Just to remind, you can tell all sorts of political lies with numbers
On seeing this we thought we’d better change our line of business. Net profit at 20% of turnover? Why aren’t we - and everyone else - piling into this sector?
Revealed: top 10 children’s care providers made £300m profits
Concern at growing role of private equity as councils struggle to meet spiralling costs
Sounds like the very thing, doesn’t it? Such profits must mean gross undersupply and thus plenty of room for us and others to fatten our own wallets:
Profits among the top 20 providers of care home and fostering places now amount to 20% of their income.
We thought we’d check though, for such margins are most, most, unusual outside the racier sort of tech operation. This is last year’s report on the same issue but they’ll not have changed their measurement method:
Aggregate profits measured using the popular EBITDA method (Earnings before Interest, Depreciation and Amortisation) amount to £265 million at an EBITDA margin of 17.2%.
Ah, they’re not in fact measuring profit at all.
There is a spectrum in politics concerning numbers. One can tell the truth, be misleading, that shades into casuistry and then to flat out lying. We’ll leave it as an exercise for the reader as to where this particular measure belongs on the spectrum.
So, one is doing children’s care, children’s homes. Which rather implies that there’s a home, a building, in which this is being done. Businesses, just like us individuals, tend to borrow on a mortgage to pay for those buildings. The interest bill on that borrowing is a cost of being in business - a substantial one. As is putting money aside each year - depreciation - to do the necessary reworking, repair and general maintenance on those very buildings.
As with anything property based in Britain these days these costs will be substantial.
So, the measurement of “profit” being used here is one before a substantial portion of the costs. That is, it’s not profit at all. It’s margin before interest, amortisation, depreciation.
Or, somewhere on that spectrum from truth to lying - again something for the reader to specify.
Just to make one further point. The second part of the report worries about the debt levels at these companies. Measuring profitability before interest plus also being concerned about high debt levels does strike us as being very close to cakeism. But then that’s rather the art of using numbers in politics, isn’t it?
Mrs Sunak and the Infosys dividend
We thought that perhaps one of these little details of how capitalism works might be useful.
Mrs. Sunak owns a stake in an Indian company, Infosys. That has paid her a dividend.
The Infosys accounting period - fiscal year - is to March 31. The latest accounts available are therefore for the quarter to 31 Dec 2021. Infosys pays an interim and a final dividend each year - or has done in the recent past at least.
Any dividend received recently will therefore be connected to the business activities, profits made, before Sept 30 2021.
Not that we expect this to change the shouting going on but we did think that someone, somewhere, ought to point this out.
The outrageous rip offs of capitalist free markets
Just such appalling behaviour, how could anyone possibly support this? Supermarkets are ripping off the poor consumer by, well, by cutting prices to said consumers:
UK supermarkets accused of ‘bombarding’ shoppers with cheap meat
Entirely disgusting, we hope we can all agree.
Britain’s biggest supermarkets stand accused of “bombarding” shoppers with offers of cheap meat, despite pledging to promote more meat-free diets to improve health and tackle global heating.
They are using money-saving promotions, such as two for the price of one, as a way of “pushing” meat, at odds with moves in the UK and globally for consumers to eat less of it, research found.
Consumers gain more of what they desire and this is - as the tone here makes clear - just appalling, isn’t it?
At which point to make that distinction between what people ought to want - even what they might say they want - and what they do want. Expressed and revealed preferences in the jargon. The best guide to which is to follow the money.
The supermarkets offer deals on meat because this at least appears to them to be profit maximising. That means that consumers must desire cheap meat - otherwise the offer would not be profit maximising. From which we can divine that consumers want cheap meat, whatever is said about health and or global heating.
As the aim of our having an economy - a civilisation even - is that more people gain more of what they desire this seems to be a good idea.
The only people who seem to be unhappy about this are those who think that consumers shouldn’t desire nor have more, cheap, or possibly even any, meat. But it is one of those very basic axioms that the people who get to define what they want is the people themselves, not others on their behalf. For those who would and do say that you cannot have what you desire because we say so are authoritarians and as such they can go boil their heads.
Supermarkets offering cheap meat? It’s the very proof perfect we require that capitalist free markets make us all richer. Because we end up with more of what we desire, not less of what some prodnose thinks we shouldn;t be allowed to have.
An amusing demand for slavery reparations
We are, of course, not meant to find such things amusing but then we tend to have a rather dry sense of humour around here. In the current demands for slavery reparations:
Sadly, too many of us do not know that it was the slavemasters – not the slaves or their descendants – who received reparations after slavery ended and the plantations collapsed.
We tend to think of that not as reparations but as a bribe to overcome political resistance. And, at £20 million, an absolute bargain at the price. Without that “compensation” slavery would have persisted for some more decades, at that great cost to those enslaved. It was a bribe, money well spent.
On the larger issue:
Work has already been done. The Caricom Reparations Commission has outlined a clear 10-point action plan with a tangible plan forward for creating justice.
One of those points leads to our amusement:
2. Repatriation
Over 10 million Africans were stolen from their homes and forcefully transported to the Caribbean as the enslaved chattel and property of Europeans. The transatlantic slave trade is the largest forced migration in human history and has no parallel in terms of man’s inhumanity to man. This trade in enchained bodies was a highly successful commercial business for the nations of Europe. The lives of millions of men, women and children were destroyed in search of profit. The descendants of these stolen people have a legal right to return to their homeland.
A Repatriation program must be established and all available channels of international law and diplomacy used to resettle those persons who wish to return. A resettlement program should address such matters as citizenship and deploy available best practices in respect of community re-integration.
Well, OK. The expansion of the Liberia programme perhaps, the country having been founded to do exactly this. If that’s what people want, then why not?
Except there’s little to bar this right now. We’d not insist that migration from, say, the Bahamas to Ghana is entirely simple but we’re equally certain that it’s possible. Also, that it doesn’t happen very much.
The reason it doesn’t is because the economic situation of near anyone in the Caribbean is between largely and hugely better than that of near anyone in West or south-west Africa.
That is, the very fact that the repatriation being demanded doesn’t currently happen is the very reason that reparations aren’t due. Because - we agree, the experiences of the intervening generations were very different - the descendants of slaves in the Caribbean are now better off than the descendants of the non-slaves in Africa. It’s not in fact possible to compensate someone for making them better off.
That very reparations demand proving that reparations are not due, yes, that does amuse.
We wouldn't call this enhanced wildfire risk a problem exactly
It is sometimes necessary to properly examine a statement before coming to any useful conclusion about that same statement:
Wildfires will pose a greater socioeconomic risk in years to come, scientists have predicted, as they increasingly burn agricultural areas and harm populations.
A study uses machine learning to model where wildfires are likely to strike in coming years, and their impact on humanity.
We agree, that doesn’t exactly sound good, but what is the driving force here?
This, the researchers said, is because: “Such elevated socioeconomic risks are primarily caused by the compound regional enhancement of future wildfire activity and socioeconomic development in the western and central African countries, necessitating an emergent strategic preparedness to wildfires in these countries.”
What they mean is that western and central Africa is going to become richer, therefore there will be something of value in those areas to burn. The wildfires aren’t exactly desirable, agreed, but hundreds of millions of people rising up out of historic and abject poverty seems a good result to us.
This all being something we think is underappreciated. Yes, it’s true, the standard models - all of those used by the IPCC and so on - do indeed say that emissions could rise dependent upon the technological path taken. Note could - there are paths where this does not happen, at least not to what even the IPCC considers dangerous levels. But all of those models also include the poor of the world getting rich.
As with this study this is one of the, perhaps the, major drivers of those worries about increased damages from events. A richer world simply has more to be damaged. It is the nett position that matters to human welfare and it is only at the very extremes of predictions that this becomes negative overall.
A threshold win - after two decades
It was a lacklustre budget that did little to address creating the conditions for economic growth, and saw the UK saddled with the highest tax burden in 70 years. But there was one small victory to celebrate.
For over two decades the Adam Smith Institute has tirelessly and repeatedly made the case for bringing the threshold at which National Insurance is levied up to that at which income tax is levied. National Insurance is a tax, not an insurance premium, despite its name, and it was always unjust to tax people who were below the minimum wage the government deemed necessary.
Finally, after more than 20 years, the thresholds are to be equalized. It is one small but much appreciated victory for common sense and fairness. It is small, however, compared to the stealth taxes imposed elsewhere. Rishi Sunak has been a tax-increasing Chancellor, not a low tax Chancellor. Unlike Nigel Lawson, who with Peter Lilley used every budget to lower taxation and abolish at least one tax, the present Chancellor has raised at least 15 taxes during his term. He uses fiscal drag, freezing thresholds and allowances to pull people into higher tax brackets by inflation so that it does not show to the general public as tax increases, but it does show to economists.
The increase in the National Insurance levy by 1.25%, the so-called “Rishi Tax,” will increase the costs of employment and put up prices generally. This is especially true of businesses where wage costs form a large part of operating costs, such as the hospitality industry. People will blame “inflation,” not seeing that the “Rishi Tax” is a major cause of the higher prices.
But one small victory is better than no victories at all, and it is a cause for celebration that we will no longer tax, via National Insurance, those earning below the minimum wage. So we thank the Chancellor, along with others who came late to this game and added their support to our campaign. Sometimes we have to take the long view, as we did with fair treatment for Hong Kong people and Freeports, but we are prepared to put in the years if it takes years. We have a huge agenda, and will still be here to advocate it long after this Chancellor has moved on. We therefore celebrate a small victory today, and hope for bigger ones tomorrow.
But what would be wrong with the Uberisation of the NHS?
We’re aware that Hunt means something a little different here:
The NHS is moving towards an “Uberisation” of GP services, with patients forced to see a different doctor every time they book an appointment, Jeremy Hunt has warned.
He’s muttering about the cab rank rule being applied to GPs in the same way it is to lawyers or, ahaha, taxis.
But let’s widen the point a little and think about what Uberisation of the NHS would mean, if the effects were the same as those of Uber itself:
First, platform users gain 72 cents per dollar spent on these platforms. Second, welfare gains are disproportionately higher in locations and times that have been underserved by taxis and public transit. Third, we estimate that 64% of welfare gains come from dynamic pricing used by these platforms.
Gosh :
…we estimate that in 2015 the UberX service generated about $2.9 billion in consumer surplus in the four U.S. cities included in our analysis. For each dollar spent by consumers, about $1.60 of consumer surplus is generated. Back-of-the envelope calculations suggest that the overall consumer surplus generated by the UberX service in the United States in 2015 was $6.8 billion.
It first argues that Uber's success stems not (just) from regulatory arbitrage or other malfeasance, but from having created a far more efficient market for car-hire services. It then argues that Uber's rise is cause for both optimism and pessimism. In addition to its obvious positive effects on consumer welfare,
The effect of all of this being that:
Chicago's business school asked its panel of 43 eminent economists if "letting car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements, but without restrictions on prices or routes, raises consumer welfare," all 40 who replied said yes
That is nice, isn’t it?
Allowing competition free of regulatory constraint makes consumers - that’s you and us out here - better off. So, we should do that then, shouldn’t we? Uberise the National Health Service immediately.
Sometimes economics is easy.
Red Lines
At the outset of Putin’s invasion of Ukraine, he warned the west against intervention, lest it meet “consequences greater than any you have faced in history”. Since then, Russia has shown no compunction in shelling the cities it attacks, possibly recklessly, possibly missing military targets; most likely targeting indiscriminately to demoralise defenders. Russia is also accused of shelling the humanitarian corridors it promotes so energetically; of firing on protesters in the occupied city of Kherson; and of deporting civilians to Russia. Whatever the details, ten million Ukrainians - just under one quarter - have been displaced.
When Herman Kahn wrote On Escalation in 1965, he noted the parallel of the fifties game of “chicken”, in which American teenagers drove their souped-up bangers at each other, to see who would swerve first. He noted that one winning strategy is ostentatiously to throw away the steering wheel, to convey that swerving is off the cards. Is this what Putin is doing? If so, how should NATO respond? Any answer is complicated by NATO’s own game of chicken: “strategic ambiguity”, intended to leave first the Soviet Union and now Russia uncertain about where the West’s red lines lie and what happens if they are crossed.
It is arguable that the present pass calls rather for a programme of deliberate and proportionate responses, well telegraphed to the other side. There are two elements to such a programme. One is to establish the threshold for action - those famous red lines. These may be territorial, attacks on the territory of a NATO member; or they may be escalation on the battlefield, that is using the chemical, biological or nuclear “weapons of mass destruction”. Complications arise out of stealth - there is evidence that in October 2014, the Russians attacked NATO facilities in the Czech Republic with deniable special forces; ambiguity - both sides have low-yield tactical nuclear weapons; and bad politics - the West funked it when Russia and Syria used chemical weapons in 2013. This may be a reason for some of that “strategic ambiguity”.
Then we turn to military responses. The West is well-informed and well-armed, so has ample options. The proportionate course is to limit retaliation to the military units violating the threshold and their associated logistics and command systems. For example, a drone strike on NATO territory may be held to justify destroying the launch-pads themselves, together with their associated radar and HQ set-ups. This is complicated, if (to take this example further) drones are launched from aircraft, warships or remote locations. Further complications arise out of the use of weapons of mass destruction, where the West is well enough armed to have the choice of not responding in kind.
These are serious matters, to be treated accordingly. How else to walk the narrow tightrope of deterring our antagonist by keeping retaliation on the agenda, without going straight to Kahn’s terrifying climax, “insensate or spasm nuclear exchanges”?
Things that are not quite as they are said to be
Apparently there’s an ethnicity bias in the way car insurance is charged for:
Hundreds of thousands of people of colour may be paying an “ethnicity penalty” of at least £280 a year each in higher car insurance costs, an investigation by Citizens Advice has claimed.
The national charity said its year-long investigation had uncovered a “shocking trend” of people of colour paying a lot more for motor cover than white people, and that the penalty was up to £950 in some locations.
Except that’s not in fact what was found:
For the “customers” the researchers picked names often associated with certain ethnic groups, though Citizens Advice said these ended up not having much impact on the prices being quoted. “This suggests this penalty is paid by everyone who lives in an area, regardless of their ethnicity.
So it is in fact not an ethnicity bias. That being the standard way that such ethnicity bias is measured in such surveys - send out equal CVS but with ethnically identifiable names and see who gets the callbacks for interview as one example - and by that standard measure there is no such bias found.
What Citizens Advice has actually found is that insurance rates differ by geographic area. Which most of us would grasp as they do ask us for our postcode before giving us a quote.
But those first paragraphs will still do their work, be referred to again and again in the future as a brick in that wall of evidence insisting society is structurally racist. The study which shows there is no ethnicity bias will be quoted as proof that there is.
Ukraine’s latest weapon—tax reform
In the midst of their amazing work fighting off a Russian assault, the Ukrainian government has found the time to reform their tax system. Glorious indeed!
Some people might question their priorities, but it makes sense to put the tax system onto a war footing, like the rest of the country.
There is a famous precedent – the British PAYE system (for deducting tax from employee wages, paying it straight to the Treasury without the employees even seeing it) was created as we were facing the Nazis in the Second World War, allowing the government to collect more tax, more quickly, more certainly and more cheaply.
But there are questions about whether PAYE was the best system – either for the war or to rebuild the post-war economy. Has 2022 Ukraine done better than 1940s Britain?
There are three parts to Ukraine’s reform (based on an unofficial translation of the announcement):
business profits tax and VAT have been abolished, and replaced by a 2% turnover tax;
for small businesses the tax will be voluntary;
alongside the tax reform is a radical regulatory reform – business regulations are all abolished.
The regulatory reform is definitely a good thing. Regulations prevent new businesses from being formed, and restrict existing businesses so that they produce less, at a higher cost, than they would otherwise be able to do. The pronouncement says that the government will “cancel all checks for all businesses…so that the cities can live”, and instead businesses will simply have to operate “within the law”. With permits, restrictions, regulation and government forms abolished, businesses can operate within a simple rule of law rather than an overbearing bureaucracy.
That will help keep their wartime economy functioning as well as it can, and will give the best chance of rebuilding and starting new businesses to encourage a fast recovery after the war. I hope there is a Hero of the Ukraine medal for whichever government official thought of this – a functioning economy is an even stronger service to the country than destroying an enemy tank.
The tax reform also is a good emergency measure for during the war. It is simple and allows businesses to concentrate on maintaining production and supplies in almost impossibly difficult times. But my enthusiasm is not quite as great.
Making the tax voluntary for small businesses is a generous emergency response that is unlikely to be continued once the war is over (although some sort of tax relief for small businesses should probably continue).
Abolishing the profits tax is also good; we know that they result in less investment, less company formation, lower growth, and ultimately a smaller economy and fewer (or less well paid) job opportunities.
But although I like low, simple taxes, a turnover tax can cause problems. It is not necessarily the best way to run a war economy, and it is certainly not the best long-term way to rebuild the economy after the war.
The first problem with a turnover tax is that its impact depends on the profitability of the business. For a business with a 20% profit margin – so that 20% of its turnover is profit – a 2% turnover tax is only a small problem. But for a business with a 5% profit margin, a 2% turnover tax would take out two fifths of its profit. And for a business with a 1% profit margin, a 2% turnover tax is disastrous.
In reality many businesses would pass a turnover tax on to their customers, by increasing their prices (which they can probably do without too much loss of sales, because all their competitors will be doing the same), and in this case the increased prices should mostly be cancelled out by the abolition of VAT.
However, even then it is possible for a low margin business to have to pay more tax under a 2% turnover tax than a 20% VAT, because VAT effectively allows you to deduct the VAT paid by your suppliers. For that reason, even in war, I would have considered keeping VAT, perhaps at a reduced rate, but with the option for small and medium sized businesses to pay a 2% turnover tax instead.
But the bigger problem with a turnover tax will come after the war.
A turnover tax is known as a ‘cascade tax’ because, like a waterfall, it gets more dangerous the further it falls - the tax becomes more damaging the more layers of business it goes through, because each separate business in the supply chain is charged the turnover tax again, without the credit that VAT gives for the tax paid by the layer below.
This encourages conglomerates, with one company doing everything, to reduce the tax bill, rather than outsourcing to lots of different suppliers. If one business does everything, from producing raw materials, then manufacturing, to selling the finished product, then there is only one lot of tax. But if components, for example, are bought in, there will be two lots of tax (on the producer and the seller), on what is ultimately the same money received from the end customer.
But modern businesses are more complex than that; it is very common for the raw materials to be produced by one company, then refined by a second company, then components to be made by a third, then the product to be assembled by a fourth, sold to a wholesaler as the fifth company in the chain, and then finally sold by a retailer as the sixth. Six companies in the chain, so six lots of turnover tax - and many supply chains are more complex than that.
The turnover tax therefore encourages businesses to try to do everything in-house, to reduce the number of layers in the supply chain and so reduce the number of times the tax is charged on the same ultimate product. And not just the main production, but all the ancillary business services as well— premises cleaning, accounting and other professional advice, transport, and many others—everything tends to be brought in-house to save tax.
That is usually inefficient, because one company is unlikely to be good at everything. It tends to have less innovation than when you have lots of different businesses each trying to improve their own little bit of the supply chain. And it damages small businesses, because they do not have the capacity to do everything themselves and so need to outsource—thus giving them a higher tax burden than a big company.
So Ukraine’s tax reforms have the right spirit: removing the burdens on businesses so that they can continue to produce and supply goods and services through these appallingly difficult times. But if they continue in the same way after the war, it risks damaging the recovery, particularly by restricting the formation of new, innovative, specialist smaller businesses.
A better plan would be to continue with a VAT, but a reformed one that is as low and simple as possible, and with the option of a turnover tax for small businesses who find VAT too complicated and would prefer a simpler, but less efficient, system. Any profits tax that is reintroduced should be as low and simple as possible, because we know that profits taxes are damaging to business growth and job creation.
I wish the Ukraine a speedy victory, and that they can soon make the Adam Smith toast to “peace and low taxes”.
Richard Teather was a university academic for twenty years, specialising in international tax, and advising governments and business organisations around the world on tax reform.