I have already written about what I think the foundations of Scottish taxation should be. This thinking is based on a report I have submitted to the Finance and Constitution Committee of the Scottish parliament in anticipation of a hearing on 19 April. In that post I referred to the economics that underpins those foundations and said I would write separately on the issue, and now duly do so.
In my submission I say that the foundations of Scottish taxation must reflect
- Modern taxation theory;
- The role tax now plays in economic policy;
- The social and economic priorities of the society that imposes the charge.
The first of these is my concern here. As I say in my submission:
To build appropriate foundations for a tax system the role of tax in the economy and wider society has to be properly understood. It is my suggestion that this is rarely the case. Just as the Bank of England had to say that the role of banking had been almost wholly misunderstood by economists and was incorrectly represented in almost all economics tax books in 2014[1], so too is tax widely misunderstood.
It is widely thought that tax is necessary to pay for government provided services. It has, however, recently been realised that this is not true. This is because all government services can in principle be paid for either by printing money or by QE operations (which amount to much the same thing).
The reality is, of course, that no government would want to pay for all government services this way. That is because the result would undoubtedly be rampant inflation. This though does not, however, change the principle: that principle is that all government services can be paid for without taxation.
What is more, if the proverbial 'chicken and egg' question of which comes first with regard to government spending or taxation is asked then it must be government spending. If government did not spend first then none of the currency it insists be used to pay the taxes it demands be paid would actually exist. The fact that much of the money in question has no tangible existence and is only in an electronic bank accounts does not change this conclusion: those banks and the accounts that they operate only exist under a licence granted by the government.
Appreciation of this fact demands a whole reappraisal of the role of tax In the economy, just as happened when the Bank of England said in 2014 that the awareness that it was lending that created bank deposits and not savings that permitted lending demanded a whole reappraisal of the role of money in then economy.
[What is clear is that if] tax is not required to pay for government provided services it must have other reasons for existing. There are six of them:
- Reclaiming the money the government has spent into the economy. It may appear that tax revenue is being used to pay for government services supplied but that is not true: the service comes first and the tax comes second. Tax reclaims the money spent to prevent inflation. The amount reclaimed is that which is considered sufficient to leave the desired rate of inflation in the economy. Because we may well want some inflation - and that usually requires that more money be created than be reclaimed by tax - balanced budgets are usually a bad idea for the macro-economy because they deny the economy the cash it needs to function in a mildly inflationary environment.
- Ratifying the value of money. Because a government requires that tax be paid using the currency that it creates, and uses when undertaking its own spending, that currency has for all practical purposes to be used in the economy for which it is responsible, assuming that tax forms a significant part of people's liabilities. Tax does, therefore, give a currency its value in exchange and as a result provide control of an economy to the government that charges it.
- Reorganising the economy. Fiscal and monetary policy are the two fundamental tools available to a government to manage its economy, assuming it has its own currency. As the previous analysis has shown, money creation and taxation are the flip side of each other. Tax is then an integral part of macroeconomic policy and so of reorganising the economy to meet social and economic goals.
- Redistributing income and wealth within the economy. Experience has shown that market economies are very good at concentrating income and wealth in the hands of a few people in a society whilst economics makes clear that this is harmful to the prosperity of society because it seriously reduces overall levels of demand in the economy. Redistribution of income and wealth is then an essential function that any Government must undertake and appropriately designed taxes are a proven and effective method for delivering this policy.
- Repricing goods and services. Markets cannot always price the externalities of the goods and services they supply or reflect social priorities. Tax permits repricing of goods and services to reflect these facts.
- Raising representation in democracies. There is little doubt that tax motivates interest in the democratic process. When people recognise that they pay tax they are more interested in engaging with the electoral process.
The foundations for Scottish taxation that I propose are based on this economic logic. It is a logic that could liberate Scotland to become a fully economically literate and functioning state and truly equip it for independence.
[1] http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf
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Have you got a citation for point 6.
There’s plenty of evidence that councils are not charging council tax to low income pensioners, but are taking young low income residents to court to pay the typically 25% of the standard amount due after council tax benefit is taken off.
I know which group is more likely to vote.
The evidence largely comes from countries where the contrast is with places with no income tax i.e. developing countries where the evidence is clearest
Developing countries typically have massive turnouts, but this is often the effect of being allowed to vote at all. Not a good comparison for Scotland imv.
Just wondering if you had a citation for the claim?
As I am on holiday right now, no
Any tax system involves some element of coercion and taking non-payers to court. It would be a bit harsh if the Scottish government followed your advice on people on low incomes not in taxation, and decided to bring them into taxation to raise their voter engagement on the basis of an assertion.
There is massive evidence that tax cuts at the lower margin have been profoundly costly to those on low incomes and much better in terms of saving for the middle classes
Why not reverse that?
Wouldn’t you want to improve the lot of those on low incomes?
“Tax reclaims the money spent to prevent inflation.”
Once again, I disagree with this assertion and I would like to understand why you think it is true. I am not challenging the fact that it does that, but I do not accept that is what it is “for”. Nor is the only tool to achieve that objective.
You have said that if government paid for all services through the “printing” of money rampant inflation would follow. Why would it? That seems to me to be an essentially monetarist position, but it does not follow, to my way of thinking.
To me, the provision of goods and services by government is in no way different in kind from the same thing done by the private sector. That a distinction is widely made is part of the neolib story. Similarly, that the money supply was (theoretically) restricted by artificial constraints on monetary policy after Thatcher came to power (in the UK) is not reflected in the reality that all that happened was that control of it passed to the private sector. Thus most money is now produced not by govt, but by banks. And it is not constrained except by the laughable idea of “market discipline”. We have seen just how effective that is, in 2008. And the result was not “rampant inflation”: but a crash.
So if the government paid for everything by printing money, and no other body could do that at all, why do you think that “rampant inflation” would follow? There is no necessary reason to assume that more money would be printed, is there? All that seems to underpin that is a notion that governments are uniquely irresponsible in fiscal and monetary policy. I see no evidence for that and it seems to be an unspoken premise in this debate.
I think there are some deep misunderstandings here but you are far from alone in making them
The deepest is that banks create money. Ann Pettifor and Positive Money share the belief that banks create money (she won’t like ma aligning them). They do, in a sense, but only in effect under licence from the government. With draw their ban kg licences and they can’t, so who really has the power? They both make the mistake of thinking it’s the bank. It obviously is not. Cowardly governments may make it look that way but it is not true.
Getting over that and governments do make money. They make it by spending. And the Es, if the kept creating it to cover sending without racing to cancel it of course there would be rampant inflation. It’s either tax or stop spending really. And I want the spending.
But that’s where the myth about tax paying for the spending comes from.
Dig deeper is my answer.
might we say that the government has privatised much of their money issuing power to the banks?
No
Privatised would mean so t had been alienated
That is not true here
QE partly proves that
Here I think you conflate the position in principle with the position in practice. The reason I say that is that you argue that the power lies with government. I do not disagree with that in principle. The problem I see is that this power has been ceded, without any true democratic oversight about whether we wish to do that. We certainly do not have to. But the fact remains that “they do, in a sense”. Only the sense is “in practice”.
With the right politicians that would not be true
With the right politicians it would definitely not be true. But the fact remains we don’t have those, or the prospect of those.
As you say the public and private sector are not that different, both can enable the money supply to grow faster than activity which causes inflation of something, whether houses, wages or chocolate over the short term. But both create money as debt which is demand on future activity which is a means to limit inflation over the longer term. Government could just create money (no debt) which is called overt money financing. Most economists think it can be done without causing inflation but you have to know when to stop. Another scheme I like (an idea of Kalecki) is a capital tax which matches the interest on government bonds and thereby completely neutralises government debt.
Inflation happens if the government pays too high a price for the goods and services it provides. In this case too much money enters the economy for the amount of current activity, so the prices (labour initially) goes up. Another way of looking at it is, there is no point throwing money at the health service if there are no more trained Doctors and nurses available to fulfil the extra posts. The EU (globalisation) is kind of great because it allowed skilled labour to move to the demand, although less great if you find that all the Doctors in your town has left, and less than great if like India
you train your Doctors only to find that some of the best ones leave.
Like everything in economics, nothing is black and white.
I struggle with non-debt money
Try as I might I cannot see how it can have value
Money is and always has been the representation of debt, which is why it is of worth
I do not agree with Positive Money on this
I have never explored the Kalecki idea in depth although I am aware of it. This ignores the fact that government debt is an amazingly valuable thing – not some kind of curse. We could not run our economies without it
“With the right politicians that would not be true”
Right as usual Richard, but by allowing the private banks to create money you furnish them with all the resources they need to ensure that the right politician never gets off the starting blocks. That is achieved by buying the political system, gaining regulatory capture and controlling the media. If by any chance one slipped past the gatekeepers they would be mercilessly attacked and vilified. Also, a major disadvantage is that the “courageous leader” would operate as a master clock. Relativity forbids master clocks. Many people would dispute that relativity applies, mainly I think because they do not know how to deal with the problem of relativism. However, relativity applies to all systems and it is better to incorporate the principle into the design process of any solution we may propose than ignore this truth. The problem of relativism is just a state of difficulty that needs to be resolved — but be warned, alas economics totters.
I’ve always found it easier to comprehend money when you think of it as a tool rather than a store of value or valuable itself. As Richard says all money is created by the state, that it is now mainly done by banks under licence doesn’t relinquish that power. If you think of money and tax as a chicken and egg scenario then it is clear that money(state spending) had to come first or there would be nothing to tax. Yes I know all the gold bug type arguments here so please don’t bother, they’ll never convince a sane person.
Inflation shouldn’t be a concern when there is unused capacity in material or labour. But a desire for healthy(debt shrinking) inflation is mainly because all money is currently created as debt and therefore debt will always exceed the supply. A very different dynamic ensues if you direct spend/create money as debt free. On balance I would plump for the debt free option but I understand Richards reservations. In some ways it’s similar to the debate around UBI, it’s polarising and also incomprehensible to some.
The last is very true
And passions are often very high
I agree with all those. It is kind of in your No. 5 but I would be more explicit about
Promoting growth by favouring investment in infrastructure and rising productivity over speculation in exiting assets and rent extraction.
This necessarily implies favouring health, education, security, energy transport infrastructure (public goods) to enable the free market part of the economy (private goods) to function at ‘full’ capacity.
I read 5 as more of Pigou style taxation to limit negative externalities.
Rereading, I guess my point was also in your No. 3.
I think so
http://www.economicshelp.org/wp-content/uploads/2015/03/annual-inflation.png
What level of inflation is considered appropriate in this model? See UK history above.
When taxing to reclaim (as described), how do you in the current environment ensure that you reclaim enough, particulary from the tax tax dodging multinationals without leaning too much on the majority of the population (and small businesses) and thereby by default reinforcing a regressive tax regime alongside stagflation. Or do you let the loss of reclaims turn the heat up on inflationary forces (and devaluation of stirling).
Recent austerity in this context could viewed as the governments allowing for such tax non-receipts and attempt to stem any further inflation. I don’t agree that this should be the focus however as mentioned before.
Has anyone complained to the ‘Competition and Markets Authority’ about these Corporations’ anticompetitive tax behaviours?
https://www.gov.uk/cartels-price-fixing/overview
https://www.gov.uk/government/publications/what-are-super-complaints/what-are-super-complaints
A super-complaint, as defined by section 11(1) of the Enterprise Act 2002 (EA02), is a complaint submitted by a designated consumer body that ‘any feature, or combination of features, of a market in the UK for goods or services is or appears to be significantly harming the interests of consumers’. The features of a market may refer to:
the structure of the market concerned or any aspect of such structure
any conduct (whether or not in the market concerned) of one or more than one person who supplies or acquires goods or services in the market concerned
any conduct relating to the market concerned of customers of any person who supplies or acquires goods or services.
Get over your obsession with big business – they are not the only cheats
And read the paper as well
What’s the right rate? I think about 3%
Yes but you tackle them, I think you’ll find the rest will tend to follow. In that sense I do believe top down is the right approach for a multitude or reasons (fairness, competitiveness in the market, resource leverage, progressive, win public support and trust in government etc..).
This article below is why I’m obsessed with the UK claiming back the tax from the multinationals (France is focused on doing it, so should we). The deal George Osborne did with Google shows how weak he was (and naive from a business sense) – this deal for starters probably could be contested as a form of professional negligence.
Title: UK economy is overheating and veering towards stagflation
https://www.theguardian.com/business/economics-blog/2017/jan/16/uk-economy-bankofengland-stagflation-inflation-growth
I believe it’s imperative that WE (as a nation) start ‘Reclaiming’ the billions and billions of tax owed to the UK now in order to fend off this potential headwind of low productivity, QE stimulated inflationary forces and Stirling depreciation (increasing costs to consumers), low growth and further worsening public unrest.
If we ‘Reclaim’ these mega funds already owed, we can invest in ‘growth’ enhancing infrastructure and ‘economic’ enhancing productivity, without spending ourselves into a even greater inflationary mess that could backfire into more of what we do not want – greater stagflation in the economy as a whole (think ‘Argentina’ at the extreme end of this).
Derek
You really have got the wrong end of many sticks – as has the author of that article
QE did inflate asset prices
So we needs be right type of QE, about which I have written
We also need the right type of inflation – the sort that writes off debt and does not inflate asset prices
But we don’t need tax to do that. Is social and no us justice that demands we collec Rac from large companies
And ur us a belief in fair market that demands that
But is not required for investment
We can print all the money we need for that
And we must
It us your route that guarantees stagflation
‘We also need the right type of inflation — the sort that writes off debt and does not inflate asset prices’
I understand your philosophy on this, and it is an exciting prospect in terms of economic investment and development. But I can not see how collecting funds from these Corps can be anything but beneficial, whilst hedging the ‘investment’ risks you are proposing. You are suggesting it’s risk free, I am not. I don’t believe there’s any risk free strategy either in the private market or public domain (economic history supports that notion). A hedging (diversification or insurance strategy) is generally the one undertaken by history’s most successful and consistent long term investors.
I am not arguing it is not beneficial – it levels the playing field for business and that is vitAL
That is the primary reason why it is important
“We also need the right type of inflation — the sort that writes off debt and does not inflate asset prices”
I’d agree with this. I hope MPs are cogently discussing these things.
Now there’s an interesting thought: Scotland, the World’s first fiscally-literate democracy.
Richard,
Going off at a slight tangent, the other day I read this partial transcript of Jim Rogers being interviewed on Bloomberg, “Jim Rogers Asks If Scotland Pushes Pound to $0.80”, about the value of sterling should Scotland vote for independence:
https://www.bloomberg.com/news/videos/2017-03-28/jim-rogers-asks-if-scotland-pushes-pound-to-0-80-video
“If the Scots leave, why won’t sterling go to 80 cents… the Scots…have a lot of oil, and if they leave they are going to take the oil with them… if the Scots leave… they are going to take their oil and you look at the UK’s balance of trade, balance of payments…without the oil, without the Scottish oil…what’s left here, little England or Great Britain or Great England whatever we’ll call it then, doesn’t have much to sell to the outside world anymore.”
After watching the interview, as a non-financial business man, a few thoughts crossed my mind:
– the fall in sterling/dollar post-Brexit vote (roughly 1.50 to 1.25 or 16%) would be dwarfed by the subsequent fall should Scotland leave the UK (roughly 1.20 to 0.80 or 33%)
– under such circumstances would it be realistic for the rUK to try and block Scotland’s continued use of the pound?
– during the last few years the pro-independence side has been strangely quiet about the point Rogers’ makes. I cannot recall them highlighting the potential post-independence fall in sterling’s value so as to answer the currency question, nor to counter the arguments that ‘the oil is running out’ and ‘Scotland’s economy is too weak to stand alone’ etc.
Perhaps the last point is explained by nobody in the finance sector being willing to go on the record?
I think the assumption here is that Scotland does not use the pound
Can you check?
I can’t see the shift otherwise
Yes, my take was that he was talking about a situation where the pound would fall dramatically on Scotland leaving the UK unless it was agreed that Scotland could continue to use sterling as an independent nation.