As I often note, there are six reasons to tax, which I usually summarise as follows in a way that reflects my thinking about modern monetary theory:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has created, the government forces that currency into use for most transactions in its jurisdiction, giving it a high degree of macroeconomic control as a result;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate. The aim is to control inflation;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation because people who understand that they pay tax tend to vote;
6) To reorganise the economy through fiscal policy, i.e., by running government deficits and surpluses that influence the overall mood of the economy.
As should be apparent, at least three of these are not really economic goals, as such. Objectives 3, 4 and 5 all focus on social policy and the need for government to direct it.
That could also be argued of the others as well. After all, the only reason for requiring macroeconomic control is to deliver outcomes that the government thinks are desirable for the people of the jurisdiction it governs. That's about social policy as well, at the end of the day - at least for those politicians who can look beyond growth as goal in itself.
Why note this? I do so because it is very obvious that tax as an instrument of economic and social policy is working right now. It is not always working as the government and others might want, but it is, indisputably, working.
The examples are all around us. The farmers' argument with the government is all about tax and whether or not the wealthy should be privileged by it. The farmers would instead say it is about correcting market failure. Either way, there is no doubt it is about how, where and for what reason tax should be used as a policy instrument.
The same is true for the argument about employers' national insurance.
And come to that, a small but growing complaint about applying inheritance tax to residual pension pots is all about the taxation of wealth.
I could go on. My point is, however, a straightforward one. It is that tax changes behaviour, and often quite dramatically. This is precisely why I wrote a book called The Joy of Tax. It's slightly out of date now, but only slightly, and that is because much of it was about why tax is the most powerful instrument to effect change within any society that a government has available to it.
If you want to change income and wealth distribution, use tax.
If you want to make the economy green, use tax.
If you want to clear up the mess that business makes, use tax.
And so on and on.
Tax works. That's the message. But those politicians who think that the only reason for tax is to fund the government just don't get this. They believe tax constrains us. That is nonsense. It is what happens in the real world that constrains us, and tax is there to influence that. If only they understood what taxes could do for us, we'd live a lot better.
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Could you please summarise how The Joy of Tax is out of date so I don’t make a mistake the next time I refer to it? I’m afraid subtle probing would show you could drive a bus through the gaps in my economics knowledge!
I would update the last chapter or so, but until then just about everything his ok.
Hello Richard
The idea that taxes fund government spending has seemed ridiculous to me ever since I was a child, and so I know that you are correct when you say government spending actually comes before taxation.
However, I am just a layperson, still confused by the variety of ‘non-mainstream’ monetary theories out there, so I hope you don’t mind if I ask you some basic questions.
1. Is it possible to estimate in a general sense how soon a government should tax to reclaim the money it has spent into the economy? If the answer is “almost immediately after the expenditure in question”, then would it be fair to say that the economy really behaves no differently to how it would if taxes really did fund government spending?
2. A similar question to question 1 – If most people (including politicians) actually believe and behave as if taxes fund government spending then would it be fair to say that the economy currently really behaves no differently to how it would if taxes really did fund government spending? (I guess this is similar to the idea that if people believe a certain person has power, then that person does have power.)
3. Would you say you advocate for any sort of monetary reform, or is your main issue with the current monetary system mainly just that ‘the powers that be’ aren’t truthful about how it works? For example, do you have anything in common with the monetary reformers at positivemoney.org, which was founded by Ben Dyson, and who are associated with people like Joseph Huber and James Robertson (authors of Creating New Money), and who build on the ideas of people like Irving Fisher?
1. You are saying what should be fiscal policy? My answer is whatever is appropriate at the time. The bookls never need be managed. You cannot therefore draw your conclusion. You also who;ly fail to undertsand the consequence of the change in thinking. Copernicus changed the world because of the undertsanding. Most people did not notice the practical difference – there wasn’t one.
2. See 1. Your question presumes thinking abnd comprehension do not matter. They do.
3. Positive Money esentially promote a pre 1930s world view that is deeply dangerous. Search Positive Money on this blog. I rate them as a menace. Would I wish for reform? Yes, the end of Bank of England independence. We need changed BoE mandates. The goal should always be net zero interest rates. We need fiscal p[olocy aimed at full employment and reduced inequality. What we do not need are people tryonmg to crash the economy, like Positive Money do with their fantasies from the gold standard era.
Some taxes work better than others. Stamp Duty has bad incentives, Land Value Tax works very well.
You say taxation changes behaviour yet you don’t list changing behaviour as a reason for taxation.
I’d say that the traditional view of tax (as seen by those setting taxes) is either to raise money or change behaviour (or a combination of both). Do you believe behavioural change is a secondary reason or is it somehow covered by one of the six reasons?
It is inherent in all of them
You say that tax changes behaviours and yet your Taxing Wealth report ignores any behavioural changes whatsoever.
How do you square this circle?
Easily
Since the benefits would all be to society ignoring them was an act of generosity by me
@Michael Cameron
Point 4.
For example: Why should a government wish to tax cigarette consumption so highly when more smokers = more tax take anyway?
Because it needs to change the behaviour of smokers. You may say it’s the nanny state protecting the health of its citizens OR it’s trying to reduce the costs to the NHS and to businesses when smoking-related diseases are rife, but you cannot deny that it’s not just smoke-free buildings that have cut tobacco use.
Tax has been a driver of changed behaviour too. The goods have been repriced.
I don’t think there is any doubt that tax policies can change behaviour, Richard even says that; I was merely intrigued as to why he doesn’t list behavioural change as a primary reason for taxation. I’d say this is especially obvious where we see reductions or allowances used to drive behaviour where there is no direct financial benefit to the government. R&D allowances, electric vehicles, IHT on farms (when introduced rather than the arguments around that now)
I guess it was obvious that the list implied that
I was obviously wrong
As usual I will say that this cannot be said often enough, along with my supporting statement to that effect.
I think point 2 needs revisiting in the light of the last 3-4 years. The idea that tax might control inflation is worth exploring, but the difficulty is the evidence. The tax share of the economy has been high and getting higher but it doesn’t seem to have tempered the core inflation rate which was up above 7% at one point and is still above 3%.
Hang on
Tax can’t stop the impact of traders out of control or the impact of botched Covid reopening
Only better regualtion and politics could do that
Might we live in tne land of the possible and what is realistic?
So there is lots of causes of inflation which cannot be stopped by tax then. Actually you ignore the most fundamental..that the electorate will not allow it. With the tax take already incredibly high it just will not be possible to raise taxes in the face of inflation. look at the way so many people are now kicking off with the Labour Party. Imagine if inflation comes back and they stick 3p on income tax..not a chance
Total nonsense, as a great many states prove.
Please tell me more about the traders who were out of control who impacted the core inflation rate and prevented even higher taxation from reining the core inflation in? What are or were these people trading in?
Gas, oil, what, fertiliser, etc.
Is the major power of the ‘Joy of Tax’ in the words of the title?
The right-wing dominance of the ‘investment finance’ conversation – in all the major British parties and publications – does not stand up to logical analysis. An instance is that private initiative, left to itself, will make very little impact on the climate catastrophe that is already abundantly evident. Strict laws are urgently needed to restrict the production of greenhouse gases. Constraints on transport, housing space and much else are required. Low carbon energy production needs to be introduced without delay and at a scale that only public initiatives can guarantee. Water conservation is not an option. Privatised companies are not doing it. They are a disaster.
While the original motivation for the Labour Party was to redress the balance in favour of poorer people, it came to be seen as a force for the sectional interests of the trade unions – mostly because that is the way in which the right-wingers portrayed it. At the same time, business interests have pursued their own agenda by representing ‘tax and spend’ as a negative, with the implication that the spending is mostly of no value to society (unless spending is urged, by the military-industrial complex, on defence equipment.)
Yet business, as well as everything else, depends on the rule of law. Order is maintained. Theft and cheating are constrained. Education provides a more effective workforce as well as young people less likely to disrupt lawful activities.
Right wing assertions such as ‘privatise and wealth will trickle down’ are mostly manifestly false. There might be good outcomes but it’s hit and miss – with little ‘hit’ and a great deal of ‘miss’.
So, yes, ‘tax works’. At this time public spending is needed for our very survival and at a rate that has not previously been imagined. It is imperative that neo-liberals, neo-cons and others are challenged when they use unexamined cliches and platitudes. It is beyond urgent that the BBC and other organs of communication are used for what Lord Reith said they should do: ‘educate and inform’. During WW2, the public was informed how to ‘make do’ on strict rations of fuel, clothing, food and much else. A ‘Radio Doctor’ was followed avidly. (I’m old enough to recall his voice with affection). Of course Reith also said ‘entertain’ but that’s already done to excess. For example, motor racing is highly popular. Even so, it needs to be banned – partly as a sign of how critical the human and ecological situation is. It is also probably time to forbid the use of fireworks – not a popular measure, I grant, but it could be an impactful communication. The original intention of the modern Olympic Games had great merit. That said, we care about our children and grandchildren intensely – which means that the world cannot afford to be squandering unimaginable quantities of fossil fuels on international travel and jamborees just for entertainment.
It is well past time for rigorously-argued and bold government action that could enable a satisfying future for most people. Individual- or profit-motivated-action cannot begin to meet current challenges. The ‘joy of tax’ requires integrity.
Thanks Joe. Noted.