Tuesday 15 March 2011

Before Spending First Raise Your Revenues

What Thin Ed’ and Fat Ed’ do not grasp and what Dive and Nack cannot get together is that having strategies for this and initiatives for that as well as Big Things and New Things may be all very well for your cheerleaders in the media but they are not much use in dealing with government finances.

Getting the money in is more complicated and quite intricate so we are spending the time arguing about what goes out. At present we have “cuts” that are rather less than real in that much of them are reductions in the insanely optimistic spending plans created in the last few years of New Labour.

We have reforms that are call “drastic” that are merely winding the clock back to telling the accurate financial time. Essentially, we have give up all the “advances” bought with borrowed or non-existent money and go back to something like what we had a decade or two ago.

However, the getting of money is the aspect to this where a real debate seems to be missing and such mentions that we have are to do with stray items that catch the media eye. It is tax, assuming a broad and not too legalistic a definition and by this I mean all the ways and means of raising the tax revenues which will be the basis now and in the future of all government activity.

Also, we have to grasp that borrowing now is not an alternative and is one part of a complex pattern. Debt on which interest will have to be paid at whatever levels will be the case in the future represent charges on future taxes. So if you make serious errors in taxation policy now, fail to put them right and then borrow to make up the deficiency as time goes on any mess becomes a much bigger mess later.

Not long ago I suggested that we have to start looking at taxes in a different way that we have in the past and adjust our conceptual vision to meet what is the reality of the early 21st Century. We are now in its second decade yet we ramble on in 1980’s terms on the basis of the ideas of that period.

It accounts for the loud screeches of “Thatcherism” from the Left and cries of “added value” from the Right. So far as I am concerned being one of those miserable creatures that have to fork our whether I like it or not and without any escape there are three categories of taxation and non-taxation economy.

I have suggested these before but they need to be repeated. One is the Illegal Economy which is free from tax for the most part and for many whose economic activity is largely in that area any tax paid is either voluntary or unavoidable, like filling the fuel tank or buying at the supermarket.

It is my contention that for a variety of reasons this part of the economy has undergone spectacular growth in the last couple of decades. It is not necessarily all “criminal” in the common understanding of that word but includes a good deal of routine tax evasion, dodgy accounting and marketing.

Then there is the Alternative Economy which embraces activity where taxes are either limited by government policy or the regulations give scope for legal avoidance. Also it might include legal activity that does not attract tax such as ordinary barter, DIY, growing your own veggies etc. and a lot of things quite normal in human exchange.

However, as tax avoidance has grown from being a cottage industry in the corporate world and amongst a few wealthy and well connected people, it is now a large part of the UK financial sector. Some of the way money is moved and the amounts that go is astonishing and this has grown hugely and is expanding rapidly.

In short the UK has lost a great deal of its tax base and is losing more. Also, as ownership of so many UK assets and key economic sectors is going abroad the essential structure for taxing in these sectors is deteriorating quickly. To add to this the increase of indebtedness of the UK population is creating more stresses.

So when we come to the Taxable Economy this is shrinking steadily in real terms leaving more to be extracted from the those who cannot avoid payment or do not have the choices available to others in the disposition of their monies.

At the same time, the financial sector has been very busy extracting money large scale from the same pool of people but their money goes into the Alternative Economy resulting in a reduced tax take that takes a large chunk out of it. Again the notion of The Economics of Extraction is one that I have been peddling.

There are others around who argue that the present UK business model is simply unworkable and unsustainable, especially with some serious policy issues due for resolution which will add to government costs. If the government fail to find a policy then what will happen will happen and it will still entail huge costs.

If we do not have a proper debate and the issues are not publicly discussed but avoided then it will be very very difficult. But our real problem is that almost the whole of our political and media class now have their money at least in the Alternative Economy.

The picture above is by Quentin Massys titled “Suppliant Peasants in the Office of Two Tax Collectors”. Something like this has happened before in History in one place or another. It always ended very badly.

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