These are the slides I used for a talk at De Montfort University this morning on achieving fairness in the tax system:

• A talk for the Taxation and Social Policy Group Launch Event - 12th June - De Montfort University, Leicester by Richard Murphy, Professor of Practice in International Political Economy, City, University of London
• Some theory
  • Most of us are here because we are aware of austerity
  • This is the idea that, in formal terms
  • G = T
  • Where G = government spending
  • And T = tax revenues
• But we know that austerity has not happened
  • G ≠ T
  • Instead the government has borrowed
  • G = T + ∆B
  • Where B = Total government debt
  • And ∆B = the change in government debt in a period, or total government borrowing
• But this is not the whole story
  • The government has also created £435 billion of quantitative easing funding since 2009
  • As the Bank of England says:
  • “Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds.”
  • Which means that QE funds government spending instead of debt in that case
• To give the whole story
  • Now
  • G = T + ∆B + ∆M
  • Where M is the stock of government created money
  • And ∆M is the change in that stock in a period
• Why explain this?
  • What it means is that tax does not fund government spending
  • All government spending can be funded by money creation (not printing, I stress)
  • Or by borrowing
  • And the only reason why a government does not do this is because of the risk of inflation
  • In other words, the reason governments tax is to control. inflation - and not as such to fund government spending which can be and is all done by money creation in the first instance by overdraft at the Bank of England
• This matters because it fundamentally changes our view of tax
  • I argued in The Joy of Tax that there are six reasons to tax:
  • Reclaiming the money the government spends into the economy to prevent inflation
  • Ratifying the value of money - because the government only accepts its own currency in tax payment it has value - which is what the ‘promise to pay' now means
  • Redistributing income and wealth
  • Repricing market failure
  • Reorganising the economy - or fiscal policy
  • Reinforcing democracy - people who pay tax vote
• This theoretical diversion has, then, been for a reason.
  • Social purpose is not a tack on extra
  • Tax is a fundamental instrument of monetary policy
  • And fiscal policy
  • And social policy
  • As well as industrial, environmental and every other policy you care to mention
• But most important of all
  • If tax is not primarily about funding government spending then its role in creating social justice is more important than ever before
• So what can make the tax system fairer?
  • First, we need to define inequality
  • And then see how tax exacerbates it
  • And then see what can be done about tackling those faults in the system
• Inequality
  • Income inequality
  • Wealth inequality
  • Market access
  • Security
    • The social safety net
• Income inequality
  • The tax system is notionally progressive
  • But
    • Those with excess income can take it out of income tax and take it into lower rate corporation tax
    • Or lower rate capital gains tax
    • And even offshore - sometimes legitimately
  • So a progressive system is undermined by tax spillovers within the tax system that favour the wealthy
  • Where a tax spillover is the way in which one part of the tax system reinforces or undermines the effectiveness of another part of that system
• Income inequality (2)
  • The tax system is nominally progressive but:
  • Of the hundreds of tax reliefs and allowances most favour the wealthy
  • Pension tax relief costs more than £50 bn a year and is intensely biased to the wealthy
  • ISA relief costs billions and has the same effect
  • As do many investment reliefs
  • The annual cost is well over £60n a year
• Income inequality (3)
  • NIC is regressive - it starts at low levels of income and is reduced at higher levels of income
  • All our indirect taxes are regressive
    • Council tax
    • Licence fees
    • Excise duties
  • VAT is regressive
    • Because the well-off do not spend all their income
    • Things they tend to buy more of such as education, health, houses, travel and financial services all enjoy major tax advantages for VAT purposes
• Wealth inequality (1)
  • CGT is not progressive
    • Each person gets a second personal allowance
    • And the allowance if effectively transferrable within marriages and civil partnerships
    • Rates are low
    • Some incentives such as Entrepreneur's relief are absurdly generous at 10% on £10 million of gain
• Wealth inequality (2)
  • Inheritance tax is absurdly designed
    • It will capture the wealthy middle classes
    • But most higher levels of wealth still avoid it by gifts in lifetime or the use of trusts
    • But such planning requires there to be excess wealth - beyond that required to live upon or in (the family home)
    • Some investments, like estates, farms and private companies, are favoured without reason being offered
  • Offshore only remains open to the wealthy
• Access to markets
  • Limited liability has a cost to the user and is only available to those who can afford it but protects wealth against failure
  • Having a single rate of corporation tax effectively lowers the cost of capital to large companies and creates unloved playing fields
  • Only large companies can really use offshore
• Security
  • The price of a private social safety net - and the saving for it - is a lot lower in net of tax cost for the wealthy because of subsidies e.g. to pensions and low tax rates on savings
  • There is no such bias to those who use the state social safety net, from which the wealthy are not excluded
• Action required
  • Education on the true nature of tax
  • Promotion of the 6 Rs of tax
  • Correct assessment of tax spillovers as they impact inequality and fairness
  • Equalisation of tax rates
  • Removal of subsidies
  • The removal of bias within markets
  • New taxes to create progressively - especially on wealth