The other elephant in the room

We all know that one of the topics the leadership don’t want us to talk about is the EU. But there is another very important matter to voters that we say almost nothing about either, taxation.

There was a time, when I was a young Liberal and just starting out on the employment trail when we proudly supported a progressive income tax system as both fair and certain. When I started work, basic rate was 33% and the top rate was 98%. We told people, quite rightly, that the tax was necessary to pay for public services. Then along came Thatcher and Laffer with his ridiculous curve and suddenly we have joined the ‘tax is bad’ viewpoint and we have become terrified of even suggesting that our policy programmes WILL require tax rises. Sure, we talk about taxes on the banks, or windfall taxes on utilities or taxing fatcats, but we simply don’t engage in the task of reminding people that their taxes are not a dreadful burden, but actually necessary to pay for the services we (and they) want.

It’s almost as if we now share the view of a US citizen interviewed about tax, who said ‘Why should I pay tax, the government should find the money!’

Since Thatcher, including during the coalition years, the UK has shifted from direct taxes, where people pay according to the ability to pay and their income, to indirect taxes which are regressive and bear down heavily on the poor.

Now, our leader has even backed down from the penny on income tax to pay for the NHS. Where does he think the money will come from if not from taxing people? Unless he has become a sudden convert to Modern Monetary Economics and intends to pay by increasing borrowing, then any policy proposals from the Lib Dems are quite meaningless if we don’t tell people how we pay for them. Yes, we say we will fully cost the manifesto, but I would put money on such financing being fudged and no mention being made of raising taxes generally.

Discuss!

* Dr Michael Taylor has been a party member since 1964. He is currently living in Greece.

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38 Comments

  • The reasons for removing the 1p on the pound are weak I.e that income tax thresholds have been frozen. So why not just raise the threshold to say £15k and keep the 1p for higher earners?
    It seems the idea is to win over more Tory voters but many of them are so hacked off they would probably lend us their votes anyway.

  • Jenny Barnes 27th Sep '23 - 11:30am

    “a sudden convert to Modern Monetary Economics and intends to pay by increasing borrowing”
    What? If you’re talking about MMT, you would need to assess the spare capacity in the economy – at the moment, very little- before imagining that funding things with borrowing would work. It would put up inflation, and in order to get the capacity to do whatever, you would need to tax to get the space in the economy. In this respect, National finances are like household budgets. If you’re spending all your money / resources already, then you need to stop doing something if you want to do something new. I agree, taxes need to be raised. Progressive Income tax, road fuel tax and airline passenger duty would be my choices. I can hear the screams already.

  • Yue He Parkinson 27th Sep '23 - 12:28pm

    Since I joined Libdems this March, one question I have been asking – what is the Libdems’ position about the national debt? most of time I failed to get answerers, the only one I got was – the voters won’t care about this. So what is Lidbem’s economic policy? where does money come from? I didn’t get direct answer from this Conference either. If we would like to earn more Tory supporters in the General election, well, we better can answer these questions before knocking on their doors

  • Peter Watson 27th Sep '23 - 1:19pm

    @Jenny Barnes “road fuel tax and airline passenger duty”
    I’m no expert (far from it!), but it seems to me that these two are more suitable for discouraging driving and flying rather than raising funds (and the money raised should be channelled towards alternatives to those activities), and their success would be measured by how much less money they bring in over time!
    Some form of “wealth” or “property” or “mansion” tax is often discussed here and sounds like a good way forward.
    However, I suspect that there are serious concerns about how target Lib Dem voters might respond to talk about progressive taxation that hits the better off, so to answer Michael’s question, “Where does he think the money will come from if not from taxing people?”, I expect the answer will be that old chestnut, “efficiency savings”. Even the “Remain bonus” from the 2019 campaign would appear to be no longer an option!

  • Jenny Barnes 27th Sep '23 - 1:37pm

    “discouraging driving and flying” Less of these, more capacity in the economy for something else.

  • Laurence Cox 27th Sep '23 - 1:43pm

    At Conference this year I did talk to Lord Newby after the fringe meeting on the pre-manifesto paper, because I advocate equalising Capital Gains Tax rates with Income Tax rates (the Party is only committed to eliminating the separate annual Capital Gains Tax allowance). Back in 1988, Nigel Lawson did equalise rates in his budget, but subsequent Chancellors have changed the rates to benefit income from Capital Gains Tax. This article in the Guardian from 2020 indicates that we could raise £14 billion by returning to Lawson’s principle of equal taxation: https://www.theguardian.com/politics/2020/nov/11/government-review-urges-major-overhaul-of-capital-gains-tax

  • MMT is not wrong to say that it not taxes that are the determinant of the governments ability to allocate resources for public services, but it is rather the productivity and utilisation of resources available in the economy. That the productivity of Land, labour and capital is what produces wealth has been known at least since the Scottish enlightenment moral philosopher Adam Smith published his works on the Theory of Moral Sentiments and the Wealth of Nations in the 18th century.
    The Laffer curve simply suggests that taxes could be too low or too high to produce optimal revenue and both a 0% tax rate and a 100% tax rate will generate zero tax on incomes. That taxes on labour and capital have deadweight effects on productivity is well understood. Tax is critical for redistribution, but how and what is taxed is equally important to productivity and consequently the wealth of the nation, as Adam Smith explained all those years ago. Sin taxes are directed more at discouraging damaging behaviours which if successful will dwindle away over-time.
    “Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people, or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon… Nothing can be more reasonable than that a fund, which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.”

  • A paper published by the Centre for Economic Policy Research in 2021, entitled “Post-Corona Balanced-Budget Super-Stimulus: The Case for Shifting Taxes onto Land”, provides a superb overview of all the relevant arguments for today. Its authors have also provided an excellent summary in VoxEU
    “Land’s share in economies’ nonfinancial assets equals between 40% and 60%, and in the US currently equals over 50%. This constitutes a very large base for a non-distortionary tax. This column suggests that a 5-percentage point or larger increase in the tax rate on the value of US land, excluding buildings and equipment situated on the land, balanced by decreases in the tax rates on incomes from labour and from buildings and equipment (and in the limit by their complete elimination), would increase output by 15% to 25%.”

  • Peter Martin 27th Sep '23 - 3:26pm

    “a sudden convert to Modern Monetary Economics and intends to pay by increasing borrowing”

    Not necessarily. As Jenny says above, fiscal policy should be set according to the available resources in the economy. Any attempt to overdo it will lead to an inflation problem.

    Prof Bill Mitchell has acknowledged that there probably will need to be tax increases shortly. This may change if the economy crashes in the meantime!

    https://billmitchell.org/blog/?p=60987

  • Peter Martin 27th Sep '23 - 3:55pm

    The Laffer curve is economic nonsense.

    If we look at any one particular tax, such as the taxes on alcohol or tobacco, then we can easily see that 0% tax will bring in no revenue and also that a ultra high tax will also bring in next to no revenue. The idea is that there is an in between optimum, but this is missing the point. We should set these taxes more with a motivation to encourage a healthy lifestyle.

    It is the level of taxes overall which matters, relative to govt spending, rather than the rate for any one particular tax. If income tax is reduced the tax take from other taxes will increase as everyone spends more. It’s possible that the two will even balance. In the conventional view this doesn’t matter because the revenue collected is the same. In the MMT view it does matter. If everyone is spending more there could be an imbalance between aggregate supply and demand which will lead to an inflation problem.

    Conversely if tax changes, again relative to government spending, cause everyone to spend less, it could be too little. We will then have recession and unemployment.
    It’s a matter of getting the balance right using the taxation system rather than the erroneous policy we have now of trying to do it by encouraging everyone but government to borrow more or less and so spend just the right amount.

  • Tax policy (as with all government policy) should be based on empirical evidence and not ideology that often proves counter-factual Can countries lower taxes and raise revenues? The evidence suggests that the optimal tax rate on higher earners is quite high
    “A paper published in 2017 by Jacob Lundberg, an economist at Timbro, a Swedish free-market think-tank, estimates Laffer curves for 27 OECD countries. Using data on Sweden’s income distribution and assumptions about how taxpayers respond to different tax rates, Mr Lundberg found that, even though five countries in his sample have top income-tax rates that exceed their revenue-maximising levels, only Sweden could meaningfully boost revenue by cutting tax rates on high-income earners. Most countries, in other words, appear to have set their highest tax rates at or below the optimal rate suggested by the Laffer curve”.
    The Mirrlees review of the UK taxation system in 2011 Mirrlees Review made a comprehensive appraisal of the efficiency and equity of the tax system concluding the UK tax system is costly and inequitable. It is that review, supported as it is by extensive research, that should form the basis for a redesign of the UK tax system.

  • I think this article is correct in pointing out that you can’t spend money without raising the money first, and is also correct to call out the damaging way that so much money today is raised in indirect taxes in order to keep the headline income tax rate artificially low. But it’s also wrong to assume we can just keep raising taxes more and more to fund services, and wrong to dismiss the Laffer curve. Tax take as a % of GDP is today higher than it’s been for a very long time, and there does come a point where it becomes unrealistic to continue putting taxes up. So how do we square that with our desire for better services? I don’t know the full answer, but I think at some point we need to start asking why providing Government services and infrastructure investment has become so extraordinarily expensive? (Example: HS2), and why demand for services has become so high (Example: NHS), and what we can do in terms of fixing the underlying causes, rather than continually expecting to throw more money at every problem.

  • Aggregate spending in the economy equates to GDP i.e. National income or what is produced. What is produced (including public services) is determined by the productivity of resources available to satisfy what Adam Smith called effectual demand and Keynes referred to as effective demand, as distinct from absolute demand which can never be satisfied.
    Direct taxes can incentivise or dis-incentivise productivity depending on what is taxed just as consumption or sin taxes do. Employment of labour and capital investment in assets that increase the efficiency of production should be incentivised with a lower proportion of taxation than that relative to unearned income derived from land, other natural resources and interest income derived from lending against these natural resources.
    Taxes also serve to redistribute what is produced in the economy to pensioners and others not able to engage in the provision of goods and services to the economy including children.
    Government deficits/borrowing (outside of recessions requiring fiscal stimulus greater than automatic stabilisers provide) need to be moderate to keep inflation low – more or less in line with nominal GDP growth (i.e. a low inflation target + real growth), typically approximating the level of state capital spending.
    The UK has been stuck in a low productivity growth cycle (with historically high deficits) since the 2008 financial crisis. Reform of the tax system and addressing trade barriers with the EU could bring about a breakout from that cycle and aid in restoring investment and productivity growth.

  • Too much of th discussion assumes money belongs to the government that does the taxation, rather than to the people who are taxed. Ultimately tax is compulsory removal of a person’s possessions, so an infringement of their right to own property.

    So tax by all means but be prepared to make the case for taxation on grounds of equity on the one hand and effective spending of the proceeds on the other.

    I am hearing some (right leaning) voters say hat public services ate so bad they’d prefer to go without, go private and have a lower tax burden instead.

  • @Laurence Cox – I disagree regarding equalising capital gains tax rates with income tax. A taxable capital gain is usually a reward for accepting a certain amount of risk, which is different from receiving income. If I have a sum of money to invest I could choose to play safe and put it in a building society account and receive a modest return via interest that would be taxable as income. Or I could choose to invest it in shares in a listed company or even a start-up and hope to earn a much better return, but would have to accept the risk that I could lose some or even all of my money. Investment is a good thing, and the rewards should reflect the risk.

    I would prefer us to be looking at National Insurance, which is a tax on employment payable by both employee and employer. How can it be fair that those working for a living should pay an addional regressive tax that isn’t paid by the wealthy receiving an income from property, land or investments?

  • Mick Taylor 27th Sep '23 - 7:38pm

    MMT – and by the way, I didn’t mean to be taken seriously about Ed’s conversion to MMT, I am certain he hasn’t – argues clearly that taxation follows spending rather than the view often outlined on LDV that you have to tax before you can spend. People working for the government, who have state pensions or state benefits or who contract with the government to provide services or construction have no money to tax until the government pays them. This means that spending precedes taxation. Of course in the private sector you can argue that governments can tax before spending, but much of the private sector does work for the state.
    The Laffer curve is total nonsense, an excuse for direct taxes to be lowered for the benefit of the rich. The question of how high to make direct income taxes has a moral element too, if you think it is obscene for a few to have billions whilst the many have very little. Redistribution used to feature high in Liberal politics, but we’re almost silent on it now.
    Labour are now so right wing on the economy and tax as to be almost indistinguishable from the Tories. So if we don’t tell people why they need to pay tax, nobody will.

  • Peter Martin 27th Sep '23 - 9:31pm

    @ Simon R

    “I think this article is correct in pointing out that you can’t spend money without raising the money first….”

    So where does the money come from to begin with before it is available to be collected back in taxation or ‘borrowed back’ via the sale of government bonds?

  • Laurence Cox 27th Sep '23 - 9:48pm

    @Nick Baird

    This is what Nigel Lawson said (in Hansard):

    “In principle, there is little economic difference between income and capital gains …. And in so far as there is a difference, it is by no means clear why one should be taxed more heavily than the other. Taxing them at different rates distorts investment decisions and inevitably creates a major tax avoidance industry. ”

    “Taxing capital gains at income tax rates makes for greater neutrality in the tax system. ”

    And remember if someone makes a capital loss on an investment, they can offset that loss against their other capital gains.

  • @Joe Bourke “The UK has been stuck in a low productivity growth cycle … since the 2008 financial crisis. … addressing trade barriers with the EU could bring about a breakout from that cycle” I don’t think that logic holds. There were no trade barriers with the EU for most of the period since 2008, so that can’t be the reason for the low growth cycle.

    @Peter Martin “So where does the money come from to begin with before it is available to be collected back in taxation or ‘borrowed back’ via the sale of government bonds?” I assume that’s a rhetorical question since we both understand it’s the circular flow of money around the economy. Doesn’t change that no entity (including the Government) can spend more money than it earns – unless it borrows the difference.

  • @Mick Taylor “if you think it is obscene for a few to have billions whilst the many have very little” … There’s nothing remotely obscene about some people having billions, if they have legitimately earned that money – for example, by creating/running a very successful business that has improved other peoples’ lives. If someone has been that successful – good luck to them! Having a fair taxation system is great, but we don’t help anyone, and we certainly don’t help the economy, if we start trying to make out that there’s something somehow wrong about people earning lots of money.

  • Money circulating in the economy is cash (3%) and bank accounts (97%). Banks create new deposits when they make a loan and credit the account with a deposit. The Bank of England creates money for the government in much same way. When deposits created in bank accounts are spent into the economy, they are transferred to another client within the bank or another bank of the payee. When banks receive more deposits than they transfer to other banks they have surplus reserves that are made available to other banks in the system via the inter-bank lending market or kept on deposit with the Bank of England.
    Tax and spending occur more or less simultaneously as spending is financed via tax receipts or borrowing from the private sector on a daily basis, just as commercial banks have to finance their net withdrawals versus deposits by borrowing in the inter-bank lending market daily.
    Money is debt and that debt is cancelled by loan repayments and tax payments. The money supply has to grow at least in line with nominal gdp growth, but also grows to finance asset growth in investment markets including crucially the housing market where much of new money creation has been directed. In a recession private debt repayments typically exceed new money creation and counter-cyclical fiscal policy (tax reductions or increased discretionary spending) may be required to offset the decline in money supply.

  • For 2023-24 the public sector expects to raise from taxes and other income 41.1% of national income OBR. Spending is forecast at 46.2% leaving a deficit of 5.1% to be financed by borrowing. That deficit is financed by transfers of existing bank deposits from pension funds, investments funds etc. i.e it is financed by household savings and International investors. That level of state spending in normal times is historically high for the UK. To maintain that level of spending without stoking inflation will require both productivity growth and tax reform to generate higher yields. A little over 28% (and rising) of national income is currently spent of state pensions and welfare benefits.

  • Peter Martin 28th Sep '23 - 6:13am

    “I assume that’s a rhetorical question since we both understand it’s the circular flow of money …

    No you shouldn’t assume. It’s a genuine question. Where are you saying money originates from? And no we don’t both understand it’s a circular flow! The alternative ‘understanding’ is process of creation and destruction which, unlike yours, does answer the question.

    @ Joe,

    “Money circulating in the economy is cash (3%) and bank accounts (97%)”

    All money is both an asset and a liability. This should be true for Government money but no-one includes the liability of the 3%. It’s not included in the National debt but probably should be. Besides the cash there are deposits in reserve accounts at the BoE.

    On the other hand everyone does know about the liability of the 97%. If the banks lend you money they, at least in my own experience, tend to want it back! This is the big difference.

    Another way of looking at it would be to ask ourselves what would happen if everyone started to use postage stamps instead of loose change. It does happen to a small extent. It could happen more if we went cashless. The Royal Mail could even issue £5, £10, £20 stamps etc. Would this increase the money supply and so be inflationary?

    It wouldn’t. The Royal Mail is creating a liability for itself with every stamp it issues. This is all the banks are doing too – except in digital format.

  • Peter Martin 28th Sep '23 - 7:42am

    @ Joe,

    You quote an article title “Can countries lower taxes and raise revenues?” However if we understand the flow of money we can appreciate it’s a nonsensical question.

    The government creates money as it spends and destroys it when it collects money in taxation. If it spends more it increases its own revenue. If it spends less…..

    It all comes back as tax revenue eventually. So, yes the government can raise its revenues by having lower taxes but only if it spends more. Is this the information the question was designed to elicit though?

    More intelligent questions would be about the number of transactions that it takes for the spent ££ to return to the government in taxation and the rates of inflation, growth, unemployment etc that any particular fiscal policy might create.

  • Peter Martin,

    the argument for lower taxes on income is one of incentives to spur economic growth in the productive part of the private sector. As Mick Taylor comments above ” in the private sector you can argue that governments can tax before spending”. This is because the bulk of money circulating in the economy is created by private banks. It is also the case that the financing of non-gdp spending i.e. transfer spending for pensions and welfare (that is in turn spent into the economy by the recipients) has to be financed by taxing the incomes of the working population and hence money principally created in the private sector.
    Monetised government deficits or QE will increase the money supply (bank deposits held by commercial banks) circulating in the economy. Monetised deficits will add to inflation. QE will add to either asset price inflation if it enables the reflation of housing and stock markets or CPI inflation if it monetises deficit spending.
    Deficit spending that is financed by borrowing of existing bank deposits does not increase the money supply, but can generate inflation by reallocating money that was held as a speculative financial investment to GDP spending i.e. spending on goods and services produced in the economy. To contain monetary inflation generated by excess credit creation and spending into the economy either or both Interest rates or taxes have to be increased or alternatively don’t create inflation of more than 2% in the first place.

  • Ultimately, you can have a successful low tax economy like the Asian tigers of Taiwan, South Korea, Hong Kong and Singapore or a high tax successful economy like the Nordic model. The UK is a financial centre like Singapore and Honk Kong and retains a high- value added manufacturing centre like Taiwan and South Korea. We operate a national health service and welfare system similar to that of the Nordic counties.
    Learning the lessons of what has made Taiwan three times more wealthy (on a per capita basis) than Chinese citizens or how the Scandinavians have developed such successful economies while delivering superior social services to that of the UK would be a good place to start in discussing the role of taxation in successful economies.

  • Peter Martin 28th Sep '23 - 2:25pm

    @ Joe,

    “you can argue that governments can tax before spending. This is because the bulk of money circulating in the economy is created by private banks.”

    I keep trying to explain. The Government ultimately wants its own issued currency back as payment of taxes. It doesn’t want the money units which are IOUs of a commercial bank and which are only *denominated* in this currency. It may be that the difference is too subtle for some, but I would have expected you to get it.

    Therefore the commercial bank has to have government currency in its reserve accounts before it can actually complete the payment of taxes to government.

    Your other points are largely political. We’ve been hearing from the Tories since at least the time of Mrs Thatcher that low income taxes are “incentives to spur economic growth in the productive part of the private sector”. It’s all part of a general “trickle down theory”.

    Some of us are quite sceptical about this one!

  • Peter,

    there is only one currency unit for the UK- the British pound. That is what is created by both the bank of England and commercial banks. Reserve accounts are simply a double-entry edger record maintained by the BofE of money it owes to commercial banks for deposits private banks hold with it.
    There is no need for a government owned bank to operate reserve accounts. The BofE itself was only nationalised in 1945, although it did provide banking services for the government since its creation. Any trusted institution can perform the inter-bank clearing services that reserve accounts enable.
    Chartalism is best understood in terms of coin or paper currency issued by the state as was prevalent when the theory was formulated by George Knapp in 1905. Today, almost all payments are transacted via commercial banks using ledger records designated in the currency unit of account.
    MMT refers to all banks as agents of the government. That is something of a stretch as any business licensed and regulated by the government might be termed an agent. However, it does not change the fundamental issue that credit creation and the supply of money in the UK economy is principally determined by policies decided by the 80 or so board members of the UK’s five largest banks. The government can seek to influence the level of demand for new credit creation by setting the interest rate it is prepared to offer on reserve balances held with the BofE (and hence the cost of capital) but it does not itself decide how much money is created or to what sectors of the economy it is directed. Perhaps it should.

  • On the issue of lower income taxes as noted yesterday Voxeu research undertaken by Michael Hudson and other progressive economists suggests:
    “…a 5-percentage point or larger increase in the tax rate on the value of US land, excluding buildings and equipment situated on the land, balanced by decreases in the tax rates on incomes from labour and from buildings and equipment (and in the limit by their complete elimination), would increase output by 15% to 25%.”

  • Peter Martin 28th Sep '23 - 3:29pm

    The pound is a unit of measure like the inch, the yard etc. Randall wray expalins the concept in terms of “money things” of which there is hierarchy. So if there is a hierarchy they can’t be all the same. The central bank or government “money things” are at top, then come those issue by the main clearing banks, other notes of credit will come below them

    See from about the 8 min mark in this:

  • Peter,

    you might as well argue about where does water come from. Does it come from rivers and oceans or does it come from rain clouds. The answer is it circulates through a process of precipitation. How it came to earth originally is a question only of interest to planetary scientists and the curious.
    As Simon R has commented “I assume that’s a rhetorical question since we both understand it’s the circular flow of money around the economy. Doesn’t change that no entity (including the Government) can spend more money than it earns – unless it borrows the difference”
    Debt money (unlike water) can be created without limit with key entries to a ledger to the extent there is demand for debt, but that does not change the fact that a country can only consume what it produces or what it can exchange for what others produce whether that be goods,services, real estate or financial assets.
    Fiscal and monetary policy has to be conducted while recognising these limits. If credit creation is directed at productivity enhancing investment it creates wealth. If it directed at increased consumption or the housing market without generating corresponding increases in productivity/supply it is self-defeating.

  • Jenny Barnes 28th Sep '23 - 5:37pm

    Suppose one managed to produce domestic appliances (white goods) that lasted say twice as long as the ones we have now, and cost only a little more. Would that be good? It wouldn’t be good for growth, obviously, as over time people would spend about half as much on white goods as before. How about cars? If people made them last 20 years instead of changing them every 3, and buying 3litre 4 tonne turbocharged pickup trucks….
    Is growth a good thing? Not necessarily.

  • Peter Martin 28th Sep '23 - 6:18pm

    @ Joe,

    The currency issuer creates money when it spends and destroys it when it collects it in taxation revenue. So it’s not a circular process at all. What’s difficult about that? Why try to over-complicate the process?

    What did you make of Prof Wray’s lecture? Any problems with that?

  • Jenny,

    yes, it would be good. The advances in living standards since the industrial revolution have come about as a consequence of the division of labour enabled by the application of machinery and the benefits of global trade.
    A washing machine that lasted 20 years would be great. Less time waiting at home for a repair man to show up after the 1st years guarantee runs out and much less environmental impact from disposing of white goods every three years or so.
    Moore’s law tells us that computer memories will double every couple of years and cost less. That is why most of the world is carrying around a powerful computer in their mobile phone today and appliances like dishwashers have become commonplace.
    This comparison from 1957 https://www.bbc.co.uk/news/business-42735294 shows what proportion of our income goes where. Essentials such as food and clothing took a bigger share of the budget then but our spending on housing has doubled.
    Solve the housing problem with land use and tax reforms and we are a long way to solving many of the societal problems of today. John Maynard Keynes prediction might even come true that our biggest problem in the future would be what to do with all our free time.

  • Peter Martin,

    debt in the form of money is created when a promissory note is accepted in the form of a loan or currency is issued (that is state spending as a debt of taxpayers). That debt is cancelled as loans are repaid or taxes are collected. New loans or currency issues are made everyday as debts settled by repayments and taxes are replaced and/or increased with new debt issues. That’s a circular process of debt issue, repayment and replacement. The total debt and currency in circulation increases when new lending and currency issues exceed repayments and tax receipts (as they generally do). I think Professor Wray in using the peculiar language of MMT tends to obfuscate what is a relatively simple accounting procedure. There is nothing to be destroyed (excepting worn out bank notes). All that is occurring is the recording of ledger entries for debts of borrowers or taxpayers and their settlement by way of loan repayments or tax payments. That process is a continuous circular cycle that repeats a bit like the twilight zone. Whether you call it cancellation of debt or destruction of money makes no difference to the process.

  • Peter Martin 29th Sep '23 - 9:45am

    @ Joe,

    Technically what you say about the taxation process is correct in an accounting sense. The state imposes a debt on us all in the first place by demanding that taxes are paid in its currency of issue so the payment of the tax can then be regarded as a settlement of the debt.

    However, there is a still a difference between money which is created by government spending and that which is created by bank lending. If we are paid to do a job by Government we receive the “money things” (in Prof Wray’s terminology) which are just the asset half of the BoE IOUs. If we are lent money by a bank we have the liability of future repayments of the loan to consider too. So their “money things” are obviously different.

  • @Mark Valladares – In Victorian times there was no Capital Gains Tax, so nothing to offer relief against. With zero being lower than the income tax rate, perhaps that encouraged investment in the Victorian era (demonstrating my point)?

    I believe CGT didn’t exist in this country until 1965?

    Regarding offsetting losses – that is true, if you are fortunate to have a basket of investments in which the ones doing well outweigh the ones doing badly…..

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