Zero Tax

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!

PeaceNepal Website

I've being trying to find out what happened to PeaceNepal (see Peace Work post, 7 March 2007). They were, I think, set up in 2005 and are mentioned positively on quite a number of websites. Unfortunately there's something wrong with their site at the moment and it returns a database error message when you try to access it. Apparently it was hacked in 2006, but the current problem could be a fault on the site. Is there any way we get in touch with them to find out what's happening?