Testimony Before the British Ministry of Magic Committee on Ways and Means

April 1, 2019

Minister Shacklebolt, Chairwoman Granger, members of the Wizengamot,

Thank you for agreeing to speak with us today. We are representatives of the Tax Foundation, an American Muggle think tank that seeks to improve lives through tax policies that lead to greater economic growth and opportunity.

While we were only recently made aware of the existence of magic, let alone the intricacies of the Wizarding World’s economy, we have done our research on the state of the British magical community’s economy and have put together some recommendations, based on our understanding of tax policy and public finance in the Muggle world.

The British Ministry of Magic’s tax code is one of the things standing in the way of economic growth. We have several suggestions for how to improve it.

The Wizarding economy has experienced little innovation in the past decades because of a lack of new businesses. Until recently, the vast majority of research and development was carried out at the now-defunct Department of Mysteries, a secretive government agency that produced few tangible benefits for the wizarding population. The most successful new firm is Weasley’s Wizard Wheezes, a joke shop-turned-technology-titan. The Weasley brothers (George and the late Fred) developed their new, better products through experimenting with potions, spells, and other artifacts.

The first way to generate productivity-enhancing magical innovation is to allow the full expensing of wizarding investments.

In the Muggle world, allowing companies to fully expense the values of their investments is the most efficient way to generate economic growth for the amount of tax revenue lost. Full expensing reduces the cost of capital, increasing incentives to invest, which helps spur productivity growth and wage growth. Empirical studies of investment behavior have shown that firms are very responsive to changes in how capital investments are depreciated. The Tax Cuts and Jobs Act, passed in the Muggle United States in 2017, helped move the country closer towards full expensing.

Under the current wizarding tax code, merchants must spread the cost of potion ingredients, cauldrons, brooms, and wands over the course of useful lives, instead of as soon as they are purchased. Allowing companies to fully expense the value of these forms of capital investments will encourage wizarding productivity and wage growth in the Wizarding World. And wage growth for workers is sorely needed in an economy such as that of the British Wizarding World that is dominated by a hereditary aristocracy.

A similar change would be removing trade barriers and tariffs on foreign cauldrons and flying carpets.

Free trade has been a key cause of the decline in global poverty in the Muggle world over the past few decades. Countries that impose tariffs on imported goods tend to suffer. When the Muggle United States has placed tariffs on imports, consumers have faced higher prices and lower real incomes, along with slower economic growth. One justification for tariffs on imports is that they will protect domestic jobs. However, by increasing prices of inputs for businesses in other sectors, tariffs often end up destroying more jobs than they create. For example, when George W. Bush put tariffs on steel imports in 2002, that saved 175,000 jobs in the steel industry, but it cost 200,000 jobs across industries that consume steel.

Tariffs on foreign cauldrons and barriers on importing flying carpets have a similar impact on the British magical economy as the steel tariffs did on the U.S. in 2002. In the early 1990s, then-Junior Assistant to Prime Minister Cornelius Fudge Percy Weasley wrote a report on cauldron depths, asserting that foreign cauldrons were leaky. This report was later disproved but was still used to justify protectionist measures such as tariffs on imported cauldrons. While those tariffs may have protected cauldron employment, higher cauldron prices likely suppressed more employment in other industries, making it more expensive for magical entrepreneurs in the potions industry to invest, create jobs, and improve productivity and well-being. Similarly, while banning magic carpet imports might protect broomstick jobs, removing an efficient form of family transportation reduces well-being for British wizards as a whole.

Lastly, the Ministry of Magic would do well to avoid the folly of subsidizing the Chudley Cannons’ new stadium.

In the Muggle world, there is broad consensus that subsidies for sports stadiums do not lead to better economic development. When surveyed, 86 percent of economists said that governments should stop subsidizing the construction of sports stadiums, and 83 percent of economists said that subsidies for sports teams are likely to cost the average taxpayer more than the benefits they would receive. Two years ago, a bill introduced in the Muggle Congress would have stopped allowing sports teams from funding stadium construction using tax-exempt municipal bonds, instead applying federal taxes to those bonds.

Applying these lessons to wizarding Britain, the Ministry of Magic should not subsidize, through either direct subsidies or tax exemptions, the construction of the new stadium for the Chudley Cannons Quidditch team. And economics aside, why should the Ministry of Magic subsidize a Quidditch team that has not won the League since 1892?[1]

[1] https://harrypottercanon.fandom.com/wiki/Chudley_Cannons#cite_note-2.



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