You can think of corporate taxation as a sort of long chess match: The government makes a move. Corporations move in response — sometimes literally, to another country where the tax burden is less onerous. This upsets the government greatly, and the Barack Obama administration in particular. Treasury Secretary Jack Lew has written a letter to Congress, urging it to make it stop by passing rules that make it harder to execute these “inversions.” I’ve got a better idea: What if we made our tax system so attractive to corporations that they would have no interest in moving themselves abroad?
- Megan McArdle.
I have actually read the letter sent by Lew to Congress, and right rollicking laugh it is too. It talks about a new sort of “economic patriotism” (which prompts me to think of Samuel Johnson’s famous line of patriotism being the last refuge of the scoundrel). Lew does actually admit in his letter that it would be preferable to go for root and branch reform and reduction of corporation tax. The US has one of the highest corp. tax rates in the industrialised world – 40 per cent – while the average for OECD members is in the mid-20s, and in the case of some countries such as Ireland, in the low teens. As a result of this system, US corporations have, according to figures I recently heard from JP Morgan, north of $700 billion held outside the US. The likes of Apple, Google and Pfizer, among others. This system is crazy; it is a sort of corporate twin of the equally mad US system of worldwide tax in which anyone born in the US, even if they have never set foot in Jefferson’s Republic in adulthood, have to file an IRS return. The situation in that respect has got worse with the enactment of the FATCA Act, a truly terrible piece of legislation.
If the Republicans want to seriously act as a party that represents business and holders of equities – such as those with 401(k) plans, a big cut to corp tax makes sense. Firms will bring their money back home, either returning it to shareholders, or investing it in the US, etc. Sure, some vested interests that benefit from the current state of affairs will bleat, but screw them. (This is the sort of reform – practical, worthwhile and beneficial, that should be a basic proposal on the GOP table.)
I asked my stockbroker why part of my dividend payments were being witheld, despite the fact that I had filled in form W-8 declaring that I am not a US citizen. It turns out that there is a tax witholding on certain payments to foreign persons, including dividends. I am lucky that the UK has a treaty with the US meaning this is a mere 15% instead of 30%.
I imagine this highway robbery marginally reduces foreign investments. I wonder what interesting forms of taxation will surprise me next.
Economic progress tends to increase insofar as the savings result in a larger supply of capital goods, which serves to increase production, including the further production of capital goods. The rate of return on capital tends to fall because the larger expenditure for capital goods (and labor) shows up both as larger accumulations of capital and as an increase in the aggregate amount of costs of production in the economic system, which serves to reduce the aggregate amount of profit. Our problems today result largely from government policies that serve to hold down saving and the demand for capital goods. Among these policies are the corporate and progressive personal income taxes, the estate tax, chronic budget deficits, the social security system, and inflation of the money supply. To the extent that these policies can be reduced, the demand for and production and supply of capital goods will increase, thereby restoring economic progress, and the aggregate amount and average rate of profit will fall.
- Reisman is dealing with Piketty and his assertion that because returns on capital can outpace economic growth in general, that this is some sort of bad thing, to be stopped, banned and generally supressed. Perry Metzger of this blog has already done a lot to demonstrate the economically insane nature of Piketty’s analysis.
In summation, if you want to increase incomes, then an essential step is to stop attacking capitalists (not to be confused with crony capitalists tapping the public sector for privileges, etc).
Reisman has another devastating take-down on Piketty and his ideas on capital, at the Ludwig Von Mises blog. (Thanks to Paul Marks, frequent Samizdata commenter, for the pointer.)
I, and I am sure many other readers of and writers of Samizdata, have been following the career of Steve Baker MP, ever since he was elected MP for Wycombe in 2010. However, the last posting I did here about Baker elicited understandable scepticism from commenters about whether Baker would stick to his free market principles long enough to make any difference. Yeah, sure, he is now on the Treasury Select Committee. Big deal. Baker, like all the others, said doubters, would soon go native.
Well maybe he will, but he hasn’t yet. Not if this City A.M. report by Peter Spence about Baker’s latest sayings and doings is anything to go by:
In almost every area of economics we’ve accepted that markets do it best, he says. Few could imagine a committee of nine wise men deciding how we produce food, clothes, cars, or mobile phones.
But when it comes to producing money, we’ve accepted just such an arrangement. And for Baker it’s crazy that this has led to an obsession with what men like Carney have to say. That we’re trying to decipher from after dinner comments the trajectory of monetary policy is illustrative of the mess we’re in. “The truth is this is like kremlinology, have we worked out what the politburo thinks? It’s mad.”
We see the same thing across the Atlantic, where former Federal Reserve chairmen Alan Greenspan and Ben Bernanke have both given speeches to investors shortly after leaving the office. What investors think about US monetary policy has knock-on effects around the world, evident after last summer’s “taper tantrum”, as the Fed stumbled towards scaling back QE.
“It’s amazing we tolerate this,” says Baker, as words from both men have had the power to move markets, such is the extent of the “kremlinology” investors are hooked on. “I want the people doing this kreminology, making their living doing it, to question whether this is actually a free market,” he says.
“I think we operate a kind of monetary socialism, and it’s the single biggest institutional problem with our economic system.”
That bit about wanting people to “question whether this is actually a free market” is the bit that really matters here, I think. Clearly, Baker wants all such questioners to realise that the answer is: “No”.
Much of the problem with the world’s financial system these days is the most observers of it don’t even seem to think of it as a nationalised, government dominated system in the same way that tractor production was a nationalised, government dominated system in the old USSR. It is simply inconceivable to them that “money” could, by its very nature, be anything but a nationalised industry, so much so that to think of it as a “nationalised industry” is beyond them, because even to use such a phrase is to allude at least to the possibility – the thinkability – of a non-nationalised, free market version of the same industry. This is not a debate about how the nationalised industry of money should be managed, so much as a debate about the fact that it is a nationalised industry. Or, it would be such a debate, if only people like Steve Baker MP can manage to get such a debate started.
No doubt many Soviet tractor-makers felt similarly about what they did. That too, they were sure, just had to be run by the government, or else tractor making would descend into a black hole of chaos and impossibility and absurdity. The idea of a “free market in tractors” was, for such people, literally unthinkable. And millions in the West mocked all this nonsense. So, why do the descendants of such mockers – literal and intellectual – not mock their own Central Bankers now, just as Central Tractorers were mocked back then?
People may respond to Baker’s challenge by saying: “Yes, it is a nationalised industry, and a good thing too.” But for people even to talk like that would be a huge shift in thinking, because the fact of monetary nationalisation would have been accepted, even as it is being defending.
Until the metacontext (to use a favourite word here) of this debate is changed, free market capitalism will go on getting the blame for all that is wrong about the world’s financial system. And the “solution” will continue to be to restrict free markets in financial matters ever more ferociously.
Keep it up Mr Baker. You have not gone native yet. And you have an admiring fan club out here that continues to notice and continues to applaud.
In a comment on my previous post, Mastiff wrote, “It is easier for me to buy stock in Microsoft than it is for me to buy equity in my friend’s clothing design business down the street, thanks to the state of securities law. So which will I tend to do?”
Which is a very good point indeed, and something I had not really considered that now seems obvious. It is just another way that large incumbents can use the state to stifle competition.
However, I have not read the Financial Conduct Authority’s policy statement on crowd funding, but there do seem to be some interesting ways of investing in small companies. Have a look at Abundance Generation, Seedrs, Bank To The Future and Crowdcube.
In the USA, there was the Jumpstart Our Business Startups Act, and Rock The Post offer startup investing.
Is this the start of something world-changing, or is it set to be stifled by too much regulation?
Positive Money want to end fractional reserve banking and have the state create money directly. According to them, when quantitative easing created £375 billion, only £30 billion was made available for the government to spend, at a time when construction workers were being laid off and school building plans to fix leaky buildings were cancelled (which juxtaposition made for a nice Facebook meme). The quantitative easing also caused a stock market bubble and made some rich people even richer.
Instead, the government could have simply invented some sovereign money, debt free with no bookkeeping, and paid the builders to fix the schools. No unemployment and happy children.
Detlev Schlichter points out that it is the government who encourage fractional reserve banking, and all that really needs to happen is for them to stop doing this and banks will create some money but not nearly as much. Also, having the state create money is no less a recipe for disaster than having the banks do it, and maybe more of a disaster. The same economic distortions will apply.
If I attempt to apply Detlev’s thinking, I imagine that perhaps the state invents lots of money and gives it to schools to spend on building repairs. Suddenly the demand for construction is skyrocketing. Prices go through the roof. This stimulates supply. Software developers and professional bloggers quit their jobs for better paid jobs in the construction industry. Whole new construction businesses are started. Pensioners put all their savings into construction industry shares. And then all the school buildings get repaired, and the government moves on to curing some other perceived shortage, and the construction bubble bursts and you are back to having unemployed construction workers and starving pensioners.
Now, Positive Money responded to Detlev Schlichter. It turns out they more or less agree with him — apart from the bit about how we do not need anyone at all to create money, which they never got around to addressing directly but I gather from their criticism of Bitcoin is because they think without inflation people will speculate and not spend. But, importantly, they do not trust politicians to control the money supply either. It turns out they think some sort of “public and transparent body” can do it.
The whole thing strikes me as wishful thinking. It sounds so good it might even get somewhere. You get to bash bankers and have free money and keep politics out of it. All you need is for the public and transparent body to stay truly transparent and public and be able to manipulate the economy with precision from a central point of control. What could possibly go wrong?
“So why is it, then, that when it seems obvious that to understand finance you need to understand human behaviour, Finance World continues to insist that finance is `all about numbers’ and can be fully understood using mathematics? Partly, perhaps, because so many of them are mathematicians to start with and they find it difficult to see things other than within a numerical framework. Partly, perhaps also, because many have Type-A personalities and they find it difficult to deal with uncertainty. Yet surely also because so many are reluctant to admit that they may have been wasting their time all these years basing their work on the Markowitz worldview, just as so many unrepentant socialists found it difficult to admit they had been used as Stalin’s `useful idiots’ when the Soviet Union’ collapsed.”
- Guy Fraser-Sampson, The Pillars of Finance: The Misalignment Theory and Investment Practice, page 187. The book is about how, under the influence of mathematics specialists such as Markowitz, a lot of investment decisions got dangerously out of whack with reality, as we saw in 2008. Despite some pushback, a lot of the investment industry on which our pensions and savings depend are in thrall to risk and market ideas that are seriously mistaken. Throw in the joys of central bank fiat money and the rest, you have a problem. I should add that Fraser-Sampson, who is a professional investment figure as well as academic, is a big fan of the Austrian school (von Mises, etc). Even better, Douglas Adams, the 30 Year’s War and The Goon Show make an appearance. What more can one ask for in a book about finance?
Government ‘names and shames’ minimum wage underpayers!
Says our tax funded news bringers at the BBC.
So can we also now get a list of companies who did not create certain jobs for people at all because the minimum wage made it uneconomical to do so?
The minimum wage: a cunning government programme for making bourgeois statists feel good about themselves whilst simultaneously motivating companies to automate and reorganise their businesses to employ as few low income people as possible.
From the “I don’t know whether to laugh or cry” department:
The Obama Administration has revealed the core of its strategy for reducing carbon dioxide emissions: increasing the cost of solar panels to discourage deployment.
The Commerce Department on Tuesday imposed steep duties on importers of Chinese solar panels made from certain components, asserting that the manufacturers had benefited from unfair subsidies.
The duties will range from 18.56 to 35.21 percent, the department said.
Read all about it here.
Note that the U.S. government has had a policy of systematically subsidizing solar panel manufacturers for some time, often with disastrous results, and so far as I can tell (from an admittedly cursory study) the main crime of the Chinese manufacturers is to be more efficient than U.S. producers.
(Whether you think CO2 emissions are increasing global temperature or not, one thing is clear: in politics, cronies are the highest priority of all.)
Most of the commenters to this fascinating Guardian article on the many copies of famous Western buildings and bridges being built in the Chinese city of Suzhou dismiss the replicas as vulgar.
Vulgar they are. They are what you get when the some of the vulgus get rich and build what they like.
It [the explosion of urban mimicry] is also a result of housing becoming a free-market commodity. After Mao’s death, the introduction of a new economic policy, starting in 1979, opened the nation to foreign investment and restored private control over land use. Real estate investors supported by Hong Kong, Taiwanese and overseas Chinese financiers were quick to exploit the new opportunities in the booming housing market. With a rapid increase in the number of cities, a growing middle class and a desire to invest capital in property, there has been a boom in residential construction, investment and sales, coupled with a desire to demonstrate personal prestige.
Part of the problem with the Pikettian “Investment Event Horizon”, which I articulated in an earlier post, is the idea that we can blindly presume that a statistical trend will continue forever without carefully considering whether the extrapolation is at all plausible.
In that spirit, a friend of mine analyzed the growth of smartphone screens, which began a few years ago at around a diagonal measurement of 3 inches, then moved to 4 inches, and have recently been going past 5 inches. He has demonstrated, by extrapolation, that by the year 2034 smart phones will be 80 inches across!
Not convinced? See his graphs for yourself! Anyone can see that the trend is inexorable. Nothing could possibly interrupt it!
Now, as it happens, Piketty’s data appear to have been incorrect, but note, yet again, that even if the data had been correct, that does not make the underlying claim any less risible.
In the United States, we’re in the midst of a giant scandal about just how bad the Veterans Administration hospital system is.
For those unfamiliar with it, the US maintains a mini-NHS just for former soldiers, and it appears that it has both been undergoing a systematic meltdown and systematically falsifying records that would have allowed outsiders to learn of the situation.
As it happens, Paul Krugman, everyone’s favorite economist, effusively praised the VA hospital network as a model for future American health care in 2006, claiming it demonstrated that state operation of the health system was to be wished for rather than feared. Quoting his New York Times Column:
I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system’s success provides a helpful corrective to anti-government ideology. For the government doesn’t just pay the bills in this system–it runs the hospitals and clinics.
No, I’m not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.
The discovery of a column or speech by Professor Krugman that seems embarrassing in the light of later discoveries has become quite routine. (see, for example, his effusive praise for the quality of Thomas Piketty’s data and the inability of opponents to refute it at a point where “Capital in the 21st Century” had been in public hands for mere days. There are numerous other examples to be had.)
What is not routine, sadly, is for Professor Krugman to ever acknowledge such a mistake. I am unaware of an instance of his admitting to an error.