Resource Rent Tax and Special Wealth Tax Unreasonable

Arnason, Grainger and Gissurarson. Photo: Mbl. Kristinn Ingvarsson.

A resource rent tax in the fisheries is not the best means to achieve the efficient utilisation of the fish stocks, because it will probably always be unacceptable to the fishing sector itself. A system of individual transferable quotas, ITQs, initially allocated on the basis of catch history is much more likely to be accepted. A resource rent tax which aims at expropriating rent created in the fisheries (after the introduction of ITQs) is not efficient, either, because it is the fishing firms which in effect create this rent, and the tax would reduce investment, innovation, research and development. However, a cost recovery charge on the fisheries seems reasonable. These are some of the implication of the research into fisheries economics by Professor Corbett Grainger of the University of Wisconsin which he presented at a well-attended seminar of RNH and the Icelandic Taxpayers’ Association 24 October 2014, chaired by Skafti Hardarson with Dr. Birgir Thor Runolfsson as discussant.

Professor Ragnar Arnason of the University of Iceland analysed some common measurements of income distribution. They were often so inaccurate and misleading, according to Professor Arnason, that it would be nothing short of absurd to base demands for comprehensive taxation changes—for example the imposition of a confiscatory top income tax or a wealth tax—on them. The Gini coefficient—often used, because simple to calculate—sometimes provided the same kind of incomplete information as the description of a horse as being brown in colour; much more was needed fully to understand each situation. There could be one Gini coefficient for various and very different income distributions. Professor Arnason demonstrated how the Gini coefficient would rise, falsely showing more income inequality, if the proportion of university students and pensioners in a given society would increase, simply because people received more education and lived longer. One-year-measurements like the Gini coefficient were difficult to use because the total income over an individual’s life was much more relevant: this income was subject to many abrupt changes; sometimes it was low (when the individual in question was a student or a pensioner), and sometimes high (when he or she was on the top of their earning ability and energy). Professor Arnason referred to the papers in the recent book published by AB on income distribution and taxation (with an English Summary).

Balzac: Capital is fragile

Professor Hannes H. Gissurarson of the University of Iceland criticized some deficiencies in the controversial book by Thomas Piketty, Capital in the 21st Century. Some of Piketty’s numbers on wealth distribution in England and France had turned out to be inaccurate, but possibly his numbers on income distribution in the West were more plausible, showing that the income of the top 10 or 1% had greatly increased in the last few decades relative to the income of the bottom 10%. However, global income distribution had actually become more even. The main common explanation for these three trends was globalisation, Professor Gissurarson stated. Unskilled workers in the West faced competition from China and India; at the same time, individuals with unique and irreproducible abilities (film stars, athletes, innovators, entrepreneurs, supermanagers) had gained access to a much larger international market than before and had thus been able to get a much higher rate of return on their services. Nothing was anyway wrong with an uneven income distribution, if it was distribution by choice: from each as she chooses and to each as she is chosen. Again, it was not as clear as Piketty suggested that the rate of increase of capital was in the long term always greater than economic growth. Capital was not necessarily accumulated by a few individuals over time: it was a much more dispersable, fragile and fickle phenomenon, as Balzac’s novels—frequently quoted by Piketty—indeed showed. Because of ever-improving technology and freer trade, capitalism had the creative power to sustain rapid economic growth.

The seminar formed a part of the joint project by RNH and AECR on “Europe, Iceland and the Future of Capitalism“. It was widely covered in the Icelandic media. Vidskiptabladid and Morgunbladid announced it in advance, and Morgunbladid interviewed the main speakers afterwards and also published an account of the seminar 25 October and 1 November.

 

Corbett Grainger Slides

Ragnar Arnason Slides

Gissurarson Slides on Piketty

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Income Distribution and Taxes: Friday 24 October 4-7

Professor Corbett Grainger

Friday 24 October at 4 pm a seminar will be held by RNH on “Income distribution and Taxes” in the Gamma meeting hall on first floor in Gardastraeti 37. Professor Corbett Grainger from the University of Wisconsin in Madison will compare two approaches in the fisheries, taxation and allocation of rights; Professor Ragnar Arnason will analyse some errors and category mistakes in the measurement of income distribution; and Professor Hannes H. Gissurarson will criticize the theories of controversial French economist Thomas Piketty on a widening gap between rich and poor in the West.

The seminar is held on the occasion of a book published by AB Publishing, Tekjudreifing og skattar (Income Distribution and Taxes), a collection of papers by six Icelandic scholars, Professor Ragnar Arnason, Dr. Birgir Thor Runolfsson, Axel Hall, Dr. Helgi Tomasson, Professor Hannes H. Gissurarson and Arnaldur Solvi Kristjansson. One of the partners of RNH, RSE, supported the publication of the book. The seminar is co-sponsored by the Icelandic Taxpayers’ Association. After the lectures and a discussion a reception will be on the premises from 5.30 to 7 pm. The seminar forms a part in the joint project by RNH and AECR, the Alliance of European Conservatives and Reformists, on “Europe, Iceland and the Future of Capitalism”.

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Piketty’s Capital: Misleading Data on Income Distribution

Participants in the ESL conference in Bergen. Professor Gissurarson (in blue jacket and red shirt) stand behind one of the girls who hold the ESL banner. Yaron Brook stands at the centre behind the banner.

The much-discussed theories of French economist Thomas Piketty are not based on sound principles, as can be seen on a close scrutiny. This was what Professor Hannes H. Gissurarson, RNH Academic Director, argued at the conference of European Students for Liberty in Bergen 10 October 2014. Professor Gissurarson contrasted Piketty with Rawls, the main leftwing thinker of the past: Whereas Rawls was preoccupied with the poor, Piketty seems solely to be concerned with the rich. Everybody agrees that poverty is a problem. But is affluence really a problem? But even if Piketty’s use of the data could be plausibly criticized, as has been the case, it could well be, Professor Gissurarson submitted, that the gap between the poorest and the richest groups in the West had widened somewhat in the last few decades (mainly because the richest have become much richer, the gap has been stretched upwards). But income distribution in the world as a whole had in fact become more even (mostly because many of the poor in China and India have produced themselves out of poverty; according to figures from Piketty’s own data base the real income of the poorest 90% in China has tripled since the mid-1980s).

Three speakers: Gissurarson, Brook and Hannesson. Photo Eszter Nova.

Professor Gissurarson asked: Is something wrong with this trend? Should it not be welcomed that hundreds of millions of people in China and India have escaped poverty by their own efforts? It was however correct that some people in the West possessing marketable, but unique, irreproducible and unimitable skills and abilities, such as film stars, entertainers, athletes, innovators and entrepreneurs, now could because of globalisation reach a much larger market than before, possibly three to four billion people instead of only 300–400 million in the past; this resulted in them gaining a much higher income (which would constitute rent in the sense of economics). But there was nothing wrong with income distribution by choice, Professor Gissurarson maintained. He gave a simple example: Milton Friedman visits Iceland to give a lecture. A thousand people attend the lecture, each paying an entrance fee of $50. Thus, Friedman becomes richer by $50,000, and 1,000 people become poorer each by $50. But where is the injustice? Everybody is satisfied. Professor Gissurarson also pointed out that capital was not made of the same solid and immobile material as Piketty seemed to think. Piketty frequently quoted Balzac’s novels. But the main theme in most of these novels was how fragile and fickle wealth could indeed be. For example, in Balzac’s famous Old Goriot (Père Goriot), often quoted by Piketty, Goriot himself, previously wealthy, has run out of money. One of his daughters was struggling to pay the gambling debts of her secret lover, while the husband of the other one had lost the dowry in speculations.

Five Icelandic students attended the Bergen conference. The other speakers were activist Rasmus Brygger from Denmark, Dr. Yaron Brook from the Ayn Rand Institute, and Professor Emeritus Rognvaldur Hannesson from the Norwegian Business School in Bergen, NHH, which was the venue of the conference. Professor Hannesson, an Icelander who has spent all his professional career in Norway, is also a Visiting Professor at the University of Iceland. The organisation was in the hands of Eirik Aaserod from Norway and Lukas Schweiger, ESL chairman. Professor Gissurarson’s lecture formed a part of the joint project by RNH and AECR on „Europe, Iceland and the Future of Capitalism”.

Gissurarson Slides in Bergen

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Gissurarson on Piketty in Bergen: Saturday 18 October

Professor Hannes H. Gissurarson, RNH Academic Director, gives a lecture on the theories of French economist Thomas Piketty at an international conference of European Students for Liberty in Bergen 18 October 2014. He will compare the theories of Piketty and American philosopher John Rawls, the main difference being that Rawls was concerned with the poor, but Piketty with the rich. He will criticize Piketty’s use of data which involves a systemic underestimate of the income of the bottom income group and also a systemic overestimate of the income of the top income group. However, admittedly it is possible that the gap between rich and poor in the West has widened in the last few decades. One reason for this, Professor Gissurarson submits, could be globalisation which has two discernible ffects. First, unskilled labour in the West meets competition from unskilled labour in China and India and other countries putting pressure on wages. Secondly, individuals in the West with special abilities, difficult or impossible to reproduce, for example film stars, entertainers, athletes, innovators and entrepreneurs, now can reach a much bigger market than before, thus vastly increasing their income. Professor Gissurarson will also pose the question whether anything is really wrong with an unequal income distribution, if it is distribution by choice.

Other lecturers at the conference include Dr. Yaron Brook from the Ayn Rand Institute in California and Professor Emeritus Rognvaldur Hannesson, from the Norwegian Business School in Bergen, NHH. Dr. Brook will discuss the moral message in Rand’s works, while Professor Hannesson will analyse the possible privatisation of marine resources. Professor Hannesson’s most recent book is Ecofundamentalism: A Critique of Extreme Environmentalism. The lecture of Professor Gissurarson forms a part of the joint project by RNH and AECR, the Alliance of European Conservatives and Reformists, on “Europe, Iceland and the Future of Capitalism”.

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Three Icelandic Examples of Spontaneous Evolution

From left: Jordan, Gissurarson and Poole.

Grazing rights in the Icelandic mountain pastures, individual transferable quotas in the Icelandic fishing grounds and the indexed Icelandic krona are three examples of institutions or solutions developed spontaneously by the market rather than imposed by government. This was claimed by Professor Hannes H. Gissurarson at a conference on the social and political theories of Friedrich von Hayek at Manhattanville College in New York 10 October 2014, organised by the Economic Freedom Institute. Professor Gissurarson recalled his meetings with Hayek who had asked the students of his thought not to become Hayekians, but rather to maintain their critical faculties and to develop classical liberal principles further, on their own. It was in this spirit, Professor Gissurarson said, that he offered his analysis of these three examples. The grazing rights in the mountain pastures and the individual transferable quotas in the fisheries had both been developed to escape “the tragedy of the commons” where open access to resources led to their over-utilisation. Professor Gissurarson said that he had first suggested the introduction of quotas in the fisheries at a conference in Thingvellir in 1980, in order to stop over-fishing, but that he had not then been aware of the fact that such quotas had already been allocated in 1975 in the herring fishery and in 1979 in the capelin fishery. A system of individual quotas was then introduced in the demersal fisheries (including the important cod fishery) in various stages from 1984, the quotas gradually becoming transferable and permanent. The system of individual transferable quotas was, according to Professor Gissurarson, a good example of an institution which was not designed by academics, but spontaneously developed by the parties directly involved, and then explained and articulated by academics.

Professor Gissurarson said that he had suggested publicly in 1983 that the Icelanders should abandon the krona and use instead some harder currency, arguing that the krona was not adequately fulfilling two of the three roles of money, as a unit of account and a store of value. However, he had not realized then that this problem had already been solved in Iceland by the use of the indexed krona which performed these two roles very well, while the ordinary krona could be used as before for the third role, as a medium of exchange. In fact, two currencies were — and still are — used in Iceland, the indexed krona for long-term contracts and the ordinary krona for short-term transactions. Professor Gissurarson pointed out that while legislation had certainly been necessary to support these three institutions, they were examples of solutions of the market rather than of government: the results of human action, but not of human design. Professor Gissurarson used the opportunity while in New York to have discussions with Professor Frederic Mishkin on the 2008 Icelandic bank collapse and with Walker F. Todd, a former lawyer at the Federal Reserve System and a specialist on currency swap deals. He also discussed the international financial crisis, the operations of the Federal Reserve System and the Icelandic bank collapse with Dr. Jerry Jordan, former President of the Federal Reserve Bank of Cleveland, and Dr. William Poole, former President of the Federal Reserve Bank of St. Louis. Both Jordan and Poole attended the Manhattanville College conference which was presided over by Professor Emeritus Anna Sachko Gandolfi and her husband, Dr. Arthur E. Gandolfi, former Citicorp Vice President and a student of Ayn Rand and Ludwig von Mises. The two Gandolfis have published, with David P. Barash, Economics as an Evolutionary Science. Professor Gissurarson’s lecture at the conference formed a part of the joint project of RNH and AECR, the Alliance of European Conservatives and Reformists, on “Europe, Iceland and the Future of Capitalism”.

Gissurarson Slides at Manhattanville College

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Gissurarson in NY on Spontaneous Evolution: Friday 10 October

F. A. Hayek

Professor Hannes H. Gissurarson, University of Iceland and RNH Academic Director, gives a lecture at an international conference of the Economic Freedom Institute at Manhattanville College in Purchase, New York State, north of New York City, Friday 10 October 2014. The conference is devoted to The Road to Serfdom by F. A. Hayek, published 70 years ago. Seventeen academics and scholars give papers at the conference, including the distinguished monetary economist Jerry Jordan, former President of the Federal Reserve Bank of Cleveland, William Poole, former President of the Federal Reserve Bank of St. Louis, Professor Sanford Ikeda, State University of New York in Purchase, and Professor Edward Stringham, Fayetteville State University in North Carolina.

Professor Gissurarson discusses spontaneous evolution in Hayek’s sense. First, he analyses briefly three well-known examples where people can solve in market transactions what economists have sometimes wrongly considered to be public goods, only to be produced by government. The first example is from A.C. Pigou about two roads of different quality where the traffic would not be allocated efficiently between them. F.H. Knight pointed out that this problem could be solved by private property rights to the two roads. The second example is in many textbooks, including that of P.A. Samuelson. It is of lighthouses where seemingly it is difficult to confine their services to those paying for them. R.H. Coase pointed out the historical record which showed that these services had often been included in port tolls. Therefore, their services could bee privately produced and priced. The third example is the US radio spectrum, where radio frequencies are allocated by government agencies. T.W. Hazlett pointed out that in the 1920 private property rights to certain frequencies in certain areas were being developed, by court decisions in a homesteading process, but that this development had been stopped by federal law.

Then, Professor Gissurarson analyses three Icelandic examples. Professor Thrainn Eggertsson has written about one of them: Grazing rights, itala, which was formed when farmers used mountain pastures in the summertime for their sheep. The pastures were each commonly held by an association of farmers in the valley closest by, but the temptation for each farmer was to add more sheep to the total number than was efficient, because the loss was dispersed amongst all the farmers, but he alone reaped the profit. This temptation was removed by only allowing each farmer to graze a given number of sheep on the mountain pastures. The second example is well known to all Icelanders. Professors Ragnar Arnason and Gissurarson have both written on it. The system of Individual Transferable Quotas, ITQs, was developed to stop the over-utilisation of the Icelandic fishing grounds. The general idea is the same as in the case of over-grazing: Each fishing vessel owner gets a quota. Then the quota-holders discover in their trade of the quotas who are best qualified to harvest fish and who would be better off leaving the fisheries. The third example is of the Icelandic krona. It was equal to the Danish krone, and Iceland was indirectly a member of the Nordic currency union before 1914. But between 1922, when an exchange rate between the Danish krone and the Icelandic krona was first registered, and 1992, the value of the Icelandic krona went down to 1/1000 of the Danish krone (the krona having been replaced by a new krona, worth 100 old kronur, in 1983). Obviously, the krona did not adequately two of the three roles of money: to be a unit of account and the store of value. Therefore, Professor Gissurarson had already in the early 1980s suggested that the krona would be replaced by a harder currency, such as the US dollar. However, the market had already solved this problem by introducing the indexed krona, which was a hard currency, unlike the ordinary krona, which remained a soft currency and which could still fulfil its role of being a medium of exchange. Thus, Iceland essentially used two currencies. A cup of coffee was paid for by ordinary kronur, but long-term contracts were made in indexed kronur.

Professor Gissurarson argues that the Icelandic institutions or rules of grazing rights belonging to particular farms, fishing rights defined to particular fishing vessels and the indexed krona for long-term contracts are examples of spontaneous rather than constructed solutions. They were developed in a process of trial and error, even if such solutions had sometimes to be consolidated or protected by legislation. His lecture in New York forms a part of the joint project by RNH and AECR on “Europe, Iceland and the Future of Capitalism”.

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