Thursday, 6 December 2012

Wage and Profit Shares, and Coffeehouse Chains

Some time ago, I posted a chart looking at how UK GDP divides up (I wasn't the first).  Chris Dillow has done the same.  He observes that "The wage share was unusually high in the mid-70s, and the profit share unusually low. It is, therefore a little misleading to speak of changes in income distribution since the mid-70s. Profits then were so low that they either had to rebound or capitalism would have collapsed." and "Since the mid-90s, the wage share has risen and profit share fallen."

Here's my almost identical version of Dillow's chart.  It's perhaps a trifle inconsistent of him to complain about the use of the mid-70s as a start point when his choice of the mid-90's is also unrepresentative:

My attention was drawn to this by a commentator on Richard Murphy's site, who had the temerity to cite Dillow's analysis that "Since the mid-90s, the wage share has risen and profit share fallen".  Murphy's reply is customarily brusque "Just add a trend line I suggest. Do and it glaringly obvious the claim he is making is just wrong" (and gets ruder after that).  He's making a testable claim, and I like to think of myself as an obliging sort of a chap, so I asked Excel to draw trend the lines.  In an attempt to be neutral I chose Q1 1996 as "the mid-90s", without looking at the data first.  Here's the result:

If drawing trend lines makes anything obvious, it's that since the mid-90s the wage share has risen and the profit share has fallen, just as Dillow asserted.

In turn, my attention had been drawn to Murphy by his brief appearance on the radio news, complaining that Starbucks' concession on corporation tax won't do.  He's right.  My brief thoughts on the issue are:
  • Starbucks is indeed gaming the system with its royalty payments.  It's obviously charging its UK operation more royalties for the brand than the brand is worth.  Because what it's worth is an amount that would allow the UK operation to make a reasonable profit, on which it would have been paying corporation tax.  (Its internal trade in coffee beans may also be at the wrong price.)
  • There's no reason to expect companies to follow any particular moral code of their own accord - they're in business to make money, not to gain your moral approval.  If you want to influence the moral behaviour of a company, you have to take action as a potential customer or employee to make it financially worth its while.
  • So boycotting Starbucks is the right thing to do if you want it to pay more tax.  (On the other hand, if you thoroughly approve of its tax affairs, you should show your appreciation by buying more coffee from it.)
  • If Starbucks is to pay more tax, it should be on the basis of a reasonable and open calculation of UK profits, not a number it's pulled out of the air to tempt the missing customers back.
  • I don't like Starbucks' product.  Caffè Nero is my coffee chain of choice (I know nothing about its tax affairs).
  • I'd tell you where to buy the best beans, but the shop's too busy already, and its business model won't scale.

Update: I may have been too quick to agree with Murphy.  Starbucks' UK managing director says they are going to pay UK corporation tax based on not paying royalties, and on buying coffee beans at cost.

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