Why Positive Money really needs to understand tax

In my previous piece on ‘abolishing tax’ I tried to show that a money system without tax is not only impractable but also undesirable, yet the campaign group, Positive Money never mentions tax. Indeed there seems to be a basic contradiction in their claim that 97% of the money creation is by Private Banks when we know that UK taxation is 33.2% of GDP, and public expenditure is 42.4% of GDP.

Because of its predictability taxation improves stability and increases the confidence in the money system. Additionally over a period of time, tax permits the government to cancel all the money it has spent. Look at £100 spent into the economy with 20% tax on subsequent transactions in the left hand chart below (geometric progression – ie money doesn’t ever completely disappear but it does disappear to infinitessimal fractions of a penny) more than 99.9% disappears after 40 exchanges (yellow highlight). And for £1 million spent into the economy with 35% tax (right hand chart) more than 99.9% disappears after 20 exchanges (yellow highlight). Everything disappears after 53 exchanges (with the proviso of the geometric progression mentioned above).

Additionally tax serves to legitimise the currency, since tax is payable only with government (created) money. Tax and spend is completely the wrong way round. Logic dictates that, tax being payable only in money that the government itself has created, the government must create the money first before it can collect tax. Thus sovereign currency is a basic for an independent state. And if ever a government requires payment in a currency other than its own it indicates a failed or ignorant state (or just possibly, one at war).

As tax pays for nothing, it should not be described as revenue. That is the ancient thinking of the vassal state. Tax hypothecation is a non sequitur – its only possible purpose is perhaps to highlight some particular project – bridge and motorway tolls are probably the most obvious examples.Tax should therefore more properly be regarded within the Positive Money framework as similar to repaying bank loans – i.e. destroying money. Money creation by government can thus be pursued independently, with tax as an anti-inflationary tool with additional influential benefits.

Now we know tax is not paying for anything but in fact simply regulating the money supply – we have quite a liberating idea on our hands. Provided we can find willing receivers, we can create money at will, and keep inflation in check by taxing.

Tax then becomes a tool that can be made use of in subsidiary, skilful ways that can also be used to shape society. Examples include alcohol and tobacco taxes, ‘second home’ taxes, or where items are purposely kept free of tax like children’s clothing or Gordon Brown’s (now abolished) tax free Child Investment Funds.

Government spending allows interest free money to circulate into the economy, and facilitate economic exchange by letting people use it; taxation then ensures it doesn’t stay there for long but returns to the government, ensuring a measure of inflation control. Of course people choosing to save their money rather than spend it will slow this cycle, but as savings do not circulate in the economy they are not inflationary.

The current inflation target of 2% also means that where government spending does not quickly return back to the government then the government might in any case actually collect more tax than it spends. We might speculate that the 54 transactions required to cancel the million pounds in the example above might take more than a year to collect – in which case by the end of the year the tax will be levied on goods and services which are, if inflation is at target, 2% more than they were when the money was first spent.

If tax is not about paying for things, it becomes instead part of an effort to pool resources in order to improve all our lives. Tax may be seen by some as individually disadvantageous but it is collectively advantageous. It becomes part of the mutuality principle: i.e. a member of a society being better off than a lone individual. Tax therefore becomes one of the reasons we participate in democracy – we need to decide where and what and how much to tax! Government is responsible to the taxpayer not because taxpayers are paying for the government but because they agree to pay taxes to the government for the greater good of society as a whole.

So if tax is about democracy and society, it is necessarily also about fairness. When tax becomes a method of shaping society and enabling prosperity, tax becomes part of a social contract with the government.

Tax havens indicate that this idea has not yet been understood by government or is wilfully ignored, thus creating a major failure in the social contract. These not only destroy trust and confidence but even worse, through their almost universal secrecy, serve to facilitate criminality and money laundering. They are also unfair to those who cannot participate or who simply feel an obligation to comply with spirit of the law.

Tax havens certainly prove that taxes affect behaviour. They also tend to undermine commercial life. This is amply demonstrated when we discover that more than 45% of multinational corporations’ profits were shifted to tax havens ($600bn in 2015) and in 2014 a fifth of the largest 800 UK companies paid no UK tax at all. Corporations domiciled in tax havens are also abnormally profitable compared to those that aren’t. This means that smaller domestic companies or startups find competition difficult when the playing field is so far from level.

This should be easy to counteract and yet governments seem, so far, to show little appetite for change (why?). After all, a mantra that corporations and trusts need to pay much more tax so that you, the voter, can pay much less, should not be a difficult sell. Yet so far it is little talked about. After the financial crisis we also know that if we don’t tax the rich, the rich will tax us, that if the government doesn’t take the wealth of the rich as tax, the rich will take the country’s wealth as rent and interest. This is something already happening and is why the return on wealth has significantly exceeded the growth rate of the economy for at least a decade. Given the currrently feeble economy this is the reason why asset prices and property prices are illogically high.

So society needs tax as a regulator of money creation in order to prosper. It can use tax as a motivator to change behaviour. If tax is fair it will make society and government more cohesive; if it is progressive it will improve economic prosperity by ensuring that all members of society have money to spend and that fortunes are spent rather than accumulated.

Plentiful government spending can be used to liberate the wealth in people (not of people) and plentiful government taxation will control inflation. Indeed, Charles Adams’ graph on the Human Development Index plotted against taxation as a proportion of GDP suggests just such a relationship. Embracing this knowledge is transformative for society.

And I haven’t even mentioned the Private Banks – which brings me back to Positive Money. Positive Money wants any money creation and banking to be taken out of private hands and to be a branch of government. Yet in giving the sole control of the economy to the state it necessarily restricts choices. More than that, as creation is more powerful than destruction, the money creation (or banking) branch of government would have control over the money destruction (or legislative) part of the government.

That means that money creation would be by an unelected bureaucratic body, whereas money destruction would be the realm of the elected legislature. And this legislature would have to consider tax (or money destruction) as revenue, thereby unnecessarily limiting – completely artificially – government expenditure. Positive Money may want to transform money creation but seem to have forgotten that fiat money is virtual – it is what you can do with it to transform lives that is real. They have fallen into the trap that Keynes referred to as confusing a theatre ticket with the performance. Positive Money needs to take on board that we never tax and spend but always spend and tax and that tax is also essential to the money creation process – that would be a true transformation of the effective money supply.

Positive Money is all about reliable money creation – but you cannot have reliable money without tax. So you cannot have Positive Money without tax. Tax is basically Negative Money. And, as with a battery, both positive and negative terminals need to be firmly connected to ensure a properly beneficial and working flow.

I fear Positive Money is, at the moment, disconnected.

 

 

Comments

  1. Andrew (Andy) Crow -

    “….both positive and negative terminals need to be firmly connected to ensure a properly beneficial and working flow.”

    Ah! At last somebody talking about money in terms of electricity flow rather than water flow.

    It’s a much more likely metaphor. Water obeys gravity so assumes a header tank. If money obeyed gravity then ‘trickle down’ might work.

    Electricity doesn’t flow until there is demand. And the electrons flow from Earth to generator – the opposite direction to the perceived ‘charge. Because the electrons are negatively charged the positive current flow is in the opposite direction.

    Kind of makes sense of banks creating money by issuing debt doesn’t it?

    1. Peter May -

      I seem always to have thought about money in terms of electricity and certainly ‘positive’ money invites the comparison. I was thinking about flow in general but it’s a very good point – no flow without demand. So you could extend the metaphor to the duality (private and public) of money creation with flows each way – needs thinking about. I have considered voltage where if it gets too low you get reverse polarity which is a good metaphor for the government not investing and running a surplus and of course electrically the result might well be that the battery then catches fire..
      The metaphor needs exploring. There are electrical engineers in our presence so I’m calling on them to dream!

    2. Sean Danaher -

      Andy
      an interesting analogy. For electricity to flow there has to be a potential difference and some sort of conducting path. It of course gets a bit complicated as the vast amount of transmission is AC but it might be worth thinking in terms of electrical power. the “trickle up” idea is an interesting one; money seems to be getting more and more concentrated in the hands of very small elite and the negatively charged electron analogy is a good one. Might be worth exploring in blog!

    3. Charles Adams -

      Yes, the electrical circuit analogue works well for money.

      The most important point is that all money flow is cyclic, and money is being created and destroyed all the time.

      All money is created as credit/debt (positive and negative) the balance is always zero. A credit/debt crises is really a distributional crises.

      Work can only get done when there is a flow which is why those preventing flow (like tax havens) are so iniquitous.

      The government and banks are simply batteries. The government battery needs to reach the parts that the banks neglect, namely public goods.

  2. Charles Adams -

    I suspect the 97% number is based on the fact that government spend is covered by bonds which are private sector savings but as a fraction of those savings were generated from government spend you are right that this number is very misleading.

    As discussed in the comments, the bank does not really create money at all, it simply creates a credit/debit relationship whose net value is zero.

    Money, eh, ain’ t it great!

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