Economics Times Three, Other Events

[tcpip]

Spoke at the Kew branch of the Labor Party on Tuesday night on the Henry Review (summary version); apparently it was well-received, as the following day received an email from the branch executive suggesting that the presentation become an FEA forum/dinner. Also recommended was a evening with Steve Hurd, the Labor candidate for Kooyong who has personal reasons for advocating disability rights. As part of a panel on disabilities I suggested Donna Williams, whom I recently had the great pleasure of being the AV Tech for her presentation between Melbourne and Singapore (presentation and photo).

On more economic issues, I have also been recently debating the so-called "Robin Hood" tax and the destructive effects this well-intentioned plan has. People don't seem to understand that nearly all taxes, surcharges etc are passed on to the consumer, the exceptions being those goods in absolute supply (and the degree of the capacity to pass on these costs and the severity of the deadweight loss depends on relative elasticity from completely elastic to completely inelastic). For a third economics issue (yes, I know, I'm a bundle of fun at dinner parties) I have raised the issue of aggregate long-run productions functions. This is one of a few questions that have come to mind as I'm preparing for my exams in Economic Decision Making and Business Law next week.

Other events: Ran a short Philosophy Forum session last Sunday on continental philosophy (German idealism, phenomeonology, existentialism, hermeneutics etc). Brittania worked out really well on Sunday. Would like to adapt it to Pendragon. Played another session of Dragon Age on Thursday. Isocracy IGM on Saturday. Giving the service at the Unitarians on Sunday for the Australian Esperanto Society; providing an address at the same two weeks later on The Evolution of the Human Spirit.

Comments

[kremmen.livejournal.com]

The "Robin Hood" tax strikes me as not well thought out.

For a start, "almost universally" is equated to US dollar, euro, pound and yen. Why would any of those countries agree, esp. the USA? Currently, a huge proportion of currency transactions are through the USA. Obviously, this tax (if only applied to those four) would create a huge incentive for currency traders, banks, etc, involved in other currencies to trade them directly and avoid US banks and US dollars as much as possible. It wouldn't surprise me if Visa, MasterCard and Amex all moved to New Zealand.

At the opposite end of the spectrum, individuals who want to send money to another country can do so by many means. Our big banks rip us off, but there are many alternatives, such as Oanda and XE. Such a tax may affect consumer-level transactions. A 5c tax on a $1000 transfer is surely going to have a relatively massive administrative cost, which would then be passed on to consumers or, worst of all, might cause these companies to not bother offering the service at all.

[tcpip.livejournal.com]

Well, the administrative costs is quite low as it can be highly automated with electronic transactions etc. There is an argument that it relies highly on volume of transactions rather than a high percentage and thus is supposed to have a minimal disincentive as a result. This however is not, and has not, be borne in reality as those in the transaction business are quite happy to - as you suggest - move elsewhere once they have done the calculations on how much they would be paying. "Capital flight" is indeed a reality when the capital in question is highly mobile.

The alternative proposal, as suggested by one of the posters that the tax be applied internationally is not an option either. As you say the cost will be passed on to consumers or the transactions simply won't happen. In either case there will be a loss of trades resulting in very significant increases in unemployment in that industry. The business of financial transactions is highly elastic. A small change in costs has large changes in output.

To give some credit to the proposal how the advocates of the tax argue it should be spent has some merit. But of course that could be applied to anything. One could apply the tax on alcohol to provide emergency aid for one-legged seagulls. The distribution of public income is independent of how it is raised.

(One could even apply it recursively, illustrating the deadweight and administrative effects of such taxes. Imagine a 10% GST that provided a 9% discount on all things that it was subject to).

[pmax3.livejournal.com]

I haven't heard about the Robin Hood tax, will look it up. Only heard about the movie, which they say is good :D

I have been enlisted to give a talk on philosophy too. But my official brief is to bamboozle the audience ;D

[tcpip.livejournal.com]

I can just see someone thinking it's a special tax on seeing the movie :)

Basically the Robin Hood tax is a transaction tax with the tax revenue extracted from supplier and consumer. This means the price of a good or service goes up. When that occurs demand is reduced, and supply follows &etc.

In this specific instance it applies to financial transactions on a very low rate; making up the difference in volume. Applied through electronic transactions it has a very low administrative overhead. The advocates of the tax suggest that the money can be shared between developmental aid and local projects (which is, I must say, something entirely independent of the tax itself).

The use of the revenue and the administrative overhead are very good there is no doubt about that. Certainly better than other transaction taxes (e.g., sales tax). However there seems to be significant "deadweight loss" caused the loss in trades. As financial services are highly elastic in demand, this means the industry is significantly affected with greater than proportionate levels of unemployment resulting. That social costs is greater, by my estimates, than the benefits gained.

[pmax3.livejournal.com]

Thanks for the info. Seems a little bit comparable to sales tax, but on high volume electronic financial transactions at a much lower rate than sales tax. Your point seems very valid. Very small changes in percentage margins have very large impact on profits in such transactions, so it probably hasn't been well thought out.

And sorry for replying late, was travelling :P

[tcpip.livejournal.com]

Indeed you have! I am interested in reading more about the Naxalites - quite clearly you're located very much in their midst. I am trying to determine whether (a) whether they are completely fanatical or are prone to compromise and (b) do they have any real degree of support, especially in the countryside where they derive their strength.

With regards to the transaction tax, alas, many people are swayed by the good intentions without understanding the effects or concepts such as elasticity. I suppose I don't expect them to either, at least not initially. People see a problem and think of a solution - it is another step to think of reactions to that solution.

Cute icon picture, btw!

[cptjohnc.livejournal.com]

>>>the exceptions being those goods in absolute supply

I will admit that I do not recall this term from my college economics classes, and my use of google did not turn up anything enlightening. I guess I treat it as a truism that ALL taxes are passed on to the consumer, whether directly or indirectly. This is why all the talk here in the US of 'taxing' financial services providers, or hitting them with surcharges to 'protect' consumers seems completely silly. At the end of the day, the consumers are going to pay every penny of these increased fees, right?

But if there is a category of goods/services to be taxed that isn't passed on, I'm open to using that. I just have trouble with the idea that the tax won't be passed on, even if the transfer is more remote.

[tcpip.livejournal.com]

I will admit that I do not recall this term from my college economics classes, and my use of google did not turn up anything enlightening.

http://en.wikipedia.org/wiki/Land_value_tax#Efficiency

Also some comments here:

http://taxreform.com.au/revenue.php

At the end of the day, the consumers are going to pay every penny of these increased fees, right?

Not every penny. The producer attempts to pass the cost on to the consumer, who responds with the increase in price with less demand. The income raised is effectively split between producer and consumer (minus administrative costs, minus deadweight loss).

http://taxreform.com.au/effects.php

[cptjohnc.livejournal.com]

So absolute supply in this context would be any good which has a fixed or finite supply which is easily known, quantified, and controlled then? So unlike water, air or oil, which, while they may be fixed supply, that supply is difficult to 'capture'. Land is a very knowable, controllable fixed commodity. I see the logic in the concept of taxing land in order to ensure that it is used at its highest value as a way to remove inefficiencies (not altogether different from the idea of taxing petrol in order to ensure that the consumer is paying for the externalities currently ignored by the market price (in the US), such as the carbon output, the impact on world peace and stability, etc). The only issue, I suppose, is that you are, in effect, nationalizing the resource de facto. Perhaps this is the right result, but it does involve trusting the government to act efficiently. But on balance, I agree that this tax proposal seems to make more sense than most.

>>Not every penny. The producer attempts to pass the cost on to the consumer, who responds with the increase in price with less demand. The income raised is effectively split between producer and consumer (minus administrative costs, minus deadweight loss).

Okay -- so to dramatically oversimplify, in effect the consumer pays for it either in higher prices, or by having less ability to consume said good. The producer pays for it by selling less of said good, and then employing fewer resources, thus putting less back into the system, and being able to consume less him/herself, which trickles across the whole supply chain.

So at the end of the day, everyone is left 'worse off' except to the extent that the tax revenue is subsequently spent on some other 'good' that provides an offsetting benefit (presuming low admin cost/ dead weight losses)- a proposition which is often in question here in the US, and, I think, in many other parts of the world (I am not saying things like roads, bridges, necessary services aren't good -- they are; but between excessive administrative costs and the sense that government spending priorities seem to favor no one but the same politicians who are raising said taxes in the first instance, one wonders whether taxes are a good solution).

At any rate, in the context of your original discussion, certainly the robin hood taxes being considered would have far more negative consequences than most people seem to realize. I know here the cries to 'tax the financial industry -- make them pay' are being made by people who have zero understanding of who will ultimately pay those taxes... or of who created the mess in the first place.

[tcpip.livejournal.com]

So unlike water, air or oil, which, while they may be fixed supply, that supply is difficult to 'capture'.

True, the supply is difficult to capture but the value is not. The mining industry has argued that mineral wealth is worthless without the companies digging it up. This is not the case, as the site and the rights for exploration and extraction have value in their own.

The only issue, I suppose, is that you are, in effect, nationalizing the resource de facto. Perhaps this is the right result, but it does involve trusting the government to act efficiently. But on balance, I agree that this tax proposal seems to make more sense than most.

*nods* I find it particularly interesting that some of the most of the strongest advocates for capitalism in other areas (e.g., Adam Smith, David Ricardo, John Stuart Mill.. all the way to Milton Friedman) also agree that resource-based taxes are the best means to derive public income.

... which trickles across the whole supply chain.

That is exactly right.

... that government spending priorities seem to favor no one but the same politicians who are raising said taxes in the first instance, one wonders whether taxes are a good solution).

Again, there is another advantage to site-based taxes and expenditure. After all, if your region receives better roads and bridges etc, the site-values increase. Thus there is no 'free lunch' extracted from those from other communities.

[cptjohnc.livejournal.com]

the site and the rights for exploration and extraction have value in their own.

Of course, just like any other commodity. Except, of course, that the value of the site and the rights can be altered depending on the regulation of the extraction and exploitation (i.e. permitting/regulation of methods/fixing of price etc...) Thus, the same government who presumably fixes the tax value of said rights, has the ability to go back and 'revalue' them at any time until they are extracted in the form of regulation (which is, of course, merely a tax by another name...)

But I definitely see why resource based taxation makes good sense from a stability and 'fairness' standpoint; go with the most basic resources, rather than the end products.

site-based taxes and expenditure.

This is where it would seem to fall apart: Taxes are generated based on the present value, but the expenditures need not be oriented the same way. So if you tax my land based on its proximity to a major metropolitan center, but then use the revenue generated to build a bridge somewhere out in the rural area, you have increased the potential value of that other site at my expense, thus perhaps leading to a more level taxation base in the future, but that future may well be long after my lifetime has expired. I'm not clear on how this can be 'fixed' (or whether it needs to be).

[tcpip.livejournal.com]

.. the same government who presumably fixes the tax value of said rights, has the ability to go back and 'revalue' them at any time until they are extracted in the form of regulation

I'm not sure how that would happen. Valuation is market-determined. Sure governments make valuation estimates, and it's an inexact science until sales go through, but is more accurate that most public revenue systems.

I'm not clear on how this can be 'fixed' (or whether it needs to be).

One method would be to vary the proportion of public revenue that most goes to the locality where it is collected.

Of course, like you, I am unsure whether it is a particular problem. If, within a wider jurisdiction, a poorer area make a political request for more infrastructure it would be effectively funded from a wealthier area. However in the process a greater balance would be achieved, reducing social tensions etc, with all the effects of a large middle-class that pragmatists as early as Aristotle recognised.

The greater advantage is that the population would be receiving benefits appropriate to their wishes and according to their afforability. At the moment the tax and transfer system benefits the landlord class excessively. I wish I could find the cartoon that makes this very explicit: "You taxes pay for the infrastructure that makes my land more valuable. Cheers!"

[cptjohnc.livejournal.com]

Valuation is market-determined.

I think as I started this comment, I answered most of my own question, and eliminated my issue. I think my problem is that I am not thinking like an economist but more as a bureaucrat -- and I am not seeing the proposal from the big picture side, but trying to fit it into my known box. I'm still thinking in terms of an annual tax system, where the government values the land on an annualized basis related to its estimate of the annualized rents received. If things like mineral rights are only captured and taxed as the minerals are extracted and sold, then my problem goes away with regard to the tax system.

If, however, the government values my land on an annual basis and taxes it based on some formula related to its value as a home for improvements plus some factor related to the prospective mineral deposits (which would, necessarily, include the estimated costs of extracting said deposits), then they could tax me for years at the improvements+mineral rights rate (taking a share of my projected future earnings even as I wait to extract said deposits), and then alter the playing field by adding new administrative burdens (which are, of course, taxes) which reduce the present value of my mineral rights by adding 'costs' to the extraction (and reducing the value I receive for my labor). [aside: I am confident that no government would return the earlier received 'overtaxation' so now the land owner has the incentive to remove all mineral or other speculative wealth as fast as possible, even if inefficient - I'm thinking deforestation of Haiti and similar disasters around the developing world)] Of course, the other part of the proposal I was ignoring was the idea that the government in fact 'takes' everything except the value of the 'labor' used in the extraction, right? But if the government can in effect re-value that labor as I have indicated above, then I think my issue remains to some extent.

Again, though, I think I understand the proposal better, now, and the taxation of the mineral rights would be more in the nature of a 'sales tax' rather than what I think of as a 'property tax'. Am I still missing something?

[tcpip.livejournal.com]

*nods* Yep, mineral rents are derived from profits not from land-value estimates, although the latter could also be based on pure market values - i.e., auctions of leasehold.

BTW, I think you'll like this free book from Fred Foldvary, "The Silver Bullet". The chapter on the transformation of Botswana is very informative..

http://www.theiu.org/tsb/TheSilverBullet.pdf

[cptjohnc.livejournal.com]

Thanks for the recommendation! I'll take an initial look at it during halftime... it is World Cup time you know. :-)