1. This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn More.

Taxes pay for things, or do they?

Discussion in 'Serious' started by Corky42, 18 Jul 2017.

  1. Corky42

    Corky42 What did walle eat for breakfast?

    Joined:
    30 Oct 2012
    Posts:
    8,388
    Likes Received:
    186
    So I've been learning a bit more about economics, the thread Zak33 started about interest rates peeked my interest, we're not talking about university level stuff hear just an understanding above pretty much the no knowledge i had before.

    Anyhows a conversation with Mankz about fiat money got me thinking, why do we still believe taxes pay for things?

    I fully understand the effect of creating or removing to much money can have wide ranging consequences, consequences that i undoubtedly don't fully understand, however if my understanding of fiat money is correct there appears to be no clear link between the taxes we pay and the amount of spending.

    So why 25 years after moving to a fiat money system do we, and nearly all politicians, still say that the amount of money our government spends is dependent on the amount of taxes they collect. :confused:
     
  2. Guest-23315

    Guest-23315 Guest

    Plz don't open Pandora's box to me matey...

    They've just released inflation figures and im supposed to be doing my actual day job.. :p

    I'll have a think this afternoon and try and give you a concise answer this eve- Are you asking (in simple terms) about whether Taxes Up = more money to spend? Or how does a government work out how much it has to spend in general including taxation, as they are fairly different.
     
  3. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

    Joined:
    4 Dec 2007
    Posts:
    10,573
    Likes Received:
    792
    Because taxes do pay for things.

    Well, that was easy. What's for lunch?
     
    Disequilibria and Guest-23315 like this.
  4. liratheal

    liratheal Sharing is Caring

    Joined:
    20 Nov 2005
    Posts:
    9,666
    Likes Received:
    427
    if taxes didn't pay for things, the national debt would either be much larger(Same spending), or much smaller(No spending at all). And we'd all be driving around on the rocky mountains, as opposed to pot-hole filled roads.

    As for what the division of expenditure is from each type of tax collected, I've no idea.

    I assumed that it all went to the department responsible for collecting it, and was spent by that same department. But chances are it goes into one big pool before going back out again.
     
  5. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

    Joined:
    4 Dec 2007
    Posts:
    10,573
    Likes Received:
    792
    That's (mostly) right: the pool is called General Taxation, and most expenditure comes from therein. Fun fact: if you're ever out using the road in anything other than a motor vehicle and someone shouts at you about not paying Road Tax, they're idiots: first, there's no such thing as Road Tax (it's Vehicle Excise Duty and is based on emissions, so if your pushbike blarted out a load of muck every time you used it you'd have to pay it too), and second, road creation, upkeep, and maintenance is paid for from General Taxation - meaning you're contributing to it too.
     
  6. Corky42

    Corky42 What did walle eat for breakfast?

    Joined:
    30 Oct 2012
    Posts:
    8,388
    Likes Received:
    186
    In a fiat money system though technically they don't, you pay the government taxes, yes, but theoretically the government could throw those taxes in the bin and instead issue more money.

    It probably sounds like I'm talking about semantics but that's not my intention, using the old system of commodity money a £50 note would be worth X amount of whatever commodity it was linked to like gold, so if you payed £50 in taxes the government could only spend £50 because they didn't have more than £50 worth of gold to backup that spending.

    In a fiat monetary system you could pay £50 in taxes and the government could spend £100 because they issue their own money, they've not borrowed it from anyone because just like the banker in a game of monopoly they can't run out of money because they just issue more.
     
  7. Disequilibria

    Disequilibria Member

    Joined:
    30 Sep 2015
    Posts:
    855
    Likes Received:
    16
    Most of the time governments can't really, without causing huge problems. I keep thinking of ways to explain this but it always sounds too wonkish in my head.
    Obviously there are cases like these.
    http://delong.typepad.com/sdj/2006/05/greg_mankiws_bl.html
    I'll give it a go (simplifying will leave out a lot)
    Money is only a medium of exchange, store of value and unit of account. If you have too much money chasing too few goods then hello inflation. When an economy is operating at effectively full employment then increasing the amount of money increases demand however there is no more supply as all production is at capacity therefore it gets pushed into price rises.

    An example outside of government is football where as football clubs get bigger and bigger TV deals and sponsorship it all ends up in higher wages and transfer fees for footballers because even if you pay more to football clubs they can't produce more footballers or improve their quality (much) so the supply of footballers is fixed but the supply of money is massively growing.
     
    Last edited: 18 Jul 2017
  8. Guest-23315

    Guest-23315 Guest

    Thats why we had https://en.wikipedia.org/wiki/Gilt-edged_securities.

    If you want me to go through the basis of government par bonds etc I can do in a PM Corky?
     
  9. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

    Joined:
    4 Dec 2007
    Posts:
    10,573
    Likes Received:
    792
    No, they can't. See Disequilibria's post for exactly what happens when you try that.

    TL;DR: 'Quantitive easing' doesn't actually add real money into a system. If you double the money supply, you effectively halve the value of said money: a loaf of bread which cost £1 yesterday costs £2 today. The result: no change. It's a short-term bandage, not a long-term plan for public spending; taxation is the long-term plan for public spending.
     
  10. Corky42

    Corky42 What did walle eat for breakfast?

    Joined:
    30 Oct 2012
    Posts:
    8,388
    Likes Received:
    186
    I did try to make it clear that I'm fully aware that creating or removing to much money from an economy can have consequences, both negative and positive, but i guess i didn't make that point clear enough. :p
     
  11. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

    Joined:
    4 Dec 2007
    Posts:
    10,573
    Likes Received:
    792
    Then I refer you to my earlier answer to your question: taxes do pay for things.
     
  12. Guest-23315

    Guest-23315 Guest

    You've also all forgotten the GDP Tax Multiplier anyway.. scrubs

    Complex Tax Multiplier = MPC / 1 − (MPC × (1 − MPT) + MPI + MPG + MPM)

    MPC is marginal propensity to consume;
    MPT is marginal propensity to tax;
    MPI is marginal propensity to invest;
    MPG is marginal propensity of government expenditures; and
    MPM is marginal propensity to import.

    And rearrange for MPT etc.
     
  13. Corky42

    Corky42 What did walle eat for breakfast?

    Joined:
    30 Oct 2012
    Posts:
    8,388
    Likes Received:
    186
    And i refer you to my earlier answer explaining how that doesn't appear to be correct in a fiat money system.



    I did say i wasn't talking about university level stuff hear just an understanding above pretty much the no knowledge i had before so you'll have to forgive me for saying, what? ;)
     
  14. Disequilibria

    Disequilibria Member

    Joined:
    30 Sep 2015
    Posts:
    855
    Likes Received:
    16
    You complained at me for MV=PY(fe) a while ago when you last brought this up.... Which is A level explanation for why we don't finance spending with printing money
    you may have missed:
    I'll give it a go (simplifying will leave out a lot)
    Money is only a medium of exchange, store of value and unit of account. If you have too much money chasing too few goods then hello inflation. When an economy is operating at effectively full employment then increasing the amount of money increases demand however there is no more supply as all production is at capacity therefore it gets pushed into price rises.

    An example outside of government is football where as football clubs get bigger and bigger TV deals and sponsorship it all ends up in higher wages and transfer fees for footballers because even if you pay more to football clubs they can't produce more footballers or improve their quality (much) so the supply of footballers is fixed but the supply of money is massively growing, costs simply inflate and profit/loss changes by nought. Though this allegory may confuse things further...
     
    Last edited: 18 Jul 2017
  15. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

    Joined:
    4 Dec 2007
    Posts:
    10,573
    Likes Received:
    792
    You say you understand that the government can't just keep printing money a la Zimbabwe, but then you post things like that.

    Fact: you can't print infinite money.

    Fact: public spending comes from general taxation.

    Fact: taxes, therefore, pay for things, whether you're being taxed a percentage of semi-fictional numbers in a computer, a selection of paper notes from your wallet, or slices shaved off your block of real, physical gold.

    If taxes don't pay for things, then where do taxes go?
     
  16. Guest-23315

    Guest-23315 Guest

    Can you all just go and do the CFA plz. :lol::lol::lol:
     
  17. Disequilibria

    Disequilibria Member

    Joined:
    30 Sep 2015
    Posts:
    855
    Likes Received:
    16
    Fiscal heaven, that's where all the tax collectors go...

    Roughly speaking (if this clears anything up and I mean roughly speaking) Governments often spend more than taxation because a deficit will not increase the burden of national debt (debt as a % of GDP) if the deficit is less than the growth of nominal GDP, i.e the growth of real GDP including inflation then, government debt burden is stabilised or falls.

    The deficit is government spending-taxation therefore the government can effectively spend taxation + nominal GDP growth and not increase the debt burden and that is what normal times deficits are usually lower than.
     
    Last edited: 18 Jul 2017
  18. Nexxo

    Nexxo Bargaining chip

    Joined:
    23 Oct 2001
    Posts:
    32,887
    Likes Received:
    1,104
    A lot of people wonder this... :p

    But seriously, one thing (of many) that annoys me about this government is how it talks about taxes as if it's a bad thing, to be avoided at all cost. How are ordinary people going to learn the link between taxes and good public services if the government does not explain that taxes are a necessary thing that buys society a good quality of life?

    I suspect that the Tories don't want people to make that link, because making that connection is socialist thinking. Better for people to think that taxes are teh evil, and public services are simply a mismanaged and inefficient socialist infatuation that is better replaced by efficient private services.
     
  19. Squallers

    Squallers Meat Puppet

    Joined:
    7 Oct 2008
    Posts:
    272
    Likes Received:
    19
    Nowhere, they remove money from the system, allowing the government to control the overall supply of money.

    The government then "creates" new money through borrowing or issuing bonds, which it then spends on stuff.

    In theory if government spending can generate enough growth to cancel out the inflation caused by the increase in the money supply then there's no reason that they couldn't go on increasing the money supply.

    Edit: There's a truck load of caveats to go along with the above
     
    Corky42 likes this.
  20. Guest-23315

    Guest-23315 Guest

    Awwwh Nexxo! We were so close to having an economic argument not a political one..
     
    Disequilibria likes this.
Tags:

Share This Page