It is a recurring theme of this blog that the money that the government spends is not 'taxpayer's money' but is instead money that is the government's rightful, and sole, property. I have said it so often that it's almost boring to say it again, but since it has come up yet again in the discussion on capital gains tax entrepreneur's relief it is worth repeating why this is the case.
Firstly it is because as, for reasons I note in detail in The Joy of Tax, governments technically never need to tax in order to spend. A sovereign government with its own currency can always create all the money it needs in order to spend in exactly the same way that commercial banks can create money for lending, which is out of thin air. In fact, as I also argue in that book, they only ever tax to, firstly, prevent inflation, and second to achieve the social goals of redistributing wealth, repricing market failure, raising representation in a democracy, ratifying the value of money in a jurisdiction and reorganising its economy through fiscal policy.
But, secondly, when they do tax governments have an absolute entitlement to the tax revenues they raise. I explored this issue in the Salter Lecture I gave at the Quakers' Yearly Meeting in Bath in 2014 from which the following extract is taken:
At its core tax justice demands that each person pay the right amount of tax at the right time, in the right place and at the right rate.
Right has a special meaning here. It means that not only do you comply with the law. Tax avoiders can claim they do that. It does not even mean that you comply with the spirit of the law — which is what HM Revenue & Customs expect. It is about putting this desire to do the right thing into action, so that what is declared for tax purposes reflects the economic reality of what the taxpayer has actually done.
That, at least, has been our usual explanation of the term ‘right' but the reality is that it reflects something broader than that. It is our belief that we are people who live in community. But that community is not made up of those immediately known to us, as neoliberalism might, at best, suppose. We think that community between people known and unknown is something that is a pre-requisite for a life well lived.
Without that community there would be a continual struggle to preserve ownership of property, to secure the means for survival, and to maintain the boundaries around communities that are necessary if it is to invest in its own identity, traditions and future, as all do, for a community does reflect a culture, even if it is one that should develop and evolve over time.
Tax provides the mechanism to achieve these aims in a non-violent way. It's not just that it pays for the process of government that defines in turn the extent of the community, the way it identifies and transfers property rights, and which protects its more vulnerable members: tax does this in a democracy with the willing consent of the members of that society. That combination of consent and tax takes away as a consequence the cause for much dispute. As a result, tax is one of the foundations of peace.
We pay a price for this: indeed American Judge Oliver Wendell Holmes, Jr. said in a speech in 1904 that ‘Taxes are the price we pay for a civilized society'. I would agree. But I would go further than that. I would suggest that we don't as such pay taxes. The funds that they represent are, I suggest, in fact the property of the state. After all, if we give the state the power to define what we can own, how we can own it and what we can do with it — and we do — then I would argue that we also give the state the right to say that some part of what we earn or own is actually its rightful property and that we have no choice but pay that tax owed as the quid pro quo of the benefit we enjoy from living in community.
This philosophy is, of course just about the polar opposite of that of the neoliberal who thinks that all taxation is, in effect, theft of the private property of the individual that the state must, by coercion and threats wrest from their possession. That notion of tax as theft is, by the way, commonplace in neoliberal thinking. Its expression in milder form gives rise to the term used by politicians of all parties in recent years when they talk about spending ‘taxpayers' money', with the clear implication that the government really does not own the funds in its possession. Well let me inform you that there is no such thing as ‘taxpayers' money': it is the government's money to do what it will with in accordance with the mandate it has been given and for which it will have to account. It is the government's money precisely because we owe it to them in accordance with the laws that we, by consent, have agreed to comply with and which underpins the society of which we are a part and in which we wish to live in reasonably peaceful harmony.
–—
In so saying, of course, let me make clear that there is taxpayer's money: it is the money they have the absolute right to enjoy after they have paid their tax. I genuinely struggle to see why some have such difficulty in understanding this glaringly obvious concept.
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It’s a well argued point – “tax payer’s money” lies alongside such misnomers as The TaxPayers Alliance, who of course, are not an alliance, nor interested in taxpayers in general.
You helpfully define the difference between the Government’s money and tax-payer’s money. But do we also need to consider what money is in the modern world, and what it is for? These seem to be fundamentals, which the world of finance has captured, at the cost of people, communities and nature.
I deal with this in the book
thanks Richard. I will look forward to reading it.
Government spends from its cash buffer. It gets some of it back as taxes. The rest it gets back when it issues bonds for reserves.
Spending only increases reserves in the commercial sector temporarily on an intra-day basis because the debt management office is constantly shuffling them back by issuing Gilts to refill the buffer.
So spending causes an increase in Gilt holdings – but only because of the institutional framework that is in place. You have a small amount of reserves that just bounces around the place as a buffer. What you really spend is Gilts.
This is just basic Treasury operations that you do with ANY financial institutions. Similarly in commercial banks they make loans and then backfill the funding by issuing bonds and shares or accepting deposits. But you know what your cash buffer has to target because loans take weeks to complete and in aggregate you know roughly how many will complete on average and therefore you can project your funding requirement really quite accurately for weeks in advance.
It’s the same with government.
Ultimately all this talk is a lot of hot air.
The entire conclusion put forward follows from the premise that the bond markets can decide things.
However if it is clear to the markets that the government believes it ultimately controls the Bank of England and the understanding is that the Bank of England will prevent yields from rising, then they will not rise.
Any bond that drops below par can be purchased by the Bank of England and cancelled. That means that the private sector gets less back than it paid out for the bond.
And that is a tax. Show me a financial person that will voluntarily queue up to pay a tax and I’ll show you a unicorn.
So it matters not what the bond market thinks. It matters whether the government decides to voluntarily tie its hands.
The control function that stops you spending as much as you want is the bank stopping your cheque. Nobody will stop a government cheque because they have neither the authority, nor the bottle to do so.
The government always has money in the account to spend and the cheques will not bounce. Ergo it can always buy anything in Sterling.
The government does not spend existing reserves. The Bank of England creates credit instruments (promises) when it spends on the Treasury’s behalf and these promises which are returnable in payment for taxes are deposited into the payee’s account. At the end of the day these balances are mopped up (funded) by the Treasury in open market operations through the sale of gilt-edged stock (dated credit instruments) in exchange for newly created Bank of England undated credit instruments.
It has been long forgotten, but ‘stock’ (the portion of the split tally stick record held by the creditor) actually recorded undated credit. Its use by the sovereign in funding himself with taxes and rents prepaid at a discount actually accounts for the phrases ‘tax return’ (the accounting event at which the’stock’ record was returned to the Exchequer for cancellation) and even ‘Rate of Return’ (the rate over time at which the instruments could be returned in settlement of the obligation, and which did not incorporate money for the use of money aka compound interest).
So the original form of undated ‘stock’ credit instrument fell into disuse when banking intermediaries came along to privatise the money supply, and was replaced by conflicting forms of funding, to wit, shares in a Joint Stock company (Common Stock) and fixed interest dated ‘debt’ (loan stock or gilt-edged stock/gilts).
So much for the history. The point is that the Central Bank does not have a banking counter-party relationship with the Treasury: The Central Bank is the fiscal agent to the Treasury’s fiscal principal. This means that a Treasury credit corresponds to or is congruent with a Bank of England credit. cf the issuance in the First World War by the Treasury of £1.00 ‘Bradbury’ notes which spent just the same as £1.00 Bank of England notes. Similarly a rump of US Treasury Notes (Greenbacks) still exists in dusty corners of the US alongside US Federal Reserve Notes.
So to cut a long story short, the Treasury and Bank of England are principal and agent, with the ‘reserve’ account being a memorandum account, for all the world as though the Bank of England is a warehouse recording title (not accounts receivable and payable) of the undated Treasury credits which constitute our modern money.
And note here that ALL modern money – whether spent into existence by the Central or private banks, and there loaned at interest or not, is in reality a Treasury credit or a clone indistinguishable from it.
When private bank loans are repaid the loan obligation is extinguished, but the credit instrument which is the object of the loan (ie of which the borrower had the use) remains in existence until cancelled by the Bank of England as fiscal agent of its Treasury principal.
You won’t find this explanation anywhere because the Bank of England – which has genuinely forgotten how it actually works, and hence has been researching itself – has not yet worked it out.
Chris
If you could send me a referenced version of that I think it’s a guest post
Richard
I think it is a point well made that the state exists in large part to protect property rights because those are about the only rights the tax avoiders are comfortable with. But if we are talking about money out of thin air then it is odd and/or ironic to choose American Judge Oliver Wendell Holmes, Jr. ‘Taxes are the price we pay for a civilized society’ when he was speaking during the era of the gold standard!
on a payslip tax is shown as a deduction so it’s hardly surprising people generally consider tax as coming out of their money not that their pay is what the government let them keep from government money.
Conventions hide mistaken beliefs
What would happen if they didn’t tax? There would be very high inflation. In fact the monetary system simply couldn’t function in such a situation.
Therefore governments need to tax and cannot just print money.
Why do you insist this is just a technical matter? It is clearly completely necessary to tax if the government is to spend and saying otherwise is nonsensical.
No
It’s about getting matters right
It does not need to tax
It chooses to
And when it does the tax due is its prooerty
Government spending each year is about a third of the size of the total money supply in the broadest terms. What would happen if this continually increased by a third every year? This is not really a choice is it? Unless you think using the brakes on your car, or breathing out, are also choices.
Of course tax is inevitable
I also think it very desirable
But you concede my argument in making your point
So tax is a choice, but no circumstances could ever conceivably exist where anyone would make the choice not to tax.
Unlikely
But only because no one chooses to have governments that do not spend
You really must get your logic right
What’s your point? Richard said quite clearly in the post…
“they only ever tax to, firstly, prevent inflation”
You are clouding issues by going back to the issue of “taxpayer money”. Just to be clear on where you stand if the Government decides that as an entrepreneur I pay 10 percent tax does the remaining 90 percent belong to me or the government? Does the government subsidise me by 90 percent by not deciding to take all of it? Perhaps you’ll find this too boring to answer again but it’s an interest insight into your thought process.
It means a government has given a taxpayer a concession
It does not mean the taxpayer then owes that tax
But I can say the government granting the concession can’t then penalise others saying it has no funds
Great post Richard and this was spot on…
“tax is one of the foundations of peace”
Anthropologist David Graeber describes in his book ‘Debt: The first 5,000 years” how the notion of inflicting debt, on the perpetrator of some wrongdoing, emerged in ancient societies specifically to stop the occurrence of ‘blood feuds’.
What was true then is still true today.
And to those who push the myth that ‘97% of all money in the economy is private bank money’ (e.g. Positive Money) do they know how much of it can be used to pay taxes?
Not one brown penny.
Do you include the Bank of England as one of the pushers?
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
That BoE paper is old news. Why they too fixate on the same 97%:3% (bank money:hard cash) ratio is a mystery as it totally omits government spending (all £111bn of it according to Richard’s headline this morning). As Chris above says “[the BoE] have genuinely forgotten how it actually works”.
Nevertheless the author’s will 100% agree with me that PRIVATE ‘bank money’ (i.e. the so-called ‘97% of the economy’ money) is not an acceptable form of money to pay tax.
You can only pay government taxes with government money (bank reserves or hard cash). Nothing else will do.
Private bank money is 100% acceptable to pay tax
It is 97% of all money we have
I think you will find public spending to be more like £700bn not £111bn.So if I take out a bank loan ie newly created money, PRIVATE bank credit money, I cannot spend it on goods and services that require VAT payment?
Not sure I get what you are saying
Richard,
Only superficially. If I write a private bank cheque to the tax-man he’ll only accept that as paid once the bank cheque has cleared i.e. once the bank has given up some of its reserves (aka ‘government money’) to the tax office.
Ultimately the tax-man will accept payment only so long as it’s cleared and he gets government money in the end. Its no different than trying to redeem a Tesco voucher at Sainbury’s. It can’t be done.
The 97% figure only covers private bank money created by commercial banks making loans (vs 3% hard cash in our pockets). In other words it specifically excludes government spending.
Please don’t fall for PM’s ‘97% of all money we have’ propaganda. Its a deceptive ‘shock value’ figure (designed to fire up outrage against private banks) that completely excludes the £110bn for 2015 you talked about this morning.
As its not counted by PM, perhaps we could call that £110bn the ‘0% of all money we have’ figure to mark its invisibility.
Strange thing is that so-called 0% is very, very real and buys everything from fighter jets to pens.
I have no idea why you relate this to the £111 billion
They are completely unrelated issues
Stephen:
“Nevertheless the author’s will 100% agree with me that PRIVATE ‘bank money’ (i.e. the so-called ‘97% of the economy’ money) is not an acceptable form of money to pay tax.”
Can’t quite get my head around this: do you mean that:
1) Bank money has to be paid back (with interest) and is collateralised
2) Government spending is not collateralised and therefore ‘real’ tax money?
This sounds like the MMT view that all Government spending IS already sovereign money creation (about 49% of GDP?).
Richard @November 2 2015 at 7:39 pm,
Indeed the two are different. In MMT terminology, the 97% figure is private-bank-created ‘horizontal’ money whereas the £110bn tax expenditure is government-created ‘vertical’ money.
However BOTH end up in our collective bank accounts ready to spend into the economy. So its’s misleading to then use a figure that only compares the horizontal portion of bank account money vs cash.
By the way taxation can only be paid using vertical money (held in reserve accounts) which is why I said originally that none of the so-called ‘97%’ horizontal money can be used to pay tax.
Simon @November 2 2015 at 10:44 pm,
Yes am coming from MMT point of view, so I guess your 2nd choice (not sure what you mean by 1st).
MMT view is tax can only be paid using government-created money. They won’t accept anything else. The fact that your private bank account goes down when you pay the tax-man is not evidence to the contrary (although it appears so). As I said above the transaction also involves your bank reducing its reserves by exactly the same amount to pay the tax-man on your behalf.
In aggregate such tax payment transactions use only that portion of our collective bank deposits that came originally from government spending. None of it comes from that portion of our collective bank deposits that originated as private-bank-created money – the so-called 97%.
Stephen-
Thanks for the clarification around ‘vertical’ and ‘horizontal’ money that seems to clear it up in my head (for the time being!).
“Yes am coming from MMT point of view, so I guess your 2nd choice (not sure what you mean by 1st).”
What I meant by “Bank money has to be paid back (with interest) and is collateralised ” is that from an MMT angle banks don’t really create money because it is attached to collateral and is paid back with interest so is removed (unless cancelled- as in a debt relief order) -there is a big debate about whether banks’ creation of credit is the same as money creation. But if only vertical money creates NEW assets then banks don’t create money???? Any thoughts on this appreciated to help out this perplexed individual!
Simon @November 3 2015 at 3:34 pm,
“banks don’t really create money”
I don’t think MMT proponents would agree. Banks do create money – which under the skin is just an IOU and so isn’t quite the remarkable feat people believe – but can only ever do so if they have a willing borrower offering in exchange exactly the same amount of their own personal ‘IOU’ money (created when he/she signs the loan agreement). Since the two corresponding liabilities negate each other, no net financial asset is created – both the borrower and bank’s financial ‘position’ right after the loan is unchanged as both have assets & liabilities that net to zero.
Conversely the government, as the sovereign issuer of the currency, can create a net financial asset in the private sector (by transferring reserves from the Treasury’s account at the BoE to the recipient’s bank) WITHOUT requiring a corresponding liability in the banking system. This results in an increase of non-government net financial assets.
No need to worry about loan interest payments. Its a misconception that this is a ‘black hole’ that sucks wealth from the system and leads to ever increasing indebtedness. As one wag put it interest is “the wages of bankers”. In other words that money doesn’t disappear from the system at all but all of it gets either spent/saved by said bankers and is still very much present in the economy. Steve Keen wrote about this recently in Forbes…http://www.forbes.com/sites/stevekeen/2015/03/30/the-principal-and-interest-on-debt-myth-2/
Sorry Richard,this was my response to “You can only pay government taxes with government money (bank reserves or hard cash).”
Stephen
“Only superficially. If I write a private bank cheque to the tax-man he’ll only accept that as paid once the bank cheque has cleared i.e. once the bank has given up some of its reserves (aka ‘government money’) to the tax office.
Ultimately the tax-man will accept payment only so long as it’s cleared and he gets government money in the end.”
Doesn’t this apply to all inter bank deposit transfers? I do not see your point.
When the government cuts spending, it is hoping that the private sector will make up for the spending loss, and hence provide what would otherwise be lost tax revenue.
Agreed, but that’s still a horizontal – private bank to private bank – transaction (needed because banks won’t accept each other’s ‘private bank’ money). Yes reserves were involved, but in aggregate (i.e. across all banks) the total amount of reserves remains unchanged.
My whole point of highlighting the inability of private bank-created money (the ‘97%’ money) to pay tax is because the proportion of that money in the economy is nothing like as high as much-talked about ‘97% of all money’. So much so it appears even Richard Murphy believes it without question.
The reason it can’t be is the calculation omits ALL government-created money in the banking system (apart from notes and coins), which runs into hundreds of billions of pounds.
An honest ratio would be government spending:private bank-created money.
Counting only notes and coins against the latter gets us the 97% and is a completely dishonest portrayal of the scale of private bank money creation.
Stephen
Extract from boe paper:
“Of the two types of broad money, bank deposits
make up the vast majority – 97% of the amount currently in
circulation. (6) And in the modern economy, those bank
deposits are MOSTLY created by commercial banks
themselves.”
So the authors do not explicitally exclude central bank money.
I am aware of the vertical/horizontal movement of reserves, and as you suggest a check against a previously cleared deposit , is acceptable by hmrc as payment of tax bill. This will surely then initiate reserve transfer from commercial bank ie vertical transfer. The deposit I refer to is likely to have been created as private bank money.
Commercial bank created money deposits are indistinguishable from goverment created deposits in terms of expenditure. The difference is in the fact that government created money can be hoarded indefinitely. Since you have made reference to Steve Keen, are you aware of his somewhat different approach and view to mainstream mmt, in the role of private banking/government roles in the economy, (in particular predominance of private banking with government merely tagged onto it.)?
Barry,
What the remaining residue is I wouldn’t know, but it can’t be government spending. In 2014-15 that was £731 billion (much bigger than Richard’s £110bn – perhaps he is talking about money not taxed back, since approx 11% of government spending ends up as savings aka known as the deficit).
So, being cautious, that’s very roughly £500bn government spending into the UK economy in 2014-15. This would be achieved via two methods: by marking up deposits in UK private bank accounts (the vast majority of it) & printing/minting notes and coins (hardly any of it).
Being very generous lets say only £400bn ended up in accounts. Is this the residue in bank deposits that is not “MOSTLY created by commercial banks”?
For that to be feasible, the level of commercial bank lending would have to be truly astronomical (in the trillions).
Agree on the source of specific deposits being indistinguishable, but its the aggregate that matters. As you imply, bank loans have to be paid back, so, in AGGREGATE, the proportion of money needed to do that has to remain in the private sector. Similarly, in AGGREGATE, the proportion of money in private bank deposits that is used to pay tax is accounted for exclusively by the government money spent into the economy (minus the ~11% the private sector desires to save).
Yes know that Steve Keen isn’t exactly on same page as MMT, but he has worked with them in the past to resolve difference between his mathematical approach vs MMT accounting approach. Also am aware he re-tweets PM material and recently attended a PM seminar with Lord Turner.
I also attended that seminar
Don’t over-read into attendance
A group of Italian economics professors in the Catholic Church have coined the phrase “The Economy of Communion” arising from the work of the Focolare. Both emphasise solidarity as a key principle of business, i.e. taking into account the whole community, which sounds like your “pre-requisite for a life well lived”.
Whilst I don’t necessarily agree with the methods advocated, I do agree with the principle. Quite a few social enterprises in South America now call themselves solidarity enterprises to make the point.
Have a good conference.
Interesting
You gave made me think about a blog on this theme
Does it matter if the State spends wastefully, if it is the State’s money?
Does it matter if is a “Good” or a “Bad” State?
And who or what is the State?
The state is the mechanism for the delivery of public services run by the government
Of course it matters if it spends badly
That is why the process of democracy is so important
It is the way to hold the state to account
I must disagree,taxes are a tool for rebalance false values to keep the economy in balance & values true,it is also a truth that capitalism is incapable of paying enough for all the people to be able to build savings to cover emergencies & government can act has insurance,ie national insurance for NHS & pensions that should be held out of reach of speculators.but in reality governments are just custodians of money for the benefit of the people & therefore a civilized society will help even those that can not contribute has much because in effect all money paid to government is insurance to help in the economic cycles those that were the victims of the cycles
Agree 100% that it is government money.
It’s why it has monarchs or dead presidents printed on it.
Whilst only 3% of it is in bits of paper, it’s the authority it conveys which gives it credibility.
By looking at government spending and government revenue (the former tending to match the latter in the subsequent year), you miss all the steps in between, which for corporate accountancy don’t matter much, as these steps are generally tax exempt (or indeed subsidised).
When looking at the consumer accounts, each pound created (loans or government spending), has only so many transactions before being consumed by tax.
Example.
1) BigAgro gets EU subsidy for growing Spuds. Some of that goes into a new tractor, fertilisers (also subsidised, as a by product of oil), etc etc.
The rest goes into labour.
2) Labour is taxed at say 20% income tax, plus NI.
3) Labourer buys petrol for car (Vehicle excise, VAT on car purchase, etc) to go to pub. <cashier at petrol station pays income tax, NI, etc, forecourt owner has various overheads, per 1)
4) Labourer buys pint and a pie. Pint taxed at around 80%, pie 20% vat. Landlord has various overheads, barman, serving staff, etc).
So, as that initial subsidy from the EU (say 1,000,000 accounting tokens) works it's way around the system, it is gradually taxed back to it's source.
A circular flow of money?
So, where is the leakage? That 1m euros does not enter the UK economy as euros.
What are the transactions?
1m euros are destroyed in the EZ, simultaneously around £666,666 are created in the Sterling arena (depending on exchange rates)?
It is a closed system, there should be no leakage, unless there is gaming going on.