A thread, posted on Twitter this morning, partly in response to all that Jack Monroe has said this week, and partly in response to suggestions that there may be some reluctant subsidies to deal with fuel poverty from the government:
It's good to say that everyone is equal. They are. But when it comes to government policy that's not enough. That policy has to be biased towards those who have least because those with the most are already more than equal. A thread....
We live in a country that is very biased to those already ahead. For example, we spend almost £60 billion a year subsidising pensions and the savings of those who are already wealthy, just to boost the value of the stock market and bankers.
On top of that we don't charge VAT on private school fees, private healthcare and second homes. We also massively under tax income derived from wealth, companies, capital gains, and expensive homes when it comes to council tax.
I've estimated that if the income and gains of wealthier people in the UK were taxed at the same average rate as paid by those who work for a living on average pay we would collect more than £170 billion more in tax a year - enough to eliminate poverty and tackle climate change.
But we won't do that. Instead there will be argument about whether we can support families facing fuel price increases of £700 a year by providing them with council tax rebates of £300, which will still leave them in food or fuel poverty.
And any payment made will be represented as if it is charity, with the wealthy being asked to subsidise these cuts when that's not how it works.
That's partly because the wealthy are in part wealthy because they get so many subsidies (call them benefits if you like) from the state.
But it's also because the wealthy just save these subsidies. That's why they are wealthy.
Worse though, these savings do not create new activity in the economy. They don't fund investment, or anything else right now because of the way we structure our economy at present. Most savings are just dead money.
For example, savings in bank deposit accounts aren't needed by banks to make loans, because as even the Bank of England now admits, banks create new money when they lend. They do not lend out savers' deposits. That's just a myth.
Savings in stock markets is no better because that's just about owning second hand shares. The company whose shares you buy does not get the money. The previous owner of the share does. And new share issues almost never fund real corporate investment now.
Meanwhile, if the saving goes into property it either buys a second hand property which adds nothing to wealth, or it is used for speculation which inflates property values, which just makes property the preserve of the already wealthy now.
Subsidising the already wealthy as we do does not add value to society then. It just increases speculation and wealth accumulation. And that is it. And this is what the tax system subsidises. I estimate that 80% of UK wealth gets a tax subsidy of one sort or another.
Giving those who are struggling to make ends meet does something totally different within the economy. Not only does it reduce the daily fear too many suffer, it also relieves hunger and prevents death from the cold, which is what causes most so-called flu deaths in this country.
It means children go to school able to learn not just because they're not hungry, but because they've got the self-esteem that makes them think that they can.
It means parents can live, a little. Or it provides them with the time to read with their child, because they're not doing two or three jobs to pay the bills.
But more than those vital things, in the most basic economic terms supporting families who are struggling puts money to life in the economy. That's because anyone desperate to balance their budget spends what they get because they need to do so.
Their spending then becomes someone else's income and that person can then spend more. And that process continues until someone stops the money rolling by saving it.
What is more, every time the money is spent the person receiving it pays tax. Now I admit that reduces the amount that they can spend onwards, but that tax paid also means that the cost of the original spending to the government is reduced.
This cycle is called the multiplier effect. It measures the amount by which government spending increases national income because any government spend is not lost once received by the person it is given to (as many seem to rather bizarrely assume) but is instead spent on by them.
The government assumes this effect is low. Research shows that they regularly underestimate it. In many cases the multiplier is big enough for the entire cost of government spending to be recovered by additional tax paid whilst along the way many lives are transformed.
The multiplier effect created by helping people afford the cost of living when in the case of most recipients of state support their wages are insufficient to make ends meet is a case of putting money to work to deliver what is good. And yet governments hate doing it.
Governments would rather subsidise the rich at overall much greater tax cost in terms of tax not collected and subsidies to savings given, which together might cost more than the entire UK social security budget a year. But that money is saved, economically dying in the process.
There is then a choice that every government has to make. It is between putting money to life - by helping people live well, which then creates new income, jobs and prosperity in society - or putting money to death by subsidising the accumulation of wealth by the already wealthy.
Wealth does not create prosperity. It's a measure of past effort, speculative price increases and, at an individual level, of hope to come, which is why people save - as I know.
But at any moment wealth does not pay the bills, because the wealthy can already pay theirs.
And wealth does not create new jobs, because it's almost never saved in a way that achieves that goal right now.
I am not against savings. People want to save, and I understand why. But I am asking why we're subsidising wealth so heavily right now whilst denying money to those who both need it and who can put it to good use, in the process helping build the prosperity we all desire?
I wish I knew the answer to that question. There is no justification for what government does now as day in, day out, it uses the power of government to make those with wealth even richer whilst denying money to those who need it.
What I do know is that if we are to live in a fairer society the tax subsidies to saving and the reduced rates of tax on income from wealth have to end and we have to instead spend money in ways that supports real lives.
In summary, we have to stop subsidising dead money and put money to life transforming lives instead. The world would be a very different place if we did.
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Give a poor person £20 a week extra and they spend it (with all the multiplier effects you mention). Give a rich person £20 a week and it just gets saved; I have yet to find anyone that disagrees. The clear conclusion of this observation is that a fiscally neutral way to boost the economy is to transfer money from rich people to poor people… and, since we all want growth, want’s not to like about a policy that taxes the rich and gives to the poor? At that point the conversation gets tricky!!
As JK Galbraith said…
“The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”
That the rich defend their privilege should not be a surprise but I am still baffled as to why poor people continually vote (Tory) to make rich people richer!
On the narrow issue of recycling you correctly observe that banks FIRST choose to make loans that they think will be profitable; only then do they consider how to finance that loan. Of course, “system wide” the loan is “self financing” since the borrower will spend the money and that money will end up in a bank account somewhere which can, via interbank lending, find its way back to the original lending bank.
However, even if you “get” this you still might be tempted to think that all this cash that rich people deposit with their banks will eventually encourage more (and productive) lending. I am sorry to tell you that this is not the case.
Why? Seriously rich people save with Private Banks that do not service borrowers. In practice they place the excess cash on deposit with other banks (or the Central Bank). The problem is that Liquidity Regulations mean that banks that take these deposits can’t use them productively and they always end up as deposits at the Central Bank or financing highly liquid (existing) assets.
So, “Trickle Down” fails because rich people don’t spend, they just put money in the bank. “Trickle through” (of cash) from these deposits also fails because of Liquidity constraints (and one or two other reasons, too).
One can think of cash like oil in an engine. If the oil pump fails and you do nothing then the engine will seize up; long term, you need to fix the pump. However, in an emergency you could just keep adding new oil in at the top… but pretty quickly you would have to start draining it out at the bottom. We are in the midst of that emergency now. How do we add the required oil? How do we drain the excess oil? How do we fix the pump?
Well put
Richard,
Mulling over similar thoughts a few days ago and trying to come up with a narrative that might provoke some questioning in at least a few minds (but avoiding saying the unfortunately blighted word ‘tax’) I wrote this,
“Money needs to be circulating to have any purpose. Otherwise it is just a number on a spreadsheet, an abstraction of no use to anyone.
Private saving is putting money on one side to spend later.
For those who can afford it, it tends to happen in periods of uncertainty.
That non-circulating ‘frozen’ money needs a home.
Businesses will not want to use it to invest in expansion because demand from consumers is uncertain.
The subsequent decline in demand will lead to job losses and the start of a downward cycle. . .
. . . unless that delayed spending can be turned into current spending to plug the gap.
As said before it is unlikely that the private sector of the real economy will want to use those funds while conditions are uncertain
So either it gets used by the FIRE (financial, insurance and real estate) sector in speculative trading which increases the price of assets which are generally held by the already wealthy
or
it gets used by the public sector for much needed investment in infrastructure, insulating houses, training doctors etc.
The latter could be funded by providing infrastructure ‘bonds’.
A government bond is a guarantee that the money will be there in the future when the saver requires it, which is what the saver wants, but in the meantime it makes the otherwise ‘frozen’ money work for general well-being.
Make sense?
So why doesn’t it happen?
Because our savings, which could be used to improve the public sphere for us and our descendants, are called the National Debt . . .
and we can’t add to the National Debt by spending on training doctors, insulating homes, updating our failing infrastructure. . can we?”
We need FIRE bonds…
Very good thread. Labour surely could sell much of this very easily under a fariness tag – ‘treating everyone the same’ – taxing income from wealth and work the same. The £170bn extra to spend should tempt them . It would even squeeze within their current ‘we are going to be so careful with your money’ mantra.
And the other main message – ‘putting money to work’ rather than ‘money making money out of money’ would be so appealing if it cut through politically.
I wish so
About sales of shares financing businesses. I have the impression Anglo American businesses rely on the stock exchange far more than the Europeans, who mainly financial business via the banks.
How far is that true?
Not true
They use quoted bonds
But very few use shares to fund their businesses
They might to fund acquisitions but these are only share swaps, not real investment
Good afternoon Richard. I know from past online conversations that you are wary of the Enterprise Investment Scheme that has been available (via HMRC approved plans) for several decades. And I agree that past abuses have tarnished the reputation of EIS. However, the financial limits now imposed curtail tax evasion but provide a legitimate way for ‘Rich Uncle Ronnie’ to help anyone (except immediate family) in launching a business. Back in 2011, I used Twitter to propose that bonus payments to bankers should be required to have an element of social reinvestment. Possibly the only Tweet I ever made; shortly thereafter Revenue & Customs declared war on wealthy footballers who were duped into parting with cash to finance movies that were never intended to be made. Sadly, all EIS then became tarred by the same brush.
I remain as unconvinced
Rich people’s games, most of them
Attach more conditions e.g. jobs created or climate change contribution but right now it remains roo unfocused by far
Yes – a really good thread and another benefit of putting this money to work is to stop it finding its way into the pockets of political parties.
I am grateful for the SIPP allowance to incentivise me to save for later life..I earn 52k pa, decent but have a wide and 2 kids so absolutely don’t feel wealthy!!!! Plenty like me out there.. what you propose would be deeply unpopular if adopted by the Labour Party (for example)..
Why should you get what might be a bigger subsidy than some on universal credit?
Please explain?
I can’t work this out for myself
“Why should you get what might be a bigger subsidy than some on universal credit?”.. well there are many many inequalities in fact the list is endless..
I said I was grateful for the SIPP subsidy as will many others in my position so citing this is just a subsidy for the wealthy is misleading when it is a subsidy for a vast proportion of the working population..
Also if you truly want Labour to form the next Govt then they have to capture the middle ground and this is not the way to go about it.
You are, politely completely deluded
SIPPS are rare
And most working people have almost no pension provision
You are really very deeply out of touch with reality
I, too, have been a beneficiary of saving for old age using a SIPP… but this does not make it a good policy.
This tax break only makes sense if it alters behaviour and in reality, I would have saved that money anyway.
Dave, without your SIPP would you have spaffed the money on wine, women and song? Or, would you have tucked away money anyway?
Precisely….
Clive..Well maybe you had so much wealth you would have saved anyway… but for me where saving demands a sacrifice in how we live. So the tax break 100% changes my behaviour and I think those in a similar earning bracket..Who in their right mind would tie money up for 30/40 yrs without it????
Who in their right mind would tie up money for that long with the tax break if it is such a bad idea?
Answers please…
“SIPPS are rare..And most working people have almost no pension provision”
Even more reason to increase their appeal to a greater proportion of the working population!!!!… not go back to the Victorian age and hurt Labours electoral chances in the process..
Politely, it is you who is deluded and out of touch
I think you are trolling here……
SIPPS and the like are appealing in a country which has allowed its state pension to dwindle and where care in old age is outsourced to a profit hungry private sector. People, including those like Dave and many of us who follow this blog, are concerned about the future for us and our families. The answer is not to fiddle with schemes that give slight help to those relatively better off, but to tackle the big issues head on and really make public funds work for the benefit of the public. Why is it that Westminster and the media usually only approve of radical ideas if they help the wealthy? No-one lectures the right on sticking to small-scale incremental change and not ‘rocking the boat’. BTW Dave your 52K salary, modest though it is compared to the high rollers in finance and law etc, is well above the national average. Imagine trying to support a family on 35K.
Or less
And the answer was SERPS by the way
This is over 800 words. You may not want to post it. You may also think it periferal to the topic so if you don’t use it, I won’t be distressed.
Clive Parry wrote ‘we all want growth’.
First, in ‘Less is More; how degrowth will save the world’ Jason Hickel’s arguments are compelling. In the final paragraphs, he described how in 2012, his wife, an NHS doctor, posed the question ‘Do high-income countries really need to go on growing – forever? To what end?’ The result was this book – and Hickel says ‘No!’
Second, the Paris Agreement included a commitment to ‘equity’ – both within nations and between them. The UK offends on both counts: Samples from Oxfam statistics (estimated from an FT graphic) highlight inequalities in ‘Differences in household lifestyle consumption emissions of rich and poor’ in tonnes of CO2 per capita:
[Bottom 50% / Average / top 10%] US 8 / 17 / 50. UK 5 / 9 / 24. Japan 4 / 6 / 15. China 1 / 2 / 6 India 1 / 1 / 2
Third, while most commentators now accept that greenhouse gases are a serious cause for concern, few acknowledge the other climate catastrophe that is now upon us —
Sir David King, was chief scientific advisor to Blair and Brown and is now chair of Independent SAGE. For over a year, he has been saying something along the lines of:
1. For millions of years … the carbon dioxide in the atmosphere has ‘kept heat in’. Without it, the earth would have been too hot by day and very cold at night.
2. The ‘CO2 kept heat in’ but the earth did not get ever hotter because white snow and ice ‘reflected heat out’. There was a balance: heat in = heat out (approx)
3. In recent times, carbon dioxide emissions from burning fossil fuels have, with other greenhouse gases, raised the temperature of the atmosphere.
4. These higher temperatures have caused massive ice loss in the Arctic, Antarctic, Greenland and from mountain glaciers.
5. The melt-water contributes to sea-level rise but also, there is less ‘white ice’ to bounce the sun’s heat back into space. The dark land and sea that was beneath the ice, now absorbs most of the warmth of the sun that hits it.
6. This is adding to global overheating which is happening faster and faster.
7. Cutting carbon dioxide emissions to zero – is both urgent and essential. But it is not enough. A tipping point has been passed. Temperatures will rise and rise … unless there are LARGE SCALE INTERVENTIONS.
In this Cambridge University presentation (https://www.climaterepair.cam.ac.uk/ ) Sir David says [From 36 seconds and slightly paraphrased]
“4 degrees centigrade? Forget it! We are never going to get to a world of 4 degrees centigrade with anything like the humanity survival rate that we have today.
“Vietnam will be under water once a year in 30 years time. Across the water in Indonesia, the capital, Jakarta, was built during the country’s tiger economy over the last 20 years. Within the next 5 to 10 years, because of frequent flooding, it will not be liveable. The plan is to move it to higher ground. Similar flooding will occur in South East China.
“Once paddy fields have been flooded with seawater, rice can no longer be grown. This means that if we cannot prevent sea level rise, within about 30 years, rice production in that part of the world will collapse.
“We are talking about very urgent problems. If rice production collapses, there will be no global economy such as we have today. The wealthier of those countries like China will be on the global markets … until the global markets shut down. Countries won’t allow a sufficient export of food. That is the way in which nations operate – on a selfish basis.
“This implies a collapse of the global economy well before the temperature increase reaches 4 degrees.”
This leads to the points that Sir David makes at the start of the recording which are:
“The Cambridge Centre for Climate Repair is fully focused on greenhouse gas removal. If we remove 30 – 40 billion tons of greenhouse gases per year, we could reduce the concentration of carbon dioxide in the atmosphere to 350 parts per million by the end of the century … which is far too late.
“This is why we have to buy time, by the seemingly incredible idea of refreezing the Arctic and possibly also the Himalayas and other parts of the world where we are losing ice.”
This situation is unimaginably more serious than in WW2 when in 1942, for instance, the UK petrol ration was reduced to zero for non-essential motoring. The population were informed and accepted this.
Once again, I advocate Tradable Energy Quotas http://www.teqs.net/faqs/
If the populations of wealthy nations like ours are properly informed of the track we are on for the future of their families – or indeed, for themselves if they are under the age of about 70, ‘Growth’ should now be for the poorest half of humanity only.
Prof Danny Dorling has stated that ‘UK has more bedrooms per person than ever before.’ https://www.dannydorling.org/books/allthatissolid/ It is time for redistribution.
Cars per person? The wealthy have far more than their (our) share! Clothes? Food? Plastics? Trinkets? Electronic ‘toys’… ?
A simpler life could be healthier for us – as well as for the rest of humanity.
Degrowth is a must!
Thank you, Richard, for this post today, along with mentioning Jack Monroe’s interview on LBC which starkly illuminates how much the cost of food is actually going up… and means not only those of us who already have to live supplementing our frugal incomes with Universal Credit, many more people are falling into food ‘insecurity’, if not actually going hungry yet; or no money for fuel to cook it.
…So, yes, if only those in power would heed your words: “…we have to stop subsidising dead money and put money to life transforming lives instead. The world would be a very different place if we did”.
Simples… but, will the Tories do this? Heck, no. Pigs may fly.
And now today on LBC James O’Brien pushing the narrative that we have a hole in the public finances therefore we need to raise taxes. It’s hugely frustrating that this simplistic view is continually pushed that raising taxes is needed AND that it’s a “good” thing.
I wish I could get in there….I can elsewhere on LBC
Does that show what these programmes are really all about, messaging what they want people to believe rather addressing the reality.
“This cycle is called the multiplier effect. It measures the amount by which government spending increases national income because any government spend is not lost once received by the person it is given to (as many seem to rather bizarrely assume) but is instead spent on by them.”
This is another example of people’s unthinking generalisation from their own experience. When I spend money then, from my point of view, it does for all intents and purposes, disappear. But even this is an illusion because I do pay it to somebody.
In this the 21st century aren’t we constantly trying to reinvent the wheel, rather than looking at real solutions.
Shouldn’t we be talking about self sufficiency and providing the seed corn industries that feed the real economy, that of course has nothing to do with market fundamentalism but full on government intervention, as we have been waiting 50 years now for all those entrepreneurs to arrive that will create a society that works for people.
All the real solutions have been dismantled to serve the interests of the 1%, being a baby boomer myself, and born before the NHS, I witnessed growth levels unheard of before the war or since Thatcher dismantled our manufacturing base.
We only have to ask ourselves how the Labour Party created all those nationalised industries and welfare state with a so called deficit of 240% of GDP as opposed to today’s level of 106% of GDP. As we speak before the crash the deficit was around 35% of GDP and rather than cure that so called problem it now much higher of course.
Just to throw a few ideas as to how we could improve peoples lives without having to raise tax, we could nationalise public services and let people use it free of charge, as we saw use of public transport increased when Ken Livingstone reduced the price of fares on London Transport. Just think of the environmental benefits, we could even research and produce new modes of transport systems that wouldn’t adversely affect the environment.
We could start creating industries that work for what people need, thinking about the computer industry that Thatcher sold off which we owned. It would not take much to just sit down and think of all those industries in the far east that we could provide here at home, we have the knowledge, all it would take is the initiative and finance to do it, and what we all know is that money is not the problem.