Unhelpful things lefties shouldn’t say part 3

Part 3 of this 3 part series. Here are parts 1 and 2. This part is about probably the most common thing my fellow lefties get irate about, but in a way I think is unhelpful. What is it? Tax avoidance. Here is the line I often hear:

3. If [INSERT COMPANY NAMES] paid their taxes austerity wouldn’t be necessary. In parts 1 and 2 I used pieces by two journalists I quite like as examples, but for this one, I’ve chosen one I have less time for, Polly Toynbee. I wouldn’t say she’s a lefty, more all over the place, but a lot of left-wingers seem to like her work. This piece is a general rant about Amazon, Starbucks etc, but it contains this sentence:

The culture of getting away with what you can has to give way to a popular understanding that one man’s tax dodge is his own community’s lost children’s centres, libraries and swimming pools.

This is the idea I find unhelpful. That tax avoidance means we can’t afford things like children’s centres. libraries and swimming pools. It just isn’t true.

That’s not to say we shouldn’t get annoyed about tax avoidance (although I don’t think shaming companies into paying more tax a la UK Uncut is particularly effective). It’s about fairness rather than needing the money to pay for public services. Government needs to collect tax, but if tax is seen as optional for one section of the economy, why should any of us pay what the government says we owe? So that’s the issue, and one which is more something the government needs to sort out through its tax laws rather than the companies doing the avoidance (which is legal and a perfectly rational thing for them to do).

So why doesn’t tax avoidance mean less money for public services? Most people think that the government must first tax us before it has any money to spend. You often hear it said that it’s “your money” the government are spending. In reality though, money goes round the economy in a big circle. Just as we could start with tax providing the money for government spending, we could equally start the circle with the government spending some money into the economy which then comes back to it in the form of tax. I think Peter Martin explains this idea quite well in this post when he writes:

“When sovereign governments spend they simply credit bank accounts as we know from MMT. Much of their spending is on wages and salaries. Straightaway about 30% or so comes back in tax and other Government deductions, like National insurance in the UK. The remainder gets spent and respent. After a few respendings there’s not much left after the government has taken its cut at each stage. 20% VAT, fuel duty, corporation tax etc etc and yet more income tax… Eventually nearly all spending goes back to government as taxes regardless of the level at which they are set, providing they are finite.  It just takes longer if taxes are lower.

Peter goes on to say:

There are two exceptions to the rule that issued money always comes back to government. Money which is saved by individuals and private companies, and money which is net spent on imports. The taxman can’t get that back.

So you get a deficit when individuals save and/or when we import more goods and services than we export. The impact of tax avoidance in this story will depend on what happens to the potential tax that is avoided. If it is taken out in profits by shareholders and spent into the economy, it will be taxed at at later stage and returned to the tax man. This won’t impact on the deficit, but it meant some people unfairly had their spending power increased because they were able to avoid a portion of tax that would otherwise have been due.

What if the additional money gained from tax avoidance was just saved though? If this was the case that would cause a government deficit larger than would have resulted if the tax hadn’t been avoided. In this instance would that mean public services would have to be cut to make up the difference? Again no. There are a number of reasons why governments need to tax, but paying for government spending isn’t one of them. As most transactions in the economy are taxed, as Peter Martin shows us for every £1 the government spends, it will get back £1 in tax, only not in the same time period. Individuals saving and imports exceeding exports extends the time it takes for that £1 to come back to government, but the delay doesn’t prevent it from funding the programmes it wants to fund.

Lefties should be aware of this because once understood, each possible spending programme can be argued for on its merits rather that whether it can be afforded. “Affordability” is measured in real resources – people and stuff – rather than pounds sterling. If we use (for example) building materials and labour (which is finite) to build more council houses, that might mean less private houses can be built, if it results in a shortage of those things. If we spent (say) £10bn on housebuilding though, that doesn’t mean we have £10bn less to spend on other things (unless those other things were other construction projects). Again, the trade off is over the use of real stuff, and the government can always create enough money to use those resources any way it sees fit.

In part 2 I objected to Zoe Williams writing that free school meals shouldn’t be extended because the money could be better spend on other stuff. The cost of providing those meals is the probably next to zero, because presumably those kids were going to eat something at lunchtime anyway, it’s just someone else is paying for the food. The amount of food consumed will probably be unchanged. The government providing free schools meals doesn’t reduce the government’s ability to spend in other areas by a single £1, and equally, Amazon avoiding tax also doesn’t reduce its spending power.

Hopefully that all makes sense, but the short version would be: by all means campaign for government to simplify the tax system, to close loopholes and make tax avoidance more difficult, but don’t link it to the provision (or lack of provision) of public services. The two are not linked, but by trying to link them it perpetuates the myth that for every £1 the government wants to spend, it must first raise £1 in tax from all of us. We hear this from politicians all the time. It is really annoying! 


6 thoughts on “Unhelpful things lefties shouldn’t say part 3

  1. I probably should add an edit to the posting on my blog that the way the tax system works should not be an excuse for tax avoidance. As Alex says above the tax system is ultimately about fairness. Once public acceptance is lost then the system ceases to function effectively.

    The tax system in countries like the UK, USA, and Australia which issue their own currencies is primarily about regulating demand. Taxes have more effect, in that respect, when they are levied on the less affluent than the more affluent simply because the affluent are more likely to save their money. So, should this be an argument for not taxing the wealthy? Some would say yes, but I’d say the correct view is that taxes have a role in regulating the disparities of wealth in society too.

    For a country like Greece, which doesn’t issue its own currency, the only way it can come close to meeting EU regulations is to raise more tax from the wealthy. If that money is lying dormant, then putting it to use will have a stimulatory effect on the economy. It is effectively extra money into the system. There’s no point in taxing the poor! Its just counterproductive and reduces demand in the economy.

    The same could be said of the UK too, in the sense that a tax on the wealthy, could stmulate the economy in the same way without increasing the government’s deficit!

    Not that it’s necessary of course, but politically it could be a useful argument.

  2. I agree with the circular argument, I’ve used it myself, but it only works in a context where taxes are actually collected, not hidden away in havens otherwise it’s devaluing the currency. That’s not the situation here. Plus of course we signed away our right to do anything like creating money direct into the economy at Maastricht in ’92. I think we should ignore that, myself, go ahead and do it, and shut down all tax havens, create our own money into the economy backed with the value of what it’s used to create, and introduce 100% reserve requirements for the private banks. But who listens to me, eh? 🙂

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