Musings on the Cinderella part of “tax and spend”

Unlike a lot of you, I was in the conference hall on Saturday morning for the debate on business tax. It was nice to see this issue being debated, but it is a reflection of political debate in general that the Hall was pretty quiet and that speakers cards were few in number. It seems that, for Liberal Democrats, as for politicians of other stripes, spending money is much more politically sexy than raising it.

The motion itself was relatively anodyne. Could anybody seriously contest the proposal that corporate taxation would benefit from simplification? Of course not. Would greater transparency of the tax affairs of multinationals and a crackdown on tax evasion and tax havens lead to greater fairness in the system? The detail will be more challenging.

Of course, we spend a lot of time talking about things that impact on our tax system. Reliefs for this positive behaviour or that, calls for a penny on income tax for that. All thoroughly worthy, all perfectly reasonable in themselves.

And yet, our tax system is creaking. With businesses and individuals increasingly international in their operations and financial holding, with the nature of work changing, our tax system needs major re-engineering to ensure that it retains the capability to raise the revenues we want to deliver our core promises. And how we do that impacts on everyone.

Now I would be the first to acknowledge that tax is taxing. It’s technical and complex, and much of the tax code feels esoteric and remote from our lives. Much of its complexity is designed to address the issues of a relatively small number of taxpayers, corporate or individual. Much of it impacts only tangentially upon most of us. A former Treasury spokesperson for the Party used to talk about the growth in the physical scale of tax law and he was right. The complexities of international trade, use of the tax code to encourage positive behaviours and the explosion in the number of limited companies over the past two decades have all impacted on how corporation tax operates and is administered.

But it’s not just about rules. It’s about governing. Having rules requires having proper policing of them. Are we, for example, willing to countenance better resourcing for regulatory bodies, not just HMRC but Companies House, to ensure that the legislative framework is properly and credibly policed?

So, colleagues, it’s time to take the “tax” bit of “tax and spend” seriously. Because, if you really want to do those things that might make our country a better place, you need to secure the funding first.

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24 Comments

  • Peter Martin 16th Sep '19 - 1:00pm

    @ Mark Valladares,

    ” it’s time to take the “tax” bit of “tax and spend” seriously. Because, if you really want to do those things that might make our country a better place, you need to secure the funding first.”

    Let’s take a step back and ask where money comes from in the first place? It isn’t from taxpayers. Unless they have an illegal printing press in their garage!

    It’s not that difficult. Govt spends its own IOUs into the economy then it gets some (not all) of those back when it imposes taxes. So logically the sequence has to be spend and tax rather that the more usual “tax and spend”. So, for a currency issuing government there is no need ” to secure the funding first.”

    The more the Govt spends the more it will get back in taxes. BUT , obviously, the increasing amount it gets back shouldn’t be used as a justification to then spend even more. The limit is the productive capacity of the economy. If excessive demands are made we have too much inflation.

    The correct question to ask isn’t just about the ‘political sexiness’ of the spending but whether or not we have the spare capacity to justify it. Otherwise we don’t get anything for our money. Increasing taxes can help alleviate the problem but they aren’t a magic solution. For example if we need more police officers and we spend more on them than we have available police officers we may find that we just push salaries up. That’s good for the police obviously! Maybe not so good for the rest of us.

    So any change in spending patterns has to done relatively slowly to give the labour market time to adjust even if taxation levels are adjusted too.

  • nigel hunter 16th Sep '19 - 2:20pm

    As a start the party could ask for ideas from the members how to raise e xtra income thru taxation.

  • nigel hunter 16th Sep '19 - 2:27pm

    This coffee cup tax on Costa cups that the Tories stopped.That is one idea to re-introduce but at a cheaper rate. That is one idea to start with.

  • Bless,
    Peter just explain to us how Zimbabwe and Argentina got into the mess they did as both can print their own currency. I’ll give you a clue its might be to do with this “If people don’t believe your currency has value, it doesn’t have any value” and guess what Brexit damages the value of the British brand so what do you think might be the effect on the value people think our currency has? Come on Peter give us all the answer to that question.

  • Peter Martin 16th Sep '19 - 6:40pm

    @ frankie

    So where do you think money comes from? I’d be interested to hear your (un)considered opinion? Hint: It’s all just printed or created in a computer these days!

    It’s value is little to do with confidence or what people think. The Govt demands its taxes be paid in its currency of issue and threatens us with jail if we don’t cough up. That creates a demand for the currency which trumps any other considerations.

    If I threaten you with a long jail term I can force you to treat my business cards as though they were £20 notes. Even though they only cost a penny or two to print in qnty.

  • @ Peter Martin Talking about the value of the curreny, you say : “It’s value is little to do with confidence or what people think”.

    What a load of cobblers. Just for starters look what happened at Suez, in 1966 etc. etc. etc. and in both world wars. Brexit has – and will – hammer the value of the pound.

  • “What a load of cobblers. Just for starters look what happened at Suez, in 1966 etc. etc. etc. and in both world wars. Brexit has – and will – hammer the value of the pound.”

    Yeah, but we weren’t operating a fiat currency back then. Things have been rather different since the collapse of the whole Breton – Woods thing. Not saying that the £ might not take a hit, but the circumstances under which that may happen are completely different now that the currency is completely free floating.

  • I will provide a link for the hard of thinking about Argentina and the loss of confidence in the paso and the effect it has had
    In Argentina, many things, from goods to long-term contracts and rents, are priced in US dollars, and converted to pesos at the time of payment at the current rate because Argentines don’t trust their own currency. This makes it hard to use the peso for pricing and transactions, which is one of the primary functions of a currency. The lack of a relatively trust-worthy currency handicaps the functioning of the economy.
    https://wolfstreet.com/2019/08/12/brain-dead-investors-get-crapped-on-again-by-argentina/
    Even the most tinfoil of wrapped individuals should be able to grasp “No confidence in the currency, means no value to it” so print notes to your hearts content it won’t buy you anything. But we are not Argentina you cry, true but a 100 years ago Argentina was the coming power and in 1909 only six countries had a higher GDP per person. How the mighty have fallen and if we continue following the Jingoistic nonsense of our Brexi’s we to can fall as far.

  • So MMT works on the principle that you can print money as long as there is a demand for it. Well I agree with that, but then we come go its Achilles heel as stated in Wikepedia “MMT argues that as long as there is a demand for the issuer’s currency, whether the bond holder is foreign or not, governments can never be insolvent” but there is no demand for the Argentinian peso so they can become insolvent, there was no demand for the Zimbabwean Dollar so they bin bagged it and replaced it with the real Dollar. So we now come to the million dollar or should that be trillion dollar question, going forward what demand will there be for Sterling printed by a weakened, friendless state. Tick tock Peter I suspect the answer will not be to you liking.

  • @ Adam “Not saying that the £ might not take a hit, ”

    It’s probably escaped your notice that it already has….. it’s floated down in value by over 20% since the 2016 referendum.

    Not sure what a fiat currency is…. something to do with the Italian motor industry ?

  • Peter Martin 16th Sep '19 - 10:00pm

    @ David Raw,

    You’re confusing two different issues. In the post war period various Govts wasted a whole lot of effort and resources by trying to maintain the £ at an unrealistically high value. They also ran the economy far too hot with unfortunate inflationary consequences. Eventually it got out of hand and the Keynesian economics which was the accepted wisdom at the time was unfairly discredited. Unfortunately 2% unemployment in a capitalist syetem is far too low. In the South of England it would have been even less.

    The Government would have been better with a Job Guarantee instead.

    Adam has it right saying the £ wasn’t a totally free floating currency. It was tied to the dollar which was in turn tied to gold. You can’t then run your economy flat out and not expect to have inflation and B.O.P.problems with down ward pressure on the currency.

    https://upload.wikimedia.org/wikipedia/commons/c/c4/United_Kingdom_unemployment_1881-2017.png

  • What is Fiat Money?
    Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.

    Now if people have no faith in the government what faith do they have in the currency? A question that seems to be beyond our Brexi’s. To provide them with the answer it’s “Not much at all”.

  • William Fowler 17th Sep '19 - 8:02am

    The fall of the currency since 2008 is directly related to the inability of the British government to balance its book, the further fall after the referendum directly related to an expected fall in government revenues (Sterling would be close to 1.4 euro, 1.8 dollars if the referendum had gone the other way and the UK was running a small surplus). Historically, countries which have a steep fall in their currency buy themselves space to reform their spending and then the currency bounces back but has not happened in the UK as it managed to double its national debt although the deficit is okayish at the moment. Agreed a huge chunk of the debt is QE generated and can be written off at an appropriate moment (once QE is ended and interest rates get above inflation).

    The other thing about printing money, whereas the EU and USA could evolve into self contained units if necessary, the UK is totally dependent on food and goods imports, could quite easily slide into oblivion in the same way as Zimbabwe with someone like McD in charge of currency printing presses.

    On actual tax, would love to see some radical reform along the lines of a combination of turnover and transaction tax replacing business rates, employer NI, council tax and even the TV licence – thus simultaneously evening out the High St and Online and moving some of the burden of tax from individuals to companies, always popular with voters.

  • No it hasn’t escaped my notice. Currencies go up in value… and they go down. They’re free floating.

    I really hope that anyone who is commenting on economic matters is joking when they ask if this is something to do with the Italian car industry; this is economics 101!

    Just in case you aren’t joking, here is the summary from wiki.

    https://en.wikipedia.org/wiki/Fiat_money

  • Peter Martin 17th Sep '19 - 9:49am

    @ William Fowler,

    “The fall of the currency since 2008 is directly related to the inability of the British government to balance its book”

    Predicting currency movements is notoriously difficult. Currency traders look for ways to do it successfully. They’ll all tell you that looking at the Govts fiscal balance doesn’t give much indication. If that were the case their job would be too easy and anyone could do it.

    IMO you’re better looking at the current account balance. If we are buying more from overseas than we are selling, the textbooks will tell you that there could be some downward pressure on the currency. On the other hand there will be capital inflows into the UK to push it back up again. They may tell you that too.

    Yes the currency has fallen. But imports still exceed exports so maybe it hasn’t fallen enough? On the other hand the big net exporters rely on us to run a deficit. Which is their surplus! Therefore, they do have to play ball and recycle their unspent pounds to keep the currency relatively high.

  • Steve Trevethan 17th Sep '19 - 12:25pm

    Perhaps improvements to banking might help matters?
    “Banks no longer lend money: they extend credit by creating money. Only banks can trade in sovereign money created by the central bank which they trade with each other.” ( Ellen Brown, quoted above)
    Do the credit created money money transactions result in banks engaging in activities which are risky, as in 2008?
    Are our “internal”debt charges an unnecessary internal cost which could be reduced to make “our book balancing” better?
    Ditto housing costs?

  • Sue Sutherland 17th Sep '19 - 1:28pm

    Going back to the question of tax. Everyone tries to pay as little as possible and the wealthy pay accountants lots of money to help them avoid it. This is a cultural as well as a practical issue. Governments have allowed this to continue and added to the complexities by offering tax breaks to encourage certain behaviour as Mark says. Perhaps the solution is to stop using tax breaks to encourage certain behaviour and instead use positive investment to do so.
    This would, of course, affect the public sector borrowing requirement in the early stages but would equate tax avoidance with tax evasion, giving a clear signal that people are expected to pay the tax required from them in order to fund the public services the national community needs. At the moment the negative view of tax predominates and people feel justified about taking steps to avoid it rather than seeing what their tax contribution does to enable society to function.

  • Another Brexi bonus for our resident Brexi’s

    “Moreover given the increased likelihood that the UK will leave the EU, losses are expected to increase, so we have decided to withdraw from the UK business.”

    Daikokuya, which does not appear to have published any explanation of its decision in English, said it was now seeking a buyer for the company’s assets and had begun a voluntary redundancy problem for its nearly 400 staff.
    https://www.theguardian.com/business/2019/sep/17/japanese-parent-company-pulls-plug-on-albemarle-bond-over-brexit

    Still I’m sure you can spin the demise of a pawn broker as a good thing.

  • Risk of seeming a fool for being a non-economist, but, I’m feeling loquacious, so why not?

    Seems to me that money isn’t a thing in its own right, but a kind of “parking bay” for value to allow trades to happen between multiple people, and apart in time. Simple trade: I do something useful for you, you do something useful for me. Money allows me to do something useful for person A, in exchange for a token that I can use to get something useful from person B later (which they can use… etc.)

    So, for that to work, everyone has to believe in the value of the token otherwise person B has no reason to care what I did for person A, and I can’t get what I need from them, despite helping person A. I don’t, frankly, understand why this is different if the token is paper of controlled quantity regulated by a government, or a lump of shiny metal whose usefulness to industry doesn’t have much bearing on people’s belief in it as a token — the only difference is whether the amount of it available is set by the banking system or mining companies. Not sure why it should be obvious that miners are better regulators of our capacity to trade with each other.

    Tax seems to serve two purposes
    (1) A payment for services that are better provided at a whole-of-society level
    (2) Some redistribution of wealth so that people can trade in markets to get what they need

    But, I do think the payment is *from* people *to* the government for both. That’s because, if wealth is the value that people have accumulated from doing useful things for others, then the total size of the economy should be the sum of all the useful things being done in a period. (“Use”, defined by markets / money, as how relatively important some things are versus other things). Money’s value seems to stem from individual people doing useful things for each other — those “useful things” were not created by banks (or miners) but by individuals.

  • Peter Martin 18th Sep '19 - 9:53am

    @Steve,

    “Banks no longer lend money: they extend credit by creating money.”

    This isn’t really true. If the bank decides you’re good for a loan, of say £100, then they really don’t care whether or not you take that in cash. If you do, then they are lending you BoE money. Not money they have created.

    “Only banks can trade in sovereign money created by the central bank which they trade with each other.”

    Banks don’t have any special powers. Anyone can trade sovereign money. That’s what happens when anyone hands over a £5 note. The £5 note is an IOU of the BoE. If you or I wrote out an IOU of £5 then theoretically that could be used as money too. The only difference between you, myself, and a commercial bank or the BoE is that their IOUs are more credible, and therefore acceptable, than ours.

    Even so the taxman won’t accept commercial bank IOUs in payment of tax other than on a provisional basis. The Govt wants real government money payable from the banks reserve account at the BoE.

  • Peter Martin 18th Sep '19 - 10:13am

    @ Sue Sutherland,

    “Going back to the question of tax. Everyone tries to pay as little as possible…”

    Yes that’s true. And we shouldn’t use the argument that a currency issuing Govt isn’t fiscally constrained to justify tax evasion. Or even tax avoidance. Just where the line is drawn can be sometimes questionable.

    Taxes are just as necessary for a currency issuing government as they are for a non currency issuing local government with the proviso that the former doesn’t necessarily have to ‘balance the books’ whereas the latter does.

  • Daniel Walker 18th Sep '19 - 11:14am

    @Peter Martin “This isn’t really true. If the bank decides you’re good for a loan, of say £100, then they really don’t care whether or not you take that in cash. If you do, then they are lending you BoE money. Not money they have created.”

    Interestingly, Peter, the Bank of England itself disagrees with you on that one.

  • Peter Martin 18th Sep '19 - 4:40pm

    @ Daniel,

    Also interestingly, many proponents of MMT also cite that BoE paper with approval. Nevertheless I stand by the logic of the the sentence you quoted. The problem I have with the paper is that there’s a residual of “money supply” type thinking about it all.

    The correct way to understand it all, IMO, is that money is both an asset to the holder and a liability to the issuer. It all sums to zero, so the ‘money supply’ as a concept is meaningless. In fact there are lots of definitions, M0, M1, M2, MZ etc. I don’t think any of them mean anything. Google ‘money supply’ for more info.

    That’s not to say the level of private borrowing doesn’t matter. It does. Because borrowers are spenders too. The short term consequence of increased borrowing is therefore a expansionary boost to the economy.

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