I spent yesterday discussing transparency in government revenues cycles. That may not be everyone's idea of fun, but I suffer from excitement by taxation, and so I enjoyed the debate.
For once though I am not publishing my slides: they will make little sense without what I said during my presentation. Instead I want to discuss a couple of points I made during the day.
The first related to the public's demand for tax transparency. I made the point that those with an interest in tax transparency should not assume that the public is likely to share their enthusiasm for the detail of the issue. Nothing suggests to me that this will happen. Instead I offered some of my experience in tax justice. There I think two narratives have proved to be fundamental.
The first is that large companies, using tax havens and the secrecy that they provide, exploit both developed and especially developing countries to ensure that less tax is paid than might otherwise be due, at cost to all of us. A great many of the well known tax justice narratives are based on this theme that John Christensen and I developed many years ago.
The other narrative was gifted to us by the Global Financial Crisis. This argument is that if the tax gap was closed - which is a bigger issue than that mentioned in the previous paragraph - then austerity would not be needed. I know all the implications that this has for spending being based on revenue (and for the record I explained why that was not true yesterday) but the reality is that this narrative is really about who has wealth and power, and so is about the redistribution of both in the interests of social justice. To put it another way, it is about who should have suffered the consequences of that crisis, and that the wrong people did.
I know that suggesting there are just two arguments does not reflect considerable nuance around what else tax can and should do, but remember what I am suggesting here is what permeated to create the mass interest in change. The rest is important, of course, but it's not what mass public perception registers.
Put that in the context of the tax revenue transparency cycle and the issue to be addressed to which people really want an answer is the one that is perpetually asked of 'How will it be paid for?' whenever any initiative is proposed. To put it another way, there's remarkably little public excitement about tax that is paid, but there's massive interest in what might have to be paid if the world is to change. And let's not pretend that more tax won't be paid because if more is spent it's quite likely it will be.
I fully accept that education that tax does not need to cover all government spending is part of this agenda. I was the only person to make that point yesterday. But, that perception is not going to be commonplace yet. And so how additional revenue is to be found is an issue.
Additional revenue comes in three ways. First you sweat existing taxes better. This takes no more effort than collecting what is owed as a result of the additional economic activity the extra government spend will give rise to. Remember a lot of government spending is likely to pay for itself, as Charles Adams has demonstrated at Progressive Pulse.
Second, you make existing taxes fairer. As one presenter demonstrated yesterday, in Brazil the highest overall rates of tax in that country are paid by poor black women and the lowest by rich white men. Sometimes fairness dictates a pretty clear direction of travel for taxation.
And third you make clear you'll collect what is owed but not paid. This is getting this debate back to the tax gap, but with a twist. To be fully understood tax not paid is not just that illicitly unpaid, however important that is. It is also potential tax bases not charged, like wealth, financial transactions and land value.
And tax unpaid is also tax given away in allowances and reliefs, like the £50 billion spent subsidising the savings of UK pensioners annually. Or the £2.8 billion spent subsidising ISA savings. And the £28 billion annual cost of wholly exempting the capital gains in homes from tax.
Pointing out these issues is what will, in my opinion, inspire interest in the tax revenue cycle because once they are understood then the answer to the 'How are you going to pay for it?' Question has to be more than a shrug of the shoulders and a 'We can't afford it' because with the right data people will know that's a choice and not a reality.
I am going to work on this.
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I had a crack at the same argument as Charles Adams a few weeks back on Facebook:
“When the government spends money into the economy, in most circumstances all of the money will eventually be recouped as taxation, having passed through many different hands on the way, and in doing so having stimulated economic activity, leading to economic growth, also known as the multiplier effect.
For example, let’s say Mr. Binman gets a 10% payrise.
i) That is subject to income tax at 20%. Government gets 20% back immediately.
ii) Mr. Binman uses the remaining 80% to pay a builder to fix his leaky roof.
iii) Mr. Builder spends half of that (40%) on parts and materials, at B&Q, including VAT at 20% rate. So that’s another 8% back to the Treasury, not to mention the taxes on B&Q’s profits and employees that will be returned.
iv) Mr. Builder has to pay corporation tax on his profits at 19%, again, back to the treasury.
v) Mr. Builder then spends what is left of his profits on clothes, fuel and groceries, which are again taxed at different rates of VAT, and the businesses which receive that custom pay tax on their profits too, as do their employees on their wages.
You can see from the above how quickly the money spent on public sector wages ends up back in the Government’s coffers. The end result is that pretty much all of the money is recouped as tax. So the cost to the Government is only that of the rate of interest which it is paying on it’s debt, which at the moment, is negligible. As the Government can create it’s own money, as it has done with Quantitative Easing, there is not even any need to pay interest on this if it so chooses.
In any case, the multiplier effect will take effect, which states that for every pound of government spending, additional economic activity beyond the value of that pound will be generated. So in that case it is possible, if not likely, that increased government spending generates additional economic activity which actually creates more GDP. i.e. the Government will eventually get more back in tax than it initially spent.
The point being, that it costs the Government almost nothing to increase the pay of public servants as their income will be recouped eventually in its entirety as tax. In spending this money it will create economic activity which will stimulate economic growth and improve people’s livelihoods. Austerity is a political myth and is economically incoherent. Fight it.
Thanks
And agreed
If so much goes back into the system as you suggest, then why aren’t we all getting 10% pay rises?! How about that small elephant in the room: inflation? Surely?
Inflation happens when capacity limits are reached – productive full employment is reached
Until then inflation is not generated
After that limit is reached stimulus is not needed
And inflationary tendencies require overall increased tax take
Daniel – your post implies that the Government is not doing something because it is not possible. But we know that the Government is economically illiterate, so that’s a non-argument.
As wages in the public sector have been cut for the best part of 10 years, I reckon you could easily give all public sector workers a 10% pay rise tomorrow and the impact on inflation would not be problematic.
I assume you are in agreement with most of this –NOT.
https://order-order.com/2017/10/11/high-tax-tories/
They are really getting paranoid, aren’t they?
Richard I am getting confused again because so many of your statements seem contradictory to me.
About a month ago you wrote
. This suggests that tax is not required for spending but to prevent inflation.
Then you wrote a blogpost advising Mark Carney not to raise interest rates
So you seem to be saying that inflation is too low in the UK at the moment. So why are you advocating swingeing tax increases now given that tax in your words is a mechanism to control inflation?
I am sure that I have missed a gap in your reasoning or simply misunderstood what you are saying.
If yob bothered to read The Joy of Tax you would note I argue there are six reasons to tax.
One is redistribution
I can argue for increases fir that reason and not want an increase in the overall tax take
This stuff really is not hard unless you think the world is binary
Let me assure you, it isn’t
“It is also potential tax bases not charged”
Does that include taxes I choose to avoid? Am I going to be forced to take up smoking and drinking to force me to pay the tobacco and alcohol taxes I currently avoid?
I note your email address
I presume you take pride in offering fatuous comments
I learn from the best.
Sorry to be so dense but I am grateful for your explanations, abrupt and dismissive as they might appear. But if inflation is too low then there should be tax reductions because tax is taking too much out of the economy?
And I can understand how you can tweak tax rates to take more from the rich and less from the poor. But here you are talking about closing the tax gap by taxing pensions, house inflation and tax free savings. Just about everyone has to pay into a pension now, so how would that benefit the poor without a lot of tweaking?
More widely, surely closing the tax gap is about raising more tax rather than just altering the distribution of who pays tax? And since we don’t have enough inflation, why raise taxes at all? Surely we should reduce them. But in such a way as to benefit the people who don’t pay much tax.
It must be me but these objectives seem to run against each other
Your idea that all pay into a pension equally is politely absurd but important to note“; if you make crass assumoptions you will get crass answers
And closing the tax gap is ensuring
a) the rule of law is enforced
b) fiscal policy is delivered
c) tax abuse by the wealthy (see Zucman et al 2017) is defeated
d) social issues are addressed
I’m entirely happy to cut taxes on lower earners to compensate if inflation permits
You really do need to learn to dual task
There is not one thing I am saying that is contradictory but you are making a great deal of nonsense up
It is good to see ample enthusiasm for the concept of of “self-sustaining stimulus” a.k.a. self-financing deficit. I would also like to note however, as an encouragement, that the idea is neither new (its basic Keynes) nor radical.
We can even find it in the pages of The Economist (for example) and promoted by the likes of US Treasury veteran, Larry Summers: http://www.economist.com/node/21551069
The article and Summers’ advocacy is tentative, conditional and, as such, a little bit bullshit but it is there and it is mainstream nonetheless.
Agreed
Sometimes when the question “How will we pay for this” arises, it does so in relation to things that have already existed in the past and have since been cut or taken away.
One argument that I use and recommend is simple. If, for example, someone asks, how we could afford to restore the services that have been cut from the NHS or pay for new infrastructure, I tell that them that those services existed when my mother was young. Or I might tell them about some of the very familiar things that were built in my father’s time.
I then note that technology and productivity are supposed to have improved since then and I ask them: Are you saying that we could afford those things in the 1950’s or ’60’s and can’t pay for them now? What sort of progress is that?
There are numerous variations on this theme. Its a semantic device that throws the onus of explanation back on them while begging the obvious question: Why should we be worse-off now?
In my experience this one does the trick more often than not, it gets them to think and it changes the perspective on “normal” from present assumptions to past/present comparison.
It helps if one knows their audience and picks their moments well. Sometimes an explanation of distribution, multiplers, and debt-to GDP ratios is just too much information.
On that account I thoroughly endorse your suggestion that initial arguments be limited to the concept of revenue as most people currently understand it. Sometimes an expansion into MMT etc. etc. is definitely to much info. As you say, “that perception is not going to be commonplace yet” and introducing it, over time, is an art form.
Agree with a lot of that
But you can only get away with your suggestion if the person you’re speaking to is unfamiliar with Baumol’s law
Yeah,
Its not meant for those people. They get a different answer.
As far as Baumol’s Law is concerned, it sort of does and doesn’t apply. In his time Baumol didn’t (couldn’t?) foresee the ITC boom and the way that automation has since moved into service industries, both public and private.
Even if we leave that aside, citing Baumol’s law’ one might justify a relative slowing or plateau in the growth of real pay and that of services, but not an outright decline. I doubt that Baumol or anyone could use his logic to justify these outcomes:
http://www.nytimes.com/imagepages/2011/09/04/opinion/04reich-graphic.html
He was more or less right about one thing though. There is an end game to relying on “productivity growth”. Once we’ve automated everything we can or want to, ‘per capita growth’ ends and it all comes down to distribution.
BTW all readers of this comment would do well to click on that link (above). Few, if any, will be disappointed.
A lot valid in that
And the graphic is great
This is all very confusing. If the economy is at a point when stimulus is needed then increasing tax is austerity by another name. We should be cutting tax overall during downturns and increasing it during upturns.
No
It is the net stimulus that matters
That is G – T
You are wrong again
Might I suggest you do some basic education on this?
Richard – I’ve been doing some general reading and online bickering around the government being able to pay off bondholders when the debt is denominated in its own sovereign currency, on the understanding that the risk involved is on the part of the investor, if the value of the currency should subsequently fall. However – if the currency does fall in value then that might affect the willingness of investors to buy more newly issued bonds. Correct me if any of that is wrong.
On a counter-point, someone highlighted the Argentine financial crisis of 1998, which I understand involved Argentine Peso denominated debt. Why then did the Argentine’s default on that if they could just create more money to pay off the debt? Was it because they were concerned about inflation? Did they simply prefer the idea of defaulting on the debt? Was it even necessary?
I know your time is scarce but I think a blog on this would make for interesting reading!
BenzO
I think a) Argentina was pressured by a world that does not believe a state can print money b) it was vulnerable to institutional lenders who gave it little choice – i.e. the market was not prevailing c) the option of thinking they could dispense with debt was not allowed to be on the table as a result
I think a poverty of thinking reinforced by the power of the creditor is the explanation in other words
Richard
I would agree with the multiplier effect for some spending, and that kind of spending should be targeted but sometimes the multiplier effect is claimed on spending or investment that a political party wants for moral reasons or vested interests.
It is lazy to just claim anything you already wanted on spending is justified or economically viable because of a vague overall multiplier effect………….get me proof and I will be in favour………..use it as a bland justification then I will not.
So hang on a minute….
You want political parties to be elected and not do what those who voted for them wanted?
You really understand democracy, don’t you?
If spending has a multiplier effect from the Government then it must also have the same effect from private spending……….even if from tax evasion?
For example say someone manages to evade (completely illegally, not avoidance) £50k from Company accounts? You would add that to the tax gap as a loss of around £10k for Corporation tax.
But what if the evader uses that money to buy a Porsche for £50k that would of course have £10k of VAT?………Then the Porsche purchase adds further multiplier effects to the economy through the dealer, manufacture, transport, road tax, petrol etc.
In this case would the tax received and economic effect be greater than the original Corporation tax due on the money evaded?
So you’d like a world in which some cheat on others?
Where the mu;ltiplier is stacked under the bed?
Where honest businesses cannot compete because of the presence of cheats?
Where investment does not pay because there is no return because of evasion?
Where the multiplier is of mistrust
And dishonesty?
And then criminality?
Is that really the world you want?
I agree there could be such a multiplier effect. It’s called the race to the bottom. It’s run from tax havens. And you believe it is of benefit?
Why?