back to article To defend offshore finance bods looting developing countries of their tax cash

I have been set a task by Reg reader Salamander: to critique or defend the offshore finance system. This should be easy enough as I'm clearly a pig dog running lackey of the plutocrats and so the answer is just yes. Whatever they pay me to say. Sadly, there are no plutocratic cheques flying around, just those from the editors …

  1. Mage Silver badge
    Unhappy

    Must be like Quantum Mechanics

    Because you lost me. I think I understood all your previous pieces. Which isn't to say I agree with everything, though a lot makes sense and I'd agree with.

    1. SecretSonOfHG

      Re: Must be like Quantum Mechanics

      Count me on, it could be very well that Tim is abusing terminology, but I could not get the point of the article.

      1. Tim Worstal

        Re: Must be like Quantum Mechanics

        Q "Is it a good thing that multinational corporates are dodging corporation tax in developing countries?"

        A. "Yes, because it's the workers in those countries who would pay corporation tax if it were collected. Thus tax dodging raises local wages".

        1. jonathan keith

          Re: Must be like Quantum Mechanics

          I'd love that to be true, Tim, but my lefty gut reaction is that the workers are simply paid as little as the corporations can possibly get away with, and the money spirited away offshore is instead used to increase the rewards to the shareholders and the executives.

          So it's not as if the workers have anything less that can be taken away from them if as you contest they would end up paying the corporation's tax burden.

          However, I would be happy if you can prove me wrong!

          1. Tim Worstal

            Re: Must be like Quantum Mechanics

            I agree entirely, this does happen:

            "but my lefty gut reaction is that the workers are simply paid as little as the corporations can possibly get away with, and the money spirited away offshore is instead used to increase the rewards to the shareholders and the executives."

            But that's the point about my argument. It *assumes* this happens and then goes on to examine the consequences. That capitalists are making out like bandits in this poor economy. So, more capitalists come along to make out like bandits. That increases the amount of capital in the country. That raises productivity and thus wages.

            Heck, we can call Marx into evidence here. It's the competition among the capitalists for the profits that can be made from labour that raises wages. Once the reserve army of the unemployed is exhausted then wages will indeed rise as the capitalists vie with each other for access to that labour that makes the profits.

            1. Androgynous Cupboard Silver badge

              Re: Must be like Quantum Mechanics

              I'm sorry, but in my naive world - where a company pays it's workers in the country they're employed and pays it's corporation tax in the country where the value is obtained - then I can't see how company pulling minerals out of the ground is going to underinvest because of corporation tax.

              If there is a pile of unobtanium in the Congo and Company X wants it then they will pay to extract it, and if that cost includes corporation tax then they will pay that too. If it becomes available elsewhere and cheaper to extract, they will shift production. I think we'd agree on that at least, and if corporation tax was undodgeable then this would be a good system.

              However in our world where profits can be shifted about, now suddenly your argument holds water - Company X can move production to Country B because in Country B they can fuck over the government more effectively and not pay any tax. The race to the bottom is won, and the worker is shafted. Your defence of this only works because your argument is circular.

              1. Tim Worstal

                Re: Must be like Quantum Mechanics

                You're missing the bit I made about minerals. Location specific, resource rents, tax them till the pips squeak. Corporation tax, not location specific, not resource rents, different situation.

                Dodging resource rent taxes, bad, dodging corporation tax, good.

              2. Matt Bryant Silver badge

                Re: Andorgenous Cupboard Re: Must be like Quantum Mechanics

                "......If it becomes available elsewhere and cheaper to extract, they will shift production......." It's not that easy nor as cheap as you want to think. Before they can ditch their investment in country A, they have to buy the rights to extract in country B, paying the rent TW mentioned (and probably a whole load of bribes as well). They also have to write-off the investment already made in country A including bribes paid there). Not all as cheap or easy as you want to believe. This is the problem facing North American coal mining companies - they have paid for rights, sunk money into mines and processing plants, yet are faced with a Worldwide glut of cheap coal. In their case they cannot just close their US plants (called idling a plant) and go elsewhere, they have to pay more to maintain closed mines than they would gain in moving their operations to Africa or China. Hence they are all producing at a loss as it is less of a loss than simply moving as you suggested (http://finance.yahoo.com/news/appalachia-miners-wiped-coal-glut-041524050.html). This has an effect on investment in such coal-mining companies, which have seen massive drops in share price, and their ability to raise loans to tide them over to when they hope the coal glut eases. This all puts pressure on the actual workers at those coal plants - less investment means no wage rises (probably wage cuts), less opportunities (no-one is employing more miners or training ones to move up the career ladder), and less long term job security. No-one is creating new coal-mining or processing companies and moving into the market because the cost of entry (mining rights, equipment, staff, etc.) is so high when the returns are actually negative.

                And before you shriek "The US is not a 3rd World country", the commodities market (commodities being the majority of what 3rd World countries produce) is in such a bad state it's even been effecting cheap-as-chips African mining operations (http://africanbusinessmagazine.com/sector-reports/mining/why-are-mining-companies-losing-money/). That your 3rd World country B is slightly cheaper than country A has been made largely irrelevant as an investment argument by the macro-economics. Most 3rd World governments are trying to retain their current foreign investors, tax wheezes being one means by which they do, which in turn assures their people of jobs at all. Their chances of attracting additional new investment (getting a company to move their facilities) is actually close to zero.

                1. Anonymous Coward
                  Anonymous Coward

                  Re: Andorgenous Cupboard Must be like Quantum Mechanics

                  I'm curious. Why did you pick a natural resource that who's demand in the developed world is shrinking? And does that make any difference?

                  1. Matt Bryant Silver badge

                    Re: theodore Re: Andorgenous Cupboard Must be like Quantum Mechanics

                    "..... Why did you pick a natural resource that who's demand in the developed world is shrinking?...." I picked coal because, like just about all types of mining, it requires a substantial investment in both assets and people. So the idea you can just transfer production to another country at the drop of a hat is shown to actually be excruciatingly expensive. It's also a good example because it illustrates the problem is not just in the Third World but in developed countries (for example, the glut of coal affects many European countries too). I could have done copper in Zambia but there's not much copper mining to compare in Europe or the US.

                    "......And does that make any difference?" Well, it kind of destroys the whole idea that the workers are going to be objecting to the Nasty Capitalists using tax dodges - at the moment, anyone anywhere working in producing a commodity (oil, copper, coal, etc.) is just hoping their government can keep the Nasty Capitalists and their investments around. If you are coal miner in the Appalachian Mountains you're probably really hoping your State's government or the Federal government cough up some more tax incentives to keep the coal mining companies from going bankrupt, not chasing them for legally avoiding corporation tax. Same goes for a coal miner in any other part of the World.

          2. Matt Bryant Silver badge
            Facepalm

            Re: jonathan keith Re: Must be like Quantum Mechanics

            ".....but my lefty gut reaction....." And therein lies the problem in trying to debate anything with Lefties - at a certain point in the discussion, logic ceases to hold sway and their faculties are swamped by a wave of righteous indignation. No matter what facts you put before them, they autonomically switch to denial: "But, but, but, it must be bad because my sociology lecturer at the LSE said so!"

            And so it goes against their deeply engrained baaaaaahlief that "capitalism is the root of all evil" to understand that lower taxation is used by 3rd World countries to actually encourage investment and improve the lot of the workers (aka "The People" to Lefties), because your mindset cannot see beyond "evil Capitalists always exploit The People".

            1. Hollerith 1

              Re: jonathan keith Must be like Quantum Mechanics

              Will, Mr Bryant, that was certainly both a rational argument and a fact-filled demotion of your enemies.

              1. Matt Bryant Silver badge
                Happy

                Re: Hollerith 1 Re: jonathan keith Must be like Quantum Mechanics

                ".....fact-filled...." Oh, the facts regarding the inability of Lefties to process beyond a certain point were copiously supplied by Lefty posters.

            2. Uffish

              Re: gut reaction

              I was chatting with a French colleague on day and he mentioned the difficulty he was having deciding on the rent to charge on some of his apartments. I was surprised that it wasn't easy to find out the going rate in that area of Paris.

              "It's always difficult", he said "because I don't charge the going rate I charge the just rate, and that depends on the circumstances of the tenant as well as the desirability of the apartment".

              I have always admired his attitude. Does that make me a leftie?

              1. Matt Bryant Silver badge
                Happy

                Re: Uffish Re: gut reaction

                ".....Does that make me a leftie?" Only if you assume compassion is not possible to those in the Center or on the Right, which is kinda disproven by the fact charity is still very popular with the rich. However, you'd be a true Leftie if you slapped him and insisted all property is theft anyway.

        2. Tim99 Silver badge

          Re: Must be like Quantum Mechanics

          A. "Yes, because it's the workers in those countries who would pay corporation tax if it were collected. Thus tax dodging raises local wages".

          Tim,

          One of the things that could effect this is whether the supplying countries are sufficiently powerful and organized to set up an effective cartel.

          I think that local wage taxation only fully applies when you go tax and price shopping between developing countries. If there was a similar cost for a raw material in all the developing (lesser developed) countries that could supply it, and the tax rate was the same for all of those countries, wouldn't the tax have be paid by the corporations and thus their shareholders and customers in the developed world, and not the local workers? Obviously some developed countries supply their own raw materials, and export their production surpluses weakening this potential effect.

          I note that Australia (and Brazil) were/are major suppliers of tantalum - Did the destabilization of world prices cause the war lords of the Congo to become significant suppliers (up to 10%) or was that an effect of them effectively enslaving their workers and undercutting Australia and Brazil?

          1. Tim Worstal

            Re: Must be like Quantum Mechanics

            Be very careful of the Ta figures. Congo was indeed the supplier of some 8% or so of tantalite, the ore. But as much as 50% (it depends upon the year) of Ta comes from tin slags, not tantalite. But that's a detail.

            Undercutting Oz (to the extent that a large mine closed down for a number of years) was not about that slavery no. It's about those deposits being so damn rich. They can be mined with peasant and shovel. And they are, absent that slavery (only a minority of the mines were ever controlled by the military gangs). Quite seriously, the tantalite is just lying about on the surface, maybe under 10 foot of mud. This is why it can be mined by people with bucket and spade.

            It's the richness of the deposit. Whether the slavers were there or not, even if it had been world class mining companies exploiting those deposits, the result on the market would have been the same.

  2. Nick Kew

    Applies here too ...

    The Laffer curve tells us (qualitatively) that too much tax destroys economic activity (Britain went bust in the '70s when it taxed both capital and labour at eyewateringly punitive levels). It's not an all-or-nothing, but tax and red tape certainly shift the balance: I'm more likely to invest where I take more and the state less of my profits if the enterprise is successful in generating them. And where the state isn't going to make it impossible to generate profits in the first place.

    I think Worstall omits some vital points. But that's no doubt deliberate: the article is long enough already without addressing difficult externalities.

  3. x 7

    all the bullshit in this article misses the fundamental point:

    the foreign-owned companies make a fortune, the country gets paid a tiny fraction of what it should, most of what is paid goes into the governments back pockets, and the poor bloody workers get SFA.

    You can use whatever fanciful theories you like, but they are all useful fanciful theories.

    The bottom line is that open markets / free trade - when concerning national resources on this scale - don't work. There is too much corruption at all levels, but especially within the corporate exponents of "free trade. Far better that the resources are controlled and exploited by a nationalised monopoly. I realise that then offers scope for diversion of funds into the greasy hands of politicians and their cronies but at least the money has a chance of staying in the country, rather than being spirited out to Switzerland or whereever

    1. Ossi

      And where would the nationalised monopoly get the funds to invest?

    2. Phil O'Sophical Silver badge

      Far better that the resources are controlled and exploited by a nationalised monopoly. I realise that then offers scope for diversion of funds into the greasy hands of politicians and their cronies but at least the money has a chance of staying in the country,

      Except that all the evidence in the former Eastern Europe, Balkan states, etc. is the exact reverse. The money goes straight into the greasy hands of the politicians, and thence into Swiss bank accounts. What incentive is there for the politicials to keep the money in the country? There's nothing there they want to spend it on. Letting a nationalized monoploy run things not only provides no incentive to reward the workers, it also removes all chance of unbiased oversight.Not to mention that the political cronies who run the monopoly are unlikely to have been selected on the basis of their competence in the industry concerned, as 1970s Britain showed.

      1. P. Lee

        >The money goes straight into the greasy hands of the politicians, and thence into Swiss bank accounts.

        That may be mostly true but still, its politicians who are at least in-country and to some extent (if only via revolution) accountable to the populace. A foreign corporation has no accountability beyond the value of the in-country assets and it never will. Even the greasy politicians will want to live like kings and spend some of it in-country. Foreign corps will send the profit abroad, no question there.

        I suspect the root of the problem is that capital is not mobile. When a company owns a mine, they have a local monopoly. How do "more capitalists flood in" to get a share of the super-normal profits if there is a legal monopoly there?

        Ultimately, the best thing for the country is to develop its own processing skills. Large corporations know this and keep strict division of labour, not (I think) only for efficiency, but to prevent skills from leaking between areas. Someone did an analysis of the iphone production costs and worked out that making it all in the US would cost less than an extra $5 per unit. Why go to all that trouble to offshore? Perhaps for the extra profit, but I suspect its more about avoiding tax by splitting up the industry and ensuring that a manufacturing industry isn't built up in the US where business skills and capital are plentiful. That would make a new challenger more likely. Far better to make it difficult for new entrants by making sure you have to be a multinational to even enter the game. There is a good reason McDonalds dumbs down the running of its outlets. It makes everyone easily replaceable. Do you really think the resource extraction industry doesn't do the same?

        There is also a national problem. If prices rise for the raw or nearly raw materials, the western companies lose profit. That means lower pensions, higher-priced goods. Is that what we want? Do you think our own governments would push for that? What happens when all those imported goods cost a great deal more. Wealth is not really about increasing the size of the pie, its about pie distribution. You are only wealthy compared to poor people. The number of zeros at the end of your bank balance is not relevant. Increased efficiency does lead to greater wealth, but that is process efficiency (actually doing things better) not capital efficiency (increased ROI, usually by cutting costs, most often labour costs). Economists tend to over-simplify and conflate the two.

        I don't think its just developing countries which fall foul of all this. Australia does very little processing of its own raw materials. Most of it is shipped to China and the result re-imported. Why? I suspect not for labour-cost reasons alone, though Australian labour is grossly over-priced. Processing raw materials is a capital-intensive, bulk-reducing process. Cheap Chinese labour is unlikely to make much of an impact. However, it would be very hard to avoid Australian tax by processing locally and selling something valuable. It all becomes quite easy when the goods disappear offshore.

        As to a solution, the best one I can think of is to encourage local processing. Nationalisation might be one way of controlling the goods, but rather than purely taxation, I'd consider licenses for extraction to be based on building up local processing and local training. Create a local industry which knows how to process sand into semi-conductors, obtain plastic or gas from coal and oil. If you don't do the work yourself, you don't get the profits. There is a place for division of labour, but it needs to be carefully monitored because it will keep the workers poor (and tax receipts down) and may need breaking.

    3. Ilmarinen

      @ x 7: Missing point

      "the country gets paid a tiny fraction of what it should"

      "should" as determined by whom?

      I guess you don't mean as determined by the payer. Who then?

    4. This post has been deleted by its author

    5. Anonymous Coward
      Anonymous Coward

      I'm no economist, but the basic Marxism I learned at university taught me that open markets do work. His next idea, for what it's worth, was that open markets were inherently unstable, and that the whole system was going to collapse.

      He predicted that after the collapse, the open market system would be replaced by a more stable, but less efficient and less productive system where the resources are controlled and exploited by a nationalised monopoly.

      You may think that Marxism is a fanciful theory, but on the face of it, your fanciful theory appears to be rather less real than his was.

    6. IHateWearingATie

      different topic

      I think you're mixing up free trade and taxation of investments. The article is about taxation once a company has invested, though i think what's in your mind is protectionism in order to build up local industries in the way that South Korea and India did ( and the UK and US did much earlier). If youare interested in that aspect I'd recommend Ha Joon Chang's book 'Bad Samaritans' - he's a developmental economist at Cambridge.

      Thinking about it, I'd be interested in Tim's take on that in a future article

      1. Tim Worstal

        Re: different topic

        I've actually written an entire book about it......

        1. Anonymous Coward
          Anonymous Coward

          Re: different topic

          don't be coy - post a link ;)

          1. Tim Worstal

            Re: different topic

            http://www.amazon.co.uk/s/ref=a9_sc_1?rh=i%3Aaps%2Ck%3A23+things+we+are+telling+you+about+capitalism&keywords=23+things+we+are+telling+you+about+capitalism&ie=UTF8&qid=1428316242

            23 Things We Are Telling You about Capitalism. It's actually a critique of another of Chang's books but these points are covered in it.

            1. Anonymous Coward
              Anonymous Coward

              Re: different topic

              cheers,

              There's another couple of pence towards your filthy capitalist running-dog lackey expenditure ;)

    7. WalterAlter
      Pirate

      Exploiting Swine

      Yah, and they manipulate the colony into borrowing from the IMF to pay for the infrastructure necessary for extraction of the raw materials and the IMF insures payback of the loan with their freaking "conditionalities", i.e., forcing the country at the point of a gun to convert its agriculture to mono culture- soy beans or corn or cotton or whatever, as a cash crop and then they gain further concessions by threatening to manipulate the price of the cash crop. Meanwhile the infrastructure that all the money was borrowed for does diddly to increase trade and communication within the colony or with neighboring colonies since it was designed to get the raw materials from inland to the nearest port, period.

      Meanwhile Obama, the bankers' step n' fetchit, goes ballistic when these exploited countries get ballsy and start up banks that will actually do their countries some good- BRICS and AIIB. Kill the IMF and its crypto-Nazi goons.

    8. LucreLout

      Far better that the resources are controlled and exploited by a nationalised monopoly

      I'm assuming you're too young, too idealistic, or both to correctly recall the miners strikes in the UK throughout the 70's and early 80's? Monopolies are almost never the answer to anything - they should be avoided at almost all costs.

  4. Ossi

    To put it simply....

    Wages only go up with productivity - a simple point that you ultimately can't have more without producing more. To increase productivity you need investment. To get investment you need profits. So tax dodging => profits => investment => rising incomes.

    The profits => investment bit is the subtlety in the argument. Where capital is very mobile (like developing countries, because it comes from abroad) then the amount of investment is very sensitive to profits, much more than in the developed world. That's why Tim's careful to apply the argument to the developing world.

    1. Aitor 1

      Re: To put it simply....

      Wages don't go up with increased productivity: they go down, as you need less workers, and there is more offer of workers than need.

      You have to increase the company productivity in order to be able to pay more, and that is different from paying more. Completely different.

      You just pay as little as possible, and sell for as much as you can, that is the basics of a good deal.. there is no reason to pay more if you can pay less. Not only you have no reason, but it is bad management to do so.

      1. Ossi

        Re: To put it simply....

        @Aitor 1

        "Wages don't go up with increased productivity: they go down, as you need less workers, and there is more offer of workers than need."

        Only if you assume that output is fixed and, well, it isn't. What actually happens is each worker produces more and output increases. As I say, the simple point is that if you want to have more stuff (i.e. increase wages across an economy) you have to make more stuff.

        "You have to increase the company productivity in order to be able to pay more, and that is different from paying more. Completely different."

        I'm not quite sure what you mean here, but if one company doesn't keep up with the productivity increases of its competitors then it will go bust. The economy will discard it and march on.

        "You just pay as little as possible, and sell for as much as you can, that is the basics of a good deal.. there is no reason to pay more if you can pay less. Not only you have no reason, but it is bad management to do so."

        Yep. Absolutely right. It's competition in the labour market that drives up wages. The more investment you have, the greater the ability (through increased productivity) to pay higher salaries and the greater the competition for labour forcing you to pay higher salaries. That's the transmission mechanism.

        1. Red Bren
          Pint

          Re: To put it simply....

          @Ossi

          "Only if you assume that output is fixed and, well, it isn't."

          But Ossi, you're assuming that demand is not fixed, when for a given price point, it likely is. If you start producing too many widgets, you're going to saturate your market and drive your price down, so you produce the same number of widgets, using less staff. More people chasing fewer jobs drives wages down, but less money in the workers pockets means less customers with the money to buy your widgets.

          So there's no point investing money in anything, ever!

          Hmm, I assure you, this holiday drinking hasn't intaired my impellect *hic*

          1. Ossi

            Re: To put it simply....

            @Red Bren

            Well the simple evidence of centuries of increasing productivity and simultaneously increasing wages and employment should be enough to answer your point. But just to explain a bit more, yes I am assuming that demand is not fixed - but I'm talking about aggregate demand in the economy.

            You saw the logical impossibility of the cycle that you described, so you'll be pleased to know that it doesn't work like that. Even if we assume the (unlikely but possible) scenario where the quantity demanded of a product is completely unresponsive to price, then increased productivity will force down the price of that good (initially decreased cost of production would mean more profits - which is why you'd invest - but eventually competitors would be tempted by those profits and would invest and prices would be forced down until profits are at a level that doesn't tempt in new competitors but doesn't drive current competitors out - think what's happened to telecom prices, for example). That makes consumers richer, and they go and spend their money elsewhere. The laid off workers would then go off to the resulting new jobs.

          2. Matt Bryant Silver badge
            Facepalm

            Re: Red Bren Re: To put it simply....

            "....so you produce the same number of widgets, using less staff....." That assumes two things - firstly, that efficiency drives don't happen unless there is a glut, whereas modern management techniques have been pushing efficiency drives in good times and bad for decades; secondly, that you can still produce the same number of widgets with less staff. In a glutted market it is far more likely that you cut production, producing less widgets, until the glut has cleared. If your staff are highly trained and hard to find then you will not just throw them away either, otherwise you risk being unable to ramp production (and profits) back up when the market improves. If your market is doomed (think Welsh coal mining) you're pretty much screwed either way, so better start praying your government starts throwing out tax incentives and grants to attract those Nasty Capitalists so some of you can get retrained (as happened in Wales).

    2. ecofeco Silver badge

      Re: To put it simply....

      "Wages only go up with productivity"

      US workers have the highest productivity in the world, yet are compensated the worst compared to all the other 1st world nations.

      The largest economy in the world has just demolished your hypothesis.

      1. Tim Worstal

        Re: To put it simply....

        "US workers have the highest productivity in the world, yet are compensated the worst compared to all the other 1st world nations."

        This isn't actually possible. So, fortunately, it's not true. Mean hourly wages in the US are $25 (OK, $24,8x). In the UK £14 or so.

        1. ecofeco Silver badge

          Re: To put it simply....

          "This isn't actually possible. So, fortunately, it's not true. Mean hourly wages in the US are $25 (OK, $24,8x). In the UK £14 or so."

          Do you actually do any research?

          "Mean" is irrelevant when the wealth gap is as huge as it is in the US. The wealthy 1% are so rich they skew and distort even the mean.

          The us workforce is 156 million people of working age. 72 million earn less than $500 per week. That's almost HALF of the entire workforce. Now remove the wealthy 1%. Now remove the next 10%. Those are the folks who make $200K or more per year.

          What's left? It sure as hell isn't a mean of $25hr. And their wages have NOT kept up with inflation for the last 35 years.

          Yet they have the highest productivity in the world, while receiving the worst benefits (if any at all), the least worker protection, the least amount of paid holidays, sicks days and vacation and the weakest of pensions.

          US workers are in fact, more productive than the much vaunted Japanese worker.

          Google "us wealth distribution" Click on the charts. Do your research next time.

    3. Tim99 Silver badge

      Re: To put it simply....

      Ossi,

      Good point, but governments don't want increased productivity - They say they do, but they really don't. A nightmare for a government that has to pander to a small vested interest, is a high productivity economy that allows their population lots of free time. You can have only so much of bread and circuses before the proles start asking questions instead of being safely at work, or travelling to it.

      This might be one reason why we have created so many "non jobs' since industries were off-shored. The last thing that our rulers want is a lot of over-educated people with spare time. The other effective mechanism of high levels of un(der)employment, or forced leisure can only be held at a certain level before the rioting mobs start setting fire to stuff.

      I wonder what we will do when the current Indian, South American, and Asian work force is too expensive; and they too are replaced by automation and workers from still cheaper countries? I remember the 1970s and 1980s, when I was one of the people tasked with increasing productivity by means of automation - We were told that everyone would only have to work 2 days a week, and that would apply to our children too, who we should encourage to go into service and leisure related jobs...

  5. Anonymous Coward
    Anonymous Coward

    God?

    Some part of a mineral value is just that the bloke that God gets in to design worlds sticks a nice lode of minerals in a place where a certain tribe ends up living.

    You believe in the "invisible hand" i take it.

    1. Anonymous Coward
      Joke

      Re: God?

      The 'bloke' he's referring to is probably Slartibartfast...

      1. Tim Worstal

        Re: God?

        There's another very similar character in a couple of Tom Holt novels as well. But yes, that sorta idea.

  6. Salamander

    Wow.

    I think I need a pint after reading that one........

    When I wrote my original comment, I just thought I was being a little cheeky and having a little bit of fun on the Register comment boards during a coffee break from my job.

    I had not realised that it was construed by Tim as a declaration of war. Perhaps I should have worded it a bit better.

    It was an interesting piece but I think I need to re-read it to full digest it and take a look at some of the papers that Tim has linked to it.

    As for the $1 in aid for every $10 removed from the country statistic, I picked that nugget up whilst listening to an audio book version of 'Treasure Islands: Tax Havens and the Men who Stole the World' by Nicolas Shaxson. I would try and find the source of the statistic quoted for Tim but since it is a audio book finding it would involve listening to it again. I found the book to be quite interesting and fairly well balanced, though it does get a bit soap boxish at times.

    Anyway, thanks for responding to the request Tim and enjoy the rest of the bank holiday weekend.

    1. Tim Worstal

      Re: Wow.

      Nick Shaxson is part of Tax Justice Network, who work very closely with Christian Aid on this point. So it is from the same source, ultimately.

      Amusingly, Shaxson was based in Zurich when he wrote that book.....sadly though it was because his partner was working there, not for tax reasons.

    2. Hiyamaya

      Re: Wow.

      Salamander -

      The $10 removed for every $1 in aid statistic originally comes from an organisation called Global Financial Integrity which estimates 'illicit flows' out of developing countries. It is often mistaken for a tax loss figure (they are related but different - for example if someone shifted $100 of legitimate profit out of a country by a nefarious means that allowed them to escape a $20 tax charge, the bigger number is the illicit flow and the smaller one is the tax loss).

      The bigger number seems to be mistaken for a tax loss a lot - I think because it fits the perception that the numbers involved must be huuuge, and because when the illicit flow estimate is presented as a contrast with aid coming in ($10 for every $1....), the impression is given that they must be the same kind of money (i.e. that could be used by governments to pay for schools, hospitals, roads etc..)

      As Tim mentioned it bugs me that the numbers used to underpin these debates are so often confused and misused!

  7. GoldenToast

    Help! I can no longer tell the difference!

    Are Tim Worstall and amanfrommars1 the one and the same?

    1. Anomalous Cowturd
      Joke

      Re: Help! I can no longer tell the difference!

      It's easy to tell the difference.

      If it isn't incomprehensible tosh, it's AmfM.

      HTH. HAND.

      1. GoldenToast

        Re: Help! I can no longer tell the difference!

        Thank you for your insight. I feel so much better now!

        Today, I'm going to play in the garden...

  8. phil dude
    Thumb Up

    nice one tim....

    Tim's statement about "corporations being people and therefore any tax on them is real money from the wallet of a real person", is the real issue.

    Scenario A: you have a job you are taxed on your income, but you can offset very little of your expenditure for "project life".

    Scenario B: you are a company doing that same job, you get to write off all the expenses (including the wages of the guy in Scenario A!), and the net profit is taxed and shareholders might even get a dividend.

    The economy has become bifurcated due to the positive-feedback possible for Scenario B, that does not exist for Scenario A. All taxes are paid by group A. Group B can modulate their accounts to exploit the loopholes politicians leave in for one lobby group, but which get used by others!!

    Big companies can afford the best lawyers and accountants, so much so they can even delay the govts long enough to wait for a change. When big enough (especially when multi-national) they can exploit the differences in the "political tides", where it is elections not the moon that causes the shifts in capital....

    Off-shoring is part of the anatomy of a large corporation, but it only happens when you have sufficient capital to overcome the lead time to get things up and running.

    Corporations live to maximise profit at any cost.

    P.

    1. Matt Bryant Silver badge
      FAIL

      Re: Phil dude Re: nice one tim....

      ".....that does not exist for Scenario A...." Not true. Whilst you may not be in a position to earn enough to investigate tax deductibles, many of the rest of us do. A simple example would be tax-relief on pensions - am I "aggressively avoiding" tax on the "corporation of me" if I stash away the maximum permissible annual amount? How about tax relief on charitable contributions, or my personal expenses used for business, or just for being married with kids?

      1. Anonymous Coward
        Anonymous Coward

        Re: Phil dude nice one tim....

        > am I "aggressively avoiding" tax on the "corporation of me" if I stash away the maximum permissible annual amount?

        That's not really a valid example because your pension fund isn't tax-exempt, it's tax-deferred. When you start drawing from your pension fund, at retirement time, you will pay taxes on your pension income, just as if you were receiving a job paycheck.

        On a different train of thought: I am beginning to think that Tim Worstall is in fact Mitt Romney's Nom De Plume.

        1. Doctor Syntax Silver badge

          Re: Phil dude nice one tim....

          "When you start drawing from your pension fund, at retirement time, you will pay taxes on your pension income, just as if you were receiving a job paycheck."

          That depends on the tax levels. The pension investments are likely to be getting relief at the highest marginal rates of the worker's tax. The pension income is going to have the pensioner's tax allowances set against it, then the lowest tax band etc. It might never have any portion fall into the highest possible tax band: mine certainly doesn't :(

          1. Anonymous Coward
            Anonymous Coward

            Re: Phil dude nice one tim....

            > That depends on the tax levels [ bla-bla-bla-bla-bla ]

            Any tax level is dependent on income and its corresponding tax bracket. What's your point?

            The point here is that pre-tax pension or IRA withholdings are not tax-exempt, they are only tax-deferred.

            Incidentally, a well-managed IRA or pension fund will incur higher taxes at retirement than would have been incurred if the corresponding annual withholding wouldn't have been tax-deferred. Do the math.

            1. Tom 13

              Re: That's not really a valid example

              I did. You're a liar.

        2. Tom 13

          Re: That's not really a valid example

          It's absolutely valid. You're calling it tax deferred only because you like it. I maximize the hell out of this one and I'm NOT a six figure earner. As a random example, let's say that except for the retirement contribution, a family of 4 in the US makes 55K. Their taxes on that is 2014 would be 7346. But with their retirement tax dodge they only pay 6596. That's 750 not paid to the government. When they finally retire chance are they'll try to work their income at about 80% of what they were making when they were working. So that puts them in the 44K bracket and the taxes of that are 5546. But it took 8.8x that 5K per year contribution to make it to 44K, so the effective tax paid is 630.23, leaving the government short 119.77 from what they would have gotten if the retirement was taxed at the 55K bracket at the time it was earned.

          *Note: for purposes of this argument I've used the loaded phrases you use to describe "greedy" corporations to describe the working citizens because from a tax standpoint, there is no difference between the two. But mostly because you deserve a dose of your own medicine.

    2. Ossi

      Re: nice one tim....

      @Phil Dude

      "Corporations live to maximise profit at any cost."

      You say that likes it's a bad thing; like with that statement you've ended the argument. That's the starting assumption of the argument (although 'at any cost' is hyperbole - do you really think Tim Cook would order the murder of Satya Nadella?). Their desire for profit leads to investment, employment, competition, rising productivity and rising wages, given free markets. If you really want to make the world a better place, take the time to understand how and why.

      Given the millennia-old inevitably of people (why stop at 'corporations'?) trying to make profits, that seems like a jolly sensible place to start from. If you find that immoral, then feel free to invest your pension fund in profit-free enterprises. But, come to think about it, what's actually immoral about profit?

      1. phil dude
        Megaphone

        Re: nice one tim....

        @Ossi, that was not my intent. It is simply a description of their function. Also an indication of their limitations.

        Capitalism is "just" a system of goods and services exchange. Although it is often portrayed as an ideology (to prevent discussions of any detail), it really is a simple idea.

        The problem is the optimisation mechanism works really well for problems that fit within a small set of well regulated (i.e. low %age of fakes and frauds) markets. The mechanism of capitalism fails when there is essentially nothing to stop it destroying the system of one part of the planet to benefit another as they cross boundaries and distort the system. And I don't even mean oil, to pick an obvious example. I mean business can cross borders where *MANY* people cannot.

        Humans are mortal , frail beings and the corporations as legal agents in our society have no such weakness. Therefore, layoffs, arbitrary profit returns are all part of the currency of "being a good business".

        Profits are not the problem. It is the massive inequity of how individuals are treated versus corporate organisations.

        I'll say it again, as I think it is a point often overlooked. Humans can deduct little of their living expenses. Corporations can deduct a great deal. As the corporations use their "flexible accounting" advantage to change the law via lobbying and the humans can't, this optimises society to run a business. Not live as a human.

        I'm not saying there is malintent (that would be human). It is a statement of fact that corporations act like sociopaths because they *have* to to survive within the law we currently have.

        P.

        1. Ossi

          Re: nice one tim....

          Phil,

          "The mechanism of capitalism fails when there is essentially nothing to stop it destroying the system of one part of the planet to benefit another as they cross boundaries and distort the system. And I don't even mean oil, to pick an obvious example. I mean business can cross borders where *MANY* people cannot."

          I'd like to respond, but I'm not sure what you mean. This is a very broad statement. Could you be more specific? What do you mean by 'destroying the system'? What 'system' are you referring to? How does it destroy it?

          As for your tax point, there's a difference between costs and consumption. If you buy some flour for 80p, and sell your bread for £1, your income is 20p. You don't expect to get taxed on the cost of the flour (which the seller would have already paid tax on), but it seems reasonable to tax the income. If you then spend 10p of that income on a bus fare to the cinema, that's consumption - it's how you've chosen to spend your income. Now you might be able to persuade Mrs taxperson that it's a cost of business if the bus fare was to work and back, and she might go for it, but the distinction between costs and consumption seems a reasonable one to me.

          1. phil dude
            Boffin

            Re: nice one tim....

            @Ossi: The natural end state of capitalism is monopoly or oligopoly. This is wrecking the system because there can be no free market as this state is approached.

            Just look at the state of ISP's in the USA. One choice in many areas. The laughable "press release bingo" when google annouces a new fibre city!!!

            How about computers? Decades after Microsoft was declared a monopoly made almost no difference. Facetious press release about "open source". Complete bollocks.

            What about Intel vs AMD? I love Intel hardware but it is sooo *expensive* for what is mediocre performance.

            The point is NOT that Microsoft is crap. It is not. It has some brilliant people working there. The point is it is so large that it is able to use the inertia of its capital resources to distort the market. Why else would an Android phone not allow the native Linux filesystem? What about the huge number of devices with "windows only" drivers?

            As a result of effective competition Microsoft software only needs to be "so good" because they have a huge legacy footprint.

            This is the problem with capitalism. Once a company reaches a certain size relative to its market, it no longer has the same competitive restraints (i.e the need to compete) and the humans within become cannon fodder.

            An example that many people reading here will understand is the late payment by big corporations to SMEs.

            Maybe they delay payment on purpose hoping the small biz will go out of business before they have to pay?

            Or perhaps they are so big and as there are no effective sanctions, they simply *DON'T* care.

            P.

            1. Tim Worstal

              Re: nice one tim....

              "The natural end state of capitalism is monopoly or oligopoly."

              Mebbe. That's why we need markets, to allow new entrants to challenge said monopoly.

              1. Hollerith 1

                Re: nice one tim....

                Adam Smith himself said that capitalism naturally ends in cartelism (I paraphrase wildly, as I can't lay my hand on his book at the moment).

                1. Matt Bryant Silver badge
                  Facepalm

                  Re: Hollerith 1 Re: nice one tim....

                  "Adam Smith himself said....." Ah, the faith of Smithism! Often blindly followed by those that are quick to denigrate anyone else that quotes from a religious tome. Sure, Smith was a genius, but that doesn't make him either infallible or omnipotent. After all, he did rather consider the poor victims of their own lack of spirit - "The real tragedy of the poor is the poverty of their aspirations" - whilst at the same time castigating society in general for there being poor people - "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable". So, Smithist, is it society's fault there are poor or just the poor's fault for being stupid?

            2. codejunky Silver badge

              Re: nice one tim....

              "The natural end state of capitalism is monopoly or oligopoly"

              While people crying for nationalising things and greater gov control are skipping the market part and going direct to the monopoly or oligopoly. Capitalism only has and end state when people give up and stop trying. Otherwise we get advancement in knowledge and technology while solving problems in new and innovative ways.

            3. Tom 13

              Re: nice one tim....

              No, the natural state of capitalism if the agricultural market and the grocery store. If you want oligopoly or monopoly you MUST involve the government a la Apple's iPhone, or Ma Bell before it was broken up into the oligopoly it is today.

              The ISPs issue is precisely governments granting monopoly access based on some perceived social good (usually the "we don't want wires willy-nilly all over the neighborhood").

              Again, Microsoft has a government granted monopoly: copyright. Again, perceived to be a social good and therefore protected by government.

              The government granted monopolies always precede the "so big they can buy governments" phase.

            4. x 7

              Re: nice one tim....

              "The natural end state of capitalism is monopoly or oligopoly"

              that may or may not be true........but its certainly true that the the natural end state of Marxism/Leninism is monopoly or oligopoly - given sufficient time.

              Look at the current situations of both Russia and China

          2. phil dude
            Boffin

            Re: nice one tim....

            @Ossi: Your second point.

            As a human you MUST eat, drink and sleep and pay for housing. These are basics you must purchase but cannot pass the costs on, and yet they can consume a considerable amount of any income. And yet you are taxed before hand.

            No company pays taxes on these things because they pass the costs on to you. If a company pays "business rates" , the costs to the customer go up. Maybe they will have less profit. Maybe they will fire someone. But either way the burden is disproportionate on the human.

            I am not arguing against capitalism as I think it is a pretty obviously good idea. I am arguing that the implementation needs careful regulation as the natural equilibrium point, is a company that achieves monopoly presence.

            P.

            1. Ossi

              Re: nice one tim....

              @Phil

              Well whether the ultimate burden of business taxes falls on workers, businesses or customers is rather complex and depends on the type of tax. Suffice to say that all or a combination of those groups could end up ultimately paying the tax.

              So you won't be surprised to hear that the same logic applies to taxes on wages. In fact, employers would end up with a proportion of the burden, possibly the majority of it. To understand why, think about what happens when an income tax is applied. Workers suddenly get less pay. That means that fewer will be willing or able to work for you for any given salary. Thus, you have to raise wages to compensate at least partially.

              But, I hear you say, if they get paid less, they'll get paid less everywhere. There's no more reason to change jobs now than before the income tax. One answer is that lower effective wages make employment a less enticing option. Some people will simply leave the workforce - think about those who are near retirement, for example. At the other end, some will stay in education. Others will leave the country. They'll be a shuffling effect as people move around. How much they can and want to shuffle out of your business determines how much of the income tax burden you'll have to stump up yourself.

              But ultimately all the burden falls on humans, because humans ultmately own all the businesses.

            2. Tom 13

              Re: These are basics you must purchase but cannot pass the costs on

              Nope. Meet clients for breakfast, lunch and dinner. Write them all off as a business expense. It's been done all over the place. In fact, back in the 70s there was a millionaire in NYC who not only ate entirely on his company's dime, he lived in a hotel on their dime, and the company provided him with a limo to get around town. Obviously airflights whether commercial or charter were also on the company account.

        2. Tim Worstal

          Re: nice one tim....

          "Capitalism is "just" a system of goods and services exchange."

          Well, no, not really, and this is a very useful distinction to make. Capitalism is a description of who owns the productive assets in a society. The capitalists, obviously. socialism is also a description of who owns the productive assets: they're owned socially. Different variations of course, could be socially the consumers (the Co Op), the workers (a workers co op, Mondragon say) could be the government (state socialism) and so on.

          A "market" is a description of goods and services exchange. As is also a planned economy.

          Using these definitions I'm so so as to capitalism/socialism (in more detail, some things work better either way). I'm vehemently pro-market and anti the planned economy.

          I also think that the biggest mistake British leftism in general has made has been to fail to make these distinctions. Being anti-capityalist, oh well, but then everyone assumes that this also mean they must be anti-market. And it's just not the same thing at all.

          1. phil dude

            Re: nice one tim....

            @Tim Worstall: Please excuse my sweeping generalisations for brevity!

            I am in agreement with your general point. See my other post about equilibrium, it is why planned economies fail and free markets don't really exist when a company gets too big.

            P.

    3. Tim Worstal

      Re: nice one tim....

      "Tim's statement about "corporations being people and therefore any tax on them is real money from the wallet of a real person", is the real issue."

      Not quite what I said. To clarify. Corporations are legal persons. But all taxes are, ultimately, paid by natural persons. Corporations are not natural persons therefore corporations do not, ultimately, pay tax. The burden of the tax *must* fall on some set of natural people.

    4. Martin Budden Silver badge

      Re: nice one tim....

      "Corporations live to maximise profit at any cost."

      Here in Australia, they are legally required to do so. Any board of directors found to have not done everything possible to maximise profit for their shareholders will be prosecuted - as individuals. They don't want to go to jail, so naturally they go profit-crazy.

  9. ecofeco Silver badge

    The Commanding Hieghts

    The Commanding Heights

    American PBS, 3 part series does a damn good job of explaining our modern global economy. The history (past 100 years), current events (up to 2002), and how very, very unstable it is and how much damage it has done to nations, peoples and economies of every industry while masking it with record setting historical gains for the financial markets and the few who benefit from it.

    Fun little tidbit from the series: "free market" cheerleaders and founders of the Chicago School were Pinochet's and Peron's best buddies. Yeah, "those' guys.

    It also features financial leaders of the world like former Goldman Sachs chairman and Federal Reserve chairman and a couple of former presidential economic advisers and government economic secretaries from South America (among others) saying we need better regulations, firewalls and safety cutouts because the current free-for-all will lead to the next world war.

    1. This post has been deleted by its author

    2. Ossi

      Re: The Commanding Hieghts

      @ecofeco

      I've not seen the series nor read the book. However, I understand the book was pro-market and pro-globalisation, and their concern is not that these trends *should* end but that they *might* end because of their flaws, taking away all the benefits they've brought. It's a call to address the flaws, not sweep away the system.

  10. anothercynic Silver badge

    Well-argued...

    Thank you Tim, well-argued as always.

    As you point out, the resource rent (or lack thereof) is what ruins countries... those desperate for investment will happily make deals on that and then realise eventually that they've shafted themselves.

    Tax on commodities/corporations don't mean much... that's what many tax 'activists' don't seem to get.

  11. All names Taken
    Alien

    The only logical evolution ...

    ... must be:

    Germany and Russia become friends

    (this diminishes the Ukranian dilemma straight away unless, of course?, Uncle Sam still wishes upon fractious fecking of the European sector?)

    EU, less UK obviously, follow suit

    Norway and Scandanavian elements see the sense in a friendly Germany, friendly Russia, friendly EU and ponder/wonder why they ever thought UK and US were totalities to be followed blindly whatever whenever?

    Uncle Sam gets his petticoats twisted?

    In 40 years time India does what EU, Germany and Russia did 20 - 30 years earlier and develop a trading sector most formidable and reliable without dollar dependency and dear old China is glad to chip in?

  12. Mike VandeVelde
    Devil

    economists: similar to climatologists

    Take all the derogatory commentardery about climate researchers you find around here, and just look how much more nicely the same comments fit when applied to economists instead :D

    http://kickitover.org/notebook/

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