I think the time has come for me to note the project that I am working on this summer.
Like so many readers of this blog, I was appalled to hear Labour shadow minister, Lucy Powell MP claim recently that “there is no money left“. This is very obviously untrue: the government creates all the money it spends, and there is, in theory, no limit to the amount of money it might create. Her claim was very obviously wrong.
I am also, of course, aware that modern monetary theory suggests that tax does not fund government spending. That is a proposition that I agree with.
However, as a matter of fact, if a government wishes to pursue policies that are likely to create full employment, then if it is to spend more on activities that it thinks are necessary on behalf of the population to whom it is responsible it must find ways to withdraw the additional money that it has spent from circulation within the economy or inflation will follow. The best way to do that is by raising additional taxation.
In the work that I am doing I am presuming that the government is seeking to create full employment. I am also presuming that it will do so by meeting the demand for government services on which most of the population are dependent, meaning that more must be spent upon them.
As a consequence, whilst additional tax will not fund additional services, extra tax revenues will be necessary if those services are to be supplied. This, as a consequence, requires that those potential additional sources of tax revenue that might be used to achieve this purpose be identified, and identifying and quantifying those additional taxes is what I am working on.
The Conservative government has shown no willingness to do this. Its recent attempts at taxation reform have been bodged in the main and have been profoundly harmful because they have significantly increased the rates of tax owing by those on low income in the economy, particularly because of the impact of frozen tax allowances at a time of rising inflation.
Labour has shown only a little more interest in this issue. It has suggested that there might be just two additional sources of tax revenue on which it might rely. It is their suggestion that cancelling the domicile rule might raise a little over £3 billion a year in additional tax revenue, although of all tax estimates that might be made this is one of the hardest to prove. In addition, they are suggesting that by abolishing the VAT exemption enjoyed by private schools an additional £1.6 billion or so of VAT might be raised each year. Those two sums are, together, the sum total of their ambition.
I am at present, ignoring the plans of all other political parties. That is not because they are unimportant. It is instead because, given the current state of political opinion polling, they are unlikely to have significant influence on this issue during the course of the next Parliament.
There is, of course, one other factor to take into account here, and that is the obsession of modern politics with the household analogy. This presumes that the government is unable to create new money when that is glaringly obviously untrue. Instead, this analogy suggests that a government must instead explain the source of all new funding for its plans as if this is something that is wholly within its control when everyone knows that it is not. The vagaries of the economy make forecasting tax revenues hard in many cases. The combination of these two factors is, however, the inevitable question asked by every journalist whenever a politician puts forward a proposal, which is “how are you going to pay for it?“
What I am, in essence, preparing is a whole raft of data to answer that question.
I have started with a calculation of the likely additional capacity to tax those with high income and wealth in the UK. Such is our tax system that there is considerable scope available.
From there, the work explores the theoretical reasons why raising additional tax from those with higher incomes and wealth would be appropriate at this moment, even if it was simply for the purpose of redistributing the overall current tax due. This review will also consider how undertaking this exercise would likely reduce both the size of tax gaps in the UK and the risk of tax spillovers arising.
Having considered these theoretical points, which are likely to be in appendices in any eventual publication, I am then preparing a range of recommendations for reform. At present, I think that there will be at least twenty of these, of which nine have now been researched and written. These relate to capital gains tax, VAT and national insurance. Unsurprisingly, there will be more recommendations with regard to income tax than anything else, but corporation tax, inheritance tax and transaction taxes are all also within the scope of the review. Even so, I do not pretend that it will be comprehensive.
What the review will not recommend is a wealth tax. The reason is that when there are so many simpler, more straightforward, more cost-effective and efficient mechanisms for raising tax revenues from those with income and wealth than a wealth tax it makes no sense to introduce such a tax when it is likely to face significant opposition and simultaneously be a nightmare to operate.
There is one other thing to note. Whilst every recommendation that I make will be costed based upon data available from UK government sources, I will not be proposing that any government adopt all the recommendations I make, not least because some of them might overlap or contradict each other. The aim of the exercise is not to suggest that more tax should be raised for its own sake when additional taxes can only be justified bythe provision of additional services. Instead, the object of the exercise is to defeat the argument that there is no money available to permit such expenditure to take place when that is plainly untrue.
What the report will supply is a complete smorgasbord of options that any politician or political party might need to fund its proposals with all of them being designed to improve both the horizontal and vertical tax equity of the UK tax system whilst reducing the levels of tax abuse within it.
My editors will begin to look at what I have written on this project in the next week, and I hope that thereafter parts of the report will be published in stages on this blog over the weeks to come so that it can have a form of peer review here before the work is finalised. With luck, it will be out in September in time for the party political conference season.
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I hope that your research will address behavioural changes if taxes are increased. I note you would like to see higher taxes on high earners who are wealthy, but not wealth taxes. Presumably a high earner who has little net wealth has no changes to fear, but one who has accumulated a high net wealth along the way will see an increase in their tax rate. That will make that person think about relocating, going part-time, leaving the labour force in their 50s. Those would be spillover effects to net off. I hope they are considered.
I am proposing a wide range of modest tax changes that will patently be fair. The likely behavioural consequence will be small. It takes extreme change of the sort the Tories imposed on doctors to create behavioural responses.
Anyone leaving is welcome to do so: they clearly have no intent to add value.
You also fail to understand, services are not dependent on taxation. They generate their own wealth.
I like to think not in terms of money, but in terms of cost, of which there are many kinds.
A person who is not working and producing, is a cost to the country.
So, Ian, we work hard all our lives, pay taxes and NI, and when we come to retire we are a cost to the country, even though we may still be paying taxes. Thanks a lot! You’ll be telling us next that you expect us to sign DNRs on getting our pensions.
“A person who is not working and producing, is a cost to the country”. I did not expect that one from you Mr Tresman. I do not believe that is, or should be the purpose of life; and that is the effect: look around you. Two steps more in your deductive argument and you could arrive safely at “arbeit mach frei”.
Hmmmm
So, all those useless pensioners aren’t paying VAT on their purchases, no duty on the fuel they use for their cars, or the energy they use in their homes, no licencing fees for renewing passports, driving licences etc, not providing childcare so their adult children can work as ‘productive members of society’, not out volunteering for charities, not financially helping their children and grandchildren, not paying income tax on any income in excess of the personal allowance?
We’re just being a total drain on the economy?
Just give us a cyanide pill with our first pension payment and hope that you never grow old…
Maybe I phrased it badly. I was trying to say something along the lines that the government can always employ people, and this is a better option than austerity and unemployment. The country benefits when people produce (goods or services), as do workers.
Ian
Consumption also benefits a country – I always liked Paul Krugman’s statement or definition of the reality of a proper functioning economy: ‘Everyone’s money is someone else’s money’. Or how the value of money transfers through being used (instead of for example being scooped up to go offshore or to pay down excessive debt to rentiers).
That’s not to say that we shouldn’t be concerned about what money is being used for (we should indeed).
But It relates to the distribution of ‘disposable income’ (I hate that term – its so redolent of people who favour capital acquisition for its own sake). That includes helping to make sure that those without income or fixed income (not working) can take part too.
If you’re selling goods and services in a market, would you not be glad to have a social security system that enables/widens people to purchase your goods and services? Think of the tax generated, the jobs saved, the pension saved from the jobs and all the other good things that stem from that.
But we tend not to think like that these days – we are ‘taught’ about pensioners and the non-working being a burden instead.
It makes no sense to me at all.
You’ve managed to dismiss the entire voluntary and care economy without which the rest of the ‘productive’ economy would not function.
Wow, really looking forwards to reading this Richar – nice one.
[…] Cross-posted from Richard Murphy’s blog ‘Funding the Future’ […]
You make no mention of the deflationary effects of increases in productivity. Is there a reason for this?
Yes
I am not assuming there are any.
There might be, but I am not considering that issue.
I mention it because Wray in the following paper (page 18) states productivity increased by 60% in the United States over 30 years and this must have put a lot of downward pressure on prices:-
https://www.levyinstitute.org/publications/the-unbearable-weight-of-aging
But also because low wage labour was exported
Most of that was down to selective patrolling
Richard in the United States and indeed to a lesser degree in the UK you can’t use that as a generalisation about the domestic services industry (retail, take-aways, home deliveries for example) nor for much of agricultural production which is increasingly highly mechanised.
I have been reading about a radical new taxation proposal for Annual Ground Floor and Roof Rental, link attached.
https://www.businessforscotland.com/its-time-for-annual-ground-floor-and-roof-rent/
It would replace all current taxation in Scotland, ie no income tax, council tax, rates etc.
Given your considerable credentials on tax matters, I would be interested in your views on this. Is it too good to be true?
Sorry – but this Georgian nonsense has been around for more than a century and there is very good reason why it has been ignored. Let’s summarise those reasons as the fact that it’s economically absurd and utterly unable to deliver desired revenues. Apart from that it has everything going for it.
I’ve not seen much talk about establishing a proper “sovereign wealth fund” similar to Norway’s that would invest in strategic businesses (energy, chips, AI, etc.) and infrastructure that would create wealth for the country too. I have little to zero knowledge of economics but just find it strange that the U.K. doesn’t have one that benefits the country. Maybe we do, and I just don’t know about it.
We don’t have one.
Thatcher squandered the opportunity.
Scotland could have one in the future.
England has no chance.
Slightly off topic, but I would like to see a blog post/series on what you think things like the tax free allowance should be (should there be different allowances for different age groups, incomes etc)
Tax rates, council tax reform, VAT rates and reform, NI rates and reform etc…
Basically, the taxes that affect both working and non working people.
I think that it would be an interesting post/series.
I will think about it.
Let me get through this ione first of all.
Yes, obviously concentrate on your current project first.
But I do think that your thoughts on the above would be very interesting and generate discussion.
It sounds as if there are two strands to this project: eliminating unfairness the way taxes on income of all sorts are levied at present, and then in the process identifying where additional tax could be levied to balance the economy if more money was put into public services.
Curiously I don’t recall you commenting on the recent work by the Resolution Foundation on the first of those issues, https://economy2030.resolutionfoundation.org/reports/tax-planning/ . While I am sure you will have issues about a lot of their ideas, they might stimulate some creative thinking.
That was because the paper was too abstracted from anything that has a prospect of being delivered to have been worht commenting on.
Fair enough, taxation has to be practicable or it is useless.
Even so I would think it is important to work out a way of delivering alignment of tax on different kinds of income (employee salaries through PAYE and NI, rental income, dividend income, income drawn down from capital gains) rather than reject it because it couldn’t be achieved by a single tweak. However I agree that it is difficult to see a way to move to some of their other, somewhat utopian, proposals.
I am dealing with alignment
I am ignoring the impractical
Richard for me an issue is that if there is to be a large increase in the amount of tax paid by someone the need for some transitional arrangements should be considered.
That is why I am proposing a lot of smaller changes where rates can be ramped over time if desired.
Transitional arrangements often seem to be a way of retaining things as they are. If there is an identified distortion, having a longer/show transition merely maintains it …..
I agree
Land Value Tax?
Given the speed with which Council tax was rolled out and how long The Inland Revenue took to prepare for it in the 1900’s it might be a goer
On a small scale, maybe
But candidly, I think the effort not worth it. Valuations woild take a decade or more to agree. So there are better things to do.
While I realise your current project is about tax reforms that could be introduced relatively straightforwardly, starting from where we are, I wonder if the discussion indicates the possibility of a secondary project highlighting taxation issues for which work should be initiated for longer term reforms.
Council Tax is a case in point, it was a flawed revision to a flawed predecessor, and there ought to be consideration of how property could be better taxed even if it takes a few years to implement. It would be pointless having another system based on a snapshot valuation, which quickly makes it anachronistic, it needs to be designed in a way which doesn’t date. My own thought is to use objective measures of a property such as floor area (or more likely a combination of liveable floor area, outbuilding area such as garages and sheds, and area of associated garden/unbuilt land) which could be used as a proxy for current value since reasonably accurate value/area factors at postcode level could be extracted from Land Registry data and updated periodically. An initial survey would be needed, but would only involve measurement not subjective judgements of value.
Other slow to implement reforms might include Inheritance Tax, where the problem is less in collecting information about estates but more about how to manage the transition if the successor taxation was significantly different.
Some such ideas will be in there.
What I will it do is go near taxes I know will be a nightmare to introduce or comply with. Having spent the last five years negotiating a favourable tax settlement for a client I appreciate how tax works in a way very few who comment on it from NGOs or academia do.
So, I am rooting this in plausibility. If I doubt a tax can be delivered I will nit recommend it. That is my point.
This sounds like an extremely useful exercise, and timely to say the least. Has something like it been done before? If so, when, by whom and to what effect? If not, maybe there could be some commentary in a forward to it to suggest why not?
In the way I am doiung this it might be new
It will signifiacntly expand my version in 2020
Small thing – or maybe not so small…
Remove the “fix” on the upper band of council tax. I can’t find actual figures linking today’s house price with council tax paid on the property.
But I’m pretty sure that over a house value of about £800,000 the amount of council tax paid on a property does not increase anywhere in the country, and it is lower than that in many places.
If it continued to be linked to house value via the “pretend amount of rentable value”, especially in the south, it would be a start…
(I would prefer to see council tax as a fixed percentage of house value but that’s for another time).
This will definitely be in the mix
This sounds hugely useful and the timing is good for feeding into the manifestos that parties will be putting together now. It’s long been the case, as you have so often pointed out, that with a degree of imagination the funding is there to properly fund what is needed. That includes tackling climate change, rebuilding public services and the investment that is needed to drive the wider economy. It means using all the options available to government, and if it is clearly about investing in the economy it need not ‘spook the markets’.
Might be helpful to highlight the scale of investment needed – a high level ‘shopping list’ – to underline the need for the level of funding proposed.
The high level version is planned…..
We might need to talk
Thank you for undertaking this additional piece of work, Richard. It sounds absolutely invaluable for anyone with an interest in persuading our political leaders that there IS an alternative. I very much look forward to reading it.
I have just one query about the opening sentence of your fifth para., which states “As a consequence, whilst additional tax will not fund additional services, extra tax revenues will be necessary if those services are to be supplied. ”
Reading this as a stand-alone sentence, my first response is “Why do you need extra tax revenues if they are not required to fund the additional services?”. I am sure that most readers of this blog will slide past that statement, subconsciously acknowledging that tax does not fund spending. But, if I want to discuss this with people who are reluctant to acknowledge that basic proposition, I cannot explain the apparent contradiction of stating that the extra taxes will not fund the additional services but we need them if those services are to be provided.
It may be that most of your readers will consider this to be a question only fit for a “Mastermind” specialist subject of the “bleedin’ obvious”, but I am a bear of very little brain and I am puzzled.
Thanks for all you do. It’s always appreciated.
To control inflation.
That is it.
Richard, I follow you regularly and first found you by connection with Scottish independence and having done the edX course by Bill on MNT. I am delighted about your project and hope lots will flow from it.
I have a family connection with Germany and having worked there myself a number of times in my career I had it brought to my attention that their tax system, whether good or bad, has a much more tiered system – 5 different levels as I recall. We have two levels as I understand it, and I’ve noticed over the years people talk about pay rises being sometimes a bit of discouragement if it suddenly takes you over the next limit.
Having more levels surely makes this less extreme and more and more our two seem so crude. Come to that, because computing makes such things relatively easy to calculate, might it not be possible to have more and it be very useful? It might even seem good to have an infinitely changing increase starting at ( x ) and finishing at ( Y )? I haven’t heard such a system discussed and wondered if the same has ever been considered.
Keep up the good work – it is surprising and also encouraging that your work seems rather alone? Or am I wrong
With best wishes
Nigel
Nigel
In effect what you ask for is exactly what we have.
I think you are suffering from the belief that if you trip into a new tax rate you pay it on all your income. You do not. You only pay it on the amount in that band, meaning that the overall rate is as you describe.
Richard
Import levies is an interesting one.
Given that Industrial aid is now the policy response to China there is considerable scope for this.
And whatever happened to Tobin taxes?
I will be looking at transaction taxes
Tobin/transaction taxes always were as much about dampening down high volume trading as they were about raising money. A mistake made by some campaigners whose optimistic assumptions about the potential taxes to be raised, rather ignored the likely (desirable) reduction in trading volumes.
I very strongly agree…the ideal collection from most Tobin taxes is nothing.
However there are other transaction taxes worth looking at.
Richard are you planning to bring out another book? I’m pretty sure you are and looking forward to reading it but would just like to make sure. Also, do you have any links with Tax Justice Uk? I ask because I have the impression they manage to make some inroads into mainstream media, more perhaps than people like yourself or Prem Sikka (an unjust state of affairs of course).
Brendan
A) Not at present – but I am being encouraged to think about it
B) No, because I do not think Tax Justice UK is technically competent, largely because the people there do not have experience in tax – or certainly had not the almost time I looked. I’d say I get a loot more media, and my university (which monitors this) would I think agree. Despite all TJUK spend on media they have 6,000 Twitter followers and I have 240,000. It’s a crude measure of impact but one I think indicative.
If that sounds like bragging, apologies, but you did ask.
Rather than the household analogy, I suggest a farm analogy. The farmer has a river running through the property so can irrigate as and when she likes. But she knows that if she waters the crops too much they’ll develop root rot, and if she waters them too little they’ll be stunted. Her job is to water wisely, watching conditions in the fields and forecasts of sun and rain and temperatures. Of course she could not irrigate at all, relying on rain, but that would be stupid and invite disaster.
‘additional tax will not fund additional services,…but extra tax revenues will be necessary if those services are to be supplied’
Although as a matter of definition, public money required is created and not raised from tax – it seems more or less semantic or purely definitional – if the extra money has to be taxed away anyway to stop inflation.
I have been trying to make a list of money for a quasi Labour policy programme.
So your ‘ additional tax from those with higher incomes and wealth’ and ‘capital gains tax, VAT and national insurance, corporation tax, inheritance tax and transaction taxes’ are a welcome source.
I agree the semantics are hard
Richard, reads like a good subject. Taxes are a source of revenue for govt and a great deal of political rivalry over what and how. I do wonder whether we are asking the taxation system to do too much “heavy lifting” sometimes. Another example would be our national health service doing too much when many of the problems could have been prevented earlier. So are there things that could be achieved with out using taxes? Lets for example pick household income. If we could raise income paid by employers etc perhaps by focusing more on greater equality in policymaking could this reduce the desire to use the taxation system to redistribute? If you think I’m going mad please ignore me.
Pragmatically, tax is the easier target
@Eric “Taxes are a source of revenue for govt”
When you get your tax bill, your payment extinguishes your obligation, and the money is deleted. So taxes do not provide revenue for government spending. Parliament alone decides all of the government’s spending, regardless of the government’s claims to “tax revenue”. We see that when the government buys a new aircraft carrier, fund the Ukrainian war, or create money through quantitative easing.
But they are revenue – so I am not going to reinvent the wheel.
Richard
I hope I have not got this totally wrong, but you have talked previously about the impact on government interest costs arising from the hike in base rates – in essence, government has printed money following the banking crisis and Covid, and is now having to pay those banks holding that money substantially higher interest than a couple of years ago. Although this may not be a taxation matter, if there was a mechanism for the government to impose a different interest rate on those monies held by the banks this would reduce government spend, and achieve very substantial benefits to the government’s budget similar to increasing tax. However, I’ve no idea how you assess which of the banks reserves should receive at the lower rate of interest. I would be very interested to hear if there is any mileage in my suggestion, or whether it is complete nonsense. A change of this sort would certainly go down well with a majority of the electorate when positioned against tax rises.
I will have something out on this very soon
Keep reading – I am wroking on it