Sunday, 1 September 2013

Monopolies, rents, taxes

Here is a summary of what we were debating here.

Basically, in a sane world, normal earned income, output or profits would not be taxed at all. But there's no harm, and a lot of benefit to taxing rental income or monopoly/cartel income.

Monopolies and cartels

The traditional view of monopolies is simply to say that if one business controls a large share of a particular market, then the government steps in and prevents it increasing in size, opening new outlets or taking over rivals. The usual example is supermarkets in the UK. This is actually a misuse of the word "monopoly" because what the supermarkets have is a cartel with half a dozen big players and a few minnows. So what the Monopolies and Mergers Commission does if it restricts each business to a market share of x%, it ensures that there are 100/x players in the market, and cartel behaviour or collusion is less likely the more players there are.

Some kinds of monopolies/cartels arise solely because of barriers to entry, usually imposed by the government (encouraged by incumbents), which restrict the size of the market, thus enabling incumbents to push up prices without fearing competition. Two examples of this are towns where there is only a limited number of taxi-drivers permits and the mass of regulations imposed on children's nurseries and child-minders. These monopolies can be largely abolished by getting rid of the barriers to entry.

But there are "natural" monopolies where there can only ever be a limited number of providers or where the total market is limited by other forces (natural, economic, legislative, doesn't really matter). If the government wants to claw back the monopoly element of their profits, there is no one-size-fits-all approach, it's a question of divide and conquer.

The main sources of rental or monopoly income:

Rental income from land-location values

An annual tax on the land-location's market rental value. The tax can be anything up to 100% of that rental value without any harm being done, but it could be a lower figure.

This is by far and away the largest potential source of revenue. In the UK, it's only about one-sixth of GDP (£200 - £250 billion per annum) but if taxes on earned income were abolished, it could easily be one-third or one-half.

Road space

In monetary terms, the second largest source of rental income for the government is user-charges for roads (currently about £50 billion per annum). In theory, this can be done by road pricing but that requires a lot of technology.

What most countries do is simply have fuel duty and then VAT on top of that. There are lots of other bits and pieces like the annual car tax; VAT on new cars, parts and repairs; P11D charges on company cars; parking fees and fines; insurance premium tax and so on. It all adds up to about £50 billion a year.

The whole lot could be replaced with a slightly higher fuel duty. This has the advantage over road-pricing in that it is also a tax on pollution and encourages people to build/use more efficient cars, drive more steadily and reduces the cost to occasional motorists. It also acts as a "congestion charge" because driving during the rush hour is simply less fuel-efficient than driving at other times when the roads are emptier.

Oil, gas and other natural resources

Different countries do different things.

Some countries auction off extraction rights for a certain period and some levy a very high rate of corporation tax on the profits.

The most sophisticated system would be to realise that actual extraction costs + reasonable profit margin are fairly fixed but market prices fluctuate wildly. Any excess of selling prices over actual costs is pure unearned rental income.

So what a sensible government would do is to declare itself the legal owner of the resources and put the extraction out to tender - whichever company offers to extract a certain amount per year at the lowest cost (for a given minimum safety and environmental standard) wins the tender. From thereon in, the company receives the agreed price for unit extracted, and the government then runs a daily or weekly auction system again to sell those materials for their market value.

Other sources of rental or monopoly income

There is then a whole list of much smaller monopolies, the value of which is in the order of a couple of billion or perhaps only a few million every year, but it's useful to go through some examples:

Airport landing slots

The UK government currently raises about £3 billion a year in Air Passenger Duty, which is an incredibly daft tax, as it is per passenger, it doesn't matter which airport you are flying from and depends on the distance travelled.

The scarce resource which is being used is that few minutes for which the runway and the airspace leading to/away from it is needed for landing or take-off. This clearly places a burden on the people under the flight path, whether the plane is full or empty. It doesn't really matter how far the plane flies after that, there's no shortage of airspace over the Atlantic or the Pacific.

So a more sensible tax is a per-plane tax, and even better than that is a tax on the value of the slots themselves (or annual auctions thereof), which in turn is down to the location of the airport (i.e. near London is worth far more than near Newquay) and how many connections there are from that airport. So although Heathrow only accounts for half of aircraft movements in the UK, its slots are probably 80% or 90% by value.

Happily enough, such a tax/auction achieves three things: it raises revenue; it captures the agglomeration benefit of lots of routes converging at one airport; it captures the location value of the airport itself (i.e. half an hour from a large city) and it captures the external costs of half a million flights a year over a densely populated area.

Radio spectrum

Depending on the cost of the technology required to exploit frequencies fully, the government can just auction off twenty- or thirty-year licences for capital-intensive things like 3G, 4G. For bread and butter stuff like radio or television, the auctions can be for much shorter periods like a year.

Please note, the amount which the winning bidders pay for their licences has no impact on the prices paid by end-consumers, because the bidders worked backwards from their likely total income, deducted their likely real costs and a fair profit margin and the amount left over was what they were prepared to bid.

Cherished number plates

These are a government-created monopoly. It came up with the sensible rule that motor vehicles all have to have unique number plates to make it easier to track down offenders and recover stolen cars.

Then it noticed that some people were prepared to pay over the odds for the right to use certain numbers, so about thirty years ago, the UK government started auctioning off new number plates.

It doesn't raise much money from this, about £3 - £4 million a year, but so what? It's a good principle and an entirely voluntary tax - just imagine that the government just embedded a radio-readable micro chip in each car to help identification and abolished the requirement to have unique number plates entirely? What would a really cool number plate be worth if everybody were allowed to make himself one and drive round with it as decoration?

Fishing, angling, hunting

Having decided how much fish can be safely caught from the North Sea without depleting stocks, the government can then auction off quotas on an annual basis. Or it could measure how much each boat catches and charge per amount caught. If stocks are becoming depleted, it increase the charge and vice versa.

For whatever reason, the UK government decided years ago to hand out quotas which can be traded on the grey market, which is the worst of all worlds, as one cartel has now accumulated all the quotas for itself and imagines this to be its "property" and even had the temerity to try and sue the UK government when it tried to cancel/re-allocate some of the unused part of the quota.

If a town notices that there are too many hobby-anglers using a river, it can make a few quid by charging a daily rate for angling permits. The same applies to hunting and shooting rights - if people really get a kick out of hunting foxes with dogs, then make them pay £x00 per fox.

Water and utility companies

Their monopoly income can be choked off at source by imposing price caps. This leads to slight over-use of water or electricity, which you might consider a price worth paying.

Or the government could abolish price caps and allow them to charge what they like and levy a very high rate of corporation tax and pay this out as a kind of Citizen's Dividend, i.e. every person gets a few hundred pounds a year cash to cover the increased cost - if they manage to curb their water or electricity use, then they can keep the rest to spend on what they like.

Betting shops and pubs

A local council can restrict the number of betting shops or pubs by simply limiting the number of licences it will grant. All this achieves is to push up the profits of the few lucky people who own a licence. The second-hand value of that licence can be hundreds of thousands of pounds, so a bookie or landlord can cash in several years income at once by selling on the business.

So the better way is to make people pay for the market value of the licences (the super-profit or monopoly element). So if the council decides that there should be only two betting shops or three pubs in a certain area, it just auctions the licences off each year, or for a few years at a time. That way the people in the area are still restricted in their choice of gambling or drinking haunts, but at least there is some money in the kitty to pay for libraries or lollipop ladies, or indeed treatment for compulsive gamblers or drinkers.

Copyrights, patents

Without the protection of international governments, nobody would earn much in royalty income. But protection of intellectual property stimulates creativity and innovation creativity - up to a certain extent - so it seems reasonable for governments to levy a tax on royalty income.

The system of patents is used by some to stifle innovation. Corporations (especially electronics and software) just register thousands of vaguely defined patents to prevent anybody else from actually turning a good into a viable product. I suppose you could deal with this by charging exorbitant registration fees for such vague ideas. If registering the design of an actual existing piece of technology were cheap or free (but making the owner liable to tax on the future profits) but it cost £1 million a pop to register a vague idea, then the practice would more or less cease overnight.

The administration of this is going to be quite tricky, but it is still less complicated than taxing everybody's income. The owner of a patent can set his own price for the amount of monopoly income embedded in a certain product. If he sets a high price, then he will pay a lot of tax on that price, and if he chooses a low price, his competitors will be able to use that patent in their own product provided they pay the price (net of tax) over to the patent owner.

We can also looks at methods rather than sources:

Annual user charges/licence fees

This is the best and simplest method, and applies to LVT, fishing quotas, radio spectrum, betting shops etc.

Export restrictions

Where a country has a natural advantage in producing something for prices well below world market prices, it can lock in some of that saving for its own citizens by imposing export restrictions.


Is always a fall-back, but approached with caution, as there is always mission-creep and a reluctance of politicians to accept that some industries ought best be shut down or privatised, so this often ends up as subsidies for unviable industries.

The government retains the monopoly and pays others to do the work

This works with oil, gas and natural resources. It also works with e.g. public transport - the government can decide the routes, timetable and the prices and then put the franchise out to tender. If the franchise is profitable, the highest bidder wins. If the route is unprofitable, then whichever company is prepared to do it for the lowest price gets paid to it, see for example with refuse collection (one of the examples where privatisation really worked well).

Very high corporation tax rates

This is what Norway and The Netherlands do this with oil and gas companies.

"Windfall taxes" aka "fines"

Another fall back for governments when they think that large corporations are abusing a position of market power but can't quite pin down how or why, is to simple find them guilty of "anti-competitive behaviour" or other misdemeanours and negotiate a fine.

The EU does this every few years with Microsoft and the USA does it quite often with non-US banks.


Pavlov's Cat said...

Not sure where Insurance Premium Tax fits in there or indeed how much it raises.

Ben Jamin' said...

Train franchises?

Has anyone done the maths on HS2 to see what the likely auction revenues might be, and how long that would take to pay off the tax payer investment?

Ben Jamin' said...

Water abstraction licences. Apparently, they dished those out for free and in perpetuity. WTF????

Anyone want to guess why so many of our rivers are f**ked?

Free abstract+price caps(ie no metering)=massive waste and over use=environmental disaster.

This really does illustrate just how useless/spineless our politicians are.

Ben Jamin' said...

That example of the fish quotas is hilarious. I read about it a little while a go. Fish-quota-owner-ism.

It just goes to show, once people think something is theirs of right, trying to take it back again is no easy task.

Mark Wadsworth said...

PC, IPT is another stupid tax, raises about £2 or £3 billion. You can split it in two and merge one half into fuel duty and the other half into LVT.

BJ, HS2 is a waste of money, I think we are agreed on that.

Water extraction rights are part of land values, would be covered by LVT.

Or when it comes to "protecting the environment" then a straight limit on the amount you can extract each year would cover it, that's a separate topic.

Pavlov's Cat said...

I get your point about it being a stupid tax , but from a Govt point of view it's ideal , not many people know it's there, they can raise it without any outcry (1994 2.5% to 2011 6% ), any increase in premiums they can blame on the dastardly insurance companies. As it is mandatory to have vehicle insurance they have a vested interest in keeping premiums as high as possible

Mark Wadsworth said...

PC, agreed.

The annoying thing is that the taxes which are the most damaging in economic terms are usually the politically most acceptable.

Bayard said...

"Anyone want to guess why so many of our rivers are f**ked?"

Well, seeing as Britain is not what you would call a hot country, I suspect that there are other forces in play as well as abstraction. Most abstracted water ends up back in the river, either quickly (mills, turbines) or slowly (irrigation). Even water abstracted from the aquifers ends up back in the river at some point, though this depletes the upper part of the river at the expense of the lower part. A large part of the depletion of the aquifers (which, AFAIK, are now OK thanks to the wet weather in 2012), apart from simple lack of rain, is caused by increased run-off of rainwater, causing floods when it rains and drought when it doesn't.

Kj said...

Great summary MW. As for the last example: this is quite naughty in regards to property rights, but it has a few pros; retrospective taxation doesn´t change incentives, as long as this isn´t done too often. But it applies most often to energy, which should have at source superprofits taxation anyway.

Some other thoughts on "monopoly":
With regards to Microsoft, I think history shows that software isn´t a natural monopoly in the long term. And the thing about the internet-related companies that have almost monopoly-like status, is that they don´t really have what you can call superprofits, some very little profits at all, likw Amazon. What above normal profits there are in internet-related business is almost exclusively deposited in Silicon Valley, and/or warehouses with logistical advantages for internet retailing. Which goes to show that LVT is our prime way of handling monopolies.

Supermarkets: Whatever the stats are on ownership concentration in the industry, the fact remains that we spend less on food than ever before in history, supermarket margins are tighter than speedos, and what price spikes there are, are almost exclusively due to shocks caused by natural reasons, political ag intervention, and union action in some part of the supply chain. IMHO etc..

Mark Wadsworth said...

Kj, thanks.

I have remembered another couple of things I have to add - like the value of banking licences, that's a biggie (about £30 or £40 billion a year, even without subsidies).

And maybe I ought to rank those monopolies in order of £ value.

As to supermarkets, I personally like supermarkets, on the whole the consumer gets a good deal. The people getting screwed are the suppliers.

I don't really count software and internet as a monopoly at all, they come and go quite quickly. And we know from reading the paper that half of Google's profits (i.e. wages) promptly get siphoned off by landowners anyway.

Kj said...

MW: Good point, but if you reduce land monopoly profits, banking privilege profits would be reduced as well.

Re supermarkets: yes, suppliers, insofar as you mean farmers, are pretty much screwed from the outset. As long as we live in a society that can transport stuff as easily as it can, they are competing against thousands (even if the farmer population is a very small percentage) of other farmers, sometimes even millions, that can and do produce the exact same products. At the same time their products are bought by an oligopoly. They are bound to earn close to subsistence income no matter what, and whatever you try to do about it, it just increases profits somewhere else in the supply chain/increase land rents. I don´t really know a good policy for farmers that can ameliorate this fact. Those that do make decent money either do other parts of the supply chain themselves, or are very, very big.

Mark Wadsworth said...

Kj, even with full-on LVT, banks will still be earning that 2% interest margin in their sleep, that is rental income. I don't care whether it's £10 billion or £50 billion a year, it's rental income and worth taxing.

Supermarkets don't just screw farmers, it's every single supplier. Occasional commenter Shiney Mart knows more about this than I do.

That's just what happens when you have an oligopsony. Any small business which mainly supplies a few large customers is doomed to eternal misery.

Kj said...

MW: then, considering that there is enough competition in supermarkets to ensure quite thin margins, consumers are reaping most of the rewards of supermarket oligopsony.
We´ve discussed before that supermarkets are large because of logistical advantages. But there is also the matter of VAT and high taxes on labour to boot. And even if supermarkets will always have advantages, reducing barriers to entry through eliminating VAT and reducing taxes on labour would open up much more opportunities for suppliers, especially farmers, to get more of the retailing pie themselves, as is fashionable and as people at least say they want them to these days.

Mark Wadsworth said...

Kj: "consumers are reaping most of the rewards of supermarket oligopsony"

That is almost certainly correct, which is why I don't think it's a big deal.

Ben Jamin' said...


One swallow doesn't make a summer, and one years above average rainfall doesn't change the fact that over the past fifty years, every river(other than the tidal Thames perhaps) in the UK has suffered some degree of degradation.

Some rivers simply don't exist any more.

Indeed the UK may not be a hot Country, but we have less water per capita than any European Country, and in the SE less per capita than Morocco or Egypt. And our usage is considerably higher.

Most water abstracted ends up being treated, and as you say pumped back. But this is a leap frog effect with it ending up tens of miles away in heavy canalised lower reaches which in the case of SE rivers are ruined anyway. From a ecological point of view this isn't where it's needed.

As you say, flooding is caused by modern farming techniques, whereby water is not given the chance to soak into the ground. The fact this also causes siltation is a double blow.

Farmers also own many abstraction licences. Again, there is no pressure on them to use the most efficient irrigation methods, which means most of the water in summer just evaporates away.

The point being, if a natural resource is considered free, the environment suffers. You just have to look at fish stocks around the World to see that is a fact.

The Stigler said...


Supermarkets don't just screw farmers, it's every single supplier. Occasional commenter Shiney Mart knows more about this than I do.

That's just what happens when you have an oligopsony. Any small business which mainly supplies a few large customers is doomed to eternal misery.

And it's not just supermarkets. I used to work for a company that specialised in doing billing for telcos and they would drag out paying invoices as long as they could and pull all sorts of crap on us.

Mark Wadsworth said...

TS, yes of course. This happens everywhere.

My mum used to work for a textile company, a rep from their main customer (Marks & Spencer) popped round to see her boss, and he asked "Out of interest, what per cent of your sales do we account for?"

Kj said...

The owner of a patent can set his own price ... his competitors will be able to use that patent in their own produt provided they pay the price

Do you mean then without the license of the patent owner, in paralell with the patent owners´s own production?
I think this is a great idea. If this was the case, that anyone could use it if they paid the price, it would be easier to administer than if it was on permission from the owner (where they could arrange ways to pay for the privilege).
The problem with patent law is that it´s very international and probably very difficult to change wholesale in a short time. *But*, using the example of that Creative Commons things, maybe you could implement a voluntary scheme, where stuff that is qualified for protection under patent law, could be registered on a separate scheme, where usage was open conditional on fee payment (as for example a per-product fee). You could lure patent-holders into the scheme with low registration costs, and exempt that post-patent-tax income from other taxes.

Kj said...

In fact you wouldn´t need to make the owner pay any more than a per-item tax of the products he produces himself. If production expands, he would be indifferent between whether he himself produces or others. It doesn´t directly adress patent trolls, that´s why you have to limit it to very clear stuff.
The benefits for the patent holder is that because of the potential tax receipts, the state can take on the costs of upholding the patent, which would imply much less cost than individual court action.

Mark Wadsworth said...

Kj, yes, patent law is international and difficult to change.

But what I mean is, if Company A is using a patented thing without permission in the UK, and is sued by the originator Company B, then when awarding damages, the UK court works out how many units Company A sold, and then multiplies it by the amount which Company B was declaring as taxable patent income per unit.

Company A has to pay total value x tax rate in tax and Company B gets the rest.

So you do not need to change the law, and infringement is still infringement.

NB, for the purpose of this post, general taxes on sales or income have been scrapped entirely.

Kj said...

MW: yes, but usually, patents used are on permission by the patent holder, not infringements with court cases and all that, and that´s when it starts to get difficult to reveal the true income from the patents.
With the scheme I was proposing, you wouldn´t need to change the law either, you´d just have an open usage policy on the condition of a per item fee. You could have both, but charge the traditional patents extra up frontfor all the hassle in revealing what income to tax, or give the option of having the state charge any user of the patent, and hand over the charge minus the tax rate.

Bayard said...

"like the value of banking licences"

Why do we need banking licences? Aren't they just a barrier to entry protecting incumbents from competition?

"Indeed the UK may not be a hot Country, but we have less water per capita than any European Country,"

Living in Wales, I find that very hard to believe.

"As you say, flooding is caused by modern farming techniques, whereby water is not given the chance to soak into the ground."

Well, no, I meant that flooding is caused by the increase in roofing, tarmac and concrete over grass and plough.

Anyway, charging water companies for the water they abstract from the aquifers might be a good idea from a tax raising point of view, but it won't do anything to limit water consumption, as the water will not become any more expensive to the consumer. Charging farmers might be a little more productive, but irrigation is a minor problem as most of the excess soaks back into the soil and charging water mill and turbine owners is just daft, as the water is put straight back in the river it was taken from in the first place. The reason why the UK has so few working water mills is that the old Water Boards could and did charge the millers for the use of "their" water and put them all out of business.

Kj said...

MW: plus when the patent holder is the producer, it´s very difficult to work out what the monopoly income is. Having a pwe-product charge solves this.

Kj said...


Mark Wadsworth said...

B; "flooding is caused by the increase in roofing, tarmac and concrete over grass and plough"

And what % of UK land is actually "concreted over" or has buildings on it? About four or five percent, I believe, i.e. half the ten per cent which is developed.

And I'm not sure if any of this has to do with BJ's original point about too much water being extracted in the first place. Floods in urban areas are caused by "too much rain" and not "too much water being extracted".

Kj, what I was proposing IS a "per product" charge.

Company B invents whizz bang gismo and incorporates into product X which sells for £100. Company B then decides how much of that £100 relates to the patented component.

If he decides £20 and the tax rate is 20%, he has to pay £4 tax per unit sold. The other £80 income per unit is tax-free.

If Company A uses that gizmo in its own competing product and gets caught out, it has to pay £4 tax to the government and £16 tax to Company B for each unit sold.

Kj said...

MW: ah, sorry, that's exactly what I meant.

Bayard said...

"Air Passenger Duty, which is an incredibly daft tax, as it is per passenger, it doesn't matter which airport you are flying from and depends on the distance travelled."

It's not a daft tax if you are a politically well-connected owner of airports. From that point of view it's a very sensible one.

Kj said...

For bank taxes, i refer to the second-best option, a "financial activities tax", which is a type of income-based VAT. It's in use in denmark with great success. Here is an analysis, which shows that it's not "passed on".

Mark Wadsworth said...

B, so the tax favours the owners of Heathrow, but the UK govt is no big friend of BAA. Or perhaps it favours airlines who use Heathrow?

Kj, nope, for banks, an assets tax is much better (or indeed a tax on liabilities, comes to the same thing as assets = liabilities, give or take).

An activities tax is too easily avoided and difficult to administer. Total assets are whatever their UK balance sheet says.

Kj said...

MW: We´ve been over this. It´s not a tax on "activities", it´s a tax on net income, either wages or wages+profits.
And I did say it was second-best. It´s interesting because it´s in actual use.

Bayard said...

"For bank taxes, i refer to the second-best option, a "financial activities tax", which is a type of income-based VAT."

It would be a start if the bloody banks paid VAT in the first place. OTOH I suppose you can't levy a value added tax on an activity that doesn't add any value to anything.

"And I'm not sure if any of this has to do with BJ's original point about too much water being extracted in the first place. Floods in urban areas are caused by "too much rain" and not "too much water being extracted"."

The relevance was water shortage is also caused by not enough rain soaking into the ground and running off into streams and rivers instead, also causing floods. Mind you, I think that floods are actually caused by the wrong sort of rain: infrequent cloudbursts instead of constant drizzle. All in all I think that the weather is far more to blame for water shortages than abstraction, but then there ain't nothing you can do about the weather.

"Kj, nope, for banks, an assets tax is much better"

Why is it better than a tax on interest? Such a tax would be logically coherent with LVT (both are taxes on rent) and is tapping into an income stream, rather than levying a tax on a fixed amount. It also doesn't just apply to banks: there is no reason why other people and organisations that lend money at interest shouldn't be taxed on it too.

Kj said...

B: that´s the point of the tax, compensating for the VAT exemption on financial services. You can´t put VAT on interests, and therefore you tax the value added as measured by profits+wages in the bank. But it could as well be used i a situation without VAT. Would someone read the actual thing before commenting? :)

Bayard said...

Kj, but why should financial services be exempt from VAT in the first place (apart from my somewhat tongue-in-cheek reason)? All they are doing, after all, is renting out money. Why should this not attract VAT in the same way as renting out tools or cars?

Bayard said...

"Would someone read the actual thing before commenting?"

I have and I am still not convinced that VAT couldn't be charged on interest. It reads to me like the main reason it can't is because the EU says it can't, so Denmark has had to come up with another tax that does sort of the same thing to get round the EU's ban on charging bankers VAT.

Kj said...

B: vat is on the extra value that is between income and expenses. Banks live off the spread, and if you put vat on interests, you both tax value added and double-tax interests. Again, that's the rationale for the FAT, to tax the value added only.

Kj said...

B: double tax interest income of the depositors that is.

Mark Wadsworth said...

Kj, you emailed me that thing about FAT, and in the end I did read it.

Kj, B, the point is that people who take deposits and lend out money DO add to wealth, if they can channel it into profitable activities.

(This is quite different from stripping out land rents, we can fix that with LVT).

We also know that the first 2% or so of interest margin is very easy to earn, they can earn that in their sleep by paying 3% on deposits and charging businesses or unsecured borrowers 5% or 6%.

And so a bank asset tax of (say) 2% does not discourage high value productive lending, it just discourages them from lazy low-value lending.

So lazy banking with a 2% margin is taxed at 100% of the income, but riskier productive lending with an 8% interest margin is only taxed at only 25% of income, and so on.

Or in cash terms, the UK's finance sector boasts/whines that it pays £60 billion a year in taxes on income.

A 2% bank asset tax would only cost them £30 billion or £40 billion or something, so what's the problem? If they don't like paying it, then de-register as a bank an strike out on your own.

DBC Reed said...

So" banks take deposits and lend out money"?.Not necessarily in that order. Creating money and controlling the money supply is a natural monopoly and should not be in private hands.Nationalise the banks !

Mark Wadsworth said...

DBC: "So" banks take deposits and lend out money"? Not necessarily in that order"

When they are lending 'secured' on land, no certainly not in that order. THat's called 'splitting the zero'.

But they won't be able to do that with LVT in place, so we would revert to the traditional notion of taking deposits first and then lending them out.

DBC Reed said...

But the notion of taking deposits and lending them out is not even traditional. As soon as the Italian bankers realised they could issue notes for loans, they kept the original gold in the vaults and issued as many paper notes as they could get away with , given the odd awkward customer was going to demand gold .And this was with the strictest possible gold standard!Loans are always going to outrun deposits by a fairly fabulous percentage.Its no good: the banks have to be nationalised.

Kj said...

MW: fair enough, I´ve nothing against the BAT at some level. But is it smart to set a minimum spread to encourage high value lending? If the point is to tax some profit-inducing privilege, is total assets a good metric?

Mark Wadsworth said...

DBC, yes I know all that. A bank asset tax would discourage that, because every time the bank prints £1 it has landed itself with another 2p tax liability.

Kj, I could write you a 10,000 word essasy on that.

To cut a long story short, the idea is to tax "rental income" at high rates and "earned income" at low rates.

Banks can earn a 2% margin in their sleep for no effort, so it's "rental income". To earn more than that, they have to be a lot cleverer and work harder.

So a 2% tax is a 100% tax on the "rental income" and does not tax the "earned income".

Bayard said...

"B: double tax interest income of the depositors that is."

Well, no, not unless the depositors are VAT registered, it wouldn't be. And if they are, they can offset the VAT paid against their VAT collected.

Bayard said...

"B, the point is that people who take deposits and lend out money DO add to wealth, if they can channel it into profitable activities."

They aren't the ones carrying out the profitable activities, so they are still not adding any real value. Anyhow, as you and I both know, very little lending actually goes towards profitable activities. Most goes toward speculation in land and other things.

Kj said...

B: But I´m not VAT registered, and why should I pay outgoing VAT on my received interests, should here be a treshold etc.? There´s a strange logic for why (most) capital transfers are exempt from VAT, rooted in the idea that it´s a tax on "consumption". Most of that logic is the same reason we should abolish it ofcoure, and I don´t think putting it on interests, dividends, share purchases or whatever, is an idea to make it better.

They aren´t the ones carrying out the profitable activities, so they are still not adding any real value. Anyhow, as you and I both know, very little lending actually goes towards profitable activities

Look, banking as it is, is in a feed-back loop with land, because the latter is not taxed. You can say all you want about how the banking system is structured, but the fundamental idea about a middleman facilitating credit, is not unsound, and it does add value. And if you´re hinting at the idea that there´s anything wrong with interests as such, I have a hard time following the logic. Whether money is "fiat", gold, just figures in a computer, they are still a means of exchange that have value, and as long as you postpone it´s use, and someone else wants to use those means, you should get a return of that in the same way you should be able to get a return if you bought the object yourself and rented it out. Rich countries have high availability of credit, poor countries don´t. And a portion of the money that is, according to you, just used to speculate, is used to build housing, which is the single, largest item of real capital in the economy. Business lending is actually quite an important source of capital in some countries, more so than in the anglo-american area, especially benelux, Germany, scandinavia.

Kj said...

In where I´m defending banks all of a sudden, pretty sorry situation :)

DBC Reed said...

Golden oldies time. I have not seen the argument that people deserve interest on unused deposits because they are forgoing consumption in many a long year.The problem is that banks don't make money by lending out their depositors' money.There would n't be anything in people's accounts if they did.
And taxing the banks' assets is not going to work either.This kind of taxation is just a wimpish cop-out from nationalising the things.Did I say I am in favour of bank nationalisation?Perhaps I need to labour the point a bit more!

Kj said...

DBC: that´s still the principle, whether banks of today are structured in a way that allows money to be on demand and loaned out at the same time, it´s still the principle. I know that not nationalising is a cop-out for you, but some of us are able to live with that.

Mark Wadsworth said...

Kj, thanks for responding re banks.

"Saving" is a good thing, and "businesses investing" is a good thing. So if individuals lend to businesses and businesses pay interest to individuals, this is a good thing*.

So individuals can lend to companies directly and take all the interest or they can invest via a bank (for convenience etc), who makes a profit (the interest margin), some of which will go in BAT and the rest is the bank's to keep.

* What is more dubious is when businesses lend to individuals to consume stuff in advance, this is a two-edged sword, but is of no relevance here.

Bayard said...

"But I´m not VAT registered, and why should I pay outgoing VAT on my received interests, should here be a treshold etc.?"

Well, if you are not VAT registered, you won't be paying VAT on your received interest, will you? You are the one who is renting money to the bank, you are not VAT registered, so you won't be charged VAT, just like I am not charged VAT on my supplies of services, because I am not VAT registered.

I'm not pro VAT, I agree with Mark that it is the worst tax, but if we have to have it, everyone should pay it. It'd not a tax on consumption, it's a general tax on turnover, with exemptions for powerful interest groups (bankers and landowners, mainly).

Bayard said...

"So if individuals lend to businesses and businesses pay interest to individuals, this is a good thing"

But, as you have been at pains to point out, very little of this goes on. There is very little lending by the general public direct to businesses, and it is almost impossible for a business to borrow money from a bank, unless it is secured against land, apart from running an overdraft.

Anyway, the whole idea of borrowing money from banks and running up debts is relatively new and I can't see that it helps businesses to borrow money from an organisation who only cares about getting their money back and their interest payments rather than borrowing from shareholders who have a stake in the business.

Mark Wadsworth said...

B: "But, as you have been at pains to point out, very little of this goes on."

Agreed. But it is still A Good Thing, and in the absence of land price speculation, there would be more of it.