ECONOMIC PERSPECTIVES – 24

[Early-November 2017]

PROTECTIONISM IS SIMPLY “PATRONAGE” IN A MODERN GUISE

Protectionist policies are by no means confined to trade deals. Yet, in every one of their guises they appeal for popular support from local commercial interests, pleading fairness, justice and equity to justify their anti-competitive political demands. Rational economic principles take a back seat.

The obvious antidote to these tendencies is to promote competition – not just by eliminating barriers to trade, but by eliminating the very concept of what is “fair”.

I don’t know if there are such things as “unfair” competition or “unfair” trading practices, but if there are, I haven’t encountered them. I am, of course, as familiar as you are with cases of special pleading by sectional interests and unions in the name of job protection – indeed industry protection, from chickens to steel to motor cars – but, as set out in “Economic Perspectives” 14 and 23 [copies on request], lobbying by special-interest groups to impose tariffs, or grant subsidies, (what was once labelled “patronage”), is without exception dangerously misplaced.

Raising taxes to pay for waste

 

competition in tax policy is an equally healthy antidote

 

As with competition generally, competition in tax policy is an equally healthy antidote to protectionism. If a particular government is able to manage its affairs efficiently, imposing regulations sparingly, eliminating waste and keeping welfare commitments within affordable bounds (Wow, that’s a big “if”!) – its tax policies will reflect its relatively lower revenue needs, and its citizens will benefit accordingly by being able to spend, or save, more of their own earnings.

In the UK, however, a prodigious amount of waste arises from the idea that, as a wealthy country, we should be pulling our weight when it comes to such emotive triggers as overseas aid. This money, taken from the earnings of UK citizens, is simply allocated by the Treasury to government departments and, from them, to aid receptacles of questionable provenance. This practice has absolutely nothing to do with humanitarian instincts to alleviate suffering when hurricanes or famines strike.

As with so many attempts by government to “do the right thing”, yet somehow managing to achieve the exact opposite, its aid budget, currently standing at £13.3 billion, is based on “targets”. So what actually happens in this scramble to meet the quota for throwing our money away? Our Department of Health, bless them, gave £15 million to pay for anti-smoking classes in Cambodia, Colombia, Egypt and Myanmar, all known for an egregious scale of corruption.

And China? It would be hilarious if it were not so ghastly: the Foreign Office allocated £3 million to help China develop football! China’s premier league is paying its star players wages of over £600,000 per week, and luring the world’s best players. While our health service, schools, police, military, etc, struggle under budgetary pressure, we find that the struggle faced by Whitehall is to find inventive ways of shunting £13 billion into someone else’s pockets.

“Tax equalisation” – what an idea!

 

a retributive attack on US hi-tech corporations, and it will, if successful, backfire spectacularly

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Yet here I am in France again, where the new boy on the block, President Macron, has picked up on the EU’s latest mission statement, and announced his intention to implement a policy of “tax equalisation”. Does this idea sound familiar? Well, take it from me, it’s rubbish! Unmasked, it is simply a retributive attack on US hi-tech corporations, and it will, if successful, backfire spectacularly.

The governments of France, Spain, Germany and Italy are now trying to find a way to “redistribute” (steal?) the prodigious resources of Amazon, Google, Apple, Facebook, Microsoft, et al, by imposing an “equalisation tax” on these internet giants, based on their turnover, and prohibiting them from routing business through Luxembourg, Ireland, or any other low-tax jurisdiction. As thoughtless knee-jerk policies go, this one takes some beating! (As an aside, Luxembourg is Jean-Claude Juncker’s personal fiefdom, so he may soon be facing a little domestic flak!)

The EU bureaucrats’ economic philosophy can be simply expressed: if the law permits international businesses freedom to locate their operations in countries that impose lower taxes, then – it’s simple – just change the law!

 

another way of penalising prudent nations while subsidising the profligate

 

The notion of tax “equalisation”, chiming with égalité in the national motto of France, is a virtuous-sounding but half-baked euphemism for the EU’s pet policy of tax “harmonisation”. This nauseous notion, as any fool can see, is simply another way of penalising prudent nations while subsidising the profligate, and it therefore fits in perfectly with the EU’s abiding philosophy of “ever closer” interdependence.

EU’s right to “oversee” national tax rules

Yet despite its innocent sounding purpose, it has severe longer-term consequences for the economies of France, Germany and the others that, between them, have yet to produce a single internet company of international significance.

What, you may ask, gives the EU the right to prescribe rules on tax policies that other nations must enforce? The answer lies in its very constitution, which includes the obligation to “oversee national tax rules, making sure that businesses in one country don’t have an “unfair” (that word again!) advantage over competitors in another. Can you believe the sheer presumption underlying this nonsense?

 

an additional levy on virtually everything you buy on the internet.

 

In the first instance, the extra revenue generated by such short-sighted legislation will help France and Germany to fund their swelling welfare budgets. But there is a huge price to pay when considering damage to the wider economy. The additional taxes, like any corporate impost, must ultimately be passed on and therefore be borne by consumers. New taxes, based on the turnover achieved in each relevant jurisdiction, will merely serve as an additional levy on virtually everything you buy on the internet.

 

Under the benighted accounting rules that currently apply, there is in fact no readily accessible formula for calculating the amount of tax that Apple, Microsoft or Intel should be paying – but in the meanwhile who can lay blame when they locate their servers in low-tax jurisdictions?

 

The businesses under attack have in fact created industries that simply did not exist a dozen years ago. Thousands of people are employed by these behemoths and every high-tech industry spawns a host of smaller supplier businesses. But there is a natural limit to the level of dictatorial penalties and regulatory imposts that their shareholders and employees will swallow, and the tipping point will be triggered when other regions – China, Russia, SE Asia, South America – are preferred as liberal centres of trade.

 

The great, but incidental, achievement of tax competitiveness is that it puts a natural ceiling on budgetary extravagance in competing countries. The very concept of tax “harmonisation” is a move in the opposite direction. Just like government-imposed price capping, its effect will be to raise countries’ tax burdens to the level of that of their most indolent and wasteful members. A charter for profligates.

 

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                 [ Footnote:                

 

The high-tech companies are hated for another reason too: they invent, and bring into production, robots and electronic components with inbuilt artificial intelligence feared by latter-day Luddites. In mining, for example, automated tools, driverless haul trucks and locomotives, automated rock crushers, automated boring and tunnelling, are expected to transform mining industries worldwide, immeasurably improving both productivity and safety. Even though miners are being retrained to monitor the equipment in new control facilities, the job losses over a period will be huge.

 

But, like the inception of free trade, unimpeded freedom to exploit technology will entail a gradual reallocation of productive resources to establish a new norm. If you don’t like it, (as Pat Barron quips) “Smash the machinery! Give the miners spoons instead of shovels! This will create lots more jobs.” Insensitive? Heartless? Maybe – but that’s how progress works.]

 

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