Salmon tax with a weak professional basis

Producers of ready-to-slaughter salmon and producers of store-ready salmon products are usually integrated within the same company. It does not change the tax-theoretic argument that taxes on inputs lead to distortions; in other words, non-neutrality.

The economic argument is as follows: A producer of salmon products sold to consumers sells at a price equal to its (marginal) cost plus a profit margin. However, an input unit sells to the final unit at a price equal to (marginal) cost without a profit margin. For simplicity, I assume that the firm has an appropriate control system that implements the price that maximizes the firm’s entire profit, which includes both inputs and finished goods.

We need figures that measure the effects of the proposed tax on investment, employment, tax revenue, etc.

If the input unit is charged a higher price to make a profit, this would be at the expense of the final unit and reduce the overall firm’s profit. The input factor unit charges this low price even without tax, only for internal efficiency reasons and not to avoid tax. The analogy of firms distorting internal prices to shift profits to offshore tax havens is therefore incorrect. If the tax authorities asked for the firm’s internal price, the answer would be a low price. Not to avoid tax, but because this is what proper management requires.

The tax authorities are thus faced with a dilemma. If they use the price charged by the intermediary to achieve efficiency, the tax revenue will be small, since the intermediary earns little from this. If, on the other hand, the tax authorities use a higher price, for example close to the price observed in centralized trading places for raw salmon, not only the profit but also the inefficiency can be large.

The reason for the inefficiency is that the intermediary must now charge a price that is higher than the real operating costs of the final unit, since a tax acts as a cost increase. This transfer of taxes to prices creates inefficiencies in the final unit but also in the intermediary, since the management of the entire firm looks through the entire production process when making investment decisions for the intermediary.

What does this mean? The arguments for introducing a cash flow tax have a shaky academic basis, simply because a (cash flow) tax on an input factor is not neutral.

This is yet another argument that a thorough quantitative assessment should be carried out to understand the costs and benefits of such a tax before an aquaculture tax is possibly introduced. We need figures that measure the effects of the proposed tax on investment, employment, tax revenue, etc. The public debate on various economic topics, including the Torvik Committee’s report, typically refrains from such assessments, and limits itself to numberless verbal arguments.

I do not know of any economist who would not agree with me that a political measure needs a quantitative assessment. The debate on the aquaculture tax therefore appears scientifically puzzling. It is also a bit of a mystery how the reference price and the tax rate are determined without a quantitative assessment that combines tax theory, empirical work and feasibility in practice. But perhaps “it’s the moral, stupid”, to paraphrase Bill Clinton’s 1992 campaign slogan.

Marcus Hagedorn

Professor at the Department of Economics, University of Oslo (UiO)