Review: Richard Murphy, The Joy of Tax

This is an interesting, articulate book which criticises the United Kingdom's failing tax system and proposes a fairer system and - at the same time - defends the legitimacy and effectiveness of deficit financing. It gets better as it goes along: the final chapter is very good indeed in setting out a coherent progressive vision for UK tax policy. My doubts centre on some of the lacunae, the things Murphy does not write about. An enthusiast for government borrowing, treated as the painless creation of debt which can be put to good use, he nowhere mentions two things: debt servicing and Greece – the former is not mentioned at all and Greece gets just one mention for the size of its black economy (a quarter of total output).

Debt servicing matters for a number for reasons. It’s true that most governments still have remarkably little trouble selling bonds, even long-term ones, which promise a fixed return each year. They have been doing it for centuries. But problems can arise and they usually start in the second-hand market. Suppose a government issues a £100 bond promising 5% per year (that’s £5 to the bond owner once a year) plus face value back when the bond expires. Suppose it prices the bond at £100 and sells out. If the bond market thinks that 5% is generous and that the government is a dead cert to repay and that inflation is likely to be low, second-hand bonds may start to trade at higher than the original price. In contrast, if 5% seems mean or there are doubts about whether the government will repay or concerns about inflation eating away the repayment value then the second-hand price will fall. All of these things can create problems when the government issues its next lot of bonds. They may have to drop the price to £90 or £80 and still pay out £5 a year on the face value and still have to come up with £100 at the end even though they only got £80 or £90 to start with. It’s a further complication that if the bonds are traded internationally, it becomes relevant what foreigners think they can use £s for. If they think there is nothing the UK makes or does which they will want to spend their pounds on, then that will adversely affect their valuation of the bonds on offer. In the real world, some countries have currencies which are to all intents and purposes worthless outside their own boundaries because no one outside can think of anything they would want to do with that currency. It’s only if you start offering fantastic rates of interest that they may begin to look around to discover if maybe your economy actually produces something worth buying or buying more of.

There is also the small matter of how the government finds the money to pay the interest and repay the bonds. If it spends sensibly the money it gets from bond sales, then economic activity will increase and (in a well-run state) tax revenues will increase with it and there is no problem – money will come in to service the debt. In other words, bond money has been used to invest, to make things happen which otherwise wouldn't. This is the virtuous cycle which Murphy simply assumes. But if governments give away the money on electoral bribes ( “Everyone can now retire at 50!”) or if it has a corrupt or inefficient tax collection service ( = Greece), then no money will be generated to service the debt. In such circumstances, governments can try to sell new bonds to pay the debt on the old ones but sooner or later the market will realise that the government is now running a Ponzi scheme and will refuse to buy the bonds. At this point, the government can ‘fess up that it cannot service its debt and go into default. Or else, it has to cut back on important activities like the health service and schools and divert the money saved to paying interest on debt – at which point it loses popular support and in addition the ability to go on funding the retirement at 50 it has made everyone think was possible.

Somewhere in this interesting book such matters should have been addressed.