Wednesday, 28 May 2014

The TaxPayers' Alliance way off piste as per usual

From City AM:

TODAY is tax freedom day, according to the Adam Smith Institute... The day represents the portion of the UK’s national income needed to pay direct and indirect taxes, collected by central and local authorities. Today, 41.09 per cent of 2014 is over – the same proportion of the UK’s income that is collected in tax.

Despite the day coming earlier than it did last year, “cost of government day” is still far ahead, coming on 26 June. The second day comes nearly a week earlier than in 2013, but the month-long gap between the two events illustrates the difference between what the government collects in tax revenues and what it shells out in spending...

The Taxpayers’ Alliance also weighed in on the findings, saying that the average household spends more on tax than on essential items like fuel, clothing, food and housing. The typical tax bill comes to £9,415 and the essentials run to £7,727, according to the group.


Where on earth do they get £9,415 from?

According to the PSFD, page 22, the UK government spent £640 billion in 2013-14 (of which approx. £540 billion was collected in tax and £100 billion was extra borrowing).

So the average tax paid per household was (say) £21,000 and the median is maybe two-thirds of that, £14,000.

And seeing as extra government borrowing is just deferred tax, the true average is £24,000 and the median is £16,000.

While the TPA are really good when it comes to pillorying government waste and theft, they don't understand the tax system, they say that Council Tax is the biggest single bill paid by households etc. Who pays the piper, I guess.

(As MMTers point out, the government doesn't actually collect tax money and then spend it. The government creates money by spending it and then, to prevent hyper-inflation, destroys a similar amount of money by collecting taxes. But that's another topic.)

UPDATE: Dinero queried the MMT logic and Derek explained it rather neatly:

It's just an accounting thing, Dinero.

You can look at the government as collecting existing pound notes into the Consolidated Fund and then spending them, or as creating new pound notes for spending and destroying the old ones collected for taxation.

Either way works for the accountants but the advantage of thinking about it in the second way is that it makes it clear who creates the pound notes and when.

24 comments:

mombers said...

Excellent point MW. When I try explain how the average tax bill per household is £21k, people get really confused. Employer's NI is an easy one to explain, then you go onto corp tax, etc. A good starting point to build up to the 'Would you rather pay rent AND tax or just rent?'

Dinero said...

The government does collect and spend tax - it collects taxes into the "Consolidated Fund" and then spends from that fund. Local councils have accounts too.

Derek said...

It's just an accounting thing, Dinero. You can look at the government as collecting existing pound notes into the Consolidated Fund and then spending them, or as creating new pound notes for spending and destroying the old ones collected for taxation.

Either way works for the accountants but the advantage of thinking about it in the second way is that it makes it clear who creates the pound notes and when.

Mark Wadsworth said...

M, next biggest is VAT, roughly ten per cent of your gross income.

Din, I refer you to D's comment. It might sound trite but that is exactly how it works.

Think about Mugabe - he just printed Zim dollars without taxing them away again = hyper inflation.

Dinero said...

But its not the goverment that creates the pound notes, it's true that they, more often than not, issue some bonds in a year but their number is dwarfed by the number issued by corporations and mortgagers.

Dinero said...
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Derek said...

Who creates pound notes then?

Derek said...

Bonds are not pound notes. They are a promise to give the purchaser pound notes at some future date.

Dinero said...

Pound notes are deposits held at the bank of England written on a loose leaf of paper. The deposits at the Bank of England are created by commercial banks borrowing reserves from the BoE that are used to settle Clearing transactions between banks. The pound notes are produced at the request of commercial banks when they require cash instead of Bank of England ledger deposits. As a deposit is an accounting accompaniament to a bond on a Bank's T account it is bond issuers, be they Government, corperations or mortgagers, who ultimately are the creators of the pound notes.

Dinero said...

This is how the process works

1. mortgager signs loan document for 100 Thousand

2. Bank uses this part of their loan book as colateral to borrow 100 thousand of reserves at the BoE and a deposit is created on the Bank's reserve account held at the BoE.

3. Bank then requests the BoE to have these reserves converted to cash instead and thusly they are printed and delivered to the Bank.

4. the mortgager comes to the Banks and picks up the notes and buys a house. So it was their actions that created the pound notes.

5. Over the period of the transaction the Mortgager sells goods and services to re-aquire the notes and takes them back to the Bank, who in turn returns them to the BoE. However most Banking transactions and the creation of deposits, do not involve the Bank of England or the Pound notes you refered to, as the transactions are cleared and settled between the Commercial Banks themselves.

Mark Wadsworth said...

Din, you are completely way off piste here.

Derek and I were talking about normal government spending and taxation.

The way that banks create loans and deposits is a completely separate cycle.

These two systems are very, very simple.

Once you've understood those two, we can look at the interaction between commercial banks and central bank/government. This is highly murky and artificial.

Dinero said...

Its not a seperate cycle, the government issues bonds the same way that corporations and indivduals do, and taxes are collected from the deposits that are created from those bonds.

Bayard said...

All money is debt. The pound is simply the UK unit of debt. Money is created either when someone owes someone else for their time or goods or rent and doesn't have anything physical to give them in return, or when a loan is made. The money is destroyed when the debt is settled. If I owe Mark a fiver, Mark owes his neighbour a fiver and his neighbour owes me a fiver, £15 has been created that will disappear when we all get together and call it quits.

Dinero said...

>Bayard

I agree

and signifIcantly, in your illustration of neighbours debts, the BoE and the government did not appear at all, that is how it works.

Derek said...

Bayard, Dinero, this is where I disagree. A bond or a mortgage is a debt. But a pound note is not. It is a thing which can destroy a debt. An anti-debt, so to speak.

When a bank issues a £100,000 mortgage to me two things are created, a bundle of 100,000 pound notes (normally virtual ones in a deposit account as Dinero points out earlier) and a debt for a £100,000 plus interest. The two things are completely separate and I can only use the first of them to buy a house.

Now about bonds. Bonds are debt contracts pure and simple. When bonds are issued, money (aka pound notes) is exchanged for them. If you have money you exchange it for the bond. If you have no money you can't buy a bond and the issuer can't sell it (to you at any rate). But you don't create money to buy the bond. You either take it out of your pocket and hand it to the bond issuer in exchange for a promise to return the money later with interest or you do nothing.

Bayard, yes we can all agree to write off a mutual cycle of debts but suppose that Mark's neighbour is a bastard and insists that the debt must be paid as agreed or he'll take it to court. In that case the debt can be settled only if one of you has a fiver.

I'd also dispute that £15 has been created. Oh, I agree that there's £15 of debt. But not of money. If debt is money, how would I go about spending that £15 down at the shops?

Mark Wadsworth said...

Derek, sorry but Bayard has nailed this one.

Money = debt. One person owes it, one person is due to receive it. Positive and negative.

So the pound note is the asset/positive and the liability/negative is the money owed by the government to the holder of that note.

You can call it notes, coins, bonds, IOUs, contracts, bankers drafts, bills of exchange, you can replace the whole shebang with numbers on computer screens, anything you like, fact is they are all largely interchangeable.

They are called different names depending on the status of the borrower, is all, they are all ways of recording who owes whom how much.

And when a debt is repaid, the money disappears.

Dinero said...
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Dinero said...

> Derek

When banks buy bonds they do in fact create the money to buy them. The same way as if the issuer was their customer.
Deposits are the benefactor of a debt. Pound notes are created the same way as any other deposit. They can be used to cancel a debt in the same way as a deposit can be used to cancel a debt. And you can use a bond to buy a house if the seller considers that you have the credibilaty.

Bayard said...

" but suppose that Mark's neighbour is a bastard and insists that the debt must be paid as agreed or he'll take it to court. In that case the debt can be settled only if one of you has a fiver. "

Mark can borrow a fiver. He gives it to his neighbour who gives it to me, who gives it back to Mark, who gives it back to the person he borrowed it off. None of us three is left holding a fiver.

"If debt is money, how would I go about spending that £15 down at the shops?"

"All money is debt" does not mean that all debt is money. If you borrow my bike and promise to lend me your wheelbarrow in return, you owe me the use of a wheelbarrow. That's a debt, but it's not money. It's only money if you say that you can't lend me your wheelbarrow because it has a flat tyre, would £3 be OK instead and I accept.

Bayard said...

Oh, and you can't spend that £15 down the shops, because you are not me, Mark or Mark's neighbour. We were indebted to each other and the measure of our total debt was £15. just as the measure of our total height, should we have decided to stand one on top of the other, would be around 17 feet.

Derek said...

Gents, I used to think that all money was debt too. However I changed my mind after reading this interesting article Economic Organisation of a P.O.W. Camp written by an economist who was taken prisoner during WWII.

While I am quite prepared to admit that debt can be used as money and in that context to agree with Mark's asset/liability positive/negative view of money and debt, the article also showed me that there is such a thing as commodity money (eg chocolate and cigarettes in the article) which can be used to settle debts but which is not itself a debt and did not come into existence with a matching debt.

I realise that the vast majority of our money comes into existence as a result of the debts associated with bank loans just as Dinero says above, No argument there. However debt-free commodity money is possible and was used in early times (the early Romans used small chunks of bronze and valued them by weighing before they went to a standardised coinage) and when the financial system breaks down (Cigarette Money and Germany). So I can no longer agree unreservedly with the money-is-debt theory.

Derek said...

Oops, meant to include a link to an article on Cigarette Money. I'll try again. Cigarette Money and Black-Market Prices
during the 1948 German Miracle

Mark Wadsworth said...

B, owing somebody use of a wheelbarrow is a debt like anything else, nothing special about it. It is just not a very tradable or easily exchangeable one.

D, people can use commodities like fags or chocolate or gold as a medium of exchange. That is not money-debt for the purposes of this debate. Banks cannot create fags or chocolate or gold out of thin air.

Bayard said...

Mark wasn't that what I said?

"the article also showed me that there is such a thing as commodity money (eg chocolate and cigarettes in the article) which can be used to settle debts but which is not itself a debt"

Well yes it is, in as far as it is acting like money. If the currency is cigarettes, and someone gives you cigarettes in return for your time or goods, then they are either bartering, if you are a smoker and intend to smoke those cigarettes, or the cigarettes are money, if you intend to exchange them for something else. If you intend to smoke them, then there is no debt, but if you intend to exchange them, then there is a debt. You haven't got the thing you want/need yet, all you have is something that is intrinsically worthless to you , but which can be exchanged for something you want/need in the future. That's what money is.