In early December I gave a talk to the local Positive Money group about tax. Naturally this drew heavily on what I’ve discovered from TaxResearch.uk as well as Richard Murphy’s ‘The Joy of Tax’ and still other details that I have learnt here on Progressive Pulse. It is striking that on the Positive Money website tax barely gets a mention – indeed the only time I can see that it does is Charles Adams’ and David Laws’ piece, which first appeared here on Progressive Pulse!
What follows is a based around my talk. I started by mentioning a rear window sticker which I’d spotted only a couple of days before, because it is so symptomatic of what everyone basically thinks about taxation ” Don’t steal – the government hates competition!” I suggested it didn’t actually work like that.
Most would agree with the basic idea that there are five methods of government money creation:
1.Printing or minting it as cash.
2.Borrowing it – which probably means allowing somebody else to create it for them, in effect privatising its creation.
3.By telling the Bank of England (BoE) to create it: as the government owns the BoE really this is the same as minting or printing it.
4 By licencing private banks to create it when they lend (partially covered by no 2 above),
5. Most important of all, money creation by government when paying benefits (to either individuals or companies) or purchasing goods or services.
Here I was interrupted – to be told that the government wasn’t creating money when it purchased goods and services – it was recycling money from taxes. One could argue that this is partially the case but I successfully encouraged the questioner to hear me out.
We have, after all, the evidence of a Bank of England email in September 2017 (made public on the taxresearch blog): “Regarding whether taxation is necessarily required to finance government spending the answer is no, it is not. Along with raising money by taxation, governments can borrow money and they can create money outright.”
We all know that the government owns the Royal Mint, which creates physical money on demand so it is not a stretch to consider that when the government spends it is able to “create money outright”.
And as it is also clear that very few of us enjoy paying tax – and since The Bank of England says tax doesn’t fund anything – surely it would be better all round if we just abolished tax altogether?
But let’s think about this further. State expenditure is roughly 40% of GDP. So that means that every year we will have those monies being spent into the economy. After a year or two it will be quite impossible for the supply of goods or services to keep pace with the scale of money creation. Money will accumulate, because every time a payment is made the money will just stay sloshing around in the economy.
The consequence is that inflation would be rampant after a few years, which is not only undesirable for commerce and trade, it also destroys currency stability and particularly impacts confidence in the government’s money. And we have learnt (see Weimar and Zimbabwe) that money is all about confidence.
So how to remove this large amount of government created money from the economy so as to avoid rampant inflation?
The most obvious way is government borrowing through individual public saving. Interest rates would need to be high to encourage either bond sales or savings and in consequence you’d probably have to ban foreign savers – the requirement is, after all, to take money out of the UK economy, not attract it from elsewhere. Is there really an appetite for issuing bonds/ensuring saving for more than a third of the economy every year?
Additionally, in order to counteract inflation it would be essential that public saving occurs in the right quantities every year, otherwise the money supply could double every 2½ years or so! Furthermore, interest for savers would mean inequality (already problematic) becoming an ingrained feature in society. It would be enshrined into its very function, since those with capital would receive what would probably have to be quite large amounts of interest whereas those without would not. It would, further, be vital for matured savings/bonds to not just be spent but reinvested, as otherwise the saved money would come flooding back into the economy fuelling inflation again. And, if bonds are seen as they are now as government debt (in fact, as this scenario demonstrates, they are equally private savings) then ‘debt’ would be both very much larger than now, as it would be substituting for taxes, and so this government ‘debt’ would be subject to the same arguments as now – principally the specious ‘leaving debts to our grandchildren’ suggestion.
In short, encouraging widespread saving on such a scale is not looking to be an easy task.
Perhaps government ownership of some large industries that could extract money from the economy would be a more fruitful possibility? Perhaps a selection of telecommunications/internet? Breweries/pubs/hotels? Electricity/gas/water? Road tolls/expensive rail travel? And so on. It would be probably need to be all of them and more because the saving/borrowing method looks both expensive and unreliable. Yet Britain already pays more than most other European countries for many of these items (see chart below)
So one might speculate that it would be problematic to extract much more profit. Indeed, because of the difficulty in extracting excess profits in the quantities required out of only a small range of companies, you could well end up with a largely nationalised economy. Certainly markets would be distorted – Britain already stands accused of disadvantaging its industrial capacity as energy is so expensive compared with other European countries.
Of course, if Britain were a closed economy it might be able, (as a proud sovereign nation?) to nationalise almost everything and make purchases of goods and services especially expensive and so especially profitable for the government. But Britain is far from a closed economy and even imports 40% of its food so there must be grave doubts that there would ever be able to be ‘Government Britain’, even if there were an appetite for such a system. Nationalisation on such a scale might in any case give the government control that is too wide for comfort. After all Britain isn’t China (though many in our current government appear to admire such a system – or at the least those that rule over it). Hence, given Alibaba’s probable co-operation with government on face recognition software something similar might end up looking too appealing for the UK government to resist – particularly if we suffer a hard Brexit.
If these alternative methods of extracting money from the economy are, as they seem to be, in the ‘too difficult’ category – hence inflation remains an issue – we could, perhaps, put up with it as simply taxation in another guise. But inflation comes with the extra disadvantages of uncertainty and instability, particularly at levels likely to exceed 30% a year. Taxation would be something much more predictable.
There seems to be no other choice, therefore: in order to provide a measure of stability tax is a necessary part of money creation. It controls inflation since money does not accumulate. We will know that every time a government spends, tax will withdraw a proportion from the economy, making it possible for the available goods and services to keep pace with money creation. And with the so called ‘multiplier effect’ of government spending – where the spending causes other sectors outside those where the government spends to increase their own activity – then there is even likely to be more tax raised than money spent.
The result? A more stable and robust monetary system.