There is no case for tax: only a case for what tax can do for us

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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.