I am not alone, I know, in despairing that Labour has apparently ruled out support for any tax increases this year when it would seem that it is very likely that the Chancellor is going to announce increases in corporation tax on business profits and capital gains tax on the sale of personal assets such as shares and property next week.
What is Labour doing? I wish I knew. Of course it is correct that no overall tax increases should be levied now one the economy, but as I expect to say as part of the talk I will be giving to Keele World Affairs tonight:
Whilst we do not, overall, need to raise tax we do most urgently need to address the inequality arising from Covid 19. Whilst some households are in dire stress as a result of Covid others are saving vast sums. The result is that inequality is growing rapidly. As a result, we should tax to reduce inequality at the top of the income and wealth orders in the UK.
This, I stress, is something we should do to tackle inequality though, and not because we need the money. That point is worth repeating: we do not need to feel grateful to the rich for the tax that they pay. We now know that taxes are just part of the government fiscal cycle. Instead, we need to tax the rich more because they are rich.
And before anyone says this is the politics of envy, it isn't. This is about pure, hard-nosed economics. Being rich is problematic because the rich earn money from being rich. And most of that money earned from being rich is paid by those who aren't well off. If you're in doubt as to the fact that the least well off subsidise the rich, just call the payments from those with the least to those who have the most interest charges and rent and you'll see exactly what I mean. The fact is that if the gap between rich and poor is too big we create an unequal society.
And that means that we also end up with a poorer society. That's because the rich will, in that case, control more and more of the income, as they do now. They, though, will save more and more of that income, and that's a real problem.
And the problem with too much saving is easily explained. It arises because the more that is saved in a society the less is spent on generating income. And as a result it ends up poorer as a consequence. Savings don't generate income. They may redistribute them, but they never create them. So, societies that have too big a wealth divide don't thrive.
So the simple fact is that tax has to correct for these trends, or failings, if we are to have a thriving, innovative, and wealthy society, which a country socially divided by inequality cannot deliver.
These are facts. Facts denied on the right-wing of politics, of course, but facts nonetheless. All I am describing is the lower marginal propensity to consume amongst those well off compared to those on lower incomes. That this is a fact is obvious: the wealthy must consume less as a proportion of income or they would not be wealthy. And we do need to address that inequality as a result.
Tax as an instrument of social policy can do that, This is what I described as The Joy of Tax in my book of that name.
It is time Labour learned what it is.
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Maybe you could say `fail to spend` instead of `save` wherever possible.
`Save` is immediately equated with `a good thing` by the unconcious and it takes an intellectual self argument to re-align it into an ` in this context… ` argument.
On this blog probably not a major problem but if your words are quoted in the MSM (and especially out of context) I can see the word `save` setting up a bit of the old cognitive dissonance in the middle classes.
Maybe that is necessary?
I would not re-write the piece but I think Brian might have a point – certain words trigger certain emotions. Perhaps both phrases can be included…… something along the lines that “excessive saving in the economy overall (which is an almost certain outcome without redistributive tax policies) imply a failure to spend and invest that leaves us and the next generation all worse off. This needs to be tackled in two ways; clearly, taxation but also useful mobilization of the savings that are made through a Green New Deal or perhaps the recently suggested Recovery Bond.”
Savings is dead money for the wider/macro economy, this is a critical issue to get over to the public.
It should not be that hard concept to promote
Repeated spending of that pool of savings is what is needed. So what we need is the velocity of that money to increase, that is its turnover. Each spend helps businesses, which helps employment and generates more wealth for all, the pool just stays the same but is more productive on the macro level,. The govt just has to ensure that wealth generated gets more evenly spread. The gov is the referee here.
Labour falling into the trap of deciding policy on “how does this look?” rather than “what is right?”. In fact, it’s worse than that is is “how will this look in the Daily Mail?”
Is it really so hard to explain the idea of “fiscal neutrality” with some tax rises offset by some reductions? I don’t think so.
Not hard to explain but the likes of that propaganda rag will twist it and, guess what, the only thing reported will be the tax rises and the rest of the lamestream media will leap on it.
Maybe, the Labour Party should pay more attention to the benefits of these tax changes and focus on those and keep on doing it and keep on doing it…..’Yes, there will be a cost to some but the benefit will be…’
Craig
Couldn’t agree with you more Richard. I spit out my tea when I heard Labour’s position on taxing corporations. I also agree with Clive. Labour look very much like a party out of ideas and solely motivated by winning right wing votes. What makes me very very angry is that the people who need Labour the most are those who are (or have) self-disenfranchised due to disillusionment and hopelessness. I worry very much about a future when the supposed leading progressive party is more right wing than the Tories. An inside out world.
Leaving Labour to one side for a moment, your comment explains something to me that I did not fully understand. The role of savings in an economy. Savings are, I suppose obviously, money that by definition is not circulating. This helps explain its real purpose in an unequal society. The objective of such a society is not to increase the amount of wealth overall, although that may well be what it pretends, but to ensure inequality continues unchecked. Billionaires are the inevitable outcome. These are people with literally thousands of times the amount of money they can possibly spend. Their surplus hoard can do nothing to make useful things happen in the economy, like create employment.
It must be possible to extend this argument to another area, in which I admit I have little expertise. What about the billions locked into the stock market? Does this not also behave like savings? It seems like surplus money available to only a very small number of players. I am guessing it also does not contribute to the wider economy.
For the ordinary person, savings make sense. We need to save up to buy things we cannot immediately afford. But savings that run into billions do not make sense. They will never be spent. The owners of the billions are effectively deciding that certain things will NOT happen. Money will NOT circulate to create jobs. It is money that is controlling the economy by stopping things from happening. Inequality is not only an effect, but the desired result.
It does not surprise me that Labour would not grasp any of this. The suspicion grows that its leadership, far from seeking to diminish inequality, seeks to help it on its way.
Individual savings make complete sense
I save, I admit, when I can
But in macro terms they do not make sense because they do not get invested now and do not generate real returns now
This is the paradox in the macro / micro dispute
Thanks. I’m beginning to see how the macro and micro worlds of economics are confusing to people and this confusion can be exploited.
From other comments, I’d make one further observation. Presumably, savings can be respent – by whoever happens to be in possession of them? I am thinking of my savings. They are probably used by my bank to buy shares or invest in pension funds. Each time they are respent, they move on to another owner. Eventually, when I ask for them back, the bank loses its opportunity to spend my money. It has circulated around various financial institutions and must be withdrawn from that circuit to pay me. Have I got this right? This would be a micro economic analysis.
The macro economy analysis is that my savings are effectively dead money. None if the things the various institutions have done with my money has made possible any real economic activity. It has merely circulated a system that operates separately from the real economy.
In other words, savings are useful to me, because I can save up to by things (micro economics), but when aggregated with other savings, particularly those of the extremely rich, they represent a dead pool of money that has limited capacity to direct real economic benefits (such as creating jobs). This would be a macro economic analysis.
Am I on the right lines?
Your bank does not respend your money
Might I suggest reading some modern monetary theory?
Martin,
Not quite, you only have an iou from your bank,payable on demand. Your bank has this listed as a deposit, but all that is is a re cord of what it owes you. Legally you have lent that money to the bank for safe keeping.The bank does in a way lend that out to various borrowers.The bank will only keep a small fraction of your deposit aside as a small unofficial reserve to settle daily withdrawals. Your bank,due to the peculiar way banks can work, will also be making entirely new loans,for which it has no deposits, this actually creates new money or increases the pool of money.,so banks act as both intermediaries and creators of money at the same time. ,confusing I know.
When you buy something, all is happens is they transfer your money on account to the account of the person/company you are buying from. The overall amount in deposit accounts has not changed at all,just the ownership of it has. Govts also can increase the amount of money in existence but haven’t done so much throughout recent history,they exclusively allowed the banks do this. Only since 2008 have we seen govts have to step into do this with QE.
Sadly this is not a good system as banks create too much money in the good times and not enough in the bad.
Hi Vince, Richard,
Thanks for your replies. What a brilliant resource this is!
I’m fumbling my way towards understanding MMT. You have to piece it together bit by bit, and it really helps to have your ideas corrected.
Don’t worry, I’ll get there in the end.
Martin,
Glad it is of help.
I forgot to add that when you repay a loan the money is effectively destroyed. It vanishes from the banks balance sheets. Banks lend every day so they create money and all the old loan repayments actually destroy money. In a boom banks lend more than gets repaid and so the “pool” of money increases. In a recession the opposite happens because repayments exceed new loans and the money supply shrinks. in 2009 money became so tight the BoE decided to act and create some money itself in with “unorthodox” QE ,which is the state actually creating new money(in the form of bank reserves) and then buying up gilts from the holders of gilts(in secondary markets.i.e not new gilts). This puts new reserves into the banking system as owners of gilts receive new money for their gilts, increasing the money supply in banks’ deposits, as gilt holders accounts receive that money, thus replicating what banks do in a boom.
The last year the BoE ramped the QE even further, they actually created new reserves and bought new gilts issued by the govt on the so called primary markets(though they deny they did this, haha), which was slightly different to previous QE where they did not buy new gilts .This is outright funding of govt debt, usually forbidden by most central banks, but a very significant boundary has been crossed now. This is what MMT has been suggesting should happen in a recession, that the state(Treasury and central bank) creates the money to spend into the economy to return the economy to full(or near full) employment.
Of course, as Richard is concerned about, this has left lots of money sitting in bank accounts now collecting dust or looking for higher returns in property or shares, creating bubbles in those sectors. Normally when banks are creating more loans we would be in the middle of a boom, and business confidence is usually high. Money is turning over fast and growth and employment is good. Right now we are not in that situation. There is plenty money , but its not being used to help employment ,in fact it is more likely to cause mischief right now.
Thanks again Vince,
That clears things up for me. I had never really understood the role of banks before. Knowing the mechanism by which money is lent and deposited, is useful. It helps prevent me from slipping back into bad ways (ingrained ways) of thinking.
Btw, it’s not surprising to me that people struggle to understand some concepts. I am well-educated and have taken an interest in MMT. I still make mistakes. Part of the problem is, I think, one of visualisation. It’s easy to think of a pot of money (a bank) with savings going in and borrowings going out. It makes sense visually. The real mechanism is much harder to visualise, and possibly why people struggle.
The relationship between banks, money supply and the role of the government I found particularly interesting. Thanks for all your help on this. 🙂
For me, tax still should come back to a position of fairness – nowhere is that highlighted more than in the transition between benefits and employment. It is not only Universal Credit and the taper that needs looking at, but also the take home pay of workers who are not in the benefits system. Get that right and a better system can emerge. A person should be better off by working – and that doesn’t mean reducing welfare to cause even more poverty.
Aside from that, I agree that messaging is important particularly from an MMT perspective. Spreadsheet Phil is doing the rounds today sounding sensible to many with his caution and the need to repay the debt. A Dodds hasn’t got her message right and needs to find an ongoing story of where we need to be and how to get there. K Starmer sounds entirely unconvincing when he speaks of investment. The recovery bonds were a step, but again Starmer didn’t sound confident/credible.
For my money, talking up Green investment and citing examples will help. People like stories and when they are true and coherent, it gives the ordinary person confidence in that narrative.
Until then, the likes of Darling and Hammond will retain credibility and restrict the country from investing in the Green stuff we need for climate, and the jobs that follow.
And, for the love of all that is holy, close opportunities for tax havens to suck money out of the economy, end domicile provisions and work harder to tax where revenue is earned.
Because Public Credit also has to usually satisfy the private sector desire to save we might talk about the need for Discretionary Value Securement whereas for Private Credit Non-Discretionary Value Securement is appropriate.
My suspicion is that you may need to unpack that a bit
The following previous post went AWOL I think. Here it is again:-
Outside of a desire to save we use money because it’s set up to self-liquidate through repayment and taxation. Government in its creation of money can be flexible over this liquidation not least because it has to satisfy the desire to save. Non-government creators can’t really be flexible. We don’t really have any simple descriptions to describe these two differences. Flexible and Non-Flexible Self-Liquidating Money doesn’t really have much resonance to it but it would be useful to have such explanatory descriptions since most voters don’t understand these as necessary flow processes to give money value.
Thanks….no idea why AWOL
Old money infects both sides of the house