Wednesday 24 September 2014

Loot and plunder

So Ed Miliband has decided that tobacco companies make too much money and so he's going to help himself to some of it. Looting private industry on a whim is not the best way to convince companies that the UK is the best place to do business, but there you go. The other vultures of the parasitic state immediately began to circle...

This smacks of arbitrary and capricious government. And it will ultimately be paid for by the consumer, as one analyst told the Guardian...

“The obvious solution for companies is likely to be a pass-on of the cost through higher prices, so you would expect the consumer to ultimately bear the cost.”

Yep. But there is one thing that puzzles me about the way the media reported the story and it is this:

The fees, similar to those introduced by Barack Obama in 2009, are to be based on the firm’s market share.

Most newspapers echoed the claim that Obama did the same thing in 2009, but I can't work out what they're referring to. Obama introduced a major tax rise on tobacco in 2009, but that can't be it. Miliband's idea more closely resembles the Master Settlement Agreement, but that was a legal settlement and it happened way back in 1998 under Bill Clinton.

Can any readers explain? Or is this the Labour press office desperately trying to get the words 'Obama' an 'Miliband' into the same sentence?


Carl V Phillips said...

Actually, the MSA is really a sales tax (and thus arguably in violation of the rule that only the legislature can impose taxes). That is, it is a per-unit charge and therefore is paid like any other sales tax (i.e., basically by the consumer).

And I also cannot think of anything Obama did (ever) that resembles this at all.

However, it would actually work the way the supporters say it would (setting aside the pesky issues about being arbitrary and creating incentives for everyone to offshore). If you confiscate a chunk of a company's profits, it will not change their incentives about optimal production, pricing, etc. When you charge them per-unit (as in the MSA) then they have the incentive to increase their prices by that much (approximately -- it might be a bit less or a bit more). After all, they do not want to be selling a ton of product that they are losing money on each unit of. Thus it is a sales tax.

But if you just take some of the resulting profit, they still have the incentive to make as much profit as possible, which means keeping prices and the same as they are, since they are already optimized for that. It is like Thatcher's poll tax -- for all that was bad about it, it at least had the feature that it did not distort anyone's behavior. Of course, if you take enough of the profit they will just leave the jurisdiction, since that is the one way to avoid it.

Unknown said...

The tie in is SCHIP - Obama raised the tobacco taxes to produce more cash for uninsured children.'s_Health_Insurance_Program

Christopher Snowdon said...

OK. So it seems that the only similarity is that the money raised is supposed to be ring-fenced. Thanks.

Dick Puddlecote said...

Carl, good point about profit maximisation. However, as a business beholden to shareholders they'd be obligated to work overtime to recoup the profit projections somewhere. As you say, offshoring to avoid taxes is one option, but more automation to reduce labour (small 'l') is an obvious choice, or else the share value would drop thereby affecting millions of 'hard-working families' everywhere with pension funds reliant on some of the best performing stocks on the market.

Either way Labour's core vote will suffer. But then so they should if they vote for unimaginative and sinister sound bite politics like this. ;)

Anonymous said...

Why not tax socialists for causing depression and anxiety in normal people?

Carl V Phillips said...

DP, But every major company is already making as much money as they can (to first approximation). If they had something up their sleeves that would allow them to recoup (i.e., increase) profits they would already be doing it. Thus it really come out of the shareholders' pockets with no further change. It is like the poll tax -- perfectly non-distortionary (except for the pesky issues of creating the incentive for no company to want to operate within the reach of that government). That is, unless it is so high that they just shut down because it took all their equity.

So sales would not change and there would be no effect on consumers. There would be no effect on labor (small 'l', no 'u'). It is actually a far less disruptive tax than a sales tax (again, except for the long-term incentives).

Jon Fell said...

Most of this still seems puzzling to me. The text of the speech itself only says ". . . we will raise extra resources from the tobacco companies, who make soaring profits on the back of ill health." The Guardian article you link to in your blog refers to "a novel windfall tax on the profits of UK tobacco companies", but the next day the Guardian was talking about this £150m in fees, ". . . based on their market share, a technique that makes it more difficult to pass the costs onto the consumer":

But something based on market share sounds like it would actually be volume-based (effectively) - ie if you sell fewer cigarettes your market share drops and so you pay less tax - which would very close / identical in effect to a specific tax (like the MSA, as Carl identifies).

£150m seems to be broadly equivalent to a single-digit pence tax increase on a pack of cigarettes, less than the annual budget-related excise increase, which makes you wonder what all the fuss is about.

Perhaps this is about linking the tax revenue to a specific spending goal. That has been tried before, but seems swiftly to have been forgotten about: (I remember this because it’s the first time I came across ‘hypothecation’ as a concept).

Or maybe they genuinely are thinking of something quite novel in terms of an actual tax on profits (in which case wouldn’t it be allocated according to profits, rather than market share?). Canada is the only other place I can think of that has something similar, and this provides some interesting background: With this sort of thing you run into questions of where profit is actually generated, which could be complicated by offshore brand ownership and manufacturing (Imperial has announced that it is to close its Nottingham factory, so that only Japan Tobacco of the big four UK tobacco businesses will be manufacturing in the UK soon).

Jon Fell said...

@peterfranklin_ doesn't seem so familiar with your work: