A letter in issue 1550 titled ‘A taxing situation’ suggests that the primary function of tax is not to fund government spending… Unfortunately, this suggestion is wrong.
It embraced the fallacy of modern monetary theory, a largely discredited economic theory not supported by most economists. The UK government can only afford to spend so much without raising taxation (and to raise serious levels of extra revenue taxes must be raised on ordinary people, not just the rich, since there are far more ordinary people to tax compared to rich people in the UK).
If a government does not raise enough money in taxes then it must borrow money from the bond markets. In recent years central banks have made this easier by having very low interest rates and by printing money (quantitative easing) but this, for various reasons, has now started to create inflation in the economy.
One of the classic textbook side effects of a government borrowing too much to fund itself is, eventually, inflation. If we want to help poorer people then somebody has to pay more tax, and there’s no point just saying you can get it all from the rich.
Yes, the rich could pay a bit more but ordinary people on average incomes will also have to stump up. And that is when things get politically difficult. Britain has an ageing society and so that is why our public spending is not going as far as it used to, this is a structural problem that will last for quite a while yet.
Kyle in The City, London