Taxing ourselves poor

Another thing old Karl got wrong — it’s farce first, then tragedy. For Gabriel Zucman, in the Guardian, is now proposing the Monty Python Tax — where we tax foreigners living abroad. No, really:

The UK Treasury would calculate what Tesla should have paid in the US if British tax law applied there and collect 5% of that amount. Similarly, Britain would step in to tax Elon Musk proportionally to the amount of his wealth that originates from the UK (which, since his fortune is mainly in Tesla stock, can be estimated to be about 5%). 

Note that this is to apply not only to companies — or people — that produce here, but to people we import from. Someone in Britain thinks a Temu dress will make their life better, Britain gets to tax Temu, in China, on Temu’s Chinese profits. There’s also that thought that well, where did the cotton come from? The yarn? Who made the sewing machine? The steel for the sewing machine? All of which are a part of that import into Britain. This is, in its most complete version, an insistence that Britain gets to tax the entire global economy. 

It’s possible to mutter something about how this might not work. Perhaps, you know? 

Zucman also gets imports wholly and entirely wrong, because of course he does:

This approach is inherently extraterritorial, since countries would partly impose their tax standards on foreign actors in exchange for market access. 

Apparently we’re doing people a favour by allowing them to sell to us. Wholly wrong, obviously, for the entire and whole point of trade is to get our hands on those imports. The things that J. Foreigner does better, or cheaper, or faster, than we do. We only do exports so as to be able to afford these delights. We’re not doing anyone a favour by allowing them to sell to us — that’s the point of the whole damn enterprise.

So, why is there this suggestion? This is really about the Laffer Curve. Yes, yes, we all know, line drawn on a napkin, it’s not really real and so on. And yet one of Zucman’s frequent collaborators, Emmanuel Saez, has a very good paper about the peak of that Laffer on the taxation of incomes in the US — with a Nobel Laureate no less, Peter Diamond. So it’s real enough for someone to make a stab at calculating it.

Something we all also need to know is that the curve is not just different in different societies, it’s different for each different tax. My own only published paper (perhaps not so good) points out that a financial transactions tax of 0.01% is over the peak of that curve. What we’re taxing makes a difference to how much we can tax it.

In essence, the underlying point is that the act of taxation itself means that some economic activity does not take place. This is aside, entirely, from how lovely it will be to spend the moolah. Tax means less. How much less matters. For it’s possible, at a certain tax rate, to be destroying so much economic activity that total tax revenues decline despite the income from the  levy under discussion. This is why we tax the snot out of cigarettes — to stop people smokin’ ‘em. Currently there are those — sensible people too — who insist that stamp duty on shares in the UK would raise more revenue if there were no stamp duty on shares. 

Which tax makes a difference to the rate that maximises revenue. As it happens we know the spectrum here too. Land Value Tax — that favourite of some libertarians and all Georgists — has the lowest deadweight — the killing of activity. Then in order consumption taxes, income taxes, capital and corporate taxes and at the top idiocies like an FTT and SDRT, what are called transactions taxes. 

Zucman is suggesting that we tax the world on those two taxes toward the top end — the bad end — of that taxation spectrum. Why? 

Because one of the ways in which revenue decreases is that people simply bugger off if subject to such taxation. That can’t happen with land which is why the distortions of activity engendered by taxing land are so small as to sometimes be positive. So too, but less so too, with consumption taxes — if you’re in a place drinking your beer then you’re going to have to pay the local tax on beer. And so on — but companies and capital can move. Which is one of the reasons, but only one, of why revenue drops when they’re taxed. 

And thus the insistence that, no, ackshully, we should tax all these foreigners living abroad. Because that means that if they move they still pay that tax. Which means we can push the tax rate up ever higher without losing revenue. 

Which is true. Except it’s only true for one of the reasons why capital and corporate taxation have a lower Laffer peak than some other types of tax. Even if we close off some, or one, of the ways in which people can avoid the taxation on doing something, there are still those deadweight costs. The things that people simply do not do because the taxation of succeeding is such that no one bothers to try. And, as above, on capital and corporate taxation those deadweights are higher than raising the same amount of revenue elsewhere in the system.

Zucman’s other regular colleague, Thomas Piketty, is on record as insisting that we should tax the rich lots and lots even if this makes us poorer ourselves. That is, even if we’re so far into deadweight territory that it’s to our own disadvantage. Which is, you know, odd, but some people just do want to tax the rich that much. They want to tax the foreign rich so much that making us poorer is worth it.

Ah well, the French have never really understood British humour, have they?