The Elusive “G” Factor – Part 1

[Economics in a Nutshell]

 

An Introduction

There is a conundrum here somewhere!  As a libertarian leaning Think Tank organization and publication, we instinctively know that more government interference in the economy and bigger government per se is not a good thing.  And so is sovereign debt and the servicing of that debt.  Both are drains on the economy and economic potential of any sovereign nation, yet both are necessary evils too.

But where lies the ‘sweet spot’ between the size of government, fiscal policy, sovereign debt (if necessary)?  The magic formula or ratio between the public and private sectors and their respective shares of the economic output pie?

These are questions the political and business leaders are struggling to understand and define in Europe and the USA at this point in time in order slowly and arduously drag their economies back to a ‘normal growth cycle’.

Economy
Economy (Photo credit: Donald Macleod)

Part of the challenge we believe is the massive imbalance created by the shifting nature and sources of production, combined with the rapid uptake of technology and the disruptive influences of technology.  Our planning cycles and hence levels of understanding and ability to adjust the factors of productions to keep up with these disruptive forces are being severely challenged.  Or maybe our grasp of the theory underpinning our economic models just aren’t up to coping with the rapid nature of change and forces of change in the global economy.

As has been argued in previous articles, by its very nature the instruments we utilise to adjust economic activity and output in specific geographical locations, namely fiscal (tax) and monetary policy, are very blunt instruments and not as effective and able to cope with the speed of change in given economies.  But are their any other mechanisms we can utilise to adjust unfavourable behaviours and activities in order to get back to equilibrium?

A further factor we believe is a lack of understanding of where exactly we are in the global economic adjustment life-cycle.  There is no real comprehensive understanding and agreement at best of these influences.  True mechanisms like the G8 now G20 have been created to address more global challenges, but there is hardly ever consensus and a collective will to act in unison to address the bottlenecks and imbalances in global economic activities.

With this introductory article we have laid out some of the areas to explore and bring back into the ‘light of scrutiny’ as part of a deeper understanding of the nature of our global economic state and status.

theMarketSoul © 2011

Economy
Economy (Photo credit: John H McCarthy)

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theMarketSoul ©2011

theMarketSoul ©1999 – 2010 Ventures an opinion on the ‘Economics of Taxation’

[All names and references to places in this post has been changed, so as to protect the innocent bystanders]

 

Cracking down on ‘Tax Havens’ became a stated objective of the G20 last year during one of the meetings held during 2009.

This image was selected as a picture of the we...
Image via Wikipedia

Lets us keep the argument very simple and divide the world into two colours namely magnolia and chocolate brown (close enough approximation of two other colours normally used in arguments), or rather more accurately the regulated world and the unregulated world.

If it is regulated, it moves slowly, is a target and gets nailed very quickly.  The credit quake of 2008-2009 resulted in the implosion of this world, which today moves even slower, with a catastrophic collapse in taxable revenue and actual tax take an unfortunate consequence.

So, as our hypothetical magnolia world has ceased up almost completely, the G20 thought it right and proper to start targeting the chocolate brown world.  This is the ‘dynamic underground’ of slush funds, oiling the cogs of industry, money laundering, crime, drugs, terrorism and anything that moves outside of the regulated world arena.  Apparently this world is alive and well, with cash sloshing around the system that unfortunately does not hit the regulated world’s sides and filters, and is therefore not siphoned off as ‘direct’ tax flows and revenues.  If your jurisdiction has indirect taxes, then this cash does get siphoned off, as goods and services are also consumed by the chocolate brown world.

Now if you view these two worlds as two balls or circles, the magnolia one is shrinking and the chocolate brown one is growing in size.  So the question really becomes this:  Which one do you attack?  How do you appease the populist vote?  For one of the choices is:  “Tax ‘em to death”, because you are already taxing ‘em pretty harshly! (Those living in the magnolia space).  Alternatively, you grab the populist media’s h(d)eadlines and attack Tax Havens with the natural association of the chocolate brown world with ‘dirty’ cash.  This way you score two potential hits:

(1)    Populism on your home turf and

(2)    capital flight from tax havens.

This is a great tactic if you believe that the ‘Economics of Taxation’ mean that you either tax the flows of money or the stock of money (capital and other ‘fixed’ forms of property).  Flows of money include indirect taxes and maybe this scare-mongering’ tactic does encourage capital movements between jurisdictions, however, as a general approach and tactic to attack Tax Havens, I believe this is doomed to fail.

English: Map of tax havens, using the 2007 pro...
Image via Wikipedia

Tax jurisdictions, fiscal policy and ‘one-upmanship’ is a national and international ‘sport’.  Therefore, we can’t have the big boys and girls getting upset at the little boys and girls, just for trying to scrape together a few crumbs off the BIG table, in order to survive, can we?  A sense of fairness and a measured and proportionate response is definitely called for in this so-called ‘war on tax havens’. Or am I wrong on this call?

 

theMarketSoul ©2010


Increased Friction Costs

We start today’s article with a cry for a return to common sense and a reduction in the unnecessary Friction Cost in the economic system (especially here in Britain).

Friction Cost, in economic terms is defined as:

  1. The implicit and explicit costs associated with market transactions.
  2. The total cost, both direct and indirect, of a transaction after commissions, interest rates, taxes, research, time, and other expenses. (Financial Dictionary)

What we will be focussing on today is the ‘hidden cost’ element of Friction Costs.  As in definition 2 above, it is the Total Cost, including the economist’s ‘Opportunity Cost’ than needs to be considered in this discussion:

We start of the debate with a quote from Dean LeBaron:

“Market inefficiency exists because we do not root out their basic causes. These causes are easy enough to identify, if one looks with enough dispassion and rigor.”

As we are entering a politically charged season, we want to remind everyone of the key word in the above quotation:

Dispassion

We believe that too many decisions and arguments are framed in the ‘emotionally charged world’ and that too few dispassionate thinking and analysis is applied to the really big questions and problems facing us today…

Let us briefly focus on an example of what we mean by ‘hidden costs’:

This is a criticism of British legislative fervour and spurious targeted ‘efficiency’ gains.  This leads to sub-optimal solutions.

Our actual real life example:

By April 2011, most businesses and individual subject to the ‘Self-Assessment’ tax regime must file online, irrespective of size or individual circumstance.  Nothing wrong with these facts so far.  However, we are still embroiled and faced with legacy Information Technology systems that cannot cope with the 21st Century IT revolution and government collection tax collection regime aspirations.

A typical example is where certain legal entities (Limited Liability Partnerships) are forced to file online, not with the HMRC’s system and software, but have to purchase additional commercial software to file (An example of a friction cost, that is not very clearly recognised).

Further to this, should the entity actually comply and file their tax return online and in time, the legacy systems at the HMRC, does not automatically recognise this fact, even though an acknowledgement of receipt has been issued by the HMRC’s system.

The actual Tax Return submission is acknowledged, but not the physical filing of the data.  The consequence is that a penalty notice is sent to each partner (another friction cost) and has two consequences:

  1. HMRC and The Treasury has made a false penalty determination, but the revenue gets recognised  in the HMRC’s accounts, therefore falsely inflating the tax takes
  2. The business has to incur another Friction Cost as they have to respond to the penalty determination and dispute the claim.

Therefore a compliance costs has escalated into an opportunity cost as the individuals in the firm have to allocate time and resources in dealing with more unnecessary compliance mitigation work by refuting the spurious penalty determinations.

When will we recognise in this country that the process should not be:

  1. Create a target
  2. Legislate the target
  3. Then build the solution process
  4. Beat up the citizens for not being able to comply

But Should be:

  1. Build the solution
  2. Integrate the solution
  3. Test the solution
  4. Create the target
  5. Legislate the target…

This way we will create a new culture of efficiency, compliance and citizenship that respects and endures the necessity of tax regimes to deliver wealth creating opportunities for all willing and able participants in the system.

theMarketSoul ©2010

 

Should you experience any taxation compliance challenges, please do contact us on theMarketSoul ©1999 – 2012

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Further themes and related issue to the above debate are:

  1. XBRL compliance
  2. Annual Accounts submissions at Companies House