The Joy of Tax – Richard Murphy. Corgi, June 2016

This is a book you must read. Yes you. Murphy’s arguments are ones you need to understand and promote if you care about your own wellbeing and that of the country. Because Murphy seeks to turn out understanding of tax economics on its head, and persuade governments that they have misunderstood their role in relation to tax and the economy.

He starts by arguing that tax is good for us. You may believe this already, but his words are inspiring:

‘In a democracy, tax is one of the cleverest of human inventions and one from which we all benefit as a result of the massive contribution to our wellbeing.’

‘Tax isn’t about oppression, about a loss of income, it’s about how to make collective choices that work best for the communities in which we live.’

‘Tax works to deliver wellbeing when nothing else can.’

He defines tax as: ‘the consideration paid by people who live in a country in exchange for the social contract that exists between them, its government, and each other’ and convincingly argues that it belongs to the government. Governments do not ‘spend tax payers money’ (Murphy detests this phrase), they are not merely agents for their citizens, they have a vitally important role of their own: to manage the economy for the benefit of us all.

Murphy has another reason to hate that phrase: governments do not have to charge tax to spend money. They can spend as much money as they like by printing it – as this government has done with Quantitative Easing. Here Murphy is challenging conventional wisdom and a few thousand text books, but has won the backing of the Bank of England for his logic, and quotes from Abraham Lincoln suggest that this was well understood before modern economic academics suggested otherwise.

The economy is made up of money in circulation. Anyone saving money takes it out of circulation and decreases GDP. The money in circulation comes, not from savings but from loans from the banks. When you borrow money from a bank you have two accounts: the one the loan is paid into (from which you spend) and the one it’s repaid into. No real money has changed hands but you are now spending money nevertheless. Magic. And the government can do exactly the same – indeed that is precisely what QE is.

If the banks lend too much, or the Government prints too much money, there is too much money in the economy chasing too few things to spend it on, and inflation results. So the amount of money in circulation needs monitoring and money withdrawn if it overheats. The way the government withdraws money is through tax.

So governments do NOT charge tax and them spend it. They spend and then charge tax to regulate the money supply. There are other roles for tax, which Murphy describes, but none of them is providing the government for money for it to spend.

Murphy also demonstrates that ‘balancing the books’ is not a proper aim for a government as follows:

The national economy (GDP) is made up of only four sectors:

  1. consumer spending;
  2. government spending;
  3. investment –both government and private sector; and
  4. net exports i.e. exports – imports).

The total amount of saving and borrowing between these has to balance. So if any of these groups – consumers, companies, government – saves money instead of spending it, the others have to borrow.

The government is the biggest spender and employer in any economy, so when it talks of making cuts neither consumers nor companies want to spend the money needed to boost GDP. Consumers don’t because they know that the government no longer offers a safety blanket so they must save to look after themselves. Businesses don’t because consumers and the government are not spending so they have no customers. And as UK productivity is low our trade deficit is increasing.

So the government has no choice but to borrow to meet its unavoidable commitments.

Because countries are not the same as companies. When companies sack someone that person is off their books. When governments ‘lose’ people through downsizing the public sector those people still need housing, food, health care etc. They aren’t sacked from the country.

The only way for the government to reduce its deficit would be for us, consumers, to go into more debt or for GDP to fall. So we become trapped in a vicious circle.

The virtuous cycle arises when government spending boosts GDP, increasing confidence, and allowing government to increase the tax take, and reduce the deficit.

Murphy describes a number of legitimate aims for a tax system, the first being to keep the peace – reduce the causes of economic conflict between different sectors of society. He argues that the tax system should enable society’s resources to be used more equitably, make sure all basic needs are met, and provide people with access to the means to make their own living. It should also encourage innovation, skills and enterprise by supporting these in both private and public sectors. And it should ensure bother horizontal and vertical tax equity. We are, in the UK, scandalously bad at this last: people gaining the same amount of money but from different sources – earnings, savings, rents, offshore savings..) pay very different amounts of tax, and people earning more pay a smaller percentage of that in tax than those earning the least.

He makes a convincing case for combining the tax system with the benefits and social security system (which he describes as a negative tax system) and argues persuasively for a national Citizens Income,

He laments our ignorance about tax, and particularly the ignorance of politicians and the media, and argues for the following features of a good process for making decisions about tax:

Education about tax and how it really works– for everyone including school children

  1. Research into the impact of tax decisions from reputable disinterested research centres ) of which there are currently none).
  2. Proper preparation for tax policy, with every piece of tax legislation accompanied by a statement of exactly what it is meant to achieve, to guide tax collectors and courts, so that clever tax advisors cannot thwart the will of government by finding loopholes in the detail.
  3. Proper scrutiny from relevant parliamentary scrutiny committees, which should have a budget to support their role (currently not the case, Margaret Hodge’s committee has no budget ).
  4. Accountability of HMRC to parliament. Historically accountable to the Queen there is no named government minister taking responsibility for it.
  5. Much closer relations between HMRC and the public, returning to local tax offices offering advice and support and information.
  6. Transparency from Tax Havens and from Multinational Companies, e.g. country by country reporting.

There is more, Murphy looks at what taxes should stay national and which could be devolved to City Powerhouses; examines National Insurance, Inheritance Tax, and more.

The book’s style and title led me to imagine Murphy as the kind of socially awkward middle aged man you might try to avoid in the pub, and that’s a pity – his editor has let him down. I don’t suppose he is like that at all, and his arguments deserve a much snappier, arresting presentation.

Rewritten as a 75 page call to action, in the manner of Thomas Paine’s Common Sense, this could be phenomenal. We know where that led, and we need this to have that kind of impact.

 

 

Valerie Iles

29 June 2016

 

 

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