econ geekery

[gusl]

I just had dinner with techstep and killerandy over at Gullifty's, and we did some serious econ-geeking while listening to the Grammy's.

Stocks

There are apparently instances of stocks for the same company being listed in both the Shanghai and Hong Kong stock markets, for which the prices don't agree: in fact, Chinese stocks are supposed to be overvalued (bubble). It seems like an explicit demonstration of the markets' irrationality (at least one of them). There are no arbitrage opportunities because you can't cover a Chinese short-sell with Hong Kong stocks. As techstep said, the best you can do is bet that they will converge at some point in the future.

This seems like a "perfect" experimental control (just like twin studies). Maybe this way we can see 2 different ways markets could respond to news (it's like having 2 shots at the random number generator).


Saving vs consuming

killerandy showed me that, for the world, saving is better than consuming (from Hazlitt's Economics in One Lesson), contra Keynes. This is because the money saved gets lent and used productively by capitalists.

I wonder how dynamically this works in practice. If I deposit $500 at my checking account, does this mean that capitalists can immediately get more loans (by lowering the interest rate), or is there some friction in the system?


Taxes

Later, I made an argument that taxes trickle down identically whether you tax sales or income: since all income is meant to be consumed, the two systems (pure income tax, pure sales tax) produce the exact same incentives. So the puzzle then is: in practice, would they really have the same effect?

When you choose save (i.e. loan money to capitalists), does their capital spending count as consumption? Saving is something you can do more of under a 100% sales tax system, but said sales taxes will make the prices go up by just as much, making no difference at the end. So I think my argument stands, regardless of the answer to this question.

So maybe taxing only unproductive products (i.e. non-capital) would be a better system? i.e. no sales tax on tools. OTOH, this should make a small difference since, according to techstep, most of the cost in almost any capitalist enterprise is labour.

But remember that VAT stands for value-added tax: we try to avoid double-taxation. But how does this work in practice? If you buy a crate of coke bottles and sell the bottles individually, do you pay sales tax on both transactions? If not, how do you avoid paying taxes for the crate (incoming)?

What about land taxes (Georgism): how do they trickle down? I can definitely see how this would incent people to use land more efficiently.

Comments

[bhudson.livejournal.com]

But remember that VAT stands for value-added tax: we try to avoid double-taxation. But how does this work in practice? If you buy a crate of coke bottles and sell the bottles individually, do you pay sales tax on both transactions? If not, how do you avoid paying taxes for the crate (incoming)?

Typically, you pay the VAT on the crate to the warehouse. You collect VAT on the bottles. Then you get reimbursed the VAT from the crate.

[gustavolacerda.livejournal.com]

Do you need to wait a year until April 15, getting no interest? Do they let you pay your collected VAT at the end of the year too?

I'm guessing these rules apply not just to bundles, but to all material inputs to your process.

But I wonder if there's a grey area: humans are machines that require food (and occasionally luxury goods) as fuel. Therefore, I should be reimbursed for the VAT on the food (and jewelry) that I buy for them.
Hm... Maybe I can come up with a more reasonable example.

[bhudson.livejournal.com]

I'm not sure what you're getting at with the questions about the remitting schedule for the VAT. The entire economy has delays; this is no different.

Typically you assume that it's individuals who place value on things; certainly at some point the recursion has to bottom out.


There is another question I'm sure you'll happily investigate: corporations typically pay taxes on their profits -- i.e. on gross income minus consumption. Individuals pay taxes on their gross (roughly) income *plus* their consumption. (And if you want more to think about: notice that profits are taxed but losses don't get credits.)

VAT

[ewen]

Generally what happens from a VAT-registered perspective is that you pay VAT on the things that you buy, then you collect VAT on things you sell, and then you "settle up" with the taxation authority on a regular basis, claiming back the VAT you paid, and paying the VAT you collected (well the net value gets transfered one way or the other). Typically the regularity increases with turnover -- if you turn over $40,000 a year it might only be once every 6 months; if you turn over $40,000 a day it's more likely to be once a month. And yes this applies to all inputs to a VAT-registered entity (give or take a few things touching on exempt supplies), and all outputs.

As you observe there's a period where you're not getting interest on money that you paid out. But any successful business will be collecting more money than they're spending (otherwise they won't be successful long!), so in practice you end up collecting more VAT than you pay out, and get to keep it for a while (eg, 1-6 months) and use it as working capital and/or earn interest on it (that you don't have to give to the taxation authority). This is generally considered a feature, and the "payment" for the work of shuffling VAT around. For a business turning over tens of thousands of dollars a day it can be a non-trivial amount of money earnt (but of course they're spending a non-trivial amount of money tracking it all on behalf of the taxation authority).

Some countries try making exceptions to their VAT for, eg, "essentials" (Australia -- who call it GST -- and the UK both do this I believe). But in practice you end up mired in details as to what is and isn't an essential, and end up with silly situations where, eg, a loaf of bread is an essential and not subject to VAT, but a made up sandwhich is not an essential and is subject to VAT on the whole amount.

I actually think the New Zealand solution (who also call their VAT GST) is more sane -- virtually everything is covered by GST, including "essentials", but there's (a) a discount on the lowest tax rate, and (b) income supplements made available to low income earners to offset the GST on essentials. Similar effect, with far less paperwork, and much fewer boundary cases. (New Zealand's exceptions are basically (a) domestic rental (but commercial rental is subject to GST) and (b) financial items like interest (which is subject to income tax instead).)

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Ewen

[kvschwartz.livejournal.com]

Happy birthday.