Home > Uncategorized > “Gross operating surplus” in the Eurozone: do high profits make an economy more resilient? (graph)

“Gross operating surplus” in the Eurozone: do high profits make an economy more resilient? (graph)

Update: coincidentally, Eurostat published its “gross operating surplus” time series today (Jan 30). They call it the ‘rate of profit’, but it includes rent and mixed income as well as is shown by the tables.

 

Gross operating surplus is equal to profits, interest and rents before tax plus income of the self employed. Ireland had the highest rate of the EU, in 2007 (graph). Germany had one of the lowest.  This metric is of course influenced by the structure of an economy. Even then: it is remarkable that the German economy was so much more resilient than the Irish one, after 2007. I’m rather sceptical of most kinds of industrial policies. But making your country a tax haven, like the Irish did, may actually be one of the worst.

But didn’t Ireland, which at the time still had a large deficit on the current account as well as a rapidly increasing government deficit and no car industry to speak of, introduce a ‘cash for clunkers’ policy to boost demand, back in 2009? Germany said: thanks! So much for Irish economic policy.

The official definition of the metric: “The turnover is used to remunerate the production factors: capital in the form of the gross operating surplus, and labour in the form of the personnel costs. The share of the gross operating surplus in the turnover varies from sector to sector: The more capital-intensive the sector, the higher the share of gross operating surplus in turnover” and:

“Operating surplus is the surplus (or deficit) on production activities before account has been taken of the interest, rents or charges paid or received for the use of assets. Mixed income is the remuneration for the work carried out by the owner (or by members of his family) of an unincorporated enterprise. This is referred to as ‘mixed income’ since it cannot be distinguished from the entrepreneurial profit of the owner.”

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  1. January 28, 2012 at 5:17 pm | #1

    The big profits of Ireland, the UK, and some others, were due to subsidies to real estate, creating a bubble that collapsed. Germany did not have such a real estate bubble. The problem is not profit, but subsidies that may look like profit but are really Ponzi schemes that collapse when they run out of greater fools.

    • Alice
      January 29, 2012 at 7:30 am | #2

      I beg to differ – The ponzi scheme of Ireland was created by Ireland turning itself into a tax haven for global corporates. Nothing to do with land although Im sure a lot of ponzi corporate profits got ploughed not into investment but into speculation (now that could be art, property, jets, cocaine, shares – you name it).
      Deficit budgets arise when governments are still trying to provide or maintain infrastructure for firms to use to produce, police that firms use to protect their goods, roads, ports and everything else that firms use to produce (that the chump taxpayer pays for) but those firms dont want to pay tax anywhere at all and want to keep all their profits primarily for their executives and contribute nothing to tax..

      We will get to the point in the end that taxes have to rise on corporates and the wealthy. Just how long it takes is another question entirely. There are no signs of the sensible solution emerging in Euro policy or in US policy, just more claptrap about continuing to mollycoddle millionaire entrepreneurial…. thieves by bashing employment and budgets and governments and ordinary workers and wage earners who want to work (In short by bashing everyone else except those who do actually need to work on their sense of social responsibility). The rich didnt get there without the help of governments and tax payers.

      I suppose Fred will now give me a lecture on why corporates shouldnt pay tax and everyone else should pay their way (or perhaps why no one should pay tax? Cant wait)

      • January 29, 2012 at 12:21 pm | #3

        It seems that some cannot see land once it is built upon. Alice, are you trying to say that house price inflation had nothing to do with the problems of Ireland (UK, US and Spain)? Lax credit always feeds into land values. And in allowing this ultimate Ponzi scheme to flourish governments ignore the finest tax base they have: land values. You can’t hide land in a tax haven.

        And in leaving th

      • January 29, 2012 at 12:23 pm | #4

        Let’s finish that, don’t know what happened:

        And in leaving the ultimate Ponzi scheme to flourish governments ignore the finest tax base they have: land values. You can’t hide land in a tax haven.

      • January 30, 2012 at 7:01 pm | #5

        An Internet search on reveals many articles. Low taxes on corporations just make them rich; they do not cause depressions. A land value tax would prevent the real estate boom and bust, and would be paid by corporations as well as by natural persons.

      • January 30, 2012 at 7:03 pm | #6

        Corporates should indeed pay tax, but only on their land value. An Internet search on real estate bubble Ireland shows many articles.

  2. January 29, 2012 at 11:06 am | #7

    It is still the case that the profit share is higher n Ireland than in Germany, In fact the highest profit share currently is still in Greece, then Italy, followed by Ireland, then Spain, and so on….you get the picture.

    http://socialisteconomicbulletin.blogspot.com/2011/11/profits-and-austerity-in-industrialised.html

    However, because of the banking crisis economies which became increasingly dependent on financial transactions as a proportion of profits have fallen t the bottom of the league table, the US, Britain, and, yes France.

    But it is instructive to note too the scale of the GoS in the crisis-hit countries, and elsewhere. In the Euro Area as a whole the total GoS was more than 6 times greater than the public sector deficit. In the crisis-hit countires it varied from between 3.5 times (Ireland) to nearly 7 times (Italy). The GoS was so great that it could cover the entire public deficit and, with the remaining €1.25trn, nearly double the current level of investment (GFCF).

    This is inevitble as, from national accounting indentities applied to the Euro Area as a whole, and the EU’s current account being in broad balance with the rest of the world, the deficit of the pulic sector must have a counterpart in a private sector surplus, which is the level of GoS after corporate investment.

    • merijnknibbe
      January 30, 2012 at 8:11 am | #8

      The metric shown in the post includes ‘mixed income’, which is defined in the post as:

      “Mixed income is the remuneration for the work carried out by the owner (or by members of his family) of an unincorporated enterprise. This is referred to as ‘mixed income’ since it cannot be distinguished from the entrepreneurial profit of the owner”

      As Greece knows quite a bit more self employed than Germany, this explains part of the differences between Greece and Germany. In fact, Walmart and Aldi advance by destroying many small shopkepers, wage labor substitutes for the activities of these formerly ‘self employed’. In the course of these events, the share of wages in total income increases (showing as an increase in unit labor cost, which excludes mixed income!) while gross operating surplus declines. This does not, however, explain the high share of gross operating surplus in Ireland.

  3. Manuel Angeles
    January 30, 2012 at 2:28 am | #9

    As Michael Burke says, the picture is quite clear: in advanced countries profitled regimes seem to have fared much worse than others (although one shouldn´t forget recent wage repression in the likes of Germany). Neoliberalism everywhere favours profit, albeit with differences in degree, as economic and social structures matter too.

    In Mexico, even in its heyday as a “miracle economy” in the 1960s income distribution was highly unequal, as only about 40% of income went to wages. The wage share is now about 32%. Mexico´s gdp fell by 6.5% in 2009, more than twice the US fall, so that we can add one more country to the inequality cum disaster chart.

  4. January 30, 2012 at 7:02 pm | #10

    I wrote, an internet search on – real estate bubble Ireland – but the search terms were taken out evidently by the software.

    • Alice
      January 30, 2012 at 9:29 pm | #11

      Fred – referring to your post at #6 – who exactly would you rely on to value the land owned by corporates for tax purposes? Is there a case for allowing corporates to value their own land holdings? We have seen what happens when we permitted the US wall street firms to pay other private firms to assess the risk of their CDOs – they were fraudulently rated triple A.
      Assuming there is a case for a land tax – who or which organisation exactly should value the land?
      Further what makes you think that land holdings couldnt be shifted by complex processes to a tax haven somewhere? And assuming it would be an effective tax do you not think excess corporate profits would not create a speculative bubble in some other asset class or commodity should land become more expensive relatively?
      The problem we have is corporate profits (at the cost of labour’s share of income) in excess of investment demand. The most obviously practical thing that can be done with it is to redistribute it to the government and to labour – ie reduce the public sector deficit and correct the current gross imbalance – rather than leave it with those firms who are accruing but not re-investing their surplus profits in useful job creating production.
      It seems to me a financial transactions tax would be far faster and simpler because land transactions take time and because firms need to park money in financial services before during and after… maybe there is a case for both. Notwithstanding, taxing either of these does not specifically target only the wealthy and it is the wealthy individuals and firms who need to have their taxes increased (ie the excessive tax reductions granted to this class over the past thirty years need to be reversed).

      • January 30, 2012 at 10:18 pm | #12

        A tax on land value would be implemented similar to the way that current property taxes are levied, except that the value of the improvements (buildings) would be exempt, and the tax rate on the site value would be 80 to 90 percent. The common practice in the USA is for the counties to assess and collect the real property tax. If the land value tax also finances the state and federal or national government, then to prevent under-assessment, the board of assessors would include representatives from the state and federal governments.

        Land would become less expensive to purchase, because the owners would keep less of the rent. A land value tax would not be on any transaction, but paid monthly based on the current land value or rent. So the fact that real estate transactions take time does not matter. True, land value taxation does not specifically target the wealthy, but it does take their income from land without the credits, deductions, and capital hiding and flight that takes place when taxes are focused on their financial income or holdings. A properly implemented land tax cannot be evaded. Since land is not being produced, LVT is a way to tax the rich without any bad economic effect.

      • January 30, 2012 at 11:28 pm | #13

        The valuation of land is much easier than is generally recognised. It can be and is carried out on an annual basis in various jurisdictions (Denmark, Australia). The essential thing is that valuations are in the public domain so that it can be seen if valuers have been compromised.

        The tax should be levied on owners (in the UK we levy annual property taxes on occupants). If the tax is not paid then the title to the land should be ultimately forfeit.

        It would ensure that land is not wasted. A recent article in the FT claimed that the UK has more ‘brownfield’ sites than anywhere else.

        In the UK in particular there is antipathy to taxing agricultural land. Yet tenant farmers happily pay the equivalent of LVT to their aristocratic landlords. And since the Common Agricultural Policy subsidy was changed to payment according to acreage, the subsidy has fed straight into land values – a completely predictable outcome.

        LVT meets all the criteria for what a good tax should be and it is quite remarkable (sinister?) why the economics profession chooses to ignore it. I know an Oxford professor of economics who has written in support of LVT, used to have breakfast chats with the then UK chancellor, Gordon Brown, but when I asked why he never mentioned it when consulted by the Treasury, said simply ‘it is not politically feasible’. I have no doubt that there is something in that, but is there no courage at all nowadays? I guess that some of the reason for the rejection of LVT is the insistence by Georgists that LVT be the only tax. I don’t hold that view and it is in any case a pretty rotten reason for ignoring such a potentially powerful policy instrument.

  5. Alice
    January 31, 2012 at 7:53 am | #14

    Fred – just above you say “and the tax rate on the site value would be 80 to 90 percent.”

    Now that would cripple an awful lot of Mums and Dads and middle class families who own their own house and land and are busy raising families in them and I dont think we need to cripple the middle class any more than they have been put down already. The middle class were always an important source of assistance to the poorer amongst us and if they lack the resources to donate to others less fortunate – then the poor will also only get poorer. Of course the wealthy can afford to pay 80 or 90 percent tax on their landholdings but ordinary families just cant. As I see it – this would increase inequality rapidly, such that only the very wealthy could actually afford to own land. I am assuming you mean an annual tax of 90 percent of the value of land?. We might (the majority of us) all end up tenants and servants again for some wealthy overlord.

    That idea sounds counterproductive entirely as a way of rectifying inequality. I think we have been forced to swallow too many ideological silver bullets over the past few decades and that sort of tax on land just sounds to me like another one.

    • January 31, 2012 at 10:23 am | #15

      80-90% rental value, not capital value. At 100% LVT capital values tend to zero. And LVT is meant to be a replacement for all other taxes on property plus taxes on production, so eminently affordable.

      • Alice
        February 1, 2012 at 9:50 am | #16

        80 to 90 percent rental value tax is still way too high for many people trying to simply own a house and land to raise kids in….Im not talking about the wealthy – Im talking about the middle – maybe this land tax if it was prgressive would be fine so why is Fred suggesting a flat tax percentage on all. Still not well thought out Im afraid – there would still be a transfer of land to the wealthy as they would be the only ones who could afford this land tax. Not something we need right now.

      • Alice
        February 1, 2012 at 9:50 am | #17

        by who?

  6. Alice
    January 31, 2012 at 7:56 am | #18

    I also dont see much income being earned from middle class family homes by Mum and Dad raising their children. Certainly not enough to be able to afford an 80% to 90% land value tax annually. The reality is many who own land simply wouldnt earn that much…so the land would be transferred to someone who earned much more.

    • Derek R
      February 7, 2012 at 12:56 am | #19

      Not at all, Alice. Just as there is a Personal Allowance associated with Income Tax so there could be a Personal Allowance associated with Land Value Tax. It could take the form of an exemption on the first x thousand pounds of value, or of a cash rebate, or of a credit against other tax liabilities. This would ensure that most people would pay little or no tax on their home. The implementation of LVT has actually been thought through in considerable detail by Land Taxers over the last 130 years and if you do some research you should find answers to most of the problems you may see.

      But whether the implementation were to be done in the way that Carol wants or that Fred wants (and admittedly there would be differences in their approaches), the outcome would be that the 99% would end up paying considerably less tax than they do now and the 1% would end up paying considerably more.

      • February 7, 2012 at 11:12 am | #20

        I do not agree with the personal allowance ‘homestead allowance’ idea. We took it out of our Labour Land Campaign manifesto. It’s a distortion and loophole which is not necessary. At a high rate LVT there would be such a huge revenue stream that we could afford generous transitional reliefs, but they should only be transitional while the market adjusts. An issue which would need to be addressed is the mortgage burden. Consideration should be given to transferring some liability for paying the LVT to the banks who in effect own a fair proportion of the relevant land.

        One of the main effects would be a relative increase in the value of non-residential land.

        And Alice, we are talking about 80-90% rental, not capital value.

  7. Alice
    January 31, 2012 at 8:19 am | #21

    Carol – you mention that Australia has an annual land valuation system yet it might not occur to you that a lot of people are rather unhappy with the valuations carried out by the new “privatised” land valuation company (LPI).

    The land values have risen at a rate that seems excessive even when the market values have taken a downturn and feed into Council rates and land tax which of course then lead to excessive rate rises above market values. Never ignore the reward factors at play here – again I raise the case of institutions like Standard and Poors who received rewards for rating risky credit instruments as safe because they got paid to do so.

    That their ratings are in the public domian is insufficient to curtail this sort of behaviour. There is only one valuation that is possible and that is from a genuinely independent public body – something increasingly hard to find these days. This task in Australia was previously carried out by the Valuer Generals department (not so long ago when it was thought prudent to separate the activities of government from the activities of the private sector to of course reduce the possibility of corruption of ;public departments and ensure government employees acted in the best interests of all – an attitude we could do with today). For many decades the Valuer General’s department carried out all land valuations without too many questions and their land valuing activities were rarely considered or described as questionable, unlike the current private organisation (LPI) that carries out land valuations.

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