CapX Editor wrong
Iain Martin is critical of anything that moves and seems to be holding the answers to all of life’s political and economic questions. After reading the hubristic article “Angela Merkel is overrated” may I remind him of the following quote by Theodore Roosevelt:
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Christopher Yardley, London, United Kingdom
CapX Editor Iain Martin
Editor’s response: Thank you for this useful reminder that I should avoid being excessively critical. It is a journalistic curse and in my trade we are forever chiding politicians, central bankers, civil servants, business people, sportsmen and sportswomen, the police, doctors, supermarkets, airlines, generals, authors and filmmakers for their failures, when the rackety condition of the journalism business suggests that we’re not exactly lacking fault ourselves. However, two quick points. I did in the piece you mention cite my own mistakes on the Iraq War. And annoying as it may be from time to time, if we are too incessant, surely journalists, indeed all of us, should expect very high standards from those who seek power over their fellow citizens?
Risky business
Tim Montgomerie wrote recently for CapX that: “Many businesses aren’t making a full contribution to the country from which they take so much. Starbucks, for example, is a notorious example of this phenomenon”
What phenomenon? Business not making profit does not pay a tax on the profits it isn’t making. This is notorious in what manner?
This was in fact investigated in depth. There were two major claims that Starbucks was sending profits out of the UK by two methods. The first was royalties for the brand to Holland. HMRC had approved their calculation. And a subsequent EU investigation showed that Starbucks UK paid the same royalty as Starbucks franchises in other countries also had to pay. For their not to be doing so would in fact have been a breach of the transfer pricing rules. Something we’ll come to in a moment.
The second was that they paid a 20% margin to Switzerland to the unit that bought the coffee beans. One point is that coffee beans make up perhaps 5 p of that £4 latte. Meaning that it’s unlikely to have much of an effect. However, not to be making such a margin would again be in breach of the transfer pricing rules. For this is how the international tax system works.
If you’ve got various subsidiaries of the one company trading with each other then in order to stop profit shifting they are supposed to price transactions at the “arms length price”. That is, as if they are not co-subsidiaries, but are independent companies. So, Starbucks UK should be buying coffee beans from Starbucks Switzerland Coffee Bean Brokers (whatever they were called) at a similar enough price to what they would buy them from an independent bean broker would demand. And yes, Switzerland is the world’s centre for coffee been brokering and no, none of the independents do offer to trade with you if they make no margin. It would actually be illegal for Starbucks not to pay a margin on such bean purchases because that would not reflect arm’s length pricing. And the same goes for the brand rights and royalties. That they were paying the same amount they charge franchises is right and proper, not to do so is illegal.
Finally, as the UK’s former Business Secretary Vince Cable pointed out, once you added these back in Starbucks was still making a loss in the UK. So no tax would have been payable. Companies that don’t make profits don’t get charged a profits tax on the profits they’re not making.
As to why they weren’t making a profit the first chapter of Tim Harford’s “Undercover Economist” gives a lovely explanation. It’s straight Ricardo on rent. Location is everything, so all the profits of the coffee trade go to those who own the properties. And yes, landlords really do pay UK tax on their profits. Starbucks simply paid too much for too many prime properties.
It’s fine for people to have differences on how corporations should be taxed, of course it is, but it does help if people are actually informed.
Tim Worstall , Algarve, Portugal | @worstall
For a left-wing reader of CapX Tim Montgomerie’s article has, much to its credit, drawn my attention to the pitfalls of what had initially seemed (to me) a reasonable proposal to stop corporate tax abuse across the EU. That said, the case for lower corporation taxes on the basis that it leads to greater productivity is not borne out by the UK in recent years where a dramatic slicing of corporation tax (28 down to 21% – almost certainly 20% as of this week’s Budget) has not seen any such increase in productivity nor a much higher capital investment from firms which raises interesting questions for policymakers on the left and right – particularly as ultra-low interest rates don’t seem to have been a spur for companies to spend their cash holdings either.
Jonny Roberts, Newbury, UK
Stop being rude to lefties
I wonder why Dan Hannan continually refers to “Lefties”. I am sure many “righties” are not over the moon with TTIP either. I for one do not think Hannan in his article on this subject answered the questions in depth. Big business does not make the world go round and it might help if they paid the correct amount of tax in this country and around the world.
Patricia Moore , Ramsgate, UK
Thank you Daniel Hannan for a well balanced article on TTIP. I’m one of the leftists you write about but unlike those who, as you say, have failed to follow the logic through, I am both anti-TTIP and anti-EU. This goes against the grain of the party I voted for at the last election – Green.
The “if the other side like it then we must vote against it” attitude of many on the left goes right across the board. It’s the nature of British politics. You get the odd rebel here and there but generally an MP will vote in favour of everything his or her party puts forward regardless of whether he/she supports it.
I am pleased that Dan’s party, the Conservatives, will be offering a referendum on EU membership but I’m not happy that it will effectively be an indicative ballot. The leading members on both sides of the House will be bombarding us with arguments in favour of staying in. If it was a truly democratic referendum then we’d be left to make up our own minds.
Mark Harks, Milton Keynes, UK
I often find myself in agreement with Dan Hannan MEP, but I found his latest article for CapX baffling. In particular, I reject the motives he ascribes to the European Central Bank in its policy towards Greece.
The ECB, like any central bank, lends funds to national banks and it demands collateral in exchange. This collateral comes in the form of bank assets, mostly commercial loans in the case of retail banks. Greek banks already have an exceptionally high rate of non-performing loans in their books, which makes the collateral they post less attractive. And as the likelihood of a deal between the Greek government and its creditors diminishes, and capital continues to flee the country, the probability that many Greek banks will become insolvent rises.
Hence the greater discount applied to their collateral from Monday. Any other move would amount to a denial of reality, and expose the European Monetary System to greater risk. Rather than a political move, this is an instance of the ECB fulfilling its mandate.
At any rate, the ECB’s actions would seem to make Grexit more likely – and isn’t that what Dan wants?
Diego Zuluaga, London, UK
Syria is not the Falklands
While I do not doubt Margaret Thatcher’s determination, Nile Gardiner’s article on the Falklands is not comparing like with like. The UK’s Falklands campaign bore a strong resemblance to the Desert War of World War II, in that this was a pure conflict between armies. There were few civilians in the way. In the Falklands, I understand that the civilian casualties were 3.
The conflict in the Syria and Iraq is asymmetrical warfare. Military formations equipped with modern weapons are facing motivated civilians who are able to conceal themselves in the general population. Civilian casualties are enormous. In addition, ISIS is using the grisly tactics of suicide bombers, where they seem to be sending soldiers into battle wearing bomb vests so that when they infiltrate positions, they blow themselves up, killing their opponents more effectively than a precision bomb or indeed clip-worth of machine-gun fire.
It has always been possible for the West to fight a no-holds-barred war using modern weapons like cluster munitions, or using B-52s to sanitise large areas with conventional explosives. Such a strategy would win the war but lose the peace as the civilian casualties would be horrendous. The responsibility would be laid at the feet of the incumbent president, who would be reviled by liberal opinion through the ages. Remember how Lyndon B Johnson decided not to contest the 1968 presidency. He was destroyed by the nightly images of horror beamed into American sitting-rooms and the disapproval of Walter Cronkite.
The 1933 King and Country debate by the Oxford Union, where the motion no to fight under any circumstances was carried, was followed 10 years later by people in the same country sending hundreds of bombers over the city of Hamburg to destroy it in a firestorm. A lot of events took place in the intervening decade to turn a peace-loving people into a nation that devised the most efficient means to deliver death from the air over a well-defended area. At present the will to prosecute a total war against Isis is not there. This is the real reason why Obama and the West as a whole are reluctant to commit forces. The politics and the events do not justify action.
Paul T Horgan, Crowthorne, Berkshire, UK
Problems with Uber
Thank you for Guy Sorman’s Uber article. I was looking forward to CapX getting round to the extreme end of value transfer within liberated markets. Uber, AirBnB, Google, Facebook are the poster-childs. But Houston, we have a problem. That problem is that businesses with thin individual transaction margins but giant scale, that are (almost) friction-free or free of heavy plant and that are global or at least multi-country (think banking, media, tech) pose significant problems for society. These problems, which have no solution in liberal free markets, are:
1) The ability, supported by liberal economics, to pick and choose where and how they pay tax “provided they don’t break the law”
2) The need “in the interest of consumer choice” to circumvent laws and regulations that have been adopted through justifiable democratic processes
3) Success means land grab, which builds the barriers to entry and closes off the bastion of liberal economics – competition
4) Deep-pocket funding (which goes with the need to grab land) and ultimately the transfer of huge value to a tiny number of individuals. The dominants or oligopolies we are allowing to be created today will be the monopolies that liberal economists rail against in the future.
David Hunter, London, UK
Estonian identity
“The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty” – Eugene McCarthy
While I can understand where Rachel Cunliffe was coming from with the advantages of small government, with reference to Estonia, I would still rather pay a little more in taxes and have to spend longer filing a tax return than allow them to force ID cards on people.
Rhys Pilkington, Accrington, United Kingdom
