A new commentator on this blog, called Sammy, asked last night:
I often hear a version of the phrase used in the blog, where the tax taken from the idle wealth can be ‘redistributed' for other uses. I'm not sure I can wrap my head around the logic correctly.
Would the tax collected from the idle wealth be paid to the Treasury? If so, does this simply then alter the numbers in the government accounts, or would this pot of money THEN be ‘redistributed' by whatever spending process in a second round of spending without touching the accounts? For example moving into a special account dedicated to redistribution for housing however that might work.
Maybe I have totally misunderstood, I think I am struggling to understand where the redistribution occurs, if at all, if I have understood correctly that all spending comes before the taxation has commenced. Apologies if the question is poorly worded, cheers Sammy.
This, I thought, was a very good question that demanded an answer, so this is it:
To paraphrase this question (and I hope I do so appropriately): if the government spends before it taxes, then what exactly is being “redistributed” when we talk about taxing idle wealth?
Let me try to set this out as clearly as possible.
First, all government spending is funded by new money creation, which is actually put into circulation as a by-product of that spending. The process is as follows:
- When the government instructs the Bank of England to make a payment, the reserves in the banking system increase (for an explanation, see the glossary entry on central bank reserve accounts).
- That money then enters the economy as commercial bank money because those banks create that form of money based on the reserves that they now hold when, in accordance with government instructions, they make the onward payment to someone in the real economy.
- No tax revenue is needed before any payment of this sort is made.
Referring to glossary entries on base money and money creation might aid understanding of these processes.
Second, since taxes do not fund that spending, they instead take money out of the economy. That is the role of taxes in the government's macroeconomic cashflow cycle. Taxes reduce the central bank reserve account balances previously created by the government's spending, and so too the balances of commercial bank created money put into use as a consequence of the government's instructions to banks to make payments on its behalf. As a result, tax performs three essential roles:
- It takes money out of circulation to stop excess inflation arising.
- It can rebalance wealth and power by proportionally reducing the cash holdings of those who have more than they need, rather than the balances of other people (we can have progressive taxes, in other words).
- It gives value to the currency because people know tax bills can only be settled in the currency issued by their government.
Third, redistribution in two ways in this cycle. It happens in the first instance at the moment the government makes new spending decisions. Some groups will receive more government-created income (through benefits, public services and public investment) than others do. That will be deliberate intent. Then, and secondly, others see their ability to accumulate wealth curtailed by the taxes they owe as the government seeks to reclaim the money it has spent into the economy from them. The direction of that redistribution flows from the choices made about both spending and taxation.
Fourth, taxing idle wealth is not in that case about creating a pot of stored money waiting to be spent. It is about:
- Reducing inequality.
- Releasing real economic capacity that the wealthy are hoarding.
- Creating fiscal space for more public spending without creating inflationary pressure.
What actually changes when we tax idle wealth is that the distribution of claims on the economy's real resources, whether they be housing, labour, land, energy, or care, all change. Those claims are taken away from those who are not using them for common purposes, and the government then makes choices that direct those resources towards socially useful outcomes.
So, in answer to the question posed, the Treasury receives taxes. And yes, that does alter the numbers in government accounts. But the reason for doing so is not to fill a pot. It is to clear space for the government to spend again where need exists.
To put it more bluntly:
- Government spending does the heavy lifting of redistribution.
- Tax clears away the economic clutter that would otherwise get in its way.
And that is why taxing idle wealth matters. It is about reclaiming the power to care.
Taking further action
If you want to write a letter to your MP about the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
Comments
When commenting, please take note of this blog's comment policy, which is available here. Contravening this policy will result in comments being deleted before or after initial publication at the editor's sole discretion and without explanation being required or offered.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Slightly off topic, and have your sedative of choice available and no sharp objects nearby, but here is an article about redistributive work being done by HMRC, stopping child benefit payments for families who go on holiday because their return to the UK has been missed by our border controls.
https://www.theguardian.com/society/2025/oct/28/hmrc-cuts-child-benefit-for-35000-families-based-on-incomplete-travel-data
If only HMRC could show such zeal dealing with individual and corporate tax fraud, or even just answering the telephone.
That is absurd…
You can just imagine the meeting where some bright spark came up with that idea.
If only they put as much work into chasing down billionaire’s unpaid taxes.
While there are obvious problems caused by those that flew from Belfast & returned via Dublin it raises some much more worrying issues about the efficacy of our border control
Given our politicians’ obsession with immigration, it is problematic that for many years we have not been able to accurately measure net migration, merely rant about it.
“If you can’t measure it…”
We have never had efficient border control.
You used to be able to enter this country by driving a car off a ferry and waving a number of closed passports at the passport control booth (usually empty).
There were huge issues post Brexit because, as members of the EU, our government never bothered to implement registration for foreign nationals living (legally) in this country. So EU nationals could have the right to remain if they could show they had lived in this country for x years. But there was no Home Office record that they had done so.
The absurdity of uk ‘s lack of counting people in and counting them out crossed with their obsession with immigrants beggars belief.
We live in Spain , and I visit my family in Argentina every year . At each entry and exit of each country I am recorded , digitally. Both countries have a record of who is here or there or not . And the ONLY upside of Brexit for us “Furreners” is that Spain has given us a photo / fingerprint proper ID card that is endlessly useful . That card also serves as our official document to show we are formally resident here, and the means to access many services . You could not reside here in Spain without it . It is not rocket science .
Quite apart from the invidious distinctions made and the manifest injustice and suffering when they’re often not made correctly, hard to see how the inspectorate thus employed can produce ‘savings’ which cover the cost of their salaries. So, a prima facie waste of public money.
Useful, thanks. I’ve got my head round the idea of ‘spend first then tax’ and tax extinguishing money, through months of RJM output. But redistribution still twitches the old circuits and I find myself thinking ‘hang on, how does that go?’
Yes, all agreed. But ”government then makes choices that direct *those* resources” & ”to clear space for the government to spend again” could still be taken by some as implying tax has to come before spend.
I don’t disagree with your post. It is a helpful explanation. 🙂
I would frame redistribution this way:
Taxing idle wealth removes money from wealthy people who are not using it. In that sense it reduces inequality. But it doesn’t directly give more money to the less wealthy. The net effect is to reduce total money in the economy. That’s what tax always does.
IMO it doesn’t have huge effect on the money that government can spend without causing inflation. That’s because the idle wealth wasn’t going to be spent anyway. It is invested in second hand assets, shares, real estate etc which don’t add to the economy. Their purchase only causes asset price inflation.
What it does do, with the current wide misunderstanding of economics, is to make the government FEEL like they can spend more money without causing inflation. That’s not actually true; they could spend that money that anyway; it makes no difference to inflation whether or not they tax idle money. But if the government feels they can spend more, and they actually do, then that is likely to go to the less wealthy thereby directly reducing inequality.
I am aware that legal academics have researched the link between taxation as a method of generating nation/regime security. For them it is rather easy to grasp the concept that if you take financial resources away from Alice and not from Bob then Alice will have less influence over Bob. If we only view taxation as a game to balance the numbers then we miss what is actually going on. If we believe that taxation only funds government projects then we miss what is going on. Taxation establishes political stability. Taxation is also a marker of the states capacity to act. If the state can’t demonstrate to its citizens it can organise an effective tax system it is very unlikely it can persuade that it organise anything else.
Much to agree with
A really clear explanation that has helped me tie all the important concepts together. I think it has clicked for me now, thank you for taking the time to answer in such detail I appreciate it. Best regards Sammy
Thanks
To what extent does the multiplier effect apply? If the government implemented an essentials guarantee for universal credit (about £20 billion) or raised public sector pay to undo real terms erosion (another 20+ billion £) or significantly increase capital spending would it then eventually pay for itself?
It might well do so, in my opinion.
Thank you for the explanation. Struggled with that part myself.
Anyone have reeves email or WhatsApp’s number? Someone should send her a copy.
Thanks, Richard, for the patient and insightful explanation. In my mind it leaves a question that keeps bugging me: when commercial banks make a loan, and the borrower spends it, it puts money into the economy. As the loan gets repaid, that money disappears from the accounts.
When a government spends, it seems, the money is taken out of circulation by tax.
BUT. Is that money taken off the accounts by a similar process? It looks from your explanation that the money sloshes around in the central bank reserve account and can be put into circulation again by public spending?
I’d love to know which account actually cancels the spending, or to know that government spending increases the amount of money in the system perpetually.
I might post my response as a blog, probably tomorrow now. Is that OK?
Absolutely Richard! Whenever you are ready!
It will be there…
the Bank of England creates money, HMRC destroys money.
They’re both government agencies