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The LVTC blog, by Henry Law

The comments in the LVTC Blog are a personal view of our Hon. Secretary Henry Law and do not necessarily reflect the official policy of the Campaign.

This is a place for personal observations and comments on politics, economics, current affairs, on-going discussions on the potential for LVT to remedy some of the current ills, and the impact on Society of any of the above. 

Please read and enjoy, and feel free to respond to Henry if you have any thing you would like to add.


Bombardier v. Boeing - what wasn't said

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Comments about the Bombardier affair demonstrate the abyss of misunderstanding about the nature of trade and of the economic process itself.

US aircraft manufacturer Boeing has initiated a court case against Bombardier, relating to the proposed sale of aircraft to the US company Delta Airlines. Claiming unfair competition, the threat is to impose a tariff of over 200%. This threatens the livelihood of workers at a branch factory in Northern Ireland, which manufactures the wings of the aircraft. Boeing apparently produces no aircraft which would compete with the Bombardier model, which is for short-haul routes. The alleged unfairness is that Bombardier has received financial assistance from the Quebec government.

While a lot has been said linking the affair to Brexit, with which it has nothing to do, no commentator has pointed out that the main losers in this affair are Delta Airlines, which is being made to pay more for the aircraft it has chosen, or will have to purchase an alternative, and Delta's passengers, since the additional costs will be reflected in higher fares. Other losers are the Canadian taxpayers.

There is more than a hint of double standards here, because Boeing is able to transfer to its civil aviation division technology originally developed as part of its military contracts for the US government. But then again Bombardier management knows the situation. The Northern Ireland dimension is also worth a look. Factories like Bombardier's are sometimes located in peripheral regions because of the availability of labour, with or without some kind of financial inducement from government. This is partly an attempt to mitigate the damage done by a tax system which ignores geographical disadvantage, since the same amount of tax has to be paid per unit of added value anywhere in the country; this has the effect of amplifying those disadvantages and sending large tracts of the country below the margin of economic production.

Factories such as Bombardier's wing production unit can only nibble at the problem. To make matters worse, they tend to be one-product plants - they have all their eggs in a single basket. This savours of bad commercial strategy as much as anything else, since aircraft technology is to some extent transferable, for example, to the buoyant wind power industry.

Returning to the Bombardier affair: the company got a raw deal from the British government over the Inter-City 125 train replacement project. Hitachi having won the contract on the basis that its design came closest to the original, impossible to meet, specification produced by the Department for Transport. The specification was then altered so much that it ought to have been put out for re-tendering, since the final design was one for which Bombardier had a product available almost off-the-shelf. For reasons which have not yet been revealed, Bombardier refrained from taking legal action.

Bombardier has also possibly lost out, over a contract to provide new trains for regional routes in France. This is a wasteful job-creating scheme supported by the French government, with the aim of keeping Alstom's Belfort plant with a flow of work, since the existing 1980s (Corail) stock can almost certainly be refurbished and kept in service for another decade or two. The replacement has been brought forward, but the clever scheme is to use new TGV high-speed trains on the regional routes. where they cannot operate at their 300 kph design speed. Bombardier does not currently produce a TGV equivalent and has thereby not had the opportunity to tender for the new trains.How all this fits into EU competition rules is an interesting question.

The worrying thing here is that none of these points has had an airing even in the heavyweight newspapers.

 

Inconsistencies

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As part of the Brexit debate, we are being told by the "remainers" that we need to protect home producers, which is what the EU's Single Market has done for the past 40 years. In other words, imports are a bad thing and dumped goods are the worst of all. American President Donald Trump is saying much the same thing - that US industry should be supported, by keeping out imported competitive goods. On the whole, it is the "remainers" who are most critical of Trump for his alleged populism. There is an inconsistency somewhere.

It doesn't stop there, either. The EU has imposed sanctions on Russia; ie it is refusing to allow certain goods to be sold to the country, which has had a damaging effect on agriculture in some EU countries. The US is following suit. North Korea is also the subject of this kind of sanction. Which is a further inconsistency. If imports are a bad thing and should be restricted by tariffs, then sanctions must be good for Russia, North Korea and anyone else on the receiving end of them. In which case why are they being imposed? If dumping is a bad thing and we want to damage the economies of those countries, surely they should be the recipients of dumped goods and we should be sending shiploads of stuff in their direction, produced at below cost? That would also satisfy Trump's desire to rejuvenate the US steel industry.

 

The obscene Institution of “ability to pay”

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I received this from a correspondent yesterday. It is food for thought.

"From my contract work, more evidence of the tax collectors' wicked approach: He won't come after your because your tax planning is fraudulent per se. You'll attract their attention based largely on how much more they estimate they can squeeze out of you relative to the associated collection costs of the squeezing. That is, so called tax avoidance is not seen by the tax collector as a moral crusade. It's pure revenue generation. So taken up to the very large scale of the likes of Amazon, Google, Facebook etc. there will be a 'negotiation' on their so called 'tax avoidance', related to how much more they are able to pay before they'll simply ramp down their business activity and wealth production. The amount one is able to pay and the effort the HMRC are prepared to devote to the investigation will both meet at this 'break point'.

"Here is more evidence of the obscene institution of taxation based on ability to pay - the break point is determined by the point where business will stop operating and the hard working self employed go back onto benefits, and all iterations in between. On this observation alone, how much more will be dead weight losses from total revenue collected, to add to all the other monstrous losses totting up?

Taxation is the root cause of bankruptcy and unemployment.*

Sure, there are other causes. Tax is the biggest.

* Editor's comment: HMRC is the largest single initiator of bankruptcy proceedings.

 

An essential book for a confused time

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PROTECTION OR FREE TRADE? was written by Henry George in 1886. It is still in print and readily available. It rebuts most of the arguments being put forward by both camps in the Brexit debate, as well as the protectionist sentiments that seem to be at large in the USA following the election of Donald Trump. It has become essential reading, for it provides a guide to the morass of debate that has developed in the wake of the referendum result and the Trump presidential victory

The EU is founded on protectionist trade principles, as becomes clear when people express concern about losing access to the Single Market, which is not a free trade area but a customs union, sustained by an external tariff wall and the internal tariff that is Value Added Tax. Brexit supporters are divided between those who want to see a tariff wall around the UK, under the pretext of protecting British jobs, and a minority, who are in favour of genuine free trade.

Trump was elected partly on the populist belief that protectionism would somehow bring about a revival of industry in the US which has become obsolete as production has moved to other parts of the world. It seems as if he is intent on putting policies into effect with the intention of reversing this long-term trend. They can be guaranteed not to work, except in isolated instances. The overall result will be to do nothing but damage to the US economy and make most people poorer. A trade war with China also brings with it wider risks.

George demonstrates, wittily, with irony, and using the technique of reduction to absurdity, the fallacy of the protectionist arguments. Anyone who reads the book will realise that the best way forward for a post-Brexit Britain would be to open the doors to tariff-free imports and scrap the internal tariff of VAT. The prospects of the latter do not look good, unless the Chancellor takes the bold step of putting the tax under scrutiny. Tariff-free imports, on the other hand, are a more realistic proposition, if only because of the trouble and expense involved in blocking the import of goods by holding them in customs compounds at every port around the country while they wait for clearance.

However, unless we get rid of VAT and resist the temptation to replace it with some kind of purchase tax, people entering the UK will once again face the return of the "anything to declare" business, the abolition of which was one of the better aspects of being in the EU.

 

Fee trade area

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The Single Market is described as a free trade area. In reality, is very expensive. It means that if you want to trade with me, even if we are next-door neighbours, we can only do so legally over a 20% high tariff wall between us - Value Added Tax. In some EU countries, the internal tariff wall is even higher - 25% in Sweden. That is not much of a free trade area. Fee trade area, more like.

Green and Brown are neighbours. Green does gardening work for Brown at an agreed price of £200. Brown services Green's car for an agreed price of £200. There are three possibilities.

  1. They exchange their services and no money changes hands.
  2. They pay cash to each other.
  3. They bill each other and add 20% VAT.

If VAT is not a tariff barrier against legal trade, then what do you call it? What do you think they will do in practice? You could of course say the same about income tax. Why would Green pay Brown taxable wages when he could just pay cash under the table?

VAT and Income Tax are a pair of poisonous fruits.

 

The dead loss of VAT

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Brexit is a golden opportunity to get rid of all the trade tariffs we have been saddled with by the EU - that is, to reduce taxes on sales of goods and services, by dropping not only existing ‘free trade agreements’, with their enforced tariffs, but while we are at it, VAT as well.

VAT is a trade tariff - just the UK’s intra-national version. The irrationality of government, elected by the people, is here without bounds when it comes to such a destructive tax. Persisting with VAT merely retains our own home-grown version of the poison of trade tariffs.

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The symbiosis of Marxism and Neoliberalism

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The current problems with social democratic parties world-wide stems ultimately from an ideological failure. Insofar as contemporary socialism has any ideology at all, it is Marxist. There is a fundamental flaw with Marx which is these days not widely known and understood. He conflates land and capital. They are separate entities.

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