2009 November » Tax Research UK

We have to stop chaps regulating chaps – or we will destroy all we value, including democracy itself

Banking, Economics, Ethics, Regulation 1 Response »

Nov 262009

The world of banking has won two more victories over the rest of society.

The challenge to its right to charge excessive fees to people who make the smallest error in running their bank accounts has been overthrown by the new supreme court. This is regressive tax in all but name: it is now the poorest in our society who will continue to be charged excessive fees to bail out our banks.

And the Walker report on banking reform in the light of the banking crisis has proven to be even weaker than anyone feared. Julia Finch has put it well in the Guardian:

Nine months’ work. One hundred and eighty submissions of information and opinion. A weighty interim report, and 167 pages of final recommendations: so much work for so little. Sir David Walker‘s review of the corporate governance of banks, ordered back in February, is a crashing disappointment – an anti-climax of even greater proportions than the anodyne code of practice he drew up for the private equity business in 2007. Here was a chance to rewrite the rulebook in a bid to ensure that there would be no re-run of last year’s crisis when two of Britain’s biggest banks, it has now emerged, needed £62bn of secret Bank of England support to keep their doors open. Instead we have some relatively minor tweaking.

Walker says he is "sympathetic with Guardian types … it is outrageous that we have been left all this debt". But he is an investment banker and an old-school City man. He was never the man for this job.

The question is: why was he ever given it?

Given that for all practical purposes his report changes nothing at all – except disclose the number of employees earning more than £1 million a year – for fear ‚Äòtalent might go abroad’ – this is the only relevant question.

We had the stupidity of the Foot report on tax havens – written by a tax haven insider with clear intent to excuse them of all wrongs – and now the Walker report on banking – written by a bank insider with clear intent to excuse them of all wrongs.

In the meantime the abuse goes on. The capture of the state by an elite in banking is becoming more and more apparent. And we are all paying for it.

When will politicians stand up and challenge this?

That question is at the core of the future of democracy – because have no doubt about it, these people don’t believe in democracy. If they did they would not treat it with such contempt. For them the state is just one thing – a mechanism for diverting resources to them for their use. I give them credit: they’re good at doing just that. But the process has to be brought to an end.

Australia’s development fund allowed to use tax havens

Development, Secrecy jurisdictions, Tax Havens Comments Off

Nov 262009

Government takes the brakes off.

The Green Party in Australia tried to stop that country’s international development fund investing through tax havens yesterday. It failed:

THE $64 billion Future Fund will continue to be free to invest through tax havens such as the Cayman Islands and will also be freed from a raft of restrictions relating to pay scales, freedom of information laws and the use of its $4.3 billion Telstra shareholding, under reforms unveiled by the Finance Minister, Lindsay Tanner, in the presence of the fund’s chairman, David Murray.

Mr Tanner told the National Press Club that given the structure of the industry and complexity of international tax law, investing through asset managers domiciled in the Cayman Islands was ”a common practice and often difficult to avoid”.

No it is not. It is a choice as to whether to avoid it or not. The difficulty is that the ‘funds management’ industry and the combined forces of the lawyers and accountants of the world say that these structures are hard to avoid even though they unambiguously use arrangements that are used to facilitate the biggest scandal since slavery – the movement of US$1 trillion each year from the world’s poorest people to the world’s wealthiest people (you – the reader, I suspect, and me too).

And the usual excuses were offered:

”And the Cayman Islands is changing,” he said. ”It is negotiating a tax information treaty with Australia, and joined the OECD list of jurisdictions that have substantially implemented the internationally agreed tax standard.”

Twelve Tax Information Exchange Agreements is not transparency, honesty, accountability or even an indication of any benefit actually arising. The OECD has to hand its head in shame for setting this absurd indication ‘compliance with international standards’.

And the Australians (like the UK, and others) have to be ashamed of the duplicity in their position:

The fund’s annual report revealed that in the past year it had opened five subsidiaries in the Caribbean tax haven at a time when the Prime Minister had been part of the global push to crack down on tax shelters.

Only Norway has had the courage to begin tackling this issue. It is long overdue that other’s did.

Thanks havens for new taxes

Secrecy jurisdictions, Tax Havens, Tax justice 1 Response »

Nov 262009

I spoke using the above title at a meeting in Parliament last evening, previously noted here.

For those interested, these are my speaking notes set out as a mindmap.

Dear Tim, love Alex

Economics 17 Responses »

Nov 252009

Tim Worstall, the right wing blogger who likes to think he can answer all objections with reference to neo-liberal economics, challenged some of the assumptions in the Compass tax report, with reference to the Laffer curve.

Alex Cobham, a real economist, has rebuffed his claim to authority in a paper not freely available on the web, writing as follows:

Tim, I think this paper’s assumptions are so strong that – at least in terms of the argument that you use it to make – the approach may in effect assume the answer that you are looking for.

Here is the abstract in full:

"We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring ”constant Frisch elasticity” (CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation."

Although the paper can’t be accessed freely via the NBER, you can find the University of Chicago version here:
http://mfi.uchicago.edu/wp/pdf/trabandt_uhlig_laffer_vers21_WP.pdf

The model has three key (sets of) assumptions on which any results must therefore rely:
i. the assumptions underpinning the neoclassical growth model; and
ii. the assumptions underlying constant Frisch elasticity preferences.
iii. a closed-economy

Let’s take these in turn…

(i) The neoclassical growth model has been largely superceded by endogenous growth models, although it is still taught in e.g. undergraduate development economics courses as a simple way of begining to think about the growth process. Steve Keen’s debunking of the assumptions (e.g. showing the internal contradictions, never mind the lack of empirical support) is a little over the top but very clear; see his book but also e.g.
http://www.debunkingeconomics.com/Talks/KeenGrowthTheory.PPT A longer perspective, encompassing the theory’s marginalisation of income distribution issues and highlighting some key flaws (e.g. the critical lack of evidence for fundamental underpinnings like the production function) is in e.g. Pasinetti: http://www.unicatt.it/docenti/pasinetti/pdf_files/Treccani.pdf Since the assumptions of the neoclassical model cannot be stood up, and have a direct bearing on the returns to capital and labour, we should be rather wary of putting much weight on the predictions of tax elasticity (of e.g. labour supply!) that the paper generates.

(ii) The assumption of constant Frisch elasticity is, if anything, a more serious concern. The Frisch elasticity of labor supply is defined as the percentage change in labor supply resulting from a one percent increase in the expected wage rate, holding the marginal utility of wealth constant. Constant marginal utility of wealth means, for example, that an extra £1 is worth the same to someone with nothing or someone with £10m. You can think for yourself what that assumption might do to an assessment of responses to taxation.

In their ‘Proposition 3′, the authors demonstrate mathematically how the Laffer curve emerges from the CFE (and broader neoclassical) assumptions – the existence of the curve is thus entirely based on the mathematical extension of these assumptions.

(iii) The closed-economy assumption is an obvious concern for anyone who thinks that there may be anything to phenomena like international tax competition or tax-induced capital flows – e.g. profit-shifting , which is estimated to reduce Germany’s tax take by more than 10% – see Huizinga and Laeven: http://www.luclaeven.com/papers_files/huizinga_laeven2007.pdf When this model is used to calibrate real economies, in which we would expect to see both real capital flows and also artificial shifting of profit and income declaration locations, it seems inevitable that the calibration will give rise to upward bias in the estimates of capital tax elasticity. This would make the authors much more likely to find (erroneously) that any given real country is near the peak or even on the wrong side of the capital tax Laffer curve whose existence they have effectively assumed.

This is exactly what transpires: “we find that the US can increase tax revenues by 30% by raising labor taxes but only 6% by raising capital income taxes, while the same numbers for EU-14 are 8% and 1% respectively.”

[Open-economy assessment might favour, for example, better regulation of such international manipulations, rather than capital tax cuts.]

**
A final thought, Tim: even after all the assumptions are made, and the results thereby determined, the authors still find that tax cuts would not pay for themselves in either the US or the EU as a whole – indeed, tax increases would increase revenues. And all of this is without mentioning the likely inequality impact (ignored in the paper), or the fact that the authors focus on taxes being used to pay for transfers rather than e.g. public goods (which the authors, in fairness, point out as distorting the findings)… Imagine what the results of an assessment based on more realistic assumptions might look like.

That’s an argument Tim.

Note for future reference.

IMF to look again at Tobin tax

Transaction tax 1 Response »

Nov 252009

IMF to look again at Tobin tax – Accountancy Age.

Good news.

Enough said.

People do want tax justice, not cuts

Economics, Tax justice 19 Responses »

Nov 252009

Stephanie Flanders, the thinly disguised Tory in the BBC’s economics’ department wrote on her blog today:

We’ll be debating the timing of Britain’s fiscal budget squeeze until at least the next election. But what about the how?

On the Today programme this morning, Richard Murphy, director of Tax Research UK, made the case for raising an extra £47bn in taxes to fill the fiscal hole, almost entirely from the top 10% of earners or corporations. It has a good populist ring to it. But it doesn’t seem likely to win over the public – or most economists.

I was, of course, discussing the Compass report on tax.

Flanders, a pure down the line economist is, of course, not convinced. She knows here bread is buttered by pandering to wealth. But she’s wrong about the electorate. Compass did some polling with YouGov on a sample of more than 1,000 people to support this report, which I co-wrote. The polling was pretty emphatic. There were three questions:

When all taxes are taken into account – income tax, national insurance, VAT, excise duties, council tax etc – the richest households pay a smaller share of their income in tax than the poorest households. The overall tax rate for the richest 10% is 34%; for the poorest 10% it is 46%. In principle, do you agree or disagree with this statement‚Ä¶?:

“The government should change the tax system to ensure that the richest households pay at least the same percentage of tax as the poorest households”

The finding to this one was 78% strongly in favour or agreeing; just 14% disagreed in part or strongly.

The second question was:

Until last year the starting rate of income tax was 10%, paid on the first £2,220 of taxable income. Last year this was abolished to pay for a 2p reduction in the standard rate of income tax. Do you agree or disagree with this statement‚Ä¶?:

“The government should restore the 10p starting rate by increasing taxes on the top 10% of households by income”

Here the finding to this one was 59% strongly in favour or agreeing; just 13% disagreed in part or strongly.

And finally they asked:

Some people say that the tax system should be changed to reduce the income of the richest 10%, and increase take home income for the remaining 90% of people. Their proposal has 4 key elements:

1. the income tax rate would be 50% for anyone earning more than £100,000 a year;

2. the cap on national insurance would be lifted and also applied to investment income;

1. the income tax rate would be 50% for anyone earning more than £100,000 a year;

2. the cap on national insurance would be lifted and also applied to investment income;

3. and new anti-avoidance rules would be introduced and simplified to ensure that all income, apart from standard personal allowances, is taxed;

4. the 10p starting rate of income tax would be restored.

Overall this new package would raise enough tax to allow government borrowing to be reduced sharply without major cuts in public spending and many economists believe the economy would be less likely to slip back into recession.

Which of these views comes closer to your own?

“This package is a good idea: it would make Britain fairer, it would assist the recovery by giving more money to 90% of all households, and ensure that our public services don’t suffer”

“This package is a bad idea: many high-paid people and international companies would move to other countries, and Britain’s economy would suffer”

Don’t know

And the finding to this one was 62% favoured the first statement, 25% the second and 13% did not know.

As such Stephanie Flanders is wrong: there is support for this package, it’s just not being offered to the public.The reality is that if it was it would be very popular indeed because people have an innate sense of justice that so far, and with regret, politicians will not respond to because economists say it does not exist. But it’s the economists (and especially economists like Flanders – ex the Institute for Fiscal Studies, I note) and not the people who are wrong.

And let’s ask the simple question that Stephanie Flanders seems to have ignored, but to which I drew attention in the interview. Why would a tax proposal that makes 90% of people significantly better off be unpopular? Come on Stephanie – you believe in rational people – so why would they vote against their self interest?

Will the best off cut their income if tax rates rise?

Economics, Tax avoidance, Tax evasion, Tax justice 29 Responses »

Nov 252009

There has been an interesting response to the Compass tax report. One has been to challenge why my co-authors and I did say that:

Of course the right will argue that higher taxes will just lead to higher rates of avoidance or the flight of talent. Research by the Work Foundation busts the latter myth. Our view on avoidance is that if the top rate is increased while at the same time reforms are made to the tax system, minimising avoidance and evasion, the taxable income elasticity is likely to be small, if not zero.

Tax is a life issue, not just an economic one. As an accountant I know that. Of course it is. But, as is so often the case, those who claim that the well off will reduce their effort in the face of tax rises entirely miss the point. Those who think this adopt the assumptions of conventional micro-economics, with all its flaws. These assumptions are wrong: for a start this assumes people can respond to changes in tax. This may not always be true. And this model assumes that people conform to the model of homo economicus: that people are wholly rational but only with regard to matters relating to cash reward and that nothing else matters.

First, our target is people in the top decile of income earners. These people earn on average £94,000 a year – but many earn much more. A significant majority of these people (also representing the majority of tax paid) earn less than £150,000. I could, no doubt, work out what proportion of them is in employment: the reality is it is a significant number. Most of these people will not be rewarded by the hour; most of them with variable earnings will receive that variable pay in accordance with criteria quite unrelated to labour effort expended. A great many will work hours way above contract demand and do so for reasons quite unrelated to money. In other words, they have no reason to change their work effort depending on tax rate. And some will have no measurable opportunity to do so.

More important though, most in this large group will, based on my experience, spend a great deal of their income. Savings where they exist will be in institutionally run pensions in this income grouping. Remaining cash will be committed to excess consumption, over-sized housing, school fees, ponies and more. This is the reality for those who earn (as opposed to those who live on unearned income, who byu definition will not be changing their effort) in this group: they are committed beyond their means despite those means being amongst the highest in society.

As such for many their option to withdraw effort and reduce earnings in response to a tax increase does not exist. Rather, many, if not most in this group behave in exactly the same way as economists assume the low paid do in response to a tax increase: they are price takers and respond against their fixed budget commitments by seeking to increase effort, putting in more work to maximise reward to maintain what is by far the most important social goal of this group (and others), which is keeping up relative reward and appearing to out-perform others, usually indicated by conspicuous consumption. For this socio-economic reason the impact you suggest might exist is highly unlikely to do so.

And as I note, those with investment income will not be sweating harder. So their behaviour does not affect this issue.

And there is another factor to take into account. By eliminating tax avoidance for this group by setting minimum tax rates we do two things. First, we make net return have a direct relationship with gross earnings – so the incentive to work harder in the face of increased tax is enhanced because the incentive to avoid tax has been removed. And second, this removes the harmful and wholly destructive game of comparative tax deduction competition that many will play to seek to outperform the perceived tax avoidance of others in their peer group.

Finally, there are some other realities: the first is there is little demand for Brits abroad. The second is few can work abroad in places where it is easy to go because they can’t speak the required language. The third is a lot of self employed are not in this earnings bracket, and those that are will not tax evade any more to get out of tax at this level than they do now. Fourth, really successful self employed people are not driven by money – or if they are it is as a gross and net a net measure.

I could go on, but the point is clear: the model on which claims that people with high earnings will reduce their effort in the face of tax increases ignore the realities of life.

Which means they really are not a safe basis for predicting outcomes. Which is why I ignore them – especially when, as is the case proposed, the change is hard to avoid and reasonable.

Is that really the best the Tories can do?

Conservatives, Economics, Tax avoidance, Tax Havens, Tax justice 3 Responses »

Nov 242009

I was on the Today programme this morning discussing the new Compass report on the need for a fairer tax system for the UK. You can hear it here for the next seven days – start at 2 hours 55 minutes – just move the slider to very near the end of the programme.

I was opposed by Michael Fallon MP – the Tory who wants to chair the Treasury Select Committee if they win the next election. And what did he have to say? That if the tax changes we propose came in the rich would flee and we’d all suffer as a consequence.

Remember the context in which he said this: I’d made clear, and he knew, that our proposals are to make 90% of British households better off after tax, and 10% – the richest, worse off.

And now let’s unpack what he really meant. First he was saying that these people should be paying proportionately less tax because in cash terms they already pay more. This is a wholly spurious argument not far removed from promoting a poll tax. Second, he clearly implied as a result that they should pay less because they are worth more to the UK economy. This is, I think clear indication of what the Tories think of most who live in the UK. Third, he has such regard for this group that he thinks they can, will and should hold the country to ransom to advance their own self-interest. In what low regard he holds those who earn higher incomes – or maybe he knows them too well. Either way, it’s a damning indictment of him, those he knows, or both.

As an argument it really is a very poor one. It gets worse. The only place where most people have a right to go is the EU. 10% of the UK is not going to the EU. they tax more, at least in those places where there is work to be had. Latvia is few people’s destination of choice right now. And Sir Michael really ought to face a reality: there aren’t high paid jobs for millions of British people in the EU for one very good reason. They might be able to speak English and come here with ease but it’s a sad fact that the vast majority of us can do little better than read a menu, ask directions and hold a very basic conversation in one, at most, other EU language – the most likely being French where tax is not an incentive to move.

So the reality is Michael Fallon’s argument does not stack at any level at all.

And there’s good reason for that: there is no good argument against tax justice.