Avoiding Tax and Panama

The big story at the moment surrounds Panama, which many folk may know best from Prison Break rather than its financial sector. A truly massive leak of confidential files from a law firm (terabytes, not just gigabytes…) is causing embarrassment and more for many leading global figures. UK Prime Minister David Cameron is fending off questions about his family’s involvement with the law firm via his father, while the Icelandic Prime Minister was more deeply embroiled and has already bitten the bullet. Links to Vladimir Putin do not appear to have caused quite so much shock and consternation

What exactly is going on, and why does it matter from a macroeconomic perspective? It must matter, since it pertains to billions of dollars. Economies have billions of dollars (or pounds, or euros) moving around within them, and hence that billions ended up in Panama rather than the places that the people mentioned above are located is of interest.

Towards the end of term we covered the Balance of Payments, which is the financial account of a country – what financial flows go in and out of a country. Clearly, it seems, considerable flows went out of the UK, Iceland, and Russia to Panama, and for what? Money is moved from one place to another usually for some purpose – for example an investment, or to pay for imported goods. The claim, however, is that much of these financial flows were “offshore” – moving of money primarily for the purpose of avoiding paying taxes.

In the case of Ian Cameron, the PM’s dad, their company Blairmore Holdings was based in Panama, it would seem, to avoid paying as much tax as would be paid in the UK. However, as the leaks appear to make clear, major decisions about the firm were still made in the UK (based on documented meetings of board members revealed in the leaks) – which apparently is the test of where a company is “located”. What this makes clear is the difficulty of regulation – definitions have to be made for things that are easy to think about, but harder to pin down the detail of – what is the definition of where a company is located? And once a definition is made in a country’s law, it will provoke those in that country to consider ways in which that law can be avoided. As a result, it’s likely that those involved will claim nothing illegal was done, regardless of the wider moral implications about doing right and wrong.

Economic activity, you’ll learn more as you study further in microeconomic topics, tends to need some level of regulation. However, that regulation need not be a panacea, and need not lead to unintended consequences. The rise of offshore tax havens came primarily in response to higher tax rates in major Western economies, particularly in the 1970s, and of course regulation is something that many in favour of the UK leaving the EU cite as a reason to leave. A very thoughtful friend of mine has noted the link between these two – the UK remains a place for lots of finance taking place onshore, and is so at least in part because of its position within the single market (single market = more customers = more revenues). If that attraction was lost, the UK may need to consider other ways to retain its position, which may include more favourable tax and regulatory arrangements for finance – yet financial markets are precisely the markets where the clamour for “more regulation” has been greatest since the financial crisis.

As with anything in macroeconomics, it’s complicated, but it’s well worth studying!

Snooker and Rent Seeking

A fellow economist, Rob Taylor, challenged me on my risk aversion interpretation of Ronnie O’Sullivan’s refusal to take a black for a maximum break (which would have got £10000+£2000 for highest break) and instead opt for a pink and a 146 (getting £2000 for highest break).

It stretches credulity a little to think about Ronnie O’Sullivan, one of the most talented snooker players that has ever played the game, as in any way risk averse on the table.

A better argument, and one that covers a concept we covered earlier on term, is to think about rent seeking. If you recall, rent seeking is where some agents rather than creating value, seek to apportion the value created by others for themselves. Music piracy is one example – the value is created by the artist, and rather than the artist getting any money, if we obtain a pirated copy of their music for some cheap price, we have paid someone other than the artist who has made available the artist’s work at a fraction of the true value of it – at the same time depriving the artist of any return for their value added.

In snooker, big breaks are a huge part of the game – anyone who watches the games loves to see a big break being built. Sure, safety exchanges can be fascinating, but the reality is that great pots followed by great positional play are what draw in the crowds. Nothing more than a 147, the maximum break which requires a player to keep position on one colour after each of 15 reds potted – the black, a colour that is usually mired in amongst the 15 reds due to its position on the table. To see a 147 is very rare also, if increasingly common.

However, the prize for a 147 is not particularly large. In 2010 at the World Championships, O’Sullivan needed persuading to pot the final black on being informed the prize was £4000. In the case the day before yesterday, the prize was £10,000, five times that for the highest break, yet it is hard to argue that a 147 is worth that little relative to any other high break.

The suggestion thus is that snooker authorities are pocketing (pun intended) the revenues from crowds flocking to watch the game, rather than rewarding the players, who are the reason fans watch the game. They have extracted rents from the process over and above what is due to them for their role in ensuring snooker is a game we can all watch around the world.

What’s wrong with a bit of corruption?

One bit of news over the last few days has been another bunch of Fifa officials being arrested for corruption. You may, of course, be tempted to shrug your shoulders, particularly if you don’t like football much. Maybe if you like it, you may have already got corruption fatigue in light of all the high-profile (and long overdue) arrests thus far.

It might be worth thinking about what exactly is wrong with corruption? What even is corruption? Casting it in an economic light, it’s a mis-allocation of resources, where the means of re-allocation has a criminal element to it.

Thinking even more strongly in economic terms, corruption is rent seeking behaviour. That is, it is behaviour that does not create new wealth (such as producing a new widget that can be sold), but instead that extracts wealth from others. For example, a corrupt official may solicit bribes from those around him (or her); those bribes do not create anything, they simply reallocate wealth to the corrupt official.

Hence we can think that, absent of corruption, there might be a very different distribution of funds and activities in Fifa – some of the vast amounts of money that move around the game might get to grass roots endeavours around the world, in some of the poorest and needy parts of the world, rather than in the pockets of officials of football associations in some of those countries (and other ones).

So, even if we don’t care about football itself, we ought to care about corruption – and we ought to be trying to ensure that in all areas of economic life resources are going where they ought to be going, rather than into the hands of corrupt officials…