Friday, 31 July 2015

Taxes for Revenue are Obsolete - a précis

We have known for over 70 years that Taxes have nothing to do with government spending. However it is an idea that has taken root again in the recent past, and we really need to get beyond it if we are to build the society of the future. There is a faint whiff of punishment in a lot of tax proposals, which is very reminiscent of the treatment that the Greeks have received in their recent attempts to improve the lot of their population. Most unpleasant.

The following is a simple précis of the points from the Beardsley Ruml article from 1946 and the Bill Mitchell piece on the same article from 2010 - and targeted at the UK.  Readers wanting more details should click the links.

There is a common belief that in order to maintain its independence and solvency a government has to tax sufficiently. This may be true of the devolved governments and local authorities but the Westminster government has no such restriction.

There are two reasons for this:
  • Firstly we have gained great experience in the managing of central banks and;
  • Secondly the elimination of the convertibility of a currency into Gold, or any other currency or commodity. 
That means there is freedom from the money markets for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into Gold or other commodities. 

Note that buying gold, commodities or currency on a market is an exchange not a conversion (you get the gold, somebody else gets the currency. All that has changed is the ownership labels). Conversion happens when an exchange rate is fixed rather than floating.

The prime consideration, therefore, when imposing any and all taxes is their inevitable social and economic consequences.

So what are taxes for? They have four purposes:
  1. Inflation Control If the government spends too little or taxes too much then you end up with a depression or a hole filled by excessive private borrowing and little saving. Government spending must be sufficient to maintain aggregate demand in an economy, but not too much as to over spend the capacity of the economy.
  2. Redistribution Expressing public policy in the distribution of wealth and income - which is where progressive taxation comes in.
  3. Stop Bads. Promote Goods Express public policy by subsidising or penalises certain industries or economic groups.
  4. Hypothecation Politically contentious spending should be transparent and matched pound for pound. The classic UK example is of course the TV licence fee.
The questions that arise from these four purposes are:
  1. Do we want a currency with reasonably stable purchasing power over time?
  2. Do we want greater equality of wealth and income than would occur naturally from the imperfect distribution of economic forces?
  3. Do we want to discourage certain things and activities via levies and encourage others with grants?
  4. Do we want the beneficiaries of certain government spending to be aware of what they cost?
These questions are not tax questions; they are questions as to the kind of country we want and the kind of life we want to lead. The tax program should be a means to an agreed end. The tax program should be devised as an instrument, and it should be judged by how well it serves its purpose.

Nothing could be clearer. National policy priorities are the central question. Then the taxation serves as part of an overall functional finance policy package to advance these goals as best as the government can.