Nick Clegg’s conference speech committed Lib Dems to manage debt out of the economy and implement a fair tax regime. But the objectives of economic policy often conflict with each other.
Let’s take it that there are three objectives for current economic policy:
- to reduce deficit and the debt it accumulates
- to inject demand into the economy
- to have a fair tax system
In the following table, I’ve had a try at evaluating recent and proposed economic policies against these objectives.
| Lib Dem Policy |
Does it reduce deficit and debt? |
Does it stimulate demand? |
Is it fair? |
| Tax threshold to £10K |
NO |
YES |
YES |
| Top tax rate to 45% |
NO |
YES |
YES |
| Cut government spending including welfare |
? |
VERY MUCH NO |
NO |
| Increase pension contributions/Reduce pensions |
YES |
VERY MUCH NO |
? |
| Mansion tax |
YES |
NO |
NO |
| Reduce rich pensioners benefits |
YES |
NO |
? |
Whether a policy reduces deficit and debt, and whether it stimulates demand is a fairly objective question. Whether it is fair is subjective. In my suggested policy rating, the two tax changes already implemented win on two of the three criteria – they don’t reduce deficit/debt, but do stimulate demand, and are fair. I claim this because taking more than half of the marginal income someone earns, apart from being likely to dissuade them from earning it in the first place, does not feel fair to me. Others might disagree.
But when we move to consider policies proposed or imminent under the coalition government, then the picture changes markedly. Cutting government spending will not necessarily cut the deficit, because more redundancy and unemployment in the economy will increase the welfare bill. And if the welfare spend itself is cut, then huge demand deflation will result, and the effect on the poor will be extremely unfair. Changes to the pension regime, to increase contributions and delay payments may be more certain to reduce the deficit, but will certainly also reduce demand in the economy, and can hardly be argued as fair to those who have worked for so many years in the expectation of a better pension. Increased taxes on the rich, whether property owners or pensioners, will also depress demand, and in my view are not fair, since most people’s homes are not ‘unearned wealth’ but the result of a lifetime allocation of earned income to purchase their home. That income has already been taxed, for many at 40%, and will again be taxed under inheritance tax.
So Lib Dem economic policy doesn’t look as effective for deficit reduction or for demand stimulation or for fairness as is claimed.
But which of these conflicting objectives is most important? My contention is that the main issue facing the economy currently is not deficit and debt, but lack of demand. It is this lack of demand occasioned by real wages being depressed below rising levels of productivity that has caused the crisis. We need to feed disposable income into consumers’ hands to get them spending again, and to allow them to spend sufficiently to purchase the GDP output the economy is capable of. Otherwise we face continued recession, unemployment and growing communities in poverty. Is that a fair or desirable outcome? On this leading objective of stimulating demand, cuts in government spending, increased pension contributions, delayed pension payouts, mansion tax and rich pensioner benefit reductions all fail.
What of the deficit and the debt mountain? Steve Webb warned us at conference that the markets will bust us if we don’t reduce deficit and debt. But can we actually achieve this? We haven’t so far. And should bond markets dictate economic possibility and social policy? Failure to stimulate demand is what will certainly devastate our economy. I have argued elsewhere that modern technology is pushing productivity so much above real wages that debt is inevitable in the theoretical model, and so it seems to be in real economic practice across all developed world economies. This is not just a matter of governments making mistakes. It is a real unavoidable phenomenon.
So I offer one more policy, the only one which can break the deadlock:
| Lib Dem Policy |
Does it reduce deficit and debt? |
Does it stimulate demand? |
Is it fair? |
| A citizen’s income funded outside PSBR through a government bank with a lending multiplier |
YES |
YES |
YES |
* Geoff Crocker is a professional economist writing on technology at http://www.philosophyoftechnology.com and on basic income at www.ubi.org. His recent book ‘Basic Income and Sovereign Money – the alternative to economic crisis and austerity policy’ was recommended by Martin Wolf in the FT 2020 summer reading list.
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53 Comments
I think a citizens income would be an excellent idea. It would have been good to see an article explaining why – but the absence of means testing, the ability of people to take on volunteer/intern type jobs if they choose, and to turn down exploitive / dangerous jobs that aren’t reasonably paid would be a start. Elimination of means testing , job centres, etc. would be a relevant saving.
The article confuses (once again) deficit and debt. You can reduce the deficit while the debt continues to increase. This is because the deficit is a flow; the difference between the amount borrowed per year and the amount repaid. As long as the net borrowing is positive, even if it’s smaller than last year ( thus the deficit is reduced ) the debt will increase. The debt will only reduce when the deficit becomes a surplus – and keynes recommends paying down debt when there’s a lot more growth in the economy than we have now. ( I was going to say boom, but let’s not get too hopeful!)
I’m afraid you’ll need to explain a bit more about “funded outside PSBR through a government bank with a lending multiplier”. A citizens’ dividend or basic income should be funded out of a sustainable pool such as land value tax where its effects will be magnified by the reduction of basic living costs that would bring on and will affect all other production through the removal of a dead weight loss on factor inputs (tax on labour mainly).
Thanks Jenny. A previous article on LDV at https://www.libdemvoice.org/opinion-why-austerity-is-the-wrong-answer-to-debt-30167.html seeks to explain more about the justification and operation of a citizen’s income and contains a link at the end to a longer paper I have written on it. I accept your finesse about deficit/debt. I’m not confusing them, but glossing over your point for the sake of brevity. Generally deficit still drives debt. My reading of Keynes is that he allowed this payback from boom times to console others’ worries about deficit finance, but my argument about a technologically advanced economy is that deficit and hence debt is inevitable. And so in reality it appears to be, ie the theory is currently empirically well justified?
Thanks also to Joe and I hope the above paper also addresses your point. Commercial banks lend out more than they have in deposits every day through their lending multipliers, and a government bank could do the same to fund a citizen’s income. How would we fund a fully automated economy with no wages and huge output? We are not there yet but we have elements of this in our economy. Real wages have fallen behind productivity requiring consumer credit and/or government deficit to bridge the gap, OR face a recession (paln A).
I can’t let your comments on mansion tax go unchallenged. I’ll take your arguments in turn:
1. “It will depress demand”. The OECD has shown how property taxes are the least demand-depressing form of taxation there is: http://blogs.spectator.co.uk/coffeehouse/2012/02/which-tax-cuts-would-be-best-for-the-economy/
2. “homes are not ‘unearned wealth’”. House price gains are very much unearned by the owner. They reflect the supply and demand for housing in a local area. They go up when the local economy is doing well and down when the local economy is doing badly. Your house price is based on how much wealth the society around you has earned, not how much you personally earned. This is the basic moral argument for property/land/location/site value taxation. See this: http://www.youtube.com/watch?v=sTxyNQ0ea-k
3. “That income has already been taxed”. That’s an argument for cutting income tax at the same time as raising taxes on property and land, which is exactly what the Liberal Democrats are pushing for.
4. “and will again be taxed under inheritance tax”. Inheritance tax is needed because we don’t tax unearned wealth properly yet. We don’t tax wealth properly yet because people keep using these circular arguments to block Liberal reforms.
And both these ‘double tax’ arguments are totally bogus. Tax is a means to an end: funding the government services we need for a fair and prosperous society. If we don’t double-tax, then the single tax needs to be huge to pay for these services. We ought to have a broad tax system that doesn’t penalise any particular economic activity too heavily. That means some income tax, some capital gains tax, some property tax, some consumption tax.
“and in my view are not fair, since most people’s homes are not ‘unearned wealth’ but the result of a lifetime allocation of earned income to purchase their home. That income has already been taxed”
Blimey, you could have copied that from a Daily Mail editorial piece. So you believe most properties over £2 million are the fruit of honest toil, sweat and labour? Many, no doubt are, but I think you show a touching faith, if you believe that anywhere near all of them are.
And given that eliminating the deficit and servicing the debt is a burden that has to be shared, do you think if fair that the larger part of that process should fall on the wealthy or those with more modest incomes and assets?
Who will put the money into the government bank?
And in what way would a citizen’s income
a. reduce the deficit?
b. stimulate demand? and
c. be fair?
Geoff,
Is there not an inherent contradiction between “stimulating demand” (in the Keynesian sense) and tackling the deficit? It is notable that in your list of Lib Dem/Government policies, every policy that aims at deficit reduction fails to stimulate demand, and visa versa. If one takes a C+I+G+X-M approach to economics, G has to be funded by either taxes or borrowing, with the former depressing demand elsewhere (and, indeed, depressing aggregate demand as well) while the latter increases the deficit.
I also note that you discount any dynamic effects. If cutting government spending allows current (or expectations of future) taxation to be reduced, it may stimulate demand among taxpayers, and encourage them to take on more work (as you implicitly acknowledge when you state that “taking more than half of the marginal income someone earns… [is] likely to dissuade them from earning it in the first place”, a trade-off which does not solely occur at the 50% threshold).
I’ll leave “Joe” to discuss the wisdom of relying on fractional reserve banking to provide a citizen’s income.
Thanks Duncan, Paul and Richard. Duncan, you and I appear in fact to agree. You accept that a mansion tax will depress demand, as must any tax. You simply claim that it won’t depress it much ie it’s a matter of scale. You also accept that it can represent double taxation which you one minute call ‘bogus’ and then say is OK. I in turn agree that house price increases are unearned wealth, but not house prices per se. The real problem is that people cannot pay asset wealth as tax. They can’t pay the house, or part of it, in tax, unless they are forced to sell it. They must have associated income to pay a mansion tax, or deplete their savings. So in effect a mansion tax taxes the income or savings of people with housing assets. Is this fair? Or even afforable? If two people each have £2m, and one buys a house whilst the other banks the money or buys a yacht, is it fair that only the housebuyer (who might have stimulated the economy and created jobs) is taxed? This is why Lib Dems have long opposed property taxes, ie local rates, and campaigned for a local income tax. Multiple taxation must have some end. Can we tax all income, all expenditure, all assets, and all inheritance? The state will have really taken over our whole economic living.
Paul, I think that tax should be progressive, ie fall more than proportionately on those with higher incomes, not assets or houses.
Richard, a citizen’s income will reduce the deficit if it is not charged to public sector debt as I propose, will clearly stimulate demand if it is spent and not saved, and can be made fair since we can distribute it as fairly as we wish, ie more to those on low incomes.
Tom , I entirely agree. This is why in my earlier op-ed, I pose the question of demand management in the thought experiment of a totally automated economy with massive GDP output but no wages and hence no demand. In such a context, there would be no choice but a government voucher scheme to allocate demand to buy the output. Bob Crow of the RMT made the same point in his FT interview that if robots build cars, then who will buy them? Pursuing this theme means that the vouchers (or citizen’s income) cannot be a deficit/debt burden, or if it is, will have to be written off. We are not in this extreme position, but productivity growing in excess of real wages as it has, pushes us towards it.
Paul, I didn’t realise the Daily Mail advocates a citizen’s income ? 🙂
Geoff,
Stephanie Flanders, the BBC economics corrsspondent, has been presenting a short series of programmes entitled ‘Masters of Money. She has covered Keynes and Hayek in the first two programs and last night covered Karl Marx. Marx in particular was noted as providing illuminating insights into the dangers that extreme inequality present to the functioniing of a modern capitalist economy.
I am a fellow traveller with regard to a citizens income and have written on the subject here on LDV Citizens Income.
The idea of funding a citizen’s income outside PSBR through a government bank with a lending multiplier is intriguing, but relies on an, as of yet, unproven and untested theoretical base in monetary policy dynamics for its rationale. This base might be developed further by reference to the work of James Robertson.
Roberston argues in his new book ‘Future Money’ that using the proceeds of monetary reform to reclaim the huge ongoing taxpayer subsidies to commercial banks and reassert state control over the money creation process together with resource-based taxation, would be more than sufficient to fund Citizen’s Income and more besides.
There is a meeting tomorrow night at party HQ in London Flock together. where Libdems will be discussing these very themes.
Joe,
Agreed. I’ve just posted an Amazon review of Nicholas Wapshott’s book on Hayek and Keynes which you might like. It’s at http://www.amazon.co.uk/product-reviews/0393343634/ref=dp_top_cm_cr_acr_txt?ie=UTF8&showViewpoints=1
I agree that the issue of permanent deficit needs thinking through and will see if I can get to the group but have just got back to Bristol from travelling ….
Oh good grief.
This is a very rabbit-out-of-the-hat solution to all our problems with some opaque financial engineering that will apparently allow us as a country – or as a planet – to consume more without having to produce it.
Because that is the implication. You fund a citizen’s income through <>, rather than by, say taxing people, or printing money, nobody has to lose out or work harder there do they? Consumption without production. Magic. Brilliant. Harry Potter for Prime Minister. Where do I sign up.
Ah parsing got me. the missing phrase in the angle brackets above is “insert financey technobabble here”.
This is why Lib Dems have long opposed property taxes, ie local rates, and campaigned for a local income tax.
Support for Land Value Taxation has a long history in the Liberal Party. So strong was the support for this policy that it was actually written into the Liberal Party’s constitution. Inheritance tax was introduced by the Liberal Party Chancellor Sir William Harcourt in the 1894 budget. The 1909 “People’s Budget” of Liberal Party Chancellor David Lloyd George proposed land taxation to fund welfare reforms. Go away and read your history books (or at least Wiki:
People’s Budget to see what Liberals REALLY stood for in the past, as opposed to what the 21st century equivalent of the Tories who are trying to steal the word “liberal” CLAIM they stood for.
most people’s homes are not ‘unearned wealth’ but the result of a lifetime allocation of earned income to purchase their home
I bought a flat in 1998. I sold it for over twice what I paid for it in 2005. In the years in between I did nothing with it except live in it. So in what sense is the money I made from this sale not “unearned income”? Why do you hold that it is right that I should have received it entirely tax free, whereas had I received the same amount as wages, I would have had to pay a hefty sum in income tax on it?
Increased taxes on the rich, whether property owners or pensioners, will also depress demand
Why do you say this? The rich are more likely just to put the money into the bank or invest it in more property or to spend it abroad. Poorer people who have more immediate needs, however, are more likely to spend it on those needs. If it goes it government spending, this is primarily on wages, and those paid those wages will in turn spend them, particularly if they are low paid.
I claim this because taking more than half of the marginal income someone earns, apart from being likely to dissuade them from earning it in the first place, does not feel fair to me.
If one of these financial traders who earns millions decides not to work due to high tax, might this not be a good thing? These people are always going on about the long hours they work, so why not have them half the hours and give the rest of the work to someone else?
The real problem is that people cannot pay asset wealth as tax. They can’t pay the house, or part of it, in tax, unless they are forced to sell it. They must have associated income to pay a mansion tax, or deplete their savings.
As Gladstone put it, wealth should “fructify in the pockets of the people”, that is, those with it should be using it to create more wealth, and from that they should pay their taxes. That is the point of taxation which encourages people to invest their wealth in enterprise rather than in property and other unproductive assets. Go and read the words of the Land Song to see what Liberals used to be so proud to think about these issues that they sang songs about them.
Proposals for these sort of taxes now are usually accompanied by schemes whereby the elderly can pay from some sort of state-backed equity release. That is, no-one need actually be thrown out of their home by the need to pay this taxation, it would come from their estate only when they have died. Is a state backed loan like this to pay for it, with appropriate safeguards, unfair? Well, we have introduced state backed loans with appropriate guarantees for young people to pay university tuition fees, why is it fair to do this to the young, but not the old?
Joe Otten is spot on. This is the proverbial intellectual gobbledegook..
Richard,
here is some more of the proverbial intellectual gobbledegook – an interview with James Robertson future money where he concludes:
“The practical new principles for the money system at national and international levels should include the following:
– Public agencies serving the common interest should create the public money supply.
– People and businesses and other organizations should be rewarded untaxed for the contributions we make by our efforts and skills to the wellbeing of other people and for the contributions we add to the value of common resources.
– People and businesses and other organizations, including public service and other nonprofit organizations, should be taxed on the value they take from common resources.
– The revenue from those taxes – after democratic decisions on what is needed to finance other public services – should be fairly shared among us all as a citizen’s income.
Those arrangements should be designed to help us to meet our own needs in ways that help others to meet theirs and to conserve our common inheritance of the world’s resources. They should free us from continually increasing dependence on centralized national and international money, and on big business and government to meet all our needs, and so enable us to reduce our use of conventional mainstream money.”
Like the new thinking of Copernicus in the middle ages, I think we should be listening to what this man,and others like him, have to say.
@Matthew Huntbach
“I bought a flat in 1998. I sold it for over twice what I paid for it in 2005. In the years in between I did nothing with it except live in it. So in what sense is the money I made from this sale not “unearned income”? Why do you hold that it is right that I should have received it entirely tax free, whereas had I received the same amount as wages, I would have had to pay a hefty sum in income tax on it?”
The problem with this logic is that to live in a similar property you would need to spend the new value not the original price…
Surely a better way would be to tax realised profit as a capital gain if it is not re-invested into another property. In other words, as unpopular as this is taxing those who downsize later in life who are actually realising some profit rather than the family who are moving for an extra bedroom.
From reading this and other sources of a citizens income proposal, it appears that the kind of figures we are talking about are £3,200 per person per year.
Apart from the very valid comments here as to how it is all funded, why not simply lift the £10,000 personal allowance to £13,200? It would be far cheaper than the administration costs via a ‘Government Bank’ would it not?
Geoff, thanks for replying and getting stuck into the debate.
“You accept that a mansion tax will depress demand, as must any tax. You simply claim that it won’t depress it much ie it’s a matter of scale.” – The mansion tax needs to be seen as part of our tax reform package: shifting tax away from income and onto land and property. The net effect of this will make the economy both fairer and more productive.
“You also accept that it can represent double taxation which you one minute call ‘bogus’ and then say is OK.” Nope. I called your argument bogus then explained why double taxation is sensible. If you’re arguing for a single tax, please say so? Which tax should be the only one?
“The real problem is that people cannot pay asset wealth as tax. They can’t pay the house, or part of it, in tax, unless they are forced to sell it.” Every worked-through proposal I’ve ever seen for an asset tax has a deferral mechanism for people with liquidity problems. Our party policy on mansion tax includes a deferral system where the unpaid tax is a liability to be repaid whenever the deeds change hands.
“If two people each have £2m, and one buys a house whilst the other banks the money or buys a yacht, is it fair that only the housebuyer (who might have stimulated the economy and created jobs) is taxed?” Yes. When you buy a yacht, another yacht can be manufactured. When you buy a house, you’re buying the rights to the exclusive use of the land it’s built on. More land can’t be made for other people. Money in a bank is lent out again and put to use in the wider economy.
“This is why Lib Dems have long opposed property taxes, ie local rates, and campaigned for a local income tax.” We haven’t had rates for a long time, but yes we’ve proposed scrapping council tax in favour of LIT for a while. Honest question – has it got us anywhere? I think we need to move away from this policy. It doesn’t fit with our message of reducing tax on income and raising tax on property and land. Council tax is in desperate need of reform – it’s regressive in its present form and out of date. In the spirit of localism we need to set councils free and allow them to revalue, set up more bands and allow for tax deferral.
“Multiple taxation must have some end. Can we tax all income, all expenditure, all assets, and all inheritance? The state will have really taken over our whole economic living. ” Who’s saying ‘all’? Of course not. We need to tax each thing a little bit. If we don’t, we need to tax one thing a lot. (There are land tax reformers who advocate this. I’m not one of them, but I see merit in it becoming the primary source of tax revenue.)
What do we mean by “fair” with regards to taxation (and every thing else)?
Why is it fair for the lowest earners to pay zero tax on their income?
Why is a marginal rate greater than 50% unfair?
Why is double-taxing unfair when it is taxed income spent on a house but fair when it is taxed income spent on a pasty?
“Fair” was the word that underpinned our manifesto in 2010, but the more I repeat it, the less it seems to mean.
Joe,
You are correct. Gobbledygook is everywhere. But here is a piece of common sense. ..
If the government cuts the job of a nurse earning £30k, preferring to pay JSA at say £5k instead, the government saves £25k, and so can reduce its deficit by that. Good? No, because the economy shrinks by £30k, creating negative growth. But, I hear you say, the nurse can get a job in the private sector. But who pays for that ?- the people of the country! And if the people can’t afford it, they go into private debt.
This is really the problem – cutting government spending may be good for the government’s books, but it’s no good at all for the country. The result of cuts is either negative growth, or a transfer of debt from the government books to private books, or a mixture. It’s not an umprovement for the country – after all, the people would have had to pay for the givernment debts anyway in the end.
So why are LibDems supporting a government that cuts?
Peter Watson:
You are correct. Fairness is a very subjective concept. If I work and have a family, (wife and 2 children), I must pay tax on my income over £10,000, to support my family in housing, food, heating etc.
However, If I don’t work, and my family live in inner London, I can get (for a three bed rented property Housing benefit of ( £340 x 52 = £17,680 ).
I agree Peter. “What… DO… we mean by “fair” with regards to taxation (and every thing else)?”
Steve Way
@Matthew Huntbach
“I bought a flat in 1998. I sold it for over twice what I paid for it in 2005. In the years in between I did nothing with it except live in it. So in what sense is the money I made from this sale not “unearned income”? Why do you hold that it is right that I should have received it entirely tax free, whereas had I received the same amount as wages, I would have had to pay a hefty sum in income tax on it?”
The problem with this logic is that to live in a similar property you would need to spend the new value not the original price…
No, it was pure cash profit as we then moved into the house my wife inherited from her late mother.
@Matthew Huntbach
Then that makes you significantly different from most people. I have probably made a huge profit on paper, but as I am never likely to inherit more than some bills then it is a false profit as I would need to replace my house with a like for like replacement. When both my wife and I die, and assuming the house has not been sold to pay for care, then I would like to think we have a tax system that takes a fair percentage of our estate before it goes to our three children.
As I said in a previous post, in my perfect world I would feel that the profit you made should have been taxed as it was true profit and not being used to buy a like for like replacement property. Also the property you moved into should have been taxed in the same way as an inheritance in a fairer world.
Of course if you feel so strongly about the perils of inter generational wealth and the profit from property you could have donated the profit to a suitable charity or sold it at a lower price to someone struggling to get on the housing ladder 😉
Steve Way
Of course if you feel so strongly about the perils of inter generational wealth and the profit from property you could have donated the profit to a suitable charity or sold it at a lower price to someone struggling to get on the housing ladder
Yes, but taxation is an “I’ll do it if everyone else will do it” thing. In any case, when I was younger and arguing for such policies with my parents renting a council house, I was accused of only arguing for them out of jealousy. So one cannot win – those who argue for these sort of policies are either hyprocrites if the y do so while benefiting from the property system, or people eaten up by the “politics of envy” if they don’t so benefit.
Thanks for the rich debate, except for the ‘gobbledegook’ claim which is itself gobbledegook by avoiding explaining what it means.
Joe Otter who gets Richard Dean’s support, doesn’t get the point at all. The claim is not that people can consume without producing, which as he says is clearly nonsense, but exactly the opposite to that, ie that they/we can produce without being able to consume. This clearly does happen, and is happening, whenever productivity growth (from automation) exceeds real wage growth, which it has in the US and now the UK for some time. Richard later then in fact agrees with me in criticising cuts in government spending, so do we really differ much?
Matthew Huntbach makes several points. Of these, house price inflation is an important but separate issue. It’s not a good idea, and in fact makes us poorer rather than richer as the real price of a house soars, And it has adverse distributional effects. But it’s a red herring to the argument which has to apply to constant prices (and even house prices have more recently been constant or declined). As others have pointed out, taxing this ephemeral gain is not possible on a fair basis.
Matthew, I agree that the propensity to spend is lower for rich people, but it’s still positive. But I would agree that a citizen’s income could be distributed in favour of low income consumers both for fairness and effectiveness in getting spending going on domestically produced goods and services. Your argument that highly taxed rich earners are producing worthless stuff is unsupportable. There are many capable professionals who earn £100K, not £millions, and whose marginal tax rate was until recently 62.5% because of the withdrawal of the personal tax allowance for earnings above £100K. Such a person has to be very socially motivated to bother to undertake the next £10K project which probably involves a lot of work, if they only get a net £3,800 for work worth over £10K . In this case, not only the professional, but also GDP and the tax take loses out.
Duncan, yes I do support one main tax, ie on income, since a person’s current tax can only be paid from income and savings depletion, and not from assets for the reasons I give. Options to defer an asset tax, either to a point of sale, or death, wouuld become the default option, and would effectively simply raise stamp duty or inheritance tax. Whether fair or not, this would anyway make the tax totally unpredictable, and therefore unreliable as a source of government income to reduce deficit and debt. Equally we cannot base the national finance on asset price increases, like house price increases, because such increases may or may not happen. As for the point about multiple taxation, when value is currently created it passes through 30% corporation tax, 40% income tax, 20% VAT, 5% stamp duty, 1-2% mansion tax, 40% inheritance tax?
Joe Bourke offers James Robertson’s lateral thinking contribution with which I’m bound to agree. Let’s try thinking outside the box like this, because current thinking hasn’t turne d the crisis around and isn’t going to.
John Dunn suggests a citizen’s income of £3,200 but I calculate that in 2007, a per capita income of £1,000 only was needed to replace the £55bn of extra consumer credit taken out to plug the gap between consumer income and GDP output.
And I agree with Peter Watson that an absolute definition of ‘fair’, like that of ‘justice’, is not possible.
I still argue that a citizen’s income is the only technical solution to the present worldwide economic crisis, which is a demand crisis brought about by productivity exceeding real wages, therefore making aggregate demand insufficient to purchase the full potential output GDP. This is much more important than whether the mansion tax is fair, and so far, I’ve not heard any convincing counter-argument.
Geoff Crocker.
Here is some gobbledygook: your apparent suggestion that people produce without being able to consume. Such a thing produces waste, self-evidently. Or in the case of Germany it produces static real wages and products for export, so that investors then arrange for sily Greeks to borrow the cash to pay for those, resulting in excess profits for investors and a stable state of financial crisis.
Real growth comes from producing and consuming more things (velocity) or better things (quality) or both. It does not come from the gobbledygook government cutting spending and so transferring its debt to the private sector. Nor does it come from taking money out of people’s pockets in the form of tax, since that just reduces their consumption power and so reduces sellable production.
Richard, I’m puzzled why you persist in contemptuously deriding my view as ‘gobbledygook’, whilst apparently agreeing with me, as I do with the substance of what you say?
Productivity can and does at times exceed real wages, leaving a Keynesian demand deficiency. As you say, this can be channelled to exports and a trade surplus, which in time actually impoverishes an economy, Alternatively it won’t lead to wasted production as you suggest, but to economic recession due to insufficient demand and deficit reduction policies as is now happening in the UK.
I certainly very strongly agree with you that cuts in government spending and increased taxation is exactly the wrong policy mix when we have insufficient demand in the economy, and this is a major thrust in my article.
“I claim this because taking more than half of the marginal income someone earns, apart from being likely to dissuade them from earning it in the first place, does not feel fair to me. Others might disagree.”
No indeed, I am in absolute agreement with that principle.
I am happy to agree that IHT is inefficient and overly vague inappropriate way that makes avoidance too easy, and that it might better be replaced with a mansion tax, but just make sure it remains a tax on ‘mansions’!
I even want it called a “mansion tax” on the statute books, in order that any backsliding into a general property tax is politically embarrassing.
Geoff Crocker
Your argument that highly taxed rich earners are producing worthless stuff is unsupportable. There are many capable professionals who earn £100K, not £millions, and whose marginal tax rate was until recently 62.5% because of the withdrawal of the personal tax allowance for earnings above £100K. Such a person has to be very socially motivated to bother to undertake the next £10K project which probably involves a lot of work, if they only get a net £3,800 for work worth over £10K .
Sorry, just who are these highly motivated and able people who sit in bed all day because of they tax they’d have to pay if they went out and worked on their ideas? In my experience, highly motivated and able people are motivated primarily by excitement at their ideas, things like tax rates if they work out just don’t feature.
I actually disagree with the thesis that there’s a small number of very high ability people, which happens to coincide with those who already have large amounts of money, who are oh-so-much-better than the rest of us, and therefore need to be given a special cossetted existence. The point I made about maybe it’s good if these people you suppose they are do stay in bed so others can share their work was not meant to be entirely facetious – I do rather think extremes of wealth difference squash rather than promote entrepreneurialship by pushing down from a chance to do it all those who aren’t party of the charmed circle. What I actually find when I look closely at what some of these high-earning finance people do is that it’s fairly routine admin work which is highly paid only because it involves shifting large amounts of money from here to there, and is paid by taking a cut from the money.
Thanks Jedibeeftrix, but what’s your definition of a ‘mansion’, and what do you do if its owners can’t afford to pay the mansion tax from their income or savings?
If they are allowed to defer payment, it becomes stamp duty or IHT ?
Or do I dedect a strong sense of tongue in cheek in your post ……?? 🙂
Matthew, I think it’s a mixture. Maybe there are some lazy people able to earn shedloads of money for doing simple stuff which others could easily do. But it’s not my general experience in professional work circles. Here’s an example of a piece of work I did. I was heavily taxed on its earnings, and believe me it was incredibly hard work to do in some very arduous circumstances. Like a lot of professional work, it’s quite specialist and there aren’t very many people available and willing to do it. I’m not sure I’d want to do it again. http://bookshop.iea-coal.org/report/80561/Coal-markets/82077/Prospects-for-coal-and-clean-coal-technologies-in-Russia
Geoff Crocker, well if you insist, here’s where you can find an example of a piece of work I did, which is quite specialist and there aren’t many people willing and able to do it:
http://www.wotug.org/papers/CPA-2011/Huntbach11/Huntbach11.pdf
I’m not paid extra for this, I’m expected to produce this sort of thing as part of my job as a university lecturer, when I’m not teaching classes on topic which private sector training charges £2000 a week for and covers in a much more superificial way than I do, and I teach this stuff not just to a class of 100 here but also to a class of 500 in Beijing. Brings in a bit of money to help reduce the balance of payments deficit. If I were taxed more I would not stop working at this stuff, in fact if I were paid by the hour I might have to work more in order to get more money to pay my bills.
Thanks Matthew. I didn’t in fact insist as you claim, but I certainly congratulate you and commend you on your contribution, so far as I can understand it. However you miss the point. Your claim was not that either you or I and others fail to deliver value for money, but that unnamed others get high pay for low value administrative work. This you haven’t demonstrated. We may both agree personally that tax rates might not disincentivise us but we live in a market economy where work effort and net earnings are related for most people. In fact I think you and I agree on most points – I am simply less in favour of slagging off imaginary groups of betes-noires (usually super rich) people which has become a popular passtime in LD circles and is neither true, liberal, or democratic.
@ Geoff – “Thanks Jedibeeftrix, but what’s your definition of a ‘mansion’, and what do you do if its owners can’t afford to pay the mansion tax from their income or savings?”
Lib-dems are flirting with making the tax threshold depend on the minimum wage X thirty seven hours, why not do the same for a mansion tax but add a multiplier of two hundred.
Or, simply index link it to inflation as with benefits, but convince me first that there will be no backsliding into a general property tax or there will be no support from me (or, crucially, much of the middle class).
Jedibeeftrix, arbitrary multipliers like this for income tax or mansion tax thresholds are difficult to support as policy, either for effectiveness orfairness. The mansion tax is essentially a property tax, and to some extent a general property tax, since in the London area, families can easily find their home having breached the £2m ceiling without their having wanted this to happen. If the mansion tax is effective for raising revenue, then by definition very many people will have to be affected by it, ie it will be ‘general’. If it’s just to get at presumed rich people, then it’s an unworthy idea in the first place, and ineffective for revenue raising, and deficit reduction, in the second case. Vince Cable almost always presents it as a tax against super rich foreigners which then also starts to sound sadly xenophobic. Contrary to his and Danny Alexander’s assertion, they are the very people who can move their mansion offshore, ie sell here and buy elsewhere. Not a lot going for this mansion tax really…
Forgive me for getting comments out of order, I’ve only been watching this once a day. there’s been some concern expressed about what Churchill even a hundred years ago referred to as the “poor widow bogey” on land tax. Recent research (James Graham pointed me to it I believe) showed that this was first of all a very small problem – most people with few assets have little income and most people with assets have a source of income.
If I can’t pay the rent on my property I would be homeless, and I cut my coat according to the cloth. What you are expropriating when you “tax” land values is the rent that rises because of community inputs that make a location more or less valuable over time. Once land tax is established, people will learn to cut their coat…make provision out of their increased income for staying in an expensive place when they stop earning and so on.
Second, I thought this when I read the original post, but it has become more clear in some of Geoff’s responses to comments, that what he is suggesting is effectively C H Douglas’s Social Credit. Correct me if I’m wrong Geoff, but that’s what it sounds like to me. I think it is madness to start with that without first properly redistributing the community’s share of rent. As with so much else, without doing that you are simply pumping more money into a system that will eventually inflate asset values artificially.
Fund your CBI with land rents and that should be nearly an end to welfare. See what the shortfall between demand and production *after* taking out these artificial payments that prevent consumption because money you would otherwise use to consume is spent on artificially inflated rent. Then worry about C H Douglas’s frankly bonkers idea.
Jock, but people can’t cut their cloak according to their cloth with their house purchase when it is subject to unexpected prices rises which then takes it above some arbitrary Lib Dem mansion tax threshold for which they have no associated income to pay. Mostly they did not buy with this in mind. They just bought somewhere to live. If as you claim people who live in expensive houses have associated high income, then tax this income if you want. This is the end result anyway, unless we are going to see massive dumping of high end housing on the market, bidding up the price of the next tier of housing. These imputed rents you speak of have been landed on the houseowner by the uniquely mad nature of the UK housing ,or more specifically land, market.I agree that they need a policy corrective. They have made us poorer in real terms by increasing the real price of our housing.
So far so good but you spoil your argument by simply calling a policy for a citizen’s income ‘bonkers’. Are you lost for a proper argument? Whoever has contributed to it in the past, including as you correctly say, C H Douglas, and as I quote in my full article ‘Why Austerity is the Wrong Answer to Debt’ the Nobel Economics Laureate Robert Solow who is exactly the opposite of ‘bonkers’, the argument needs addressing properly. I have seen no rebuttal to the argument that the divergence of productivity and real wages led to a deficiency of consumer income against output GDP of £55bn in 2007 in the UK economy. This was made up with a boom in consumer credit which proved of course unsustainable. £55bn of citizen’s income, funded not from PSBR but from a credit multiplier in a government bank, would have been a better policy. It would not have the effect of inflating asset prices, since it would be restricted to this amount of £55bn which was non inflationary in the goods and services markets included in the definition and measurement of GDP. Furthemore objections need to overcome the thought experiment of a fully automated economy with massive output and (almost) no wages. In such a situation, there would be no alternative way of allocating goods and services except a citizen’s income. I also quote Bob Crow of the RMT who correctly pointed out that if robots build cars, who will buy the cars? We are not fully there yet but we have elements in our system. It is the divergence of productivity and real wages which is causing the crisis which is one of deficient demand. Technology makes it inevitable. We urgently need a solution, and proposed solutions like a citizen’s income need good critical argument, not gratuitous insults.
@ Geoff – “If the mansion tax is effective for raising revenue, then by definition very many people will have to be affected by it, ie it will be ‘general’. If it’s just to get at presumed rich people, then it’s an unworthy idea in the first place, and ineffective for revenue raising, and deficit reduction, in the second case.”
And there lies the problem.
The first sentence will see middle class support for the advocate evaporate: “My home is my castle, your writ does not run here!”
The second sentence I personally agree with, but wasn’t the boy clegg justifying these tax increases for fairness (copulating for virginity, anyone?), on the grounds of the extraordinary circumstances we currently find ourselves in? i.e. asking those most able to contribute at a (temporary) time of agony.
Quite how you’re going to square that circle I don’t know, because my attitude at least is; “you can pry my three-bed semi from my cold dead hands!”, and I don’t think that will be an uncommon view.
Geoff Cocker
I am simply less in favour of slagging off imaginary groups of betes-noires (usually super rich) people which has become a popular passtime in LD circles and is neither true, liberal, or democratic.
Suggesting that the best way to pull our economy out of the mess it is in is to get the people who have the money to pay for it doesn’t sound to me like slagging off. It’s simply reality – governments since 1979 have done all these people said they should do to make the economy zing, but it hasn’t zung, so we’ve got to go back to plan B (of the 1980s).
What I really want to do is to get the people of this country to see that if they want what they say they want from government, they are going to have to pay for it. If it’s health care and good pensions for people now living to 100 where they used to die at 80, that costs more, ditto much else that has changed. Paying for it might involves taxes they would want to resist. Well, ok, if you don’t want the taxes, don’t moan about the cuts, tuition fees etc. I agree – we can’t pay for it ALL from taxes on the super-rich.
Matthew, you clearly know a lot about complex computer science, but not about economics. This idea that we have to pay for elements of the GDP is nonsense ; we simply have to be able to produce it. As I have pointed out in several replies, if technology leads to productivity growing faster than real wages, then the problem is Keynesian, ie one of deficient demand. By definition we can afford the higher GDP the technology allows us to produce, but we don’t have the income in our pockets to purchase it. Therefore, we don’t need tax increases or cuts in government spending as the neo-classical economists (quasi accountants really), whose line you are peddling, tell us. This would simply make the problem worse as it is and will do further. On the contrary we simply need more effective demand to purchase the output we can readily make. Hence a citizen’s income (which it’s interesting you haven’t commented on much but this is the core of my proposal) Try Nicholas Wapshott’s recent book on Keynes vs Hayek, or Robert Skidelsky’s ‘Return of the Master’ to see who won this argument. Keynes did.
Geoff, you mistake me: I did not say a citizens’ income/dividend was a “bonkers” idea.
Hi Josh:
Perhaps you can elaborate on why you think that C.H. Douglas’s ideas “bonkers”?
I don’t know who Josh is, but for my part, I’d simply refer you to “The Use of Knowledge in Society“. And since we’ve already had a grand experiment on managing the money supply inspired by the Chicago Pinko and implemented by Mrs Thatcher, I think it’s fair to say that one’s confidence in any bureaucratic state run system getting such calculations right is pretty low. Deliberate inflation is a nasty game, economically destructive and reckless as to who feels the worst effects.
But Jock, a citizen’s income scheme is calculable and should not be smeared with inflation of the money supply. In fact, it’s quite the opposite – it’s not Reagan/Thatcher monetarist supply side economics, but it’s Keynesian demand management. The amount in 2007 would have been £55bn which would have met the gap between output GDP and aggregate consumer income and would therefore have been non inflationary, as the £55bn of consumer credit was.
We face a demand crisis rather than a supply crisis. Productivity has risen faster than real wages. Only a citizen’s income can ultimately resolve this. All these cuts the coalition regularly announces, including now to welfare spend, will only deflate the economy further, and massively.
I am a Japanese.
I write this by machine translation of the Web.
Will the A+B theorem in the social credit of Douglas be right?
I think that citizen’s dividend or basic income not to depend on the tax is necessary if it is right.
Please examine it.
* Reference
The A + B Theorem by Victor Bridger
http://www.alor.org/Political%20Democracy/The%20A+B%20Theorem.htm
Douglas – Hawtrey Debate
http://social-credit.blogspot.jp/2009/09/douglas-hawtrey-debate.html
Thanks for these references kyunkyun. They are fascinating. They’re rather long so will take some time to digest but I’ll get back to you.
Hi Jock:
I think your conception of Social Credit is somewhat erroneous. Douglas never said that the state should manage the money supply. In fact, he opposed the centralization of all banking – a policy which he considered to be the worst form of tyranny possible.
In a Social Credit system most money is endogenous and created by commerical banks as it is now. There is extra purchasing power created by some “credit authority” exogenously, which would increase individual’s purchasing power such that there would be sufficient effective demand to purchase all goods and services created within the nation. This extra purchasing power is necessary because of the accounting flaw Douglas discovered via his A+B theorem.