10 myths about government debt - video

Very fitting for the Fiscal Policy topic - but also supply side etc.

Some microeconomics on de-merit goods

Looking for that extra-special conclusion? Have a look at how this article analyses the gains to the Treasury, as well as the costs, from smokers:

http://www.telegraph.co.uk/news/2017/10/18/comes-smokers-burden-nhs-may-contribute-tax-take/

•  Ashley Kirk 

18 OCTOBER 2017 • 2:37PM Daily Telegraph

T

he NHS has come under criticism after plans to ban patients from surgery unless they quit smoking were revealed. 

The logic behind the move is that smokers are a higher burden on the health service due to the illnesses that they pick up as a result of their own decision, but this clear-cut, utilitarian approach has come under fire.

It has been accused of going "against the principles of the NHS", but does it even make financial sense?

Many would argue that smokers contribute far more in tax than is needed to deal with the costs of their potential health issues - we've dug into the numbers to see if they add up. 
The tax contributions of smokers

Smokers are taxed a lot. In a 20-cigarette packet costing £7.35, some £5.37 of the cost goes to the tax man.

Per packet, they currently pay tobacco duty at a rate of 16.5 per cent of the retail price, as well as a further 'flat' element of £4.15.

The result of this is that the Government receives a lot of money from smokers, with FullFact's most recent research showing that they bring in about £12 billion in direct tax revenues.

But they also depend on the NHS a lot

The healthcare cost side is trickier to pin down, with estimates ranging from anywhere between £2 billion and £6 billion per year. 

According to the Action on Smoking and Health group, smoking costs the NHS in England approximately £2bn a year for treating diseases caused by smoking.

This cost includes hospital admissions, GP consultations and prescriptions - as well as any operations or treatment needed for smoking-related diseases.

This burden on hospitals, however, has been decreasing, with the proportion of disease-related hospital admissions attributable to smoking all down over the last decade.

And it isn't just the NHS

There are other smoking-related costs for the Government. Taxpayers fork out for things such as sweeping up cigarette butts off the streets, or for the fire brigade to put out fires caused by cigarettes.

When people are made ill from smoking, the country also misses out on lost productivity and tax revenue for the time that they aren't working. 

These costs are harder to quantify - although the think tank Policy Exchange made an attempt in 2010.

It estimated that the overall total for smoking-relating costs on the taxpayer was £14 billion - including an estimate of £2.7 billion for NHS costs.

This figure has come under criticism - not least of which because of its £2.9 billion price tag on people taking smoking breaks at work - but it goes some way to totalling all these individual costs on society.

People dying earlier from smoking could limit the health costs

Another thing to consider is the hypothetical scenario of what would happen if a smoker who died earlier actually didn't smoke, lived until they were 90, and racked up huge medical costs through an assortment of minor illnesses. 

People who die prematurely might actually have a smaller net burden on the health service in the longer term, reducing the state's spending on social care and pensions.

As FullFact's explains:

Imagine a patient in her 40s who is diagnosed with terminal cancer as a result of her smoking. Let's say her care costs the NHS £20,000 before she passes away. Now imagine we could go back in time and prevent her from taking up smoking in the first place. She might live into her 80s, and even if she spends that time in relatively good health is likely to require any number of GP consultations and routine prescriptions in that time.

If her treatment over these decades costs any more than £20,000 then actually the NHS would have spent less had she been a smoker.

So smokers may actually be paying for their habits

It's hard to say whether the two sides balance, and the numbers will of course vary from smoker to smoker - but it really isn't as clear-cut as some would have us believe.

When smokers buy their cigarettes, around four in every five pounds they spend is actually tax.

This means that Britain's 7.9 million smokers are contributing around £12 billion per year to the Government.

Our best estimates for their overall cost on society - whether that's NHS health costs, cleaning up cigarette butts or putting out cigarette-caused fires - is around £14 billion.

So the figures are relatively balanced, and this is before even accounting for other indirect benefits such as taxes from people employed in the tobacco industry.

Whatever the direct impacts on the health or culture of society, in terms of the murky world of financial costs and benefits, smokers may actually be paying for their habits.

US Corporation Tax - implications of change.

American corporation tax - possible changes, and the implications thereof. Important for Tax & Fiscal Policy section:

CAMBRIDGE – The United States Congress is likely to enact a major tax reform sometime during the next six months. Although the new rules will apply only to American taxpayers, they will have important consequences for companies and markets around the world.

The most important changes will apply to US corporations rather than to individual taxpayers. Of these reforms, the one with the most obvious and direct international impact will be the change in the taxation of US corporations’ foreign subsidiaries.

The current US rule is unique among all major advanced economies. Consider the example of a subsidiary of a US corporation that earns profits in Ireland. That subsidiary pays the Irish corporate tax at Ireland’s low 12% rate. It is then free to reinvest the after-tax profits in Ireland, in financial securities, or in operating businesses anywhere in the world – except the US.

If the foreign subsidiary’s parent company brings the after-tax profits back to the US to invest or distribute to its shareholders, it must pay the current US corporate tax rate of 35% on its original pre-tax Irish profits, with a credit for the 12% that it has already paid.

Because of this 23% penalty on repatriation, US companies generally choose not to repatriate the profits of their foreign subsidiaries. The Treasury Department estimates that these subsidiaries have accumulated $2.5 trillion of offshore profits.

Congress is now likely to adopt the “territorial” method of taxing the profits of US corporations’ foreign subsidiaries. Under the territorial method, which virtually every other advanced economy uses, US corporations will be able to repatriate their foreign subsidiaries’ after-tax profits with little or no extra tax.

Congress is also likely to enact a “deemed repatriation tax” on the $2.5 trillion of profits that have been accumulated abroad but never subject to US tax. Although the details of this provision have not been decided, the basic idea would be to levy a tax of about 10% on the untaxed overseas profits, to be paid over a period of years. In exchange for this new tax liability, a US corporation could repatriate those accumulated profits whenever it wanted to do so.

The shift to a territorial tax system is likely to have important effects on US corporations’ behavior. A large share of their foreign subsidiaries’ future profits, which would be retained abroad under current law, are likely to be returned to the US, reducing investment in Europe and Asia. A portion of the $2.5 trillion of past profits now held abroad would be repatriated as well.

Moreover, US corporations will no longer have an incentive to shift their country of incorporation to other countries in order to be able to distribute their foreign-earned profits to their shareholders. At the same time, foreign companies will have an incentive to shift their headquarters to the US, where they could enjoy the advantages of being a US corporation without incurring the current tax penalty.1

Although the shift to a territorial system of taxation would have the most obvious foreign impact, the planned reduction in the corporate tax rate may have an even larger effect. The 35% statutory tax rate on corporate profits is one of the highest among all developed countries. The congressional proposal would reduce the corporate rate to 20%. President Donald Trump has called for a 15% rate.

A lower corporate tax rate and the shift to a territorial system would increase the flow of capital to investment in US corporations from abroad and from capital investments in owner-occupied housing and in agriculture. This would raise productivity and GDP, leading to increases in tax revenue that would partly offset the direct effect of the corporate rate reduction.

But, because corporate tax revenue is now about 1.6% of GDP, the direct effect of halving the tax rate would reduce revenue by about 0.8% of GDP, or $160 billion a year at the current level of output.

The US cannot afford such a large increase in the fiscal deficit. And, because few features of the corporate tax law can be changed to reduce that revenue loss, I think the corporate tax rate will be reduced to about 25%. That would still be substantially less than the current rate and in line with the OECD average.1

Corporate tax rates have been declining around the world in recent decades. The US rate was previously 50%, and rates in the other OECD countries were substantially higher than the current 25% average. It is certainly possible that the reduction of the US rate will cause other developed countries to reduce their corporate tax rates to improve their relative attractiveness to internationally mobile capital.

In short, the congressional legislation that is likely in the months ahead will change the tax rules for US companies, but it will also have important effects on international capital flows. It could also have significant effects on tax rules around the world.

Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. Currently, he is on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues.