Boosting Business and Encouraging Entrepreneurs

An alliance of rich people has written to the Telegraph urging the Chancellor to cut the top income-tax rate so as to "boost business and encourage entrepreneurs".    I'm puzzled by this: there's no need for entrepreneurs to pay income tax on money they invest in new businesses.  Do they mean that higher income taxes cause them to take more money out of their businesses so as to maintain their net income?

Meanwhile, other opponents of the 50p top rate warn us that it may not raise any extra money anyway, because it will put top-rate payers off earning the stuff.  They might be right, but if so, it tells us that the rich guys are not that interested in maintaining their net incomes, otherwise an increase in the top rate would make them work even harder.

So one of those arguments could be right, but not both.

A more cautious analysis would suggest that much of the reduction in top-rate take is likely to be temporary: it's much easier for high earners to move their income forward or back by one year than by two years or more.  That would suggest that in all fairness we should persist with the 50p rate for long enough that everyone who ought to pay it has to pay it.

Copyright: a proposal

As previously discussed, property rights for non-rivalrous goods are not the same as for tangible property, because they're not needed as a rationing mechanism to allocate finite resources.

However, we want new works to be created, and a good way to encourage people to do things is to pay them for it.  So we should keep copyright in some form.  But whereas copyright can enrich us by encouraging the creation of new works, it impoverishes us by restricting access to existing works.  We need to strike a balance.  The current Berne Convention stipulation of 50 years after the author's death is far too long - according to the EU it was intended to benefit two generations of the author's descendants.  The extension to 70 years after the author's death in the EU and the USA is supposed to allow for longer lifespans.  But it's fantastically implausible that a prospective author would be deterred from producing creative work by the consideration that her grandchildren might not receive royalties from it.

I suggest that we retain copyright in its current form, with the exception that we restrict it to five years from first publication.  That should be sufficient in most cases for the author to receive a fair return, but we should allow extensions year by year if the last year's sales of a work are the highest yet, so as to accommodate works that take some time to become popular.

This paper attempts a theoretical analysis of the optimum (welfare maximizing) copyright term, and comes up with fifteen years. Whereas this one, which I find more convincing, thinks two years is about right (reportedly the authors think their model unrealistic, and actually believe that copyright should not exist at all).  Before we adopt my proposal worldwide we should probably explore the optimum term more thoroughly: we might decide to adopt different terms for different classes of work.

I suggest that we add an additional right to protect one's reputation as the author of a copyrightable work, to apply during one's lifetime after the copyright period has expired.  This would mean that anyone using the work in public would be required to state whether it was used with the author's permission.  The author  would have the right to waive this requirement for some or all users.

Any objections?

TaxCast on Bankers' Bonuses

The Tax Justice Network is publishing monthly 'podcasts' suggesting improvements to the UK's tax system.  I've listened to this month's edition: most of it consists of monologues by Richard Murphy.

One of the subjects Murphy discusses is the taxation of bankers bonuses:

...so is the whole bonus environment properly taxed at this time?  And my answer to that is no, the tax system is far too generous with regard to bonuses at present. Quite a number of these bonuses are now paid in shares.  That also means that quite possibly part of the bonus will now be recognized as capital gains rather than income, and as a consequence it might be taxed at a lower rate...

Yes, a substantial proportion of the larger bonuses is typically paid in deferred shares: a typical structure being that about half the bonus is in shares, and those shares vest in thirds one, two, and three years after being awarded.  The holder is not able to sell the shares until they have vested, and may forfeit them, particularly if he voluntarily leaves his job.  There are various government schemes to encourage share awards, but they do not cover the sort of large awards Murphy is concerned about.  So the tax treatment is simple: the shares are subject to both income tax and national insurance contributions, as described here.  Usually the awarding company meets these obligations by selling the appropriate proportion of the share award on its vesting date.  (The employee has the option to pay at the time of the award: some bankers will have done this two years ago in anticipation of the introduction of the 50% tax rate in April 2010.)  Contrary to what Murphy, a self-proclaimed tax expert claims, none of the bonus is recognized as capital gains.  Capital gains tax applies only to changes in the value of the shares after the time when income tax has been paid, just as it applies to any investment in shares.

Murphy continues:

The second issue is that actually we give an enormous subsidy to pay these bonuses.  When a bank declares that it's going to pay somebody a bonus of, let's call it a million pounds, in the UK they get tax relief on that payment.  This year they'll be getting tax relief of around 26% of that sum, so two hundred and sixty thousand pounds of that bonus of a million is effectively paid by reducing the bank's corporation tax bill.  Well if that's the case then we should be using the tax system to reprice bankers' bonuses and that can be done by simply removing the tax relief on the part of the bonus that we consider excessive.  Now this is a completely valid use of the tax system to deliver a social purpose, to raise money, and to save something which is causing harm to the market - and that's what these bonuses generally are perceived to do - should be priced by the tax system to discourage them.

Here he is quite right about the operation of the tax system.  Staffing costs, whether salaries, benefits, or bonuses, are considered to be operating expenses.  Corporation tax is levied at 26% on profits, which naturally are calculated net of operating costs.  He's also right that we could, if we wished, change the tax system to make large bonuses more expensive to pay, though I suspect the tax would be more effective if implemented as a payroll tax, following Alistair Darling's example two years ago, rather than by means of corporation tax.

But there are two problems with this.  First, if you make it harder for banks to pay bonuses, they will compete for staff by paying higher salaries instead - this happened in 2009.  And bonuses are preferable to salaries in that they give banks control of their staffing costs: they can and do pay less when they make losses or insufficient profits.  Second, the City of London is hugely profitable for the UK - PwC estimates the total tax contribution of the financial sector in 2010 as £53.4bn.  There are good reasons for banks to operate in London, but they're not so overwhelming that there's no level of taxation at which business will tend to shift overseas.  Darling judged correctly that his payroll tax would not do that, but he was careful to say that it would be for one year only (a year later Ed Miliband had forgotten that).  Murphy perceives banking as an evil that should be discouraged by taxation, but alas it is not within the UK government's powers to end the international banking system.  Is Murphy willing to forego many billions of pounds a year in tax revenues simply in order to express his distaste?

Politician behaves inconsistently when offered money shock horror

Here are Chris Huhne and Sayeeda Warsi giving a joint press conference 18 months ago, at which Warsi told former Labour ministers they shouldn't be accepting severance payments, because of their alleged "frankly criminal" irresponsibility in office.  No criminal charges have been forthcoming.

Here is Chris Huhne accepting a severance payment following his resignation from office to face criminal charges of perverting the course of justice.

Fast falls the eventide

A fortnight ago the town of Bideford made its most important contribution to English jurisprudence since its witch trial 330 years ago.  Mr Justice Ouseley found that Bideford Town Council is not allowed by the Local Government Act 1972 to hold prayers as part of its meetings.

The ruling was met by a chorus of ill-informed protest.  Eric Pickles said that councils "should have the right to say prayers before meetings if they wish".  The ruling agrees with him - prayer meetings are permitted before council meetings, but not as part of them.  A spokesman for the Christian Institute called the ruling "extraordinary" on the grounds that the "practice that goes back to the Elizabethan era".  Quite possibly, but then councils in the 16th Century were not bound by the 1972 Act.    The Bishop of Exeter said "I think it's a great pity that a tiny minority are seeking to ban the majority, many of whom find prayers very, very helpful, from continuing with a process in which no-one actually has to participate."  This goes to the heart of the matter.  The idea of democracy is not John Adams' "tyranny of the majority": it should be a system which disempowers oligarchs while respecting minority rights.

Suppose there were a majority on the Manchester City Council in favour of singing songs in support of Manchester City Football Club at the start of council meetings.  Should that be legal?

There is one sentence in the ruling that reads oddly: "18. As the prayers at Bideford Town Council were always Christian, or occasionally Quaker led...".  This seems to imply that Quakers are not Christians.  I think George Fox, William Penn, and my mum would dispute that.

Greek Sovereign CDS

One minor but interesting aspect of the latest Greek bail-out is its effect on Greek government CDS.  When the private-sector write-down was first agreed back in October, it was accepted that it would be voluntary and so would not trigger CDS payouts.  This time, I'm fairly sure that there will be a triggering event, despite the scepticism of some commentators.

There are two reasons why I think so.  First, the Greek government says that it will today introduce legislation to parliament retrospectively to apply "collective-action clauses" for most of its debt (the part governed by Greek law).  This will be necessary to force the quite large minority of its debt-holders which is not susceptible to international government arm-twisting to accept the write-down.  And ISDA, the body responsible for ruling on defaults for CDS purposes, made an unambiguous statement last month about this possibility:

...the inclusion of a CAC would not, in and of itself, be expected to trigger a Credit Event. On the other hand, the use of such a clause to effect a reduction in coupon or principal or one of the other events set out in the definition of the Restructuring Credit Event could trigger if the other requirements of the Restructuring Credit Event were met (for example decline in creditworthiness), as its effect would be to bind all holders of the relevant debt.

Which is to say that if the CAC is implemented and then used to force a write-down, ISDA will declare that CDS payouts have been triggered.  European politicians will be asking them not to, because they've been straining throughout the crisis to avoid anything that could be called a default.  And some American banks and insurers will be doing the same, because they've written the CDS contracts.  But ISDA has stated its position, which is mandated by its own procedures.  Its argument last time round was that a voluntary write-down is not a "restructuring credit event", whereas a write-down that "binds all holders of the 'restructured debt'" would be.  There's no getting out of that logic.

Second, the markets think it's going to happen.  Markets tend to get these things right, because there's a lot of money being staked on the analysis.

How much does this matter?  Well, it would restore some meaning to the sovereign CDS market.  But the direct financial consequences are quite small.  Because every CDS has its own expiry date and swap rate*, if you want to trade out of a CDS position you have to enter into a new contract that roughly offsets the risk.  Net positions are therefore much smaller than gross positions: Table 6 here shows gross notional $69.9bn, net notional $3.2bn (in the "Hellenic Republic" row).  There's a plot here showing the net positions of individual banks: if you're a British taxpayer, and hence have a financial interest in the fortunes of RBS, you'd like the CDS to pay off.

*Exchange-trading of CDS using standardized contracts was introduced in 2009.  But these contracts don't yet dominate the open interest.

The latest Greek bail-out

It can't work and it won't work.  There's not much point in my telling you why not, other commentators have done an excellent job already.  This is not because the powers-that-be are acting particularly foolishly; it's because there are no good options available.  Daniel Davies has put together an ingenious game in which you can try in vain to come up with something that works: the current deal leads to paragraph 26.

Quite apart from the numbers not working, a general election in Greece has been promised for April.  Wolfgang Schäuble, the German Finance minister, wanted the elections postponed, because he quite reasonably had no confidence that an incoming government would abide by the terms of a bailout package, but a postponement seems not to be part of the deal.  I suppose there will be an attempt, probably not in public, to get anyone who's at all likely to be important in the next government to sign up to the deal before any money is handed over.  This could break down very quickly.