Since 1979, when Margaret Thatcher came to power, politicians – sadly including many in our own party – have denigrated taxation, reduced the levels of income tax and switched tax from income and wealth to consumption. All mainstream political parties have perpetuated the myth that you can have low taxes and good public services. When I first worked, in the late sixties, the basic rate of income tax was 33% and the top rate was 98%. This had persisted since the war, regardless of which of the main parties was in power. The basis for these levels of taxation was the need to pay for public services, including a good number in public ownership. There was also a view that the gap between the bottom and top of the income scale should not be too large. Broadly people accepted this post war settlement, except of course for a few very highly paid individuals – like the Rolling Stones, who went to live abroad.
Mrs Thatcher, a disciple of economist Milton Friedman, changed all that. Tax rates at the top plummeted to 60% (and later to as low as 45%) and basic rates declined a little. Soon taxation on consumption was to rise and there were new taxes too. The argument used was that income tax was stifling enterprise and that letting people keep more of their own money would incentivise them to invest and develop new businesses. The corollary was that there was less money for public services and an inexorable squeeze on those services was started by Mrs Thatcher, continued by John Major and compounded by Gordon Brown. The coalition made it worse.
At the same time inequality started to get worse. Over time the ratio of top earners pay to shop floor workers’ pay went up from about 4:1 in the immediate post war years, then to 10:1 and much more in some cases, even as high as 50:1. Peter Mandelson may have been relaxed about people getting filthy rich as long as they paid their taxes, but the effects of this huge widening of inequality has had devastating effects on our society, as detailed in ‘The Spirit Level’ by Kate Pickett et al.
The reductions in income tax continued, urged on by the millionaire owners of the press and media. Despite the big increases in personal allowances the gap between the top and bottom has continued to grow and with it the breakdown of the caring society some of us still remember. The politics of envy, stoked by the advertising industry, create a society filled with anxiety, mental illness and violence. In many areas people don’t even know their neighbours, let alone love them. Gated communities tell you just how uncaring we have become.
Denigration of tax has continued apace. Few politicians have dared to contradict the idea that tax is bad. At the same time, vital public services are in the hands of private companies, whose motivation is rewards for shareholders, rather than services for the service users.
Reading a book like the Spirit Level makes me realise how much we have all been duped by the mega rich and the alt right. We have mostly swallowed hook, line and sinker the arguments about high levels of income tax being a disincentive and the need to cut public expenditure. Well, perhaps tax should be a disincentive to paying obscenely high salaries to people who have conned us into believing the world would end if they weren’t paid so much. The truth is that there are many many competent people who could successfully run businesses for a quarter of the money paid to so-called business leaders. Professors Friedman and Laffer need to be ridiculed not aped. Public services in the UK are now ludicrously underfunded or in many cases no longer exist.
The time has come for the Liberal Democrats to break away from this trope and campaign for taxation and argue the case for properly funded public services. We must also stop pretending that income tax rates higher than 45% or even 50% tax the very rich adequately. Sweden, whose record in the inequality stakes is the polar opposite to the UK, has income tax rates in the 60% + region and far better public services than we do.
Others on LDV have talked about inequality. We need to recognise that one of the main causes is the get-rich-quick society and the people who no longer pay their fair share towards public provision of health, education, social care or transport . There can be no justification for the obscene levels of inequality we see in the UK.
One of the remedies is a progressive taxation system that taxes wealth, income and land. We need to be alert to the opportunities for creating or improving equality throughout society e.g. by re-building democracy at work, reducing the differentials between Chief Executive pay and shop floor pay and more mutual and worker/consumer run businesses, but a proper tax policy will be a start. We must start prioritising increasing equality if we are ever to convince an increasingly sceptical electorate that we have anything relevant to offer.
Calderdale has submitted a resolution on rehabilitating tax and I hope FCC will allow us to debate in at conference.
* Michael Taylor and Ruth Coleman-Taylor are members of Calderdale Liberal Democrats
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34 Comments
“……in the late sixties, the basic rate of income tax was 33% and the top rate was 98%”
Or maybe 95%? I seem to remember George Harrison using the phrase ‘one for you and nineteen for me’ in his Taxman song.
You can argue for whatever level of taxation you think appropriate. I wouldn’t say a 95% or 98% rate was necessary. But that’s just my opinion.
What is not a matter of opinion is that Government spending precedes taxation. Otherwise there wouldn’t be any money in the economy for us to pay our taxes. You do need to understand why we have taxation before advocating changes to the tax structure.
It’s not to provide Governments with the money they have created in the first place!
This article mixes together quite a lot of things. I have to say that I have mixed views on high pay. IF by their skill and ability people earn a lot of money for their company that in turn benefits those in their company – even the poorer paid. In a comment in a previous thread the management of Marks and Spencer were slated for high pay but M&S have a reputation for paying their shop workers above average wages.
If high earners are helping Britain earn its way in the world then that is to be encouraged – and is helping fund public services and benefit the less well paid.
But… More equal societies do seem have to have lower crime rates, better health and generally happier societies. George Orwell wrote an essay on why is a judge paid more than a miner – surely the miner was of greater use to society? Perhaps today’s equivalent is the Premier League footballer and the nurse.
It is wrong – I would argue – to say that high earners do not pay a good share – “fair” or not is always a debate. I don’t believe that the highest marginal rate of tax should be much above 50% – you should keep at least half of what you earn by the sweat of your brow. But that should be for lower earners as well as higher earners – and lower earners – especially in the £10k-£20k bracket face very high effective marginal rates.
There is some reforming we should do. Council tax replaced by local income tax. Low earners face very high marginal council tax while high earners get away virtually scot-free. I would have a small inheritance tax to pay for social care. And as I have argued before borrowing for university tuition and increased education spending. And end the cap on National Insurance.
But.. We should be weary of the argument that you can raise much by “soaking the rich”. In general taxation is borne by the vast majority on below average, average, and above average wages. And the case needs to be made to them – and a large number agree or are receptive. They get a lot back – the minimum Obamacare premium is £4000 – so you have to add that on to US taxes. And for a civilised society and investment in a better future.
” The corollary was that there was less money for public services and an inexorable squeeze on those services was started by Mrs Thatcher, continued by John Major and compounded by Gordon Brown”
cutting income tax raised more money. Public spending increased in real terms throughout the period.
Professors Friedman and Laffer made significant and important contributions to economic theory and thinking about tax policy. The leading economists in this area- Stiglitz, Piketty and the late Tony Atkinson all focus on two key issues – Wage levels and distribution of capital. Atkinson laid out 15 proposals to tackle inequality https://www.tony-atkinson.com/the-15-proposals-from-tony-atkinsons-inequality-what-can-be-done/ that form the basis of a comprehensive manifesto to tacke inequality head-on:
Proposal 1: Encouraging innovation in a form that increases the employability of workers and emphasises the human dimension of service provision.
Proposal 2: A proper balance of power among stakeholders.
Proposal 3: An explicit target for preventing and reducing unemployment underpinned by guaranteed public employment.
Proposal 4: A statutory minimum wage set at a living wage, and a code of practice for pay above the minimum.
Proposal 5: National savings bonds with a guaranteed positive real rate of interest on savings, with a maximum holding per person.
Proposal 6: A capital endowment (minimum inheritance) paid to all at adulthood.
Proposal 7: A public Investment Authority , operating a sovereign wealth fund with the aim of building up the net worth of the state by holding investments in companies and in property.
Proposal 8: A more progressive rate structure for the personal income tax, with marginal rates of tax increasing by ranges of taxable income, up to a top rate of 65 per cent,
Proposal 9: An Earned Income Discount, limited to the first band of taxable earnings.
Proposal 10: Receipts of inheritance and gifts inter vivos should be taxed under a progressive lifetime capital receipts tax.
Proposal 11: There should be a proportional, or progressive, property tax based on up-to-date property assessments.
Proposal 12: Child Benefit should be paid for all children at a substantial rate and should be taxed as income.
Proposal 13: A participation income should be introduced at a national level, complementing existing social protection.
Proposal 14 (alternative to 13): There should be a renewal of social insurance, raising the level of benefits and extending their coverage.
Proposal 15: Rich countries should raise their target for Official Development Assistance to 1 per cent of Gross National Income.
Simon McGrath – You have to be careful with words here. “Cutting income tax raised more money. Public spending increased in real terms throughout the period,” implies some sort of direct causation.
Of course a lot more was going on in that period e.g. North Sea Oil receipts, the privatisation of lots of nationalised industries and the demutualisation of lots of building societies. All these pumped lots of new money into people’s pockets which drove growth.
It would be equally valid to suggest that “selling mutual assets boosted the economy, which allowed a growth in public spending due to the increase in tax revenue associated with growth, despite income tax being cut.
Wonderful proposal. Income tax should be 100% for income over £50,000. That will bring in massive amounts of money.
I absolutely agree that we must prioritise reducing inequality. It was indeed a theme as you suggest of The Spirit Level, the influential book by Kate Pickett and Richard Wilkinson, the thoughtful academics who addressed the meeting in Keswick on Wednesday night which I attended and have reported on here, in the article posted at 10.35 this morning (see below). I trust our September Conference will indeed forge a strong taxation policy, which will include among other aims taxation of land value and fairer corporation tax. Since the Economics Working Group is at last (delayed by the GE) I understand putting forward a motion for Conference, there will surely be a fruitful debate on whatever motion. Yours, you certainly argue for strongly in your article, which is good to read.
It is interesting also however that Professors Pickett and Wilkinson have considered further the harmful social effects that are proved to result in more unequal societies. And their new book The Inner Level explains those harmful effects, including increased depression arising from people’s internalised sense of inferiority and submission to it, a finding which will surely also seem important to Liberal Democrats. This is referred to in my report of their talk, where Professor Wilkinson’s spoken conclusion, that reducing inequality requires changing the culture as well as taxation, seems worth deep consideration by us.
Equality of outcome, which is what the authors of this article appear to be arguing for, is a socialism pure and simple.
“The Spirit Level” has been comprehensively debunked as using highly selective data. https://en.wikipedia.org/wiki/The_Spirit_Level_(book)#Critical_response
As Simon points out above, Laffer’s work shows that punitively high levels of taxation reduce overall revenue and lead to less money to spend on public services, not more, thereby hurting the very people the authors purport to want to help.
And this source shows, relative poverty has been stable in the last 20 years, but – crucially – absolute poverty has reduced significantly. https://fullfact.org/economy/poverty-uk-guide-facts-and-figures/
Absolute poverty is the standard that any Liberal would want to see measured.
Peter Martin: As a recently retired principal lecturer in economics, business, and politics I might just understand how money is created and how taxation works!
What you suggest might once have been true when most tax was paid at the end of the financial year. However, the vast majority of people pay income tax and NI monthly and indirect taxes like VAT are collected quarterly. Council tax is mostly paid in monthly instalments.
I know, and I’m sure you do, that taxation is to provide services and pay for the governmental/state machine. Because it doesn’t all arrive at the beginning of the financial year, governments have to borrow money to be paid back when the tax comes in. Now of course most governments have a gap between taxation and spending known as the budget deficit, though it has to be said that for at least some years of the Blair/Brown government there was in fact a surplus. A cost conscious government would run a surplus when times are good and a deficit only when times are bad, aiming to balance out over the business cycle.
Michael 1: I am not arguing for a return to the ultra high rates of supertax that existed from 1945-1979. But 60% or 65% is not ‘soaking’ the rich. After all it happens in most Nordic countries with their much more equal societies.
Innocent bystander: I am sure your comment is sarcastic, but in any event that’s not what we’re suggesting, nor would it be fair or sensible.
There will be a price that has to be paid for a more equal society and those with broad shoulders will carry more of it than those with low incomes, at least in terms of the tax burden. Equality will not be driven solely by tax changes. Lots of other changes are necessary too as our article mentions. It is vital, in my view, to challenge the view that people deserve or earn the sorts of obscene salaries that are paid in the city or to captains of multi-nationals, whilst mere mortals are told the national minimum wage is unaffordable and will cost jobs. The real challenge will be to greatly increase shop floor wages to a decent living wage and to reduce the ratio between top pay and the shop floor.
I wouldn’t say a 95% or 98% rate was necessary. But that’s just my opinion.
A tax rate like that isn’t about raising money, it’s an attempt to bring in a maximum wage law by stealth. So it should never occur; if you want to cap, by law, the amount people can be paid, you should have the courage to argue for that directly and see if the voters go for it. You shouldn’t do it though the tax system.
What is not a matter of opinion is that Government spending precedes taxation. Otherwise there wouldn’t be any money in the economy for us to pay our taxes
Surely this isn’t true? I mean, back in the mists of history there were no governments and no government spending; but kings and temples still levied taxes.
If there can be no money without government spending, then that should have been impossible. But it happened. How do you explain that?
I remember Mick speaking against the plans to cut taxation in 2008. When Vince, Tim, Nick et al were all gung ho about cutting taxes (actually cutting not raising the threshold – that came later).
When the LIb Dems were in government they prioritised cutting taxation rather than NHS funding. Had the NHS funding increased at the average it did under Thatcher/Major it would have more than covered the increases being talked of today.
Simon
you are having a laugh if you think Laffer curve (cutting taxes) contributed much, every time they try his prescription it goes very badly wrong.
“Brownback sold the cuts as a way to jolt the Kansas economy to life, promising major job growth thanks to the lower tax rates. To pass these tax measures, Brownback worked to replace moderate Republicans in the legislature who opposed his ideas with true-believer conservatives. He helped knock off nine moderate Republican incumbents, and the effort paid off when his tax reform passed in 2012.
Brownback sold the cuts as a way to jolt the Kansas economy to life, promising major job growth thanks to the lower tax rates. To pass these tax measures, Brownback worked to replace moderate Republicans in the legislature who opposed his ideas with true-believer conservatives. He helped knock off nine moderate Republican incumbents, and the effort paid off when his tax reform passed in 2012……
But instead of the miracle growth that Brownback promised, the tax cuts have left a widening crater in the state budget. State economic growth has lagged behind the national pace, and job growth has stagnated. Lawmakers have been left scrambling each year to pass unpleasant spending cuts when tax revenue comes in below expected levels, leading to contentious fights in the legislature and state courts over reduced public school funding. When the state legislature convened last month, it faced a $320 million budget shortfall that needed to be closed before the end of the current fiscal year in June—and a projected additional $500 million shortfall for the next fiscal year.”
https://www.motherjones.com/politics/2017/02/sam-brownback-kansas-tax-cuts-donald-trump/
TCO: Not sure where you found the ‘equality of outcome’ idea advanced in our article, because it wasn’t. The authors of the Spirit Level – both professors in academia – have answered all the criticisms you mention in the latest edition of their book. I suggest you read them before putting up such an ill- thought out article as debunking the Spirit Level and incidentally totally lacking in the sort of academic rigour shown by the authors of the book.
Laffer proves nothing of the sort by the way except at very high levels of taxation and we’re not proposing them.
And no, it’s not socialism because that’s statist by-en-large and we’re certainly not that. What we are actually doing is following Adam Smith in getting the government ‘to hold the ring’ in ensuring that the economic system works well for everybody not just the mega rich.
@ TCO
The authors are not arguing for equality of outcome; they are arguing for a more equal spread of income. This would also bring more equality to freedom and liberty.
My reading of the Wikipedia article you link to suggests that the criticism of ‘The Spirit Level’ has not be judged significant.
The second link you gave tells us that absolute poverty measurements in the UK are useless as it has been set at 2010/11 relative rate and it should decline over time without real poverty rates changing. However, the relative poverty graph shows that over 20% of UK individuals live in relative poverty after housing costs and about 18% before housing costs. We all should think this is unacceptable in the fifth richest country in the world.
@ Dav
Where there was a money economy in the past then the government created it. It was the government that had the right to issue coins or sell that right to others. The first coins were minted between 700 and 500 BC. The government could be a city state one or a monarchy.
@ Dav @Mick Taylor,
The question of where money comes from can easily be resolved by a simple thought experiment. This is a neat trick often used by Physicists to resolve certain issues which can be causing some trouble.
Imagine a society which is transitioning from not using money to using it. Previously they might have managed some other way -like barter. The Government could be an individual KIng or be a group of people democratically elected along more modern lines. It doesn’t really matter.
One possibility would be for the Government to issue Gold coins and the value of the gold in the coin would give it a value. Alternatively, the Govt could issue paper, plastic or even electronic tokens which are instrinsically worthless. So what would then give them a value?
The Government would demand the tokens they had created as tax payments, thereby creating a demand for them. The Govt pays its workers, and its contractors etc in its tokens but at the same time the Govt does have to issue tax demands with the threat of punishment for anyone who doesn’t pay.
So, logically, the spending has to come before the taxation. Also, logically, it must also follow that the Government can never get back more tokens than it has created in the first instance and so technically is always in debt.
Possibly Governments don’t like the idea of everyone thinking that the so-called “currency of the realm” is just a tax voucher! So they make them look as pretty as they can and put a nice picture of a few notable people on the banknotes. Then they’ll create a central bank to issue the money, that they do own, but at the same time they’ll make out that it’s an independent organisation totally separate from Government!
Are we fooled? Well maybe some of us are!
@ Mick Taylor
I forgot to answer your point about “Council tax is mostly paid in monthly instalments.”
I’m sure the councils do prefer it that way. Council tax does work the same way as most people think all taxes work. The council spends the money that it has raised in taxation. If it doesn’t get raised, the council can’t spend it except if it borrows it.
Like you and I, the council is a user of the currency. But there has to be one issuer of any currency and that is nearly always the Govt. The euro is a little different in that it is shared between 19 Govts but that’s another story. But nearly everywhere else in the world, we have the model of one Govt as the one issuer of the currency.
Again logically, it has to follow that the rules for the issuer can’t be the same as the rules for the users. They can use QE to get them out of a hole, as just one example!
@Peter Martin: Please tell us which government is spending Bitcoins into circulation. Thanks.
Bitcoins and other similar crypto-currencies are more like a commodity than money. I would say! Not just me. In September 2015, the Commodity Futures Trading Commission (CFTC) in the United States officially designated Bitcoin as a commodity.
They are an interesting phenomenon. It doesn’t matter if 99 out of 100 people would say they are worthless. If the other person is prepared to pay $N for one, then that’s what they are worth. There’s no getting away from the fact they have some value and some use.
But with Government issued currencies their value does depend on the existence of that Govt. When the Confederacy was defeated in the American civil war the confederate dollar became worthless. When the DDR ceased to exist in 1989, the Ostmark became essentially worthless, although the newly unified German government did intervene to give it some value subject to certain conditions.
https://www.thebalance.com/is-bitcoin-a-commodity-4126544
Money is also used as medium of exchange and a store of value.
In ancient times, governments would debase their currency by adding a lower value metal to the gold or silver content of the coins.
Roman emperor Nero began debasing Roman currency around 60 AD by reducing its silver content. Over the next 150 years, the silver content was reduced to 50%. By 265 AD, the silver content was down to 5%. When a currency is debased, sooner or later the citizenry catches on and begins demanding higher prices for the goods they sell or more wages for their work, resulting in inflation. In the case of the Roman Empire, the debasement produced annual inflation of around 1,000%.
Henry the Eighth needed a lot of money for his lifestyle and foreign wars. After selling off the monasteries he started debasement of the coinage leading to inflation of 400% in the 16th century against a backdrop of stable prices over the previous century.
By the time Elizabeth I came to power in 1558 the quality of England’s coinage had already greatly affected both confidence in the monarchy as well as the country’s trading relations with foreign merchants refusing to accept the debased currency as payments.
Today, most currencies are fiat currencies and are not based on a precious metal. So, debasement only requires that the government print or electronically more money. The Weimar Republic reduced the value of the German mark from around eight per U.S. dollar to 184 per U.S. dollar by printing money to meet its financial obligations. By 1922, the mark had depreciated to 7,350 per U.S. dollar. It eventually collapsed, reaching 4.2 trillion marks per U.S. dollar, before Germany returned to the gold standard. The official money became so worthless that virtually nobody would take it and farmers began to hoard food. Accordingly, any currencies backed by any sorts of value became the circulating mediums of exchange. In 2009, hyperinflation in Zimbabwe began to show similar characteristics i.e. almost no one would accept Zimbabwe currency, but would accept almost any foreign currency, goods in kind or precious metals.
The principles of sound finance require that governments moderate inflation and budget spending in accordance with growth in productivity and economic output i.e. do not allow the money supply to grow at a significantly greater rate than the economy as a whole.
I so despair at the desire to punish the productive and reward the rentier.
But what can we expect from our political economy academy when even Nobel recipients like Stiglitz tell us that they were consistently warned off talking about/focussing on rent while they still had a neo-classical based academic career they wanted to succeed in?
Most high incomes (and almost all obscenely high incomes and wealth) are really nothing to do with “work” but about the ability to extract economic rents from different situations, from natural scarcities or privileges and protections granted largely by our governing institutions that consistently enrich the few by enabling them to bilk the many.
Collect and share all that rent (economic “bads”) and we can stop punishing the productive labour, investment and trade in economic goods, while respecting our innate equal birthright to a share in the natural and social commons.
The rentier economy is once again flourishing, even, perhaps especially, in developed nations that pride themselves in having the sort of institutions that should be able to keep it in check, and we squabble about how much to punish the productive instead of addressing the real herd of elephants in the room.
@Jock – Thank you for finally bringing some reality to this thread!
The overwhelming source of inequality in this world is not income inequality, it is asset inequality, usually as land. Bill Gates didn’t make $50billion by earning $2billion a year for 25 years. He made it in capital gains. Ditto everyone else in the world’s rich-list.
We should stop our silly and ineffective obsession with relatively unimportant salaries, and go after the real wealth, the real source of inequality in society: property in land.
Pre Thatcher you high taxes but lots of tax free allowances and ways to avoid paying taxes, when the latter were tightened and the former cut, the actual tax take increased as did the dynamism and economic creativity of the country… the effects of this carried on through Major into Blair’s government and only Gordon Brown trying to bankrupt the country put the brakes on things and ended up with a country saddled with incredible levels of debt and a ruined currency.
It’s wrong-headed to think that increasing income tax will help public spending, all it will do is make people less inclined to risk their own money and time in creating new products and services because the reward won’t make it worthwhile. Taxing wealth in terms of inheritance tax is a way towards a more equal society in the sense that there is more equality in the starting point of people’s lives but even that is a hard sell to an electorate who have had huge sums taken off them in tax over the years. A sales tax on property as employed by most EU countries is also way of evening things out a bit.
If you look at it from other side, in making individual lives as easy as possible then getting to a point where you need very little money to live is more interesting as it would free up opportunities for people to do stuff that interests them, so that means cheap rent, no council tax or standing charges from energy companies, cheap food, etc. The concept of relative poverty and equality should not concern governments once people have somewhere to live and enough money buy the basics.
@ Cllr Mark Wright
“….go after the real wealth, the real source of inequality in society: property in land.”
Yep that’s fair enough if you want to reduce inequality. But it won’t raise anywhere near enough “spending money” to fund the NHS. Much of the wealth of the kind you are thinking of (shares, buildings, land) is in the form of valuations. If the Govt and their tax people are seen to be seriously coming after the owners of these, their value will decrease sharply. The wealth will disappear like a snowflake on a summers day.
Even if you are successful for say the first year there won’t be anything left in the second year so the problem of the funding will only be postponed. The solution is, as always, to properly manage the economy so that everyone is working as productively as possible. That way, we don’t waste resources by having many workers unemployed, underemployed or working in low paid low productivity jobs. That way working people can have good and rewarding jobs. The rich can keep their shares etc.
It should be an idea to appeal to Lib Dems. So why the reluctance?
@Mark – whilst land does of course occupy a special place in the economic rent scene (especially when you include all kinds of land in the economic sense of all scarce natural resources used as a factor of production) I would say Bill Gates and many others extract a different sort of rent – in the form of state protection of intellectual property to which they made only a tiny contribution that goes back in his case to the efforts of Charles Babbage and Ada Lovelace. Carlos Slim’s wealth is entirely based on privatisation of publicly created value and land rents in the form of electromagnetic spectrum monopolisation.
I thoroughly recommend “The Corruption of Capitalism: Why rentiers thrive and work doesn’t pay” by Guy Standing for quite a thorough but very readable book about the whole effects of rentier capitalism.
As an example, we just need to look at this year’s Sunday Times Rich List which proclaimed as a headline that Jim Ratcliffe of Inneos showed that the “landed aristocracy” were no longer the force they were, whilst ignoring that all his wealth also comes from the exploitation of land rents (in the form of natural resource extraction – just like a Russian oligarch). Collectively, we don’t seem to understand this and it’s killing us by corrupting our economy and democracy!
@Peter Martin – the “value” in land is its capitalised rental value. Someone collects that “rent” – because it’s a factor of production every one of us needs, is relatively scarce compared with more reproducible factors (labour and capital)…as Churchill put it:
“Land, which is a necessity of human existence, which is the original source of all wealth, which is strictly limited in extent, which is fixed in geographical position — land, I say, differs from all other forms of property, and the immemorial customs of nearly every modern state have placed the tenure, transfer, and obligations of land in a wholly different category from other classes of property.”
It is that (“passing”) rent we want to collect. Yes, the capitalised value of it will disappear just as if you remove the coupon on a gilt its yield to the holder disappears and with it the capitalised future value of that yield. Let’s put it this way – if land were to be “valueless” and no rent owing to anyone I’d be moving to WC1 or OX1 tomorrow 😉
There is plenty of rent to fund the country – and as the Physiocrats, Adam Smith and David Ricardo showed before Marx and Marshall came along and decided that land and capital were of a piece as the same factor of production, taxing it does not make it disappear, it just transfers it from a private expropriation to a social one.
I think we need to be careful about high pay being bad – generating economic wealth is good for a company, its workers, pensioners and the country has a whole – including helping provide better health care and public services.
To take one example, Steve Jobs took Apple from being 90 days from bankruptcy to the world’s most valuable firm. Whatever he got paid – he clearly generated a lot of good well paid jobs economic wealth – far in excess of what he got paid – along with some useful devices.
While relative poverty may be bad – absolute poverty is worse.
As as been discussed before enforcing any restrictions on high pay is difficult. People would either form one-off service companies just containing them so as to get round the restriction on the ratio between the highest paid and lowest paid or base themselves abroad – many jobs could be done from abroad.
But we also need to tackle inequality. Through redistribution. Through providing services – state pensions, health care etc. But also I believe it is better tackled through two means. Firstly a good minimum wage/living wage. Secondly through investment in education and skills – far, far in excess of what we do today. The well-paid jobs of tomorrow and today globally are “knowledge” workers rather than manufacturers and assemblers.
Apple is a huge accumulator of economic rent both through intellectual monopoly (both in its own right as owner of IP and by exploiting the IP of others through its dominance for a long time of the online media market), tax avoidance and through the banking system and manipulation of interest rates by central banks enabling them to make it cheaper to borrow at those artificially low interest rates to buy back stock whilst sitting on a pile of cash offshore (though they’re now, under Trump, natch, being cajoled into repatriating it).
Tax has a number of important functions and a direct impact on inequality. As Peter Martin points out it has a function of reclaiming money sent into the economy to prevent excessive inflation and tax serves to give currency a value in exchange that is under the control of the government.
There are however, a number of other important attributes of taxation. Money creation and taxation are the flip side of each other and tax is an essential element of fiscal and monetary policy. Tax is also the principal means of redistribution of income and wealth in the economy without which we would revert to feudal times with wealth concentrated in the hands of a few people and the great majority living at subsistence level. Markets cannot always price the externalities of the goods and services they supply or reflect social priorities. Tax permits repricing of goods and services to reflect these facts. Finally, the payment of tax gives people a good reason for participation by voting in a representative democracy.
How and where taxes are collected is the key as Jock Croats points out in his comments. The first and main source of taxation should be society wide generated economic rents of which land and natural resources are the main but not only source. Intellectual property based on accumulated knowledge is another important source. A few years back during the battle for internet search engine dominance between Microsoft and Google the computer screen was described as the most valuable real estate in the world.
Taxes on economic rents can be collected in various ways. The key is to minimise disincentives to productive activity. Collection of land rents is the principal method. Economic rents from Intellectual property can be collected by taxing company profits over and above a normal return on produced assets. Excess executive pay arising from the agency problem in public companies can be collected vis higher rates of income tax. All methods, however, share a single common aim – the collection of community generated economic rents for the public good.
I recently filled in a survey about my use of technology from Conde Nast who publish magazines. It asked how much my income was and I was shocked at the way incomes were divided. Out of a total of 11 divisions 3 accounted for incomes up to £75,000, which would cover most of us I think and 8 bands covered the rest including one for over £1 million+. I was shocked because normally I only see tables referring to tax at £50,000+ or £75,000+. If Conde Nast think these extra divisions are necessary for them to target spending on technology, surely we should be just as focussed when discussing tax.
I agree that we should be looking at wealth as well as income but we should also bear in mind what the economy needs for the growth which will make life better for us all, and that is increased spending power for the majority. Just consider China’s growth in recent times, our own industrial revolution and American mass production. This lessening of inequality in spending power enabled the establishment of the welfare state.
At the moment wealth, income distribution and spending power seems to be more and more in the hands of the very rich and the inequality which caused the French and Russian revolutions seems to be what society is moving towards. Yes, we will have less absolute poverty than in those times but I don’t think those in relative poverty will console themselves with the thought that they aren’t starving when they rely on food banks.
We need to increase everyone’s spending power, not that of the very rich, to achieve economic growth and stability.
“We need to increase everyone’s spending power” – by which I hope we mean not merely increasing peoples’ incomes but deflating their costs by destroying the economic rents that bilk people.
Yes, in most countries 25k would be considered a huge income but because rents/mortgage and even cars are extortionate in this country it ends up just being survival money once the major costs are taken out. Of course, if you stay for free in the family home and don’t own a car you can do very nicely on 25k.
Compared to 1979, there are more than 6 times as many higher rate tax payers than there were. Likewise, in 1979 the top 1% of taxpayers contributed 11% of the total income tax take and now it’s 27%. So the idea that the problem with the tax system is that it doesn’t soak the rich enough with income tax is not supported by the numbers.
Around 60% of the Government’s tax income is from income tax, NI and VAT.
Only 1% comes from capital gains tax, and less than 1% comes from inheritance tax. Interestingly, it’s generally only when people die that we try to quantify their wealth. Maybe we should start there?
@Nick Baird “Only 1% comes from capital gains tax, and less than 1% comes from inheritance tax. Interestingly, it’s generally only when people die that we try to quantify their wealth. Maybe we should start there?”
Absolutely, nail, head, hit. Starting with the Baby Boomer generation who are collectively sitting on huge unearned property value windfalls, are soaking up most of the social care budget and generally have had pensions since they were 60. None of which will apply to my generation and those after me.
It is important that those who are less wealthy and earn less feel that the state is looking after their interests in the areas of food, clothes, energy and even holidays. We can enjoy a diversity in living standards as long as everyone has sufficient. It is the culture of concern and support that matters as much as the actual level of inequality.