Hypothecated taxes are designed to undermine the NHS

[ks.234]

The idea that we need to raise tax to fund the NHS is muddleheaded and wrong.

A realistic understanding of how money really works would give us better public services without the need to raise extra tax

https://www.taxresearch.org.uk/Blog/2018/03/27/hypothecated-taxes-are-designed-to-undermine-the-nhs/

Excellent podcast on hypothecated tax for the NHS https://podcasts.apple.com/gb/podca...christian-reilly/id1375093518?i=1000409417665

 

[Cav]

There are no hypothecated taxes.

 

[ks.234]

There are no hypothecated taxes.

Well yes, but that is very much the point.

Government does not need to raise tax in order to spend. The suggestion that it does, is the lie

The recent talk of raising NI to pay for care is not the reality.

Government raises tax as a consequence of issuing money, not the other way around. Government does not rely on income from tax before it is able to spend.

Spending on public services doesn’t come from a pot of money stored in the Treasury or anywhere else. If government wants to spend then the Bank of England simply has to make that money available.

The point is that the household economic model of income v expenditure does not apply to government spending. The idea that government ‘can’t afford’ decent public services is a deceit.

 

[Dave H.]

This is something I’ve been trying in a vague manner to get my head around for a while. But as yet I haven’t found an explanation which made sense of it for me.

One explanation I saw said that, similarly to loans issued by banks, money spent by government is spent into existence. I can more or less grasp that, but don’t see how that relates to the economy in general. Where do taxes ‘go’? Where does the BoE fit in? How come if, as is implied, the deficit means nothing, we hear about interest payments being required on government borrowing? And what are the downsides to profligacy?

It strikes me that few people seem to have an effective understanding of all this, and the lack of an easily available, comprehensible explanation for the rest of us is one reason the household budget myth, which I accept is pernicious, persists.

 

[ks.234]

This is something I’ve been trying in a vague manner to get my head around for a while. But as yet I haven’t found an explanation which made sense of it for me.

One explanation I saw said that, similarly to loans issued by banks, money spent by government is spent into existence. I can more or less grasp that, but don’t see how that relates to the economy in general. Where do taxes ‘go’? Where does the BoE fit in? How come if, as is implied, the deficit means nothing, we hear about interest payments being required on government borrowing? And what are the downsides to profligacy?

It strikes me that few people seem to have an effective understanding of all this, and the lack of an easily available, comprehensible explanation for the rest of us is one reason the household budget myth, which I accept is pernicious, persists.

Absolutely agree with your scepticism, much of MMT is counter intuitive and I have struggled to get my head around it for some time.

Therefore I must start out by saying that I am a very long way from being an expert and have been doing my best to read up as much as possible recently. As such everything here comes with a big AIUI.

(The podcast I linked to above is a good place to start if you want to learn more.)

Yes, money is spent into existence, this basic concept should be uncontroversial as the way money is created is laid out by the BoE itself in a 2014 document called Money Creation in the Modern Economy.

Once you realise that money is spent into existence, everything flows from that. Money is created and has value based on trust, that is trust that the £5 you have, unless it is counterfeit, is worth £5 to everyone else in the economy. That trust in your £5 is instilled by government by the fact that the Inland revenue will only accept multiples of that £5 to service your debt, your income tax bill. You need that £5 to pay your tax. Those taxes don’t ‘go’ anywhere, they are just deleted out of existence. The purpose of the BoE is to circulate currency and control inflation. If the government wants to spend money on, for example, building a high speed railway, it just tells the BoE to create the money. The BoE will then make that money available and write that money as a negative onto the government’s spreadsheet (but as money has been spent into existence, it is not an amount the government has borrowed from anywhere, so does not need to pay it back) and when tax comes in, it is written off that spreadsheet.

If you imagine that the government spends into existence £100bn, that money is given to the builders of the high speed railway who spend it on goods and employing people and paying themselves bonuses etc, then the tax paid on that spending, say £75bn, comes back to the BoE. The £25bn difference between the £100b created and the £75b tax is the deficit and it sits in the in the pockets of you and me. Well! a very small portion of it sits in my pockets and a lot more sits in the pockets of the high speed railway companies, but you get my point?

Not having a deficit is a bad thing for you and me!

As much as MMT is counter intuitive on some levels, on other levels, and the level that started my own mind whirring, it is obvious that money is being spent into existence without question for certain things the government likes. It is never questioned when there is a desire for a war, or to build a vanity project like a high speed railway. There is never a need to raise taxes to pay for a war or a vanity project. The need raise taxes is only ever an issue when it comes to paying for public services.

Why is that? Why is the cost of a war only ever calculated after the event? Why is the national conversation always that money for public spending need to be raised before the event? Government spending does not rely on some money it takes from us and saves into a piggy bank, it just doesn’t work like that, the BoE itself tells us so.

Here is the podcast link again if anyone is interested https://podcasts.apple.com/gb/podca...christian-reilly/id1375093518?i=1000409417665

 

[Heckyman]

Indeed, money is spent into existence, but it must also be destroyed (via taxes and debt repayment) at an equal rate (minus the real growth rate of goods and services).

Agree that Govt spending is all one big pot and that it's purely political as to how that pot is shared out.

Disagree that there's a way to financially engineer a bigger pot (beyond a very slight stimulative push to get the ball rolling). More paper just means that the paper has a reduced purchasing power...

 

[ks.234]

Indeed, money is spent into existence, but it must also be destroyed (via taxes and debt repayment) at an equal rate (minus the real growth rate of goods and services).

Agree that Govt spending is all one big pot and that it's purely political as to how that pot is shared out.

Disagree that there's a way to financially engineer a bigger pot (beyond a very slight stimulative push to get the ball rolling). More paper just means that the paper has a reduced purchasing power...

But one of the functions of tax is to control that inflation.

Another point is that we are not talking about just pumping paper currency into the economy without purpose or need. If we were to pump money into the NHS beyond the capacity of the NHS to employ nurses and doctors, that would indeed create inflation, but as I understand it, there is quite a need for more doctors and nurses. Money to fund the NHS and other public service needs, is available. To restrict it is a political choice

 

[ks.234]

This is something I’ve been trying in a vague manner to get my head around for a while. But as yet I haven’t found an explanation which made sense of it for me.

One explanation I saw said that, similarly to loans issued by banks, money spent by government is spent into existence. I can more or less grasp that, but don’t see how that relates to the economy in general. Where do taxes ‘go’? Where does the BoE fit in? How come if, as is implied, the deficit means nothing, we hear about interest payments being required on government borrowing? And what are the downsides to profligacy?

It strikes me that few people seem to have an effective understanding of all this, and the lack of an easily available, comprehensible explanation for the rest of us is one reason the household budget myth, which I accept is pernicious, persists.

Apologies, meant to link this earlier. Monetary Sovereignty: Why Taxes Do Not Fund Government Spending

 

[Dave H.]

There we go, straight into what I'm sure for a lot of people must be a conceptual brick wall.

Taxes don't go anywhere, they just destroy money brought into existence because the government spent it. WTAF?
The deficit, which we're told equals borrowing, is actually the money we have as individuals that we can spend? Eh?

Based on the above posts, it seems that the only real point of taxes (and debt repayment) is to control inflation, but this is never, ever mentioned anywhere to the general public.

I'm not having a go, the links etc are appreciated, and I shall do my best to follow them up when I get chance.

But this just illustrates that the gulf between what I take to be most people's intuitive understanding and the apparent reality is vast. To be honest I'd say it seems to be so vast that it's not so much an information deficit or public education need, it's more like the bloody Matrix.

 

[Le Baron]

So people are coming round... Nice, I've been struggling to get folk on board since 2006. I actually know Christian Reilly.

Money is created and has value based on trust, that is trust

It's the legal enforcement of a tax liability which gives the currency value, not trust.

 

[Le Baron]

I'd also take some of what Richard Murphy says with care. He only flipped to an MMT understanding quite recently. I agree with a lot of what he says, but only a year ago he was making elementary mistakes and is still on the learning curve. The best is that he has a large Twitter following and can reach a lot of people.

 

[KrisW]

For the sake of balance, I should point out that MMT or ‘Modern Monetary Theory’, the enabling theory for this proposal, is not a widely-accepted model of how economies operate, and the evidence for its central claim (the real source of price changes) is weak.

Creating money to meet domestic obligations increases the money supply - there is no doubt about this whatsoever. Where MMT differs from traditional models is that traditional economics says that such increase in supply will always put upward pressure on pricing: this is “Cash-Push Inflation” - having more money prevents buyers from seeking the lowest price, or when combined with scarcity (“Demand-Pull Inflation”) it encourages buyers to overpay to outcompete other buyers). This is true of both the classical “left-wing” Keynesian economics as well as the more right-wing Monetarist economics models.

Under a traditional model, that increase in prices will negate the effects of increased money supply, and so governments end up having to either spend less (or seek better value for the money they do spend), acquire more of the money in the economy (via taxes or bond issues) in order to spend it, or keep generating money and accept the fact that sooner or later their citizens will have to get used to counting the number of zeroes on banknotes.

MMT is revolutionary in claiming that pricing is not caused by the supply of cash at all; instead, the theory asserts that pricing is the result of conflict between the goals of holders of capital and producers of value (=workers), and thus can be controlled by a government through legislation independently of the amount of money being produced. If this were true, it would allow governments to effectively spend on domestic labour without limit - but this is the part that remains unproven.

MMT got a lot of publicity in the USA, but the USA is perhaps the only country that can produce money with little consequence, as the US dollar is held by other nations as a reserve currency, and many essential goods (most notably oil, but also many basic food staples) are traded in US Dollars. The UK does not have such a currency.

In an exporting economy (one with a trade surplus), inflating the currency can be relatively benign - there’s always more money coming in than going out, so the cost of living doesn’t change much in real terms: only the numbers on the price-tags increase: your country becomes an expensive place to live, but people who do live there live fairly well. (Australia is an example of this phenomenon). However, in an economy like the UK which runs a trade deficit, inflation can quickly destroy the standard of living as any increase in wages is met by an increase in the cost of foreign-purchased goods and services, and it’s the lowest-earners who will get hurt first.

 

[laughingboy]

the evidence for its central claim (the real source of price changes) is weak.

I'm not an economist, but my understanding is that the central claim of MMT is that a currency issuer cannot, by definition, be currency constrained. The constraints are real resources and - entirely at odds with what you have written - inflation.

MMT is revolutionary in claiming that pricing is not caused by the supply of cash at all

No. That's simply a mischaracterisation of MMT.

in an economy like the UK which runs a trade deficit, inflation can quickly destroy the standard of living as any increase in wages is met by an increase in the cost of foreign-purchased goods and services, and it’s the lowest-earners who will get hurt first.

To some extent, I can see this as an argument against MMT. Most MMT enthusiasts seem to skim over potential 'balance of payments' problems, and it's one of the areas that make me a slight MMT skeptic - probably because I have no mental model to map out the complexities.

The other main criticisms of MMT seem to be that it is imprecise and politically impractical. The imprecision is that it describes the limit to spending in being 'full employment', but it includes no measurement of when this point is reached. So, in effect it encourages government to seek the point of inflation (with provisos below).

The next bit - the political impracticality - concerns whether once inflation is detected, MMT's toolbox is capable of controlling it. MMT seems to have two main weapons to attack inflation, a Job Guarantee and taxes. The Job Guarantee scheme has the government as 'employer of last resort', and it is intended to create an anti-inflationary anchor to wage rises. I have no idea whether that would work. Secondly, taxes. The criticism of MMT is that if inflation arose in a big way, the political costs to any government of raising taxes would effectively limit their ability to do so. That is, any government that dramatically raised taxes would condemn itself in the eyes of the electorate.

So, why, despite these misgivings, do I find MMT interesting? Because it suggests that, compared to orthodox economics, it is possible to run most economies in a slightly more expansionary way with practically no ill-effects. There is no need to go full-throttle. And year-on-year, compounding effects would lead to governments and a society that are a damn sight more capable of facing future threats - such as climate change - than we have currently. MMT, in short, focuses on the wasted resources in society (unemployed and underemployed people, on the whole) and suggests that they can be put to use.

 

[KrisW]

I’m wary of anything that promises unlimited consumption of any resource that has value. With MMT, the promise is that a state can procure services for the public good without paying for them (paying in the broader sense of exchanging something of value for something else of value).

Your example on the inability to raise taxes hints at the big problem behind this: it requires every political party to act altruistically, for the long-term benefit of the populace. It shouldn’t be too hard to find a counterexample to show that this is a very dangerous assumption to rely on.

My gut feeling is that this can only work in a autarchy - an economy that is wholly self-reliant, requires no inputs from outside, and exports nothing (i.e., no real economy). Countries that try to become autarchies have tended towards totalitarian control, especially of movement. After all, emigration is an invisible import - when someone leaves your country for another, you are effectively giving that other economy the cost of raising and educating a healthy adult who can work.

I also don’t see how guaranteeing employment can prevent inflation in any way that doesn’t boil down to the bad old neoliberal “Workfare” idea, where the unemployed are effectively hired to do low-paid jobs by the government, rather than given money to support themselves while looking for a new job.

 

[Heckyman]

Money to fund the NHS and other public service needs, is available. To restrict it is a political choice

By the same token, money is available to fund more teachers, childcare workers, turkey pluckers, capital investments to save the planet etc. ...

Johnson with his hand in the Bank of England till is a truly scary prospect, spraying out bribes to voters like a deranged Santa.

Alternatively the (political) decisions would have to be outsourced to (wise and benevolent!) technocrats and anyone who protested would have to be dealt with by the police/army.

The next bit - the political impracticality - concerns whether once inflation is detected, MMT's toolbox is capable of controlling it. MMT seems to have two main weapons to attack inflation, a Job Guarantee and taxes. The Job Guarantee scheme has the government as 'employer of last resort', and it is intended to create an anti-inflationary anchor to wage rises. I have no idea whether that would work.

Well. Inflation is here and HGV wages are rising due to a driver shortage — a shortage that exists by and large because the job pays shit money for what you have to do. So the "Job Guarantee scheme" would step in and attempt to keep those wages down by literally forcing unemployed people to go do those jobs. Jobs they probably don't want to (or can't) do...and then presumably some of them would be fired (or re-trained as meat factory workers?) when policy wonks (or Govt ministers) had determined that wages had been suppressed low enough. As for raising taxes, much higher and the Govt will lose the next election...

 

[Le Baron]

For the sake of balance, I should point out that MMT or ‘Modern Monetary Theory’, the enabling theory for this proposal, is not a widely-accepted model of how economies operate, and the evidence for its central claim (the real source of price changes) is weak.

It's actually an unmatched description of how monetary economies operate. So much so that the scales have now fallen from the eyes of the Fed. Three days ago the St. Louis Fed published a paper declaring the money multiplier (which is a myth) dead. I posted another Fed paper here a week or so ago which accepts other general myths are also nonsense (many which you have rehearsed in your post and I can tell you've never read any primary literature).

Creating money to meet domestic obligations increases the money supply - there is no doubt about this whatsoever. Where MMT differs from traditional models is that traditional economics says that such increase in supply will always put upward pressure on pricing: this is “Cash-Push Inflation” - having more money prevents buyers from seeking the lowest price, or when combined with scarcity (“Demand-Pull Inflation”) it encourages buyers to overpay to outcompete other buyers). This is true of both the classical “left-wing” Keynesian economics as well as the more right-wing Monetarist economics models.

The first sentence is obviously true, the answer to it is : yes, and so what? So much wrong here. The simple issue of spending currency into existence does not automatically cause inflation. Creating bank reserves does not automatically cause inflation (see QE), purchasing what exists to be purchased in that currency does not automatically cause inflation.The first fact is that the central bank has no control over money supply and only the treasury has (some, because it fails to enforce the law) control via destruction of it by taxation. 'Traditional' economics or 'new classical' - which is not all that traditional, but a late 1960s revivification of demolished ideas restated in another way - fails to see that the massive QE programmes done under its own watch to the tune of multiples of trillions led to no inflation. 'Cash push inflation' is a non-term. There are two kinds of inflation: 'cost-push' with several causes (none of them to do with money issue) which hypothesis a trade-off between price inflation and unemployment, and 'demand-pull' which is aggregate demand outstripping the capacity for real output. Keynes said nothing about what you attributed to him and I challenge you to present evidence of it; and not John Hicks's IS/LM version of bastardised Keynes which he himself has already disavowed long ago.

Under a traditional model, that increase in prices will negate the effects of increased money supply, and so governments end up having to either spend less (or seek better value for the money they do spend), acquire more of the money in the economy (via taxes or bond issues) in order to spend it, or keep generating money and accept the fact that sooner or later their citizens will have to get used to counting the number of zeroes on banknotes.

You make an elementary mistake right in the middle there claiming a government must 'acquire' money, whilst previously sowing panic about them being able to just 'print' it. Totally ignoring the fact that taxation destroys and doesn't recycle money. The functions of bond (so-called 'debt') issue I've written about elsewhere in the Brexit thread. If you read that you'll learn what bonds are actually for. The claim that they will be 'counting' zeroes is just another fake 'Zimbabwe' claim. If you understood how and why hyperinflation occurs you wouldn't have said it. It is a very rare occurrence with particular circumstances, usually a sovereign issuer constrained by lack of real resources or productivity or where outside economies have a claim (as was the case with war reparations on Germany; so no, Weimar scare stories are also invalid).

MMT is revolutionary in claiming that pricing is not caused by the supply of cash at all; instead, the theory asserts that pricing is the result of conflict between the goals of holders of capital and producers of value (=workers), and thus can be controlled by a government through legislation independently of the amount of money being produced. If this were true, it would allow governments to effectively spend on domestic labour without limit - but this is the part that remains unproven.

It's not actually, the concept is ancient. Abraham Lincoln knew about it. Robert Owen, author of the Federal Reserve Act knew about it. Abba Lerner knew about it in the 1940s... Your claim of what it 'claims' is just wrong. Prices are largely set by what government as biggest purchaser is willing to pay. Small-scale market pricing is trivial in comparison.

MMT got a lot of publicity in the USA, but the USA is perhaps the only country that can produce money with little consequence, as the US dollar is held by other nations as a reserve currency, and many essential goods (most notably oil, but also many basic food staples) are traded in US Dollars. The UK does not have such a currency.

False. Any sovereign issuer can create currency and does do every single day. This is an entry-level mistake to make. That dollars are held by some nations is neither here nor there with regard to issue for the U.S. And means absolutely nothing for the UK, Australia, Canada, the ECB...or any other country issuing a sovereign currency. They buy things denominated in their own currencies not another sovereign currency. The final sentence is frankly just wrong.

In an exporting economy (one with a trade surplus), inflating the currency can be relatively benign - there’s always more money coming in than going out, so the cost of living doesn’t change much in real terms: only the numbers on the price-tags increase: your country becomes an expensive place to live, but people who do live there live fairly well. (Australia is an example of this phenomenon). However, in an economy like the UK which runs a trade deficit, inflation can quickly destroy the standard of living as any increase in wages is met by an increase in the cost of foreign-purchased goods and services, and it’s the lowest-earners who will get hurt first.

You're confused between 'inflation' and spending money to purchase available goods/resources. They are not the same. In actual fact a large trade surplus means the majority of domestic production is being given over to export trade. I live in such a country and it runs an austerity budget. The assumption that 'money coming in' is somehow well distributed is a poor assumption. Imports are a benefit because they are goods for mere currency. The point of domestic activity is that the money issue (purchase of goods and services) mobilises domestic resources for domestic consumption and Gov UK is not doing that properly, plus it is importing.

 

[Le Baron]

I’m wary of anything that promises unlimited consumption of any resource that has value. With MMT, the promise is that a state can procure services for the public good without paying for them (paying in the broader sense of exchanging something of value for something else of value).

No it does not claim that. You need to read primary literature instead of critical articles.

I also don’t see how guaranteeing employment can prevent inflation in any way that doesn’t boil down to the bad old neoliberal “Workfare” idea, where the unemployed are effectively hired to do low-paid jobs by the government, rather than given money to support themselves while looking for a new job.

Can you explain how paying people benefit rate 'wages' to do "workfare" whilst they create higher output (and then don't even have the purchasing power to buy any of it) is actually a sensible idea and then explain why you think a JG is the same? Or just paying transfer payments (benefits) where output remains lower, but people have equal purchasing power (which actually could affect prices)? The very point of a job guarantee is to reduce unemployment and employ idle resources, whilst paying an inclusive wage and also addressing the FACT that the private sector does not take risks on long-term unemployed people. Which is the very problem it aims to address.

 

[KrisW]

I shall answer that with a little more civility than your responses offered to me.

First, read what I actually wrote about Workfare before assuming that I think it’s sensible.
The claim made was that Job Guarantees can reduce inflation. How you do that by holding wages high is something I’d be interested in hearing about. One way of guaranteeing employment that does reduce inflation, by reducing wages and thus spending power, is Workfare. Which I think is one of the nastiest, most unfair and ultimately pointless policies around unemployment. Is that clear enough for you?

No it does not claim that. You need to read primary literature instead of critical articles.

I have mostly read the people proposing this as a good thing, but in their enthusiasm, they leave a lot of detail out: specifically details about how such a system can function in the world we have right now, rather than some better one which operates differently. (The critical articles tend to be from the shining stars who brought us multiple asset crashes and the current record wealth inequality, so their opinion doesn’t carry a whole lot of weight with me.)

 

[Le Baron]

I shall answer that with a little more civility than your responses offered to me.

First, read what I actually wrote about Workfare before assuming that I think it’s sensible.
The claim made was that Job Guarantees can reduce inflation. How you do that by holding wages high is something I’d be interested in hearing about. One way of guaranteeing employment that does reduce inflation, by reducing wages and thus spending power, is Workfare. Which I think is one of the nastiest, most unfair and ultimately pointless policies around unemployment. Is that clear enough for you?

I did read it. Could be that I was unclear in responding, but what I asked was: how can paying people benefit wages to increase production or just paying people benefit transfer payments, be equal to paying people a regular wage to do normal work? The claim that JG is 'like workfare' is a false claim. The claim it is 'make work' is also a false claim assuming that capacity and goods/service requirements are somehow 'at capacity'.

I have mostly read the people proposing this as a good thing, but in their enthusiasm, they leave a lot of detail out: specifically details about how such a system can function in the world we have right now, rather than some better one which operates differently. (The critical articles tend to be from the shining stars who brought us multiple asset crashes and the current record wealth inequality, so their opinion doesn’t carry a whole lot of weight with me.)

It describes how the monetary economy operates (with unrivalled accuracy with regard to how money is issued/spent, how the interest rate system operates and why, how and why bonds are issued and what they actually do (they are a reserve drain system); what the purpose of NAIRU unemployment policy is and does, etc), but also makes clear where this is grossly misrepresented in mainstream economics 'theory' which bears no relation to reality. The fact is that since the GFC and the Covid pandemic we have been living in fiscal expansion, something the neo-classicals claimed is automatically 'inflationary', but they never make any predictions which come to pass. The only problem is that it has been mostly spent into corporate pockets by people still drunk on deformed supply-side economics ideas. And that they do little to address tax evasion/avoidance, creative accountancy.

One of the main problems is that the details in aggregate are often beyond forum posts and are probably best dealt with one-by-one without deviation, before fully interlocking them.

 

[KrisW]

I did read it. Could be that I was unclear in responding, but what I asked was: how can paying people benefit wages to increase production or just paying people benefit transfer payments, be equal to paying people a regular wage to do normal work? The claim that JG is 'like workfare' is a false claim. The claim it is 'make work' is also a false claim assuming that capacity and goods/service requirements are somehow 'at capacity'.

Again, I did not claim that Job Guarantee was like Workfare - my comment contrasted the two. I said that I could not see how any system of automatic government employment that was not Workfare could bring down prices.

The Government paying people normal wages to do normal work is fine, but I do not see the mechanism by which this would reduce prices in an economy. In such an environment, private-sector employers would have to offer more money than the Government does in order to attract employees (I have no problem with this), but given that there’s no penalty for leaving a job, there can only ever be upward movement of wages. As wages in general rise, the Government needs to up its “normal wage” too, and we have more money flowing around, and the same amount of stuff to buy, which leads to... ?

I am not arguing for or against inflation. I am not arguing that wages should be kept as low as possible. I am not arguing against the idea of a Guaranteed Job policy itself. I just don’t see how a Guaranteed Job policy that increases wages can lead to lower prices in the long term, which is the claim being made. I am arguing against the reasoning: it does not make logical sense.

One of the main problems is that the details in aggregate are often beyond forum posts and are probably best dealt with one-by-one without deviation, before fully interlocking them.

Do you, by any chance, contribute to EU-funded academic and scientific research programmes?