Evasion and avoidance

Following up on my recent comments on piracy, recent news reports have forced me to learn the subtle difference between “tax evasion” and “tax avoidance”. Apparently “evasion” is when you don’t pay the taxes you’re required by law. “Avoidance” is when you don’t pay the taxes you’re required by law, but structure your property or income in such a way that you don’t pay (much) tax. It sounds like a pretty clear distinction, but the application can be dubious.

The Times recently reported on a widely used scheme that is so banal, so transparent, that one can hardly see it as representing anything other than a fig leaf to cover the authorities’ wish not to to tax the wealthy and powerful. The way it works is, extremely wealthy individual X doesn’t like his salary from company Y being taxed by government G, as though he were just an ordinary citizen. So he comes to an agreement with Y that they will stop paying him a salary, and instead pay an offshore shell company K2 for his services. So far so good. Y now pays no tax, because he has no income, but for obvious reasons this is not entirely satisfactory. Poor Y, who is now starving in a garret with no visible means of support, appeals to the good will of K2 (which has made such a great profit from Y’s tax aversion) for a loan. They’re a soft touch, and they loan him essentially all the money they’ve earned on his case, telling him, “Pay us back when you can.” He never pays it back, but they never lose hope. Loans are not taxable, of course, unless they are written off. Continue reading “Evasion and avoidance”

On the downgrade

Further reflections on non-transitive folk probability

Continuing my thoughts about zero-one probability from here, I come to the recent decision of Standard & Poor’s to lower their rating of US treasury debt. There are plenty of reasons to doubt their judgement,  both because they’ve been absurdly wrong in the past (subprime mortgage backed securities were AAA, but treasury bills are risky?), because they can’t read budget estimates or can’t do basic arithmetic, because they are trying to project political trends, which they surely know even less about than about arithmetic, or because the people who work there are generally known to be pretty dim. But from a probabilist’s point of view what’s strange is the timing. Whatever you may think of the recent deal to avoid the US defaulting on its debt, it did avoid defaulting on its debt. Surely the likelihood of a default went down after the deal was passed. So why is the credit rating lower this week than it was last week? Now, this is all perfectly consistent with the view that S&P is not actually making a prediction of future default probability, but simply seeking the best opportunity to promote its wares. Certainly, the way they operate is not the like someone trying to give what will be perceived as neutral advice; they act more like central bankers, timing their announcements to try to move markets and (above all) seem relevant. They’re reminiscent of the folktale of the rooster who threatens to withhold his crowing, which inevitably will forestall the sun rise. The other animals plead with him to relent, but it’s a threat that only works as long as the rooster is modest enough to recognise that he can’t hold out forever. In the case of the US treasury bonds, S&P held out, and still the sun rose.

But there is something about their approach that seems to make sense to intelligent people, and not purely idiosyncratic. I’m reminded of Tversky’s famous conjunction fallacy, with studies seeming to show that people’s everyday probability intuitions don’t necessary satisfy the apparently inevitable law of conjunction: The probability of A or B must be bigger than the probability of A and the probability of B. Here we see intuitions of probability that don’t seem to satisfy the law of total expectation: If  are possible future states of the world, and is the probability of event A conditional on  happening, then the probability of event A now must be some kind of average of these conditional probabilities.

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Playing Euro Survivor

It’s starting to look like we’re all going to be entertained this summer watching the monetary reality show, Euro Survivor: Who can be the last country left in the Euro? Greece has already been voted off the island, even if it hasn’t left yet. Ireland and the Iberians are looking decidedly unpopular, and Italy seems headed downhill as well. (I never understood why Italy was not on financial deathwatch. Is such a massive default just too horrible to contemplate? Or perhaps people just assumed Italy couldn’t possibly print lire until Berlusconi has arranged adequate shell companies to siphon the printing contracts discretely into his own syndicate.) My money is on Luxembourg. It seems fair that they should get to keep the Euro for themselves, since I can’t remember what their currency was called before the Euro. Belgium may end up with two new currencies. (But what’s the first prize? Maybe they get the rump European Central Bank, and a free set of dominoes.)
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Continue reading “Playing Euro Survivor”

Credit and Credibility

Are banks crazy or a cartel?

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When a government (let us say, in Athens) could possibly renege on promises made to banks who loaned them money or bought their bonds, which that government is unable to fulfill without draconian cuts to public services, all right-thinking people attack the feckless politicians and threaten a collapse of confidence and the world economy. This is a DEFAULT! Other governments and the IMF might jump in to pour money into the state coffers, on the condition that they flow out the other end into the investors’ pockets.

But when a government (could be in Athens, or in London, or for that matter Madison, Wisconsin) has made promises of pensions to government employees, but has failed to fund them adequately, it is short-sighted and greedy for these civil servants to insist on these promises being honoured.

Why is a default such a terrible thing? Because, they say, if the country defaults on its debts it will be shut out of the credit markets. Hmmm. Let’s suppose it is true. Why? Suppose you own a bank, and your thinking of lending to one of two countries, let’s call one of them Piigsia and the other Sameria. Both are heavily indebted. Piigsia introduces crushing austerity measures, while Sameria repudiates its sovereign debt. Which of those countries would you rather loan your bank’s money to? The one that’s shown a great willingness to pay off its debts but is financially crushed, or the one who may be more likely to try to weasel out of its debts, but is eminently capable of paying. Solvency is not merely (or even primarily) a state of mind. I mean, what good is it to have the current government express a willingness to pay off its debts, knowing that it’s likely to be punished by voters for these “good” intentions? Maybe they just don’t want to be serial defaulters, so having avoided defaulting this time will encourage them to default on the next batch of loans.

As for Sameria, it sucks for the other banks that have lost their money, but why should I give up a chance to make a good profit for the sake of punishing Sameria for hosing my competitors? In fact, in a competitive market, why shouldn’t I be happy that my competitors have made a loss, and just try to get better conditions for my loan?

Continue reading “Credit and Credibility”

What’s a queen for?

One really peculiar thing that immigrants from republican lands need to adjust to in the UK, is that they actually take this monarch thing seriously. Not in the sense that people regularly drink toasts to the Queen, or speculate about fine points of the order of succession, but that people genuinely think it a reasonable constitution order that the head of state should be selected on the basis that her father held a similar position many decades ago, and that her son (and grandson) should be presumed to take on the job after her demise. Having always lived in republics (except for a brief stint in the Netherlands) kings and queens seemed to me figures from fairy tales and history. I knew that there are people called kings and queens existing in the modern world, but that always seemed an unreal and somewhat ridiculous anachronism, like the toga party in Animal House, or hobby jousters. But when the most recent elections descended into chaos, the experts were clear that it would be the Queen’s prerogative (after consultation with her advisors) to decide which politician should be “invited” to form a government. Again and again the Prince of Wales makes scandals by interfering in London city planning, among other functions of government. They fuss and fume about the prince overstepping his constitutional bounds, but no one would think of telling the prince to just go fuck himself, and treat his “black spider letters” with the same consideration they would give to the letters of any citizen — is he even a citizen?

Which leads to my proposal, which I hope will be taken seriously, given the depth of the current financial crisis in Britain: A lottery for the right to be the next monarch. I suspect that very many people would be willing to stump up a few pounds for a shot, and quite a few might pay several millions for a really substantial chance. The winner of the lottery has exactly the same chance of having the personal qualities required of the head of state as the monarch selected by the genetic lottery currently in force. We might have to eliminate certain requirements of the job, like weekly meetings with the prime minister, to make it more attractive. They could keep the post until death, and then it would revert to the state for a future lottery.

Now, this may seem like a huge constitutional change, but when I read about the British Constitution, the only argument that ever seems to be presented for the hereditary principle is that it saves the British the nuisance of having to vote for their head of state, or of having some washed up old politician appointed head of state by his old confederates. I think it should be clear that my scheme also avoids these problems, as well as complying with all EU directives.

I’m sure the professionals can work out some good advertising slogans (“Paris is worth a mass, but London is worth a pound”; “The new Magna Carta” — stamped on a mock-up lottery ticket; “It’s never too late to have a royal birth”?)maybe a jingle or two, and a legal and constitutional framework.

All British institutions have submitted to the exigencies of finance, except the monarchy. It’s about time the Queen gets with the program and moves to the City.