Ragging on Ritchie

As the FT has noted this morning:

John Glen, City minister, has vowed that Britain’s financial services sector will enjoy “competitive tax rates” as he paved the way for a Budget cut to the 8 per cent surcharge on the sector.

The same article also noted that the government was reviewing the cap on bankers’ bonuses, which was an EU requirement. The aim is to boost the City of London.

So, as large numbers of working people in the UK face increased NIC, consumer price inflation, massive employment uncertainty, cuts in universal credit, and straightforward shortages because business cannot plan how to get out of a paper bag, let alone recover from an economic lockdown, the City’s bankers face tax cuts and bigger bonuses.

1) Taxes on bonuses are higher – because NI – than taxes on profits plus dividends. So, removing the limit on bonuses will mean a larger portion of the City’s total profit plus labour bill – aka added value – will go in tax payments. For someone who believes in MOAR TAX this is good, surely?

2) The 8% surcharge is on bank profits. The P³ stoutly maintains that taxes upon profits do not impact upon worker wages. Yet here he says that bankers will gain lower tax rates. So, profit taxes on banks must impact upon the wages of bankers.

He never does think through what he says, does he?

If ever there was a wrong person for a job right now Haldane is it.

I can think of the occasional person less suited to be an economics professor, for example.

Nigel Dawson says:
September 19 2021 at 1:38 pm
Surely even the most basic economist must know that FX rates are primarily driven by interest rates in different currencies, not productivity?

Reply
Richard Murphy says:
September 19 2021 at 2:40 pm
They’re not

That’s why no one knows that

Reply

Oh.

11.1 INTRODUCTION
It is conventional in macroeconomics textbooks to see the interest rate
as the price of money and to consider it in the context of the supply of
and demand for money. Here, however, we consider the interest rate
alongside the exchange rate. The reason for this is that because capital
can move freely into and out of the country, UK interest rates are
closely linked to interest rates in international markets, particularly
those in the USA, Europe and Japan. Because investors, in deciding
where to place their funds, are choosing between assets denominated in
different currencies, this leads to a close connection (explored in detail
later in this chapter) between interest rates and exchange rates. In an
open economy such as the UK, the link between interest rates and
exchange rates is stronger and more direct than the link between
interest rates and the money supply. We start with interest rates, and
then consider exchange rates.

It’s astonishing what he doesn’t know, isn’t it? And yet he attempts to advise governments?

And we’ve the international Fisher effect, and interest rate parity to think about as well.

Ho Hum.

It’s also unnecessary. Given that exchange rates are largely set by relative productivity rates after hot money flows are taken out of account

Err, no. They’re – largely – set by differences in inflation rates/interest rates, those two being rather intimately combined. The FX rate is a monetary phenomenon, thus influenced by monetary factors.

We can indeed look at the real exchange rate and productivity, but not really the nominal.

And last, there is the rather odd assumption that the Scottish people would not be willing to lend their own government money after independence. As in the rest of the UK there are substantial savings owned by Scottish people. My research has shown that maybe 80% of UK savings are tax driven as to their location. This is likely to be true in Scotland, therefore. If the Scottish government decided that it wished to change tax incentives in ISAs, pensions and its own range of savings accounts to encourage people to save with it then that would very likely be successful in raising significant funds for it. The dependence on foreign money markets could be eliminated.

Better still, my solution puts Scottish savings to work, when at present few of those savings will actually fulfil any useful function within the economy. Much will be lying dormant in bank accounts earning almost nothing. And by Saving for Scotland what people will also do is provide the capital for the solid foundation of their new state – and in the process help build it for the generations to come. As a move towards national solidarity little could work better.

And that hot money he talks about is oft referred to, more correctly, as portfolio investment, which is exactly what those savings he’s talking about are. So, we’re to solve that FX problem of portfolio investment by portfolio investment. Hmm….

Accountancy does always require double entry. Tett is worrying about the size of the credit – as is so commonplace, based on government debt obsession – but the consequences of the debit – which represents the asset that ownership of debt represents – is just as significant.

Growing debt represents increasing wealth inequality. There is no widespread ownership of this debt, and nor is there widespread ownership of the legal entities that own that debt, such as banks. Pension entitlement is, for example, very concentrated.

Borrowing is required to provide access to funding for those without it. But that creates increasing wealth for a smaller number. In my opinion the issue here is not the debt as such. It is the increase in inequality that really matters here, I think, because that is the real cause of the stress Gillian Tett is worrying about.

How to tackle that? Additional taxes on wealth are one very obvious way to do this, not because we need the money to fund anything, but because inequality has to be reduced. It is time we recognised that.

So we tax folks more, reducing the debit, which means – ineluctably – reducing the credit which is that borrowing that is required.

This works how then?

We have short term price pressure because of Brexit, Covid and climate change, but when iron ore prices can fall by 20% in a week, as they gave done in the last week, this can be seen as the price of disrupted markets and not the consequence of any underlying monetary trend that can be tackled by central banks.

All monetary explanations of inflation are wrong because the iron ore price can fall. Good to have that sorted out then, eh?

What is the way forward? With this post already 1,000 words long this is not the moment to address that in detail. But there is one over-riding message, which is that nothing will change until it is accepted that what we have had is broken, irreparably. Whilst we hanker for what was, and the idea that we can ‘get back to normal’ remains a dominant narrative, we remain in trouble.

What was has, I rather strongly suspect, gone. What we have to do now is build what comes next. It does not matter whether we want to or not. We have no option. The way we were was not sustainable in any sense, whether politically, economically or socially. When that is recognised we can move forward. My big concern is that I doubt that we are there yet. At the same time, I also think that awareness is coming. And that’s my basis for hope.

We must do something different though I know not what. A useful guide that, eh?

The allegation is that the process was corrupted.

There is much fury in the development community about this, and those who have always seen the World Bank as a neoliberal enemy are having a field day.

I admit I see things slightly differently. I am delighted by the demise of the Doing Business report. It has always promoted a profoundly inappropriate view of the world concentrating as it did on light regulation and low tax as the basis for prosperity when quite clearly what was not true. This report was part of the old Washington Consensus which the world can most definitely do without.

The background here is that the World Banks’ “Doing Business” report ended up with some governments putting the pressure on to get better results. They’ve thus cancelled the report.

Hmm, well, that just never does happen in other international bodies, not at all. The WHO is not, in any manner, beholden to China over ‘rona for example. Nope. Therefore we should not take this as an example of why we should be leery of international bodies and law. Nope.

But rather more interesting is the insistence that the WB is on the side of low tax and light regulation. And that this report measured that. Not really, no:

The reference to tax rates is here. It’s not even a majority of the ease of paying taxes measure.

It’s not even about light regulation. It doesn’t ask anything at all about gaining permission to operate in a particular sector or anything. It is about effective regulation – rule of law, contracts, courts, property rights and so on. But then those are ease of doing business, not predelictions for light regs and low taxes.

But the P³s opposition isn’t based on knowledge of what the measurements actually are anyway. As with his opposition to the Washington Consensus itself – merely a list of 10 stupid things you shouldn’t do to an economy – it’s just that there’s a vague lefty unease at anyone measuring bad government therefore the measuring should be opposed.

How to tackle that issue remains very largely unknown, but acknowledgement of the issue is a key first step.

Third, in that case what this suggests is that better data on many aspects of employment is required from employers. Gender, class, and race and ethnicity pay gaps are all required now by that most important of stakeholders of all corporations, which is what employees are.

There is no accounting standard on this issue. There should be. It’s on my list.

We’ve no idea what to do about this but someone should pay me to write some blather about it.

Cool!

It is already the case that the financial services sector is piling in to make money out of offset. And since scarcity will pay them rich rewards you can be sure that they are going to restrict supply. In that case assuming the availability of offset opportunities when suggesting a route to net zero is naive at best, and profoundly misleading at worst.

High prices being the solution to high prices. For, of course, when seeing the vast amounts to be paid for offsets folks will go create more offsets.

Has he even reached that chart on page 3 of the standard Econ textbook yet?

And in the meantime discussions on sustainable cost accounting suggest that it is being noticed. The awareness that the sustainability reporting being proposed at COP 26 will fall far short of real need is increasing as investors realise that knowing how much carbon a company produces does not indicate how the problem will be solved, or what the cost of doing so might be. Despite this the government seems wedded to this approach that will fall so far short of investor needs, and those of society. I am being encouraged to write an alternative accounting standard on this issue and that is requiring some thought.

Have a carbon tax. That puts emissions into all market prices. Corporate accounts are compiled from market prices. Job done.

Of course, that doesn’t get me a one day a week job from Copenhagen Business School for the next four years so perhaps someone would care to just give the cash up front right now?

The idea that MMT says there may be money creation without limit is so grossly wrong it is absurd: what it emphatically says is the exact opposite. It recognises the real physical limits of the economy. The authors do not even hint of their awareness of that. It makes one wonder how much they have actually read about MMT. They only reference one MMT article by an MMT author, which is by Stephanie Kelton, but rather more by opponents.

What they have emphatically also not realised, or deliberately ignore, is that MMT has a very strong focus on inflation control.

They also, therefore, ign0re the role of tax in MMT, even though they read an edition of the Real World Economic Review where I had an article that discussed the role of tax within MMT.

From the article being fistthumped at:

Arguably, proponents of MMT are aware of this history. What they derive from these insights is that the roles of fiscal and monetary authorities (Treasury/Congress and the Fed) could be effectively reversed. Under MMT, the Fed finances the deficit by printing money, while the Treasury and Congress use their tools (taxation, expenditures and fees) to stabilize the economy and fight inflation. For example, Congress could raise taxes to dampen aggregate demand when the economy heats up. In fact, many MMT theorists are quite concerned about the dangers of inflation — perhaps to a greater extent than adherents to post-Keynesian or even New Keynesian views — because it erodes the purchasing power of wages. While in the latter frameworks, inflation greases the wheels of the economy, this is not necessary under MMT since the government’s printing presses provide lubrication. The hallmark of MMT is thus a fiscal view of the world, where the fiscal authority becomes responsible for the traditional monetary policy domain. In fact, MMT might be more aptly called “modern fiscal theory.”

So, they talk about tax being used to control inflation, this shows that they don’t talk about tax to control inflation in MMT does it?

Dr Tim Rideout says:
September 10 2021 at 5:06 pm
My expectation is that a post-Brexit sterling continues its 100 year pattern of decline so sinks against all currencies including the S£. So I am leaving the S£ unchanged and predicting a continuous slow erosion of sterling. We would not want the S£ to rise against the Euro, Dollar etc. Back when my mum went to Switzerland in 1947 you got 25 SFr to £1, today it is about one to one. I don’t think it would be good to pin ourselves to sterling unless somebody thinks we need a devaluation against everything else.

The P³ in charge of money printing will lead to the Bawbie rising against the £ sterling, will it? And an;t it quaint to think that the FX rate is in the control of a government anyway?

This is fun too:

Richard Murphy says:
September 11 2021 at 7:16 am
Jim

Scotland should never, ever join the euro and there is no reason for it to do so or peg. That would be economic madness. And Sweden proves it is not necessary.

Richard

So, Bawbieland can sign an international treaty promising to do something and not do it, ever, and that’s just fine. But for the UK to breach the NI protocol by having a border in Ireland – something not even mentioned in the Good Friday Agreement – is such a breach of international law that Boris should be on the wrong end of a pike?

The bit that’s being missed in that little hope is that there will be much in those bank accounts to convert on 1/2 Jan…..given that they themselves are predicting depreciation, won’t everyone move into sterling first, before the Bawbie?

The comment is, of course, misleading. There is no chance of the US running out of cash, or defaulting, unless that is what the Republicans choose that it should. The US can in reality create as much money as it wants, subject (if it is prudent) to inflation constraints and, of course, politics.

The Republicans could try to crash the dollar. But let’s be quite clear, that is not necessary. And the impression given that the US is running out of money is false. It can’t do that unless some deeply misguided politicians choose otherwise.

Sigh, if only he knew anything.

The US has a legal debt limit. Congress has passed a law – you know, democracy and all that – which says that the national debt can only become “yea big”.

Every few years they realise how much this is constraining their spendthrift ways and vote again to make the new debt limit “yea plus big”.

The Federal Reserve does not print dollars and send them to Treasury. Instead, financing is done by the Fed buying Treasury bonds (bills, notes) meaning that the debt size is, given the debt cap, a constraint of the number of dollars available to the government.

Congress has, in the past, refused to raise the debt cap. And government has started to close down for lack of money. They do, generally, quickly then raise the debt cap.

The US is one of those places where the national government can actually run out of its own cash.

the one unexpected element, which was an increase in the dividend tax rate by 1.25%.

Dealing with the latter first, this should be seen for what it is. It is a sop to criticism. It supposedly addresses the issue of national insurance avoidance by those who pay themselves using dividends from limited companies. I have no particular problem with tackling that issue, but there is a flaw. The implication is that genuine investment income – the dividends received in ISAs and by savings institutions, interest and rents – should all remain exempt from this charge. Implicit in this move was another attack on working people as a consequence, with the very obvious intention being that genuine wealth should be untouched by the demand that it contribute to society. The bias could not be clearer.

Genuine wealth contributing to society by being, umm, invested in it perhaps? That capital stock does have to come from somewhere, after all. Whatever is to be said about MMT and money printing it’s still true that for there to be a capital stock someone, somewhere, has had to delay their consumption….

I think I need add very little. I would much rather none of these issues had needed to be drawn to public attention, but eventually John and I, for differing but related reasons, felt we had no choice but to disassociate with TJN because we now consider it is doing more harm than good when it comes to tax justice-related issues. The colleague who reviewed the comments made by Alex Cobham to The Times agreed. But what their analysis suggests is that this is not an issue that can be laid at the door of what that commentator calls the ‘founding group’ (otherwise called John Christensen and me) and can instead, on the basis of Alex Cobham’s own analysis provided to The Times and on its blog be laid firmly at his door, rather as John and I have suggested.

The bit they’re missing is that every organisation not subject to market forces does turn to shit. The market forces having the glorious result that when it does turn to shit then it goes bust and is cleared from the environment. This is the grand glory of the system.

You know, the system the P³ thinks shouldn’t have such prominence despite his own personal experience.

The professional bodies with a concern about tax – whether of lawyers or accountants or the dedicated tax profession – all have one thing in common. They supposedly exist to promote high professional standards in the public interest. I emphasise the last point.
…
It’s possible for the tax profession to engage in policy debate with your doing politics. But right now my allegation is that its silence is profoundly political. In the absence of comment the status quo and the prevailing narrative are maintained. That is what the taxed professions are permitting. And when what is happening is clearly not optimal tax policy that does them no credit.

It’s time the tax profession acted in the public interest – and right now I am not at all convinced that it is.

All must be politics, all the time politics. The professional bodies should be arguing for a specific set of political policies that is. Instead of, you know, paying unto Caesar and otherwise shutting up?

What’s really cute about it is the underlying assumption that if those bodies did do politics then they’d do the politics the P³ approves of. Which isn’t, to put it mildly, what we have seen when people who know what they’re talking about do opine now, is it?

Charging national insurance at 12% on all employees, including those earning over £50,000 a year, could raise £14 billion of extra tax a year

That would put us well over the peak of the Laffer Curve. Which, in that Saez and Diamond paper was put at 54% in taxes paid upon employment income. Note the careful description there. Not income tax, but taxes paid upon employment income and as the paper says, that includes employer paid employment taxes.

40 or 45% income tax, 12% employee NI, 13.8% employer NI – we’re well over 54%, aren’t we?

threats to the US constitution arriving via state abortion and election legislation

Just weird. Elections are – explicitly – something for the states to deal with under the US Constitution. Abortion is arguably so under the enumerated powers bit. That actually being what the argument currently is, is abortion a constitutional matter or a legal one – like it is here in Europe? You know, we pass a law, that’s what the law is? Democracy even?

If the tax rates on wealth and wealth increases were the same as those on income the UK might collect more than £170 billion of extra tax a year

Leave aside the problem with the taxation of unrealised gains. Further, leave aside the problem with tax refunds when asset prices fall.

Think about MMT. Which says that the purpose of tax is to reduce the inflation created by newly minted money being spent into the economy by the government. OK.

If £100 billion is spent in then the tax has to have an equal effect upon that inflation as the £100 billion spent, right? This is the multiplier as explained by the P³. That very same folks get money, spend it, it’s taxed at each stage, is also the same multiplier that creates the inflation. It’s the velocity of money again.

In the P³’s model – such as he actually thinks through one – money that goes into savings isn’t invested and thus has no multiplier effect. The flip side of this is that taxing wealth doesn’t reduce inflation. The two are the same statement.

Thus we get £170 billion of taxation that doesn’t reduce inflation and therefore also doesn’t increase the ability of government to spend newly created money into the economy. Wealth tax – in Ritchie’s model – therefore doesn’t work in an MMT sense. Because wealth taxation doesn’t reduce inflation and thus leave room for more government spend.

Reality says that of course wealth is invested, therefore does affect both the economy and inflation. But then if it does those things then why do we want to tax it so heavily?

We can use a milder – and accurate in fact – model. Yes, higher income people save some of their income. Lower in come people spend all. Therefore the multiplier – whether of tax or inflation – is higher for incomes going to poorer people. The direct corollary of this is that taxation to reduce inflation therefore needs to be of poorer people. Because, get this, richer people save some of their income which doesn’t affect inflation.