Sometimes conventional wisdom may be right. Don't rip it all up in the name of pointless, ill-conceived radicalism
Banks work in a very simple way. People deposit money and the bank lends it out. Assuming that the depositors don’t all come calling at the same time no one reality notices that their money isn’t really in the bank but is being spent on a new conservatory by someone they have never met. Ever since the advent of the cheque it has been possible for banks to actually lend out far more money than they ever held. Simply put, if your money exists only on an electronic balance sheet a bank can create money by crediting one side of the balance sheet with slightly larger numbers. This leveraging has been going on for a long time and was, in part, responsible for the collapse, or near collapse of a good number of banks in 2007/8. Depositors learned that their bank had lent to people who weren’t going to repay and demanded their money. The banks, unable to pay, went cap in hand to the Treasury. The ‘confidence trick’ of banks creating money is something which seems to greatly upset Richard Murphy, and represents a great scandal he has helped to expose, despite the fact they everyone already knew about it.
From the great scandal of banks creating money Murphy builds his thesis. If debt is the creation of money then repaying debt is merely the distraction of money. The private sector destroys money when you pay off your mortgage and the public sector does it when you pay your taxes. The money supply is not controlled by the creation of money, but by its distraction. Murphy points to the grown of government debt in the post 2008 era as coinciding with a great paying down of private debt, which by 2014 had fallen from 196% of national income to 160%, as evidence that a total debt level must be maintained for there to be economic stability.
This is all well and good except that it leads to Murphy to conclude that "Government debt is just that part of the money supply that central government has created just as commercial bank lending is that part of the money supply the private sector has created.” On the surface this is obviously backwards. When the government borrows it takes the place of the person who has taken out the loan, not the bank. Indeed, government borrowing might contribute the public sector money creation if it borrows from a leveraged bank, but it does not create any money through borrowing.
More worryingly is it allows Murphy to claim that there is no need to ever repay government debt. A government running a surplus depletes GDP and, since the money was created out of thin air more can be created to follow it. I don’t know where Richard Murphy goes on holiday but he has obviously never been to Greece. A country can only borrow indefinitely provided its private sector lenders believe that it can repay, if they do not the bond yields will rise and eventually the flow of capital to the government will cease.
The other problem with wishing money into existence is that it doesn’t really happen like that. Murphy has arrived at his rather bizarre view because he has conflated government deficit spending with quantitive easing. the Bank of England’s QE program merely allows banks to shift bad debt from their balance sheets to the government and credit an equivalent amount. Effectively the state creating money to pay off debts the banks should never have created. This is very different from government borrowing. When a government wants to raise money it issues bonds which it sells to the private market. the bonds are bought by, lets say a pension fund, which I have put my pension in. My pension is effectively lent to the government in the assumption that in 10, 15 or 25 years I will get it back plus, say 2%. The money has not been magiced into existence, it has been transferred from one bit of the economy to another.
So a government can, assuming it wants to run the risk of turning into Zimbabwe, indefinitely print more money then it raises through taxation, but what it cannot do, unless it wants to run the risk of becoming Greece, is borrow indefinitely.
The fact that Murphy seems to think it can does not bode well for his proscriptions. And indeed they are disappointing. He is essentially a poor man’s Thomas Piketty. To create a fairer, more progressive, inclusive society he plumps for wealth taxes, and proceeds to layer them on like Nuttella. not only would he impose a financial transaction tax, he would extend it to all transactions, including those between individuals, so yes, you could be taxed for transferring money to a friend. Not only does he impose a mansion tax, he would extend it to all wealth, he would tax the value of land, rather than the property upon it, so a derelict plot would attract the same taxation as the luxury villa next door.
The problem with wealth taxes is that I am just not sure why we want them. Why as a society should we strive to tax grandmother’s silver spoons? The argument against taxing wealth are old; If an asset does not appreciate in value a continuos annual tax upon it will eventually reduce its value to zero. Equally wealth can be held in many forms, property, stock, etc, yet, unless we are going to revert to a mesopotamian system, where tax can be paid ‘in kind’, these assets will have to be converted into cash before the tax can be paid. In practical terms this means selling them or borrowing against them, not things the government should be forcing people to do. This is the 'asset rich cash poor' argument which dogged Labour’s ill conceived mansion tax policy in the run up to this year’s general election.
What Murphy and Piketty and even Ed Miliband really want to do is tax capital, they just can’t work out how to differentiate between a capital good and mere accumulated wealth. As a result they have adopted the trawler approach and seek to catch everything and is therefore deeply unfair and punishes those who happen to live in a certain place or hold goods which happen to have acquired value.
At their worst Murphy’s solutions to the problems of tax avoidance and evasion are deeply sinister. Murphy wants HMRC to hold banking data of every individual and company in the country, he wants them to amass passport data so that travel can be tracked and airport duty charged, he believes that any individual who fails to declare property for the purposes of tax forfeits that property to the state. Any individual who undervalues his or her property faces it being sold at the stated rate. In an unpleasant reversal of the concept of innocent until proven guilty he wants to place the onus of proving that tax should not be paid on the individual, rather than the state. and woe betide anyone clever accountant who thinks that he can help someone avoid paying their fair share, he will become liable for the amount of tax avoided.
In an attempt to finally defeat tax avoidance Murphy proposes that each tax law be accompanied by a statement laying out the purpose of the law so that breaching the spirit of the law, as well as the letter, becomes an offence. He is utopian if he thinks this will work and delusional if he thinks it is legal. But then he seems to be. The whole book has a faintly ‘in an ideal world’ aura to it. He believes in information sharing between tax jurisdictions which just isn’t going to happen. He believes that other countries would tolerate their companies having to disclose world-wide revenues to Britain’s HMRC. He believes that the public will tolerate a tax on their bank accounts and that he can hike taxes on business and make individual shareholders personally responsible for their paying tax without causing an industrial exodus. The whole book has the feeling of having been written by some one who is desperate to strong arm economics into an ideological mould.
Murphy is right about one thing, tax is an important part of our economy, far too important to let people like Richard Murphy fool about with it.
