I spent a long time in a discussion of tax yesterday. Now this is not a new experience, but what was interesting was noting the problem people have with embracing the idea that some really good taxes collect no money.
Take an example: if taxes on tobacco worked as well as I would like them to do then the revenue collected from them would be zero as no-one would smoke. That's not going to happen, of course, for two reasons.
First, we have got used to tobacco taxes raising revenue and may find it hard to do without them even if lung cancer incidence reduced. There is some argument for this: after all, people are going to die of something else likely to have an associated cost if it is not smoking related and so money is required.
Second, the tobacco price required to achieve a ‘no-smoking' outcome may be too high to be socially acceptable because of the regressive tax burden it might impose before the zero revenue goal was achieved. As a proportion of income more tobacco taxes are paid by the least well off already.
As a result of this regressive quality of tobacco tax (which would also apply be a characteristic of sugar taxes as I understand it, but not so dramatically of alcohol duties) tax may simply not be the only way to tackle the problems relating to such issues, even if it has a role to play. And if revenue is also planned to be raised then any tax intended to address any such issue is compromised from the outset.
The same is also true in another area, which is the financial transaction tax. There is a conflict inherent in the design of this tax. If the aim is to raise revenue, for example for development, then it must not discourage too many of the transactions on which it is charged even though many might think some aspects of those transactions harmful. If excess speculation is to be ended the rate would need to be high enough to produce little or no revenue. This paradox needs to be solved.
I stress, no revenue can be the right outcome for a successful tax. I acknowledge that fact in The Joy of Tax. But as I also make clear in that book, tax design that overcomes these inherent paradoxes in many potential situations requires clarity of thought and transparency on tax design. And we don't see enough of that.
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Like parking fines and speeding tickets these things (hopefully?) are the seeds of their own destruction.
In the end all things come down to the creation of wealth and the ability/facility/willingness to distribute it.
‘many potential situations requires clarity of thought and transparency on tax design’
Transparency is a key issue, not just for tax design. I suppose really it’s a question of ‘WHAT ARE THE FACTS’? Governments seem determined to hide them from the public. For example, didn’t Alan Johnson sack Professor Nutt (the Government’s drug adviser) for revealing that the club drug ecstasy was statistically about as dangerous as horse riding (or was it jumping).
Aren’t there now moves afoot to make requests for Freedom of Information relatively expensive?
Re the last, nigh on impossible might be a closer description
One snag with some kinds of taxation is that you finish up with a Dr. Syn of Dymchurch or his modern equivalent or the bootleggers. For other taxes there are many financial advisers who would sort you out a nice deal somewhere sunny.
Regarding a sugar tax:
Wouldn’t it be feasible to impose this on the producers, rather than just putting the prices up, to discourage producers putting to much sugar in their produce?
It would have to be imposed on producers
But what would stop them passing it on?
Nothing really, though government regulation maybe should in place to make sure they don’t pass every bit of the extra cost onto the consumer.
Of course, this will bring cries of “the government is interfering with free enterprise”. However, that doesn’t seem to stop them taking subsidies and grants from the government.
“If the aim is to raise revenue, for example for development..”
I thought with Modern Monetary Theory, all tax revenue ended in the bin?
Those campaigning for FTT are not MMT adherents
Confused here Richard. If according to MMT, taxes aren’t even used for raising revenue at the central government level, what’s the point of arguing over taxes on those terms? Unless MMT has it wrong or its more nuanced than MMT proponents make it out to be?
The whole world is not an MMT Adherent
I engage with the world as it is
And the reality that people will use taxes for social reasons under MMT
If MMT denies that role for tax it is useless to me
Strange reply. I’m now totally confused about your position regarding MMT?
MMT is a good explanation of money
It is good explanation that tax reconversion spend
But to pretend for a moment that how tax is collected is neutral would be just absurd
And MMT arguments on employer of last resort make little sense to me
So I use those parts of MMt I think useful
I see no reason why not
What I like about this blog is that no-one takes life too seriously.
Alright.But wouldn’t you rather tell them what actually happens rather than what they believe in? I’m supposing here that MMT is line with reality when it says that taxes are not used for revenue purposes by central governments.
Taxes are used for revenue purposes in the sense that revenues are essential to prevent inflation. So to say otherwise makes no sense
And revenues are needed to influence behaviour
That is the paradox I am highlighting
I do not buy for one moment that MMT in practice means gov’t has no care how many is raised, if at all
If it does it has no value in use and tgat is what I am interested in
Right. Thanks for your reply. Sorry I still dont fully understand what you are trying to say in your above comment –
1)”revenues are needed to influence behaviour” . Sorry I didnt get that. Are you saying that the revenue from the tax develops a dependency(of the state/county or central government) on the very activity that the tax is designed to prevent?
2) “I do not buy for one moment that MMT in practice means gov’t has no care how many is raised, if at all. If it does it has no value in use and tgat is what I am interested in”. Sorry I didnt get that either. I think there are some grammatical errors there.
3) My concern here was that if MMT is correct about taxation(that the central government doesnt tax to fund itself but to prevent inflation and for other political/social reasons), then why is the rhetoric in government and private finance still that central governments tax to raise revenue to run themselves and their various projects like healthcare,schools,defence research,etc?
Thanks!
What can I add? The comments make sense to me
How tax is raised does influence behaviour, in my opinion
If MMT says that it does not matter how tax is raised then I am saying it is wrong
Can I be clearer?
Raising tax can in that case be important whether or not revenue is needed, and whether it funds government, or not
Surely if you are going to raise taxes to the point no one can realistically afford something then you may as well just outlaw the product.
Would you also consider a “neutral” tax in the same instance, that is a cost is known and the tax rate is set so that tax receipts equal that cost, so the overall effect to the government of the tax is zero.
That’s a possibility
Barring the fact it’s not possible to equate that due to time effects
Yes it would have to be an approximation or possibly a protected fund of some sort.
Taking your transaction tax the revenue could be placed into a development fund with specific uses attached and the value of the fund managed to adjust for over/under estimating in prior years
Like the ‘idea’ that the road fund licence scheme being used to maintain roads, rather than going into general revenue (not sure where that common misconception came from, but have heard it repeated a few times)
Or another example, the recent referendum in Vancouver to add 0.5% to local sales taxes with the revenue being ring fenced to fund the proposed plan for expansion of the transit system.
That was the original purpose of the Road Fund Licence – in 1920. The licence fees went into the Road Fund, which was used to build and maintain roads. Controversially, not all the money was spent each year, and the government of the day started to siphon it off for other purposes, including subsidising the railways (nothing changes!) As a result, hypothecation was ended in 1936, with Vehicle Excise Duty (the official name) going into general taxation, and the Road Fund being funded from the general budget. The Road Fund itself was closed in 1955.
Only being 80 years out of date is pretty good going for some economists…
I am opposed to hypothecation
Unfortunately some tax raising, designed to change behaviour, also gives rise to unnecessary criminality – as in alcohol and tobacco taxes. To really change behaviour there should be very much more enforcement than there currently is.
But of course there are now no staff and the onus is put on the legal operators. So I’m told today in the HMRC ‘Alcohol Trade Newsletter’ that “If you purchase alcohol from an EU supplier and/or from a UK based business which has an account in an EU bonded warehouse, we will expect to see evidence of [EU – not UK or Ireland] VAT registration as part of your due diligence checks.”
No indication of how you are supposed to discover whether a UK based business has an account in an EU bonded warehouse. Could ask I suppose, but should I believe their reply or not?
So HMRC hasn’t the resources to do the checks but a sole trader is expected to! Where it really falls down of course is that they haven’t the resources either to check on the sole trader. So as ‘Private Eye’ would say, trebles all round.
And also
Richard Murphy says:
“So I use those parts of MMt I think useful
I see no reason why not”
And in that respect you are in the long tradition of the practical British school of thinking (of which I rather approve). Piecemeal is what the Continentals often call it in a not entirely approving way – but then I’m not sure they’ve given much that is all embracing. They have goes at it but not with conspicuous success. The metric system is all that I can think of – though that’s in a very specific sphere!
Good. Now hopefully you will see banning things frees up real resources just like tax. Tax is just one tool, and only really good for freeing up general fungible resources 🙂