Wednesday, 22 May 2013

Lessons from Apple's Tax Avoidance

The scandal of the day is that Apple has been using a hostof tricks and loopholes in order to avoid paying tax on its enormous global profits. Naturally, everyone’s using this as a chance to draw their own preferred policy conclusions. Matt Yglesias is hardly alone in suggesting that it’s the US corporate tax code that’s the problem. But it’s hard to see a future in which the US tax code isn’t a problem – and that’s an important fact to consider when taking a step back and looking at corporation tax more broadly.

The government needs money to pay for roads, police, schools, hospitals and pensions. That money has got to come from somewhere, and as a democratic society we have to make decisions about how much of that money should come from the rich relative to the poor. We also have to make decisions about how to actually collect that money.

Mitt Romney got a lot of stick for his infamous comment that ‘corporations are people’ and yet he and his detractors were actually making much the same point. Apple is not a person, and as such it can’t pay taxes. When the government taxes Apple it doesn’t take money away from Apple the corporation. It takes money away from Apple’s shareholders, who own those profits.*

This makes corporation tax a roundabout way of taxing rich people. Another way to tax rich people would be to take money from them directly. The appeal of corporate taxation as a way of getting at rich people’s money is that, if it’s not too distortionary, it might be easier to do and harder to avoid than if we tried to tax rich people directly. Clearly, though, the Apple fiasco suggests that, in a globalised world, it’s really really hard to squeeze money out of corporations. And Yglesias' followup echoes Derek Thompson in hitting the nail on the head – we’re never going to be able to effectively tax corporations. So what’s the point in doing it if it would be easier just to go straight after the rich people?

Sidenote: There is one side benefit of corporate over individual taxation – individual taxes apply only to people living in your country, whereas corporation tax allows the government to get revenue from rich foreigners’ investments as well. If your aim is to squeeze the most money out of foreign shareholders, though, the best strategy is to set your corporate rate low, Ireland-style, so that lots of foreigners redirect their corporate tax liabilities to your country.

*To make things simpler, I’m going to make the heroically generous assumption that the incidence of corporate taxation falls entirely on shareholders and not on workers etc.

Monday, 20 May 2013

Immigration Tariffs vs. Auctions, or Becker vs. Peri

Ashok Rao has a new post laying out a proposal for an immigration permit auction, as suggested by prominent immigration economist Geovanni Peri. This is a great idea, and it would definitely be a major improvement for public policy, especially if the number of visas auctioned was substantially higher than current immigration levels.

That said, it isn't the only way you could do market-based immigration policy. One alternative would be to have an immigration tariff, as advocated by Gary Becker. Instead of auctioning a fixed number of permits, the government would sell as many permits as demanded at a fixed price. The benefits of this kind of system are broadly the same as the benefits of an auction Ashok describes in his post. However, there are a few subtle differences that for me suggest a tariff might be a better way to go.

The first reason to prefer a tariff is that it means the market is more responsive to shifts in supply and demand. In a boom, more people want to come to the country and the economy ‘wants’ more immigrants. In a recession, the opposite is true. Using the auction system, the same number of people come – all that changes is the price. Under a tariff regime, on the other hand, the number of migrants is free to fluctuate according to the needs of the economy. This is true on a micro as well as a macro level.  If a new computing technology creates a sudden need for hordes of Indian programmers, or demand for immigrant builders goes up following a huge natural disaster, then the policy responds by allowing more immigrants. Yes, the government could adjust the number of auctioned permits according to economic circumstances, but it is better that changes in the number of migrants be market-driven, rather than decided by bureaucratic assessments of ‘need.’

Having a fixed tariff price, or at least a planned price schedule, also gives a level of certainty to the market. If I live in Mexico and my family is saving up to buy my way into the USA, I want to know how much I’m going to need to squirrel away. With an auction, the price will vary from year to year, perhaps dramatically, and there will be no guarantee that my savings will prove sufficient to get me a permit this year, or even next year. Tariffs solve this problem.

A criticism of immigration tariffs are that it is difficult to know how many people will come. If permits are auctioned, then the government knows what the level of immigration will be. There will be no concerns about a ‘flood’ of immigrants driving up house prices, overwhelming public services and so forth. Under a tariff system, things are much murkier – immigration is very difficult to forecast, as the UK government found to its embarrassment in the mid-noughties. However, that might serve as a feature and not a bug. It’s difficult for a politician to stand up and say that he wants millions upon millions of immigrants to be allowed in every year. It might be easier to sell to the public the policy of letting in anyone who coughs up £20000, even though the two policies might be equivalent. Voters are also reassured that every immigrant who arrives will ‘pay their way,’ whereas under an auction system there is the possibility (however unlikely) that the price will fall very low, creating the fear that people might get in ‘for free.’

A final, practical point is that tariffs would be far easier to administrate. It’s obviously feasible to design a working auction system, but it would be complicated. There’s a lot of room for the government to screw up, and there would almost certainly be teething problems to start with. It might also be simpler to verify the buyer’s identity and administer a background check under a tariff system.

Ultimately, I think the parallel with international trade holds – tariffs are better than quotas. An immigration tariff would be more sensitive to the needs of the market, less bureaucratic, in some ways more predictable, and maybe even more politically palatable than an auction system.

Thursday, 9 May 2013

Why not everyone should pay into the system

There’s an idea going around that it’s a bad thing when poor people don’t pay taxes. This has manifested itself in the infamous Mitt Romney ‘47%’ gaffe and also in the debate here in the UK about contributory benefits, the personal allowance and whether people should be getting benefits out of a system they haven’t paid into. The central argument is that, if you don’t pay taxes, you’re going to want to increase the provision of public services – all public services – because you get a share of whatever scant benefits there might be from the increase, and you don’t have to pay for any of it.

There are a couple of standard objections to this view. One is that poor people do pay a lot of taxes, in the form of social insurance contributions, consumption taxes and so on. Another says that, even if people don’t pay taxes one year, they might pay taxes the next; certainly, many of the 47% has paid income tax recently, and might again soon. There’s also a related life-cycle issue – many people not paying taxes are retirees or students, who have paid or will pay taxes at some other time in their life.

Then there's the argument that social insurance is just that - insurance - and just like with, say, home insurance, if some people get back much more than they paid in, it's a feature rather than a bug.

I’m going to explore a few other objections, though.

Firstly, it confuses average and marginal costs and benefits. If I’m going to vote for more spending, the cost to me of that spending isn’t the taxes I already pay – it’s the extra tax I’d pay to finance that spending. I might not pay any tax now, but if the government increases spending, it might pay for that by lowering tax thresholds so that I will pay tax in the future, or raise one of the kinds of taxes that I do pay, like VAT. Whether or not I pay taxes now has little to do with whether or not I will pay the cost of a rise in spending.

Equally, the myth of the squeezed middle (more on this later) allows many people to argue for ‘free’ benefits – not because the middle class doesn’t pay taxes, but because at the margin any tax rise is going to fall on the rich. This is obvious in the USA, where the Democrats are pushing for higher taxes on the rich and only on the rich, and consequently the alternative of spending cuts looks comparatively unpalatable.*

Secondly, the simple fact of whether or not I’ve paid into the system doesn’t really matter that much. If I paid £1 in income tax last year, it’s not going to make me dramatically more averse to increased spending than if I didn’t pay anything. As a result, even if the tax rate paid by the poor was important, the 47% statistic would still be meaningless. What’s important is the average tax rate paid by the poor. And that becomes an argument against any and all redistribution, which no-one** advocates (even flat-tax advocates think that benefits should be progressive).

Thirdly, while people are self-interested voters at the margin, on average they are actually quite civic-minded. Bryan Caplan's excellent articleThe Myth of the Rational Voter, was widely derided for calling voters idiots, but one of the interesting things it pointed out is that voters don't tend to vote for the things that will be best for them. People vote for farm subsidies not because they benefit them but because they (mistakenly) think that it will be good for society. Equally, even if poor people not paying tax had a marginal effect on how likely they were to vote for extra benefits, it wouldn't be the only or even the most important deciding factor. They might still vote against it if they thought that was what was best for society.

Summary: if anyone ever tries to argue that taxing the poor is vital for preserving democracy, tell them they're an idiot.

*This argument is starting to look a bit politically slanted. Of course, from a Rawlsian/utilitarian perspective, if you can get benefits to the poor and middle class solely by taxing the rich, maybe that’s a great thing.
**Apologies to any anarcho-capitalists I may have offended by this statement. I love you really.

Wednesday, 1 May 2013

The Pope Is Right – Bangladeshis Are Slaves

The new Pope has come out and called the conditions of Bangladeshi workers like the 400 tragically killed in a building collapse last week ‘slave labour,’ and he’s right.*

Let's be clear. He’s not right because ‘not paying a fair wage’ and ‘only looking to make a profit’ are things that ‘go against God.’ Here, I’m firmly on the side of Matt Yglesias’ posts on the subject (which were widely criticised). Essentially, there’s a tradeoff between work safety and employment/wages. As Bangladeshis get more productive, they’re going to work less, and they’re going to be willing to give up some of their rising wages in order to make their workplaces safer. This will happen, just like it happened in the UK in the 19th and early 20th century, and just like it happened in China over the past couple of decades. Until it does, we should be wary of imposing higher labour standards, because poor Bangladeshis probably prefer long hours and unsafe conditions to reduced wages. Once Bangladeshis get richer and more productive, working conditions will improve – and government legislation will likely follow the improvement in conditions rather than lead it.

Rather, the Pope is right because the Bangladeshis are slaves in another way. Or, more accurately, they’re serfs. Back in the days when the Pope had significant lands and armies, Europe was ruled by feudal lords. Peasants working on the land weren’t slaves – the lords didn’t own them – but there were tight legal restrictions on their freedom to move to the next farm over. That meant lords didn’t have to compete for labour – you couldn’t just work for someone else who offered better wages and conditions, which meant there was little incentive for your current lord to offer you better wages and conditions. It hurt the economy, too, as people were unable to work where they would be most productive.
Of course, serfdom is complete anathema today. It’s obvious to everyone that the feudal system was destructive and immoral. Nothing like that could ever happen now. Right?
Imagine that there are a large number of corporations who would love to hire Bangladeshi workers at fair wages and with good conditions. If the Bangladeshi employers wanted to keep their workers, they would have to pay higher wages and provide better working conditions.

This isn't just a hypothetical. These companies do exist. Sadly, however, they’re mostly based in North America and Europe. There are legal restrictions on where Bangladeshis are allowed to live and work which prevent them from working for said companies, stifling competition. That's what makes the Bangladeshi's willing to accept the bad wages and working conditions - they have no alternative. As long as serfdom is allowed to persist, the serfs won’t have much chance of earning a fair wage in a safe environment.

On the other hand, feudalism long ago ceased to exist. So maybe there’s some hope that things will improve.

*It’s worth noting that the building itself was illegal under existing Bangladeshi law. Like the Pope, I’m going to focus more on wider issues of labour exploitation in Bangladesh.