The FT is joining in the chorus that UK taxes must rise to pay for the coronavirus crisis. It has an editorial this morning that says:
Tax rises will be needed to fill Britain's fiscal hole
The argument is, initially, that:
Rishi Sunak, the current chancellor, will be no different. However, first he must hold the line and resist attempts to push the UK into a premature fiscal retrenchment. Cutting spending in the middle of the worst recession since the creation of the country would be a historic blunder and make Britain poorer in the long run through unnecessary unemployment and business failure.
But then they say:
Eventually the bill for the crisis-fighting measures will come due. Extending the maturity of debt and low interest rates mean there are no concerns about fiscal sustainability in the medium term but modern monetary theories cannot mask the fact that the productive capacity of the UK economy has shrunk and a higher rate of taxation will be necessary to sustain the same quality of public services.
Why do they say this? Because:
Britain's fiscal watchdog, the Office for Budget Responsibility, has warned that the long-term public finances are on an unsustainable path. While the assumptions used in their forecasts can be quibbled with – the economist John Maynard Keynes wrote that the state of interest rates in 20 years' time was the kind of thing one could simply not know. The scenario of economic crises ratcheting up debt levels, while the government fails to reduce borrowing in good times is all too plausible. The watchdog estimates £60bn of tax rises are needed this time.
My immediate reaction is that its a shame that the FT can't think for itself.
It's worse that it thinks that a decline in productive capacity will be solved by increasing taxation, but it does. As they say:
The hit from the 2008 financial crisis and the decade of meagre productivity growth that followed was distributed largely by cutting the welfare state and spending on public services, in particular to local authorities. Even before the coronavirus hit, many in Britain were prepared to pay higher taxes in order to boost spending on public services. The pandemic has only underlined the importance of investment in collective health and social insurance schemes. Many who have found themselves relying on the universal credit scheme of income support for the first time are surprised at how little they receive.
So they conclude:
Taxation rather than cuts will have to do most of the work. The commissioning of a report into capital gains tax suggests the government has the right priorities: those with more will have to pay additional tax. However capital gains tax is probably not the right tool. While there is a case based on fairness for equalising tax on earnings from working and investing, research by the Treasury suggests raising the top rate above 28 per cent does not increase revenue. Taxes on sales, such as capital gains tax and the similar stamp duty, have the counterproductive effect of reducing sales.
The research was biased. What they're really saying is everyone needs to pay more:
Overall, taxes will have to rise by a few percentage points of national income, bringing the UK more into line with continental Europe. But as well as increasing rates, Mr Sunak should lay out a comprehensive package of reforms to change how the system works, simplifying some taxes and reducing the distortions from others.
I agree with the need for removing distortions. But what is really scary is this:
The Mirrlees review from 2011 provides an excellent starting point, as does the Dilnot report from the same year on how to fund social care provision. The blueprints for fixing the public finances are already drawn up. Mr Sunak should follow them.
Let me be clear FT could not get this editorial more wrong if it tried.
Firstly, Mirrlees effectively ignored taxes on wealth: it concluded they were not desirable.
But, second, and following the extraordinary line from the Institute for Fiscal Studies that VAT is not regressive (which they manage to conclude by comparing tax paid with a person's spending when all measures of regressivity compare tax paid with income, meaning they are knowingly disingenuous in pursuit of tax increases on those with least capacity to pay them) the Mirrless report argued for the replacement of corporation tax with what was, in effect, an additional VAT. As noted here, the Mirrlees proposal for corporation tax reform:
... fails to provide any effective basis for taxing investment income and capital gains in companies. Any government seeking a level of tax revenue to manage its fiscal budget will then, if [this tax base] was in use, have to shift taxes onto individuals and consumption in that case because [it] effectively exempts the wealthy and capital from much of the (already little) tax that they might owe at present.
In a letter I wrote to the FT a year ago in this same issue I and others said:
Corporation tax has three purposes. One is to protect the income tax base from attack. The second is to tax capital, which by and large it does, making it a rare tax as a result. And third, it is a tax that should be used to apportion taxable benefits to those locations where value is added in the global supply chains that benefit us all.
Mr Wolf misses all these points and proposes a destination-based cash flow tax. This, in effect, is nothing more than an additional VAT in those places with the biggest consumer markets in the world. The consequence is that it will be regressive within a state as the incidence will be highest on those with lowest income, since the tax will be easy to pass on to consumers. It will reapportion taxable income from the world's poorer regions and states to the richest ones of all. It will, as a result, increase global inequality when the precise opposite is needed.
So the FT gets at least three things wrong.
First, because productive capacity has reduced they want to tax more, and not less. That will continue the downward capital in productive capacity, of course, which should be exactly what they do not want.
Second, they are promoting tax reform that is pure neoliberalism from an era long dead - which is what Mirrlees represents.
And third, they want tax proposals that hit those on lowest incomes with the highest propensity to consume who are, therefore, the drivers of recovery, the hardest.
It is very hard to imagine economic tax incompetence of this level, but the FT manage it. And worse, they have influence.
Worse still, they show their ignorance of MMT. MMT says the job is not to balance the books but to restore the productive capacity, which can be done as money is costless: we can have as much of it as we like until full employment is reached, and without inflation risk. That this simple fact might be ignored because of the callous indifference and economic insanity of the likes of the FT (sorry to be passionate there, but this matter requires the expression of passion) is staggering.
The fight for economic sanity has to go on.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
“My immediate reaction is that its a shame that the FT can’t think for itself”
Isn’t that true of the human race in general with a few exceptions? I’m nearly half-way through Zachary Carter’s book on John Maynard Keynes’s life “The Price of Peace,” page 240 to be precise, and Keynes has reached the point in the development of his ideas of urging the American president Roosevelt to deficit spend as the main way to get America and to a large extent the world out the Depression. Right I think this book is moving onto Abba Lerner and MMT ideas. I go to the book’s index. Not! From the index two brief notes on Abba Lerner and no mention of his Functional Finance and no mention of MMT.
Just over a hundred years have gone by since Keynes started to demolish Neo-Classical economic concepts of equilibrium and balancing and Carter can only get as far as stating the Western world is still stuck with Hayekian thinking who fronted these Neo-Classical ideas despite not having the “intellectual heft” to rationally challenge Keynes’s thinking. He sort of recognises the problem yet not the need to explore the full logic and mechanisms behind deficit spending!
Is time standing still in the Western world? It feels like it when specialist newspapers like the Financial Times can’t get their thinking act together after over a 100 years of financial history commented on by Keynes and his successors the MMT economists and analysts!
You are further into the book than I am – I keep getting distracted although it is very well written
Yes it’s worth reading and I’ll carry on with it even though I know it will be ultimately disappointing like Robert Skidelsky’s book “Keynes” in terms of following through the logic of Keynes’s ideas on money creation. I find it sad though that so many authors and journalists who write about economic matters are still stuck in an “ignorance fog” nearly 75 years after Keynes died yet he spent his life working so hard to increase knowledge on economic matters. Carter mentions that Hayek lacked “intellectual heft” to demolish Keynes’s ideas yet Carter doesn’t spell out why particularly in regard to the mechanics of government deficit spending. Yet here we are in the Western world still dominated by Hayek’s shallow platitudes on these deficit spending mechanics!
I now know Robert Skidelsky and we have not cooperated since last week
But he really does not get money
You ask “why doesn’t the FT think for itself?”. There ARE (occasionally) very thoughtful pieces in the FT from some contributors and journalists…. but when it comes to “grand editorials” it merely reflects the consensus view of its readers at the time. I am afraid the FT editorial is just telling us that there is a lot more work to do in getting people to think.
Moreover, despite a few lone voices (me and one or two others) there is very little push back in BTL commentary.
Sad.
Indeed
You have my kind of sanity – it may be the only kind. If someone like me with no special knowledge of economic theories can see this, have these people been misled by bad theories all their lives?
Yes
https://www.taxresearch.org.uk/Blog/2020/04/04/the-financial-times-has-abandoned-neoliberalism-and-they-must-never-be-allowed-to-forget-this/
Either they have forgotten or it was a fake Leader article.
Or they have multiple leader writers
Yes, newspapers have multiple leader writers, but each leader broadly reflects the views of the leader-writing team. The rest of the ed-op pages is a different matter, of course
Here’s a not too difficult paper to get the Financial Times’s amateur journalists thinking:-
https://sci-hub.tw/10.1177/0275074020941717
They are right
Or the Financial Times journalists might start worrying their kids will one day be asking why they were monetarily illiterate dinosaurs:-
https://larspsyll.wordpress.com/2020/07/20/mmt-keynes-2-0/
Note Neil Wilson’s comment re Keynes’s work! Hunting the Snark!
Further “Hunting the Snark” (Did Keynes really say the government should balance its budget over the business cycle?):-
https://www.newstatesman.com/economy/2011/01/cable-greece-keynes
I doubt it occurred to him
I did…
Keynes is said to have said a lot of things neoKeynesians created
It would seem reasonable to argue that the journalists at the FT haven’t understood the arguments in Keynes’s book “The General Theory of Employment, Interest and Money” and the further development of these by MMT and therefore they are in the position of a one-legged goat stuck down a coalmine!
As Keynes makes clear in his book the one leg is the relevant but not sufficient information learnt from Classical Economic Theory. This is the one leg FT journalists are still trying to balance on.
The three legs these journalists are missing which Keynes did his best to point out in his book and MMT economists have in their writings are as follows:-
Leg Two. Classical Economic Theory was developed at a time when technological advances were just beginning and scarcity was still a major issue but not by the 20th century. Technological advances now allowed people to produce so much more with so much more less effort. The issues had become what stood in the way of fully deploying technology and its management for the general good of all.
Leg Three. Keynes identified that the Classical Economic Theory economists had been massively ignoring the difficulty of being able to see into the future and therefore attaching little premium to risk in investment.
Leg Four. On the very first page of the preface to his book Keynes states the following:-
“A monetary economy, we shall find, is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction.”
Keynes is telling Classical Economic Theory economists that human beings have now developed the monetary economy but future risk is still there so it would be wise to thoroughly understand what a monetary system can do to mitigate that risk for the general good of all. Enter MMT economists!
Indeed
And thanks for the clarity of your insights
Chris Dillow opines that MMT has been around for some time but knowledge of it got suppressed by capitalists https://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2020/07/the-deficit-myth-a-review.html
The trouble with a Marxist is that proverbial one about the hammer and the nail
Hmm. “Taxes on sales, such as capital gains tax and the similar stamp duty, have the counterproductive effect of reducing sales.” I wonder what they think is the effect of sales taxes like VAT, or taxes on employment such as NICs…
The reference to 28% capital gains tax is misleading. Most people pay at zero (due to exemptions) or 10% or 20%. The 28% rate only applies to higher or additional rate taxpayers who have realised gains on residential property (other than their principal private residence, of course – so second homes, and investments such as buy to let) or gains on carried interest (which is effectively bonus earnings anyway).
Thanks
My view is that the FT seems to see-saw a lot between ideas. If I could afford it, I’d buy it if only to see what the financial sector was getting up to. I rate Gillian Tett highly to be honest – an anthropologist by training I think.
I think a number of our institutions are wrestling with these ideas and the FT is one of them – MMT, Tax, the real economy – and I think the see-sawing reflects divisions in the institution but also an existential crisis at the heart of many long held (Neo-liberal) assumptions. And they deserve it.
The real problem is that we know that all von Hayek, Freidmann & Buchanan (and others) really did was create an intellectual framework for greed. And here lies the problem.
It is the rich that will continue to prop up this system long past its sell by date I’m afraid. In fact they will grab as much for themselves as possible before it falls.
As usual, you confuse “XYZ is getting it wrong” with “XYZ has a different opinion than you”.
No
They’re wrong