Monday, 13 June 2011

Privately collected taxes

My old chum Mr Wadsworth regularly puts forward a proposition I just can't understand (as he did yesterday). The starting point, as I understand it, is that governmental activities sometimes result in people making money they would otherwise not make. No one could dispute that. This government-inspired profit is described as "privately collected tax", and that is the concept I cannot grasp.

I suppose it all depends on where you start. The blankest page is one of anarchy, a situation in which there is no government and, therefore, nothing we would describe as law. Onto that blank page we put a system of government or, to be more precise, we put a system of law. The most basic effect of any system of law is prohibition of particular activities accompanied by sanctions for breaking the prohibition. Every prohibition that impinges on economic activity results in people either gaining or losing money compared to how things would be in the absence of the prohibition. I can illustrate what I mean with a simple example.

Two factories make motor cars. A law is brought in requiring all new cars to meet a particular standard of robustness in the event of a head-on collision. Factory A's cars meet that standard but Factory B's cars do not and it would cost so much to redesign them that Factory B is no longer viable. Factory B closes and Factory A makes additional sales as a direct result of Factory B no longer being a rival. As I understand it, the theory says Factory A benefits from "privately collected taxes" because it makes additional income because of the new law - that law gives an economic advantage and this advantage is said to be a "privately collected tax".

I fail to see this as privately collected tax. To my mind it is an economic consequence of a law but it is not a tax unless you adopt a highly artificial definition of tax.

It is hard to find an example of economic activity in the UK which is not affected by law. The costs of manufacturers and retailers are increased by the need to comply with health and safety laws. Those who are unable to comply or who can only comply at a cost that makes their business unprofitable will go to the wall. They do not go bust because of tax they go bust because of the cost of complying with the law. Those who are able to comply do not make "privately collected taxes" they make income by selling their wares within the framework of the law. All businesses that receive income by way of cheques or card payments do so only because there is a framework of law to give such payments a cash value. Businesses that deal only in cash receive valuable income only because the law recognises bank notes and coins to have value. To what extent do the laws that turn cheques, plastic payments, notes and coins into useable value represent "privately collected taxes"?

No sensible person could deny that laws allow people to make income they would not make in the absence of those laws. Indeed, I would go further and suggest that no one earning a living in this country would earn exactly the same living doing exactly the same thing without a complex framework of laws affecting the job they do and the field of business within which they operate. Identifying a single law and suggesting that it provides a benefit that should be classified as a "privately collected tax" is, in my view, to take that single law out of context. All other laws that affect the business in question will necessarily increase or decrease income or costs. Any law that increases income must be balanced against laws that increase costs.

It is no more realistic to look at those laws that lead to increased income or decreased costs as allowing the business to benefit from "privately collected taxes" than it is to say the laws that lead to decreased income or increased costs amount to "privately incurred tax rebates". And that is the heart of the matter. Once one adopts the language of tax to describe something one must adopt all the language of tax and describe every aspect of the business in the same way. If you describe economic benefits received because of a new law as "privately collected taxes" you have to have a description of losses incurred as a result of a new law. Only "privately incurred tax rebates" could fit the bill yet it is a nonsense because there is no one to pay a rebate. The reality is that some people benefit from new laws and some people suffer a detriment, but neither the benefit nor the detriment is tax in any sensible use of the word.


Mark Wadsworth said...

"it is not a tax unless you adopt a highly artificial definition of tax."

Can you tell me what the big difference is between Scenario A and Scenario B? They both lead to the same group people paying money involuntarily to the same other group of people.

How about this for a definition of tax "when money changes hands purely as a result of the actions of the state"?

I did a Fun Online Poll on this topic and eight per cent of respondents agreed with this definition.

Sobers said...

"when money changes hands purely as a result of the actions of the state"?

Thats fine, but as TFB says there's hardly a person in the UK who could argue that their income was not affected by State interference in their stated job/profession/industry sector.

If virtually everyone is collecting private taxes, varying from 100% of income (accountants!!) to 0% (for a very exclusive few, such as itinerant ditch diggers), then the concept becomes a bit pointless, no?

gyg3s said...

"I suppose it all depends on where you start. The blankest page is one of anarchy, a situation in which there is no government and, therefore, nothing we would describe as law."

Although not especially relevant to your argument, I cannot accept the above proposition. And nor, I suspect could Baroness Hale. At a lecture she gave a couple of years back she said that there is always law.

Sobers said...

"Brenda Marjorie Hale, Baroness Hale of Richmond, DBE, QC, PC, FBA (Hon) (born 31 January 1945)is a British legal academic, barrister, judge and a Justice of the Supreme Court of the United Kingdom."

Hmm. No vested interest at all then, in there always being some law in existence.

Mark Wadsworth said...

"If virtually everyone is collecting private taxes, varying from 100% of income (accountants!!) to 0% (for a very exclusive few, such as itinerant ditch diggers), then the concept becomes a bit pointless, no?"

Exactly not. It is partly a question of degree.

There are clearly private tax collectors (tax advisers, not necessarily book keepers, lawyers, wind farm people, land owners, whatever) at one extreme and itinerant ditch diggers at the other.

But for simplicity, we can ignore laws (whether good or bad) that apply to all businesses or activities (like laws against pollution, law that says you can be sued if you don't pay your bills) as these do not distort things or result in one group paying more money to another group than they otherwise would do (if you couldn't be sued for a debt, people would demand cash on delivery).

And for every private tax collector, there is a private tax-payer (i.e. people who need to pay tax advisors, solicitors, higher electricity bills or ground rent).

Summar summarum, laws that force one group to give money to other groups = probably bad. Laws that apply to everybody equally = possibly, but not necessarily, good.

As ever, I note that people are refusing to answer my question, but hey.

Sobers said...

@MW: thats nonsense. All laws apply to everyone, they are just may be targeted at certain areas of business for example. A law stating you have to be have a State registration to fit windows (such a law exists btw) applies to everyone in the country, but only has practical implications if you want to be a window fitter.

When such a law is implemented some businesses will close, and the ones that remain can reap higher rewards due to less competition. Ergo anyone who works in an industry that has significant State regulation is collecting private rents - either as salary or profits or dividends, which are higher than they would be without State interference.

Take for instance the recycling/waste industry. If there were not strict rules on such things people could get rid of their commercial waste by burning it, or tipping it on the side of the road or burying wherever they liked. But the State says you can't do that, you must dispose of it as they direct. And getting all the right permits etc to dispose of waste legally is very expensive and time consuming. Thus those that are in the waste disposal business can charge pretty much what they like, there is very little competition. So despite the rules on waste disposal applying equally to everyone, private rent collection is very high in that industry.

I could continue in similar vein for most industries you care to mention. Anywhere the State imposes a cost on business, those that remain in business despite the extra cost are collecting private rents due to reduced competition.

I'm not sure what the question was in your first post.

Mark Wadsworth said...

S, I asked, what is the difference between Scenario A and Scenario B (TFB links to the post).

You give good examples of other 'privately collected taxes'. You claim that 'the rules apply to everyone' but if the net effect is that money is transferred from the economy in general to licensed firms in particular, then the result is that the impact of those rules is quite different on different people (most lose out, a lucky few win enormously).

Clearly, this is all a question of fact and degree, i.e. the basic rule that you cannot just dump your waste in a local river or somebody's front garden is a sensible rule, this is a question of the benefit far outweighing the costs to society as a whole, and if you have to pay to have your rubbish collected and disposed of sensibly, then that is merely internalising what would otherwise be an external cost - especially if there are no barriers to entry in the 'refuse collection' business.

Anonymous said...

I don't think the example of two competing businesses is particularly apt. The example I would use would be something like the recent law on incandescent bulbs. Light bulb manufacturers don't make extra income because some of the competition closes down. They make more income because the law forces people to buy more complex, inappropriate and expensive light bulbs than they would otherwise.

And isn't your friend's idea really that the private companies make more income, and then pay some of that to the government in their business taxes i.e. they have "privately collected" some tax for the government? An unscrupulous government could engineer higher tax receipts without having to overtly raise tax rates this way.