In England foreigners are not taxed on their overseas income – we should try that. Also the CGT exemption is good, and was overdue, but we are still fairly high-taxing in company tax.

But we have significantly improved our international tax – the necessary trade-off should be, since the improvements have effectively broadened the base in areas like fx, to reduce the load.

Like you I’m skeptical, and one of the (many) grounds is – as you point out – it’s middle class welfare. On the other hand I wonder what you make of the NBER study? And, I’m quite happy with the idea that there are rents in the labour market for finance. My intuittion (and the empirical work) suggests a reasonable kind of case for this. It goes along these lines.

There are rents in finance because of assymetric information, economies of scale and various other things. Being close to money is a good place to be if you want some. Some of the rents earned by finance companies get shared with the workforce. (Ask people in Macquarie Bank). So it might be worth it to compete for some of it – but it will certainly benefit the (upper) middle class. My response to this is to say that that’s yet another reason why I don’t want to reduce the progressivity of our tax system.

In fact I think it’s not that important to hand subsidies over to finance – but it is important to ensure that we regulate with sensitivity to the ability of our finance industry to export. The financial entrepots all do this. By contrast we have a finance sector that looks very competitive in terms of cost and capability but it exports less than 3% of its output! I think that’s because we have run tax and financial regulation systems in a way that’s pretty oblivious to export issues. We’re just starting to turn that around.

Declaration of interest – Lateral Economics is currently consulting on these issues.

…lots of lefty-bonuses like funding for operas and ballets.

Where do I sign?

Then their kids go to school which pushes more money into schools, and improves their facilities etc and gives them money to offer scholarships, ditto for Unis, etc.

Finance and capital markets even creates lots of lefty-bonuses like funding for operas and ballets :)

The only ‘rent’ is that of knowing people and a fairly accessible skills set, which hardly seems monopolistic.

If a good has high value-added per worker in a given country, this must be because either (1) its production uses an exclusive technology or resource that earns monopoly rents, or (2)the labour is itself expensive. In the case of a resource or an established technology, the country will have a cost advantage anyway. In the case of a technology that is not yet realised, an advantage might be achieved by means of astute investment in R&D. If the benefits can be captured by an individual firm, the profit motive will do its job and there shouldn’t be any need for subsisdies. On the other hand, if somehow the technology can be kept within the country but not limited to a particular firm, then in principle R&D subsidies could contribute to the creation of a high value added industry, until such time as the technology is copied elsewhere and the price falls to match the cost of production.

That leaves the case where labour is itself expensive. To the extent that this is due to a high skill component requiring years of education or training, such an industry has no obvious advantage over others. In some cases, however, the work involves native talent as well as skill, so the workers in question earn monopoly rents. A policy to promote such industries creates more for such people to enjoy their power, but has no broader social benefit – it is actually a form of middle class welfare.

There’s certainly some successful tax competition in Ireland and Luxembourg’s success.

But your point is quite valid – as is the more general point that N Gruen’s industry policies that work aren’t ‘industry policies’ as anyone in the world understands the term. Hence our suprisingly similar tongue-in-cheek contributions.

Which he actually makes a fairly good case for.

yay!