Discussion in 'Serious' started by Corky42, 18 Jul 2017.
I'll get my coat...
That should be the sig for all our posts here.
It's impossible to have one without the other isn't it?
You seem to be ignoring where I've repeatedly said how i understand having to much money (printing to much) or not having enough (taxing it heavily) causes consequences, like i said in my initial post I'm not talking about printing excessive amounts of money or taxing excessive amounts, I'm asking why most people and politicians link taxes with how much we spend.
No i said i understand that a government printing money a la Zimbabwe has consequences.
I said you can print infinite money but it would have consequences.
And despite you saying public spending comes from general taxation that's not where it comes from in a fiat monetary system.
In a fiat monetary system Taxes are one of the tools used to prevent inflation or deflation, high taxes take money out of the economy making your £50 worth more than it was yesterday because there are fewer £50's.
^^That's^^ roughly what I'm trying to say, rather badly by the looks of things.
That's putting it mildly!
Taxes pay for Tory bribes to the DUP.
I refer you to the Office of National Statistics (ONS) on public spending and taxation. Spoiler: the government does, indeed, spend the taxes it collects (and then some); they don't just get deleted from a spreadsheet once collected.
In inflation targeting systems we use the interest rate to set the price of money to control inflation, the BoE largely doesn't try to control the money supply as a tool for this. Money creation is mainly by the banking system.
What I have explained is that any government spending, that is not funded by taxes or selling bonds, will create inflation at full employment.
Technically they don't, from an accounting book keeping perspective they do.
The government for all intents and purposes could delete the taxes people pay from the spread sheet and issue exactly the same amount of money a few days later, obviously they don't do this as it would be a rather convoluted and possibly confusing from an accounting perspective.
However being a currency issuer means they could *print any amount of money any time they wanted, the BoE did that with QE (afaik), in effect our taxes don't pay for things they help keep the system in balance.
*Taking the caveats that have already been mentioned into account.
That, i think, is what I'm trying to say, that government spending (issuing money) and Taxes (taking money away) isn't exactly linked, that they're both tools used to manipulate inflation, deflation, employment, etc, etc.
So for instance the government could go on a spending spree but that would cause inflation as there'd be too much money sloshing around, or it could tax the hell out of people and cause deflation because there isn't enough (have i got the inflation / deflation part the right way around?)
Ahh, but which internest rate? Real or Nominal?
But that would be precisely and functionally identical to taxation, just significantly more convoluted.
Thought experiment time!
Let's make an economy, just you and me. We each have half the 200-unit monetary supply, which we'll call £s. I have £100; you have £100. A loaf of bread costs £10. We can, theoretically, buy ten loaves each.
We need to build a thing, which costs money. We introduce a 50% tax rate to pay for the thing. This leaves us both with £50 and £100 in a central pot for building the thing; now, we can only buy five loaves, and the rest of what was previously our money has gone to build the thing that needed building.
You decide you don't like tax, so instead of introducing the 50% tax rate we agree to increase the monetary supply by 50% to £300, leaving us both with our original £100 but with £100 in a pot we can spend on building the thing that needed building. Trouble is, our £100s used to be worth half the overall value of the monetary supply; now they're worth a third of the overall monetary supply. The result: the cost of a loaf of bread increases from £10 to £20, to maintain its value as a proportion of the overall monetary supply. Even though we still have our original £100, we can only buy five loaves - meaning that printing the extra £100 is exactly equivalent to introducing a 50% tax rate.
EDIT FOR CLARITY: If you're wondering why the monetary supply went up 50% but the bread went up 100%, it's because there's a step missing from the above for the purposes of simplification: the fact that the £100 that would have been sufficient to build the thing under taxation now isn't sufficient to build the thing 'cos the cost of building the thing has gone up as well in order to maintain its value as a proportion of the overall monetary supply. Effectively, you'd have to increase the monetary supply 100% to £400, rather than 50% to £300, to cover the cost of building the thing - and the cost of the bread would rise 100% accordingly.
Obviously, this is dramatically simplified, but it's what you're suggesting above.
EDIT: Anyway, this is diverging from your question, which was "do taxes pay for things" and to which the answer is a resounding yes. Could something other than taxes pay for things instead? Yes, but that wasn't the question you asked, and it would boil down to being taxation under a different name.
I'm not suggesting we actually do that, I'm questioning why most people and politicians link the taxes we pay with the amount they spend when that doesn't seem to be the case, your thought experiment although simplified seems a little off as IRL we don't have an either or situations of printing money or taxes, we use both to control the price of the loaf of bread.
If you took £50 from me so i could only buy five loaves then the value of each £10 would increase and I'd be able to buy more loaves because there are fewer £10 around now you've taken half, if on the other hand we printed another £100 then the price of each loaf would go up as each £10 is worth less than before.
The commodity value of loaf of bread hasn't changed, the value of the currency has.
i think it's viable to say "taxes dont always pay for the thing they're named as"
National Insurance is a great example.
So is Road Fund License
This, I fear, is at the heart of your misconception. When I took the £50 in tax, the money didn't go away; it was spent on building a thing, rather than loaves of bread. It's not yours any more, but it's still in the system. The physical £10 notes I took from you still exist; the overall monetary supply is still £200. There was no bonfire on which I burned the money. Thus the value of the bread stays the same.
Try this: forget about "pounds." Let's invent vouchers, and each voucher is good for one loaf of bread at a local supermarket; in this scenario I've negotiated with the supermarket that the vouchers can be exchanged for said bread. There are twenty vouchers, and we have ten each. I can go to the supermarket and get ten loaves; you can go to the supermarket and get ten loaves. We decide to feed the hungry, and each give away five of our vouchers leaving us five each.
How many loaves of bread can we now get with our vouchers?
Replace "vouchers" with "£10 notes" and "feed the hungry" with "build a thing" and you've got exactly the same scenario as above, and in neither case does the 'cost' of the loaf of bread increase.
When it was known as the Road Fund Licence (which was only the case between 1920 and 1936, so you're older than I thought!) it did pay for the roads. The Road Fund, introduced in 1920, paid into a taxation pot used exclusively for the roads (known technically as hypothecated taxation). It stopped being hypothecated with the introduction of the Finance Act 1936, after which the Vehicle Excise Duty (note: no longer called the Road Fund Licence) tax began being paid into general taxation.
Yeah but that's only because you're bringing liquidity into this, and you're also talking about short run asset supply.
And, as above, you've not put that that £50 still exists, its just been recycled into the economy by paying for goods/services.
Can't we just say analogies don't work very well, when I took the £50 in tax i did in fact burn it so now there are 50% fewer £'s floating around and so i can buy two loaves of bread for my £10 as now there's not many of those around they've increased in value, a year later and me being the currency issuer i print £100 and hire two people to build something for me, now we have more £'s floating around the price of bread goes back up to £10.
I'll stop you there, because that doesn't work. The entire reason we introduced the tax was to pay for building a thing; burning the money you collected in tax doesn't pay for building the thing.
Yeah but thats the exact antitheses of what happens in capital markets Corky.
The tax receipts aren't just burred in a whole, they are used to pay for construction for example which in turn generate tax revenues on the contracts, or when the people who are salaried are in turn taxed.
This is why the Tax Multiplier exists, its the multiple by which GDP increases/decrease in response to a decrease/increase in taxes charged by governments.
If it was a 1:1 thing like you keep implying, it wouldn't exist.
Isn't it a little tricky to talk about money without talking about liquidity?
But that was when the currency we were using was linked to a commodity, it was when i could exchange the currency you took from me for the commodity of gold, in essence you took the equivalent value of gold from me and used the value of gold in exchange for the building.
When we moved to a fiat currency that link was broken and the value of the currency is now dictated by supply, without our currency being linked to a commodity (or similar) i don't need to pay for building a thing with a commodity linked to a piece of paper as i can make or destroy as many of those as i like and i don't have to backup how many i make with an commodity.
Trouble is, the builder needs to eat - which you're conveniently forgetting. If you offered him £100 from the current monetary supply to build the thing and a loaf of bread costs £10, he can build the thing then buy ten loaves of bread to feed himself and his nine hungry kids. If you print a fresh new £100 and give him that instead, he can only buy five loaves of bread and five of his kids go hungry. Thus, he's going to ask for £200 so he can feed his family. If you print £200 instead, he's going to ask for £400. If you print £400, he's going to ask for £800. Eventually, Zimbabwe.
Lets go back to the bread vouchers. In the case of the bread vouchers, I've clearly provided some kind of backing to the vouchers - in the case of real-world "get a free loaf of bread" vouchers, that would be paying for the bread in advance of the vouchers being used or promising to pay for the bread once the vouchers have been used. Let's use the former, 'cos it's easier: so, I've pre-paid for 20 loaves of bread and printed 20 "get a free loaf of bread" vouchers.
Now I print an extra 10 vouchers. Do you think the supermarket will honour those, considering that I've paid for 20 loaves of bread but the scheme now requires them to give out 30 loaves? 'Course not: they'll either reject the vouchers outright, demand 1.5 vouchers per loaf, or give you 66% of a loaf per voucher.
It's the same with printing your own money. Here's what happens to the value of the Pound Sterling when the government just talks about the possibility of printing more money.
Again, focusing on your original question: did you look at the ONS link? Did you see how the government not only spends every single penny it raises in taxation but several billion it borrows on top? I'm really not sure how much clearer it can be made: you can't print infinite money and have it still be worth anything (see Zimbabwe), and taxes do pay for things.
BoE sets nominal at a level that will get sustained inflation to 2% in two years, we don't want to include inflation within the thing we're trying to control inflation with.
Separate names with a comma.