascar, for the typewriters were so worn that they could not imprint through the necessary carbon paper. Not having a market in land was of course hugely detrimental to the growth, even functioning, of the economy. A batch of Malagasy typewriters were made up on a special order and delivered. For the sake of those few thousands of dollars that entire portion of the economy was able to work again.

There’s no grand point here, it’s just an observation. Technologies don’t so much die as just become smaller, never quite shrinking away to nothing.

Trade protection is another of those temporary government programs

As Milton Friedman noted, there’s nothing so permanent as a temporary government programme. Our example today is the trade protections upon steel. The UK imposes tariffs upon certain grades of steel because some Johnny Foreigners have the temerity to try to sell to British customers at prices British customers would like to pay:

Britain's steel industry is braced for a decision on the UK’s tariff protections as soon as this week – potentially opening the floodgates to a wave of cheap imports.

Industry insiders fear that Liz Truss, the International Trade Secretary, is set to follow a preliminary decision that recommends the removal of a large number of products from so-called import “safeguards”.

Such a move risks exposing domestic manufacturers to excess production at bargain prices which they cannot match, experts have warned.

Clearly this would make all consumers of steel better off and we just cannot be allowing that to happen, can we? And yes, the costs of this do fall on steel consumers. One analysis of US tariffs put in place during the Bush administration showed that the job losses among steel using companies were higher than the total number of jobs in the US steel industry.

The protective measures were brought in under EU rules three years ago but were transferred into UK law after Brexit. They were originally brought in amid ratcheting trade tensions, with the US introducing similar measures for its own steel industry.

However, the UK legislation is now about to lapse, requiring a decision on whether they should be retained or dropped.

We’re in favour of sunset clauses on much regulation. This being a good example why. Since 2017 - or even 2018 if we’re to be picky about “three years” - the global steel price has about doubled. Neither rebar nor hot rolled coil are quite the correct measure but they are indicative. The ability of Johnny Foreigner to steal the crusts from the mouths of the waif-children of Good British Steel Workers has somewhere between halved and vanished over that period of time. And yet the insistence is that the temporary measures must be continued. Because those Good British Steel Workers rather like being able to overcharge for their output at the expense of everyone else in the country.

As Friedman said, nowt so permanent as a temporary government programme. Trade restrictions, once introduced, gain a constituency vehemently against their relaxation. The answer, of course, is not to introduce trade restrictions and where we have them, abolish them.

National capitalism errs as does the socialism kind

There’s a little market here of The Observer not knowing what they’re talking about:

Depop may not be of such strategic importance to the UK economy as the likes of Arm, or fellow chip-maker Imagination Technologies, both bought by foreign buyers.

Neither Arm nor Imagination actually make chips. They design them. That is, employ high skill and expensive Brits to do the hard work of laying out the circuitry, then testing it. The results of which are then handed on to the high capital requirement ($10 billion for a factory) chip fabs elsewhere who employ vastly lower cost labour to “make” them.

If you;re going to get that sort of thing wrong then yes, you’re likely to get this next incorrect too:

Losing Depop to US ownership makes the British tech sector look secondhand

Time’s arrow moves in one direction. It’s the US sector which is looking second hand, if they’ve just bought a British developed company.

But it’s the underlying complaint that is the real mistake. There’s an assumption that the nationality of who owns the company is of importance. When whether it’s this group of capitalists or that which does is of zero importance to anything at all. What does matter is that the people who use the app - services, consume the goods, whatever - in this country continue to be able to do so. For this is what makes us all richer, being able to consume the production of these companies.

At which point the complaint is revealed in its silliness. The capitalists own the residual from the economic activity stirred up by their product. We the users gain the product itself, they whatever fraction is left over after everyone else is paid. So, some foreigners have just bought those residual rights:

Etsy is to allow Depop to continue as a standalone business run by the existing team from London. That is some good news at least for jobs and knowhow in the UK, although with upstarts such as Vinted and Asos’s marketplace already on its tail, it’s not clear if Etsy will enable Depop to keep its edgy, underground feel.

The change in ownership also will not prevent young UK entrepreneurs developing, via Depop, skills in online selling, design and merchandising that could lay the foundations for new standalone businesses.

There is hope the UK can capitalise on their expertise to keep the resale sector on British shores, even if we can’t compete with the deep pockets of the US tech giants.

Why on earth would people who have just bought a slice of the British resale market want to limit the size of the British resale market?

That is, we don’t actually care about the nationality of the capitalists - nor even their residence. Nationalism in capitalism leads to the same sorts of errors that allying it to socialism does.

Daniela Gabor might want to try reading the source material on climate change

Professor Gabor, of UWE Bristol (probably better known to our demographic as the Merchant Venturers’ Technical College) wants to tell us that this idea of a carbon price, a suitably altered market price as the solution to climate change, simply can’t be suffered. For to do so limits the ability of government to exercise its power and we cannot be having with that now, can we?

It reduces democratic government action to higher carbon taxes,

What horrors. What’s the point of all the clever people being in government if that’s all they get to do? Even though she admits that the carbon tax would actually work:

The numbers behind private green investment seem to add up

At which point we’d suggest bothering to read the source material, which here is the Stern Review. In which the point is very strongly made that we want to use the carbon tax, not that exercise of detailed planning along those democratic lines.

Because markets are more efficient at the allocation of economic resources than the state, government or even democracy. There then being another point that an economist should be able to grasp. Humans do less of things that are more expensive, more of those that are cheaper. So, to deal with climate change we want to be efficient. The logic being that if we do things the more efficient, cheaper, way then we’ll do more dealing with climate change. If we do it the more expensive, government planning, way then we’ll do less of it. Just because that’s the way humans operate.

Assuming that anything needs to be done about climate change the answer is the carbon tax. Because that’s how we do more about climate change.

Well, yes, we expect this will be true

The latest nonsense to afflict the British housing market brings this comment:

First-time buyers in England will be able to apply for a discount of up to 50% on a new-build home under a government scheme.

The First Homes initiative could save buyers £100,000 or more. But some experts say that with demand for these cut-price homes likely to exceed supply,….

Well, yes, we expect that will be true. Offer something at less than market price and demand will outstrip supply. That’s definitional in the concept of market price - that being the price at which supply meets demand.

There is nothing special about housing - or health care, food or beanie babies - in this respect. The market price is the price at which markets clear, at which supply meets demand.

Still, this is nothing new for the Guardian to misunderstand:

The waiting list for council housing in England will almost double to two million people next year,…

Councils housing is offered at less than market price. So, of course demand outstrips supply, that’s inherent in the price at which it is offered. The very price itself is what creates the shortage.

People queue up to buy stuff at lower than market price? Gerraway, really?

Apparently we shouldn't have that circular economy when it's more expensive

As we all know the entirety of officialdom now buys into the idea that we should have a circular economy. This is something that has been pushed by the environmental movement for many a decade and in terms of intellectual fashion this has now won the day.

Our argument has always been that where this is cheaper, taking all costs into account, then of course it’s a sensible idea. Cheaper is better - achieving our goal, whatever it is, at the expenditure of fewer resources is a good idea. Where it’s more expensive it’s not a good idea as in a market economy greater expense is the very proof that more resources are being used to achieve that goal - whatever it is.

This isn’t how that fashion now goes, the circular economy has become reified. It’s a good, a goal, all by its lonesome, a pursuit that must be chased whatever the cost. Except, apparently, when it isn’t.

In a discussion of the new nuclear reactor designs being persued by Mssrs. Buffett and Gates the Union of Concerned Scientists tells us that:

These estimates find that closed fuel cycles are more expensive even after accounting for several factors that tend to offset the additional costs of reprocessing and recycle. These include the reduced demand for natural uranium and the potential to reduce the required footprint for geologic repositories for long-lived radioactive wastes.

This is used as an argument against the use of this technology. The circular economy is more expensive and therefore should not be used. Even to the point that not digging up Gaia for more uranium is a cost, not a benefit.

Well, yes, we agree, obviously. Higher costs are indeed higher costs and if they outweigh benefits then that should be the end of that idea or technology.

It’s just that the higher costs of that recycling are ignored when it is fashionable to do so - say plastic bags - and are proof perfect when it’s something that is unfashionable - nuclear power. Which isn’t, to us at least, how science works, concerned or not. The arguments about the costs of closed cycle systems are logically valid whatever it is that is being fed through such systems. But of course it’s terribly unfashionable to say so these days.

There does seem to be a simple solution to this

We’re told that European Union rules are to raise food prices here in Britain:

Shoppers face higher grocery bills as more EU red tape looms

Higher shipping and raw materials costs and EU red tape threaten consumers' hip pockets, says British Retail Consortium

Some parts of this do not have simple solutions. Rising global shipping prices, rising prices of traded foods, well, that’s just what prices do sometimes. Some other parts would seem to have simple solutions though:

Further Brexit checks from October are expected to force retailers to pass on additional costs to shoppers, the British Retail Consortium (BRC) said.

Ah - Brexit checks and European Union rules are not the same thing. The first is something we’re doing to ourselves. The second, well, given that we’ve left the EU rules can only affect what we send out of our country to their, not what we bring in from there to here.

"We will likely see these costs filter through in the second half of this year, and with the additional Brexit red-tape this autumn, retailers may be forced to pass on some of these costs onto their customers."

That Brexit red tape is, again, what we are doing to ourselves, not what some others are doing to us. Which is what does mean that there’s a simple solution here. Stop doing this to ourselves.

After all, the general complaint here is that we are to be made worse off by this rise in food prices. So, we should take action to reduce the food price rises. Or even, in this instance, stop doing something silly that increases food prices.

Nigel Lawson took great glee in killing a tax - not just reducing the rate or changing the range of it, but actually killing off entirely - in each of his budgets. While we approve of that idea we do note that it’s entirely contrary to the spirit of this current age. We can still achieve that same goal though, that of making life better for the citizenry, by killing off red tape. Or even, kill a bureaucracy - action this day to quote another former Chancellor.