At a recent Peace Party meeting we discussed the Party's position on taxation. I happened to mention an idea for financing public expenditure without taxation, or at least without taxation as we know it. The only flaw I can see in the idea is that public scepticism would make its implementation political suicide. Still, I'm pretty sure Keith asked me to put an explanation on the blog, so here it is.
Scenario A
Suppose I earn £1000 and my effective tax rate is 30%. This means I 'take home' and spend or save £700, and the government 'takes' £300. Let's assume for the sake of simplicity that the gvernment spends its £300 wisely and that as a result the benefit I receive from that expenditure is £300, so I haven't lost anything. (This assumption isn't essential to the argument, but I include it to avoid getting sidetracked into arguments about the principle of taxation, which this approach doesn't challenge.)
Scenario B
Now suppose that instead I earn £700 for exactly the same work, but I tell the government about it, and the government responds by printing £300 for its own use, making a total of £1000 between us. It spends its £300 wisely, as before, and there is no difference in the amount of work done, the amount of money spent, what it is spent on, or who it is spent by.
Scenarios A and B have exactly the same effect on the economy. There is one proviso - we must also end up with the same amount of money in circulation (£1000) which implies that there must originally only have been 70% as much in scenario B as in scenario A. At first sight this requirement might seem to create a difficulty, because my employer has only £700 available to pay me with - but of course that's all he needs, so everything's OK.
What About VAT?
Income tax can be described as subtractive, since it appears to be taken away from the the person who earns it. Purchase tax - i.e. VAT in those countries that have adopted it - is by contrast additive. Interestingly, it doesn't have to be like this: you could apply VAT to wages, and you could equally well levy a subtractive tax on purchases. Somehow it feels more 'right' as it is though, which goes to show what a psychological business taxation is.
Anyway, the fact that VAT is additive makes it even easier to translate into the alternative system. Where I might have priced my goods at £100 and sold them at £117.50 just so that I could give the extra £17.50 to the government (to spend on my behalf, etc., etc.), under the new system I price the goods at £100 and sell them at £100. The government prints the £17.50.
Similar considerations about money supply apply as in the subtractive case, but in reverse. However, it's getting late and I've used up too much of Keith's blog already, so I think I'll leave that, and sorting out all the other complications I've conveniently ignored, as an optional exercise for the reader!
2 comments:
David
It's a fascinating idea and I've been trying to get my head around it. As you say the important point is that there is no more money in circulation at the end of the day. But how do you ever get the scheme started?
If the employer only pays me £700 that leaves him or her with £300 more at present. Or am I missing something?
For the Government to start by printing money would be inflationary - and if you are not careful you end up with the situation of Zimbabwe today with hyper inflation because the Government is printing money to pay its way as taxes have collapsed.
Anyway I'm really glad you have put this up and hope we might have some discussion over it.
I'll see if I can get this blog linked to the Peace Party web site.
Second Attempt - I just realised I hadn't answered all your questions.
"But how do you ever get the scheme started?"
Good question. First you'd need public acceptance, and I've no idea how you'd get that. Next, you'd have to abolish (say) income tax, while at the same time reducing everyone's gross pay to their current pay after tax - in other words their take-home pay would stay the same.
During the setup phase money would have to be removed from the system. This could be done by employers paying the equivalent of the employees' tax directly to the government instead of to the employee - or something like that.
You wouldn't have to do it all in one go. You could reduce tax (and gross pay) a bit each year until it was all accounted for.
It would still be necessary to fill in the equivalent of tax returns so that the government would know how much money it could safely print, but these would now just be declarations of income - payment of wages would become more like a normal purchase.
Having dealt with income tax we could then, perhaps as a separate process, apply similar principles to VAT and other forms of taxation.
"If the employer only pays me £700 that leaves him or her with £300 more at present. Or am I missing something?"
The process goes right back to the first transaction the employer made. All the transactions in the chain would be affected in the same way, so he would only have £700 to pay me with anyway, instead of £1,000. But remember that £700 buys as much work as £1,000 did when taxed at 30%, so that's OK.
"For the Government to start by printing money would be inflationary - and if you are not careful you end up with the situation of Zimbabwe..."
Different situation altogether. The Zim government just prints money because it needs it. As this has no relation to the underlying value of the economy (which in fact is diminishing as rapidly as the money-supply is increasing) the effect is inflationary. This is why we would still have to tell the government how much we earned/were paid.
This thing to remember (as I see it) is that the present situation is a convenient fiction. We think we earn £1000 and give the government £300 (or whatever). We never see the £300; our employer 'saw' it, but couldn't touch it; in reality it was the government's all along. My suggestion would merely simplify the bureaucracy by short-cutting the path between the creation of the money and its eventual expenditure by the government.
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