In the last two posts I have argued that debt has surpassed the importance of wages in increasing the flow of money and of driving first inflation and then, in the bust, deflation in those things traded and held in debt – such as property.
In this post I just want to make a fairly small side point, that the rise in our personal debt, quite apart from the larger debts which the banks created for themselves, has also helped to make our tax system less and less fair. The figures I use are UK. But the argument works just as well for what Happened in the USA. This effect of debt has not perhaps been a major one in the scale of things but it is one that bothers me.
First lets look at the scale of what we are talking about. In the UK in 1997 household debt to earnings was almost exactly 100%. So a household earning 60k owed 60K. These are averaged figures don’t forget. The grand total of household debt for the nation was just over half a trillion pounds (£500 billion).
Just seven years later, in 2004, total household debt had doubled to 1 trillion. The Bank of England warned that,
Now outstanding debt stands at 135% of household income. Mortgage lending by banks, meanwhile, is growing by 10% a quarter and unsecured lending in the form of credit cards, loans and overdrafts by 13% a quarter over the past year.
Debt and the rate at which we were increasing it were rocketing. And yet,
Hilary Cook, investment strategy director at Barclays Stockbrokers, said the £1 trillion figure wasn’t as “scary” as it seemed because during the past nine years the value of people’s assets had risen by around 60% in real terms.
Debt wasn’t problem, the bankers assured us because we were all getting so much richer. The problem was, we weren’t richer because we were earning more, in fact wage increases had been shrinking for most of the last two decades. (We were still getting pay raises but those raises were getting steadily lower.) We were getting richer mainly because house prices were inflating wildly. Thus if you step back, our ‘getting richer’ actually meant getting more in debt. If you had a house, you had a mortgage. If you had a mortgage you were in debt. But because the re-sale ‘value’ of the house was increasing people counted themselves as having a huge asset. We were counting debt as wealth. A strange topsy turviness greatly encouraged by the banks who had totally embraced the ‘debt is wealth’ world view, were in more debt than we were, ecstatic about it, and counting themselves as richer than ever.
We were all massively in debt and all was therefore well – they believed. And of course this was and still is the central sham of modern finance.
By 2007, according to Bank of England figures, debt was,
standing at nearly £1.175trn, almost as much as our entire annual gross domestic product (GDP).
Of which
Mortgage lending accounts for about 84%… the rest being consumer loans, such as credit cards and overdrafts… on the back of rocketing house prices and the biggest consumer-spending boom in the UK’s history.
By 2008 household debt had got a lot worse.
Families in the UK now owe a record 173pc of their incomes in debts, official figures have shown. The ratio of debt to income is higher than any other country in the Group of Seven leading industrialised economies,…
100% in 1997
129% in 2003
135% in 2004
173% in 2008
Total household debt:
1997 £0.5 Trillion
2004 £1.0 Trillion
2007 £1.175 Trillion
After the crash in January 2010 it had GONE UP to £1.463 Trillion.
Lastly, here are some figures for UK debts as of January 2010.
Average amount outstanding on mortgages is £111,474 per household. Each household pays an average of £2,710 just in interest on their debts. Average consumer borrowing via credit cards, finance, overdrafts and loans has risen to £4,667 per average adult in the UK by the end of January 2010.
Please bear in mind that sobering though this wall of figures is, it is only our debt and our debt was NOT the total, nor even the main problem. In this I haven’t touched at all on the far larger mountain of debts and bets and sham insurance that the financial system wound round itself. Nor have I looked at the huge debts our governments have now piled upon us as they relieve their friends of their debts and make them ours instead. So, what is my point?
Well it’s not large, it’s just a footnote. It’s two fold. To show you that we didn’t get richer due to suddenly earning lots more. Wages did not shoot up, debt did. We called it getting wealthier but it was in fact getting in to debt.
But also to suggest that, as I said at the beginning, the move from spending what we earned to spending what we borrowed, substituting debt for earnings, does very odd and regressive things to taxes and to governments.
You see the key thing we over looked, is that you can tax earnings but you can’t tax debt nearly so easily. And that has meant we have begun to shift slowly but regressively from graduated taxes to flat rate taxes. And this begins to explain something that always puzzled me.
You see, did it never strike you as a just a bit odd that during all those years of frenzied growth when things could only ever get better and better, our governments still went on about needing to find efficiencies and savings and looked to cut budgets and spending where they could?
There we were spending money we had not earned, on shoes and gadgets and coffee and make-overs for our kitchens and stuff over every sort in an orgy of bulemic consumption and waste, feeling that we’d earned it, though we hadn’t, feeling that we should have public services to match our new found sense of personal importance and spending power, feeling richer though we weren’t. But because it was paid for by debt on our creidt cards which we then paid off by extracting ‘value’ from our houses, our governments were left out of this torrent of cash. We weren’t earning it, so they found it difficult to tax it. What were they to do to meet the demands for better services and produce a ‘better nation’? They borrowed just like we did. Substiting debts for earning (think PPI) AND they started to shift from taxing incomes to taxing consumption.
And so our debt culture has promoted a regressive change in taxation. We have started to slide from a graduated taxes on income, to flat rate taxes on consumption like vat and duty on petrol, alcohol and cigarettes. Now I personally have no great problem with high duty on things like alcohol and fuel. But I do have a problem with shifting tax from graduated income taxes, to Consumption taxes, because consumption taxes are nearly always flat rates. You can’t make someone earning 200k, pay more for their beer than the bloke next to him who earns 20K.
Debt shifts the tax burden away from those who earn the most, and spreads it more evenly across all those who consume. It is just another way in which debt is making our society less stable, less fair and less democratic.
Consumption taxes certainly are regressive, despite all the window dressing of zero-rated necessities. In addition to what Golem pointed out, there's also the issue of savings versus consumption. The rich get to save most of their income, whereas the poor have to spend most of/all of/in excess of their income on necessities (many of which are *not* zero-rated). Because of this, consumption taxes hit a much smaller fraction of a high earner's income than of a low earner's income.
When people are borrowing to consume, they're being taxed on income they've not even earned yet!
It seems no coincidence to me that a right wing government brought in the VAT rise. Nor is a coincidence that Libertarians in the US campaign for a federal sales tax in place of all other federal taxes.
magicalsushi,
good points! Makes it worse.
It's a complete minefield isn't it? Whereas you're right, consumption taxes do penalise lower earners harder per unit income; we would also like people to save more and borrow less to try and reduce the level of debt while at the same time boosting the treasury's income. The easiest way: tax people more for spending.
Of course, food is non VAT rated, and with food prices rocketing, the lower income family's shopping basket will become more and more full of zero/non rated items…
There's an inherent problem with using the last 15 years as any sort of benchmark for reasons eloquently articulated above.
One of your best posts yet… till your position on taxation in my opinion…
In a transparent free market free from corruption, the only tax that would need to be levied would be a consumption tax and it would be the single fairest and most efficient way to fund activities of national interest.
Consumer tax needn't be flat. So for example, basic staples would be taxed at low rates whilst luxury goods would bear a higher tax. In the case of a beer for example, even though it might be classed as a staple, the same beer sold at the local pub in Brixton would carry a lower retail price than a beer sold at the Dorchester and the amount of consumer tax would inherently be different.
The advantage of only imposing a consumer tax is that on one hand it would greatly reduce administration costs but, more importantly, it makes it impossible to evade taxation – if you live in a country you must perforce consume in situ.
hi golem
I think you are expressing a very important point here as it connects personal experience with economic decision making and thinking. I have a suspicion-I wish it could be more-that you are getting into the heart of some very important issues with this post.
I actually remember the argument you note from Hilary Cook- and remember thinking there was something that just didn't add up properly although I did not see the problem clearly.
I used to listen( uncomfortably) to a friend telling me how great it was that he was 'earning' more, just sitting at home than going out to work. i.e. he had a large housethat went up in value in a year by far more than he earned, and was advising me to add more and more value to my own house by building extensions etc. using mortgage debt.
I actually applied 'occam's razor' and decided I didn't need added space. I could function well enough without it.
However, whatever anyone thinks-it is an uncomfortable reality that the current crisis connects to wider personal values. The fact is that there was a high demand from all sorts of people -who wanted to paryticipate in the phoney economy- for 'phoney riches' and the crisis is at some level a personal moral one for us all-not just a detached economic problem where bankers are the root of all evil.
That economic situation was palpably a corruption of reality and yet our politicians and their advisers sat on that knowledge for years.( they must have been incredibly incompetent, or incredibly corrupt or a combination of both-there is no other explanation).
Personally I want to see some 'metaphorical blood' for their criminal negligence of continually misinforming us and reassuring us that 'all was well' when it was far from well.
They failed in their job, for all sorts of reasons-none of which are justified.
Unclear, Guido,
you are of course both right – tax is a minefield and I do not pretend to be any kind of expoert I defer to those with greater knowledge.
I personally am in favour of high consumption taxes on things like alcohol and petrol/diesel and I take the point tahs trying to get people to save can be helped by taxing spending. But I do not think flat rate taxes are better than graduated taxes.
I am intersted in why you feel consumption tax is fairer than income tax Guido. The accumulation of wealth that is then used for rentier income is, in my opinion, not a prodcutive use of resources. It allows a financial elite just as bad as the old aristocracy.
MacPuddock,
I share your feeling that there is something important to be contemplated in the personal and moral dimension of what went on. And like you I am not there yet. But there will have to be, I think, a critical re-drawing of our notion of who we are, who we want to be, what is importasnt to us, and a re-drawing of relationship of what is illegal and what is immoral. Just thoughts.
That's a very good post Golem. I'd never considered the shifting taxation base in those terms. Wow, a drop in consumer spending really will hit the public finances. Oh wait a tic, I forgot, they can just increase the rate of VAT.
Progressive taxation is a reflection of a society’s values. Here in Finland there are almost no truly rich people. Those who are well off that seem to accept the idea that they pay more. I suppose they view it as a civic duty. Importantly, their kids also get grants to study and go to exactly the same schools as everyone else. The idea that wealthier citizens pay more tax but get less in return is deeply immoral, socially divisive and complicated to administer.
Hi Golem,
Small clarification required. About halfway down: "Each household pays an average of £2,710 just in interest on their debts."
– I guess that Is per year?
Of course, there is productive debt and non-productive debt – we need to teach our kids the difference.
Oh and it means that the state is in a manner of speaking taxing you in the future if you buy consumables on credit. Quite a feat of time travel!
"Hilary Cook, investment strategy director at Barclays Stockbrokers, said the £1 trillion figure wasn't as "scary" as it seemed because during the past nine years the value of people's assets had risen by around 60% in real terms."
The fact that what I assume was an extremely well paid "expert" could make this statement says everything you'd need to know about why we're here. Utterly brain dead.
I do not advocate a flat rate. I advocate a consumer tax whereby items are classified in a range that goes from necessities to luxuries and each classification carries a different tax rate.
Regarding fairness of one type of tax over another, my rationale is that in a transparent and free economy, economic actors should be allowed to increase their wealth.
In a country that only levied consumption tax, individuals that grow wealthier consume more thus contribute more to state's coffers. Wealthy individuals would not only contribute more in terms of volume of consumption but they would contribute more in terms because they consume higher end more expensive products. So, for example, if an individual of modest means would purchase a Hyunday compact, the wealthy individual would purchase the Bentley. But the Bentley not only offers a much higher tax take by virtue of its price but it would also be classed as a luxury item thus carrying a higher tax percentage overall.
But the greatest advantage of sourcing all fiscal revenue through consumption is that there is no escaping it. Simply living in the country leads you to buy your groceries and your clothing in the country. Thus, short of engaging in systemic bartering for the things you need, you cannot get away with paying tax. Compensation can be fudged leading to great expense on the part of the state to codify tax legislation, enforcing it and investigating it. It just leads to a cat and mouse game.
Just tax any and all sales and Bob's your proverbial uncle. No other tax necessary. Let people grow wealthy. All the better.
Hi Golem,
What do you think about taxing debt as a form of income tax?
Probably unfair in the case of houses, but credit card debt and the like?
Keep connecting the dots…
Guido,
I have some qualms about your proposed system of taxation.
Firstly, it still seems regressive to me. A person on minimum wage who, let's say, buys only essential items will pay as much tax as someone who earns slightly more than minimum wage but also, let's say, buys only essentials. The slightly higher earner in this scenario gets to save his surplus income and gradually pull away from the minimum wage earner in terms of wealth, the latter being prevented from saving by the tax system. Yet neither is a more important economic actor in any real sense.
Secondly, I think loopholes can be found in any tax system by dint of being applicable only within national borders. How do we tax the importer of goods under your system and how do we distinguish those who are importing goods for their own consumption from those who are reselling? How do you stop a black market in imported goods from arising? Any revenue system will require much codification of tax legislation and proper enforcement of that legislation. The problem at the moment being an epidemic of tax avoidance due to a lack of both (hence many multi-millionaires paying less tax than their cleaners, HMRC's capitulation to Vodafone and numerous other examples).
Golem, just a word to politely suggest avoiding the stylistic use of that co-opting pronoun "we" and the possessive "our" in these kind of articles.
It smacks a little of lazy journalism, and is something I've personally railed against before now in the Graun.
My grandfather, who grew up to see his father lose almost everything in 1929 New York, once told me: "Every bust is proceeded by a boom".
There are some of us who have had the foresight to know that, and been appropriately debt-averse in the build up to the crisis as a result.
Sorry, just a bug-bear of mine – carry on the good work!
D'oh – that's "preceeded", of course
MrShigemitsu,
'we', 'our' – yikes! You're right. It is a terrible laziness into which I do slip with alarming ease. Sorry. You're not the first to berate me for it. Sadly I'm a slow learner and lazy. A poor combination. I will try to cut it out.
No worries! Nothing grates more with the struggling classes though, than to be told that "WE have never been richer" etc, etc – usually propounded by the likes of Simon Jenkins, Julian Glover, Martin Kettle, and so on – and that's just the Guardian – hate to think what they put in the Mail and Telegraph!
It doesn't matter so much writing like that when you are languishing BTL – but I would like to think you're headed for bigger horizons….
"How do we tax the importer of goods under your system and how do we distinguish those who are importing goods for their own consumption from those who are reselling? How do you stop a black market in imported goods from arising?"
Valid points of course. In reverse order. The black market in this example should not be a problem because overall, the reduced administrative costs brought about by the streamlined fiscal system should result in a greatly reduced cost of living in the country concerned thus goods should be less expensive than in other countries thus obviating the need for a black market in all but illegal goods.
Importers (as they are now) must be registered recognized entities. Import of goods is not taxed. It is only taxed upon reselling in the country.
Under this scheme, cost of living in the concerned country should be lower than in surrounding countries. Thus importing for own consumption should be a moot point as it would cost more to buy across the border than in your own country.
The above presumes a free and transparent economy free from political interference. Free in this case means that there are no licensing restrictions nor are there subsidies for example. This is in order to avoid that interest groups create areas of exclusive economic interest in exchange for votes.
Finally, in your example of one individual that might earn marginally more than his neighbor thus being advantaged by this type of taxation. Good! Good on many fronts. First of all taxation is never perfect and many individuals are already advantaged both up and down the scale of wealth. So, that is a moot point. But in any case, people should strive to reach the economic level they are comfortable with in life. So there must be a bit of an incentive for people to move along in life. And, granted, you'll always have the multimillionaire that enjoys a beer at the local pub rather than at the Dorchester but overall simplified taxation and an open free economy make for transparent markets and transparent markets adjust fast and give the same opportunities to all economic actors.
This scheme also presumes the use of either a value based monetary system or of a fixed fiat monetary system.
The current debt based fiat monetary system is incompatible with streamlined fiscality or regulation.
Hi Guido,
Thanks for replying – I think we might be coming from different ends of the philosphical spectrum on this one though; our ideas of utopia are wildly divergent, I fear. It's not that I don't get how a free and transparent market SHOULD provide maximum efficiency and freedom, it's just that I don't think free and transparent markets are possible to achieve in any kind of practical way. Any kind of interference, however small, compromises the the whole market. So in my mind they can't ever exist in a human setting because humans just aren't capable of not interfering.
The key to transparency is to place the authority to manage the monetary system in the hands of the people. Once the monetary system is transparent, the rest follows. The monetary system is the framework within which all other dynamics evolve. There is nothing upstream of the monetary system. Nothing.
But thank you for the debate though we may come from different points of view.
Guido,
Making the monetary system transparent and putting it in the hands of the people is a noble goal in and of itself. I'm right behind you there.
Since no one else is saying it, wealth should be taxed too, since the rich are the only ones with the collateral to create businesses/jobs impose a tax at a level that covers the basic cost of living in any given society. In our current circumstances allow say £300,000 each before its levied then say 1% on every £500,000 ,or part, over up to a max of 10% but then 10% on everything. With no allowances for any legal entity other than a person.
And how about a turnover tax, 15%?, for mature business sectors say where fewer than 5 players control 67% of the market.
John,
as I have said i am no tax expert but I too feel a tax on accumulated wealth would be fairer. Of course there are all the usual capital flight arguments. And it is those argument that point the way for me to what we really need to consider. Which is rejecting the tenets of globalization – particularly the free flow of capital.
I think we will always be powerless to regulate, never mind control capital unlesss we embrace capital controls and firmly reject, as self serving cant, the arguments which say you cannot protect a nation's financial and economic system from outside predation.
I also think we must roll back the way corporations have gained for themselves rights which should only apply to people. I think this perhaps arcane sounding point is essential to any recovery of democracy.
Thanks for posting your comment.
I'd like to ask John a couple of questions if I may.
What do you mean by 'wealth'?
And what do you think happens to it currently?
In Ellen Browns web of debt its quite clear that those who slid out from under the world bank/imf tyranny [and these are the same revolving door bankstards as the self selecting arbiters of what constitutes a free market or free trade at the wto], did much better than those that accepted 'help'.
The other main defence against these rapacious predators was not having a freely convertable currency thus avoiding speculative raids. Like China.
Whilst I think we should approach things with a global perspective and a commitment to free trade it should be states that decide how best to serve their people within that framework. Surrendering any soveriegnty even if it was clear that the higher 'power' was benign is an acceptance of a yoke, and who wants to be a yokel.
As to corporations since they are non sentient and thus mere vehicles they should be held to a much higher standard of accountability than people, no presumed innocence maybe?
'They' sure know how to hide unpopular news http://thedailybell.com/1887/Silent-Coup-EU-Takes-Over-Europe.html
@ Unclear
"What do you mean by wealth?"
Excellent question!
Re the tax debate, has this Michael Hudson Interview been posted already?
Why America Had a 90% Income Tax
Unclear
By wealth I mean your house your savings shares any other property whos value more or less tracks or exceeds inflation.
Nothing much to argue about there then.
£300,000 each so £600,000 for a couple and no inheritence tax.