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The Economist Newspaper Ltd
Industry: Economy; Printing & publishing
Number of terms: 15233
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Prostitution may be the oldest profession, but tax collection was surely not far behind. In its early days, taxation did not always involve handing over money. The ancient Chinese paid with pressed tea, and Jivara tribesmen in Brazil stumped up shrunken heads. As the price of their citizenship, ancient Greeks and Romans could be called on to serve as soldiers and had to supply their own weapons. The origins of modern taxation can be traced to wealthy subjects paying money to their king in lieu of military service. The other early source of tax revenue was trade, with tolls and customs duties being collected from traveling merchants. The big advantage of these taxes was that they fell mostly on visitors rather than residents. Income tax, the biggest source of government funds today in most countries, is a comparatively recent invention, probably because the notion of annual income is itself a modern concept. Governments preferred to tax things that were easy to measure and on which it was thus easy to calculate the liability. This is why early taxes concentrated on tangible items such as land and property, physical goods, commodities and ships, as well as things such as the number of windows or fireplaces in a building. In the 20th century, particularly the second half, governments around the world took a growing share of their country’s national income in tax, mainly to pay for increasingly more expensive defense efforts and for a modern welfare state. Indirect taxation on consumption, such as value-added tax, has become increasingly important as direct taxation on income and wealth has become increasingly unpopular. But big differences among countries remain. One is the overall level of tax. For example, in United States tax revenue amounts to around one-third of its GDP, whereas in Sweden it is closer to half. Others are the preferred methods of collecting it (direct versus indirect), the rates at which it is levied and the definition of the tax base to which these rates are applied. Countries have different attitudes to progressive and regressive taxation. There are also big differences in the way responsibility for taxation is divided among different levels of government. Arguably, any tax is a bad tax. But public goods and other government activities have to be paid for somehow, and economists often have strong views on which methods of taxation are more or less efficient. Most economists agree that the best tax is one that has as little impact as possible on people’s decisions about whether to undertake a productive economic activity. High rates of tax on labor may discourage people from working, and so result in lower tax revenue than there would be if the tax rate were lower, an idea captured in the Laffer curve. Certainly, the marginal rate of tax may have a bigger effect on incentives than the overall tax burden. Land tax is regarded as the most efficient by some economists and tax on expenditure by others, as it does all the taking after the wealth creation is done. Some economists favor a neutral tax system that does not influence the sorts of economic activities that take place. Others favor using tax, and tax breaks, to guide economic activity in ways they favor, such as to minimize pollution and to increase the attractiveness of employing people rather than capital. Some economists argue that the tax system should be characterized by both horizontal equity and vertical equity, because this is fair, and because when the tax system is fair people may find it harder to justify tax avoidance and tax evasion. However, who ultimately pays (the tax incidence) may be different from who is initially charged, if that person can pass it on, say by adding the tax to the price he charges for his output. Taxes on companies, for example, are always paid in the end by humans, be they workers, customers or shareholders.
Industry:Economy
The idea that a dollar today is worth more than a dollar in the future, because the dollar in the hand today can earn interest during the time until the future dollar is received.
Industry:Economy
In a globalizing economy, it is perhaps surprising that countries increasingly trade with their nearest neighbors. One explanation is geography: as countries have lowered their tariff barriers, the relatively greater importance of transport costs makes proximity matter more. According to new trade theory, this also produces gains from economies of scale. But another reason for the fast growth in trade among nearby countries may be less benign. The proliferation of regional trade agreements may be causing neighbors to trade with each other when it would be more efficient for them to export to and import from afar. In the past 50 years more than 150 regional trade agreements have been notified to the general agreement on tariffs and trade (GATT) or the world trade organization (WTO), most of which are still in force. Roughly half of these, including some revisions of previous deals, have been set up since 1990. The best-known are the European union, the North American Free-Trade Agreement (NAFTA) and Mercosur in South America. There are dozens of other examples. Economists have generally been unenthusiastic about regionalism, for two reasons. First, they worry that preferential tariffs will cause trade to flow in inefficient ways, a process known as trade diversion. In a perfect world, trade patterns should be determined by comparative advantage: the comparative cost of making different goods yourself as opposed to buying them from various countries. If the United States imports Mexican televisions merely because the Mexican goods are tariff-free, even if Malaysia has a comparative advantage in television manufacturing, the main benefit of trade will be lost. The second concern is that regionalism will impede efforts to liberalize trade throughout the world. One prominent critic, Jagdish Bhagwati, an economist at Columbia University in New York, has famously said that regional trade areas are “stumbling blocks” rather than “building blocks” in the freeing of global trade. There is no clear-cut theoretical answer to the question of whether regional trade agreements are good or bad, and the empirical findings are hotly disputed. In general, though, it seems likely that it is better to have regional groups that are open to the rest of the world than groups that are closed.
Industry:Economy
An excess of imports over exports is a trade deficit. An excess of exports over imports is a trade surplus. (See balance of payments. )
Industry:Economy
The costs incurred during the process of buying or selling, on top of the price of whatever is changing hands. If these costs can be reduced, the price mechanism will operate more efficiently.
Industry:Economy
The prices assumed, for the purposes of calculating tax liability, to have been charged by one unit of a multinational company when selling to another (foreign) unit of the same firm. Firms spend a fortune on advisers to help them set their transfer prices so that they minimize their total tax bill. For instance, by charging low transfer prices from a unit based in a high-tax country that is selling to a unit in a low-tax country, a firm can record a low profit in the first country and a high profit in the second. In theory, however, transfer prices are supposed to be set according to the arm’s-length principle: that they should be the same as would be charged if the sale was to a business unconnected in any way to the selling firm. But when there is no genuinely independent market with which to compare transfer prices, what an arm’s length price would be can be a matter of great debate and an opportunity for firms that want to lower their tax bill.
Industry:Economy
Payments that are made without any good or service being received in return. Much public spending goes on transfers, such as pensions and welfare benefits. Private-sector transfers include charitable donations and prizes to lottery winners.
Industry:Economy
A buzz word for the idea that the more information is disclosed about an economic activity the better. Many regulators, private lenders, politicians and economists reckoned that the Asian economic crisis of the late 1990s would not have been so severe, or even have happened, had Asian governments, banks and other companies made available more and better data about their financial condition. Likewise, the collapse of Enron provoked demands for greater transparency, to help improve corporate governance in the United States and other industrialized countries. Some economists reckon that transparency is one of the most effective methods of regulation. Rather than risk regulatory capture, why not simply maximize disclosure and leave it to the market to decide whether what the information reveals is acceptable?
Industry:Economy
One of the most valuable economic assets, hard to create but easy to destroy - a crucial ingredient of a country's social capital. People are more likely to do business together when they trust each other. Trust can reduce market failure that otherwise results from asymmetric information. When there is a lack of trust, people may have to spend heavily on monitoring others' behavior to ensure they do what they say they will do. This cost may be so high that it is not worth going ahead with a business deal. When trust is absent, people may be less flexible in their dealings with each other. Countries can overcome some of the problems of a lack of trust by passing laws requiring good behavior, but only to the extent that people trust that the laws will be enforced. One way in which companies seek to demonstrate that they can trust is by investing heavily in a brand.
Industry:Economy
The number of people of working age without a job is usually expressed as an unemployment rate, a percentage of the workforce. This rate generally rises and falls in step with the business cycle--cyclical unemployment. But some joblessness is not caused by the cycle, being structural unemployment. There are also voluntary unemployment and involuntary unemployment. Some people who are not in work have no interest in getting a job and probably should not be regarded as part of the workforce. Others choose to be out of work briefly while they look for, or are waiting to start, a new job. This is known as frictional unemployment. In the 1950s, the Phillips curve seemed to show that policymakers could reduce unemployment by having higher inflation. Economists now say there is a NAIRU (non-accelerating inflation rate of unemployment). In most markets, prices change to keep supply and demand in equilibrium; in the labor market, wages are often sticky, being slow to fall when demand declines or supply increases. In these situations, unemployment often increases. One way to tackle this may be to boost demand. Another is to increase labor market flexibility.
Industry:Economy
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