Quotulatiousness

January 17, 2015

Alberta to introduce a provincial sales tax?

Filed under: Cancon, Government, Politics — Tags: , — Nicholas @ 03:00

Colby Cosh explains why this is unlikely, at least in the short term:

Yeah, look, guys. I realize that Jim Prentice is talking about the possibility of a provincial sales tax for Alberta. I think he’s just trying to make sure he has our FULL ATTENTION before he passes a very austere budget, because I do not see a clear path toward us actually having a PST.

Under current Alberta statute — the Alberta Taxpayer Protection Act (ATPA) — Albertans would have to vote “yes” in a province-wide referendum before a PST could be introduced. The government gets to write the referendum question, which as we all know is a big advantage, but the economists who support a PST have not done anything like the necessary public outreach and education to soften up superstitious, PST-averse voters. The PCs are obviously hell-bent on a spring election, and spring seems far too soon for that sort of gamble, although the referendum could be held on the date of the general election.

It is more likely that if Prentice sincerely wanted a sales tax, he would try for repeal of the ATPA without an official referendum. Prentice could make that a centrepiece of the upcoming election campaign — a “no me without a PST” kinda offer — but then opposition parties and troublemaking journalists might ask why there is no formal referendum being held in parallel with the election. The whole point of the ATPA was to prevent premiers from forcing package deals of that sort onto voters.

And, of course, Albertans might actually take the “no me” option, rejecting a Conservative government in favour of … Stop laughing! It could totally happen!

January 16, 2015

It’s always a good time to cut taxes

Filed under: Economics, Government, Humour, USA — Tags: , , — Nicholas @ 02:00

In a column explaining why he’s terrified that the “Modern Monetary Theory” folks might get anywhere near the levers of power, Tim Worstall fits in the best reason to cut taxes:

Given that we are discussing monetary policy it seems appropriate to bring Milton Friedman in here. And he pointed out that if you ever have a chance to cut taxes just do so. On the basis that politicians, any group of politicians, will spend the bottom out of the Treasury and more however much there is. So, the only way to stop ever increasing amounts of the the entire economy flowing through government is simply to constrain the resources they can get their sticky little mits on. We could, for example, possibly imagine a Republican from the Neanderthal wing of the party arguing that what the US really needs is another 7 carrier battle groups. And one from the even more confused than usual Progressive end of the Democratic Party arguing that each college student needs her own personal carrier battle group to protect her from the microaggressions of being asked out for a coffee. You know. Sometime. Maybe. If you want to?

QotD: The impact of lower oil prices

Filed under: Business, Economics, Government, Quotations — Tags: , , , — Nicholas @ 01:00

When oil prices are high there is a rush of investment into oil based enterprises from multi-nationals to frackers. No bad thing but there is always a real danger of over investment leading to the exploitation of very marginal resources. A lower oil price will strand some of that investment and, just as importantly, postpone a great deal of it. Which frees up investment for other, potentially more useful, purposes.

The second thing which happens is that governments become addicted to the joys of relatively painless oil royalties. This looks like revenue but, because it is drawn from a diminishing resource, is actually a rather dangerous drawing down of capital. A lot of oil “revenue” is seen as general revenue and is spent on non-capital expenditures. With a booming oil sector governments are tempted to think the exaggerated revenues are available for general expenses and will continue to be. Which means that government budgets are set based on a purely extractive draw down of a province’s or nation’s capital. This is a poor idea.

Not to take anything away from the bright guys who are fracking and mining their way to oil fortunes, the reality is that extracting oil does not leave much in the way of useful, secondary industry, much less innovation. Which, in turn, means that when the oil is no longer profitable to extract there is no residual, non-oil, economy left behind. If a government spends the oil revenue as it comes in, or worse uses it to secure loans, when the oil revenue dries up there is nothing to cover the spending or the debt.

[…]

The golden lining of additional pressures on nasty states like Russia, Iran and Venezuela is likely not as significant as the prevention of malinvestment and governmental squander. In time, as various emerging economies continue to grow, demand will drive the price of oil upwards again. With luck investors and governments will not make the same mistakes twice.

(One unalloyed good arising from the collapse of the price of oil is that so called clean energy renewables like wind and solar look even sillier with their present technology. I suspect wind will always make zero economic sense; I have more hope for photo voltaic solar as new materials promise significantly higher efficiency. And those same materials in a different configuration promise radical gains in battery efficiency for that daily occurrence known as darkness. Again, a low oil price will dampen the insane over investment in these marginal technologies.)

Jay Currie, “Oil Wars”, Jay Currie, 2014-01-03

January 13, 2015

The oddity that is Denmark

Filed under: Europe, Randomness — Tags: , , — Nicholas @ 06:55

In the New York Post, Kyle Smith has a go at de-smugging one of the smuggest countries in the world … no, it’s not Canada (but we’re pretty damned smug ourselves):

Want proof that the liberal social-democratic society works?

Look to Denmark, the country that routinely leads the world in happiness surveys. It’s also notable for having the highest taxes on Earth, plus a comfy social-safety net: Child care is mostly free, as is public school and even private school, and you can stay on unemployment benefits for a long time. Everyone is on an equal footing, both income-wise and socially: Go to a party and you wouldn’t be surprised to see a TV star talking to a roofer.

The combination of massive taxes and benefits for the unsuccessful means top and bottom get shaved off: Pretty much everyone is proudly middle class. Danes belong to more civic associations and clubs than anyone else; they love performing in large groups. At Christmas they do wacky things like hold hands and run around the house together, singing festive songs. They’re a real-life Whoville.

In the American liberal compass, the needle is always pointing to places like Denmark. Everything they most fervently hope for here has already happened there.

So: Why does no one seem particularly interested in visiting Denmark? (“Honey, on our European trip, I want to see Tuscany, Paris, Berlin and … Jutland!”) Visitors say Danes are joyless to be around. Denmark suffers from high rates of alcoholism. In its use of antidepressants it ranks fourth in the world. (Its fellow Nordics the Icelanders are in front by a wide margin.) Some 5% of Danish men have had sex with an animal. Denmark’s productivity is in decline, its workers put in only 28 hours a week, and everybody you meet seems to have a government job. Oh, and as The Telegraph put it, it’s “the cancer capital of the world.”

So how happy can these drunk, depressed, lazy, tumor-ridden, pig-bonking bureaucrats really be?

January 1, 2015

The Laffer Curve at 40

Filed under: Business, Economics, Government, USA — Tags: , , , , — Nicholas @ 11:39

In the Washington Post, Stephen Moore recounts the tale of the most famous napkin in US economic history:

It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl.

To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve” in an article Wanniski wrote for the Public Interest magazine. (Wanniski would later grouse only half-jokingly that he should have called it the Wanniski Curve.)

This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.

[…]

Solid supporting evidence came during the Reagan years. President Ronald Reagan adopted the Laffer Curve message, telling Americans that when 70 to 80 cents of an extra dollar earned goes to the government, it’s understandable that people wonder: Why keep working? He recalled that as an actor in Hollywood, he would stop making movies in a given year once he hit Uncle Sam’s confiscatory tax rates.

When Reagan left the White House in 1989, the highest tax rate had been slashed from 70 percent in 1981 to 28 percent. (Even liberal senators such as Ted Kennedy and Howard Metzenbaum voted for those low rates.) And contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation). Economist Larry Lindsey has documented from IRS data that tax collections from the rich surged much faster than that.

December 30, 2014

Tax-splaining a headline

Filed under: Business, Economics, Law, USA — Tags: , — Nicholas @ 03:00

The headline that grabs attention says that a vast number of US corporations pay absolutely no corporate taxes. Tim Worstall explains that this is quite true:

Timothy Taylor has a nice piece here on the subject:

    More than 90 percent of businesses, representing more than one-third of all business activity, in the United States are structured as flow-through entities — businesses that do not pay the corporate income tax, but rather pass profits through to owners who pay tax under the individual income tax.

    We have two (actually, more than two, but this is the distinction that matters to us here) forms of business ownership. The first is the C Corporation, what we all normally think of as a corporation. The second is an S corporation (in taxation, very like a partnership). And the important thing is that C corporations are the only ones that pay the corporate income tax. S corporations don’t: their owners pay individual income tax on the profits. So, if we saw a move from C to S corporations as the method of organisation then we’d see a reduction in corporate income tax paid. But not, possibly, a reduction in total tax paid on business profits.

And that is what seems to have happened at least in part:

    Back in 1980, nearly 80% of business income went to “C” corporations–so named after the applicable part of the tax code that governs them–which are what most of us think of when we think of a “corporation.” Back then, the remaining 20% was almost all sole proprietorships, which were just taxed as individual income. …..(…)…But C corporations now account for only about 30% of all business income. The share going to sole proprietorships hasn’t changed much. But much more corporate income is going to partnership and S corporations….(…)…Back in the 1960s, the corporate income tax often collected 4-5% of GDP. Since about 1990, it has more commonly collected 1-2% of GDP. Part of the reason is that a smaller share of business income is flowing through the conventional C corporation form.

That really is a large part of the explanation. It’s not that business profits are not being taxed, it’s that they’re being taxed in a different way. And that explains much of the fall in the corporate income tax revenues: and all too few people are over on the other side looking at the increase in individual income tax payments stemming from corporate profits.

So a legal change has drawn a lot of corporations to change how they are structured, so that profits are taxable in the hands of their individual owners, rather than in the imaginary hands of the corporate person. And another US tax quirk explains even more of the headline:

There is another point to be made here, about how we measure the share of corporate profits in the US economy. This has very definitely risen, this is absolutely true. And the tax bill hasn’t, that’s also true. A goodly part of the explanation is the above, about C and S corporations. But there’s this one more thing. Profits in the US economy includes all profits made in the US, by both Americans and foreigners. But it also includes foreign profits made by US corporations. Those tens of billions being made abroad by Google and Apple, Microsoft, they’re all included in the US profit share. And as we also know, those foreign profits aren’t paying the US corporate income tax because, entirely legally, they’re being used overseas to reinvest in those foreign businesses. My stick my finger in the air estimate of the difference those profits make is about 2% of US GDP. Meaning that if we measure US profits as 10% of GDP, then look at tax payments, we’re only seeing the tax payments from 8% of GDP (before we even look at the C and S corporation thing).

December 23, 2014

Turning the United States into something like Scandinavia

Filed under: Economics, Europe, Government, USA — Tags: , — Nicholas @ 05:13

In his daily-or-so Forbes post, Tim Worstall explains the real reason why it will be somewhere between difficult and impossible to turn the United States into a Scandinavian mixed economy like Denmark:

The essence of the argument is that sure, we’d like quite a lot of equity in how the economy works out. Wouldn’t mind that large (but efficient! of which more later) welfare state. We’d also like to have continuing economic growth of course, so that our children are better off than we are, theirs than they and so on. And we can have that welfare state and equity just by taxing the snot out of everyone but that does rather impact upon that growth. So, the solution is to have as classically liberal an economy as one can, with the least regulation of who does what and how, then tax the snot out of it to pay for that welfare state. Not that Sumner put it in quite those words of course.

The lesson so far being that if the American left want to turn the US into Scandinavia, well, OK, but they’re going to have to pull back on most of the economic regulation they’ve encumbered the country with over the past 50 years.

The other point is an observation of my own. Which is that those Scandinavian welfare states are very local. To give you my oft used example, the national income tax rate in Denmark starts out at 3.76% and peaks at 15%. There’s also very stiff, 25-30% of income, taxes at the commune level. A commune being possibly as small as a township in the US, 10,000 people. The point being that this welfare state is paid for out of taxes raised locally and spent locally. Entirely the opposite way around from the way that the American left tells us that the US should work: all that money goes off to Washington and then the bright technocrats disburse it.

Instead they have what I call the Bjorn’s Beer Effect. You’re in a society of 10,000 people. You know the guy who raises the local tax money and allocates that local tax money. You also know where he has a beer on a Friday night. More importantly Bjorn knows that everyone knows he collects and spends the money: and also where he has a beer on a Friday. That money is going to be rather better spent than if it travels off possibly 3,000 miles into some faceless bureaucracy. I give you as an example Danish social housing or the vertical slums that HUD has built in the past. And if people think their money is being well spent then they’re likely to support more of it being spent.

[…]

So, the two things I would say need to be done as precursors to turning the united States into Scandinavia are the following. First we need to move back to a much less regulated, more classically liberal, economy. Secondly we need to push the whole tax system and welfare state provision down from the Federal government down to much smaller units. Possibly even right down to the counties. The first of these will generate the economic growth to pay for that expanded welfare state, the second make people more willing to pay for it.

If you find any American leftists out there willing to agree to these two preconditions do let me know. Because I’ve never met a single one who would think that those were things worth doing in order to get that social democracy they say they desire.

December 19, 2014

In Stephen Harper’s Canada, politics beats economics every time

Filed under: Cancon, Economics — Tags: , , — Nicholas @ 00:03

Stephen Harper gets a lot of criticism for being an ideological hard-liner, but he gets nearly as much flak from small-government conservatives for being no better — and in some cases, much worse — than Jean Chrétien and Paul Martin. Earlier this month in Maclean’s, Stephen Gordon explained some of the reasons for Harper’s political and economic actions:

Politics, not economics, has also determined [Harper’s] strategy for achieving this goal [a smaller government-spending-to-GDP ratio]. If you asked an economist for the best way of reducing revenues, she’d probably prepare a list with the taxes that are the most harmful to the economy at the top, and the taxes that are the least harmful at the bottom. The GST would rank at or near the bottom of that list. (Here is a representative reaction to the Conservatives’ 2005 campaign promise to reduce the GST; here is an explanation for why economists think the GST is a good idea.) In economic terms, reducing the GST was probably the worst possible option available to the Conservatives.

But as far as politics goes, it was an inspired choice. It helped win the election, and — perhaps even more importantly — reducing the GST has made it that much harder for any future government to reverse the trend to lower spending. If the Liberals and the NDP were to ask an economist to provide a list of ways of generating the most revenues at the least economic cost, increasing the GST would be at or near the top of the list. But those two GST points are not going to come back to fill federal coffers in the foreseeable future. Both the Liberals and the NDP have campaigned at some point on anti-GST platforms, and history has not been kind to provincial governments that have raised the HST without an electoral mandate to do so. (The NDP’s proposal to increase corporate tax rates is the doppelgänger of the Conservatives’ GST cut. In economic terms, an increase in corporate taxes is probably the worst possible choice for generating revenues, but it’s a potential vote-winner. Maybe it will work for them as well as it did for the CPC.)

[…]

This brings us to the “starve the beast strategy” described in detail here: the reduction in revenues is now a justification for reducing expenditures. But, once again, the strategy is driven by politics, not economics. The elements are as follows (see also here and, most recently, here):

  1. Let transfer payments to individuals grow at the rate of GDP.
  2. Let transfer payments to provinces grow at the rate of GDP.
  3. Hold nominal direct program spending constant.

These elements have been in place in every budget since 2010. The economics of this approach are very dodgy: the economically efficient way to approach the problem of reducing spending is to perform a cost-benefit analysis and eliminate the programs that don’t pass the test. But the politics are something else. Cuts in transfer payments directly affect peoples’ personal finances, and could be reversed at no political cost. The same is true for cuts in transfer payments to the provinces; much of the Jean Chrétien-era cuts to the provinces were rescinded a few year later. The path of least political resistance is through direct program spending: the cost of paying federal public servants’ wages.

December 14, 2014

Google to Spain: “Buh-bye!”

Filed under: Business, Europe, Media — Tags: , , , — Nicholas @ 00:04

Spanish legislation imposing a special tax on Google has resulted in Google erasing Spain from their Google News business plan altogether:

Back in October, we noted that Spain had passed a ridiculously bad Google News tax, in which it required any news aggregator to pay for snippets and actually went so far as to make it an “inalienable right” to be paid for snippets — meaning that no one could choose to let any aggregator post snippets for free. Publishers have to charge any aggregator. This is ridiculous and dangerous on many levels. As we noted, it would be deathly for digital commons projects or any sort of open access project, which thrive on making content reusable and encouraging the widespread sharing of such content.

Apparently, it’s also deathly for Google News in Spain. A few hours ago, Google announced that due to this law, it was shutting down Google News in Spain, and further that it would be removing all Spanish publications from the rest of Google News. In short, Google went for the nuclear option in the face of a ridiculously bad law:

    But sadly, as a result of a new Spanish law, we’ll shortly have to close Google News in Spain. Let me explain why. This new legislation requires every Spanish publication to charge services like Google News for showing even the smallest snippet from their publications, whether they want to or not. As Google News itself makes no money (we do not show any advertising on the site) this new approach is simply not sustainable. So it’s with real sadness that on 16 December (before the new law comes into effect in January) we’ll remove Spanish publishers from Google News, and close Google News in Spain.

Every time there have been attempts to get Google to cough up some money to publishers in this or that country, people (often in our comments) suggest that Google should just “turn off” Google News in those countries. Google has always resisted such calls. Even in the most extreme circumstances, it’s just done things like removing complaining publications from Google News, or posting the articles without snippets. In both cases, publishers quickly realized how useful Google News was in driving traffic and capitulated. In this case, though, it’s not up to the publishers. It’s entirely up to the law.

December 10, 2014

US child poverty is bad … but nowhere near as bad as they say

Filed under: Media, USA — Tags: , , , , — Nicholas @ 00:04

Tim Worstall debunks a headline statistic from earlier this month:

We’ve a new report out from the Mailman School of Public Health telling us that in some urban parts of the US child poverty is up at the unbelievable rates of 40, even 50% or more. The problem with this claim is that it’s simply not true. Apparently the researchers aren’t quite au fait with how poverty is both defined and alleviated in the US. Which is, when you think about it, something of a problem for those who decide to present us with statistics about child poverty.

[…]

Everyone else [in the world] (as well as using a relative poverty standard, usually below 60% of median earnings adjusted for family size) measures poverty after the effects of the tax and benefits systems on alleviating poverty. So, in my native UK if you’re poor you might get some cash payments (say, unemployment pay), some tax credits, help with your housing costs (housing benefit we call it), reduced property taxes (council tax credit) and so on. Whether you are poor or not is defined as being whether you are still under that poverty level after the effects of all of those attempts to alleviate poverty.

In the US things are rather different. It’s an absolute standard of income (set in the 1960s and upgraded only for inflation, not median incomes, since) but it counts only market income plus direct cash transfers to the poor before measuring against that standard. Thus, when we measure the US poor we do not include the EITC (equivalent of those UK tax credits, indeed our UK ones were copied from the US), we do not include Section 8 vouchers (housing benefit), Medicaid, we don’t even include food stamps. Because the US measure of poverty simply doesn’t include the effects of benefits in kind and through the tax system.

The US measure therefore isn’t the number of children living in poverty. It’s the number of children who would be in poverty if there wasn’t this system of government alleviation of poverty. When we do actually take into account what is done to alleviate child poverty we find that it’s really some 2-3% of US children who live in poverty. Yes, that low: the US welfare state is very much child orientated.

(Emphasis mine)

November 20, 2014

“The Piketty Gang ride in, a hollerin’ an’ a whoopin’ and take all the money from Scrooge McDuck”

Filed under: Economics, Media — Tags: , , — Nicholas @ 12:30

At Forbes, Tim Worstall explains why — despite the headlines — Piketty didn’t actually change economics:

That optimal taxation theory really rests on two things that we’re pretty sure are true. The first being that Laffer Curve thing. No, this doesn’t mean that all tax cuts pay for themselves. Rather, that it’s possible for tax rates to be so high that they actually reduce the amount of tax revenue being collected. A nice example of this is the latest rise in New York’s cigarette tax: less money in total is now being raised even though the tax rate has risen. Given that our primary purpose in taxing is to get the money we need to run the government that we must have (as ever, my opinion being that we might want to have less government, and thus lower taxes, than we currently do but that’s another matter) having a tax over the revenue maximising rate just isn’t sensible.

The second pillar is that we know that different taxes destroy different amounts of economic activity for the same revenue collected. As above, we want to gain revenue but obviously we also want it at the least cost. That means getting as much of it as we can from the low deadweight costs taxes and as little of it as we can manage from the high cost ones. We also know how the spectrum looks. At the lowest deadweight costs we have repeated taxes on real property (say, a land value tax), then taxes upon consumption (VAT or sales taxes) then on incomes and highest of all, upon corporates and capital. There’s one off the spectrum, transactions taxes like the financial transactions tax, but that’s so silly that no one serious is suggesting it.

So, standard and general theory insists that we shouldn’t be taxing corporates and capital at all if we can manage it and also that we don’t want to have very high taxes rates on anything.

So, if for political (or even emotional) reasons you think that we really should be gouging the rich then you’re going to have to go find yourself some new economic theories. And that, I think, is really what is going on here with Piketty and the gang (slightly catchy that, isn’t it? The Piketty Gang ride in, a hollerin’ an’ a whoopin’ and take all the money from Scrooge McDuck?). They want to find a reason to tax wealth, something conventionally contraindicated, and they want to have very high income tax rates, something also contraindicated by conventional theory. So, rather than try to overturn that conventional theory they’re bypassing it. Ignoring it even and just bringing up the idea of inequality instead to see if that will convince people.

November 16, 2014

Germany discovers new way to depress church membership

Filed under: Europe, Government, Religion — Tags: , , — Nicholas @ 09:59

They really do things differently in Germany, as Megan McArdle reports:

The German Catholic Church is contemplating denying communion to Catholics who have … wait for it … declined to register as Catholics with the government. The reason? Those Catholics don’t want to pay their “church tax.” That’s right: Germany taxes registered religious believers of major denominations, distributing that money to the country’s churches, temples and the like. And it recently changed the rules for calculating the tax to include capital gains, prompting an exodus of presumably well-heeled Catholics from the official rolls. So the German church is threatening to cut them off. Lots of tax rules seem to be written on a pay-to-play basis, but I’ve never before heard of one that was “pay to pray.” I don’t recall Christ saying anything about an admission fee to hear him preach.

To American ears, this is positively shocking. The American Catholic Church certainly doesn’t want you to take communion if you haven’t been baptized by the church or confessed any mortal sins. But no one checks to see whether you made a deposit in the offering plate. What’s going on here?

What’s going on is a phenomenon that conservative-leaning analysts call “crowding out”: when government provision of a service destroys the voluntary institutions that used to do so. This phenomenon often gets exaggerated, but there’s no doubt that it’s real enough — and in the actions of Germany’s Catholic bishops, I think we are seeing an extreme example of where it can lead.

Without the need to support itself with voluntary offerings, the Catholic Church in Germany has become dependent on government support. And government support has some big drawbacks compared to voluntary contributions. To be sure, government money is nice and steady, but it’s also fixed at the amount of the tax.

November 12, 2014

To make renewable energy seem cheap, exaggerate the subsidies that fossil fuels get

Filed under: Business, Government — Tags: , , — Nicholas @ 00:03

Tim Worstall isn’t impressed with a recent report that claims traditional energy companies (oil, gas, and coal) get government subsidies that amount to $88 billion per year, just from the G20 countries:

The report itself is here. Have a look at it yourselves, by all means, but here’s the three things they’ve added up to get to that $88 billion figure:

    A fossil fuel subsidy is any government action that lowers the cost of production, lowers the cost of consumption, or raises the price received by producers of fossil fuels. Types of fossil fuel subsidies include financial contributions or other support from the government, such as grants and direct payments, tax concessions, non-market investments made as a result of government ownership of fossil fuel companies, in-kind support (including specific infrastructure), credit support (loans and loan guarantees), insurance and indemnification, market price support, procurement, and responsibility for decommissioning (Koplow and Charles, 2010; Steenblik, 2008). This report divides ‘exploration subsidies’ into three categories:

    • ‘national subsidies’, such as tax breaks to companies and direct spending by government agencies
    • ‘investment by SOEs and
    • ‘public financing’ including support from domestic, bilateral and multilateral international (e.g. loans, equity, and guarantees)

To take that second one first, SOEs are state owned enterprises. So when Rosneft spends money on drilling a new well, given that Rosneft is largely state owned (and most certainly closely state connected) then this is a government subsidy to fossil fuel exploration. No, this isn’t normally what we mean by a subsidy and shouldn’t be counted as one. Just that one classification error accounts for up to half of their $88 billion. Just to repeat the error: claiming that investment by a state owned company on purely commercial terms is a subsidy simply isn’t true. If Statoil drills a new well, upon which it makes the usual profits and finances it in the normal manner, this is not a state subsidy. Yet this report is trying to claim that it is.

The public financing part is a bit of a stretch to be honest. The claim is that if the World Bank lends money to open a coal mine in some poor country then that’s a subsidy from the rich countries (who subsidise the World Bank) to fossil fuels. You could, I suppose, make that case but it is very much a stretch. And if you were to make that case then the subsidy would be only the difference between commercial lending terms on that mine and the concessionary terms that the World Bank is offering. Which isn’t what they measure at all.

But the real problem is with their insistence that any tax break is a subsidy. In their estimates of tax breaks they include things that any normal company gets it’s just that given the differences in the extractive industries we tend to give them different names. Every company is, for example, able to write off the cost of R&D against future income. Drilling or surveying is a form of R&D but we just have a slightly different set of names for how fossil fuel companies can write off those costs. To include all of those “tax breaks” as subsidies when they’re on offer, in slightly different forms and slightly different names, to all producers of anything is not quite being accurate.

Update: In a post today, he revisits the subsidies argument.

Here’s one report on what the IEA is saying:

    Fossil fuels are reaping $550 billion a year in subsidies and holding back investment in cleaner forms of energy, the International Energy Agency said.

    Oil, coal and gas received more than four times the $120 billion paid out in incentives for renewables including wind, solar and biofuels, the Paris-based institution said today in its annual World Energy Outlook.

Yes, all of that is entirely true. And it’s also true, as the IEA has said in the past, that we really would like to stop those subsidies to fossil fuels. On three grounds, the first that they’re very inefficient, the second that they don’t actually reach the poor they’re aimed at and the third that removing them would take us a long way to meeting our climate change targets.

However, nothing is ever that simple: and the big point to note here is that it really isn’t us in the rich countries that are subsidising fossil fuels.

[…]

There’s our two numbers, the renewables subsidy and the fossil fuel one. And yes it’s entirely true that we’d like to reduce that second, the fossil fuel one. Either so we can increase the renewables one because we have more money or so we can decrease it as we now longer have two policies working in opposition to each other.

However, here’s the thing for public policy. It’s us in the rich countries, largely so at least, who are subsidising the renewables. Great, that’s under our control. But it’s almost entirely not us in the rich countries subsidising the fossil fuels. That means, absent the reintroduction of colonialism, that those subsidies are not something under our control.

We should also note that these are “real subsidies”. These aren’t games being played with statistics as yesterday’s attempt to persuade us that we do subsidise by $88 billion. We’re not including tax breaks, not totting up R&D allowances or anything. This really is $550 billion in cash being spent by governments to subsidise fossil fuels.

October 28, 2014

Facebook‘s UK tax picture

Filed under: Britain, Business, Economics — Tags: , , , , — Nicholas @ 07:17

Tim Worstall explains why it’s not a scandal that Facebook doesn’t pay more taxes in the UK:

In fact, it’s actually rather a good idea that Facebook isn’t paying UK corporation tax. For the standard economic finding (also known as optimal taxation theory) is that we shouldn’t be taxing corporations at all. Thus, as a matter of public policy we should be abolishing this tax: and also perhaps applauding those companies that take it upon themselves to do what the politicians seem not to have the courage to do, make sure that corporations aren’t paying tax.

That isn’t how most of the press sees it, of course

[…]

That’s an extremely bad piece of reporting actually, for of course Facebook UK did not have advertising revenue of £371 million last year: Facebook Ireland had advertising revenue of that amount from customers in the UK that year. And that’s something rather different: that revenue will be taxed under whatever system Ireland has in place to tax it. And this is the way that the European Union system of corporate taxation is supposed to work. Any company, based in any one of the 28 member countries, can sell entirely without hindrance into all other 27 countries. And the profits from their doing so will be taxed wherever the brass plate announcing the HQ of that company is within the EU. This really is how it was deliberately designed, how it was deliberately set up: it is public policy that it should be this way.

We could also note a few more things here. The UK company itself made a loss and that loss was because they made substantial grants of restricted stock units to the employees. And under the UK system those RSU grants are taxed as income, in full, at the moment of their being granted. Which will mean, given those average wages, at 45% or so. And we should all be able to realise that a 45% tax rate is rather higher than the 24% corporation tax rate. The total tax rate on the series of transactions is thus very much higher than if Facebook has kept its employees as paupers and just kept the profits for themselves. Further, those complaining about the tax bill tend to be those from the left side of the political aisle: which is also where we find those who insist that workers should be earning the full amount of their value to the company which is what seems to be happening here.

October 22, 2014

What would Milton Friedman do?

Filed under: Economics, Environment, Politics, Science — Tags: , , — Nicholas @ 07:20

David Friedman, who we can safely assume has a better sense of the late Milton Friedman’s thoughts and beliefs than most people, disagrees with a recent Forbes article asking WWMFD:

A recent Forbes article is headlined “What Would Milton Friedman Do About Climate Change? Tax Carbon.” It reports on a forum at the University of Chicago at which several economists, including Michael Greenstone, described as the “Milton Friedman Professor of Economics at the University of Chicago,” argued that Friedman would have supported a carbon tax. The evidence for that claim was a 1979 clip from the Phil Donahue show where Milton Friedman argued that if the government is going to do something about emissions, they should use an effluent tax rather than direct regulation. He does not actually say that government should do something about emissions, only that there is a case for doing so and, if it is done, the best way to do it is by a tax on emissions.

To get from there to the conclusion that he would have favored a carbon tax requires at least one further step, a reason to think that he would have believed that global warming due to CO2 emissions produced net negative externalities large enough to justify doing something about them. The problem with that claim is that warming can be expected to produce both negative externalities such as sea level rise and hotter summers and positive ones such as longer growing seasons and milder winters. The effects will be spread out over a long and uncertain future, making their size difficult to estimate. My own conclusion, defended in past posts here (one example), is that the uncertainties are large enough so that one cannot sign the sum, cannot say whether the net effect will be positive or negative.

I do not know if my father would have agreed but I have at least a little evidence on the subject, more than offered in the Forbes article. The same issue arose in the earlier controversy over population. Just as it is now routinely assumed that warming is bad, it was then routinely assumed that population increase was bad. Forty years ago I wrote a piece on the subject for the Population Council in which I attempted to estimate the externalities associated with population. I concluded that they were too uncertain for me to tell whether the net effect was good or bad. My father read the piece and commented on it. If he had disagreed he would have said so, and he did not. It is possible that he would have felt differently in the case of climate change, but I can see no reason to expect it.

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