Weekend reading links

1. Livemint raises the important question of the negative network externalities that are likely to be engendered if the e-commerce firms go bust,

If Ola and Uber reduce their incentives further, what will be the impact on drivers who purchased cars using bank loans? How will banks deal with a high inventory of repossessed cars of similar make? What will be the effect on the public transport system when there is a sudden increase in passenger load? How smoothly will retailers navigate the journey from the brick-and-mortar channel to the online channel and back? How will retrenched employees convince prospective employers that they will remain committed and satisfied at a much lower salary? Will the concurrent failure of multiple businesses taint India’s reputation as an investment destination?

This draws attention to a less discussed fact about the e-commerce and a significant share of internet business - they have benefited enormously from regulatory arbitrage. The examples of a regular taxi business and Uber or a hotel and an AirBnB clearly highlight the regulatory advantages enjoyed by internet companies that help them maintain very clear competitive advantages over their brick and mortar counterparts. There is little doubt that this advantage is unsustainable and should go.

2. From a fascinating story in the Times about Dubai and its weak adherence to the rule of law in contracting and the treatment meted out to migrant workers,

Some eight million migrants reside in the United Arab Emirates, according to the United Nations, or roughly 84 percent of the population — the largest concentration on earth... “There is a huge dependence on migrant workers who have employment terms that are no different than indentured servitude,” said Sarah Leah Whitson, director of the Middle East and North Africa division of Human Rights Watch, an advocacy group that has documented abuses of migrant workers in the neighboring emirate of Abu Dhabi. “This is a system that’s put in place to entrap workers.”

3. The marginal corporate tax rate is a very misleading indicator of actual tax incidence. Times points to this study which examined data on federal income taxes paid by those 258 Fortune 500 companies that did not suffer a loss for any year during the 2008-15 period,

Although the statutory corporate tax rate is 35 percent, collectively, these companies paid an average effective rate of 21.2 percent... 100 companies enjoyed at least one year in which their federal income tax was zero or less. 24 companies paid zero taxes in four out of eight years. 18 companies (including General Electric, International Paper, Priceline.com and PG&E) paid no federal income tax over the eight-year period. Collectively, the 258 corporations enjoyed $513 billion in tax breaks over the last eight years. More than half of those tax breaks, $277 billion, went to just 25 of the most profitable corporations.

Tax avoidance among multinationals by shifting revenues to off-shore entities in low tax havens and complex holding patterns make tax avoidance the most sought after part of tax advisory services of big consulting firms. Senator Bernie Sanders has this stunning factoid,

“The truth is that we have a rigged tax code that has essentially legalized tax dodging for large corporations. Offshore tax haven abuse has become so absurd that one five-story office building in the Cayman Islands is now the ‘home’ to more than 18,000 corporations.”

Apart from this companies benefit from accelerated depreciations and selling stock options to executives (Facebook saved $5.78 bn in taxes through this from 2010-15). 

In India too, corporate tax exemptions distort the tax incidence data. For example, in the 2016-17 assessment year, of the 5,97,884 tax returns filed, 43.17% reported losses, 3.01% nil profit, and just 53.82% reported profits of Rs 12.67 trillion. The effective tax rate was at a very high 28.24 per cent, among the highest in the world. The revenues foregone from all direct tax exemptions in 2015-16 was Rs 1.63 trillion. 

4. Even as India's cities expand placing ever increasing burden on municipal governments, their own source revenues have been declining.

5. The Economist captures the woes of the global shipping industry swimming on the back of over-capacity,

the Baltic Dry Index—a measure of bulk freight rates—has fallen by 93%. Prices for transporting containers have plunged by the same amount on some routes. In 2008 it cost $2,000 to send a 20-foot box from China to Brazil; now it costs $50.

The FT points to the scale of excess capacity,

VesselsValue, a company that monitors the value of the world’s ships, says 2,028 container vessels are currently valued at or below their value as scrap metal, with the other 3,242 vessels in the world valued at more than scrap. In volume terms, 7.3m teus (20ft-equivalent units), or nearly a third of the global fleet, is at or below scrap, with 16.2m teus above. The situation may be about to get worse. Alphaliner, a company that monitors ship construction, says total shipping capacity will grow by an average of 4 per cent a year in 2017 and 2018, on top of existing idle capacity of 7 per cent. The biggest problem is in mega-ships: more than 150 new ships with the ability to carry more than 10,000 teus at a time will be delivered by the end of next year.

6. India appears to have experienced the fastest increase in housing prices since 2010 as per the Economist house price index.