The FT has reported on Sajid Javid's tax plans, noting this:
“It wouldn't be any surprise that I think taxes should be efficient. We want to set them at a rate where we are trying to maximise revenue, and that doesn't always mean that you have the highest tax rate possible. Generally I want to see lower taxes, but at a level that is going to pay for the public services,” he told The Times.
Let's assume the quote is true. Most are. The question then is how much can Javid get wrong about tax in one paragraph?
First, as MMT shows, tax is not about raising revenue. It is about controlling inflation.
Second, taxes do not pay for government services. They are paid for with government created credit that is managed with tax, gilts and government created money, including QE.
Third, the Laffer curve argument that cutting rates will increase revenues, which he very clearly hints it, does not apply to any UK tax because all have rates too low for that to be remotely plausible.
Fourth, taxes are not ‘efficient'. Taxes are effective when they deliver the policy goal that they are designed to deliver.
Fifth, no one in history has maximised revenue because that always ignores constraints, so the claim is ridiculous. Anyway, no one knows how to maximise tax revenues because governments do not have complete control of their economues.
Sixth, what's the goal of lower taxes unless it is bigger borrowing or smaller spending? Since he does not say which the claim is meaningless.
I could probably go on but my point is, I think, made.
Just despair that someone capable of so misunderstanding tax is in charge at our Treasury.
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“Sixth, what’s the goal of lower taxes unless it is bigger borrowing or smaller spending? Since he does not say which the claim is meaningless.”
Well, it’s not meaningless: we all know what his goal is, and that is the protection and retention of the assets of the wealthy. However wrong and misguided that is, it’s abundantly clear.
[…] Sajid Javid’s single paragraph that proves he has not got a clue about tax […]
It’s not simply that the current Chancellor has no clue about taxation and the role and efficiency and what it serves, also:
1) his ideology sees any and all taxation as an impediement to captalism and free-market productivity,
2) society is nothing other than the collective-noun for free-markets,
3) people have no value above what they represent as creators of wealth (workers) and consumers of existence (customers). Everything is commodified.
Well said Richard Murphy, Amongst your predecessors were Thomas Hobbes in Chapter XIII of his Leviathan:
“In such condition, there is no place for industry; because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving, and removing, such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.”
I’m quite sure I am not worthy of the comparison
Yes Savid Javid has not got a clue about economics, only a political agenda to support the existing wealth and power distribution.
A minor point, readers may get slightly confused when you say rightly (point 2) that “taxes do not pay for government services…….. but by government created credit……”. However in point 4 you say taxes cant be “efficient” but are effective when they deliver the policy goals they are designed to deliver. Surely a policy goal and its implementation depends upon the economic resources available ie man/woman power, skills, technology, land, materials, energy supply etc and by the political priorities of the cabinet and the agreement of parliament?
Of course a policy depends on person power etc
But tax can influence behaviour even if it does not fund spending
I think the suggestions are consistent, but a mighty short form summary of MMT, I agree
Yes, clearly the usual mainstream macro nonsense from Javid there.
However, he has also recently said this:
“It is obvious to me that when you’ve got some of the lowest rates on government debt this country has ever seen, I wouldn’t be doing my job if I wasn’t thinking seriously about how do we use (that opportunity),”
https://uk.reuters.com/article/us-britain-eu-javid/uk-finance-minister-says-he-wants-to-take-advantage-of-low-debt-costs-times-idUKKCN1V61S3
Now that’s obviously still not the whole truth because it’s only current voluntary institutional arrangements that cause government to have to issue debt to match all deficit spending. Nevertheless, it hints that Javid intends a course of fiscal expansion and perhaps any proposed tax cuts should be seen in that light.
Previous governments have reduced income tax for those on middle incomes. Perhaps progressives should be pushing for reductions in VAT and NI while the government is in an (rare) expansionary mood?
Perhaps there’s an opportunity to realign various tax rates between investment income and earned income by lowering the income taxes further rather than raising the investment taxes?
I also note that Labour’s current policy appears to be to increase tax on middle to high income households to “fund £30B+ of expenditure”. That’s incoherent from a macro perspective but also destined to be unpopular. So it’s not like we’re actually spoilt for choice on macroeconomic honesty or skill from any of the main parties.
Perhaps best to make the most of what we’ve got politically right now.
responding to Adam Sawyer’s point: “Labour’s current policy appears to be to increase tax on middle to high income households to “fund £30B+ of expenditure” if politicis is the art of the possible – it might make more sense (the reality is that this will happen anyway) to announce spending first & taxation later. Which you alluded to.
Working on the basis that the £30bn (possibly more?) is spent effectively – then it is likely to be quite popular. That is the point when the gov could start to “close the loop” through taxation. Why make yourself unpopular at the start (through taxation) when in any case spending will happen first – taxation later. I still find it puzzling that Labour makes not just an economic error (spending then tax) but a presentational one (let’s tax the rich and then spend it). Perhaps this all harks back to “where does the money come from” – although the Tories given their fiscal announcements seem to have legitimised the existence of the magic money tree.
Mike Parr,
Yeah I think Labour are ultra wary of being seen not to cost their spending plans and explicitly say where the money will come from because they fear being jumped on by the right wing press.
Trouble is they are damned if they do and damned if they don’t because if they say they’ll raise extra tax to pay for it then they get clobbered with bad press for taxing normal people.
What they should say is something like this:
“Under the current institutional arrangements UK governments choose to issue debt to match all deficit spending. While we may look to modify those arrangements in a future government for now it is clear that borrowing costs are incredibly low and the government can in any case pay the low interest on those debts in the same way that it spends on anything else – by creating money.
So what we’ll do is spend the money into existence to get these vital projects done and issue the corresponding cheap debt to match any deficit thus created.
That spending will itself generate further economic activity beyond the initial projects it paid for (the multiplier effect) and all that subsequent activity will be taxed repeatedly. So actually there’s no need to alter tax rates or create any new taxes in order to prevent inflation by taking that money back out of circulation – even if it takes slightly longer than a single accounting period.
Existing taxes are dynamic – they destroy different amounts of money depending on the level of economic activity. So as long as the government doesn’t continue to spend excessively (beyond the productive capacity of the real economy) in each following accounting period existing taxes will gradually remove the new money from circulation and no extra inflation will occur.
The reasons we may choose to alter taxation are entirely other than funding spending because taxes don’t fund spending – they destroy money to prevent excessive accumulations of money in the economy. The reasons we will adjust tax rates is to improve the fairness, efficiency, sustainability, democratic accountability and overall productivity of the economy.”
You’ll have to ask him what he means by “efficient” but I suspect he is using the term as an economist would, meaning raising the intended revenue with the minimum distortion of business and personal behaviour. That ignores situations where you *want* the tax to distort behaviour(taxes on tobacco or plastic bags, carbon taxes, etc).
You could also argue that the administrative burden of taxes (for taxpayers and tax authorities) should be as light as possible, so by that measure stamp duty is efficient but say inheritance tax is not. Perhaps there are situations where you want to impose a heavy compliance burden to discourage behaviour?
But he certainly does seem to think that tax revenues pay for public spending.
I am happy for light compliance burdens
Usually achieved by eliminating reliefs mind you….
A GANTIP would help too
It really is galling to see one of the few Tories not to have come from a privileged back ground using the language and ideology that made it harder for him to get where he is now and will prevent others having the same chance.
Disgusting.
Sorry you protest too much
“It wouldn’t be any surprise that I think taxes should be efficient.”
When I read economics books, “Tax efficiency” was about the cost of compliance, has this changed? If not surely this is a good aim. ( One that Gordon Brown did not prioritise)
“We want to set them at a rate where we are trying to maximise revenue, and that doesn’t always mean that you have the highest tax rate possible”. Aggressive tax “planning”, is a constant problem addressed in this forum. This statement acknowledges that the higher the tax rate the more incentive to “plan”
“Generally I want to see lower taxes, but at a level that is going to pay for the public services,”
Again this forum notes that determining the level of taxes is arbitary. So choosing a level that equates to public service spending is as good as any other.
Tax efficiency is generally not in economic terms related to low cost of compliance: it means minimal impact on the economy when the whole purpose of tax is to impact the economy
And planning is only possible if differentials are created to make it attractive: it is not a function of rate per se but the differential in rates
And this forum does not note an arbitrary level of taxes: it is the sum needed to prevent inflation arising from government spending. That’s about as far from arbitrary as it gets
Sorry Peter: I protest appropriately
Agreed.
I think we might be underestimating Javid. He seems to have a lot of experience of the money markets and credit trading both in Asia and South America where we all know some very dodgy stuff goes on. And I am mindful that both Warren Mosler and Michael Hudson came to their basic understanding of MMT via a similar route. And a background dealing with balance sheets rather than academic models (especially ones like DSGE) also seems to help.
He might not talk in terms of MMT (and as a politician why would he – it’s difficult stuff to explain) but that doesn’t necessarily mean he doesn’t grasp it. His background to me suggests that he must to some degree. And he is certainly no fool.
I think he may well be an MMTer but of the dark side. One of the ‘amoral’ type MMTers we have discussed previously.
That paragraph is irreconcilable with that suggestion, IMO