Month: May 2014

Piketty and nitpicky (updated with link to Piketty’s refutation of FT)

John Quiggin168 Comments

I have a couple of pieces up on the topic that’s likely to consume much of my attention for some time to come: Piketty’s Capital in the 21st century.

Here’s a long review article at Inside Story focusing on the conditions that have made Piketty a bestseller. And here, at The Drum is my take on claims by Chris Giles at the Financial Times that Piketty’s data is fatally flawed.

Update Piketty has responded to the Financial Times. To sum up, as I said in the Drum piece, the criticisms are (mostly incorrect) nitpicks except for the point about UK wealth inequality. Here Piketty’s demolition is convincing. The FT hasn’t used a consistent series. Rather, it’s taken a recent survey estimate (likely to underestimate wealth) and spliced it onto older estate data to produce the counterintuitive finding that the inequality of wealth hasn’t increased.

Campus reflection

John Quiggin54 Comments

That’s the mild pun the Chronicle of Higher Education picked for my article (paywalled, but I’ve put my draft version over the fold) making the point that a higher education system is, in important respects, a mirror of the society that created it, and that it helps to recreate. I make the point that, like the US health system and labor market, the US higher education does a great job for the 1 per cent who go to the Ivy League Schools (and whose parents are mostly in or close to the top 1 per cent of the income distribution), does an adequate but expensive job for the next 20 per cent or so, and leaves everyone else in the lurch.

This is important in the context of the Abbott governments proposed removal of caps on fees for higher education, explicitly aimed by Education Minister Pyne at creating a system in which we might have institutions like Harvard and Yale. I plan to write more on this, but the central point will be that, far from creating more places at existing universities, fee deregulation will give them incentives to shrink, pushing students out to the alternatives now being funded under HECS: for-profit institutions and the TAFE system (which has its own funding crisis), corresponding to the bottom tiers of the US education system, where all the recent growth has taken place.

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If it looks like a debt, walks like a debt and quacks like a debt …

John Quiggin11 Comments

I’ve finally got around to checking out the big-ticket item (estimated value $28 billion) in the Queensland government’s privatisation program, involving the electricity distribution sector. It’s called a Non-Share Equity Interest, and the Treasury web page explains its appeal to the government.

Under this option the State retains 100 per cent ownership of the ordinary shares in the network businesses and assets. Private sector participation occurs through a hybrid security instrument, a Non–Share Equity Interest (NSEI).

The private sector contribution will equate to the net funding for the capital expenditure requirement and therefore represents new capital injections.

The NSEI security is debt in its legal form, but classified as equity for tax and accounting purposes and these characteristics give the security it’s (sic) “hybrid” form. (emphasis added)

The returns on the NSEI are sculpted to reflect the holders proportionate interest in dividends and tax equivalents paid by the network businesses separately.

In other words, the government is replacing debt raised by the Queensland Treasury Corporation from the private sector with an instrument that’s almost identical, but is classified as equity, and can therefore be presented as a reduction in debt

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Piketty Crossing the Delaware

John Quiggin50 Comments

Like lots of other readers of Thomas Piketty’s Capital, my big concern is not with the accuracy of the diagnosis and prognosis but with the feasibility of the prescription. Piketty’s proposal for a global wealth tax requires an end to the capacity of capital to escape taxation by exploiting the limitations of national taxations system, through tax havens, transfer pricing, artificial corporate structures and so on.

Given the limited record of success in past efforts to control global tax evasion and avoidance, Piketty is reasonably pessimistic about efforts in this direction. But the latest news from the OECD is remarkably positive. All members of the OECD (notably including evader-friendly jurisdictions like Austria, Luxembourg and Switzerland) have agreed to a system of automatic information exchange for tax purposes. Moreover, the “too big to jail” status of major banks engaged in facilitating tax evasion and money laundering, may finally be coming to an end.

On the face of it, the oft-repeated, but so far unjustified claim that “the days of tax havens are over“, may finally be coming true, at least for all but the wealthiest individuals. But the crackdown on individual tax evaders only points up the ease with which corporations (and individuals with the means to establish complex corporate structures) can avoid tax through a mixture of legal avoidance and unprovable evasion (for example, by illegal but unprovable internal transfers).

At the core of the problem is the ability to establish corporations in ways that make their true ownership impossible to trace. And, the jurisdiction most responsible for this is not a Caribbean island or European mini-state, but the “First State” of the US – Delaware, which has long been the preferred location for US incorporation by reason of its business friendly laws.

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