A commentator on this blog has asked why I think it necessary to tax, most especially in developing countries, when I also argue that government spending can also be funded by quantitative easing (or printing money in plain language) and government deficits.
I have, a great many times, argued that there are five reasons to tax, which are:
1) Raising revenue;
2) Redistributing income and wealth;
3) Repricing goods and services that markets misprice;
4) Raising participation in democratic representation;
5) Reorganising the economy.
There is, immediately, and very obviously one answer to the question of why we tax implicit in this list, which is that tax could not be used for goals 2 to 5 if we did not charge it. Some, of course, might think that quite acceptable because they do not think these are reasons to tax, but that would turn the question I was asked into little more than a rhetorical demand for comment on what can only ever be one aspect of the answer, and I hope that was not expected. In that case let me answer in this broader context.
Firstly, let me make clear that in theory I think it plausible for a country to raise revenue to pay for all its public services without taxation. This is for the reasons already noted: it has, for example, been proven that money printing can fund deficits without creating inflation. It is also clear that deficits can be funded by bond sales when societies as a whole want to save (as is the case at present). There are other reasons as well. For example, there is very clear evidence that in some countries, such as those with considerable resource wealth, services are effectively funded by economic rents and not by tax. In that case the answer to the question of whether or not we need tax revenue is technically that we don't.
That though is a technical answer which has virtually no practical relevance. Firstly that is because societies do want to redistribute both income and wealth and reprice market failures. Tax makes that possible. More than that though, as a matter of fact societies without tax lack a fundamental control for balancing their economies as they might wish. In practice, for example, even if you could print all the money you wished to pay for services you would, almost certainly, not know when to stop. The historical precedents for doing so are widespread. Tax provides that balancing tool. In that role it is essential. When economic capacity is reached then printing money is a recipe for disaster: tax takes its place in that situation and reduces demand as a mechanism for cooling an economy. Interest rates are a blunt instrument in comparison. Don't dismiss tax then; it has a role to play in all economic management. In fact, I now think revenue raising and economic management are intimately related tax objectives.
None of this discussion considers the fourth issue: raising representation in a democratic environment. This is fundamental. As Rebecca Bennyworth of the ICAEW tax faculty concluded last Friday at its tax assembly, tax is not something that should be done to people, it is something that people should participate in as part of a social contract between them and the state. Tax is, in my view, the consideration in that contract, and that consideration is vital. Without it there is no reason, and even no way, a government can be held to account. Look around the world and the evidence for that is readily available. That fact, by itself, makes tax, as Zoe Williams said on Friday, beautiful in and of itself.
But that is still not enough in itself. Tax does, as part of the democratic process, also provide the mechanism for making choice about what tax is meant to achieve. In other words, the decisions about redistribution and repricing are inextricably linked to the democratic decision making process that tax drives.
So why tax when technically it is possible to do without it? Simply because we actually don't want to tax just to raise money. That's a necessary function of deciding where we want to balance our economy as part of a relationship between tax, debt and money. But we also tax because the relationship tax provides with the political process empowers choice. Treating tax in this way is not about technical choice, it is about embracing society and its choices, which works, of course, so long as you think there is society.
I am told some don't.
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Richard, on a technical level, why is it do you think printing money may not result in inflation? Clearly, money printing in other scenarios has resulted in inflation and even hyper inflation.
It can so that
It does not when economic activit is well below economic capacity, as it is now
Here is a good debunking of the popular view.
http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
The whole purpose of money printing is to produce inflation. Check the Bank of England video on the subject: they are clear that the purpose of QE is inflation, a vital and temporary countermeasure in periods of deflationary pressure. It is only money cranks like Positive Money that believe you can print money as the basis of government spending. Taxation is always essential for any public spending. Bond issuance only smooths out the cycle: bonds always have to be serviced and repaid. Tax is a central fact of a functional and stable society!
The purpose of QE was not to produce inflation. It was to produce credit that the banks were creating
It could also be used to produce inflation. I have not denied that. I think there would be merit in that right now if the funds were not used to boost asset prices
But your argument that this is the sole purpose is just wrong, just as you are wrong on bonds. These are almost never repaid: they are simply recycled
Getting basic facts right helps an argument. You have all yours wrong
Richard
Thank you for this clarifcation – and for ‘joining the dots’ on this post. My reason for asking in the first place was this curious tweet, seemingly unprompted, at Friday’s Tax Assembly:
“There appears to be no appreciation at #taxassemply that you do not actually need to raise tax to fund gov’t spending. QE proves this.”
You have made unprompted statements to this effect before.
I am inclined to try to show the world just how very clever I am, so this can’t be a criticism from me. However, is that all that prompted this tweet, a desire to show your knowledge, or was there a trigger at the event?
I ask because the quote above would seem to match this from today:
“It (QE) can so (cause inflation). It does not when economic activity is well below economic capacity, as it is now”
Are we to take it that you are arguing there is presently no reason to raise taxes and that any increase in gov’t spending can be financed through QE? if not, what do you mean?
I am completely baffled by your comment.
If my post proves anything it is that the reasons for charging tax are integrated and complex, and the consequence of a whole range of parameters, all of which must be considered when making decisions on this issue, and none of which should be taken in isolation.
One of the reasons for raising tax is to boost economic activity, or to calm excessive activity. This is of course, fiscal policy.
What QE proved is that when monetary policy has reached the limits of its credibility, i.e. it is at the point where interest rates are effectively zero, and when at the same time there is reluctance to use fiscal policy to increase the rate of bond issuance, then printing money can provide a very clear alternative to the funding of state spending, without inflationary effects arising. This may have been a previously unknown circumstantial but we now know it is possible.
But note the series of conditionalities: there is a complex vector of issues to consider and yet you wish to reduce everything to a yes/no question. That is not possible. In that case your question is not credible. As a consequence it is not worth asking because just as it ignores reality any answer would have to do the same, and I’m not a participant in such games.
I come to the conclusion, yet again, that your participation here is not meant to in any way advance understanding, or even coherent argument, but is simply an exercise in time wasting. The alternative would be to presume that you simply do not understand the the answers I’ve given. I will give you the benefit of the doubt on that one, but in either case, please do not waste my time again.
Richard- a question about QE being described as printing money:
If it is ‘printing money’ isn’t it heavily disguised to look like it is still ‘borrowing’ money from the markets? That is, instead of straight Sovereign Money creation, the Government (BoE0 buys back bonds to increase bank reserves then the bonds, metaphorically, moulder in a ‘draw’ at the BoE to whom the Government then notionally pay the ‘interest’ but then cancel the interest which is, in effect, a partial debt cancellation. Somewhere along the way this is surely a scam designed to hide debt cancellation and prolong the Government=Household myth? This is before we’ve even mentioned that the whole process has enriched the markets and market ‘makers’ and added near to diddly squat to the real economy.
EU law requires the disguise
But it has now all effectively been monetised despite that, so printing it is
Richard
My ‘time wasting’ as you call it prompted this post this morning. So, do you really want to describe it that way?
I would also have thought that asking you to clarify and elaborate on your comment is by definition as ‘credible’ or not as your comment itself is.
In any case, it simply cannot be time wasting to ask whether you believe there is reason to raise taxes at this moment in time or whether you believe, as you seem to have said, that QE is the way forward now.
No, you are wrong again. Your time wasting did not prompt this post: this post was written for use in another project, and used here because it happened to answer your question. That is why I delayed posting your comment. Your ego does, I’m afraid, appear to know no bounds.
And, your question with regard to cute he does remain completely ridiculous within the context of the answer I have provided. This debate is closed
I think you don’t answer because you can’t answer. Sorry, but that is always my suspicion I’m afraid.
I have comprehensively answered your question
I’m not sure it is easy to see a ‘social contract’ in the tax system as it currently stands.
Tax is a conditional obligation, not an absolute one. It is conditional on certain events. Income tax is conditional on earning income, capital gains tax is conditional on having a taxable capital gain. VAT is conditional on the purchase of relevant goods and services. And so on.
If an individual does not bring these conditions into being (e.g. doesn’t earn income etc.), whether out of choice or circumstances, he/she is not in breach of any law, nor is he/she thought to be doing anything particular immoral or anti-social.
There will be plenty of adult citizens in this country who don’t earn income, make capital gains or buy goods or services (they may consume them, but they are not necessarily the purchaser). Think of adults who are fully supported by a spouse, parents etc. Think of the profoundly disabled citizen who require complete care. Think of prisoners.
If there is a social contract as you suggest, then these people are presumably in breach of it. Given nothing happens to them for not paying tax in these circumstances, then it is hard to see any meaningful social contract involved.
It could be possible to see some kind of social contract if there was a particular tax that was payable by literally every adult. A kind of poll tax. Is that what you’re suggesting?
I have to admit that I think that thinking bizarre
Firstly, how many such people are there? Even a relative of mine in a care home with dementia has ‘pocket money’ she spends at the ‘tuck shop’
Second, the vast majority of such people receive benefits and so are firmly integrated into the social contract
Your ‘person as an island’ does not, I suggest, exist and you are simply floating an extreme and wholly irrelevant straw man argument
How many are there?
– Students. Some work part time. Some don’t. My GP wife didn’t work during her medical degree – didn’t have time, completely supported by her parents.
– Wives (and to a lesser extent, husbands) who don’t work outside the home. You don’t need to look hard to find them – I’d reckon there would be millions in this country alone. They don’t pay tax, they aren’t on social security. It is hard to think they are in ‘breach’ of anything to society due to the lives they lead.
And ‘how many’ is irrelevant. If there is one, and they don’t pay tax and nothing happens to them, there simply can’t be a contract.
Oh come on
You’re just being silly
Students and spouses spend – and pay VAT as a result
Can we have a grown up conversation, or I will delete your comments
Also, students have (presumably) an expectation of moving into employment at some point after they graduate, at which point they will pay taxes. So on a lifecycle basis there is obviously a contract there (the same argument applies to children, most of whom won’t pay tax as children but will do later in life.)
I despair at some of the responses (you know who you are!).
The avarice, arrogance, self-absorption, cognitive dissonance on display from certain quarters does not abode well for society and humanity as a whole…
I don’t think it is worth engaging with “them” as this is a complete and utter waste of time. It would seem they are incapable of empathy and their only intention is to hector and brow beat anyone that does not agree with their distorted world view, which appears to parallel that held by the the eighteenth century French aristocracy.
On that note, I understand that the following slogan has appeared in New York
“The French Aristocracy Never Saw it Coming Either”
http://www.dailykos.com/story/2014/03/30/1288398/–The-French-Aristocracy-Never-Saw-it-Coming-Either
I wouldn’t blame you if you applied a virtual guillotine to some of the comments 😉
City am are quite willing to censor comments that are even mildly critical of the views of the editor – they certainly wouldn’t put up with those not just insisting that their comments be published, but hectoring someone like a spoilt brat until he or she complies with their demands!
I’m afraid that I have zero tolerance for bullies and I think I’d better leave it at that……
City AM’s editor is going to the Telegraph
Which says a lot
Richard, the comments on QE raise another point regarding the reasons for taxation. Taxation creates a demand for the government’s paper/fiat currency and helps to give it value. The Confederate States of America were unable to implement this during the American Civil War, and as a result suffered massive devaluation of their new currency. Bill Mitchell goes into a lot more detail about this in Printing money does not cause Inflation (http://bilbo.economicoutlook.net/blog/?p=13834 )
Agreed
Tax means a currency must be used within an economy giving government some control of it
Indeed-in Randall Wray’s book on Modern Money Theory , in his efforts to debunk the myth he points that research shows economies can suffer up to 40% inflation and still grow (not that you want that!). Hyper-inflation is defined as 50% a month, so you’ve got to have pretty dire domestic condition (civil war, war reparations and no domestic production) to create this situation.