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Insights 33: 2 September 2016
Read our latest report: Decade of Debt: The Cost of Interest-free Student Loans
Jenesa Jeram - Opposition to sugar tax not just ideology
Dr Bryce Wilkinson - Foreigner tax misses cause

Should legal fictions pay taxes?
Dr Oliver Hartwich | Executive Director |
Thirteen billion Euros ($20bn) is a lot of money, even if you are a giant multi-national like Apple. That is the sum the European Commission wants Apple to pay the Republic of Ireland.

For many years, Apple enjoyed not only Ireland’s low company tax rates. It also had a special deal with the Irish government which reduced its effective tax rate to 0.005 percent.

Now the European Union claims this treatment amounted to an illegal subsidy, which Apple ought to pay back.

Apple’s case is too complicated to discuss here in detail. But the story reminded me of a question I have been pondering for a long time: Why do companies have to pay taxes at all?
Before anyone hurls abuse at me, let me clarify where I am coming from.

Companies are not real persons but legal fictions. Companies do not enjoy the fruits of their operations: their shareholders do. And therefore companies never actually pay taxes, either.

Of course, companies have to make tax payments. In a technical sense, it is them writing cheques to Inland Revenue. But that does not mean that companies really shoulder the economic burden.

In reality, there is always some natural person that pays. That person can be a customer, a supplier, an employee or a shareholder.

In economics, we call this phenomenon ‘tax incidence’. Put simply, there is a difference between those nominally paying a tax and those effectively bearing the tax burden.

Most economists would agree that for this reason companies never really pay tax at all. So my question is why do we keep pretending that they do?

To apply this logic to Apple’s case, what if we got rid of corporate taxes altogether and only levied income tax on the dividends shareholders received?

Such a practice would make it harder to avoid taxes since shareholders would have to physically move to tax havens to escape income tax. It would also allow companies to reinvest profits not paid out as dividends, thus creating an incentive to grow.

I know the devil is in the detail. For a start, we would need to ensure that individuals do not avoid tax by channeling their incomes through company structures.

However, Apple’s case demonstrates why it might be desirable to move beyond corporate taxes as they exist today. This could well simplify tax compliance and lead to stronger investment.

It would also eliminate the need to use countries like Ireland for tax avoidance schemes. And it would leave some tax lawyers unemployed.

But would that be such a bad thing?

Have I got a deal for you
Dr Eric Crampton | Head of Research |
Right now, you probably have homeowner’s insurance that, if a catastrophe happened, would let you build a new house providing similar functionality to your current house, up to a specified total cost. 

Here’s the deal. Your new policy will guarantee that any repairs will provide you with an exact replica of your existing house. Every doorknob, fixture and bit of trim will match exactly what you have right now. The specified total cost cap on your policy will have to go up, and your premiums will likely be 3-5 times more expensive.

Like my deal? Perhaps only if I agreed to pay the extra insurance premiums – and even then, it’s not that great a proposition. What if you wanted to reconfigure a couple of the bedrooms during the repairs? My deal prevents that.

It sounds like utter nonsense. But it is what is effectively required, right now, of heritage building owners. After a destructive event, those owners may be forced into an expensive full heritage restoration. And insuring for that is not cheap. 

Owners then face a terrible lottery, where the worst case in a disaster is not the building’s destruction but rather its being severely damaged.

If the listed building was destroyed, the owners can build a new structure to suit current needs. If the building has only minor damage, repairs will be more expensive than they would be without the listing – but it should be manageable. 

But if the building instead has serious damage, the owner’s position can be very difficult.

Insurance coverage for heritage churches sufficient for a full heritage rebuild can be prohibitively expensive, now that everyone knows just how expensive that rebuild can be. Buildings not insured for full reinstatement can then sit in limbo for years after a disaster: the owner cannot afford a heritage restoration but is barred from doing anything less. As we near the sixth anniversary of the Christchurch earthquakes, the Christchurch Cathedral remains in limbo. 

If the government wishes to protect heritage buildings for the community’s benefit, perhaps the beneficiary should pay. The government could cover the extra insurance costs – or buy the buildings outright. 

Or to put it another way: If the deal I proposed for you at the outset did not sound that appealing, why is it fair to force it on others?

Further reading: The Initiative’s report Deadly Heritage.

Getting high, legally
Roger Partridge | Chairman |
Some of the most admired New Zealanders have achieved success getting high. Many have been addicted to it, and self-confessedly so.

Their particular fix has come at a cost. Several have suffered terrible physical harm from their habit, losing fingers and toes – and even limbs – and the biggest high kills nearly 1 in 50 of them. The costs have not just been borne by the addicts, but no doubt also by their families. Not to mention the costs to ACC and the national health system.

Remarkably, in this day-and-age where we try to protect people from themselves, this particular high is not only legal, but also celebrated. 

If you are scratching your head at this point, you can be forgiven for that. We’ve almost come to expect that regulation will prevent us from exposing ourselves to such risks. Fences, scaffolding, and even handrails, are mandated to protect us from harm. And when it comes to drugs, it’s straight out prohibition.

This just makes it all-the-more strange that mountain climbing remains unregulated. 

Mountain climbers are clearly a breed apart. Led by the legendary Sir Edmund, they alone it seems, may assess for themselves the risks of getting strung-out, smashed or stoned – literally. No regulations. No red tape. Come one, come all. Caveat emptor rules supreme for these adrenaline junkies in their quest to get high. Indeed, the higher, the better.

Perhaps there are lessons in this for the rest of us. If we want to free ourselves from our protective state, should we just clad ourselves in Gore-Tex and crampons as we go about our daily business? 

Or perhaps there’s a lesson in this for those wanting to protect us from ourselves. Maybe, just maybe, we should be allowed to make a few more decisions for ourselves. 

There are after all, downsides with prohibitions too. For example, last week’s report from the New Zealand Institute of Economic Research found that the prohibition on marijuana had not stopped 10% of New Zealanders from using marijuana, yet was costing the country $300 million annually in enforcement costs and foregone tax revenue.

Perhaps there is a better way to manage those who want to get high. We may not all be mountain climbers, but if we want to take risks, shouldn’t that be our own business?

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