Tim Worstall has written a really very silly article about me on the Telegraph's blog today. Worstall's gripe is with my claim that there is no such thing as objective truth in economics. So let me show that there is only, as I said, subjective opinion.
Worstall said in his article:
For a start, corporations don't pay tax at all. Ever. A tax results in some live human's wallet getting lighter: companies are not live humans so therefore they do not pay tax.
Last week the CBI claimed:
In a speech this morning at a CBI / Policy Exchange business taxation debate, John Cridland, above, the CBI Director-General, said that UK businesses pay around a quarter, £163 billion, of the country's total tax revenue, and that a competitive tax system is essential to the economy and prosperity.
Now here we have a conundrum. Wortsall says businesses can't pay tax - ever. And the CBI says it most definitely does pay tax. But Worstall says there are only objective facts. So are the CBI wrong? So wrong that they can claim to pay £163 billion and not actually have paid a single pound, ever, as Worstall claims?
Or could it just be that each has selected their argument to support their subjective view on this issue and have presented their case in good faith in that context? That, I suggest is the case - and as many will know - I disagree with both of them on this issue! Which simply supports my case that:
In economics the idea of objectivity is a myth created by pro-market economists to excuse the flaws in their assumptions which would otherwise prevent them reaching their highly subjective conclusions.
Anyone who claims to be an objective economist is, in my opinion, by definition not telling the truth.
It's a trap into which Worstall seems to have fallen, rather readily. Comfortably for me Worstall's own insistence on his own right to determine the objective truth when it is quite clear that people can, in complete good faith, hold an alternative view, makes my case for me.
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If corporatons are tax neutral, why do they always want, and lobby for lower taxation?
The answer is, of course, that it is an effortless way to increase profits.
Unless the corporation is a monopoly it can’t automatically pass on tax increases without threatening revenue and profits.
I haven’t noticed any across the board price reductions that track across the board tax reductions, which is what you might expect if you’re daft enough to listen to portugese metal traders.
Perhaps they are using the money saved to create jobs and innovate, but I haven’t noticed much of that either.
And never forget the weird (and abhorrent) situation in the US – so much beloved by Adam Smith Institute groupies – that, for political campaign funding purposes “Corporations are people”.
Don’t believe me? Look up http://www.care2.com/causes/corporations-are-people-too-goodbye-campaign-finance-reform.html
Funny how corporations can be people when they want to bribe politicians, and not people when they are liable to tax!
Let’s get something clear.
Worstall peddles myth as if he were some sort of scientific guru. When you examine his profanity-laden, swivel-eyed rhetoric, you don’t get anything more than a disaffected sixth-former – someone who is spurned, someone that likes to commentate on issues he knows nothing about, just because he can. Fair enough, it’s the internet.
One monkey with one typewriter could be used as a snipe.
What is worse, of course, are the familiar posters on his childish blog that express even more obscene views.
Although this debate is profoundly frustrating I am glad that Mr Worstall has made his contribution as it perfectly illustrates what I call the ‘reactionary fallacy,’ which is to assume that the rejection of a statement or principle necessarily entails the affirmation of its opposite. So, it is assumed that the rejection of the possibility of objective knowledge necessarily entails the affirmation that there are only opinions, that we’re all locked up inside our heads and that all claims to truth are entirely arbitrary conjectures.
You’ll notice that pure, unmediated objectivity and pure, ungrounded subjectivity are mirror images of each other and for a good reason: they’re both ridiculous. It’s the stark contast between ‘mere opinion’ and ‘indisputable fact’ that needs to be rejected. Nobody is refusing objectivity in favour of some entirely unanchored subjectivity, floating free as if in a dream. Nobody is so clueless as to be totally detached from reality; nobody is so hyper-rational as to be free of their particular position in existence. In philosophy it’s called the ‘view from nowhere,’ the place with no perspective from which one can say things simply as they are. It’s hokum.
Human beings are incredible truth makers. The fact that we make facts takes nothing away from them. These facts fly us to the moon and nourish billions, but they’re not godly, not divine. They’re subject to revision and, indeed, failure. We can never be sure just how long they’ll hold up or what will break them.
Any scientific fact that cannot, in principle, be questioned, found wanting and replaced is not really a scientific fact. This goes for all sciences. You can cry ‘but the earth is round, not flat and that’s a FACT!’ all you want but upon closer examination the earth is actually slighty flattened at the poles, not round at all!
And on it goes…
Congratulations, Richard, I think you may have found your way into a debate even more fractious, heated and belligerently furious than that of tax justice: philosophical truth and certainty!
Thank you for this comment – much appreciated
And i admit that’s a debate I have been engaged rather quietly in that debate for a long time
Worstall does not even seem to recopgnise that it exists – or at the least, thinks he has resolved it!
So, who does pay business/corporation tax? Shareholders? Employees? Customers?
Businesses/corporations collect the tax, they do not “pay” the tax.
The obvious answer is that a) companies do – which is why managers are so keen to cut tax to increase the funds under their control (and Barclays proves managers do control such funds) b) the behaviour of companies suggests shareholders do c) the spillover to others is almost entirely spurious and if it exists suggests monopoly abuse in need of regulation.
No such thing as objective truth in economics? You do not believe this, surely? If you did, why would you be engaging in discussion on the subject?
If this were really the case it would be impossible to make any assertion at all, nor to have any idea of what the possible effect of any course of action might be.
Economics is a science. Terms are defined, observations are made, relationships and consistences are detected, explanations are postulated and these explanations are tested either by mental experiments or by comparative observations where different sets of circumstances apply. The accounts of such observations may be spurious but this is testable by further observations and in some circumstances, by actual experiments.
This has nothing to do with being reactionary or progressive or left or right. It is about rationality.
Economics is not a science,
People are not rational.
Nor are economists.
I believe there is evidence based argument in economics. I do not believe there is objectivity. We all choose our evidence subjectively.
Richard, do not confuse the projection of your own approach (not being rational, selective choice of evidence) with that of those who do make the attempt to approach economics from a rational and evidentiary position.
Just because those on the fevered left see everything as subjective and situational does not mean this is the same lens through which others do.
Very politely – the claim to be objective is a straightforward lie by those promoting it
It’s utterly intellectually dishonest
Read Daniel Kahneman http://en.wikipedia.org/wiki/Daniel_Kahneman
He got a Nobel prize for pointing out the illogicality of the claim
Too true, Richard, sadly.
I never knew an economist who did not massage his or her numbers to suit a political agenda. Some would even boast openly after a few drinks when inhibitions were relaxed.
I don’t know whether the upper echelons of ‘economists’ (e.g. Krugman, Mike Devereux etc) do this — I don’t know them personally. And what about the economists of yesteryear — Keynes, Hayek, Friedman — do you think they were at it?
I reckon economics as a ‘science’ is just a smokescreen for one big fat power grab, particularly amongst the neo-liberals.
That’s why your ideas (e.g. Courageous State etc) are so refreshing. There is just no hint of any of this power grab involved.
Economies are a social and political construct. If we don’t believe in some element of objectivity aren’t we admitting that materialism has triumphed over ideas.
I don’t like that thought.
Nat at all
See my reply to Carol Wilcox
I think there are some objective truths in economics, i.e. labour creates wealth, not the owners of land and labour. Analysis should start from first principles.
The creation of logical argument by the application of logic to clearly stated assumptions is possible, of course
That is what economics should do
But that is not the creation of basic truth
It is the creation of the best understanding we are capable of
And that’s not the same thing, at all
Seems to me that Worstall is simply saying that a Corporation is an intermediary: taxes paid by it don’t go to the pockets of the stakeholders whether shareholders or employees. The existence of corporation tax has spawned opportunities for shenanigans employing armies of accountants and tax inspectors well known to your readers.
Wearing your Tax Research hat Richard a critique by you of the US Fairtax proposal (www.fairtax.org) which proposes the abolition of corporate tax would be informative.
Abolishing corporation tax is impossible if tax havens prevent us knowing who owns companies
Abolishing corporation tax also shifts tax revenue to the north from the south by getting rid of the source basis
I utterly oppose that
Highly theoretical I know but would not the abolition of corporation tax put tax havens out of business? Not to mention lots of tax accountants.
Any exploitation of ‘the south’ might best be dealt with by such mechanisms as extractive industries taxation at source.
Although the http://www.fairtax.org proposition could well be in la la land it would be good to have an informed critique.
No
Most tax haven use is by individuals using no tax companies
You forget – Tim doesn’t do morals or subjectivity or objectivity.
Tim does GREED.
I think it is probably fair to define economics as a social science rather than a natural science, which means that it is more closely related to psychology and sociology than physics and chemistry – and indeed Kahneman’s work brought psychology into economics. After all, if there were no humans economics would not exist, but physics still would – natural laws do not depend for their existence on there being humans around to operate them.
Humans are both rational and irrational beings: decision-making in the absence of emotion is flawed, but so is decision-making driven by emotion. So in a way, I take issue with both of you – Tim because there really isn’t such a thing as a wholly objective view in any social science, and Richard because facts and logic are nonetheless still important in social science.
Richard, you know perfectly well what Tim means when he says that corporations don’t pay tax. You’ve written blogs about tax incidence yourself. The research evidence on this that I’ve seen does suggest that those who bear the cost of corporation tax include shareholders and workers as well as customers, but I’m aware that exactly where the burden falls depends on other things such as the mobility of capital and the strength of unions. There is one group that doesn’t ever seem to bear the cost, though, and that is top executives. We don’t exactly have a level playing field on this, do we?
Frances
I think you will see my answer to your second point in my reply to Carol Wilcox – and I think if that logic is agreed then of course we can agree this is a social science – but honesty about its method is vital. My comment is provocative (I am provocative) but is also honest – and a clear statement of our limitations. Physical scientists recognise those in a way Tim does not – and that was my challenge to him.
I do indeed know the incidence argument – but also argue it is irrelevant. The work of Mike Devereux on the incidence on labour is one of the most subjective pieces of social science ever done. It looked only at tax increases and not tax decreases and that was utterly misleading. So all we know is executives do think the company pays – as they want to keep control of maximum reserves for their use and the CBI thinks shareholders pay. I have never known a manager who has ever changed customer or labour relationships because of corporation tax – and candidly think almost none do since 99% will have no idea of the corporation tax situation of their company.
So incidence is on retained reserves and then shareholders (and they are not the same thing – I stress).
But since we do not know who shareholders are – and never will whilst we have the lack of transparency we now suffer – we have to have corporation tax.
and we need source tax in developing countries or they lose out badly.
In other words – Tim’s arguments – and the IEA’s arguments – are threadbare practically even of their incidence claim was right – which I still question.
Richard
Richard,
Arguably, if incidence falls on retained reserves, then it is FUTURE employees, shareholders and customers of the company that bear the cost, assuming of course that retained reserves are eventually reinvested in business expansion (which of course isn’t happening much at the moment). However, these future groups may actually benefit more from investment by government of corporation tax receipts, so it isn’t that simple. Future things never are!
But I agree the lack of transparency in shareholding disclosure is a big problem.
Frances
if you believe in a free market model, & it is a big “if”, then it cannot be “employees, shareholders and customers of the company that bear the cost”.
The employees are paid the minimum the market will allow.
The customers are charged the maximum the market will allow.
Only the shareholders can bear the cost. This is classical economics.
We don’t have a free market.
Nor will we ever.
In which case why bother with those who pretend we do or we can have one?
Are fantasists really worth paying much attention to?
Shareholders bearing the cost would only be true in a closed economy where capital is not mobile. With capital internationally mobile, shareholders’ returns have to be maximised or they go elsewhere. So where tax incidence falls in an open economy depends on the relative strength of the different groups of stakeholders.
What I find more than a little odd about your comment is you acknowledged earlier that we have markets far removed from those described by pure economic theory and now you quote that theory to support your view.
As a matter of fact shareholder’s returns are not maximised. We saw that at Barclay’s AGM and we saw they have no power to enorce their claim.
Why pretend soemthing that is just not true?
Richard,
I was answering eruigenus’s point regarding the classical economic “free market” model. His definition only applies to a closed economy, because it assumes that shareholders cannot take their money elsewhere. In an open economy shareholder returns would be market driven too, hence my comment about maximisation. I also said that it would depend on the balance of power between the different stakeholders. In a classical model it would only be possible for shareholder returns to be maximised if wages are minimised and prices maximised. If workers, customers and shareholders were all equally mobile, this wouldn’t happen even in a completely free market: benefits to all three would tend towards the midpoint.
But as I said, we don’t have a free market, so eriugenus’s point is invalid anyway. We have a market which is seriously distorted by rent-seeking and information asymmetry, which skews the balance of power towards one particular set of stakeholders, namely top executives. That’s what I meant in my earlier remark about not having a level playing field. Other workers and customers have already complained about this bias, and it seems now that shareholders are joining in too. Whether these protests will have any effect remains to be seen – will they be sufficient to overcome the power imbalance?
But in that case we also don’t have shareholder return maximisation
Not least because they wouldn’t know it if they saw it
The idea of this ‘maximisation’ if itself fallacious – who knows where the second differential = 0?
No, we don’t have maximisation of shareholder returns, any more than we have maximisation of prices or minimisation of wages. We have at best a balance.
But all discussions of maxima and minima founder on the same thing anyway, which is inadequate information. You can plot the curve and find the turning point(s), but since the curve is at best an approximation the turning point(s) may not be remotely realistic. There is a very similar problem with your favourite subject, the Laffer curve, isn’t there?
And that is why, in part, I argue for much more information
Which is heavily opposed by supposed pro-market enthusiasts
Which reveals their true colours
I fell off my chair laughing after reading Tim Worstall’s blog – it’s so bad it’s preposterous. He’s not even anywhere near a correct interpretation of neoclassical economics, let alone any more sensible economics. Seriously – he fails even on his own terms.
A recent Private Eye article described how columnists on the Telegraph are judged by the number of comments their blog posts receive. Those who get the most comments tend to appear more frequently on the home page. Which neatly explains the regular appearance of such fruitcakes as the climate change denier James Delingpole (taken to pieces by Sir Paul Nurse recently), Janet Daley, Christina Odone and Boris Johnson (say no more).
So Worstall appears to be latest darling of the paper’s editorial team. Seen in this context, it’s clear he will write any old tripe, which even he scarcely believes himself, to further his own ambitions.
He’s just a puffed-up Tory troll and we all know it’s best not to feed the trolls!
Frances Coppola
I think you’re wrong. I genuinely don’t understand the comparisons you draw between “open” & “closed” economies. What ties the capitalist to his capital isn’t the nature of the economy but the amount s/he has invested.
You seem to assume, firstly, that all companies have shares freely traded on an exchange,
secondly, that no-one holds more than a small minority holding in them.
Neither of these suppositions is remotely correct.
Most investors have bought into companies that are not listed. They can’t disinvest. There is no mechanism to do so.
Some investors have bought into publicly listed concerns. As soon as they seek to offload the price will fall like a one-legged man doing the “hokey Kokey”. If they are motivated by self-interest, not political interest, they’ll stay put.
Good points
The free movement of capital is not as free as it looks – except, candidly, for hot ‘portfolio’ money
Finally,
a point that should appeal to Richard.
Why were A/Cs ever drawn up the way they were ?
Presumably in the past some wise man must have decided they should follow that pattern for a good reason ?
And the pattern was;
Sales (to customers)
-CoS (from suppliers)
Gross Profit
-costs (including employee wages)
Giving Profit before tax
-tax
To give amount available for disbursement to shareholders.
I appreciate Worstofall isn’t an accountant (not sure what he is TBBH) but that seems a pretty clear explanation, to me, of who bears the cost of CT.
Going back to this objectivity question, surely one of the problema with economics distinguishing it from science is that its subject is sentient humans. I suspect that the act of “doing economics”, formulating theories and models affects the behaviour of the subjects. Thus, it may actually be impossible to produce objective and valid theories.
Even in real science, it is understood that observation can affect results (Heisenberg). Much more so with economics, where the subject is looking back at you.
Excellent point
Eriugenus,
I did point out that we don’t have a free market. But there is international mobility of capital in publicly-traded companies, which I agree are not the whole picture but are a significant portion of it. Sadly it is not true that “most” investors invest in smaller companies. Equity financing for SMEs is a real problem and most smaller businesses are financed mostly with debt – which is exempt from tax.
Yes, capital is much less mobile in private companies and where there are owner-managers – though smaller companies and especially owner-managers in my view are more likely to pass on the cost to workers in the form of cuts in hours and layoffs. It’s the same thing with labour and customer mobility: labour is only mobile to some extent – because people like to stay in their homes and communities – and whether customers can go elsewhere depends on the availability of alternatives and how important the product is to them. What you end up with is a balance between these three elements, and where the incidence actually falls depends on all sorts of things – which is why it is practically impossible to determine.
Your point about the share price doesn’t make sense. If offloading my shareholding CAUSES the share price to drop I don’t care, because I have already sold my shares. If the price falls ahead of my selling then unless I have announced my intention in advance – which would be unbelievably stupid – there is insider trading going on. Sales of large shareholdings do cause the price to drop but they also send a signal to the market that this is not a good investment, so risk-averse investors will tend to sell on a falling price.
Eriugenus
Financial accounts don’t show economic incidence, sadly. All they show is where the tax falls in the first place, not who ends up paying it. As I said, I think economic incidence for corporation tax is almost impossible to determine – and I accept absolutely Richard’s point about incidence falling on retained earnings, which affects future stakeholders not current ones.
Thanks
The French physiocrats argued that the economic incidence of all taxes was ultimately on the economic rent of land. The same conclusion follows from Ricardo’s Law of Rent.
The latter law appears to hold objectively ie it can be observed in operation. There are a few other laws of economics that appear to be confirmable by obervation.
The physiocrats were wrong
And so ar you
If you are arguing that the Physiocrats are wrong, then you are also arguing against Ricardo and you need to demonstrate the error in his argument, or refer to someone who has done so.
The difficulty with trying to refute Ricardo is that one can see Ricardo’s law in action all around.
Ricardo’s law – and I dispute it is a law and I dispute that it can be measured – considers land use in te context of fixed labour and capital inputs.
The last points are important.
It does not say all returns are to land. It says the returns to land vary and the excess is rent.
Nowhere does it say the inoput of labour and capital should be ignored in the process.
You simply get this wrong by being closed minded about all but land.
Richard,
First of all, Ricardo’s Law is not contested territory within economics. It is just ignored. However, you can verify it for yourself by considering a simple model – busking on the London Underground.
Other things being equal ie inputs of labour and capital are the same, the busker will take the most at the busiest station. This is probably at the bottom of the escalators at Victoria. The next best is probably somewhere inside Oxford Circus station – say the in the passageway linking the Bakerloo and Central Lines. At the other end of the scale, there are places in the outer reaches of the system where the busker could stand all day and collect next to nothing – Burnt Oak, Kingsbury, Snaresbrook, Collier’s Wood.
Now, and this is the key point – there are some locations where it is just about worthwhile for a busker to perform. Think of places like Camden Town, Golders Green, Hammersmith, Stratford. There will be a threshold figure below which the average busker will not regard it as worth the effort. The difference between the takings at these marginal locations and all the better ones is, by definition, rent (locational advantage). If the takings at the marginal site are X, then the rental value of all the other sites is Y – X, where Y is the gross take at the better site. All the other sites are sub-marginal and will not be worked.
These has two important implications. The first is that a busker will be willing to pay any amount up to this rental value in order to gain access to the better site. This value could take the form of a payment to London Underground, or it could be collected by a protection racketeer. In fact if it is not collected in an orderly way by the authorities, then some sort of unofficial system of allocation of sites will spring up, because the best ones will be coveted.
The second implication is that if a charge is made for use of the marginal site, it will drop out of use. This would happen if, for instance, there was a flat-rate charging system regardless of location, or if a proportion of the takings had to be paid over – the equivalent, in principle, to taxes on earnings and profits. The presence of these charges would result in a new margin, with place such as Green Park and Tottenham Court Road becoming marginal locations. The charges will have forced many locations out of use, which would have been viable locations in the absence of the charge.
This accounts for, amongst other things, the intractability of the north-south divide, the persistence of low wages and the growing gap between rich and poor.
Maybe it’s ignored because it has nothing like the significance you ascribe to it – especially as a tax base
Indeed – your case seems to suggest why it is not a good tax base
Richard, the implication of that model is that London Underground could charge rents on all the viable sites without putting any of them out of use, because the marginal sites are freely available.
Apply the same model to taxation and the implication is that (1) taxation at marginal locations puts those locations out of use. This helps to explain why 80% of Britain’s population are living and working in one-third of the country’s land area, and (2) that taxation of the rent of land as the principal source of public revenue means that no sites are out of use due to the effects of the tax system – it has no deadweight cost, and (3) if land value is not collected in an orderly way by the authorities, then everyone is living under what, beneath a cover of legality, is nothing more than a large-scale protection racket.
I support LVT as one of many taxes.
But I think your claims and language intemperate.
And that’s why I am rather bored with your comments here – which don’t add to debate
“Maybe it’s ignored because it has nothing like the significance you ascribe to it — especially as a tax base”
Which is, of course, why the estate agent’s mantra is “Build Quality, Build Quality, Build Quality!”….
“Indeed — your case seems to suggest why it is not a good tax base”
…because?….
In any case, what I find most amusing about this exchange is that this entire blog is itself a case study in why the Physiocrats were right. Tax avoidance is all about geography (being somewhere that the tax you are trying to avoid won’t hurt you). Indeed, your rules on determining unitary assessments are all (coarsely) geography based, which is why it could have limited success (I mean that in a positive sense, btw). But it would still be limited (and that I mean in a negative sense 🙂 ).
This is why I ask about physical mechanisms and effects. While economics does have a large element of psychology, it also operates in a physical world, and that has profound consequences.