Janan Ganesh is in typically trenchant form in the FT this morning arguing that, in the context of the Labour Party's policies:
By international standards, Britain is not overtaxed. With stretched public services and a budget deficit that gapes like a mortal wound, the state must take a bit more money from most people for the sake of most people.
This argument is tantamount to self-immolation. Any Labour leader who made it would forfeit the next general election, if she or he were not laughed to oblivion before getting that far. Even Ed Miliband said nothing like it during the five-year tour of leftwing orthodoxies that ran into the ground at last month's general election. Voters do not wish to pay more tax and do not assume the tax they already pay is a proxy measure of their goodness as people.
The whole piece is an interesting exercise in rhetoric, but that is all it is. It starts from the premise that people do not want to pay tax and that they do not want the state to borrow and that, therefore, there is no political purpose to the Labour Party, saying that Labour's refusal to raise taxes for most people:
is a sensational development that has passed largely without fanfare or study. One of our great political parties has quietly given up on that which used to define it.
Now I am not here to defend Labour and what it does, or says. But I can say with some confidence that Labour has never existed to tax. Labour has, as far as I can see, existed to deliver social programmes that it has believed to be in the best interests of the people of this country. If tax has been required to pay for them then that has been no different from the need of the Conservative Party or LibDems, come to that. None, despite the claims made by the last government and this one, have actually taken people out of tax. Indeed, as is well known, those with lowest incomes pay the highest overall rates of tax despite usually paying no income tax at all. So, the simple fact is that tax is required and demanded by all parties, and not just Labour. In that context what Ganesh says is just nonsense: to claim Labour alone existed to tax, and that this was its purpose is just absurd, and I am sure he knows it.
But that claim is part of a whole process of political manipulation on this issue that writers like Ganesh and others have pursued. Their aim is to make fear of tax a proxy for dismantling as much of the state as possible. Remember that this government aims to reduce the proportion of GDP spent by the government from 41% to 36%. That it thinks it can do so without impacting on GDP itself is one of the valid questions that needs to be asked of it that Ganesh does not address.
But the question is even bigger than that, because Ganesh well knows that it is not tax that has paid for all state spending, not just now, but in essence since the national debt began in 1694. And he effectively ignores this part of the equation with an unjustified dismissive comment that people do not want the state to borrow.
And what Ganesh does not also say is why he thinks that Labour will self immolate for taxing with a purpose but the Conservatives will not when they raise more in tax than they spend, as is their plan i.e. when they tax without a purpose to create a government surplus. This is because, I suggest, Ganesh, and those like him, have got three things wrong.
First, they fail to recognise that tax is not needed to spend. As has been proved time and again, and is being proved today, governments can and do borrow to spend precisely because many of those who would really rather not pay tax are all too willing to lend their gains to the government in lieu of taxes, and will be mighty upset if and when it does not wish to take their excess funds for this purpose. To put it another way, the demand for funding to pay for the services that people want the state to supply is being met, but not as those with the simplistic view that all such spending must be met by revenue raised (as might be true of a corporation but not of a government that can issue its own money) would wish it to be. The books balance now, and the market is so happy with the arrangement the government debt is priced at record low prices: things are actually working quite well, whatever Ganesh says.
Second, there is no intrinsic merit in matching revenue with spending and a great deal of benefit from not doing so. Government debt has not, whatever Ganesh might think, existed as a result of continuing accident or incompetence: far from it in fact. Debt has been created and maintained because firstly there is demand for it (just read a Jane Austin novel in the first instance, and then realise just how desperate most investors are at present for high quality debt as a store of value in a world where business seems determined to show it has no real use for money). Secondly, this debt is used to regulate the economy i.e. to stimulate growth or just maintain GDP when nothing else will. Tax and GDP are not, after all, independent variables, and the evidence is very strong and very clear that in the vast majority of cases the higher the rate of tax so is the higher the level of GDP per capita. Thirdly, if only Ganesh understood money (which he doesn't) he would realise that the government has to tax to reclaim from the economy the money that has been created to make it work or it would be, firstly, overburdened with new cash from lending that would lead to inflation and secondly it would have no stable mechanism for exchange, which is provided by government requiring that tax be paid in the currency that it nominates i.e. sterling in our case.
Last, by ignoring the services that the state supplies and the need for those services which no market could deliver Ganesh wholly misses the point of left of centre politics, which makes clear that whatever the merits of private enterprise it also has its limits, and that any wise person should recognise that fact. Ganesh does not do so. As such he completely misses what the point of Labour is, which as far as I can see it has never been to tax, but to deliver services for the benefit of all people.
So how does Ganesh get away with this nonsense? Only because at present the reality of debt has not exposed the folly of his claims. But f debt funding is to be eliminated then people will realise just what the state does do, how brutal the world might be without it, and what tax and spend, together, achieve. Perversely, Ganesh supports policies that will expose his folly, which shows how unwise he is.
But he is right in one thing: his folly may have to be revealed before people realise just how unwise his thinking might be. That I deeply regret because many will suffer in the process. But I have no doubt that this logic of cutting the state to pursue a policy of low tax for those with wealth will fail, not just economically, but politically too as the reality rather then the rhetoric of debt reduction bites. It's just going to be painful whilst we learn what the reality of tax, and what good it does for us, really is.
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Oddly enough, I think there is something to what Ganesh says, but not in the way he thinks. The fact that Labour failed to make the case for substantially increased taxation to pay for improved public services is, I think, one of the reasons for its defeat at the election. Because Labour accepted almost all of the Tory economic plans (including a commitment not to raise taxes, with a few small exceptions like the 50p income tax rate and the mansion tax) people just assumed that Labour was following the Tory economic plan with a few tweaks (which was a correct assumption given the manifesto), decided that they thought Cameron/Osborne was a more competent managerial team than Miliband/Balls (wrongly in my view, but I can understand why people thought that), and voted for the Tories as the ‘safe’ option.
To be viewed as competent on the economy I think Labour would have had to deliver a total “game-changer”: substantial increases in taxation but funded by a wholesale restructuring of the tax burden – e.g. LVT, integrating Income Tax and NICs, a General Anti-Avoidance Rule – in essence much of what Richard and I (among others) have been talking about for the last few years. Because the tax system as it stands is regressive overall, it would be possible to raise substantially more tax without people on low to middle incomes paying more (and in some cases they might wind up paying less). One of my projects over the next year or so is to get some detailed modelling done of what an overall package of reforms might look like and how much it would raise.
Labour didn’t make the case for tax *or* borrowing to fund improved public services (except on the NHS, but the Tories were already promising more money for the NHS in any case – their sums were of course nonsense, but it was a difficult line of attack.) The UK already has a funding crisis in most of our public services – education, social care, public housing, legal aid, local authority services, and the swingeing cuts to social security. If Labour had pointed these out and explained that we needed substantial increases in tax and borrowing to sort out the mess, they might have had an earthly at the election. But instead they were “Tory-lite” and we got the inevitable result. Janan Ganesh doesn’t point this out but given that he is a hard-right Tory it’s not in his interest to do so – his column should always be read with his political bias in mind.
Thanks Howard
Good points
And agreed
But so much outsourcing now for our services, it will no doubt spread. Are we paying taxes for the benefit of private companies who will deliver same more cost effectively, as they claim, who monitors them. That vat disproportionately affects the less well off but can still be used to “take” from us especially if private versus public fails to live up to the mark is a useful tool in their box.
“Because the tax system as it stands is regressive overall, it would be possible to raise substantially more tax without people on low to middle incomes paying more”
Howard just falls into the same old trap. “We can raise lots of tax from the rich and the main voters don’t have to pay it”. Pretty much Miliband’s approach with his 50p rate and mansion tax.
Ganesh seems to offer a more grown-up approach by suggesting that if we want strong public services then we ALL have to pay more in tax.
Howard simply goes down the tired old route of hammer the rich.
I think you ignore that Howard is one of the best qualified economists in the country to make such comments
But please don’t let that stop you
I am not familiar with his qualifications (and at any rate it was only a couple of days back that you bemoaned the contributions of all economists and economics in general!).
He has clearly said we can solve our tax revenue problems without increasing the burden on the middle or low earners. I am pointing out that it will be insufficient and is a weary route that Miliband has been down for the last 5 years. From a political point of view it is the easy option.
Howard is technically absolutely right though
And you are not
And he has bothered to prove it
It seems my last comment didn’t make the cut? I don’t see why the viewpoint of someone who classes themselves as “progressive” and works for TUC and UNISON is enough to close down debate and say that we should definitively hit the rich rather than make all citizens take more responsibility for funding our public services.
I have no idea what did not make the cut
Your comments are tedious but have not been deleted deliberately
I have never worked for Unison
But I do have an absolute right of editorial freedom
And I will use it when I wish
I wasn’t referring to your work for trade unions Richard, but more the research that Howard’s company has done for them. If we are to hold him up as the authority on tax strategy I think his political leanings need to be considered. And he then complains of Ganesh’s bias!!
James
If you really think that is objective or useful comment, I don’t.
I think you’re wasting my time here
Expect to be deleted unless you add to debate from now on
Richard
Fair point, James, but given that the current tax system is regressive overall, it makes sense to raise more money from people in the top half of the distribution (i.e. by making the system progressive overall) before we need to think about raising taxes on people in the bottom half. It may be that the investment in public services we need is so great that we need to impose extra taxes on low earners but personally I don’t think that’s the case. I’ll have much more to say on this topic once I’ve actually done a more detailed analysis of potential tax reforms to make the system more progressive (hopefully later this year).
Point taken Howard. I look forward to reading your findings in due course – at present (from admittedly cobbling together figures from other sources) I can’t see how we can get enough funds through the door just by targeting the rich.
Thank you for the admission
The figures are from sources that are credible (Labour/IFS/HMRC) and I’ve been generous in marking them up. Which figure do you have an issue with?
Just to add some meat on the bones – if we go after the rich only:
Mansion tax – £1 billion (labour estimate)
50p tax rate – £5 billion (IFS think only £100 million but I’m being generous and assuming with the proposed GAAR you can get a lot more)
GAAR itself – additional £10 billion tops?
So being extremely optimistic hammering the rich gives us an extra £16 billion. The deficit target for 2016 is about £75 billion?
Ganesh is correct in my opinion – all of our citizens need to pay more. The time has come for sensible political debate on this – not just policies which hit the rich. Of course this will never happen because whichever party proposes it suffers in the polls, so we’ll carry on as normal.
You agree with Ganesh? I am amazed
🙂
The less well-off already pay substantially more, as a percentage of their income, than the rich. This is a well-established fact. If we follow what you want, and, for argument’s sake, increase everyone’s tax burden by a flat 10% of the current tax burden, then the well off will pay more as a figure, but much less as a percentage, than the poor. Does this sound like it’s fair to you?
James H – when the rich are taxed, they are manifestly NOT hammered, when the poor are and have benefits cut they manifestly ARE! (Unless you live in a parallel universe where vision is limited to the end of your nose).
Until the mid 60’s America had a top marginal tax rate of 90% (if I remember correctly) I don’t remember the economy foundering because of it-indeed that period from 1945-61 is often referred to as the ‘Golden Age of Capitalism’!
Seems like the problem we have overall, not just limited to Labour, is that there is a fundamental misunderstanding of Tax and Government spending. I’m in that group too, as (having no economic experience) stumbling upon Modern Monetary Theory, saw it as something I would like to be true about Government spending, borrowing and tax, but saw it in opposition to what is reported by governments, banks and economists alike – who advocate the line that governments must tax and borrow to spend – so was convinced that MMT, while sounding good, was in fact pure fiction.
Now I’m reading (I think) that you, Richard, also agree that fiat money works in the reverse of how Government and Media report, I’m beginning to believe that MMT may have more truth than fiction. And if that’s true, the message needs to be put out there more, or Neoliberal fictions will continue to be believed by the masses, who will in turn continue to vote for Neoliberal, right-wing governments!
Just as people were fundamentally wrong on banking (blog, tomorrow) and so money so they’ve been wrong on tax
MMT is right on this
Speaking of banking, I assume you saw the working paper issued by the BoE on 29th May? I haven’t read it yet, it’s on my list. I’m guessing this will form part of the blog tomorrow?
Comment out tomorrow – limit to what I can do in a day
That report (by Kumhof and others if we are talking about the same one) says something interesting at the end (I haven’t read it but am quoting from somebody else who has):
“the most important limit [to making new “loans”] ….is their [commercial banks] own assessment of the implications of new lending for their profitability and solvency, rather than external constraints such as loanable funds, or the availability of central bank reserves”
“This finally takes us to the venerable deposit multiplier (DM) model of banking, which suggests that the availability of central bank high powered money imposes another limit to rapid changes in the size of bank balance sheets. The DM model however does not recognise that modern central banks target interest rates, and are committed to supplying as many reserves (and cash) as banks demand at that rate. The quantity of reserves is therefore a consequence, not a cause, of lending and money creation”
Clearly indicates the tail wags the dog!