taxation
Watson Intriguing Again After Splitters’ Departure, Stoking Anti-Semitism Witch-Hunt
After the departure of the nine Labour splitters, Tom Watson, the deputy leader of the Labour party, is up to his old tricks again trying to undermine Corbyn. Watson to my mind looks like the American comedian Greg Proops, but without any of Proops’ wit, personality or charisma. He’s a Blairite, who is now trying to use the splitters’ departure to try to get his old chums back onto the front bench, develop a separate back bench power base, and then purge Corbyn’s supporters on the pretext that they’re anti-Semites.
Watson was on the Andrew Marr show to peddle his malign views on Sunday. He claimed that he had received 50 complaints of anti-Semitic abuse from MPs, and that he had passed them on to Corbyn. Now today I read in the Metro that he was demanding to be allowed to deal with allegations of anti-Semitism as well as the party secretary, Jenny Formby, because Formby allegedly wasn’t dealing with them quickly enough.
Yesterdays I, for Monday, 25th February 2019, quoted Watson as saying
‘I think he [Corbyn] needs to take a personal lead on examining those cases and, if necessary, recommend to our [ruling body]NEC what has to be done.
‘The test for him as a leader is to eradicate anti-Semitism. It is not Labour party members, who will be the judge of that, it is the British Jewish community.’
He also demanded a reshuffle of the front bench to represent a greater range of views, saying
‘If there isn’t one, I think I’d need to give a platform for my colleagues who want their ideas to be listened to by the current Shadow Cabinet’.
The I’s report about his intention to set up a back-bench group of MPs, ‘Splintering: Deputy leader to set up backbench group’, runs as follows
A new grouping of Labour MPs who are disillusioned with the party’s direction under Jeremy Corbyn is being set up by his deputy Tom Watson.
Its launch, which is expected within a fortnight, is aimed at preventing the trickle of defections of MPs to The Independent Group from becoming a flood.
But the faction will also inevitably be seen as a rival power based to Mr Corbyn’s Shadow Cabinet. I understands that organisers hope to attract more than 100 backbenchers into the group, which will appoint spokespeople and work on policy initiatives.
Meetings will be held within days to gauge the level of support for the group.
‘We need to assert ourselves more than we have done in the last two years,’ said one MP.
Mr Watson said he wanted to ‘give a platform’ to Labour MPs who felt excluded by the leadership.
‘My central point is that the social democratic voice has to be heard, because that is the only way you keep the Labour party unified and prohibit other colleagues from potentially leaving the PLP_ [Parliamentary Labour Party]. The situation is serious,’ he told BBC1’s The Andrew Marr Show.
Of course, Watson denies he is rebelling. The previous article in the I quoted him as saying that he was ‘standing up for pluralism in the party’.
This is just lies and doubletalk. Watson and the 100 MPs he wants to recruit are obviously Blairites, indignant at being forced out of power. They’ve been intriguing against the Labour leader ever since he came to power. They’ve threatened to leave several times before, just as they’ve tried to oust him as leader. But Corbyn is genuinely popular with the Labour grassroots activists, and his policies are immensely popular with the public. Which puts Watson and his fellow plotters in an awkward position: no-one wants their shoddy, mouldy neoliberal economics any longer. People are sick and tired of Labour trying to copy to the Tories as Blair and his coterie did. And the Blairites themselves were a small minority within the party. They dominated it because they seized control of party bureaucracy, just as Stalin and his supporters were able to seize control of the Communist apparat in the former Soviet Union. These backbench MPs may claim to be defending a plurality of views, but they only views they’re interested in defending and promoting are their own. Not Corbyn’s, and not anyone else’s in the party.
As for claiming to be Social Democrats, this is a sick joke. The Social Democratic tendency in the Labour party was the creation of Anthony Crosland. Crosland didn’t want further nationalisation, because he felt it was unnecessary. Its benefits, he felt, could be obtained instead through progressive taxation, strong trade unions and social mobility. Well, thanks to Thatcherism, social mobility stopped under Blair. In fact, I think under the Tories it’s even been reversed, so that for the first time since the late 19th century Marx’s statement that the middle class are being forced down into the working class is true, at least as far as middle class poverty goes. Similarly, Blair, as a Thatcherite, hated the trade unions and passed legislation aimed at destroying their power. With their acquiescence, it should be said. As for progressive taxation, they’re against that as well. Aaron Bastani quoted an interview in last week’s New Scientist with Chris Leslie in his article on the corrupt, compromised policies of the Independent Group. Leslie had said that he was not in favour of a 50 per cent tax rate. This was the tax rate set by Gordon Brown. And I don’t doubt Leslie was alone. My guess is that a number of the Blairites, who still remain in the Labour party, have the same noxious views.
Watson and the other Blarites aren’t Social Democrats: they’re Red Tories, Thatcherites. Any other description of them is a lie.
As for the anti-Semitism allegations, my guess is that it’s just more smears of people supporting Corbyn and standing up for the Palestinians. And when Watson says that Labour will be judged by the Jewish community, he’s not talking about the Jewish community as a whole. He’s talking about the Tory, Zionist Jewish establishment. The Board of Deputies of British Jews, which is monstrously right-wing and which is an explicitly Zionist organisation. An organisation which is morally corrupt and deeply compromised. How else can you describe an organisation which issued nauseating, spurious justifications for the IDF shooting unarmed Gazans last year? Which excludes Orthodox and secular Jews? And which howled with rage when Corbyn spent a Pesach (Passover) seder with the socialists of Jewdas, and claimed this was an insult to the Jewish community?
And the same is to be said about the Chief Rabbinate. The former chief rabbi, Jonathan Sacks, caused shock and outrage when he called Reform Jews ‘enemies of the faith’, like a medieval inquisitor about to launch an auto-da-fe against heretics and Jews. He also considered homosexuality to be a terrible sin and warned his congregation not to join a gay rights march, until he later changed his mind, that is. And he led a contingent of Jewish British thugs to Israel to join the March of the Flags. That’s the day when Israeli ultra-nationalists march through the Muslim quarter of Jerusalem vandalising their homes and businesses and threatening and intimidating them. I see no difference between it, and Tommy Robinson and his odious crew marching into British Muslim communities, or Mosley and the British Union of Fascists goose-stepping into the Jewish community in the East End in the 1930s. And when the Jewish community held their rallies last summer against Corbyn, organised by the Board and the Campaign Against Anti-Semitism, those attending including members and supporters of the Fascist organisations Kach, the Jewish Defence League, and the English Defence League Jewish Division.
Similarly, Watson’s declaration that he wants to assist in dealing with cases of anti-Semitism cases means that he’s unhappy with Formby’s handling of it for other reasons. He wants more Cobynites thrown out through the same spurious reasons that anti-Zionism equals anti-Semitism and that describing Israeli plotting to determine who should be in the cabinet as a ‘conspiracy’ is the same as reviving the smears on Jews as a whole of the Protocols of the Elders of Zion. Oh yes, and that showing a photoshopped image of a Jobcentre with the slogan ‘Arbeit Macht Frei’ on it is another terrible anti-Semitic smear, rather than a justifiable description of the murderous policies of the DWP.
And his demand to decide these cases personally is the precise same tactic Stalin used when he gained power. Before Stalin became leader of the Soviet Communist party, the post of General Secretary was a relatively unimportant position. His comrades thought he was thick, and so gave him the job thinking that he would satisfied purging it of all the drunks and seducers. But as well as getting rid of them, he was also using it to purge his enemies’ supporters and fill it with his own. He’s supposed to have said of the power of elections, ‘It’s not who votes that counts, but who counts the votes’.
Watson is a typical Blairite. He follows Blair and the others as a destructive neoliberal, who wants absolute obedience to a highly centralised, dictatorial party elite. It is not Corbyn and his supporters who should be thrown out, but him and his.
The global fight for genuinely universal healthcare is a fight we can’t afford to lose
GIMMS would like to welcome Jessica Ormerod and Deborah Harrington as its guest bloggers this week for the MMT Lens. Jessica and Deborah, who were recently appointed to the GIMMS advisory board, are directors of the NGO Public Matters which is a research and education partnership focusing on public services and, specifically, the UK’s public health service, the NHS.
Photo by rawpixel on Unsplash
“We should highly value public services because this is created by people for all people. Public services ensure that no-one is left behind to suffer and that everyone has equal access to the services they need”
Jennifer Yu
The Importance of Public Services to keep our society strong and healthy
You can’t have a debate about the NHS without someone saying ‘how are you going to pay for it’. Talk about increasing funding for the NHS and someone will always ask the question ‘how much more tax are YOU willing to pay?’ On the other hand, talk about going to war and there is silence on the topic. Either tax does or doesn’t pay for things and there seems to be a clear contradiction in the public grasp of the mechanism by which governments actually spend. Understanding the basics of modern money clearly defines the real relationship between the different sectors of the economy, the availability of resources and how many of those resources a government chooses to divert to its own purpose. It clarifies that such political decision-making is never about taxing to spend or cutting spending to ‘balance the books.’
From the perspective of the benefits which public services like the NHS provide and how resources fit into that paradigm, it can best be explained in the following way. If the government wishes to build a new hospital but the country is short of the professional and skilled tradespeople to design and build it, or the materials to provision it, or the clinical and associated staff to run it on completion then, no matter how much it is needed, spending money will not create that hospital.
If, on the other hand, there is an existing, staffed hospital serving real existing needs in its community then the government can fund it as long as those resources continue to be available and are needed. To close such a hospital on the grounds of ‘lack of money’ is as false an assertion as to say ‘we’ll have to stop February at the 10th because we’ve run out of dates in the calendar.’
Although Public Matters focuses on the UK’s healthcare system, it is highly conscious of this process being a part of a global move towards privatisation, driven by an economic and political orthodoxy. However, this is not just a UK phenomenon. Across Europe the same orthodoxy is driving the same damaging reform and its citizens are suffering the loss not only of the services which form the foundations of a healthy economy but also the ethos that underpins those services.
The world needs an antidote to the neoliberal orthodoxy which has a firm grip on the way our politicians make their economic decisions. In the same way that Keynesian economics was the antidote to the chaos of the post gold standard years, modern monetary realities in the form of MMT (Modern Monetary Theory) is the same antidote to the challenges we are currently facing. Not just in relation to the decimation of public services and the erasure of the public service ethic but also solving the pressing and urgent issue of climate change and planetary survival.
To put this into a fundamental principle, all money creation, whether by government decree or bank license, is ultimately backed by government, not by the private sector. Regardless of who is in government this radically transforms any understanding of the relationship between the government and the non-government sector compared to the existing neo-liberal polity which places government as a supplicant at the feet of the City. That matters and it is political.
Criticism of MMT frequently comes from those who are defending the economic status quo (defending balanced budgets as an objective in its own right etc) whilst maintaining that they support strong social policies. The reason that we had strong social policies post WW11 was because there was a consensus around Keynes. Privatisation became the order of the day because Keynes was discredited and Friedman took his place in the economic ascendency, the ground having been assiduously prepared in advance by the Mont Pelerin Society.
If we are to reject austerity then this orthodoxy must be swept away. Some believe that rehabilitating Keynes will do the trick, but Keynesian economics is tied to the social, institutional and political conditions that existed pre-1971. That world has long disappeared, and we face new challenges. We need an economic narrative fit for public purpose and for the realities of modern sovereign economies.
GIMMS are pleased to announce that Bill Mitchell will be in London on 1st March to launch “Macroeconomics”, the textbook book he has written with L Randall Wray and Martin Watts. There is limited space at the venue so registration is essential for anyone who wishes to attend. Tickets are free and available here.
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The post The global fight for genuinely universal healthcare is a fight we can’t afford to lose appeared first on The Gower Initiative for Modern Money Studies.
On National Government Spending, Taxation, and Bank Lending in the United Kingdom
Ellis Winningham is a retired US based economist, Modern Monetary Theory advocate and campaigner who works with relentless passion through his website blogs and social media work to inform and raise public awareness of MMT.
In today’s reblog Ellis discusses how the UK Government spends, what taxes are for and how banks make loans. The original post is here.
I: Introductory Matters
The pound is not a scarce commodity; it is actually just numbers on spreadsheets and there is a definite hierarchy of money starting at the top with government money, and then subordinate to that is bank money, and then on down we go to things such as coupons issued by manufacturers. All money that sits underneath government money is denominated in the government’s unit of account – the Pound Sterling – which makes it widely-accepted and which makes it behave like money in the private sector. Put simply, you can certainly buy things with bank money, but the payments for the things that you buy can only be settled with government money. And yes, though you might not think of them as ‘money’, manufacturer’s coupons are monetary instruments. To illustrate why, consider a coupon for £1 off two tins of Heinz beans.
Note that the coupon is denominated in the unit of account (£) and then the face value is declared (£1). In other words, this coupon is worth exactly £1 if you use it to purchase two tins of Heinz beans. What the manufacturer is telling you is that it will credit you £1 for your purchase. It is the same as the manufacturer standing ready to exchange its coupon for £1 if you gave Heinz its coupon back.
Contrary to what Theresa May would have you believe, there is no such thing as ‘taxpayer money’ at the national level. All UK government spending is accomplished through what is called high powered money creation. High powered money (HPM for short), is the technical term for government ‘money’ – central bank liabilities consisting of reserve balances held at the BoE as well as pound notes held in bank vaults. The process of government spending is actually quite simple to understand if we break the process down into three stages: legislative body decision, treasury action, and then central bank action.
II: How UK Government Spending Actually Works
In the first stage, the legislative body (politicians) decides how many pounds the government will spend in the fiscal year. This activity is what you understand to be ‘budgeting’. However, the word ‘budget’ is a misnomer because it implies that the government’s finances are just like a household’s. As the UK government is the monopoly supplier of the pound sterling, it does not require an income to spend. Furthermore, when it spends and taxes, the government is adjusting the supply of pounds up or down which clearly affects private spending and employment, which in turn affects poverty levels, crime rates, rates of physical and mental illness, and society as a whole. By spending and taxing, the government is pursuing a particular agenda that it wishes to see for the UK economy and society. Therefore, the so-called ‘budget’ of the UK government is, in all reality, the ‘fiscal agenda’ of the government of the United Kingdom. Once total spending is authorised, treasury is then directed to spend to carry out the agenda.
In the second stage, treasury makes deposits, crediting bank accounts by simply changing the numbers in the accounts upward via keystrokes. In other words, treasury simply makes the numbers in the accounts larger. For instance, if treasury is paying an individual £4,200 and that individual’s current bank balance is £1,000, treasury merely changes the £1,000 to £5,200 because 1,000 + 4,200 = 5,200.
The numbers in the individual bank accounts are bank money, but treasury doesn’t actually spend bank money. By changing the numbers in your account upward, treasury forces the bank to accept the increase in your available balance. At no time can a bank refuse treasury’s demands. It must comply. The third and final stage is the action of the BoE, where government money is created as an involuntary response to treasury crediting a bank account.
Because bank money must clear on par with the pound sterling in order to settle payments, the BoE is now compelled by treasury’s actions to add government money to the bank’s reserve account, and it does this the very same way that treasury did when it made a deposit: By making the numbers larger in the reserve account. If treasury changed the numbers in an individual bank account up by £4,200 then the BoE will also change the numbers in the bank’s reserve account up by £4,200. The numbers in the bank’s reserve account are government money (central bank liabilities), and again, the BoE automatically does this to ensure that when the account holder spends the bank money, the payment will clear.
In summary, the Bank of England emits government money, but cannot of its own free will just spend pounds (net financial assets) into the British economy because to do so requires fiscal policy: The actions of the legislative body first, then treasury. The BoE has no authority over fiscal policy. It is only authorised by the government to play a supporting, yet important role in fiscal policy. So, to be clear, authority over fiscal policy is reserved for the legislative body alone. Once spending is approved by the body, treasury’s actions then automatically compel the BoE to create and then inject government money into reserve accounts. Taxation is simply the reverse of the process.
III: Taxation as a Monetary Operation
When taxation occurs, your individual bank account is reduced using the same process when treasury spent: The government changes the numbers in your bank account downward via keystrokes. If your bank balance is £2,000 and your tax is £500, then the government changes the number 2,000 to the number 1,500 and, thus, your balance is now £1,500. Next, £500 in government money held in the bank’s reserve account at the BoE is deleted from the banking system, and it is now gone forever. Nobody can ever save or spend that £500 ever again. The banking system now has £500 pounds less and, therefore, there are 500 fewer pounds in the economy. Once government money is deleted, payment of your tax liability is settled and, therefore, the tax liability is extinguished. The important thing to note here is that for you to be able to pay your taxes, you must first have possession of the pounds necessary to do so. Since the UK government alone issues the pound sterling, government spending is actually what enables you to pay your taxes. So, in reality, there is no such thing as ‘taxpayer money’ at the national level. All pounds used to pay taxes to the UK government are government money which came from government spending. Now then, you hear a lot of talk about how wonderful a budget surplus would be. But would it actually be wonderful? Let’s examine that.
Were the government not to spend and just tax, or spend less than it taxed, then the taxation would reduce the number of reserves available to the banking system. If the government continued on this course, a budget surplus would result.
A budget surplus is a condition where the UK government removes pounds from the economy and then destroys them, thus reducing the net financial wealth of the British private sector and the rest of the world in terms of pound sterling. In terms the general public can understand, a budget surplus is the act of the UK government reducing the number of British pounds available for people to save and to spend. Rarely is a budget surplus for the UK government appropriate unless the UK is exporting far more than it imports.
IV: Briefly Concerning Imports and Exports
You see, when the UK imports, British pounds created from government spending leave the hands of British citizens when they buy imported goods and those pounds flow into the hands of the rest of the world. This means that after the government spends, the pounds then make their way out of the British economy, and so, there are fewer available pounds for the domestic economy to save and spend. Should the government deliberately try to run a surplus on top of that, then the government will only be accelerating the reduction of available pounds to the domestic economy. So, when you hear a person say that the government should run a surplus, what they are actually saying is:
“Imports are already reducing the number of pounds available to British citizens, so I’ve got a brilliant idea. Let’s make British pounds leave the economy much faster by having the government step in and strip even more out of the economy through taxation!”
The end result of a budget surplus when the UK imports more than it exports is a recession. The reason for this is reflected in the equation:
(G -T) = (S – I) – (X – M)
where (G) government spending minus (T) taxation is equal to (S) savings minus (I) investment, minus (X) exports minus (M) imports. The above equation is a form of what is called “The Sectoral Balances Equation”, and it provides us with important insight into UK government budget deficits and surpluses.
In layperson’s terms, the equation states that whatever the UK government (G – T) gives, the non-government sector (S – I) – (X – M) will receive, and whatever the UK government takes away, the non-government sector will lose. Therefore, if the UK government runs a £500 billion deficit, then the UK government will be depositing £500 billion into the non-government sector, and so, the result is a £500 billion surplus for the non-government sector because if the government is spending, then somebody is receiving it. In short, somebody’s spending is somebody’s income. The UK government’s spending is the non-government sector’s income. A budget surplus is merely the reverse of the process.
If the UK government runs a £500 billion surplus, then the UK government will be withdrawing £500 billion from the non-government sector, and so, the result is a £500 billion deficit for the non-government sector because if the government is taxing British pounds away, then somebody is paying it with British pounds. Since a budget surplus reduces the private sector’s net wealth in terms of GBP, eventually consumer spending falls, so business income falls, then business lays off labour, and the result is a recession. When this occurs, the budget surplus will automatically become a budget deficit again. In short, again, somebody’s spending is somebody’s income. In the case of a budget surplus, the roles are reversed and instead of the government spending, the non-government sector is now spending to pay the tax. The only difference here is that the proceeds collected by the UK government from taxation are destroyed after the non-government sector spends to pay the tax, because, as you now understand, the UK government is the currency-issuer, it provides the non-government sector with the British pounds necessary to pay the tax, and therefore, it does not have an income. So, why tax?
V: The Purpose of UK Government Taxation
The UK government sits in authority over the entire nation, and therefore, it must endure if we wish the nation to endure. Since we know that the UK government requires paper, pens, computers, chairs, carpet, bullets, aircraft, tanks, buildings, etc., to operate as government, then the question becomes,
“What is the most efficient and certain way that the government can acquire all of the goods and services that it needs to act as government now, and in the future, without fear of one day being unable to do so, and without the possibility of an entity that is subject to its authority, or a foreign one, obstructing its ability to provision itself, thus usurping its authority?”
There are two ways: The uncivilised approach and the civilised approach.
The uncivilised approach is to take what the government needs to operate as government by force. In other words, to waltz into the private sector and force people at gunpoint to hand over their property, and also, to round up citizens, hauling them off against their will to perform work in service to the government.
The civilised answer, put simply, is to operate a monetary economy, creating a market of buyers and sellers, and then issue its own currency to buy what it needs. The UK government operates on the civilised approach.
Now then, in the uncivilised method, the mechanism used to guarantee that the government can obtain the goods and services necessary to function as government is obvious – brutal force. But, with the civilised method, we are left in a bit of a quandry. As the economist Hyman Minsky said, “anyone can create a monetary instrument. The trick is getting it accepted”. So, how then can the government ensure that every citizen and business will accept the government’s currency as payment for the goods and services that it needs to function as government?
It will need some kind of mechanism to compel the nation into accepting its own currency because begging won’t do. After all, the government is the supreme authority and issuing its own currency to buy what it needs means that 1.) it can operate a nation in a civilised manner, and 2.) it can never run out of its own currency, guaranteeing that it can always obtain what it needs to function as government without any possibility of some entity that is subject to its authority, or even another nation, holding it hostage. The government is ready, willing, and able to spend pound sterling into existence to do this and it has an infinite spending capacity, so, what to do? Some measure of force will be required, obviously. But that force must be conditional to be in keeping with a more civilised approach: “If you don’t do this, then I will be forced to become a tad bit uncivilised.” As the supreme authority, it certainly has the power to confiscate property and to imprison citizens.
The UK government will impose a tax burden and let everyone know that if they do not pay the tax, then it will be forced to become rather uncivilised by seizing their property, or imprisoning people. And nobody wants that, right? Right. So, when the people ask the UK government:
“Say man, what will you accept as payment for this tax? Because I don’t wish to lose my property or wind up in the penitentiary.”, the UK government tells them:
“Simple. All you people have to do is to sell me your goods and services to get my pounds. And since I am the currency issuer, I get to decide the price that I will pay in pound sterling for those things that I need, I will spend pounds into existence to pay for them, and you will have the pounds that you need to pay the tax that I am imposing. Whatever is left over after you pay the tax, you can save or use for whatever you wish. You can then buy and sell with my pounds because everyone else in the UK will accept the pound sterling as payment because they need the pounds to pay my tax. Look, don’t freak out, ok? All that I really want to do here is to create a market of buyers and sellers of goods and services which operates on my currency called the Pound Sterling. Imposing a tax is the civilised way to achieve this.”
So, some people begin selling their goods to the government to obtain the pounds necessary to lift the tax burden. The government then decides how much it is willing to pay for those goods in its own currency, and then spends to buy them. Some people sell their labour to the government, the government decides the wage it is willing to pay these workers in its own currency, and then spends the pounds into existence to pay the wages of these workers. Now people have possession of British pounds and they use some of them to pay the tax. They either save or spend the what they have left over. Businesses hire workers, and so, they pay wages denominated in pound sterling and then private sector workers can also pay the tax in case the government places a tax burden on them too. Before you know it, an entire market and nation is operating based upon the UK government’s unit of account. The pound becomes the most widely-accepted monetary instrument in the United Kingdom and now, the UK government has a guaranteed method to supply itself with the goods and services that it needs to operate as government, now and in the future, without fear of ever financially being unable to do so. In other words:
The UK government can buy anything that is for sale priced in GBP without fear of going broke. And all of this is possible because the government imposes a burden called ‘taxation’ on the nation which carries a severe, certain punishment if you fail to comply, and so, a wide-spread desire to avoid the punishment drives the demand for the government’s own currency. Hence, as MMT says, the pound sterling is a tax credit.
Another way of looking at it which might help some of you to understand, is to view the pound as you would a movie ticket. A cinema produces movie tickets, and factually, it can produce an infinite number of tickets if it chooses to regardless of the number of seats available. Now, from your perspective the cinema produces tickets so that you can watch a film. And it does. But it also produces tickets so that it can accept them back. That might sound bizarre, but as bizarre as it sounds, it is still true.
The cinema issues a ticket and promises you that it will accept the ticket back if you have one, thus allowing you to watch the film. If you have no ticket, you don’t get to watch the show. When you hand the ticket to the cinema, the cinema destroys the ticket. Don’t deny it, you’ve seen them do it. They just throw your ticket away. The ticket isn’t the point; the movie is. UK government taxation and the pound function the same way. The government first spends pounds into existence to buy stuff, and then promises all persons who become a target of taxation that it will accept the pounds back, allowing citizens to avoid the confiscation of their property or imprisonment. The government then destroys the proceeds it collected, because the point isn’t the pounds themselves. The point from your view is to avoid punishment, and from the government’s view, the point is to cause you to use the government’s currency. Those who do not have any pounds when the tax man cometh are sort of screwed. Therefore, everyone in the UK will accept the pound for food, clothes, cars, TV, toothpaste and anything else that you can think of.
So, to sum up, taxation is the clever mechanism that allows the government to cause everyone to accept the government’s own currency so that it can use its own currency to buy stuff that it needs. The main purpose, then, of UK government taxation is all about creating and maintaining a demand for the pound sterling, and as long as the UK government can enforce tax collections, people in the UK will demand GBP. Then, there are a few other reasons why the UK government taxes.
Taxation reduces the spending power of the private sector. Let us assume that the UK has reached the limit of the economy’s production capacity and further government spending has pushed past this limit and is creating inflationary pressures. By increasing taxes, the UK government removes pounds from circulation, thus, decreasing the number of pounds available that consumers can spend. As the currency in circulation drops, consumers slow their spending and inflationary pressures drop.
Third, taxation is used to alter behaviour. Smoking is a good example. A cigarette tax raises the price of cigarettes to the point that, hopefully, some people either cannot afford them anymore or simply refuse to pay the high price. As a result, the number of smokers drops. The goal of the tax, then, is to reduce smoking. Consider also small nations with congested roadways. The nation might consider placing a very high tax on car purchases, in order to discourage people from buying cars and to encourage them to seek alternate forms of transportation. Denmark did exactly this, levying a 180% tax on car registration. As a result, people ride bicycles or use public transportation and congestion is reduced. The purpose of the tax isn’t to fund health care and welfare spending, but to modify the population’s behaviour.
Fourth, taxation creates better equity. By targeting large tax increases at the opulent (the extremely rich), while reducing taxes on working and middle-class citizens, the government destroys the wealth built up by the rich in terms of GBP while leaving more GBP in the hands of everyone else, and the result is better equity among the populace.
Fifth, taxation creates unemployment. When the UK government taxes, it is requiring people to pay the tax. Therefore, it is creating a situation where people need to obtain the government’s currency to pay the tax. The way this is usually accomplished is through employment. By taxing, the UK government is causing people to look for employment and the government hires the unemployed labour, using it for public projects. In other words, taxation allows the UK government to provision itself with workers. So, should the UK government wish to hire workers to fill some public purpose initiative, it can use taxation to unemploy labour in some sector of the economy and then hire it.
So, that is the answer to “why tax?”. When it comes to government spending, taxation doesn’t mean revenue; it means what it’s supposed to mean: “a burden”. When the populace complies, the UK government achieves its economic and social goals. The question, then, for tax policy is, “What kind of society do the people want?” and then once the voters speak, the UK government aims its spending and tax policies towards creating and maintaining that kind of society. If the economic and social agenda is persistent involuntary unemployment, underemployment, low wages, poverty, recession, high crime rates, vast income inequality, costly university education, expensive private healthcare and crumbling infrastructure, then the UK government will continue to maintain its current economic policies. If the economic and social agenda is persistent full employment, price stability, decent wages, low crime, better equity, tuition-free university education, a fully-funded NHS, and a modernized, functional infrastructure, then the UK government will alter its fiscal stance and direct its deficit spending and tax policy towards those goals.
VI: A Few Words on Bank Lending
Now that you understand the process of government spending, it will be easier for you to understand what happens when a bank ‘lends money’.
When you obtain a loan for, say, £10,000 from a bank, the bank does not lend you its reserves. It can’t. Banks cannot and do not lend out reserves. To lend, the bank merely does what treasury and the BoE do: It types the number 10,000 into an account. It doesn’t worry about reserves beforehand. It just creates its own ‘money’, which is a bank IOU, to fund the loan. The important point to understand, though, is that the bank ‘money’ is denominated in the government’s unit of account (£). If it were not, then nobody would want the bank’s money because everything is for sale in pound sterling only. Denominating bank money in the government’s unit of account means that when you spend the loan, the bank must then exchange its ‘bank money’ for government money (pound sterling). It is also important for you to understand that until the loan is spent by the borrower, the ‘money’ that the bank created to fund the loan is not yet ‘money’. The deposit must be spent first, and only then will the bank’s IOU behave as ‘money’. Until then, it is nothing but more or less ‘pre-money’ waiting to become ‘money’.
So then, the bank simply creates a deposit and then hopes that you will spend it. And the reason why it hopes that you will spend it, is because when you do, you will be demanding government money. The bank will dutifully exchange its IOU for government money, and because of that, the bank will now be able to earn a profit in government money (interest) when you pay back the loan. Now, let us assume that the borrower will spend the £10,000 loan to purchase something from a seller who has an account at a different bank.
The 10,000 in bank money is spent by the borrower to purchase something from a seller, and when that happens, the 10,000 in the account that was created by the lending bank is changed to zero and 10,000 is then credited to the seller’s individual bank account at different bank. The borrower has the product and the seller has payment, but the payment is not yet settled between the two banks. The seller’s bank needs the £10,000 in reserves to account for the seller’s £10,000 deposit. To accomplish that, government money must now be transferred from the lending bank’s reserve account to the seller’s bank’s reserve account. The reserve accounts are held at the BoE and reserves never leave the BoE.
At some future point when settlement must take place, the BoE will delete £10,000 in reserves (government money) from the lending bank’s reserve account and then credit the seller’s bank’s reserve account with £10,000 to clear the payment. This activity is what we call ‘the payments system’ and it is the job of banks to operate it, and it is the job of the BoE to ensure that it does not collapse by standing ready to provide the banking system with reserves when they are needed.
As you can see, when a bank lends it does not take into consideration its reserves beforehand. It simply creates its own ‘money’ to fund the loan which are denominated in the government’s unit of account (Pound Sterling). Lending activity is not constrained by reserves because, again, banks cannot lend out reserves, and lending doesn’t necessarily leave the bank short of reserves either as each day, deposits and transfers are coming into the bank along with individuals and businesses opening new accounts. It is only when the bank finds itself short of reserves as a consequence of all daily business that it will need to acquire more reserves, and the only reason why is because the bank must operate the payments system – it must ensure that all payments drawn on accounts at the bank will clear. The bank can obtain reserves in a few ways:
1.) Obtain reserves on the interbank market from a bank which has a surplus.
2.) Sell bonds to the BoE.
3.) Borrow from the BoE which is expensive and the most undesirable method.
4.) Attract new customer deposits which is the least expensive method.
In summary, bank lending is not a phenomenon where banks create all of the money and the UK government is broke and helpless. Bank lending is a process that only leverages government money. The bank takes advantage of the fact that government money exists by creating its own product called a bank IOU (bank money) which it then denominates in pound sterling, and then offers to creditworthy customers with the intent to earn a profit in government money by charging a fee called “interest” for using the bank’s IOU to buy a car, house, or anything else for sale in pound sterling. As the borrower makes monthly payments, the borrower is shifting government money to the bank. When the loan is paid off, the original £10,000 principle is returned to the bank’s reserve account, and all interest charges, say, £4,500 are kept by the bank which it divides between a tax account that it maintains to pay any taxes owed, and its equity account.
VII: Conclusion
The thing to note here is that the bank is not earning a profit in bank money. That would make no sense. If banks were the currency issuer, they would not have any use for an income and so there would be no reason to create loans. Bank executives could just create all the money they would ever need and go off to live a life of luxury. Unlike the UK government, banks need to earn an income, and to do that, they must earn the government’s money.
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The post On National Government Spending, Taxation, and Bank Lending in the United Kingdom appeared first on The Gower Initiative for Modern Money Studies.
Automation Is No Threat, But Mainstream Economics and Neoliberalism Are – Part I
I will begin this series with a couple of quotes from confused members of the public who’ve been made to live with an irrational fear of automation.
The post Automation Is No Threat, But Mainstream Economics and Neoliberalism Are – Part I appeared first on Ellis Winningham.
On National Government Spending, Taxation, and Bank Lending in the United Kingdom
I: Introductory Matters
The pound is not a scarce commodity; it is actually just numbers on spreadsheets and there is a definite hierarchy of money starting at the top with government money, and then subordinate to that is bank money, and then on down we go to things such as coupons issued by manufacturers. All money that sits underneath government money is denominated in the government’s unit of account – the Pound Sterling – which makes it widely-accepted and which makes it behave like money in the private sector. Put simply, you can certainly buy things with bank money, but the payments for the things that you buy can only be settled with government money. And yes, though you might not think of them as ‘money’, manufacturer’s coupons are monetary instruments. To illustrate why, consider a coupon for £1 off two tins of Heinz beans.
The post On National Government Spending, Taxation, and Bank Lending in the United Kingdom appeared first on Ellis Winningham.
Understanding Money, Federal Spending, and Federal Tax Liabilities
Using common terms to facilitate understanding with the general public, the dollars required to pay federal taxes do not come from the private sector. They do not come from the rich, the middle class, the working class, the poor, large corporations, medium-sized businesses, small businesses, nor do they come from foreign entities such as China. All dollars used by the US private sector to pay federal taxes come from the US federal government. In short, you do not fund the US government, the US government funds you.
The post Understanding Money, Federal Spending, and Federal Tax Liabilities appeared first on Ellis Winningham.
Why fixing poverty and inequality does not depend on a benevolent global wealthy elite
Photo by Steve Knutson on Unsplash
“Any man can make mistakes, but only an idiot persists in his error,” said the Roman philosopher Cicero. Now that we know how inequality harms the health of societies, individuals, and economies, reducing it should be our top priority. Anyone advocating policies that increase inequality and threaten the wellbeing of our societies is taking us for fools.
Kate Pickett and Richard Wilkinson
Why Inequality is bad for your health
Oh, the irony! Two worlds collide. Davos and the World Economic Forum versus the planet and its citizens. As David Attenborough hosts a series of talks on the dangers of man-made climate change and Oxfam shines a light on growing global wealth inequality, an estimated 1500 individual private jets fly into the Davos summit which is gridlocked all week with limos while the global elite sport their freebie ‘I’ve been to Davos’ blue bobble hats and quaff champagne. It contrasts starkly with the world outside the bubble. A world where climate change is making its presence felt in extraordinary climate and weather events from drought and crop failures to storms, floods and rising sea levels, extreme temperatures and forest fires and the threat of ocean warming. A world where the damaging effects of a deliberately manufactured and growing gap between the world’s poorest and richest is made worse by climate change threatening to drive hundreds of millions of people into more poverty or into refugee status. It is a stark and unsupportable future we face without direct and urgent action now.
The corporations, politicians and rich elite in Davos pay lip service to it, whilst divvying up the resource spoils ever more unfairly at huge expense, not in financial terms but in costs to the health of citizens and the survival of the planet. The global elites have it well and truly all sewn up in their own favour, it would seem.
Last October in one of its first blogs GIMMS reported on the IPPC’s (Intergovernmental Panel on Climate Change) comprehensive report on the state of the climate which warned that we only have 12 years left to halt the worst effects of climate change. Regrettably, those warnings may not even reflect the true seriousness of the challenges we face as the clock ticks on and our leaders behave as if time were not of the essence. As the new leader of Brazil, Jair Bolsonaro, commented at the collapse of a dam which killed many workers a few days ago and which seems to reflect a common position ‘Environmental protection shouldn’t interfere with growth’. An ostrich with its head in the sand approach is being taken by our leaders, and not just the worst tyrants, at a time when the capacity of our natural world to support life is threatened.
And whilst the planet starts to behave like a fortress under siege, people are bearing the brunt of government choices led by orthodox economic ideologies which suggest that the rich are the wealth creators, that the state has only a minimal role to play in the economic success of a nation and that a lack of money is stopping government acting in the public interest. The shift of surplus value from labour to capital has left wages stagnant and working people ever more exploited and the foundations of civil society under threat.
Oxfam estimated in its 2019 annual report, released just before the Davos forum got underway, that 26 of the richest people in the world owned as much wealth as the bottom half of the world’s population put together. In 2018 it noted that 42 people held as much wealth as the poorest half of the world’s population and that 82% of global wealth generated in 2017 had gone to the wealthy 1%.
In 2018 it called on world leaders to tackle tax evasion and boost the pay of workers. This year it suggested that “a wealth tax on the 1% would raise an estimated $418bn (£325bn) a year enough to educate every child not in school and provide healthcare that would prevent 3 million deaths”.
Nobody can deny the well-meaning intent. Equity is of paramount importance. But it is regrettable that Oxfam and other well-intentioned commentators from politicians to journalists and economic institutions focus on collecting tax to remedy not just this injustice but also to deal with the threat posed by climate change to the planet’s survival. If they did but know it, they are limiting the very action government could take to remedy these very serious issues.
Of course, most people believe that a government must collect tax (of whatever kind including National Insurance), or borrow, to cover government spending; how government provides public services, the NHS, the education system or pays for the social welfare which covers our pensions, unemployment and disability benefits. It’s a natural assumption which is understandable. However, a tax on the rich, which no-one should doubt is needed for reasons of equity and to redistribute wealth and resources more fairly, will not raise a bean towards the capacity of any currency issuing government to spend on education or indeed healthcare. In fact, a government which issues its own currency (in our case the £ – or it could be the dollar or the yen) has no need of the tax of the rich or anyone’s tax for that matter in order to spend. Indeed, logically, a government must spend the money into existence first before anyone can use it to pay their tax. This reveals the nonsense of the tax and spend narrative.
The story we’re constantly told is that we should ask the rich to pay for services to the poor in a Robin Hood kind of way; a sort of charitable donation or obligation on the rich to make a generous contribution to society. The implication is that without such contributions the state could not provide the public infrastructure on which we all depend. Society, however, is not dependent on the rich man’s benevolence. It depends instead on a government acting to protect the interests of all its citizens through reducing income inequality which has very destructive consequences on the health and well-being of people.
Of course, there will always be those who say that objecting to excessive wealth is just the politics of envy. However, we only have to look around us, on our streets and in our communities, even in our close or extended families, to see the destructive effects of income inequality. It is important to counter the arguments that the blame lies with individual irresponsibility. Excessive wealth has given a few people undue control, which enables them to buy influence in the corridors of political power. It enables them to appropriate an unfair share of the world’s natural resources and exploit those who labour to create the real wealth which sustains us.
The bottom line is that all governments make choices about their spending priorities which have nothing at all to do with the state of the country’s finances or whether it has collected enough tax to fund public services. They make their choices based on their ideologically driven political agendas. Neoliberal governments across the world have chosen to inflict damaging fiscal austerity on their citizens, which has driven the rising poverty and inequality which charities aim to address.
Yes, let’s tax the rich for equity, and to allow a fairer distribution of our wealth in terms of real resources, but it’s time for charities such as Oxfam to recognise that their taxing the rich to spend narrative does not represent the options open to any sovereign currency issuing government when making policies to deal with the challenges we face. This is a political issue driven by ideology and it’s time for those with public voices to get up and say so.
It really is time for change.
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The Myths and Legends of Hypothecated National Insurance
Over the last few days there has been a story whizzing around social media that our National Insurance contributions are being used to pay off the national debt. The Fund, as revealed by John Prescott in 2015, supposedly contained £30billion of spare money which at the time it was said could be used to save the NHS. Now it is being claimed, falsely, that the surplus fund is being used to pay down the national debt.
There is a fundamental public misunderstanding about how governments spend, the role of taxation (and after all National Insurance is just another tax) and even what the national debt is. The myth about government needing to tax or borrow in order to spend persists in the public mind. However, a government which issues its own currency, neither needs to tax nor to borrow in order to spend and shock, horror that big bad national debt burden is nothing but our savings and no threat at all for today or future generations.
In this excellent blog, originally published here, Public Matters tells the real story about NI from its history to the present day. With a better understanding of how National Insurance works, the questions about how public programmes will be paid for can move from it being dependent on prevailing financial conditions to a question of political choices and ideology.
There are pressing reasons for understanding a bit about how our tax system works and very specifically what National Insurance is. NI is used as successive governments’ tax increase of choice because of a widespread and mistaken belief that it is a direct payment to the NHS. The Liberal Democrats had it in their 2017 manifesto, Gordon Brown put 1p on NI to ‘pay for’ the NHS, Frank Field (Labour) gave evidence on NI to the Lords Committee on the long-term sustainability of the NHS and his website says he is working on this issue with Oliver Letwin (Conservative) and he wants to restore a ‘something for something’ society.
Frank Field’s website says: ‘Polling last year found that while 42 per cent of the public would support an increase in tax to pay for a larger National Health Service budget, this figure climbs 11 points, to 53 per cent, once the public are asked about an increase in NI contributions.’
One of the most recent additions to this proposition was in an ‘exclusive’ from the Daily Telegraph (18 March 2018 paywalled): “It is understood there is now broad agreement within the Cabinet that extra money must be provided for the health service. Some ministers have privately suggested an across-the-board rise in National Insurance to provide new ring-fenced funding for the NHS. However, The Telegraph understands that officials are drawing up plans for a more targeted tax rise on older workers as part of a new 10-year funding plan for the NHS championed by Jeremy Hunt, the Health Secretary. One idea under discussion is to make the 1.2 million pensioners who keep working past 65 to pay NI contributions. The move would raise £2 billion per year which could be spent on the health service. Scrapping universal free prescriptions for the over-60s is also under discussion.”
The Telegraph article incorporates many of the issues frequently raised when talking about how to pay for the NHS. These arguments have muddied the waters about how public funding is allocated giving rise to political decisions being made on the spurious grounds of ‘affordability’, ‘sustainability’ and ‘no money’. And it has led to campaigns and petitions calling for 1p in the £ tax or the hypothecation of NI to ‘pay for the NHS’.
Here we make the argument that this is not only misleading but it will undermine rather than support the NHS.
A political consensus – can we afford the NHS if the public won’t pay more?
Earlier this year, thousands of NHS campaigners marched and rallied across the country in protest at the de-funding, cuts and privatisation of the NHS. Anyone who isn’t an NHS campaigner could have been forgiven for missing it, it was given so little press attention.
In contrast, two days later the BBC gave headline space on its flagship news programme, Radio 4’s Today, and on BBC One’s Breakfast, to the Liberal Democrats’ perennial call for NI to be increased for the NHS. They are also calling for NI to be converted into National Health and Social Care Insurance – which they refer to as a hypothecated tax.
Simon Stevens has argued for different funding sources too:
“Would intergenerational fairness support a further increase in the share of public spending on retirees, at the expense of children and working-age people? Should it be easier for families to flexibly fund social care by drawing down resources tied up in housing, pension pots and other benefits?”
A little bit of history (but not too much)
Funding was a key issue in all the prototype versions of the health service that finally became the NHS. The debate about how to pay for the NHS was based around three elements, all of which are reflected to greater or lesser degrees in other healthcare systems around the world today.
These were (and are):
1. The Exchequer should pay a proportion via government run national insurance.
2. Local authorities should pay a proportion from the rates (council tax).
3. People should make a contribution from their own pockets -usually as some form of insurance.
Combinations of these are used across the world in a system known as the Bismarck Model.
NI already existed for working people in the UK before the creation of the Welfare State. It gave an entitlement to unemployment benefit, seeing a doctor and some pension benefits. But Prime Minister Clement Attlee supported Aneurin Bevan’s desire to break the connection with insurance to bring in something quite different for the NHS – and unique in a Western democracy. The NHS was to be paid for in full by the Exchequer. It has caused complaint and consternation ever since about its affordability – ‘growing and ageing populations’ have always been seen as a threat to its survival. Yet it has been consistently one of the lowest cost universal healthcare systems in existence. And that has been largely as a result of this direct funding method.
In 1952 Bevan wrote ‘In Place of Fear’ a remarkably modern set of essays showing that the questions about funding, who gets access, what should be provided are perennial and instantly recognisable across the years. He writes one of the best explanations of why NI was not chosen as the method of payment:
“When I was engaged in formulating the main principles of the British Health Service, I had to give careful study to various proposals for financing it (…) what was to be its financial relationship with national insurance; should the health service be on an insurance basis? I decided against this. It had always seemed to me that a personal contributory basis was peculiarly inappropriate to a national health service. There is, for example, the question of the qualifying period. That is to say, so many contributions for this benefit, and so many more for additional benefits, until enough contributions are eventually paid to qualify the contributor for the full range of benefits.”
So, to answer Bevan’s question, what is the NHS’ “financial relationship with National Insurance” in 2018?
Given the number of people who respond on social media to questions about funding the NHS by saying, ‘I pay for it already with my National Insurance’ – it looks as though the question is answered in popular consciousness, if not in reality.
It might surprise people to learn that the National Insurance Fund (NIF) today is used to calculate employment related and pension benefits, as it did before 1948. It doesn’t include paying to see a doctor! This Fund supposedly contains £30 billion of spare money. You may have seen the petition to parliament asking for the release of the money to save the NHS. John Prescott, former Deputy Prime Minister, was the person who discovered this ‘secret’ in 2015. But, like many things which have an eternal life on social media, it isn’t quite true.
Bevan talks about ‘the qualifying period’ for NI. NI still has qualifying periods for the various benefits it covers.
According to the government website the list below is what NI is for. Each of the benefits listed have different numbers of contribution years needed to be able to claim them. For example, it takes a minimum of 10 years contributions to earn entitlement to any state pension at all and 35 years to earn full entitlement. State pensions aren’t like private pensions. There is no personal money pot built up. Instead your contribution to society through your earnings is a social contract. There is an expectation that, having contributed through your working life, the government of the day will honour the contract when you retire.
Benefit
Class 1: employees
Class 2: self-employed
Class 3: voluntary contributions
Basic State Pension
Yes
Yes
Yes
Additional State Pension
Yes
No
No
New State Pension
Yes
Yes
Yes
Contribution-based Jobseeker’s Allowance
Yes
No
No
Contribution-based Employment and Support Allowance
Yes
Yes
No
Maternity Allowance
Yes
Yes
No
Bereavement Payment
Yes
Yes
Yes
Bereavement Allowance
Yes
Yes
Yes
Widowed Parent’s Allowance
Yes
Yes
Yes
Bereavement Support Payment
Yes
Yes
No
The NHS is conspicuous by its absence from the list above.
In the late 1970s over 65% of all unemployment benefits were based on contributions from previous employment with 35% being means tested. Today it’s almost the mirror image and contributory benefits are now just over 42% of the total.
Why do people say that National Insurance pays for the NHS?
Most people will remember Gordon Brown, when he was Chancellor of the Exchequer, saying he would put 1p on NI to ‘pay for the NHS’. There is that claim from John Prescott that he had ‘found’ £30bn in the NIF ‘for the NHS’. And the Liberal Democrats – along with Labour’s MP Frank Field – insist that NI should be changed to fund the NHS and Social Care as a hypothecated tax.
Is it any wonder that people believe that’s how the NHS is paid for, with so many politicians saying it is, or should be?
There is, in fact, a difference between the NIF and the National Insurance Contributions (NICs) collected. And the difference illustrates the confusion that exists about the tax system. At this point it is worth pointing out that, despite any statements to the contrary, NI is just a tax.
The Government Actuary’s Department has estimated that NICs will raise just over £125 billion in 2017/18, of which £101.8 billion will go into the NIF and £23.7 billion will go to the NHS.
What is accounted for in the NIF, as explained above, is the estimated amount of contributions needed to pay for the contributory benefits including pensions. Any excess over that amount is supposed to ‘go’ to the NHS, but it isn’t equivalent to the amount of funding the NHS needs. It is simply accounted for in the Consolidated Fund at the Bank of England which is a record of all the Government’s spending and receipts.
This brings us to the central issue of why politicians insist on making the link between the NIF and the NHS. At its most basic it is because politicians believe that if the public think that the tax is being spent directly on something they want and have a direct interest in (working benefits, pensions, health) they are less likely to complain when that particular tax is increased. And why do they believe it? Because countless polls tell them so. They also like going to the polls saying that they will not increase income tax – that’s a huge vote loser. But a manifesto commitment on ‘income tax’ can be neatly circumvented by increasing the other income tax – NI.
Is National Insurance a hypothecated tax?
A true hypothecated tax is one in which the tax is ring-fenced for a named service and pays for all that service. This system effectively enforces a spending cap on the service being paid for as it limits spending to an equivalent of the tax levied. That’s very difficult to do when necessary spending is required before the taxes are received. It’s also difficult to define the ‘whole’ of a service.
The NIF appears to be hypothecated. Its rules say that the Fund must always contain enough contributions to meet all its obligations as listed above. To this end it must have a reserve in hand (John Prescott’s £30bn ‘secret’). But the Treasury also makes grants available to the NIF to make sure it keeps to its rules when it doesn’t have enough contributions coming in. A further adjustment is made between the balances in the England & Wales account and the Northern Ireland account to make sure they both represent the right amounts for their relative constituencies. Yet more adjustments are made because the Department of Work and Pensions and the Department of Business, Skills & Innovation both make payments out of their own budgets for the benefits accounted for under the NI scheme so transfers are made between them to equalise the accounts.
There is also an excess of receipts required to fulfil the contributory principle over the course of the accounting year and that doesn’t go into the Fund at all. It is not a genuine hypothecated tax. It is a bookkeeping exercise.
If NI is just a tax and it isn’t hypothecated, what’s the point of it?
Historically people had a direct link between their NI contributions and the benefits that accrued to them as a result. Pensions retain that historic link, with a defined minimum and maximum number of ‘contribution years’ required. In and out of work benefits for those covered by the NI scheme also have minimum contribution periods. It is the contributory principle that makes NI difficult to abolish. Income tax is simply recorded as an annual amount, no matter what the source of the earned or unearned income. NI, on the other hand, is recorded as the number of consecutive weekly contributions. It is the appropriate number of full years in a given period that defines eligibility for the benefits.
People who take breaks from paid employment for any reason and therefore have a break in their contributions may receive a letter asking if they wish to make a voluntary payment to cover the missing contribution period. That couldn’t happen with income tax. Getting rid of NI therefore leaves a problem of how to calculate eligibility for contributions-based benefits.
NI hides the true levels of income tax
The headline rates for income tax are currently set at 20%, 40% and 45%. This looks as if we have a very fair system where the lowest earners only pay half what higher earners pay. However, if NI is added to income tax the picture looks very different.
NI (tax!) starts below the personal allowance level.
Income bracket
Income tax rate
NI rate
Total tax
£8164 – £11,500
0%
12%
12%
£11,500-33,500
20%
12%
32%
£33,500-£150,00
40%
2%
42%
£150,000 +
45%
0%
45%
People often call NI a regressive tax because it doesn’t increase with higher earnings but what is far worse is that it masks the real differentials between the rates of taxation. The lowest rate is quoted at 20% and the higher rate at 40% which leads people to reasonably believe that lower earners are not carrying the burden of tax but as the real figures are 32% and 42% respectively then it is a far less fair system.
So, when campaign groups call for a penny on income tax to fund the NHS or that there should be further increases in NI they may not be aware of how serious the impact is on lower paid workers. In 2016-17 a fraction over 31p in every £ of tax collected was income tax. NI accounted for just under 22p. The rest is accounted for by other taxes.
Inter-generational Fairness – a concept designed to persuade people that you don’t get what you don’t pay for
Over recent years there has been a change in the general understanding of what the economy actually means. Politicians talk as if the economy consists of the private sector and its wealth creation with government wholly dependent on the taxes raised from that wealth creation. Government expenditure is framed as money lost or wasted or a drain on the economy. The tax ceiling is used as a whip to limit government who must be vigilant against overspending or allowing ‘debt’ to get out of hand. It also tends to focus on income tax and NI to the exclusion of other taxes.
This is the narrative that explains why services need to be reduced or more paid for them by the public. It creates an obligation on those who cost most to be asked to contribute more for the sake of ‘fairness’ and ‘not burdening the state’. It makes means testing into a harsh system of proving you really need state help before you can get it. It reflects Frank Field’s ‘something for something’ idea that you don’t get what you don’t pay for. It is the political and moral opposite of the NHS.
Far from ensuring intergenerational fairness, this system forces the burden of payment for the NHS on to people in paid employment who are paying NI as this tax is not paid on unearned income nor by various other income groups.
The idea of expanding NI to retirees and of extending its range, making it more progressive, also ignores the contributory element. The regressive nature of NI is directly attributable to its contributory nature. Once you have paid ‘enough’ to meet the contributions threshold there is no justification for levying any more, as there is no more additional benefit to be ‘earned’.
This is the landscape that gives rise to the NHS Five Year Forward View with its voucher scheme for maternity and personal budgets for disability and now for the Liberal Democrats arguing for a National Health and Social Care Insurance for older people. Asking pensioners to pay NI when they already made their contributions to earn the status of pensioners is clearly nonsense and anything but fair, but you can change that argument if you change the purpose of the tax.
An insurance-based health and social care system
The Liberal Democrats report says:
“we .. believe that an NHS funded by national taxation continues to be the best option for delivering our healthcare system, and so we decided early in our discussions that we would not explore options for an insurance-based health system as a means of raising additional revenue.
…. thanks to great strides made in tackling pensioner poverty, after housing costs pensioner households are far less likely to be in poverty than households of working age, particularly those with children.
For this reason, we suggest policy makers consider ending the exemption from paying NICs for people who continue working past the state pension age. NICs could either be equalised with the rates paid by the rest of the workforce, or introduced at a lower rate.
(…) this is the age group who are the biggest users of health and care services and, as described in the section on income tax above, on many measures this group of workers are proportionately better off than younger generations.”
Like many of the issues we have examined in this blog these statements appear to superficially make sense regardless of whether or not you agree with them. But health and social care now form part of a single government department and the NHS and local authorities are being brought together within integrated systems with combined budgets.
Despite saying they would not explore options for an insurance-based health system, the Liberal Democrats’ focus on paying some form of insurance for health and social care actually means converting NI to a state insurance scheme. They are calling for Theresa May to back their scheme. This would transform our Bevanite state-funded NHS into a Bismarckian system. Currently healthcare is free at the point of need and social care is means-tested, which brings an element of uncertainty to what exactly is to be covered by this insurance.
If this were simply an argument about tax there are, of course, many other forms of tax. It takes experts to calculate the changes in government receipts and the effect on households when tax thresholds are raised or lowered. That is what would be being considered if this was about changing our tax structures or raising taxes in general.
But this is not an argument about tax. This is an argument over the role of the government.
While it may appeal to many to call for increased taxes to ‘fund’ the NHS what we really need is to understand how public funding works. The root of the problem does not lie in our tax system. It lies in public policy decisions.
If you are asked to sign a petition or support calls for a hypothecated NHS & Social Care NI or for 1p in the £: just say ‘no’.
For further reading:
Post crash economics and ‘Professor’ George Osborne
Jeremy Hunt calls for increase in tax to pay for Trident
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The post The Myths and Legends of Hypothecated National Insurance appeared first on The Gower Initiative for Modern Money Studies.
How to Trick Rich People into Paying Their Taxes
Maybe they’ll invest in a “wealth-sharing” start-up.
