Friday 19 November 2010

Shadow Banking Fun

I've been busy until midnight for the past few days doing bits and pieces for my 'second job', so I am slightly behind with posting. I am busily drafting posts, in my mind and on bits of paper, on the vaguely related topics of:

1. The Laffer Curve (and why even a flat tax on incomes is still heading slightly in the wrong direction).

2. Ireland's corporation tax revenues (yes, they collect more in corporation tax than they would with a rate of 25% - 30%, but that is not really a 'Laffer' effect, they are merely collecting corporation tax that would otherwise be paid in other countries).

3. The fact that people on low incomes with some savings appear to be able to earn 20% interest per annum on their savings.

4. A final pop at the DWP's Universal Credit document, the bit about maternity pay (bottom of page 23, pdf).

5. About three more 'Killer arguments against LVT, not'.

5. The Debt Generation, which is like a left-wing book-end to David Craig's Squandered, both of them lay out the facts and talk a lot of sense so the truth, as ever, lies somewhere in the middle (or where the two overlap).

5. Tim Worstall's wildly overstated estimate that the total subsidy to social housing (i.e. by adding in the value of the exemption from location rents) is in the range of £40 - £60 billion. If that were true, then the potential receipts from Land Value Tax - even without cutting other taxes - would be in the order of £300 billion.

6. An article in this morning's City AM, in which the OBR reckon that increasing VAT from 17.5% to 20% will reduce GDP by 0.3%.

7. A tasty bit of Home-Owner-Ist subsidies covered by the BBC: "Lord Freud, one of the ministers for welfare reform... argues that the government was being too generous He now wants to persuade the banks to give people [receiving Support for Mortgage Interest] a cheaper loan rate. "After all, they're being paid by an organisation with a triple-A rating," he says."
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But here's a quick win:

The world's financial regulatory bodies will shift their attention to the shadow banking market in the near future, the chairman of the Financial Services Authority (FSA) Lord Turner has said...

"Although a lot of the problems came from the shadow banking system, most of our response so far has been focused on the banking institutions," he told the news provider.

He said that regulators have got to "really think" what processes could be put in place to keep track of the shadow banking market "so that we don't, in five or ten years time, see a new shadow banking system emerging with new risks".


Pray tell, at which demonic windmills is he tilting? Ah...

In an interview with the Financial Times, [Lord Turner] said that a failure to scrutinise shadow banks, which include money market funds and non-bank investment vehicles, had played a significant role in the run-up to the financial crisis.

So they are not 'shadow banks' at all; they do not take deposits, give out mortgages or loans or run ATMs, they are not doorstep lenders or pawnbrokers, or pay-day loan shops; they are quite simply "money market funds and non-bank investment vehicles".

If you are the Bank of England and are sent monthly returns by all commercial banks operating in the UK - and even if you only work from publicly available accounts, you already know 99% of what you need to know, because the amounts they have lent to banks show up under 'other liabilities' or 'bonds' rather than under 'deposits'.

So these people are in fact the mysterious bondholders which David Malone spent hours tracking down. And these are exactly the same people that our governments are busily bailing out, because strictly speaking they weren't bailing out banks, banks are just middlemen and have little money of their own, they were in fact bailing out bond holders, money market funds and 'non bank investment vehicles'.

So if they really want to find out who these mysterious shadowy people are, our governments could just stop hurling hundreds of billions of pounds at the banks and sit back and wait for them to contact HM Treasury or the FSA asking why the hell has their lovely flow of taxpayers' money stopped rolling in.

Simples!

20 comments:

Bayard said...

From the linked-to article: “The interim OBR’s June 2010 Budget forecast assumed that the increase in the standard rate of VAT from 17.5 per cent to 20 per cent would reduce the level of real GDP in 2011-12 by around 0.3 per cent,”

Does this mean that GDP will fall by 0.3%, or that the rise in GDP will be 0.3% less?

What happened last time VAT went up by 2.5% in January this year?

Onus Probandy said...

2. Ireland's corporation tax revenues (yes, they collect more in corporation tax than they would with a rate of 25% - 30%, but that is not really a 'Laffer' effect, they are merely collecting corporation tax that would otherwise be paid in other countries).

It's not a Laffer effect from a global point of view -- assuming the corporation will exist somewhere and will pay tax somewhere, but it's surely a Laffer effect from Ireland's point of view?

I wasn't aware that the reduction of the tax base had to have a specific cause to be judged as a Laffer effect? The point is surely that the increased rate changes behaviour to avoid the increased tax?

Mark Wadsworth said...

B, VAT, my most-hated-tax, was 17.5% until 1/12/08, then it was 15% until 1/1/10, then it went back up to 17.5%, and it will go up to 20% in Jan 11 (not sure of exact date).

The most noticeable effect is the impact on gross margins of businesses. I took supermarkets as an example and showed, quite clearly that the reduction increased their margins and the increase reduced them again. Once we've got results for the period where VAT is 20% I will be able to do a four-period comparison and nail this down for once and for all.
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OP: "It's not a Laffer effect from a global point of view -- assuming the corporation will exist somewhere and will pay tax somewhere"

Correct. From a global point of view, total corp tax receipts go down slightly. As it happens, Ireland has managed to siphon off about £3 billion from elsewhere (in other words, total revenues were doubled), but that is as much as there is in terms of international tax planning opportunities - there is only X amount of profit from financial-related activities that can be 'relocated' to elsewhere in the world.

To suggest that a large economy like the UK or US could double its corporation tax receipts by halving the rate is of course complete hokum.

Scott Wright said...

I think a rebuttal to Lord Young's home-owner-ist propaganda in the Torygraph is in order too.

Scott Wright said...

MW: "To suggest that a large economy like the UK or US could double its corporation tax receipts by halving the rate is of course complete hokum."

Its always struck me as a bit odd that they think simply by dropping corporation tax to 24% over the course of a parliament they will get loads of businesses to relocate here. With VAT at 20% and Personal Income tax at 50% they type of business that's going to 'relocate for tax purposes' ain't coming here little Gideon!!

Lola said...

<> Re the lst section. Rule 1 of Lola's view of life. When you get to meet them, the Great and the Good aren't.

Onus Probandy said...

To suggest that a large economy like the UK or US could double its corporation tax receipts by halving the rate is of course complete hokum.

I don't think anyone did suggest that. It's certainly not a linear relationship.

However, assuming a country is not already at its optimal, revenue-maximising corporate tax rate; and assuming that the hubris of government has set the current above the maximising rate, then lowering corporate tax will increase revenues. Even in the UK or the US.

The fact that countries don't do this is a demonstration that society cares more about political posturing than it does about bringing in money. Being seen to "punish the rich" is more important than actually punishing them (which is done counter-intuitively by lowering the tax rate, and taking more money off them).

Onus Probandy said...

Its always struck me as a bit odd that they think simply by dropping corporation tax to 24% over the course of a parliament they will get loads of businesses to relocate here. With VAT at 20% and Personal Income tax at 50% they type of business that's going to 'relocate for tax purposes' ain't coming here little Gideon!!

It might stop those that are here from leaving though?

You're quite right though, 20% VAT and 50% IT aren't exactly pro-business. However, 24%, 20%, 50% has got to be better than 28%, 20%, 50%?

Mark Wadsworth said...

SW (first comment) you post it!

L, agreed :-)

SW (second comment) and OP, I know more about the Laffer Curve than most people, and we are not quite at the top of it yet. Of course, the top is not where we want to be, halfway down the left hand slope is much better*. Cutting the rate of UK corporation tax would not increase total revenues, to wit:

a) Irish tax was (say) 25%, receipts €4 billion.

b) They cut tax to 12.5%, so receipts from existing domestic Irish business fall to €2 billion.

c) The international tax evading community (i.e. me and my colleagues) channel €24 billion of finance-related profits through Ireland = extra receipts of €3 billion.

d) Total corp tax revenues in Ireland now = €5 billion (fact), up by about €1 billion (fact).

If the UK cut corp tax to 12.5%, then...

a) Receipts from domestic UK companies fall from £40 bn to £20 bn.

b) The International Guild of Tax Planners take that €24 billion of spurious profits and channel it through the UK instead of through Ireland, yippee, we collect an extra £2.5 billion in tax.

c) Total receipts now £22.5 billion.

d) Oo-er, HM Treasury have just 'lost' £17.5 billion, which is not to be sneezed at.

* And as far as income tax, NIC, VAT, corp tax is concerned, the ideal place is at a rate of 0% with revenues of £nil; that pushes up rental values disproportionately and hence potential LVT receipts; to the extent that we could collect more in LVT than we currently do in income tax, VAT, corp tax etc.

Mark Wadsworth said...

OP (second comment): "It might stop those that are here from leaving though?"

Nope. The reason why Shire etc are relocating elsewhere is to avoid corp tax on income of 'controlled foreign companies'.

One of the few good things that Labour did was fall into line with most other countries and exempt dividends from overseas (since 2/7/09) see sections 931A CTA 2007 oneards, which works fine for normal group structures. But the anti-avoidance provision are far too wide reaching (and nobody really understands them).

The sums involved are not huge (as far as the UK is concerned) but huge as far as Shire etc are concerned (tens of £ millions), that's why they are relocating their head office (they are not relocating any of their UK based activities!).

"You're quite right though, 20% VAT and 50% IT aren't exactly pro-business. However, 24%, 20%, 50% has got to be better than 28%, 20%, 50%?"

Nope. Less bad would be 28%/17.5%/50% - see bullet 6 of original post.

Bayard said...

I shall rephrase my question, as I appear not to have been clear:

What happened to GDP last time VAT went up by 2.5% (in January this year)?

The article says it's going up again on the 4th Jan. Let's hope the government don't make a custom of this.

Mark Wadsworth said...

B, it was perfectly clear, but I do not have an answer. The OBR says all things being equal, it went down 0.3%. I would guess more like 0.6%, but hey. But it is nigh impossible to filter out all the other factors, so I prefer to look at actual businesses:

We know that most businesses have net profit margin on sales of 5% to 10%, so if a 2.5% VAT hike knocks 1.5% off that;

a) all the businesses which were in the danger zone are now bankrupt;

b) all the businesses which were just scraping by with 1% or 2% are in the danger zone;

c) those businesses with decent margins of 5% plus are now just scraping by etc.

Add together all the failed businesses and unemployment from (a) and there's your answer. It might be one business in a hundred, it might be fewer, but 0.3% to 0.6% looks 'about right'.

And no, they won't make a custom of this. EU says standard rate is to be harmonised at 20%, which is why smaller countries with higher VAT rates have been reducing them slightly.

Mark Wadsworth said...

B, further, some other centre-right think tank recently calculated (using HM govt figures) that 1% extra VAT = up to 100,000 more jobs lost.

Onus Probandy said...

MW:

I know more about the Laffer Curve than most people, and we are not quite at the top of it yet

I have no clue how you could know this -- surely it needs an actual change of rate before it can be measured. And we haven't had such a change. However, I trust you, so will accept that it's true. In which case... I did state my assumptions for my conclusion. If those assumptions were wrong then of course the conclusion is wrong.

If the UK cut corp tax to 12.5%, then et al...

I also mentioned that I accepted that the relationship wasn't a linear one, and therefore halving the rate doesn't necessarily double the revenue. You're also a bit unfair in that you only use Ireland as additional income after a UK rate cut (there is a whole planet of countries with companies that can change behaviour). So, in the extreme:

a) receipts from UK companies fall from 40 to 20 bn

b) additional 2.5 bn from Mark and his friends rerouting profit.

c) tens of thousands of companies in countries with >12.5% tax rates think that the UK looks pretty attractive and move their businesses to the UK.

d) New income... who knows... could easily be enough to replace the 17.5 bn you say has gone missing. And what is more, would likely create jobs, reducing expenditure, which is just as good as paying more tax.

I accept that instantaneously 17.5 bn is gone; but after a time lag, revenues would increase. Whether they would end up larger or smaller is too hard a question for me. I'm not sure how one could predict this without actually doing the experiment.

Finally -- the Laffer curve is only part of the story (I'm guessing that's where your recommendation of halfway down the left side comes from). Picking the revenue maximising point is not necessarily best, since there will be another curve which tells us the growth maximising point, and the two don't necessarily coincide.

I can't see that there is any justification for saying that lower tax rates would ever harm growth. Which in turn would lead to higher (tax) revenues.

Nope. The reason why Shire etc are relocating elsewhere is to avoid corp tax on income of 'controlled foreign companies'.

I don't really understand how that is a counter to my argument? Surely it is in agreement? Lowering corporation tax to 24% from 28% won't stop all movement out, but it will stop some -- therefore 24% is better than 28%. Just as your common argument against VAT is that it prices some but not all businesses out of viability.

Nope. Less bad would be 28%/17.5%/50%

That's a bit of a cheat -- of course that's true, but that wasn't an option (since I was originally questioning your comment about Irish corporation tax). The point I was addressing was whether, all other things being equal, 24% corporation tax was better than 28% (this was in answer to SW's remark that it was "odd" to lower corporation tax to 24%).

If we're playing the "what's best given a blank sheet" game, then as you have long recommended, scrap everything and use LVT, but then all other things wouldn't be equal.

Mark Wadsworth said...

OP, I broadly agree with all that, but with one minor niggle:

"tens of thousands of companies in countries with >12.5% tax rates think that the UK looks pretty attractive and move their businesses to the UK."

Well they wouldn't though, would they? The corp tax rate is near the bottom of the list of things to worry about; top of the list is labour costs; then come stability of legal system; communications, transport infrastructure; employment legislation; import/export tariffs and restictions etc.

Surely you don't imagine for one second that Mercedes would relocate its factory (the size of a small town) from Stuttgart to Scunthorpe? Or that Carrefour would shut down all its French supermarkets and re-open them in Dover or Folkstone?

That's why European companies (typical corp tax rate 25%-ish) are happy to outsource to India, China, who have corporation tax rate > 30%, because labour costs nothing over there etc.

And, on the facts, 'tens of thousands' of companies did not relocate to Ireland, it was mainly offshore finance stuff; and those that were making real things are now buggering off to Poland etc. heck knows what the Polish corp tax rate is - it's the cheap labour costs, well educated workforce and EU subsidies that matter here.
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To clarify my comment on Shire, a few ten million £ is a lot to them, so they go; it's chickenfeed to the UK and the UK then loses more than that in other taxes.

The only thing that is driving Shire, WPP etc abroad is this the UK's CFC taxation; you don't need to reduce the mainstream rate to 24% or 12.5% or anything else, all we'd have to do is scrap the CFC taxation rules and leave them in peace.

Onus Probandy said...

Well they wouldn't though, would they? The corp tax rate is near the bottom of the list of things to worry about; top of the list is labour costs; then come stability of legal system; communications, transport infrastructure; employment legislation; import/export tariffs and restictions etc.

Well yes. It's the solving of that unutterably complex equation that leads me to say that predictions about where we are on our particular Laffer curve, with our particular set of conditions is damned near impossible to say without actually running the experiment.

My point still stands though. Given a country (say this one) where all other things are equal, a lower corporate tax rate has got to be more attractive than a higher one. I'm not saying they every company will come rushing in, as there is more to their decision that just that one rate; but for those who did their sums and found that they would like to have been in the UK but their particular threshold was 27.5% they changing it to 24% will get them to move.

So, while Mercedes isn't going to move (and being a manufacturer, with investment in factories, they would be among the last to move); flowerpotbob.com might; Photoshop Your Wife might; Mark's Tax Planning Emporium might; thousands of others might. While there are a lot of negatives to being in the UK, there are positives too -- and if negatives are removed then that could easily push those marginal cases over the threshold.

And, on the facts, 'tens of thousands' of companies did not relocate to Ireland, it was mainly offshore finance stuff

I don't know of the breakdown of company types, but I do know that Dell, Google, Microsoft, Sun (now Oracle), Oracle, SAP, etc, etc, all seem to have a presence in Ireland that arrived after they introduced their pro-business rates. These are all highly mobile companies, that will have no trouble moving elsewhere when Ireland has a higher corporation tax rate imposed on them by the ECB.

It seems to me that the same argument applies to the financial guys -- who will find it even easier to move, since they just need a computer and a phone.

If it is not true that Ireland did well out of the lower rate, and will do better out of the higher one, then why were they so delighted during their "celtic tiger" years? Shouldn't they have been crying into their guiness over all the lost tax revenue, given that they were making billions more before they did it?

Ireland's growth came from two places: property, and corporate growth. The property bubble was (as everywhere) a feckin' disaster; the corporate growth was not, and is now all that Ireland has left -- killing that golden goose with higher tax rates would be the most insane thing that they could do (and if raising it is insane in Ireland, then surely the UK lowering it is sane?).

If I allow myself a brief moment of conspiracy theorising, I suspect that collapse is exactly what the EU wants for Ireland. Ireland will lose its economic and political power if the EU manages to return bust them. Who will Ireland turn to then? The EU I suspect.

Bayard said...

Yeah it's payback time for voting "No" (even if they did get it right the second time).

Mark Wadsworth said...

OP, agreed of course. I was splitting hairs. Thanks for the list of companies (all from USA it would appear).

B, indeedy. And making the O'Irish hike their corp tax rate appears to be quite high up the agenda.

Onus Probandy said...

Stumbled by chance across this; which seems relevant here:

The Irish government has been given a stark warning from some of the biggest American companies in Ireland on the risk of a mass exodus if the country's controversial low corporate tax rate is raised in return for an IMF/EU bailout to shore up the country's beleaguered banking system. According to The Telegraph, a statement signed by senior execs at Microsoft, HP, Bank of America, Merrill Lynch, and Intel points out that although Ireland's tax rate may be low in European terms, it is not when compared with locations such as Singapore, India and China. Separately, the head of Google's 2,000-strong European HQ in Dublin told the Belfast Telegraph, 'anything that impinges on Ireland's competitiveness is going to be a big thing for Google,' adding, 'anything that increases the cost-base of a business is negative for competitiveness.

Obviously I take big talk like this with a pinch of salt, but at the very least it shows that these big corporations are watching.

I can't decide whether I hope that the EU does force a raise or not. I would enjoy watching the clusterfuck that developed; but wouldn't really take any pleasure in seeing ordinary folk screwed over some more.

Mark Wadsworth said...

OP, that looks like a three way fight where I want them all to lose (the Yanks, the Irish government and the EU generally). I feel a bit sorry for the Irish who lose their jobs, but hey, it's all good for India and China.