Category: Law

Some points about corporate tax

Written from the British context:

Should the system be changed to one where companies are taxed on all the profits they make from their sales in the country?

There are a few downsides to this.

First of all it would be very hard for one country to switch to such a system without getting the rest of the world to do it too. If we did it unilaterally it would open up more differences between national tax regimes and so create, rather than reduce tax avoidance loopholes.

It is also far from clear the UK would gain from such a change. We might gain from some of the big US-based multinationals paying more tax here, but we have plenty of multinationals of our own and they would generally end up paying less here. The biggest losers could well be poorer developing countries, especially those reliant on extractive industries such as mining. If they could only tax companies based on their sales to their residents in that country that would bring in a lot less than taxing them on the share of the economic value of the products generated in that country. The UK itself still generates between 8 and 9 percent of Government revenues from corporation tax, which is pretty respectable internationally, despite being a very open economy exposed to competition.

There is also an economic question as to who ultimately bears the burden of taxes ‎on a company – is it the shareholders, the customers, or the workers, and if the workers, is it the highly-paid top management or the people at the bottom? The answer is not certain, but it does seem likely that a shift to sales-based tax would be at the expense of the customers. In other words, by taxing internet-based suppliers more, we could be more heavily taxing ourselves.

But the strongest argument against is fairness. If a product is invented / developed / mined / refined / built and potentially even marketed and sold all round the world entirely from country X, making use of staff educated in country X, who use country X’s health care system and transport network, often with tax breaks from country X to encourage its growth, and maybe even wage subsidies from country X for its employees, who deserves to be able to tax the company’s profits? Is it country X, or every country that has someone in it who buys a product from the company? Of course if a country wants to tax sales it can, and sales taxes such as VAT are a perfectly reasonable and sensible part of a country’s tax mix; though in the EU, this is governed to a considerable extent by EU rules.

There are many further detailed points at the link.  And do note this:

There is a perceived issue with the internet making it easier than ever for companies to ‘sell into’ a country with little or no presence in that country, and therefore offering little or no taxable base for the government of that country to tax the profits of. Sales taxes can be part of the answer to this.

But of course a sales tax does not appear to consumers to be a free lunch, and so it is not as politically popular as a sales-based hike in corporate rates.  And so we arrive at the current mess of a situation: “We want tax equity, but you can’t possibly expect us to do that in a way that is transparent!”

The new proposal on corporate tax synchronization

The G-7 nations have coordinated (NYT, FT here) to announce a minimum corporate tax rate of 15%.  Even if seen through, that doesn’t mean all rates must be at 15% or higher, rather if a rate is at 5% another country (the home base country?  the countries where the customers are?) gets to tack on another 10% to make the total take 15%.  That limits the incentive to post very low rates in the first place, by checking the gains from tax haven strategies.

One perennial question is whether the 15% rate is defined over gross or net income.  You don’t want to tax gross income, especially if the business under consideration actually is making a loss.  In any case, you basically end up taxing business income acquisition per se.

If it is net income you are taxing at minimum 15%, you haven’t done as much to limit tax arbitrage as you thought at first.  Especially if the multinational and its subsidiaries engage at arm’s length transactions with shadow pricing, etc.  Net income is a major object of the actual manipulations, and would become all the more so under this new plan, assuming it is applied to net income.  Won’t countries wanting to play the tax haven game end up with very lax definitions of “net income”?  (Or for that matter gross income?)  Or does that get regulated as well?

I don’t think this whole plan should make “the Left” happy.  David Fickling wrote for Bloomberg:

The more likely outcome of the current round of reform will be a continuation of the decline in corporate rates that we’ve seen for four decades. Even amid the push to prevent tax-base erosion in recent years, 24 of the 37 members of the Organization for Economic Cooperation and Development have cut their corporate tax rates since 2008, while just seven have raised them. Statutory corporate tax rates have trended downward by about 5% a decade since 1980 to the current situation, where the average sits at around 24%. Nations that want to compete with lower-taxed jurisdictions may find the pull of 15% irresistible.

And then:

The risk now is that 15% becomes not just a minimum, but an anchor for maximum tax rates as well.

In other words, the tax haven tax competition game is redone with a 15% floor, but the agreement also pinpoints a corporate tax rate that is “good enough” and would come to be seen as “best possible treatment.”  Neither of those are forcing moves which would require countries to drop their rates to 15% in the resulting equilibrium, but yes I agree with Fickling that there might be a good deal of clustering right at or near 15%, accelerated by this plan of course.

Note also that, under the plan, the 100 largest corporations would have to pay tax in proportion to where they sell their goods and services, even if they are not formally located in those countries (will there be a literal notch right at “company #100”?).  Ireland loses big on that provision, as in essence more corporate tax revenue would be routed to larger countries such as France and Germany.  In how serious a manner would companies have to keep track of their customers?  (What happened to privacy law here?  Or did they never really care much about privacy to begin with!?  What are crypto companies supposed to do about this?)

Biden wants to raise the U.S. corporate tax rate to 28 percent, and Ireland, one of the major supposed villains in this game, has a rate of 12.5%.  So fifteen percent just isn’t that outrageously high, even if companies do end up having the pay that actual rate (though see above about gross vs. net income, and what other “outs” will there be?).

The European digital taxes may be scrapped as well (with the details under negotiation and no one wanting to “move first”), which would ease a wee bit of the burden on the major tech companies from the broader change.

Here are various observations from Soumaya Keynes.

Is the underlying view that the U.S. Congress is supposed to approve this without further renegotiations?  How about the other countries?

The regulatory cicada culture that is American

As millions of cicadas began emerging in Loudoun County about two weeks ago, Chef Tobias Padovano at Cocina on Market in Leesburg began foraging for the noisy insects and serving them in tacos.

That is, until last week when a customer ordered and ate the cicada tacos, only to later complain to the Loudoun County Health Department, which then forced the restaurant to temporarily stop serving them.

Victor Avitto, an environmental health supervisor with the Loudoun County Health Department, told the Times-Mirror that the cicadas needed to be sourced from an approved food source, and only then it would it be fine to serve them.

“They need to be sourced from a farm that is inspected and certified,” he said.

On Wednesday, Padovano said he found an online source for cicadas from Dubai which was approved by Avitto, allowing for the sought-after cicada tacos to again be served.

Here is the full story, via HHL.

Does church keep you away from alcohol?

Based on a panel between 1980 and 2016, I find that one more Sunday with precipitation at the time of church increases yearly drug-related, alcohol-related and white-collar crimes. I do not find an effect for violent or property crimes. These effects are driven by more religious counties. Previous evidence showing negative effects of church attendance on the demand for alcohol and drugs is consistent with a demand-driven interpretation of the results presented.

That is from a new paper by Jonathan Moreno-Medina.  Via the excellent Kevin Lewis.

Masking norms and Wokeism

Here is the close of my latest Bloomberg column:

On a related note: Have you noticed that private universities often have a stronger “woke” culture, and less free speech, than public universities? This fact is also somewhat of an embarrassment for many libertarians. Though libertarian-leaning, I am myself happy to be teaching at a public institution, with its stronger legal and normative free-speech protections.

Might the parallel run deeper here? Perhaps the currently enforced codes of wokeism at many universities and technology companies are like mask-wearing norms. Maybe people would be willing to relax more about these issues once someone gives the signal that it is OK to do so.

That would imply that extreme wokeism, like mask mandates, won’t last long. More than just libertarians, perhaps, can take comfort in that.

There is much more at the link.

Vaccinations at Indian hotels?

The Centre [national government] has asked states and Union Territories to initiate legal or administrative action against private institutions which are offering packages for COVID-19 vaccination in collaboration with hotels, noting that this is in violation of prescribed guidelines.

In a letter to all states and UTs, Additional Secretary to the health ministry, Manohar Agnani, said it has come to the notice of the ministry that some private hospitals have been offering vaccination packages with hotels, against the guidelines issued for the National COVID-19 Vaccination Programme.

Here is more from The Wire, via Rama.  Obviously running vaccines through hotels adds explicit pricing and tends to allocate more vaccines to the wealthy (on average the relatively productive), and to boost total vaccine supply.  So economists will see more merit in this idea than the Indian government does.

The polity that is Canada

Canada wants to force YouTube, TikTok and other video- and audio-sharing sites to prominently feature more of the country’s artists, a move that digital-law experts and former government officials call one of the most aggressive internet regulations yet from a Western country.

The aim to promote domestic content on the sites is a step in the Canadian government’s multipronged effort to get the world’s biggest digital companies to contribute more financially to the country’s economy. Canada has vowed to levy a digital-services tax starting in 2022, regardless of whether there is a global deal among Organization for Economic Co-operation and Development members on such a tax this summer.

The Liberal government also intends to follow Australia in trying to get digital platforms to compensate media outlets for content, and to create a new regulator to police hate speech and other harmful online activity.

Here is more from the WSJ.  I recall being a participant in trade negotiation sessions, way back when, and saying to the Canadian rep.: “What are you going to do when everyone consumes culture through the internet?  Enforce quotas on that too?”

Even back then, of course, I understood that it was the pro-Canadian effort that was being valued in policies such as these, not the results per se.  Perhaps the equilibrium is that the regulators tell the tech companies they have to tweak the algorithm to favor more Canadian content, there isn’t really an enforceable standard, the tech companies do in fact tweak the algorithms somewhat, culture consumption changes only marginally, and everyone goes away “happy enough.”

Individualism Promotes Benevolence

NYTimes: On average, people in more individualist countries donate more money, more blood, more bone marrow and more organs. They more often help others in need and treat nonhuman animals more humanely. If individualism were equivalent to selfishness, none of this would make sense.

…individualism promotes a more universalist outlook. In focusing on individual rights and welfare, it reduces the emphasis on groups — and the differences between “us” and “them” that notoriously erode generosity toward those outside one’s own circle.

See also my posts Globalization and the Expanding Moral Circle and Testing Doux Commerce in the Lab.

Fractional Dosing Trials Now!

Fractional dosing has the potential to massively increase the supply of COVID vaccine. The Moderna Phase I clinical trial and Pfizer Phase I/II trials already indicated a substantial immune response with smaller doses but the vaccine companies are under-incentivized to run additional fractional dosing trials (they won’t gain trillions, at best they will gains billions and might even lose some profit) and governments and private organizations are not picking up the ball. There are just two small trials underway that I am aware of:

N.B. now that we know that the vaccines work. we don’t need to study every dosage for efficacy against the virus. Instead of efficacy studies we can study how the vaccine is working in the body compared to those fully immunized, immunogencity trials (which is what the above trials are doing) and then use data and theory to infer effectiveness. If we felt it necessary to study effectiveness, human challenge trials would be ideal in this situation as you can study gradually smaller doses with little risk to the patients. But given the urgency, immunogenicity trials should provide enough information to make decisions on the ground. To limit risk, one could do a half-dose on the second dose or one could do a half-dose in people under the age of 50. Both of these regimens would still create significant increases in supply. Recall that in 2018, facing a yellow fever epidemic and a shortage of vaccine, Brazil used 1/5th doses to break the epidemic.

There are no guarantees but the world is ignoring a potential trillion dollar bill lying on the sidewalk.

Hat tip for discussion: Witold and Amrita.

My Conversation with Mark Carney

Here is the audio, video, and transcript, definitely recommended.  Here is part of his closing statement:

COWEN: Last question. You wake up each morning. Surely you still think about central banking. What for you is the open question about central banking, where you don’t know the answer, that you think about the most?

CARNEY: I gave a speech at Jackson Hole on this issue, and I started — which is the future of the international monetary system and how we adjust the international monetary system.

I’ll say parenthetically that we’re potentially headed to another example of where the structure of the system is going to cause big problems for the global economy. Because it’s quite realistic, sadly, that we’re going to have a fairly divergent recovery with a number of emerging, developing economies really lagging because of COVID — not vaccinated, limited policy space, and the knock-on effects, while major advanced economies move forward. That’s a world where rates rise and the US dollar strengthens and you get this asymmetry, and the challenge of the way our system works bears down on these economies. I think about that a lot.

And this:

COWEN: If you’re speaking in a meeting as the central bank president, do you prefer to speak first or speak last?

CARNEY: I prefer — I tend to speak early. Yes, I tend to speak early. I’m not sure that’s always the best strategy, but I tend to speak early. I will say, one thing that’s happened over the years at places like the G20, I noticed, is the prevalence of social media and devices. The audience drifts away over time, even at the G20, even on a discussion of the global economy.

And from the horse’s mouth, so to speak, do note this:

CARNEY: …I think you’re absolutely right on that, there wasn’t. It is revealed that there wasn’t a liquidity trap.

Rooftops!  Finally, on more important matters:

COWEN: Are the Toronto Raptors doomed to be, on average, a subpar NBA team due to higher taxes?


COWEN: What’s the best Clash album?

CARNEY: Fantastic question. London Calling, and one of my best memories — I was very fortunate; they came to Edmonton when I was in 12th grade in high school. I went to the concert and that was fantastic, yes.

COWEN: I also saw them, I think in what would have been 12th grade had I been in school that year. But London Calling is too commercial for me. I much prefer the Green album, like “Career Opportunities,” “Janie Jones.”

CARNEY: Well, “I Fought the Law” was the best song at the concert. I have to say, they had got to Combat Rock by this time, which was relative — [laughs] Combat Rock was more commercial, I thought, than London Calling, although they threw it all out the door with Sandinista!

Again, here is Mark’s new book Value(s): Building a Better World For All.

The British in 18th century India

The British were obliged to design a state structure in India virtually from scratch, because the one Warren Hastings lashed together between 1772 and 1784 was considered to have failed.  He had tried to adapt traditional Indian practice while adding a British top layer to it, but this compromise never worked well.  Absence of supervision, abundant temptation, scarcity of reliable information and poor communication between Calcutta and the mofussil (rural areas) created multiple problems.  When placed in Indian shoes, Europeans often behaved worse than their native predecessors.  Hastings’s system lacked discipline, so British politicians resolved in the early 1780s to supply standards and enforce them.  Pitt’s India Act of 1784 and the Cornwallis Code of 1793 were the results.

Traditional ruling practices in India were replaced by specific rules, designed to reduce personal discretion.  What the British most feared in their own rulers — arbitrary power — they were determined, at least initially, to deny to those placed in authority in India.

Just as the US Constitution was designed to thwart the central executive, so the objective of the Cornwallis system of 1793, its near contemporary, was to restrain the EIC’s [East India Company’s] servants in India.  The collective self-regulation that it set up, by means of boards and committees, worked fairly well in enforcing honesty within government in India after 1784, but not in achieving efficiency.  Day-to-day government was not facilitated, and judicial decisions slowed to a crawl.  Meanwhile tax revenues, instead of sticking to British fingers, stayed somewhere out in the rural areas, hid behind an opaque wall of legal and customary technicalities.

That is from Roderick Matthews’s excellent Peace, Poverty and Betrayal: A New History of British India.  Here is my previous post on the book.

San Francisco fact of the day

At a board of supervisors hearing last week, representatives from Walgreens said that thefts at its stores in San Francisco were four times the chain’s national average, and that it had closed 17 stores, largely because the scale of thefts had made business untenable.

Brendan Dugan, the director of the retail crime division at CVS Health, called San Francisco “one of the epicenters of organized retail crime” and said employees were instructed not to pursue suspected thieves because encounters had become too dangerous.

“We’ve had incidents where our security officers are assaulted on a pretty regular basis in San Francisco,” Dugan said.

And yes incentives matter:

The retail executives and police officers emphasized the role of organized crime in the thefts. And they told the supervisors that Proposition 47, the 2014 ballot measure that reclassified nonviolent thefts as misdemeanors if the stolen goods are worth less than $950, had emboldened thieves.

Here is more from the NYT, via Ilya Novak.

Shower Thoughts on IP

Tim Harford has an excellent column on IP:

There is a broad logic to intellectual property, then. But the specifics can be questioned. For example, just how temporary is the monopoly? F Scott Fitzgerald published The Great Gatsby in 1925 and died in 1940. The work only entered the public domain in 2021, after several posthumous copyright extensions, none of which can have been much of an incentive for him to write more.

Then there is the question of what deserves protection. At the height of the dotcom boom, an economics professor, Alex Tabarrok, was taking a shower when he dreamed up the idea of using cell phones to scan barcodes in a store, compare prices and order the product online. Alas, someone else had beaten him to the patent office by mere months. The idea, once unthinkable, was by 1999 rather obvious.

But why should society award 20 years of monopoly rights for the kind of idea that an amateur could dream up in the shower? Tabarrok suggests — rightly — that a 20-year patent should be awarded only if the inventor can prove the idea was expensive to develop. Without that, a five-year patent should be sufficient reward — and, more importantly, sufficient incentive.

I agree entirely with Harford’s concluding comments:

…If we are to produce the extra doses we need, we should focus on lifting every constraint. Perhaps patents fall into that category, but it seems more likely that they are a distraction from the expense of subsidising new factories and more doses for low-income countries. We should spend that money willingly, both for moral and for self-interested reasons.

As for intellectual property, the system needs to change in a hundred ways, some of which require the weakening of intellectual property and the strengthening of other incentives such as prizes and targeted subsidies. When we think through those changes, we should spend less time looking for victims and villains in the creative sphere — and more time thinking about where new ideas come from, and how they can be nurtured.

Read my piece on patent reform. Astute readers will note that there’s no contradiction between thinking that the patent system is in general too strong and that pharmaceutical patents increase innovation and that patents are not a major bottleneck to COVID vaccines. It’s all about evaluating tradeoffs in different scenarios.

The relationship between religious, civil, and economic freedoms

From Christos Makridis:

This paper studies the relationship between religious liberty and economic freedom. First, three new facts emerge: (a) religious liberty has increased since 1960, but has slipped substantially over the past decade; (b) the countries that experienced the largest declines in religious liberty tend to have greater economic freedom, especially property rights; (c) changes in religious liberty are associated with changes in the allocation of time to religious activities. Second, using a combination of vector autoregressions and dynamic panel methods, improvements in religious liberty tend to precede economic freedom. Finally, increases in religious liberty have a wide array of spillovers that are important determinants of economic freedom and explain the direction of causality. Countries cannot have long-run economic prosperity and freedom without actively allowing for and promoting religious liberty.

Via the excellent Kevin Lewis.