Economic myths: Asset-backed vs fiat currencies

Something which primarily misguided right-wingers but also many misguided left-wingers wail on about is "fiat currencies".

I'll exclude the Modern Monetary Theorists from this, their view is a bit counter-intuitive, but does indeed make sense. I'm not even going to pander to the gold bugs on this; the so-called gold standard is meaningless, it is a confidence trick that only works for as long as it works.

So let's put prejudices aside and imagine that the government of a country has a huge sovereign wealth fund, it owns shares in businesses; land and natural resources; and levies user-charges for the services it provides, and it uses the income derived to fund government spending. To my mind, that is an asset-backed currency and not a fiat currency.

(There are some governments which do this, primarily in the Middle East, but it is not the case for many European or Western countries.)

To narrow the debate further, let us imagine a country which does not run deficits (this merely stores up bigger problems for the future); and let's also ignore money creation by commercial banks, 80% or 90% of which is merely collecting land rents via mortgage lending (LVT would sort that out).

Does the UK government have such a massive sovereign wealth fund? On paper, certainly not.

But in economic terms... it does!

1. The government as unwelcome shareholder
2. The government collects user charges
3. The government as land owner
4. The government as protection racket/slave owner

1. The government as unwelcome shareholder

The whole point of running a business is to generate profits for shareholders. The management and employees of anything larger than a sole trade or one-man limited company generate profits each year, and after deducting cash reinvested in the business or earmarked for reinvestment in the near future, pay out most of their profits as dividends. Management and employees can be heartily indifferent as to who those shareholders/recipients are.

That money leaves the business. So UK plc and UK Ltd between them pay (say) about £80 billion a year in dividends and about £40 billion a year in corporation tax. So in economic terms, the UK government owns one-third of the shares in all UK companies. It could simply ask each company to issue it with one bonus share for each two shares actually in issue, scrap corporation tax and its receipts would be much the same.

For sure, the UK government has not invested cash directly into most UK companies (although it often does indirectly via subsidies such as EIS or VCT tax breaks), but it provides lots of useful background stuff without which businesses would not be able to operate (legal system, education, roads and so on). So the deal could be: "OK, give me some free shares and I'll continue providing the legal system, educating your workers and maintaining roads for 'free'; you won't need to pay corporation tax any more."

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2. The government collects user charges/economic rent

There is a good reason why governments own/are responsible for most large infrastructure projects - roads, railways, water and sewerage pipes, the National Grid and so on. You can Faux Lib all you like about this but it is simply true for nearly all countries, whether they are capitalist, social democratic or communist.

It is because the physical land has been sub-divided between millions of different owners, which has two consequences:

i) A private entrepreneur who wants to build a project from A to B has to pay dozens, hundreds or thousands of different landowners to acquire or use their land. Each one can hold the entrepreneur to ransom. If you need a ten mile strip to build a project with a capitalised finished value of £10 million, each landowner can hold out for a large chunk of that £10 million. If our entrepreneur manages to acquire 99 out of 100 pieces of land for their current (assume low) value, it only needs one person to twig what is going on, and even if he only owns a few yards of the total required strip, he can hold out for nearly all of that £10 million. If a few landowners adopt this strategy and get too greedy, and a few always will, then the project does not go ahead.

b) The entrepreneur only collects a small part of the economic benefit of that infrastructure. The bulk of the 'consumer surplus' simply goes into higher land values for the land which is near a junction, a station, has mains water, electricity etc.

The government is the only entity which can grant Compulsory Purchase Orders. The 19th century railway companies in the UK could only do it because of Acts of Parliament granting them the right to acquire land for its current value; and those in North America could only do it because the US or Canadian governments gave them vast tracts of land for a low price.

The government is the only entity which can tap into those increased land values, in order to pay for or subsidise the infrastructure or indeed to make an overall profit on the deal.

The best example of this in the UK is roads. The government collects about £50 billion a year in fuel duty, VAT, vehicle licence, parking tickets and fines, Congestion Charges, tolls and P11D benefit in kind charges, but it only spends £10 - £20 billion on building, maintaining and policing roads. The profit of £30 - £40 billion a year is user charges/economic rent paid by motorists.

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3. The government as landowner

The UK government is, in the narrow/legal sense, quite a large landowner. It owns four million council homes, lots of schools, hospitals, government buildings and indirectly owns a million Housing Association homes and everything which belongs to the Crown Estates. On some of these it collects the full site premium/location rent (Crown Estates) and on some it just charges for the building and charges little or nothing for the site premium/location rent, which accrues to the tenant as a freebie.

In the economic sense, the UK government owns one-third of all commercial land and buildings, i.e. those liable to Business Rates, which raise one-third as much as the total annual rental value of commercial premises.

People who pay Business Rates wail on about it being a tax, but it is not: when you buy commercial premises, you are actually only paying for two-thirds of the value up front and agreeing to rent the other third from the government. The future tax bill comes off the purchase price. So if your business needs two storeys of a building, you could buy three-for-the-price-of-two and sublet the third storey to a tenant, his rent covers the Business Rates on all three storeys, job done. The rent collected and Business Rates paid net off to nothing, and you are occupying your own two storeys 'tax free'.

The same used to apply to private housing when we had Domestic Rates. This was replaced with Poll Tax/Council Tax, but other taxes such as Stamp Duty Land Tax and Inheritance Tax (not to mention ATED and so on) have been ramped up accordingly, and the overall revenues from these are about £40 or £50 billion a year, i.e. about one-fifth or one-quarter of the total site premium/location value. It would be far better to replace the lot with a single rate tax of one-fifth to one-quarter of the site premium/location value (mathematically, this is around three-quarters of a per cent per annum of current selling prices).

That seems fair enough to me; without the government to protect ownership, to provide law and order and roads, refuse collection etc, land values would be precisely zero until such a time as enough people get together to re-impose these things by force/collective agreement, in which case, they are 'the government'.

Land ownership and 'the state' are synonymous, you cannot have one without the other. Even if you do not accept the concept of 'the government' as landowner, it certainly provides services to landowners for which is can charge, and to the extent it is collecting the rental value of land above and beyond those costs, it is acting as a letting agent for the whole of the society which generates that value.

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4. The government as protection racket/slave owner

As the reader might have guessed, I don't think that corporation tax is the worst tax, and I think road use and land ownership are perfectly fair game for taxation (Land Value Tax is actually a good tax, it leads to a better outcome if you levy it than if you don't, almost regardless of what the proceeds are spent on).

But because the government is in thrall to the land owners and bankers, it does not levy full user charges for land ownership, so to make up the shortfall, it has to turn to what can only be reasonably described as a protection racket/slave ownership.

By levying income tax and NIC on wages and salaries, it takes away 40% - 49% of your earnings (or even more that that if you are an additional rate taxpayer or have student loan deductions) for nothing particular in return. Yes of course, all taxpayers benefit to some extent from government spending, but the benefits any particular taxpayer receives bear little or no relation to how much he pays in; in fact, the ratio is probable negative - those who pay in most get least and those who pay least or nothing get most.

And then there is VAT. What the government does is to take one-sixth of the value of all goods and services which VAT-able businesses provide; or if you are economically illiterate, it charges people a fee on one-sixth for spending their already taxed money in the shops. Again, there is little or no relation between the benefits which the payer gets and the amount he pays in VAT, the only benefit is not having the rest of your goods and services confiscated for non-payment.

So, by taking away up to half of what you earn in income tax, NIC and VAT, you spend half your time working for the government; in economic terms, the government 'owns' the output of ten million private sector workers, it's nowhere near as bad as true slavery, because at least you can choose what sort of job to do, how much to work and you get to keep half of the wealth you generate, but that's only a question of fact and degree. Under current rules, a large chunk of what you are left over with goes on rent or mortgage repayments, privately collected taxes which the government allows landowners and bankers to keep for themselves, which is why simply emancipating slaves without giving them some land does not make them much better off.

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