The Tax Research glossary seeks to explain the terms used on this blog that refer to more technical aspects of economics, accounting and tax. It recognises that understanding these terms is critical to understanding the economic issues that affect us all the time.
Like the rest of the Tax Research blog, this glossary is written by Richard Murphy unless there is a note to the contrary. It is normative approach and reflects post-Keynesian, heterodox economic opinion with a bias towards modern monetary theory. The fact that many items in that sentence are hyperlinked shows that they are explained in the glossary.
The copyright notices pertaining to the Tax Research blog apply to this glossary.
The glossary is designed to achieve three goals:
- It seeks to provide a short, hopefully straightforward, definition of what a term might mean.
- It then seeks, when appropriate, to explain what the term means within the context in which it is used. This is meant to elaborate the definition to add to understanding.
- It then critiques the term, explaining, if appropriate, what the weaknesses inherent in the term or the situation it describes are. The aim here is to empower the reader to understand the issues behind the nonsense that most professions create around their activity to provide them with a mystique that they rarely deserve and which often hides what they are really up to.
The glossary is not complete. It will grow over time. If you think there are entries that need adding please let me know by emailing glossary@taxresearch.org.uk. Please also feel free to suggest edits. The best way to do this is to copy an entry into Word and then send me a track-changed document indicating the changes that you suggest.
Because of the way in which it is coded this glossary automatically cross refers entries within itself and to the blog that it supports and within the glossary itself but if you think a link is missing please let me know.
Finally, if you like this glossary then you might like to buy me a coffee. It has required the support of a fair few to write it. You can do so here.
Glossary Entries
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |
High net worth individuals
Otherwise known as HNWIs (pronounced hen-wees).
Generally categorised as individuals with more than US$1 million of financial assets (i.e. worth excluding the value of their main home) available for investment.
The proportion of HNWIs within an economy is a measure of:
- Inequality
- The concentration of economic power within it.
- The likelihood of low multiplier effects as the savings ratio is likely to be high.
- The likely exposure to offshore tax abuse within the economy as HNWIs are must likely to undertake such activity.
Homo economicus
Rational Economic Agents (Homo Economicus)
Neoclassical economics begins with a myth that sounds scientific but isn't, which is that people behave as perfectly rational decision-makers.
According to this story, each of us calculates costs and benefits like a computer, acts only in our own self-interest, and never lets emotion, the influence of others, or habit intervene. Economists even gave this imaginary species a name. This person is called Homo Economicus. He or she has become the invisible protagonist of most economic models, despite never having been observed in nature.
Assumption
The theory assumes people maximise their “utility”, which is a technical word for satisfaction or well-being, while firms always maximise their profits and have no other objectives.
Everyone is assumed to have perfect information so that they understand all options available to them, and that they then act solely on the basis of the logical calculation of the best possible outcomes for them alone.
Emotion, uncertainty and power are excluded. Economic life is reduced to a series of tidy equations describing how idealised agents interact in markets that always balance.
Reality
Real humans are not calculating machines. Behavioural economics and psychology have shown again and again that we act through shortcuts, hunches and habit, or heuristics as they are called. We are influenced by peers, advertising, culture and fear. Far from possessing perfect information, we are often misled or overwhelmed by too much of it. Biases, such as overconfidence, herd instinct, and loss aversion, all shape decisions far more than rational analysis ever could. Financial markets, which are supposedly driven by reason, repeatedly fall prey to collective euphoria and panic. The 2008 crisis, crypto bubbles since then, and housing manias are all examples of herd behaviour dressed up as rational choice.
Why It Matters
Building economic policy on this false psychology has serious consequences. It leads governments and central banks to believe, or at least pretend, that markets will always allocate resources efficiently because everyone acts logically. This then blinds policymakers to instability, exploitation and crisis. Meanwhile, social security systems are designed as if people respond only to incentives without consideration for need or dignity, whilst tax systems assume compliance depends purely on self-interest, in the process ignoring morality and social trust. It is only when we accept that humans are social, emotional and cooperative that a different economics becomes possible; one that values care, community and fairness as much as calculation.
Summary
Economics must start from the realisation that human beings are fallible, relational, and creative, and not from the assumption that we are the robots that economists wish us to be.
Horizontal tax equity
Horizontal tax equity requires that all incomes of similar amount be taxed the same sum irrespective of where that income comes from.
As example, this would mean that three people with an income of £30,000, one generating that from work, another from rents, and the third from capital gains, should all pay the same amount of tax in the year despite those differing sources of their wellbeing.
The UK is a very long way from having horizontal tax equity at present.
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