Wednesday, April 7, 2010

Chinese tax breaks

Bankers' heaven

A lesson in regressive taxation

Mar 31st 2010 | SHANGHAI | From The Economist print edition

AS AMERICA and Europe plan new ways to claw back money from high earners in finance, China is going the other way. When the Communist Party decided to transform Shanghai into a financial centre, it gave a great deal of thought to personal-tax incentives. A ruling put out at the end of 2008 by the city’s Pudong district is the most regressive form of taxation imaginable.

Ordinarily, China imposes one of the highest top marginal income-tax rates in the world, 45%. There are few complaints about this from locals: nothing good is likely to come from provoking the authorities’ attention. But it is a turn-off for employees of companies that Shanghai wants to attract to the skyscrapers popping up on the western bank of the Huangpu River.

Chinese law specifically bans local governments from offering personal tax breaks, but there is a way around this constraint. Typically taxes are divided into two pools, with 60% going to the national government in Beijing and the remaining 40% retained locally. The most competitive local governments collect their share and then send it straight back to the lucky taxpayer—technically a reimbursement, but in reality a big tax break.

The ruling by Pudong’s district government—Circular 301, as it is officially called—allows these subsidies to be paid to “qualified financial talents working at qualified financial institutions”. Upon approval by regulators, senior managers can receive a reimbursement of 40% of their taxes, plus a housing subsidy. That pushes their tax rate down to 27%, still higher than Hong Kong’s 15% and Singapore’s 20% but well below what a banker would pay in New York (44%) or London (soon to be 50%) or for that matter Tokyo (50%) or Seoul (35%).

Bankers who are not quite so important get a not-so-grand tax break, roughly half as large. More junior staff get nothing. The same system of targeted personal-tax breaks for senior executives was apparently successfully used in Beijing to entice financial firms to move from one side of the Forbidden City to the other, to an area called Financial Street. Once the leading global firms had moved their offices, the tax rebates were allowed to lapse. The same will probably happen in Shanghai. But for now, if you’re a capitalist-roader, the people’s party is pretty hard to beat.

Thursday, January 7, 2010

AS Micro Economics Application

Barriers to Exit- high sunk costs in branded sportswear industry, e.g. Nike, Adidas

Benefits of Monopolies- spending on Research and Development, economies of scale.

Buffer Stocks- market for rubber in India is stabilised through the use of buffer stocks.

Bulk-purchasing economies of scale- supermarkets such as Tesco are able to buy in bulk; their considerable market power allows them to drive down the prices of inputs, such as milk and other farm produce, thus leading to lower unit costs.

Cartel- OPEC.

Congestion Charges- operate in London, Singapore and Oslo; according to Commission for Integrated Transport (CfIT), road congestion in the UK is set to grow by 65% by 2010 unless action is taken.

Demerit Goods-cigarettes, alcohol, drugs.

Diseconomies of Scale- communication problems; Virgin combated such problems by delayering – removing a layer of management.

Education-UK's spending on education amounts to 13% of the overall budget.

External Economies of Scale-growth of specialist suppliers and expertise in the computer industry in Silicon Valley, California.

Financial Economies of Scale-big firms have higher credit ratings than smaller firms – this means they can negotiate better loan rates with banks.

Global Externalities- ozone depletion, CO2 emissions, acid rain.

Government Failure- occasionally regulators can be too close to the industry they are monitoring – this is known as regulatory capture. This has arguably happened in the water industry, partly because the regulator in many cases relies on the industry to provide it with the date it needs for an overview of how the industry is operating.

Green Taxes- a landfill tax introduced in the UK in 1996 aimed at reducing the negative externalities resulting from excessive waste.
Healthcare- the UK's planned spending on healthcare for 2004 was £81 billion, 17% of the overall budget.

Income Distribution- income inequality has widened since Labour first came to power in 1997, despite some redistributive economic policies such as Working Families Tax Credit.

Indirect Taxes- taxes on cigarettes, VAT etc.

Kyoto Agreement- agreement aimed at cutting CO2 emissions by 5% less than 1990 levels, which set up international tradeable permits scheme; UK signed up; USA pulled out in 2001.

Marketing Economies of Scale- costs of advertising very high in soap powder industry; also high in branded sportswear.

Merit Goods-healthcare, education, public transport.

Monopolies- Tesco's bid for Safeway in 2003 was turned down because Tesco would have more than 25% of the market share, which would have made it a monopoly according to the Competition Commission.

Monopolies and Mergers- a merger that will lead to a company with over 25% market share is investigated by the Competition Commission to see whether it is in the public interest, e.g. the Manchester United plc and BskyB merger was prevented because it was not in the public interest.

Natural Monopolies- rail track, water supply.

Negative Externalities- noise pollution, litter, water pollution.

Positive Externalities- merit goods such as healthcare, education and public transport are seen as resulting in positive externalities.

Public Goods- street lighting, defence (UK planned defence spending in 2004 was £27 billion of 5.5% of overall budget).

Regulators- water industry (OFWAT), communications industries (television, telecommunications etc.) (OFCOM)

Restrictive Practices- two ice-cream suppliers, Wall's and Mars, were made to end the practice of forcing retailers to stock only their goods and not those of rivals.

Subsidies- the government subsidises the rail industry, even following privatisation.

Technical Economies of Scale- occur in many industries with indivisibilities (items that are not provided in small units), such as oil tankers and other capacity transport; the more they are used, the greater the level of efficiency.

Tradeable Permit Schemes- operate to manage fish stocks in New Zealand; also an element in the Kyoto agreement aimed at reducing CO2 emissions; Singapore has a system for reducing ozone-depleting substances.

Micro Economic AS Definitions - AQA textbook and 'Market imperfections' revision cue cards

Abnormal Profit- the profit over and above normal profit

Asymmetric information- when either a buyer or seller has more information than the other party.

Barriers to Entry- factors which make it difficult or impossible for firms to enter an industry and compete with existing producers.

Basic Economic Problem- Resources are scarce but wants are infinite. Resources have to be allocated between competing uses because wants are infinite whilst resources are scarce.

Branded Good- a named good which in the perception of its buyers is different from other similar goods on the market.

Buffer Stocks Scheme- a buffer stock system is used to stabilise prices in agricultural and other commodity markets. An organisation buys and sells in the open market so as to maintain an minimum price in the market for a product.

Capital Costs- some industries are expensive in terms of set up, e.g. car manufacture. Barrier to entry in a market.

Ceterus Paribus- the assumption that all other variables within the model remain constant whilst one change is being considered.

Chain of Command- the number of people a decision must go through before it is acted on – longer in a large firm. Part of managerial problems arising in diseconomies of scale.

Complementary Good- a good which is purchased with other goods to satisfy a want.

Composite Demand- when a good is demanded for two or more distinct uses. Eg, increased demand for oil in the chemical industry will result in a fall in the supply of oil to the petrol industry because oil is in composite demand.

Conglomerate Merger- a merger between two firms producing unrelated products.

Consumer Surplus- the difference between how much buyers are prepared to pay for a good and what they actually pay.

Demerit Good- a good that is over provided by the market mechanism. It is over consumed and poses negative externalities in the economy.

Derived Demand- when the demand for one good is the result of or derived from the demand of another good. Eg, An increase in the demand for cars will lead to an increase in the demand for steel. Steel is said to be in derived demand from cars.

Division of Labour- specialisation by workers.

Diseconomies of Scale- a rise in the average costs of production as output rises.

Dynamic Efficiency- occurs when the resources are allocated efficiently over time

Economies of Scale- a fall in the average costs of production as output rises. Can also act as a Barrier to Entry.

Elastic Demand- Where the price elasticity of demand I greater than 1. The responsiveness of demand I proportionally greater than the change in price. Demand is infinitely elastic if price elasticity of the demand is infinity.

Free Rider- a person or organisation which receives the benefits that others have paid for without making any contribution themselves. Mainly associated with public goods.

Indirect Taxes and Elasticity- The government uses indirect taxes such as duties to discourage the consumption of demerit goods (e.g. cigarettes), which are considered to be over-provided by the free market system. The effectiveness of indirect taxes in reducing the consumption of demerit goods depends to a large extent on the elasticity of demand for the product.

Inelastic Demand- where the price elasticity of demand is less than 1. The responsiveness of demand is proportionally less than the change in price. Demand is infinitely inelastic if price elasticity of demand is zero.

Inferior Good- A good the demand for which falls as income rises. The income elasticity of demand is therefore negative.

Internal Economies of Scale- are reductions in a firm's long-run average costs that it can take advantage of as it increases its level of output

Giffen Good- In economics and consumer theory, a Giffen good is one which people consume more of as price rises, violating the law of demand. E.g. Bread

Government Failure- occurs when government intervention results in a sub-optimal allocation of resources. When trying to rectify market failure, or achieve some other policy objective, the government actually makes matters worse.

Homogeneous Goods- goods which are identical.

Horizontal Merger- a merger between two firms in the same industry at the same stages of production.

Joint Supply- when two or more goods are produced together, so that a change in supply of one good will necessarily change the supply of the other goods with which it is in joint supply. Eg. Increase demand/supply in Beef will lead to increased supply of Leather.

Legal Barriers- organisations may be granted a monopoly by the government, e.g. the post office has a monopoly on postage under £1 in the UK. Patents also prevent competition and provide a barrier to entry.

Lorenz Curve- indicates the degree of inequality in a society.

Market- any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services.

Market Failure- Occurs when resources are inefficiently allocated because the market mechanism is working imperfectly. Sub-optimal allocation of resources. Examples of market failure are:

  • The abuse of monopoly power

  • the presence of externalities

  • the under-provision of merit goods

  • the non-provision of public goods

  • Inequality in the economy.

Merit Good- a good which is under provided by the market mechanism. Creates positive externalities in the economy. Eg, Education, Healthcare

Monopoly- any firm large enough to dominate a market, i.e. set prices or restrict output. A sole supplier to a marker with over 25% of the market. High barriers of entry to the industry means no competition.

Negative Externalities- also known as external costs, occur when a producer or consumer places costs on a third party.

Normal Profit- the profit that the firm could make by using its resources in their next best use. Normal profit is an economic cost.

Normative Economics- Value judgement about the way in which scarce resources are being allocated.

Occupational Immobility- the inability of workers to move between professions. Causes include Imperfect Knowledge, Family Ties, Housing and Workers having job-specific, non-transferable skills.
Opportunity Cost- the benefits foregone of the next best alternative

Perfect Competition- a market structure where there are many buyers and sellers, where there is freedom of entry and exits to the market, where there is perfect knowledge and where all firms produce a homogeneous good.

Perfectly Elastic Good- Buyers are prepared to purchase all they can obtain at some given price but none at all at a higher price.

Perfectly Inelastic Good- Quantity demanded does not change at all as price increases. Numerical measure: 0.

Polluter Pays Principle- refers to the idea that those who cause environmental damage have an obligation to pay for its clean-up costs. Means that taxes and charges should be used to deal with pollution.
Positive Economics- the scientific or objective study of the allocation of resources.

Positive Externalities- also known as external benefits, occur when the benefit to an individual of his or her consumption or production is less than the overall benefit to society. Goods that have positive externalities such as merit goods are often under-provided by the free market system; therefore the existence of positive externalities is an example of market failure.

Private Good- a good where consumption by one person results in the good not being available for consumption by another.

Producer Surplus- the difference between the market price which firms receive and the price at which they are prepared to supply.
Productivity- output per unit of input employed

Productive Efficiency- is achieved when production is achieved at the lowest cost.

Property Rights- market failures, in particular negative externalities, often occur because the property rights to resources are inadequately defined or enforced.

Public Interest- Competition Commission believes that consumers benefit from lower prices, a wider range of choice, more innovation and higher quality products and services.

Public Good or Pure Public Good- a good where consumption by one person does not reduce the amount available for consumption by another person and where once provided, all individuals benefit or suffer whether they wish to or not. Non-rivalry, non-diminishing and non-excludability are the characteristics of a public good. Eg, Street Lighting, Defence.

Restrictive Practices- firms may try to prevent competition deliberately, e.g. by forcing a retailer to stock only their produce. One of the barriers to entry.

Span of control- the number of people an individual manager is responsible for – is wider in a large firm. Part of managerial problems that lead to diseconomies of scale.

Specialisation- a system of organisation where economic units such as households or nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others.

Static Efficiency- occurs when resources are allocated efficiently at a point in time.

Substitute Good- a good which can be replaced by another to satisfy a want.

Sunk Costs- if you were to leave an industry, then although you might be able to recoup some costs (e.g. by selling machinery), some costs would be lost forever (e.g. money spent on advertising). One of the barriers to entry/exit.

Superior Good- Superior goods make up a larger proportion of consumption as income rises, and therefore are a type of normal goods in consumer theory. A good the demand for which is income elastic.

Sustainable Development- economic development which provides for the economic well-being of the present generation without compromising the ability of future generations to provide for themselves.

Technical Efficiency- is achieved when a given quantity of output is produced with the minimum number of inputs.

Tradeable Permits- are used in an attempt to reduce negative externalities, particularly those caused by environmental degradation.

Unitary Elasticity- Quantity demanded changes by exactly the same percentage as the price does. Numerical measure: 1.

Vertical Merger- a merger between two firms at different production stages in the same industry.