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Bizarre economic remark of the day I was reading the Telegraph and came across this gem…
HMRC inspectors have started the crackdown in a bid to tackle tax evasion, which loses the economy around £3billion a year.
Huh? So that £3 billion that does not get paid to the state is a “loss to the economy”? How does that work exactly? Do the tax evaders burn that alleged 3 billion quid in their backyards to make sure that if they can not keep control of the money they earned, no one else will? Is that what Christopher Hope is claiming?
In what way is money not paid to the state, but instead allocated to some other economic activity chosen by the person whose money it is, a “loss to the economy”? Does Mr. Hope think taxing people’s money creates more net wealth (or indeed any net wealth) compared to money left untaxed for private wealth creation? Really?
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I think, in an odd way, that you are ascribing to Mr Hope rather more journalistic intelligence than he in fact possesses. For instance, here is one “Kate Loveys” in today’s Daily Mail(Link):
Middle class medical professionals are to be targeted in a new tax evasion crackdown, it emerged yesterday. […]
The economy is estimated to lose around £3billion a year due to tax evasion.
Try opening both articles side by side and comparing them, and you quickly begin to notice that they have any number of words and phrases in common; several passages read the same almost word for word.
This is not “journalism”, it is churnalism. So it’s no wonder that Mr Hope “thinks” that tax evasion takes money “out” of the economy – because that’s what HMRC have told him to think.
Class warfare by any other name.
In what way is money not paid to the state, but instead allocated to some other economic activity chosen by the person whose money it is, a “loss to the economy”?
In the simplest way imaginable.
If the wealth does not show up in the economic statistics, the Press cannot report it and therefore it does not exist. If Tom and Tammy Taxpayer would be punished for reporting their untaxed income, they will perforce conceal it, and therefore it will not exist. Therefore the money which would have existed had they not evaded the tax, does not exist because they did so, and has been lost to the economy. Boom boom!
There are nonetheless certain disadvantages to tax evasion. For one thing, doing it effectively costs money and/or requires specialist know-how. Thus, evadable taxes place a regressive competitive disadvantage upon the ordinary working stiff. One way of countering that would be, as a first step, to burn about 98.43% of the tax code. Another way would be progressively to tax everybody who looks too prosperous, at a rate which assumes they are going to evade most of it anyway.
This latter method is so obviously superior, and has so few potential downsides, that it has universal support amongst practically all persons greater and gooder than myself.
What makes you think that tax evasion actually deprives the state of income? If that was the case, the Italian government would have shut down long ago.
What happens is that the state simply raises tax rates to compensate. The result is increased distortion in the economy, higher burdens on those activities which can’t evade the state’s reach, and value expended on paper-shuffling, rent-seeking, and bribery.
The net loss to the economy is not the same as the nominal loss of revenue to the state, but there is a loss.
Agreed on your basic point, but you then make the same mistake by asking: “Do the tax evaders burn that alleged 3 billion quid in their backyards..?”
Burning physical money does not reduce the size of the economy by one penny, of course, it’s like waiving a loan to the government.
The byzantine fiscal regulations in Italy are not there simply to increase the State’s revenue. Firstly, even “honest” citizens who want to pay their taxes need “professional” help and so whether you pay a private accountant or go to a “patronato” (run by the unions and who receive payment from the State to allow them to provide the service for free) one of the side benefits is job creation. The complexities of the regulations also ensure that it is quite easy to fall foul (whether on purpose or inadvertently) of them and to sort the mess out the citizen needs professional (accountants, lawyers,etc) as well as political help and advice. And of course in both situations outlined you are expected to show your gratitude with a suitable “gift”.
Isn’t it strange how the £3bn in lost tax revenue seems such a small number now? Whats £3bn when you are £180bn in the red? If they collected every penny due it wouldn’t make any difference to our plight.
It is the base assumption that the
state has a a priori claim on our
money that is so galling. This
journalist just assumed it or could
not be bothered to challenge it.
I wouldn’t attribute any views to Chris Hope on the subject.
An alarming amount of reporting of government announcements amounts to cutting and pasting factoids from the press release, or from earlier stories into the story. Journalists on dailies, TV, and news websites, are so desperate to get a story out in time, and present some factual exposition, that they are really uncritical in doing so – something on which government and corporate and big campaign press officers, seldom very sure of the facts themselves, now rely.
Asked for background about cctv cameras recently, I wrote a fairly long email for the reporter within the hour, explaining that there are NO meaningful figures, and the total figure usually given for the UK (4m) is worthless, being derived from an estimate, given without method or explanation, apparently based on counting one street, in a 2002 study of data protection compliance. In the first three sentences of the article that appeared the next day appeared a statement that there are 4m cctv cameras in Britain.
So if today everyone in the UK emptied their bank accounts, took their cash and burned it, the economy would just continue to bubble along fine tomorrow, yes?
“one of the side benefits is job creation”
So useless jobs producing nothing and increasing complexity and costs is a benefit?
The line should read:
There, I fixed it. I’m guessing this Christopher Hope chap probably doesn’t know a Laffer Curve from Shepherd’s Pie.
Of course! It’s a benefit to the holders of those worse-than-useless jobs. And to the various politicos, fonctionnaires, and petty tyrants buying the support and loyalty of those job-holders – to them it is a crucial benefit!
From the government’s perspective, yes. Any activity for which money changes hands contributes to the size of the economy, and the bigger the economy, the more junkets politicians and civil “servants” get to go on. In the same way, when our children were small Mrs MarkE stayed at home looking after them (we’re old fashioned like that), which is of no benefit to the economy. If she had gone out to work and employed a child minder the economy would have grown twice; by Mrs MarkE’s earnings and by whatever she paid to the child minder (and whatever she spent elsewhere, if there had been anything left to spend elsewhere).
Government non jobs also fall into a special category; the holders of these sinecures know who they are and might be persuaded to show gratitude to the government that created their sinecure; the ten people who would have got real jobs without the dead hand of government strangling them cannot be identified and will therefore not punish the government for costing them their jobs.
I have often had conversations with other people which more or less consist of being told that “If you don’t pay tax, you are not contributing to society”, as if somehow “society” is something run entirely by the government, or that the government is necessary as an intermediary for any interaction between citizens to be beneficial. I try to then explain that generally it is money spent privately that is of benefit to society and money paid in tax that is not beneficial, but mostly they don’t get that.
(And of course, not all tax money is wasted. Just most of it).
RE Michael Jennings, 03:57
You’ll often find that the people who hold that opinion most strongly also hold a very high opinion of the BBC, and watch BBC news mostly or exclusively, claiming it to be ‘impartial’, ‘unbiased’ or similar.
Does the BBC attract or create people with those opinions though, or is the truth somewhere in between?
L’Économie c’est moi.
Mark wrote:
Physical money has a higher chance of being used in non-taxed payments. Paying someone to do some yard work, wash a car, off-hours plumbing etc, and these recipients will use this money to pay for stuff instead of dropping it into a bank account (that can be traced). There’s a whole monetary circuit of non-taxed (or low taxed) money that circulates rapidly in the economy. Governments don’t like it, because they have no control over it. Everybody else benefits from it.
–GJ–
De Wandelende Hollander schreef:
‘There’s a whole monetary circuit of non-taxed (or low taxed) money that circulates rapidly in the economy. Governments don’t like it, because they have no control over it. Everybody else benefits from it.’
The size of this can be stunning. I sometimes ask people, just for fun – this will tell you the sort of circles I move in – what proportion of the US population they think is entirely ‘unbanked’ – the ABA term-of-art for a person who has no banking relationship whatever. No checking account, no debit card, no credit card, no mortgage – nothing.
The correct answer is – between 30 and 40%. That’s 100 million people who deal strictly in cash and cash equivalents (which means, in effect, money orders) or through informal culturally-, socially- or ethnically-based cash transfer systems. Around here (SE Michigan) you can find a hawala as easily as a dentist.
The stream of low-taxed money circulating ceaselessly in the economy is just vast, and I’m sure it’s also vastly underestimated. In times like these, the flow (in proportion, at least) gets larger, not smaller. Everyone offers a discount for cash these days, it seems. And every government taxing action only serves to increase the size.
llater,
llamas
Here is another one from the Los Angeles Times (11 Jan 2010).
“The Obama administration will seek to recoup taxpayer funds used to rescue the ailing financial system, the White House said this morning amid reports that a fee on banks was one option under consideration.” ( http://latimesblogs.latimes.com/dcnow/2010/01/obama-administration-eyes-bank-fees-.html ).
Uh. . . who pays bank fee? Bank Customers who are usually taxpayers. So after tax payers are going to pay more money out of pocket for fees that will cover a debt they would otherwise had paid for with there taxes? Can someone tautology.
Despite pious claims about the public good, government is increasingly about the getting of money: either directly for the government, or for the government’s functionaries, or for the government’s functionaries’ “friends.” The great fact about government is that it is almost universally corrupt.
It is not quite as high in this country because of the relative success of the War on Cash over here, but we still have more than 1 in 12 citizens unbanked, and more than 10% without a current account. Most of them probably couldn’t get ne if they wanted, since the ‘identity’ obsession trumps even the War on Cash. For recent immigrants the proportion is much higher, for the same reason: Money Laundering regs and Know Your Customer keep them locked into cash.
Perry: “So if today everyone in the UK emptied their bank accounts, took their cash and burned it, the economy would just continue to bubble along fine tomorrow, yes?”
That is a silly example, as all the notes and coins in existence barely cover 1% of UK bank deposits; and the rush to withdraw cash would of course cause a banking crisis that would even scare me – I was talking about relatively small amounts.
But let’s assume that all builders and so on ask to be paid in cash once they’ve done the job. For whatever reason, having done the job and created that sliver of extra wealth, they burn the money. When they wake up next morning penniless, they go and do another job etc.
The government would realise that it doesn’t need to collect the extra £3 bn tax or whatever, it can just print £3 bn in bank notes, use it to pay civil servants, benefits, welfare, pensions etc, who in turn spend it on builders etc, who in turn never ask for the notes to be redeemed.
Or even more simply, a bank note is an IOU issued by the government. If the builder does a job for me and I give him an IOU and he burns it, he is ‘poorer’ and I am ‘richer’ but the overall wealth and productive capacity of the economy is not affected one iota.
Not worth a reply Mark.
Mark Wadsworth: “The government would realise that it doesn’t need to collect the extra £3 bn tax or whatever, it can just print £3 bn in bank notes, use it to pay civil servants, benefits, welfare, pensions etc…”
They don’t do it now? They realized they do not need to collect any taxes in order to spend pretty much the minute after the gold standard fell – in fact probably well before that, which is why the gold standard fell. I am not a gold bug by any measure ( “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffett on gold), but conflating fiat currency with governments’ ability to pay is so 197X…
Mark, if someone is paid X or Y for a piece of work or something they have sold, and then destroy the units in which he has been paid, either by burning the physical notes, or by deleting the electronic records of that payment, then the record of that payment has disappeared, gone, vanished. That person no longer has the payment for the work done or services/goods sold, and therefore has not accumulated anything. He has, therefore, worked or transacted for nothing, like working for a charity.
Money is a claim on resources. Money is a record of the transfers of those claims. Saying that you can destroy such records and somehow repair the damage by the government turning on a printing press is batshit. It also ignore the fact that money, as a claim on resources – as the Austrian school likes to put it – must necessarily belong to someone. If I destroy my money, then printing more does not restore that money to me. All it does is return to the total stock of money to its old level.
Jonathan, as an isolated point, without any opinion on Mark’s point (which I admit I missed):
Why not, provided you have a ‘legal’ printing press? Money is indeed a claim on resources, but not on any specific resource, no?
Alisa, destroying your money and any record of being paid for X is not rectified if the government just inflates the money supply a bit, since the person destroying the money will not get back the amount destroyed. Instead, the entire population will get a adjustment.
In any event, it is so obviously silly that anyone would deliberately destroy the payments they received for their work. The only way that such wealth would be destroyed, in reality, is by governments seizing that money and therby taking it from someone who valued it and giving it to someone else, such as a favoured interest group. Since I happen to think that in a free society, exchange involves people trading something that they value for value, anything that damages that represents a net loss for society.
Thanks Jonathan, strangely enough I missed the point of the person destroying the money and the one re-printing it not being one and the same. As to the silliness of destroying one’s own money, it should go without saying.
The more I think about the discussion arising from this:
the more interesting it gets. What, really, is the actual value of a pure unit of currency to the total economy? That is, given the availability of some temporarily fixed quantity of goods and services, how does the size of the economy vary as we add or delete currency?
My crude intuition is that the total utility of the money supply, qua money supply, is the present utility of the economy minus its utility should we be suddenly compelled to resort to barter instead. So the ‘value’ of a pound’s existence is quite separate from its revealed value in, say, roast ox or oranges – it must be that undiscoverable fraction of the roast ox or oranges which we would, on average, be prepared to forgo for the privilege of getting them via cash rather than barter. It is probably pretty damned high.
But then we must add to that the value obtained from its accurate record as to who is entitled to what under the present state of our ‘virtual barter’ system, as opposed to one in which the record is wiped or degraded. Nontrivial, to say the least, again.
This hints at all sorts of implications, which I’m not economist enough to follow through properly. Here is a fun one. If termites eat all the money you have stuffed in the mattress, that shrinks the economy as well as your happiness. But if Burglar Brown nicks it all irrecoverably, and then termites eat it after he stuffs it in his mattress, then the actual eating of the money expands the economy, in that it lessens the corruption of the record which occurred when he stole it from you in the first place.
Does all this make sense to people who are not me?
It does, Gray. I think it might help to think of money as facilitating greater efficiency in the economy. When the money is in your hands/mattress, it is consistent with that purpose of efficiency. When you voluntarily transfer it to someone else, you necessarily exchange it for some other good/service, which is consistent with efficient economy. When someone nicks it without giving anything of real value to you in return, it is inconsistent with efficient economy.
If I burn my bank notes I am giving the value of them to everyone else. As the money supply shrinks so the value of the rest of the bank notes against the goods and services they represent increase.
Governments do the reverse. They print bank notes according to their whim or ‘wisdom’ and thus devalue the bank notes against the goods and services they represent, and so the number of notes you have to give for a good or a service increases. Thus inflation.
Exactly the same principle that applies to counterfeiting. And why it is normally illegal – because it is stealing from everyone else.
John B, that is just the first degree, obvious even to my untrained eye. But there is more going on here. The bank notes are yours to burn – so much is plain. So would the Mona Lisa be, if you owned it free and clear. But in the latter case, you would still be destroying real value when you burned it rather than sold it. The question is, to what extent is the same true of bank notes?
Inasfar as the record of legitimate property-claims goes, your act is clearly neutral – they were your bank-notes. Inasfar as you are reducing your demand for other people’s goods and services, is that necessarily a benefit? Yes, you’ve effectively increased the value of the remaining notes, held by them. But you have also opted out of a corresponding share of mutually beneficial trades, which might have enriched them more, if you could have found something better for yourself than burning to do with the notes. Wealth that could have been created – and not only by you directly – is then not created. Are we sure which effect prevails? Well, we should probably agree that this is not a cash effect as such, and therefore to discount it.
More fundamentally, there is the fact that a piece of cash provides actual value: the much-demanded service of facilitating trade. It therefore seems to follow that destroying it destroys some value, albeit admittedly not its face value. After all, if we all voluntarily destroyed our whole stocks of cash, the net effect would by no means be a wash!
There is presumably some optimum quantity of circulating cash at any given time, though – according to the trades people are trying to make – since infinite amounts of cash would be even more useless than none at all. If we are past that shifting and unknowable optimum, then and only then is destroying cash an actual public benefit in and of itself. Or so it seems to me.
Where Governments go wrong is (for the rest of us) in trying to adjust the cash supply towards whatever they say is the optimum this month – and necessarily destroying value, by screwing up the trade record in the process. Wouldn’t the State or bandit who deflated the currency by burying their victims’ money in holes in the ground be doing harm just as surely as their inflationary counterpart, if only the process didn’t tend to weaken them as surely as their actual practice strengthens them?
Money is irrelevant other than a means of exchange. I don’t want to have to carry my baked loaves around until I need a new pair of shoes.
It’s the goods that count.
People like John Maynard Keynes have conspired to confabulate us with various ‘economic’ con games.
Money is a number of units that represents real wealth. It is a store of wealth, as long as people accept the promise of value it represents.
You cannot eat a pound, build with it, wear it or anything at all. (Well, okay you can do that, as they did in Zim, because it was cheaper.) Only when you exchange it with someone who shares your faith in its value to be exchanged for further goods or services, is it of value.
Money is irrelevant other than a means of exchange.
What I’m trying to say is that it’s, effectively, a good which provides the service of expediting such exchange. And that this is an extremely valuable service. But as you say, it can only perform this by virtue of a popular consensus that it does so. If one kind of money is hacked, by fraud or fiat, then people must indeed find another kind or do without.
Doing without is bad, transition costs between monetary systems are nasty, and Keynesianism is indeed crap.
Burn money and you do two things. Firstly, you renounce and redistribute your own trade credits to the money-holding population: this is indeed a wash, so everybody but you benefits in exact proportion to your loss.
Secondly, at any given time, there is a particular demand for the money with which to expedite desired exchange. If there is any positive demand at all for additional money – if anybody is willing to give up any real goods purely for the service that money provides – then surely the marginal unit of money is still a good, and burning existing (acceptable) money must therefore be destroying some value? Conversely, if the marginal unit of money is a bad for some reason, such as taking up too much valuable wheelbarrow space, then burning it increases overall welfare.
This is, to me, a quite separate issue from the inherently corrosive effects – on both the general welfare, and the specific value of the services money provides – of destroying trading information by stealing goods and issuing crap paper.