The point where things start to go wrong seems to be about 50%. Above that people get serious about tax avoidance. The reason is that the payoff for avoiding tax grows hyperexponentially (x/1-x for 0 < x < 1). If your income tax rate is 10%, moving to Monaco would only give you 11% more income, which wouldn't even cover the extra cost. If it's 90%, you'd get ten times as much income. And at 98%, as it was briefly in Britain in the 70s, moving to Monaco would give you fifty times as much income. It seems quite likely that European governments of the 70s never drew this curve.
Paul Graham, “Why Startups Condense in America”, 2006-05
June 9, 2010
QotD: The transition curve of higher taxes
Comments Off on QotD: The transition curve of higher taxes
June 5, 2010
Happy Tax Freedom Day! Maybe that’s not the right word . . .
Comments Off on Happy Tax Freedom Day! Maybe that’s not the right word . . .
May 31, 2010
QotD: A lesson for today
Empires, indeed governments generally, tend to be good things at first and bad things the longer they last. First they improve society’s ability to flourish by providing central services and removing impediments to trade and specialisation; thus, even Genghis Khan’s Pax Mongolica lubricated Asia’s overland trade by exterminating brigands along the Silk Road, thus lowering the cost of oriental goods in European parlours. But then, as Peter Turchin argues following the lead of the medieval geographer Ibn Khaldun, governments gradually employ more and more ambitious elites who capture a greater and greater share of the society’s income by interfering more and more in people’s lives as they give themselves more and more rules to enforce, until they kill the goose that lays the golden eggs. There is a lesson for today. Economists are quick to speak of “market failure”, and rightly so, but a greater threat comes from “government failure”. Because it is a monopoly, government brings inefficiency and stagnation to most things it runs; government agencies pursue the inflation of their budgets rather than the service of the customers; pressure groups form an unholy alliance with agencies to extract more money from taxpayers for their members. Yet despite all this, most clever people still call for government to run more things and assume that if it did so, it would somehow be more perfect, more selfless, next time.
Matt Ridley, The Rational Optimist: How Prosperity Evolves, p. 182
Comments Off on QotD: A lesson for today
May 27, 2010
Canada’s positive experience of US Prohibition
I knew that individual Canadians did well out of supplying booze to thirsty Americans during the period of Prohibition, but I didn’t realize how well:
. . . Prohibition — perhaps the maddest of mad American dreams [NR: in a dead heat with the current War on Drugs, I think] — did pretty well by our nation from 1920 to 1933. As American writer Daniel Okrent points out in his fine social history of the era, Last Call, the rivers of Canadian booze that flowed south enriched not only the Bronfman liquor empire, but our federal government. Canadians did make and smuggle illegal liquor, evading both Canadian taxes and American law, but we also made millions of litres of the legal, taxed stuff, the ultimate destination of which was of no concern to Ottawa. The amount of alcohol subject to excise tax — most of which went south one way or another — went from 36,000 litres in 1920 to five million 10 years later, and the excise tax on it rose to a fifth of federal revenue, twice as much as income tax.
Few in Canada had the slightest inclination to aid the American government in cracking down on alcohol use. When a U.S. Coast Guard cutter in pursuit of a Lake Erie rum-runner ran aground near Port Colborne, Ont., locals looted the vessel, then filled its engines with sand. About the only Canadians Okrent could unearth who thought the Dominion should help Uncle Sam seal his border were those making a fortune selling alcohol to American visitors. One way or another, most Canadians agreed with the smug satisfaction of CNR president Sir Henry Thornton, whose railway was growing fat off liquor tourism: “The dryer the U.S. is,” opined Sir Henry, “the better it will be for us.”
If there was an upside to what was known — at first, without a trace of irony — as “The Noble Experiment” in the U.S. itself, Okrent is hard-pressed to find it. America had always been awash in alcohol. (Johnny Appleseed’s fruit was inedible, but Americans still embraced his trees — virtually every homestead kept a barrel of hard cider by the door for visitors.) During the sodden 19th century, adult Americans downed 27 litres of pure alcohol each annually. That kind of demand wasn’t going to disappear no matter what the law said.
And yet the lesson has been forgotten. When drug prohibition finally comes to an end, historians will have a field day drawing the obvious comparison between the War on Drugs and the “Noble Experiment”. The theses practically write themselves . . .
Comments Off on Canada’s positive experience of US Prohibition
QotD: This isn’t what we mean by “the invisible hand”
Another Example of Your LCBO Hard at Work, Screwing You . . . If you’re feeling a pained sensation in your rear end, like a sandpaper wrapped glove entering your rectum, don’t worry fellow wine drinkers, that’s just the hand of the LCBO doing what they do best — sticking it to you. The LCBO has decided to take advantage of yet another potential money saving opportunity and has turned it into a money grab at your wallet. A recent article in the Toronto Star (“HST will lower tax on booze, but the price is going up ” – May 13, 2010) uncovered that the LCBO, instead of passing the HST savings on to you, which would have lowered the tax on booze from 12% to 8%, has decided to raise the price all in the name of “social responsibility”. Oh happy day, thank you LCBO for keeping me on the straight and narrow while lighting my pockets and lining yours in the process. Oh thank you — thank you.
Michael Pinkus, Ontario Wine Review, 2010-05-27
Comments Off on QotD: This isn’t what we mean by “the invisible hand”
May 13, 2010
QotD: Because your government cares about your health
If there ever was a reason to get the Ontario government out of the liquor business, this is it. While taxes on booze will drop on July 1, thanks to the introduction of the province’s new Harmonized Sales Tax, the price of your favourite poison will actually increase because — wait for it — the government doesn’t want to turn you into an alcoholic.
[. . .]
Actually, the whole modus operandi of the LCBO is counter-intuitive. At the same time that it preaches social responsibility, the LCBO inundates Ontario households with glossy brochures that take lifestyle advertising to new heights. The latest one cheekily invites customers to take “French lessons”, and features winsome couples in various states of embrace (hey, aren’t the French always making out?). A concurrent radio campaign features a sexy French-accented female voice extolling the virtues of Bordeaux. You get thirsty just listening to her.
Such campaigns are designed to make Ontarians drink more, not less, of course, funneling more cash into LCBO coffers and keeping its employees on the public payroll at juicy union wages. All fuelled by taxes and a staggering mark-up of 71.5% on that latest imported bottle which pairs so well with flank steak and frites.
This kind of hypocrisy is but one reason why the government shouldn’t be in the liquor business. The others include higher prices, less consumer choice, and the general inefficiency inherent in any monopoly business, whether public or private.
Tasha Kheiriddin, “Lower taxes, higher prices, courtesy of your local LCBO”, National Post, 2010-05-13
Comments Off on QotD: Because your government cares about your health
May 11, 2010
May 7, 2010
QotD: The HST only looks good on paper
I know all the reasons why sales taxes — i.e. consumption taxes — are to be preferred to income taxes. Every economist I respect believes consumption taxes are better because they let the taxpayer control the amount of tax he pays. Don’t want to pay as much? Don’t buy as much.
But to an ordinary person, this is a silly argument. Everyone has to buy stuff — school clothes for the kids, a new car, a laptop. If your washing machine breaks down, you have to buy a new one or pay for repairs. There is no alternative but to pay the sales tax.
To consumers, a sales tax looks like the least avoidable kind of tax. For most people, the only true way around a consumption tax is to hid their spending by switching to cash, barter or the black market.
On paper, I agree with my economist buds. And if we lived on paper, I might try to convince you to learn to love the HST.
Lorne Gunter, “The HST is fine on paper. It’s only painful in real life”, National Post, 2010-05-07
Comments Off on QotD: The HST only looks good on paper
April 28, 2010
Sorry for the lack of bloggishness
Today was a triple-whammy of first-thing-in-the-morning dentist appointment, followed by a meeting with my accountant, then a trip to the bank to open a vein pay my 2009 personal and business taxes. That left no time for more pleasant activities like blogging.
Regular blogging may resume later today.
Comments Off on Sorry for the lack of bloggishness
March 29, 2010
Americans to lose privacy in offshore banking
Of course, the headline assumes that they had any such privilege in the past . . .
Samuel Taliaferro is disturbed by provisions in a new law which will extend US government intervention into foreign bank business:
The name of the bill is the Hiring Incentives to Restore Employment Act (H.R. 2487) commonly known as the HIRE Act. This is the jobs incentive bill that was signed by the President on March 18th amid little fanfare.
Relatively small by Washington standards (“just” an $18 billion stimulus package) the bill was drafted to provide incentives to employers to hire more people but contains some very disturbing language concerning the ownership and transference of money to any overseas account. The truly galling part of the bill is that it attempts to require “foreign financial and non-financial institutions to withhold 30% of payments made to such institutions by U.S. individuals unless such institutions agree to disclose the identity of such individuals and report on the bank transactions”. Think about this — the U.S. government is attempting to strong arm foreign financial and non-financial institutions (think banks and law firms) to either withhold 30% of the transactions in a U.S. individual’s account (and presumably remit this to the U.S. Treasury) or disclose the account details to the U.S.. The language of the bill addresses both bank accounts and any foreign trusts (ie- Private Interest Foundations).
In other words, the US government is afraid more Americans are going to be worried about the security of their money and will look to offshore institutions to preserve their savings. The government is moving pre-emptively to deter that flow of money away from their direct control. You’d almost think they didn’t trust their own citizenry.
March 23, 2010
Stimulus did little, private sector did much more
Despite all the expensive ads (especially noticeable during the Vancouver Olympic coverage), it wasn’t the federal government’s stimulus package that has been creating jobs: it was the private sector:
Canada’s economic fortunes have seen a dramatic turnaround in the last year, but according to a new study by one of the country’s leading think-tanks, it had little to do with the federal government’s $47.2-billion Economic Action Plan.
The Fraser Institute released a study Tuesday that found that government stimulus packages contributed only 0.2 percentage points to the rise in GDP between the second and third quarter of 2009 and nothing between the third and fourth quarter.
The group found that it was private-sector investment and increased exports that were the driving forces behind the change in GDP growth.
“Although the federal government has repeatedly claimed credit for Canada’s improved economic performance in the second half of 2009, Statistics Canada data show that government spending and investment in infrastructure had a negligible effect on the country’s improved economic growth,” said the Fraser Institute’s senior economist, Niels Veldhuis.
Here is the news release from the Fraser Institute.
This shouldn’t be a surprise: the stimulus was, and continues to be, a media exercise much more than it was an economic plan. As with any outcry in the mass media, the government had to be seen to be doing something, regardless of the likely success. The illusion of positive motion was necessary, and the federal government knows it has little wiggle room as far as the mainstream media is concerned — doing nothing was not going to be an acceptable choice, even if doing nothing was the “correct” response.
The government can’t really “create” jobs — although it certainly can destroy ’em — most of the jobs “created” in response to government funding are going to go away as soon as that funding dries up. There’s no economic justification for them to exist, absent the stimulus money. If there was an economic justification, private employers would have created them (where not hindered by government action of one form or another, that is).
The increase in public sector employment is unsustainable: the money to pay salaries and benefits (ahem), training, equipment, and facilities all has to be taxed from individuals and companies. The more public sector jobs, the greater the drain on the private sector. The greater the burden placed on the private sector, the slower the growth of the economy. As you approach the “break even” point, where the private sector can no longer fund all the demands from the public sector, the economy gets more and more sluggish — no sane private employer is going to expand business if there’s no profit to be made. No expansion means no new jobs.
It might be possible for us all to live by “taking in one another’s laundry”, but it’s not possible for us all to live by approving permission forms, having meetings, and bureaucratic empire-building.
Comments Off on Stimulus did little, private sector did much more
March 22, 2010
After MPAC?
Lorne Cutler looks at one of the proposals to replace the Municipal Property Tax Corporation (MPAC), which sets the property tax levels for Ontario towns and cities:
As the Ontario government grapples with ways of cutting their $25-billion deficit, they should note that there is one agency that that could be virtually eliminated overnight and few would shed a tear. It is the vast Orwellian bureaucracy known as the Municipal Property Tax Corporation (MPAC), which has the role of determining the value of Ontarians’ property every four years so that municipal taxes can either increase or decrease depending on how MPAC’s valuation of the property has changed relative to other properties in your municipality.
If MPAC determines that a property’s value went up less than the average for the community, the municipal taxes will drop (before any tax increases implemented by the municipality) and if the property went up more than the average, the taxes will increase. It is a capital gains tax without the capital gains!
Not content to actually use the market to determine property values, every few years, MPAC’s army of 1,500 civil servants assesses what they think each property is worth. Even if you just bought your house last year, MPAC can decide you really didn’t pay the true value. In order to determine the value of over 4 million properties and fight assessment challenges, the agency spent over $180-million in 2008, an 11% increase from 2007. This cost doesn’t even include the millions in subsidies that the government has to provide to seniors so they don’t lose their homes because of rising property taxes due to MPAC.
Elizabeth and I had our day in “court” with MPAC back in 2004, when we were handed an assessment claiming that our house was worth (for tax purposes) 25% more than we paid for it — in the same month we took it over from the builder:
Now it was our turn, and we already knew that our ace had been trumped: we couldn’t use the builder’s sale price as part of our evidence. We tried anyway, and to our astonishment, it was allowed. In fact, we seem to have unwittingly wrong-footed the representative from MPAC, because we mentioned that we’d received two separate assessment notices for different values (the first was about 5% more than we’d paid, the second nearly 25% more).
Because we’re in a pretty fast-moving market area, we could certainly believe that the house would be worth 5% more within a couple of months of buying it, but 25%? Come on. There was no way that we could have sold the house for 125% of list price that quickly. After a few years, sure, that’d be possible, but not that soon.
We were treated to a long-ish lecture about how our builder had owned the land for such a long time that they weren’t selling the houses for what they would really be worth on the open market, because they didn’t need to make a profit on the land . . . or something equally economically unlikely. I rather lost the thread at that point. Anyway, during our respective summations, it became clear that he didn’t think we had a leg to stand on (he wasn’t openly gloating, but it was edging in that direction).
The final act was a bit of a Scrooge-to-Bob-Cratchit moment, as the adjudicator turned to us and said “. . . and in summary, I will be lowering your assessment to $XXX,XXX” — about 5% less than the lowest assessment figure we’d got. I was so sure that I’d misheard him that it was only as the MPAC rep started whining that I believed what I’d heard. The observer from the town suddenly went into a huddle with the MPAC guy, because the lowered assessment for us might have a domino effect in our entire subdivision.
March 17, 2010
Superbubble?
Jon, my former virtual landlord, sent me this link, suggesting that it “gives you an opportunity to round up all of your ‘as I said about China earlier…’ [posts]”.
The world looks at China with envy. China’s economy grew 8.7 percent last year, while the world economy contracted by 2.2 percent. It seems that Chinese “Confucian capitalism” — a market economy powered by 1.3 billion people and guided by an authoritarian regime that can pull levers at will — is superior to our touchy-feely democracy and capitalism. But the grass on China’s side of the fence is not as green as it appears.
In fact, China’s defiance of the global recession is not a miracle — it’s a superbubble. When it deflates, it will spell big trouble for all of us.
I don’t want to give the impression that I’m anti-Chinese, because that isn’t why I post this sort of material. I think the Chinese miracle has been to raise literally hundreds of millions out of poverty, but it hasn’t been a purely positive thing: hundreds of millions of others are supporting the uplift but being deprived of similar opportunities. It’s a fantastic achievement, but it has involved — and continues to involve — injustice and repression.
It also requires continued state control over media, and not just BBC/CBC/PBS type state funding, but actual state censorship and worse:
During the crisis, Chinese exports were down more than 25 percent, tonnage of goods shipped through railroads was down by double digits, and electricity use plummeted.
Yet Beijing insisted that China had magically sustained 6 to 8 percent growth.
China lies. It goes to great lengths to maintain appearances, including censoring media and jailing those who write antigovernment articles. That’s why we have to rely on hard data instead.
Those lies will compound the impact when the lies can’t be maintained any more:
What happens in China doesn’t stay in China. A meltdown there — or even a slowdown — would have severe consequences for the rest of the world.
It will tank the commodity markets. Demand for industrial goods will fall off the cliff. Finally, Chinese appetite for our fine currency will diminish, driving the dollar lower against the renminbi and boosting our interest rates higher. No more 5 percent mortgages and 6 percent car loans.
It will be bad for the US and the rest of the world’s economies, but it could well be catastrophic (in the full meaning of that word) for China. As the US economy contracted over the last couple of years, it revealed lots of malinvestments . . . and the companies which were most exposed to the risks took huge hits to their balance sheets and their business models. A similar shock to the Chinese economy could topple the government or raise the already-high chances of massive unrest and corresponding increased repression.
Interesting times, indeed.
As Jon suggested, you can see my previous concerns about the Chinese economy here.
Comments Off on Superbubble?
March 10, 2010
California launches yet another attempt to tax out-of-state corporations
California is getting desperate to scrape up every penny it can, so a renewed proposal for a tax grab vetoed by Governor Arnold Schwarzenegger last year is back in play:
The online retail giant [Amazon.com] has enjoyed an edge over many competitors in the state because it is not required to collect sales tax from residents who buy books, top-of-the-line plasma televisions, cases of diapers and thousands of other products from its website. The Seattle corporation has no store, warehouse, office building or other physical presence in California, and the state cannot tax such businesses under a 1992 Supreme Court decision.
Consumers here are required to pay sales tax on the goods they purchase at Amazon but almost never do, because the state has no mechanism for tracking Amazon purchases and collecting the money.
No story is complete without a nasty accusation:
The Democrats who control California’s Legislature plan to put their own bid on the governor’s desk this month in hopes of reaping up to $150 million annually for state and local coffers. The revenue would make only a tiny dent in the state’s $20-billion deficit, but supporters say every dollar counts in tight times, and there’s a principle at stake.
Amazon has “built an entire business model based on tax avoidance,” said Assembly tax committee Chairman Charles Calderon (D-Montebello).
Of course, tax avoidance is perfectly legal . . . he’s trying to smear Amazon (and every other business selling to customers in California) as being tax evaders. Avoidance is not only legal, it’s a sensible strategy to minimize costs and gain a competitive advantage. Tax evasion, on the other hand, is illegal.
So who is going to get hurt if the measure passes — other than Californians who have been remiss in declaring and remitting their sales taxes?
The California proposal seizes on the thousands of online sales affiliates that Amazon contracts with to get customers to its site. Those companies advertise Amazon products, provide links to the company’s website and get a percentage of the resulting sales.
Many of the affiliates are in California. Supporters of the Democrats’ bill, ABX8 8, say that the connections amount to a presence for Amazon as well and that California should be able to force the firm to collect sales tax.
H/T to Clive, who became aware of this through a website he visits regularly which may have to close down due to the proposed law.
Comments Off on California launches yet another attempt to tax out-of-state corporations
March 9, 2010
QotD: Early America
Early America enjoyed, perhaps, a little more participatory local democracy than Britain, and had a slightly broader electorate and already the highest standard of living in the world. But the revolution so rapturously mythologized by Jefferson, Thomas Paine, Patrick Henry and others, was really, as Washington, Franklin, Hamilton, Madison and Adams did not forget, a somewhat grubby contest over taxes.
In one of the greatest feats of statesmanship of all history, the Americans, and especially Benjamin Franklin, persuaded the British to expel the French from North America, and then persuaded the French to provide the margin of victory in evicting the British themselves. This precocious manipulation of the world’s two greatest powers by a group of colonists showed astounding finesse and precocity, made more piquant and ironic by the fact that their rebellion was against paying the colonies’ share of the cost of removing the French, and the French were recruited to save the Americans their proportionate share of the cost of their own eviction.
All countries swaddle themselves in myths, and the Americans aren’t more self-indulgent than others; only more successful and operating on the grand scale of a country that in two long lifetimes grew to possess completely unprecedented power and influence in the world.
Even without the great pre-eminence of America, the founders of the country possessed a presentational skill that vastly exceeded the procession of demagogues and lunatics that sent and followed each other to the guillotine in the French Revolution. And they were certainly more persuasive and sophisticated than the British spokesmen for constitutional monarchy.
But their unintended legacy of this gift for theatricality is the endless hyperbole and hucksterism of American materialism and individuality.
Conrad Black, “Send in the clowns”, National Post, 2010-03-09
