Epicycles

First we had Ptolemy, who worked out that planets revolve around the Earth in perfect circles.  Only his model – being based on a simplified view of the universe that didn’t accord at all well with what actually happened – gave strange results, so he had to add in more and more epicycles to compensate.  The basic model would work if the world were as simple as Ptolemy thought it ought to be, but he was unlucky in the facts he was presented with.

Then we got Copernicus, who worked out that planets revolve around the sun, and Kepler refined this to point out they did so in ellipses rather than circles.  This was a much better model requiring no epicycles, but isn’t quite perfect as it doesn’t really account for the interaction of planets with one another.

So we moved on to proper Newtonian physics, which adds in interplanetary interactions, though it accepts that it’s really complicated and you can’t expect to calculate things precisely so you’re probably going to have to fudge something (but it makes no practical difference).

Unitary Taxation, to me, is Ptolemaic.  Starting with a vision of the universe in which groups are discrete entities (whose activities revolve around tax), it provides a beautiful theoretical model for taxing such entities.  But unfortunately the world is a bit more complicated that it ought to be – groups and companies are not discrete entities, for example – and so to make it work we’d have to start creating epicycles.

The arm’s length principle at the moment seems somewhere between Copernicus and Newton.  You treat companies individually, but you recognise that there is an underlying principle which governs the interactions of any two bodies and use that as a guide when looking at their activities.

BEPS seems to be wanting to move towards a full Newtonian model. It suggests that you have to look at more than the two bodies directly involved when working out the tax position: other companies in the vicinity will have an impact. 

Given that we want to get tax working properly, why should we say that Newtonian mechanics are too hard to use precisely so we should go back to Ptolemy?

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6 thoughts on “Epicycles

  1. Pingback: A general criticism of unitary taxation | Ben's white space entries

  2. Very good post this, I thought.

    I’ve only just read your exchanges with Richard Murphy from Friday. I thought you made your points about unitary taxation very well and he rather dodged some of the points you raised.

    I think he did answer some points but he needed to answer more fully. He was being quite dismissive which suggests solutions for the problems you raised aren’t exactly comprehensive. Developing answers to issues is what proponents of unitary taxation need to do, as opposed to pretending there aren’t any problems at all.

    And I cannot see how Richard sees what transfer pricing is trying to achieve is a fantasy. Or that he thinks that unitary taxation, a one-size-fits all approach, provides an accurate and realistic account.

    The problem with TP is execution, not the principle behind it.

    UT’s problem is the principle behind it. And at present I cannot see that execution would be any better than TP.

  3. Hmm. At the risk of stretching an analogy way WAY too far, the proponents of unitary taxation would presumably argue that the current system is like a Copernican one where the tax “gods” are allowed to actually change the movement of planets by inserting epicycles to make them do things that they wouldn’t normally do, while the tax authorities wield the mighty sword of Newton in an only partially successful attempt to remove them.

    The question then becomes whether the system can be successfully brought into a Newtonian utopia or not. Unless the answer is “yes”, or “very nearly”, the next question is whether it might be better to work on a Ptolemaic system that we know is not accurate but which (in my, now not really very analogous, analogy) does not permit epicycles being introduced by the tax gods.

    If a Newtonian utopia was achieved, of course, the tax gods would start creating miniature black holes to affect the course of the planets instead, and eventually it would all go quantum…

    • I suppose it depends on how you interpret the analogy, and in particular the roles and powers of various people 🙂

      As I understand it Copernicus needed epicycles because he used circles, and Kepler did away with this by bringing in ellipses rather than circles – I’d say in this analogy that the tax authorities are Kepler and Newton, trying to model interactions so they can then tax them properly, and the gods would be the businesses who try to manipulate the results of the models, by say creating new planets (the big flaw here is that there is no analogue of the tax itself…).

      But I think your wider question is whether we should go to a Newtonian model, which seeks to understand and explain the actual interactions in order to allow the big picture to be assessed correctly, or whether we go for a much more simplified Ptolemaic model in which we know it doesn’t fit reality but at least the maths is simple – you know you’re paying the wrong tax, but at least everyone knows how much there is of it.

      My feeling is that Ptolemaic tax would be so far removed from reality that we would need at least some epicycles. That destroys the beauty and strength of the system straight away, and then I would reckon on scope creep giving us more and more.

      As you say on Ben Saunders’s post, what unitary tax needs is a someone trying to game it. If we have a detailed proposal we can test it to destruction, to see how much epicyclic reinforcement it needs. If it can be done with comparatively little then it may be worth while, but I fear it will need an awful lot. Even my brief exchanges with Richard Murphy have thrown up a lot of areas which seem to require arbitrary decision or subjective judgement: I don’t like the former, and the latter are the complaint about the arm’s-length principle, so unless these areas can be resolved I’m probably going to stay a bit sceptical of Unitary Taxation.

  4. OK, Sol Picciotto is the person who is referred to most as having set out the principles of how unitary taxation would work, and the paper Richard references is very readable to a non-economist. I’m working my way through it now, and then I think I’m going to imagine myself as the tax director of a totally fictional multi-national coffeeshop chain, online retailer, and internet search engine provider (let the reader understand), trying to plan a structure to produce low tax under unitary taxation. Had a quick IRL conversation with Ben on it yesterday, I don’t think it is going to be that difficult to do.

    • Yes, I’ve been reading through that and drafting a brief essay on unitary taxation, but have been vaguely thinking of doing a similar thought experiment instead.

      The problem I’ve found so far is a lack of detail, which means I have to pretty much design a unitary taxation formula for myself in order to pick it apart. This seems like a lot of work making what will after all be a straw man. I’d be very interested to see what you come up with, though.

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