Stretch and challenge time...

Have a quick look at this; the basic premise is that what we see as FDI flows are actually [legal] tax avoidance schemes. You don't need to get into the detail of this, but it would fit nicely into an essay about tax/MNCs, or FDI/globalisation:

It is Time to Change How We View Foreign Direct Investment

FDI is increasingly driven by tax avoidance.

Blog Post by Brad W. Setser

December 17, 2019

    

A lot of financial globalization has been driven by tax avoidance.

40 percent of FDI globally comes from just seven countries, which collectively account for 3 percent of the world economy.

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United States

International Economic Policy

Foreign Investment

That’s one striking result of a new IMF working paper.

It paints a picture of foreign direct investment that runs a bit against the common view of foreign direct investment as the virtuous, and low risk, form of financial integration.

Foreign direct investment is generally thought to be real investment in plant and equipment abroad—GE building gas turbines in France, GM building cars in China, Siemens building turbines in North Carolina, and BMW and Toyota building cars in South Carolina and Kentucky.

Statistically, though, FDI is often investment by one special purpose entity (generally located in a tax center) in another special purpose entity…so called phantom FDI.

That is why it is time to start viewing the direct investment data with a more jaundiced eye.

One of the biggest recent “direct” investments globally was Microsoft Ireland’s purchase of Microsoft Singapore. That transaction has a huge statistical impact on Ireland (and the euro area), but didn’t have much of an impact on the “real” Irish economy.

That same critical eye also needs to applied to the data on direct investment into and out of the United States, as it too is heavily influenced by transactions that are likely motivated primarily by tax considerations.

Consider the data on outward U.S. direct investment abroad.

That data historically has been dominated by “reinvested” earnings—the profits American firms earn abroad that they legally kept in their offshore subsidiaries.

   

This was the source of the supposedly offshore cash stash of U.S. firms (the funds were only legally offshore, as they legally were assets of say Apple Ireland or Microsoft Bermuda; in practice they were invested in U.S. financial assets—and firms that wanted to access their offshore cash to say buyback their shares could do so by borrowing against their offshore cash). The bulk of those reinvested earnings—if you looked closely in the data—weren’t being reinvested in physical assets, but rather were piling up in the offshore subsidiaries U.S. firms had established in low tax jurisdictions. From 2010 to 2018, 65 percent of all reinvested earnings were “reinvested” in jurisdictions like Ireland and Bermuda (which works out to about $200b a year of investment in those jurisdictions, or about half of all US FDI in the “pre-tax reform” data).

   

That clearly was a function of firms’ ability to defer paying U.S. tax on otherwise un-taxed global profits under the old tax law. Profits earned in high tax jurisdictions didn’t have any U.S. tax liability under the old law, as firms could deduct taxes actually paid abroad. Indefinite deferral effectively distorted the global data—raising the amount of U.S. direct investment abroad (the cash Apple held in Ireland was an asset of Apple USA, so reinvestment raised the stock of U.S. equity assets abroad even if technically the equity investment abroad was the accumulation of offshore cash) and the amount of foreign claims on the United States (U.S. treasuries purchases by Apple Ireland were counted as foreign holdings of U.S. government debt, that’s why Ireland was at one time the world’s third largest holder of U.S. Treasuries).

FULL ARTICLE HERE

Food banks - good article for evaluation in your current Micro topic

In his introduction to Labour’s election manifesto, Jeremy Corbyn pledged to end something he called “food bank Britain”, and when I read that my immediate thought was: “I hope he never does.” This is not because I take any delight in the idea that thousands of my fellow citizens regularly go to local food banks to get food to feed themselves and their families, but rather because of the deeper significance of food banks; what the fact of their existence actually tells us about this country and its people. Our network of food banks should be a cause for national pride, not shame; food bank Britain is not a symptom of decline or national hard-heartedness: it shows us as our best. Let me explain.

Ten years or so ago I got involved in setting up a food bank in Oxford. It was a bit different from most food banks because, rather than receive food donations from the public to give to families in need, it set out to be a “food recovery” operation. We asked supermarkets and wholesalers to give us their surplus fresh food (bread left over at the end of the day, wilting vegetables, that sort of thing) which we then gave to other charities operating in the city. The idea quickly took off and today the organisation is a well-established part of the city’s charity landscape. My involvement taught me many lessons: about the colossal (and shameful) amount of food that is wasted daily across the country but also that voluntary action, at a local level, is a good in and of itself. To paraphrase Shakespeare on mercy: the quality of food banks is twice blessed. It blesseth him that gives and him that takes.

In the Book of Revelation it is promised that eventually God will “wipe away every tear” and it is a long-standing fantasy of the British Left that our welfare state should emulate this feat. But there are practical reasons why this will never happen and what’s more, why it should not.

One of the surprising things I learnt from my food bank experience was the appetite there is for volunteering: it was never a problem to get volunteers to drive our vans and hump around sacks of potatoes. On the contrary we often had to put volunteers on a waiting list. It’s easy to sneer at ‘do-gooders’ (and some on the Left make a speciality of it) but the instinct that drives people to offer their labour free of charge is surely a good thing. It means that individuals make a personal investment in their local community — and these are the ties which bind. A well-stocked, well-run food bank is a sign of a healthy community.

SUGGESTED READING

Don't call it poverty porn

BY JENNY MCCARTNEY

I am pretty sure that when Mr Corbyn wrote about ending food bank Britain he was not aiming his guns at local volunteer groups; what he meant, I think, was that the benefits system should be generous enough to ensure that no one need access a food bank ever again. But there are good reasons to believe that, however munificent the social security payments were, we would never arrive at that happy destination. However hard we try there are always going to be some people in poverty; a combination of bad luck and bad individual choices will ensure it is so. Our benefits system is designed to provide a basic standard of living but despite its good intentions there are always going to be circumstances in which people don’t get what they need. It is an intractable failing of a huge bureaucratic mechanism.

Food banks are a relatively new phenomenon. They burst into the national consciousness in a major way some time in the noughties and the reason they did was largely through the efforts of a charity, The Trussell Trust, which now operates about 1,200 centres across the country.

Because the work of food banks is so practical — there is, after all, no charitable action more basic and fundamental than giving food to the poor — their appeal was immediate; kind and well-intentioned people saw food banks as a straightforward vehicle for their generosity. New food banks sprang up everywhere and because they were newcomers to the charity scene — the Trussell Trust only got going in 1997 — they attracted a lot of media attention.

SUGGESTED READING

How charities are corrupted by Whitehall

BY IAN BIRRELL

Much of that media coverage was misleading. The rise in the number of food banks was used to argue that ‘food poverty’ was on the rise, but that was faulty logic. Commentators and politicians said: “Look at the facts. Last year another x hundred food banks opened round the country. That proves our point.” Actually the rate at which new food banks were opening was unrelated to the underlying real rate of poverty. What the statistics demonstrated was that the food bank movement had caught the public imagination; people saw them as a way of helping others in the most practical way possible. The food banks were offering a new and useful service to people on very low incomes who flocked to them. Why wouldn’t they? If you are on a very tight budget a local food bank can ease the pressure. But, inevitably, food banks got dragooned into the political debate.

The food bank argument is now a permanent fixture in the Left’s political rhetoric. In the run-up to the election The Independent carried a story about a Tory candidate (and now MP), Darren Henry, who at a public meeting was incautious enough to offer the opinion that people who use food banks are often those who can’t manage their budgets properly. Predictably his comments were condemned by his opponents and, as the paper said, “drew gasps from the audience”.

He may well be right but he would have been better advised to keep his thoughts to himself; this is an argument the Right can never win. The Independent article, in typically tendentious fashion, observed: “The proliferation of food banks, which were rare before the 2008 financial crash, has increased hugely under the Conservative government, with many experts and campaigners blaming austerity and policies such as universal credit for driving the surge in need.” This is a perfect example of how the truth gets mangled in the poverty debate.

SUGGESTED READING

Why money won't fix the poverty problem

BY ANDY COOK

Yes, it is true that food banks were uncommon in the early years of the new millennium; that’s because the movement was only just getting going. And then came the financial crash and reporters had to find a way of illustrating their stories. What better way than to highlight the growing numbers of food banks? The coverage acted as promotional videos for the food bank movement; it touched the generous instincts of the country and lo! food banks sprang up everywhere. What gets overlooked is that, had food banks been operating 30, 40 or 50 years ago they would have been just as well patronised — but then no one had thought of them.

None of this debate should obscure a fundamental truth: it is good to feed the poor. The Church has always seen it as one of the “corporal works of mercy”, that is those actions which attend to basic human necessity. It’ll be a black day when Britain fails to rise to the challenge of poverty and, despite the wonders of our welfare state, there will always be the need for that to be supplemented by the efforts of individuals.

I would go further: it is neither possible, nor desirable, that the state should displace and render unnecessary all voluntary charitable action. Across the country millions of people volunteer their time and effort to help make life a little better for others. Both sides gain from this arrangement and government is well advised to let the volunteers get on with it.

While the state should never lose sight of its obligations to the poor food banks should make us proud, not ashamed.

Wooing voters or tackling a real issue?

UK minimum wage to rise by four times rate of inflation

Employees over 25 will receive a 6.2% pay rise equating to £930 a year for full-time worker

Richard Partington Economics correspondent

 @RJPartington

Tue 31 Dec 2019 13.48 GMTFirst published on Tue 31 Dec 2019 00.01 GMT

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 Apprentice workers will receive a 6.4% pay rise from April. Photograph: Alamy

Almost 3 million workers in Britain are to receive a pay rise of more than four times the rate of inflation from April, after the government said it would increase the official minimum wage.

In an announcement designed to woo low-paid workers in the immediate aftermath of Boris Johnson’s election victory earlier this month, the government said the national living wage for over-25s would increase from £8.21 an hour to £8.72 from the start of April.

Johnson said the increase was the “biggest ever cash boost” to the legal pay floor. “Hard work should always pay, but for too long people haven’t seen the pay rises they deserve,” he said.

Workers over the age of 25 on the legal minimum wage, rebranded as the “national living wage” four years ago, will receive an annual pay rise of 6.2% from April – more than quadruple the level of the consumer price index (CPI) gauge of inflation, which stood at 1.5% in November. The Treasury said the increase equated to an increase in gross annual earnings of around £930 for a full-time worker on the current minimum rate.

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Pay rates will also rise above inflation across all other age groups, including by 6.5% for 21-24-year-olds to £8.20, by 4.9% to £6.45 for 18-20-year-olds, by 4.6% to £4.55 for under-18s and 6.4% to £4.15 for apprentices.

The TUC general secretary, Frances O’Grady, said the rise was long overdue. “Workers are still not getting a fair share of the wealth they create, and in-work poverty is soaring as millions of families struggle to make ends meet,” she said. “No more excuses, working families need a £10 minimum wage now, not in four years’ time.”

Details of the pay rise had been put on hold after the chancellor, Sajid Javid, scrapped the autumn budget as Johnson pushed for the snap election. Annual changes in the legal wage floor are typically announced alongside the autumn budget.

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The Conservatives faced criticism earlier this month after including a caveat in the Queen’s speech that the election promise to raise the national living wage to £10.50 by 2024 would only happen “provided economic conditions allow”.

Javid had said at the Tory party conference in September that his party would set a five-year target to raise the low-pay floor from 60% of median earnings in Britain to two-thirds. He also said he would lower the age threshold for the national living wage from 25 to 21.

Labour had promised to introduce a real living wage of at least £10 an hour for all workers aged 16 and over immediately, in a policy designed to show it would move faster to support households than the Tories.

Average pay packets across Britain remain lower than before the financial crisis, once inflation is taken into account, after one of the worst decades for pay growth since the end of the Napoleonic wars 200 years ago. Annual pay growth has accelerated this year, repairing some of the damage by rising at the fastest rate in 11 years.

Unemployment has dropped to its lowest level since the mid 1970s and inflation has remained relatively stable in the past year, hovering below the Bank of England’s target rate of 2%, helping hard-pressed families to repair their finances.

Pay growth has started to fall again in recent months, however, against a backdrop of heightened uncertainty over Brexit and a slowdown in the world economy.

Campaigners say work no longer guarantees a way out of poverty, with figures suggesting that about 14.3 million people are struggling to make ends meet, including about 9 million people who live in families where at least one adult is working.

The latest government announcement does not meet the level outlined by the Living Wage Foundation charity, which sets a voluntary pay floor used by about 6,000 companies calculated to reflect what people need to live on.

The Living Wage Foundation sets its “real living wage” at £9.30 an hour and £10.75 an hour in London. Firms including the insurer Aviva, the Nationwide building society and football clubs such as Crystal Palace are among employers committed to paying the real living wage to more than 210,000 workers.

The business secretary, Andrea Leadsom, said the government would set out a future policy framework in the spring for raising the legal minimum pay level over the next five years.

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Business leaders, however, said the government risked damaging companies at a time of heightened economic uncertainty.

Hannah Essex, co-executive director of the British Chambers of Commerce, which represents 75,000 businesses, said the move to raise the wage floor by more than double the rate of inflation in 2020 would “pile further pressure on cash flow and eat into training and investment budgets” at companies across the country.

“For this policy to be sustainable, government must offset these costs by reducing others and impose a moratorium on any further upfront costs for business,” she said, adding that many firms were struggling with rising costs.

We cover this in Unemployment...

But it also sits well in the Tax topic just finished. I'm think the book would be a good read...

Nations will soon find taxation
more taxing

The world of work is changing as the gig economy – and the self-employed themselves – go global. That will leave a big hole in countries’ coffers, says Dominic Frisby

Governments around the world have got a big problem on their hands. I wonder if many of them even realise it. What has been their biggest source of revenue for years is going to get that much harder to collect, just as their needs, whether to cover spending programmes or service debts, grows more pressing.

Across the developed world, 50% of government revenue comes from income taxes. The relationship between employer and employee has proved easy to tax: the levy is deducted at source. But that relationship is changing. The nature of employment  is changing.

In the UK, the number of people working for themselves has grown by 50% since 2000, compared with a 6% rise in employees over the same period. London’s gig economy has grown by 73% since 2010. But this is a global phenomenon. In Europe, Australia and across Asia there are similar levels of growth.  By 2030, says Ernst & Young, a full 50% of full-time US workers will be contingent.

GET READY TO GIG 

In 1990, the three biggest companies in Silicon Valley employed over a million people. Today, the three biggest – Facebook, Google and Apple – have a combined market cap over 60 times higher, yet have a quarter as many employees. The largest taxi company in the world, Uber, has just 16,000 employees. The largest accommodation provider, Airbnb, has 9,053. Yet how many giggers find work as a result of Silicon Valley giants?

“IN THE US, 69% OF FREELANCERS DIDN’T REALISE THEY HAD TO FILE A QUARTERLY TAX RETURN”

Some have criticised the gig economy, saying it exploits people and does not give them the protection they deserve, but surveys show much higher satisfaction levels among the self-employed than among the employed. The large majority of giggers want to stay in contingent work to progress their careers. As we live longer lives many more of us will pursue gig work in what was previously our retirement. Many will embrace multiple income streams as machines – whether AI, robot or algorithm – replace blue- and white-collar workers. Employers like it too. Freelancers dramatically reduce the costs and other burdens of employment.

The tax implications are considerable. First, there is the loss to government of employment and payroll taxes, but far bigger is the problem that income taxes will get harder to collect. At present there are few systems in place to deduct tax at source from contingent workers. There is vast scope for non-compliance, whether accidental or deliberate.  The Inland Revenue Service already attributes 44% of its $450bn annual tax gap to the improper compliance of individual business income. In the US, 69% of freelancers surveyed did not even know they had to file quarterly returns.

CHASING THE SELF-EMPLOYED

A review of employment practices commissioned by former prime minister Theresa May found that self-employed workers typically pay £2,000 a year less in tax than employees in equivalent jobs. Given that someone on the UK average salary of £27,500 would pay about £5,300 in income tax and national insurance, this is no small loss.

The response will be to raise taxes for the self-employed and to re-regulate those who employ them. Already UK freelancers who hire themselves out through limited companies have had their dividend taxes increased, while flat VAT rates for the self-employed have also been altered. Meanwhile, employers such as Uber and Hermes have come under pressure through the courts by those seeking to redefine full-time employment and gig work. Tax authorities will, I suspect, try to find ways to deduct presumed income at source from the platforms providing the work and then leave it to the individual to claim back the difference – much as withholding currently works in the US. But none of this is as clean and simple as old-school income tax.

Tax systems, built around a physical economy, have struggled with the intangible, globalised economy. Look at the problems they have with the likes of Amazon, Facebook and Apple. What happens when workers themselves globalise? One estimate is that by 2035, a billion of the world’s six billion people will be “borderless”, working via the internet in multiple jurisdictions and never spending more than 183 days in any given one. Many will use borderless crypto money, often the most efficient system of payment across the internet, which itself is hard to tax and regulate. 

The nations that adapt soonest to the realities of the new, digital, globalised economy around us will be those that thrive best. I don’t see a single British politician talking about, let alone preparing for, any of this.

Daylight Robbery: How Tax Shaped Our Past And Will Change Our Future by Dominic Frisby, Penguin Business, £20. Audiobook on Audible.co.uk. Signed copies are available at dominicfrisby.com