I am at the launch of the Mirrlees review on the future of the UK tax system.
Mirrlees’ fundamental assumption is that the tax system should be neutral. The report follows from this assumption, and this is its fundamental flaw.As they say:
Tax systems that distort people’s behaviour by treating similar activities differently without very good reason — as the UK tax system does — create inefficiency, complexity and opportunities for avoidance. Exceptions, to deal with the cost of smoking or pollution for example, should be limited and designed with care.
This is an assumption I reject. Tax systems are not neutral. They reflect the society that promotes them and the choices, political and otherwise they make.
There are five reasons for tax:
1. Raising revenue
2. Redistributing income and wealth
3. Repricing undesirable and desirable goods and services
4. Raising representation
5. Reorganising the economy
This, to me, seems obvious. There is no prospect whatsoever that a democracy can be run effectively without embracing these ideas. There is no way an economy can be managed without recognising these aims.
The report is, from the outset, fundamentally flawed as a result.
Why ass this mistake mean made? Simply because this whole review is built on the bankrupt model of neoclassical economics. The assumption of neutrality is, of course, not neutral. It is a choice, and it is a choice based on three assumptions:
a. Government is bad;
b. Tax is bad;
c. The market is good.
So neutrality is actually an argument that the market must decide and governments, through the tax system, must not interfere with the market.
Of course they did not say that — so I will for them.
And they’re wrong. Markets are utterly dependent on governments for their survival — by maintaining property rights, by providing the regulation on which all markets are utterly dependent, on bailing out market failures — whether of banks or by providing unemployment benefits, and by pricing externalities which the market is unable to do.
Mirrlees ignores — to a very, very large extent externalities bar (it seems smoking and the environment) and seems quite indifferent to the fundamental role of government in all other aspects of market behaviour.
The result is that this review is based on flawed assumptions — and everything it prescribes has to be viewed in light of that even when they seem useful.
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Richard Murphy, I don’t understand your fifth reason: “Reorganising the economy”. Given that you’ve already separated out “Redistributing income and wealth” and “repricing undesirable and desirable goods”, why should “reorganising the economy” be a separate reason? I can understand reorganising the economy for redistribution, or for repricing desirable and undesirable goods, but you’ve already accounted for those separately. I doubt you are advocating reorganising the economy solely for the sake of reorgansing the economy.
And what does raising representation mean? I’m guessing it’s something along the line of “no representation without taxation”, the idea that giving governments a financial interest in the wealth of their citizens increases their incentives to support that wealth, but I don’t know.
It is a choice, and it is a choice based on three assumptions:
Source please?
So neutrality is actually an argument that the market must decide and governments, through the tax system, must not interfere with the market.
Um, to requote the bit you quoted from the report:
“Exceptions, to deal with the cost of smoking or pollution for example, should be limited and designed with care.”
If the Mirlees review was based on the belief that the tax system must not interfere with the market, then they would have said “no exceptions”, not “exceptions should be limited and designed with care.” So in otherwords, you’re rejecting a report for a reason that the preamble explicitly disclaims.
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I don’t understand what “Raising representation” means, either.
I’ve googled the term and it gets practically no hits. An elaboration would be welcome.
I’m also wondering what ‘raising representation’ means.
@Colman Stephenson
my apologies for appearing obtuse with regard to “raising representation”
Four of the five reasons for raising tax were prepared by Alex Cobham of Oxford University and now Christian aid. The fifth was added by me.
the reference to raising representation refers to the fact that tax is what might fairly be called theconsideration in the social contract between a population and their democratically elected government. There is very clear and unambiguous evidence that when a population pays direct tax, and holds its government accountable for it, then the quality of the government and the strength of democracy in that location is dramatically increased. When, however, most of the tax paid in a place is settled through indirect taxation such as VAT, or by tax on natural resources then the level of representation, the quality democracy, and goverance declines dramatically.
It is therefore necessary, it seems, to have a flourishing and effective, and progressive, income tax if there is to be an effective democracy. That is the point that this makes
put simply, having an effective direct taxation system means that people hold government to account, and I think that a particularly good thing
@Tracy W
Reorganising the economy is fiscal policy by any other name. It is a fundamental component in the macroeconomic policy available to any government. If the economy sluggish, then reducing tax can increase demand, and vice versa. having a range of tax instruments available to achieve this goal is a necessary part of economic management.
Of course, at present, our government is raising tax when the economy sluggish. That indicates economic incompetence.
the three assumptions that I refer to are inherent in neo liberal economics and the Washington consensus. Read any critical source on the subject – starting perhaps with Anatole Kaletsky and capitalism 4.0
and yes, the review contradicted themselves. That seems to be implicit within all their work. They have delivered a miserable, contradictory, and downright irresponsible report. That is not a weakness in my commentary, that is the weakness in their work
Surely a tax on the returns to land is a direct tax, just as income tax is a tax on the return to labour and corporation tax is a tax on the return to capital.
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“Markets are utterly dependent on governments for their survival”
This is simply incorrect. Many markets exist without any government intervention. Indeed, markets existed before national governments, even note and coin.
Let me give this example.
I trade interest rate derivates (swaps) in sub-saharan Africa. There is no existing market for these products though there is demand for it. Terms of trade are mutually agreed between the various banks, and documentation is standardised via ISDA, which is an organisation run by the banks.
At no point is there ANY government intervention or regulation.
This doesn’t just stop at African derivatives though….most if not all involve little or no government involvement – certainly in their developement. The markets are set up because there is a need, not because a government requests it.
@Tyler
Utter nonsense
Without a government to maintain property rights, create and maintain a currency, provide a contractual law framework, deliver the infrastructure for trade and so, so much more you could not do these transactions.
Stop writing such utter nonsense in other words.
@Richard Murphy If the economy sluggish, then reducing tax can increase demand, and vice versa. having a range of tax instruments available to achieve this goal is a necessary part of economic management.
Ah okay, I thought you were talking about something like shifting the economy more from growing grapes to educating dentists, or what not.
the three assumptions that I refer to are inherent in neo liberal economics and the Washington consensus. Read any critical source on the subject – starting perhaps with Anatole Kaletsky and capitalism 4.0
I’ve looked at that source and it doesn’t cite any sources in the neoliberal thinking, or the Washington Consensus. I’ve read a bit about tax neutrality and I’ve never seen those assumptions you described. I think that these “assumptions” are a strawman that people like Anatole Kaletsky made up, possibly unconsciously.
Wrong again Richard.
Using my particular example (Interest rate derivatives), the terms are agreed between banks, are independent of any particular currency (to the extent that I can settle with any agreed collateral), the infrastructure was created by the banks and the legal framework (including margin agreements) is again agreed between counterparties and is not based on any particular legal jurisdiction.
In practice, the only time governments get invovled is when they try and block markets or tax them.
Whilst governments legislate to try and achieve their certain goals, the markets would still be there without said legislation.
I mean, it would require pretty amazing foresight to create rules for markets which don’t yet exist. What happens is a market starts naturally when demand for a product emerges, and afterwards a government may step in with legislation. Markets lead government, not the other way around.
Do you honestly believe markets wouldn’t exist in a place with no government? THey’d look very different for sure, but they would still be there.
@Tracy W
respectfully, there are none so blind than those not willing to see
those assumptions are absolutely commonplace throughout neoliberal thinking
@Tyler
Again, respectively, I think that absolute nonsense
I presume you are being wilfully blind. How on earth would you enforce your contracts without there being the backstop rule of law, enforced by government, unless of course you wished to resort to violence. I don’t think that derivative contracts were too commonplace in societies where violence was the means of enforcing property rights, by the way. and I suggest to you that that is not a coincidence, but because the absence of enforceable property rights, maintained by government, with all the other consequences for society, underpin what you are doing, and that you are completely naive to think otherwise
@Richard Murphy
respectfully, there are none so blind than those not willing to see
Respectfully, have you ever heard of the Tale of the Emperor’s New Clothes?
those assumptions are absolutely commonplace throughout neoliberal thinking
Not as far as I can tell. Take for example the NZ Labour Government of the 1980s, which often gets called neoliberal. The NZ Labour government of the time amongst other things, introduced Individual Transferrable Fishing Quotas in the fishing sector in a response to over-fishing. Basically, the government created property rights to catching fish. This was not the behaviour of a government that believed all government was bad.
Or take the Washington Consensus, the original paper is available online at http://www.iie.com/publications/papers/paper.cfm?researchid=486
John Williamson’s conclusion on public expenditure was:
So here, the original author of the Washington Consensus, stated that government spending should be directed towards infrastructure and education and health expenditures, rather than subsidises. If he believed that government was always bad, then his conclusion would have been to argue that government spending should be reduced to zero, not transferred to other sources.
Or Milton Friedman, normally quoted as the founding father of neoliberalism. To quote from an interview with him:
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3748
So, what we have is that you, and people like Anatole Kaletsky tell me that it’s those assumptions are part of neoliberalism and the Washington Consensus. But you don’t cite any original sources and when I look at what the groups called neoliberals wrote and did, I see statements and actions that I find impossible to reconcile with the claimed assumptions.
@Tracy W
You are wasting my time
It is perfectly clear you are completely familiar with this literature and are playing games
My claims are entirely reasonable and supported as any open minded person would agree
You wish to waste my time
I’m not playing that game
@Richard Murphy
It is perfectly clear you are completely familiar with this literature
While I thank you for the kind thoughts behind this compliment, my conscience has obliged me to disclaim it. At best I would say that I am “vaguely familiar” with the literature. Sadly there is too much of it relative to my reading speed any my concentration span, to justify such a description of me.
I thank you for answering my other questions on your principles.
@Tracy W
Try this from “The Keynes Solution” p 30 by Prof Paul Davidson:
“The mantra of [neoclassical economic theory] is that free markets can cure any economic problem that may arise whole government interference in free markets always causes economic problems. In other words interventionist government economic policy is the problem while the free market is the solution”
As I said….
@Richard Murphy
This quote from Paul Davidson has the same problems for me as Anatole Kaletsky’s work. Their assertions about what neoclassical economists believe contradict with my knowledge about what those people commonly called neoclassical economists say, and often with what they do (eg introduction of Individual Transferable Fishing Quotas in NZ by the 1980s Labour Government).
@Tracy W
I cannot help the wilfully blind