In today’s issue:
- Money grows on trees. How do you avoid picking it?
- Taxpayers of the world, unite!
- Income tax doesn’t dominate revenue
My 1-step plan to balance the budget (every year) burned a hole through the reader mailbox. Here are some highlights provided by you…
I absolutely agree with your concept of linking the spending in people’s (individuals’) minds.
Invariably we (including the broadcasters and journalists) speak of “government spending”, “they” provide this or that benefit, “Labour will raise wages”, “Conservatives will give tax breaks”.
The biggest mental reset that we could apply would be to substitute ‘we’ for “they”, ‘our budget’ for “government spending”, ‘I will give my neighbour a tax break, a benefit increase’ for “this or that party will magic it out of the bottomless state pirates’ chest”, etc., ad infinitum.
Regards and thanks for a thought-provoking idea.
F.B.
The trouble with this argument is that it’s based on a false assumption.
The awkward truth is that money does grow on trees. Well, central bankers can create as much as they like out of thin air in the system we have today. To that extent the MMT crowd are technically correct. You don’t need to tax other people to pay for government spending. Government can just print the money it needs wants.
The hard part is convincing people it’s not a good idea to use this money printing power to finance government spending. Because that creates inflation.
But it’s a trade-off. You can tax or you can print the money.
The big question is what constraints society puts in place to prevent governments from printing money. That’s why we have independent central banks which promise not to do it. The Europeans placed such limits in the Maastricht Treaty. Neither is working very well lately. Central bankers printed up a storm and gave us double-digit inflation despite the rules.
I’m suggesting a different route to the same limit on money printing: balance the budget, by law, to avoid the need to print money in the first place. Then it really would be “our money” that’s getting dished out.
A.M. points out that the system I propose would be a rather radical shift:
Nick,
I love your idea in theory, but I can’t see it ever happening in a democracy as too many people vote for short-term personal self-interest rather than the long-term benefit of the country.
To get the system started would presumably require several years of high taxation and austerity to achieve the first balanced budget, which would then be the benchmark for future years. It’s not exactly an election winner!
Also, it would require a political party that was committed to discipline in public expenditure. This is certainly not the new Labour Government or the present centre left Conservative Party.
I look forward to the time in future when benign dictator Hubble is in charge, when we might make some progress!
Thanks to you and your colleagues for your very informative postings on Fortune & Freedom. I’ve learnt a lot since I’ve been subscribing. Keep up the good work.
Best wishes
A.M.
The whole point of the plan is that people who vote for short-term personal self-interest get taxed for it. So it doesn’t work anymore.
I don’t think the plan is a vote winner yet. But we are facing a debt crisis that will morph into a long-term inflation crisis.
Voters will be forced to choose between a plan like mine, austerity, or high inflation, whether it’s popular or not. So I suspect it’ll become more popular in the future. When people lose trust in politicians’ ability to run the country’s finances and look for a way of keeping their spending low.
The point of the plan is that it turns the Labour and Conservative parties into fiscal conservatives by the back door. The political incentives become to spend less. And taxation is really just a function of spending, however delayed by borrowing.
I suspect that the plan would trigger an immediate vast cut in spending so that tax rates do not spike in the first year. Argentina is achieving this now. I didn’t think it was politically possible until it did it.
This reader reckons we might be close to the crisis that triggers the choice:
Nickolai
Brilliant idea and guaranteed vote winner, but it will never be enacted. That said, you are right when we you state that something has to give and soon. As you have noted, we can’t go on mortgaging our future as the bond market won’t tolerate it.
Keep up the great insight.
Regards,
B.F.
A lot of readers sent in a comment like this one:
Like every commentator on taxes and voting, and I thought you were better than the average, you do not talk about the significant number of people who do not pay taxes (I exclude NIC on purpose) are paid directly out of taxes, and they don’t give a damn about tax levels.
J.M.
This is an important point for my plan. It works by connecting tax rates to government spending as an incentive to cut the spending. But J.M’s point is that a lot of people would be immune to the incentives because they don’t pay tax. So they get to vote on spending without feeling the impact.
But that’s true of today’s system too. So it’s no big change.
G.W. explained the challenge in more detail:
Hi Nick,
Thanks for the article and the interesting suggested solution to balancing the public sector budget. It does have a lot of merit albeit likely to be very controversial.
The challenges that such a system would face include the following:
- A significant proportion of the population are net recipients of state funding but don’t pay any income tax. It would be grossly unfair to only charge the income tax payers for expenditure that they don’t benefit from. Maybe reduce state benefits by a similar percentage to the increases in income tax?
- A major contributor to public sector revenue is VAT, which many more people pay than pay income tax. Unless VAT was adjusted in a similar way to what you’re suggesting, the increase in income tax would be disproportionately high.
- If you retrospectively increase income tax with a one off charge for the previous year, many people won’t have the funds available to pay. How would you collect that money and how much do you expect to have to write off? Maybe just collect the amount over the course of the next tax year using the PAYE tax code system that currently seems to work well?
You have my permission to quote the above and to use my initials.
Keep up the good work.
The issue here is that my idea requires only a small portion of total taxes to fluctuate to balance the whole budget. Thus, a small increase in government spending would amount to a large increase in the income tax rates we get hit with.
I didn’t realise how small a share of taxation income taxes are – only about a quarter of the total tax take. That said, national insurance contributions are 18% and they could easily be lumped into the same system.
Corporation tax is another 10%, and that could be on a floating rate also, with its own reference bracket.
VAT could rise and fall in anticipation of what it’d take to balance the budget in a year. VAT could be fixed at the same rate as the lowest tax bracket, for example. (You can’t adjust VAT after the fact because chasing down the consumers who paid it would be a bit of a hassle…)
CGT could be adjustable too.
But perhaps the best way is to raise and lower the income tax threshold. That happens on occasion already too.
J.G. makes an awkward point:
Dear Nick
HMRC cannot keep abreast of the present fairly static tax system. However do you imagine they would cope with a major re-evaluation every year? It’s totally impractical. They cannot chase up the million or so tax dodgers now – how many more will there be with that variable approach.
No thanks Nick, I don’t think so!
Best Regards
J.G.
Given the need to complete tax returns regardless, I don’t think it’d be a big change in workload to adjust tax rates. Tax rates change on occasion anyway.
That said, you have humiliated me by pointing out I’m assuming the government could set all this up properly…
Another J.G. has a better idea than mine anyway:
I also reckon 6 ordinary housewives should be put in charge of the Treasury: they would know about the result of overspending and therefore not allow it. It’s so easy to be profligate with other people’s money.
So much for “benign dictator Hubble”. I knew it wouldn’t last.
Until next time,
Nick Hubble
Editor, Fortune & Freedom
