Sunday, 12 June 2011

Spot the difference

There are those who claim that a payment only counts as 'tax' if it is paid to the government and dismiss my notion that there is such a thing as 'privately collected tax'. So can anybody tell me what the big difference is between Scenario A and Scenario B?

Background

The government decides, in its infinite wisdom, that we are relying too much on natural moonlight and should be sourcing more moonbeams from cucumbers instead, because that's a 'sustainable' source and is unaffected by cloud cover (or some such silly argment). It sets a target that in future, one-fifth of all moonlight should be sourced from cucumbers.

Scenario A

The government works out how much cucumber growers and moonbeam extraction labs will need to be paid (£ umpteen billion) to supply this amount of moonlight, and so it increases income tax by a couple of per cent, or adds a surcharge of £ thousands to everybody's domestic fuel bill, and then gives this money as a subsidy to the cucumber growing and moonbeam extraction labs as a cash subsidy.

They duly produce the amount of moonlight required, which the government then sells to the general public for its market value of precisely nothing (apart from people who want romantic lighting on a cloudy night, or people lost in the mountains who need the light to see where they're going).

That's a publicly collected tax and a publicly paid subsidy, simple enough.

Scenario B

The government simply passes a law that people have to source one-fifth of their moonlight from this new renewable source. So people are forced to pay £ thousands a year to the extraction labs, who in turn pass on a lot to the cucumber growers.

By and large, we observe that the profits earned by these suppliers is roughly equal to the amount of the subsidy that they would have received under Scenario A, only this time, the general public does not pay extra tax to the government, which the government then pays as a subsidy to the suppliers, the £ umpteen billion goes straight from the general public to the suppliers.

The income (or extra income) which the suppliers receive can be referred to as economic rent but in the instant case, I would include it in the narrower category of 'privately collected tax' (most, but not all 'economic rent' arises because of government action, for counter-example, see e.g. Premier League footballers' salaries).

20 comments:

View from the Solent said...

Haven't you overlooked something Mark?
It's projected that there's another 8 years before the collection/extraction process is viable. Who's going to pay the development costs?

Mark Wadsworth said...

VFTS, the up front costs will also be funded by the taxpayer, of course. The same principles apply even if they never work out how the extraction process would work - it makes little difference to the labs and the growers whether it ever works or not, to be honest.

manwiddicombe said...

Is the difference that scenario B is far more efficient as the money won't pass through 3 or 4 different government departments on it's way to being given to the cucumber growing and moonbeam extraction labs?

;o)

DNAse said...

My friends live very near to one of the big local hospitals. There is very little parking at the hospital. My friends rent their drive way out to a consultant to park his Porsche. To my mind this is a privately collected tax. Those living in the area not lucky enough to have a drive way have to buy a permit from the council to park on the road - this to my mind this is the public version of the same tax. Or can you argue that a usage charge is not a tax?

Mark Wadsworth said...

MW, possibly, but in Scenario A at least the maximum the growers get can be capped by government responding to some sort of political pressure. In Scenario B, it is possible that the growers will be able to screw even more money out of people who are forced to use their services.

DNA - brilliant example!
Pay council for a permit = publicly collected tax
Pay somebody to use his driveway = privately collected tax.

Whether a user charge is a tax or not is a separate debate, i.e. is Land Value Tax actually a 'tax' at all, or is it a user charge?

CIngram said...

Didn't I see this in the LibDem manifesto...?

Mark Wadsworth said...

CI, I'm sure it was in every party's manifesto. It's even in the Home-Owner-Ist Party and Faux Lib Party manifestos, just under another guise.

Woodsy42 said...

@DNA. They are not 'lucky enough' to have a driveway. Surely they choose the house and probably paid more for it, or pay more rent, because of the facility. How they use it is up to them. Is renting a spare bedroom a private tax?
Having paid for the off road paring facility it will also be taken into account in their council tax assesment, so they may be paying as much or more than their neighbour's parking permit.

Mark Wadsworth said...

W42, yes, they might well have paid extra for that driveway, but what they paid for was the right to collect tax (or to be lifted from the burden of having to pay the council for on-street parking).

An apple doesn't cease to become an apple, just because somebody sells it to somebody else. What the buyer does with that apple is up to him - he can eat it, save it or sell it on.

DNAse said...

Ok here is the *full* story with the drive way. My friends bought about 15 years ago. We know what has happened to house prices since then... Over that period the hospital has expanded massively (tax payer funded). Along with the hospital, University teaching and research establishments have been built (a lot of this tax payer funded I imagine). With all the new jobs has come an increased demand for housing and parking. With planning constraints and NIMBYs there has been very little housing built locally so this becomes an *extra* demand on parking. The council wanted to discourage commuters driving in, clogging up the roads and parking all over the place, so *then* they introduced parking permits. All of sudden that scrap bit of land at the front of your house is worth a lot more! My friends could argue that since they have to pay income tax on their parking revenue they are actually contributing *more* (they don't argue this they are rather more enlightened!) But of course the reality is that all of that rent is unearned income (not just the bit that goes in income tax). This whole process is of course the reason why despite the meddling of various governments the gap between the working poor and the idle rich continues to grow... Now when they come to sell they can include the parking revenue as part of the sale price. Its as if the (tax-payer funded) council had planted an oil well in your garden!

DNAse said...

I forgot to add - When were council tax bands last reassessed? In fact when was council tax ever a representative property tax?! In reality the value added by the driveway rent is small compared to the overall increase in location value. My calculator displays a house value increase over the period of 350 or 360% - it is hard to make out through my tears of jealously ;)

Mark Wadsworth said...

DNA, as far as I know, homes were put into bands in 1991 and that was that. New houses are put into whatever they band they would have been in in 1991 and houses only get bumped up a band if there has been a major extension and this only takes effect when the house is next sold.

Bayard said...

Yes, the gov't has revalued Wales (in 2003) and perhaps Scotland, but they don't dare do England, despite the fact that it makes fsck all difference - as you know.

Derek said...

Looking at the payments in these terms, I agree that there's absolutely no practical difference between rents and taxes.

However looking at it in Modern Monetary Theory terms it is possible to see a difference. Remember that in MMT there is no actual connection between government spending and government taxation levels (although there are inflationary/deflationary consequences if you don't keep them at about the same level). They are two separate activities with distinct economic effects. government spending is basically a way of creating new money and government taxation is basically a way of destroying excess money. And of course because of the level of Government spending there is a lot of excess money that needs to be destroyed.

So the difference between taxes and rents in MMT terms is that money collected as tax is destroyed whereas money collected as rent is then spent back into the economy.

The overall economic consequence is that a tax has a deflationary effect because it causes a reduction in the money supply whereas a rent doesn't.

So from a microeconomic POV there is no difference between taxes and rents but from a macroeconomic POV the difference lies in the effect that tax has on the money supply.

Mark Wadsworth said...

D, in Scenario A and B, we assume that the income received by extractors and growers is the same in either case, and that the extra tax raised in Scenario A is exactly enough to cover the spending.

TheFatBigot said...

Who are the "people" referred to in Scenario B?

In Scenario A the little people have to pay an extra 2% income tax come what may and the government can spend it on whatever it wants, it might be moonbeam subsidies today but it can be something else tomorrow.

Scenario B can only operate if you identify the "people" who are required by law to derive one fifth of their moonbeams from cucumbers and identify the sanction if they fail to comply.

Who are they and what is the sanction?

Derek said...

Understood, MW. Your post just set me thinking about the difference between tax and rent in general and it led me off at a bit of a tangent.

Mark Wadsworth said...

TFB, clearly you can't extract moonbeams from cucumbers, this is just an example.

But in this example, the government could insist that people pay for at least 100 hundred hours' of extracted moonbeams per year, or something.

Deniro said...

scenario b sounds like royally granted monopolies of the Elizabethan era or modern day Rail franchises.

Mark Wadsworth said...

Den, yes indeed. I was just choosing an example where the Homeys and Faux Libs might agree that there is such a thing as 'privately collected tax'.

People like you or DNAse saw straight through this ruse :-) what I am of course alluding to is the fact that 'private land ownership' is in itself a kind of 'privately collected tax' which the H & FL brigade will dispute hotly - see e.g W42's comment above.