How do we improve our tax take?

I seem to have lost my "d". Two "answer should have read "and".

There are only two ways that money gets into the economy, by foreign earnings and by money issued by the government, either directly by government spending, or by banks, under licence from the government, issuing loans.

We can discount the foreign earnings because we import more from other countries than we export to them (so money is actually leaving the UK, the old 'balance of payments' problem).

Money issued by the banks, while it circulates to some extent in the economy by businesses buying resources and paying their employees, is ultimately repaid by the borrower but the borrower pays interest on it, usually at above inflation rates, so it contribute only to bank profits (and banks most emphatically do not use this money to make more loans) . So 'bank money' is ultimately lost to the economy.

Which leaves us with government issued money by way of government spending. Some of this returns to the government by way of taxation, but as government procurement uses private enterprise, which uses its profits to pay dividends and to remunerate its higher management, who, tend to save their money rather than spend it (marginal propensity to spend, economists call it) a significant amount is not recovered via taxation.

What is more, the already wealthy recipients of share dividends and high wages 'invest' their money in interest bearing instruments which pay above inflation interest, and are frequently more lightly taxed than income subject to PAYE. It is found that, although taxation is more or less progressive, from the 95th percentile on the very wealthiest are taxed far less than the rest of the population. This holds true across most developed Western economies

There have been growing calls for a tax on extreme wealth, one proposal is highlighted in this blog by economist Simon Wren Lewis.

mainlymacro.blogspot.com/2025/

In the meantime, as this report from the Resolution foundation Think Tank a (centrist organisation) shows, there has been little growth in wages and the RF predict that, under current economic conditions, this will persist, with the lowest percentiles losing out the most. They actually predict zero growth over the decade.

www.resolutionfoundation.org/app/uploads/2025/06/LivingStandardsOutlook2025.pdf

The UK is currently held to be experiencing a high rate of taxation. Given the cost of living increases of recent years, and those projected for the future (higher utility bills, high interest rates on mortgages) and that the amount of private debt is rising People in the UK owed £1,900.3 billion at the end of April 2025. This is up by £48.7 billion from £1,851.6 billion at the end of April 2024, an extra £898 per UK adult over the year. ( themoneycharity.org.uk/media/June-2025-Money-Statistics.pdf ) can government really propose extracting more money by way of taxation from the general populace?

It seems to me that the only options open to the government for increasing the tax take are to tax the super wealthy and/or to put more money into the economy, but in such a way that it will reach the pockets of those who will actually spend it into the economy (which will lead to growth).

Current government moves to remove money from the economy by way of cuts to public spending and cuts to welfare spending are just economically ludicrous and, frankly, a political death wish.

So why do they (along with previous governments) keep doing it? And why are there not howls of protest from (eg) the BOE and other bodies? If it is so obvious that economies have been mismanaged for so long, and the reason why is clear, why has nobody done it differently? Has every Chancellor and every PM been unable to grasp what appears to be a simple concept?

Putting money into public spending and simultaneously cutting taxes would be enormously popular and a guaranteed vote winner, so why don’t governments do it if it would also boost the economy? I can’t believe they are all just too stupid and have been for generations.

It would be helpful if the OP could give a fuller summary of the key points made in the discussion.

So why do they (along with previous governments) keep doing it? And why are there not howls of protest from (eg) the BOE and other bodies?

Sorry, Doodledog, I don't quite understand what the 'it' that governments keep doing refers to nor why there should be howls of protest from the BoE and other bodies. Can you clarify?

I'll try, but I don't have an economics vocabulary, so you will have to bear with me.

Why do governments past and present talk about balancing the books and introducing austerity measures and cuts to public spending. Why do they tax people if tax doesn't buy anything? Why don't they just say they will cut taxes and increase spending? It would mean guaranteed election, a happy population and probably less crime and unrest. Also, why don't developing countries do likewise and improve the lot of their citizens?

If generations of governments were getting everything wrong, why is there silence amongst people like Mark Carney and the Director of the IFS? Why aren't they telling everyone that there is no need for taxation and/or cuts?

I understand how money circulates, and that if people have no money they can't spend it so don't pay the wages of others, creating a vicious circle; but I don't understand why we have to pay tax if it doesn't fund spending, or why we are told by politicians, journalists etc that anything the government does has to be costed, and the books balanced. Similarly, if something expensive happens (eg threat of war or a pandemic) why are we told that taxation must increase in order to pay for it?

winterwhite

It would be helpful if the OP could give a fuller summary of the key points made in the discussion.

Not really possible. I do do that if the author puts their own list in the "comments" of the piece but this Is not the written word - even those often take too long to summarise!

Perhaps, one day, you will be able to ask an AI programme to give a brief overview of a video - tell me if you already can! The point of this one lies in the difference (and lack of at times) and the outcomes (clarification) from the two people having the conversation.

If you don't want to watch that's really okay. I wouldn't be happy if someone insisted I read more than I had time for so no one should expect you to do something similar. I put them up now and again like this and one day more of grannydom will meet the way many if the population now get information If GN is a "no links" area currently, that really is okay.

Why do they tax people if tax doesn't buy anything?

Oh, Doodledog, you are pointing up my complete failure as a communicator 😢 I've tried so hard to explain this over the years and people find it difficult to understand (or just plain don't believe me)

There is a long history to taxation and currency issuance but the current situation stems from two facts.

1) The Bank of England is the sole issuer of our legal money, either directly or by licensing commercial banks to issue it (subject to regulation). The BoE belongs to the nation and is obliged by law to pay for all government spending, regardless of the state of the nation's (nominal) current account.

It is also required to issue hard cash into the economy but that is a very small part of its payments on behalf of the government these days.

Although the BoE is nominally independent, that is only with regard to controlling inflation and issuing cash. But the government has ultimate control and legally can require it to issue more money in emergencies, such as during the global Financial Crisis, Brexit and Covid, when a total of some £900 billion was issued to supposedly keep the economy working (and to save the commercial banks).

2) Until the early 1970s our currency was supposedly backed by gold and silver, how much that could be issued depended on our gold & silver reserves and the global value of those metals. This was the Gold Standard.

If governments needed to spend more than the value of those reserves it truly had to borrow from elsewhere,e.g. other countries or foreign banks (I'll gloss over the holding of government bonds by wealthy Brits because the source of their money is complex).

In 1972 the Gold Standard was abandoned internationally. Since then the international value of our currency has 'floated', being valued against other currencies. Which affects the prices of imports and exports. But domestically the result of abandoning the gold standard meant there was, in theory, no constraint on how much money the government (via the BoE can issue.

This was a complete game changer, but the implications of it have been slow to be understood by governments and still don't appear to have been fully understood by them even now. It meant' for instance, that there was absolutely no need for the government to go to the IMF for a 'loan' in the 1970s, because governments issuing their sovereign currency just cannot go bankrupt.

But, though they can't go bankrupt they can seriously adversely affect the value of their currency by issuing too much of it, particularly if the issuance coincides with shortages of things for the population to buy. That's what happened in the countries cited as favourite responses to an assertion that a government can issue as much of its own currency as it likes. Weimar Germany, Venezuela, Zimbabwe the naysayers shout 😱

This is where taxation comes in. Because a primary purpose of taxation is to control inflation caused by too much money chasing too few resources.

So, when I say taxation doesn't fund spending it's a fact. The government doesn't have to tax before it can spend. But if it continually spent and issued money to keep the domestic economy working, without taxing much of it back, the country would end up in a hyperinflation situation.

You could look at taxation as being a mechanism to reduce the government's 'overdraft' with the BoE, but the spending has to come first in order to put the money into the economy before it can be taxed back.

As the government never gets back all of the money it spends into the economy, because people save it, or it is spent in other countries and thus becomes unavailable for UK taxation, it has to continually top up the 'national account'. If it depended on taxation to fund its spending the amount available to it would become an ever diminishing pot because of the fact that taxation never gets all of it back. The country would end up with very little money at all.

Sorry, this is very long (and could be even longer ). Is it helpful.

I could address your other questions but it would make this post even longer.

P.S I think that understanding that money circulates is very important because so many people seem to think that government spending is just pouring money into a big black hole where it is never seen again...

Thanks Maisie. Very clearly explained.

Maizie, blasted auto carrots!

LauraNorderr

Thanks Maisie. Very clearly explained.

Thank you. I do try

I've just been watching a different post on the same channel. The YouTuber was saying Rachel Reeves has done years of research on tax closing tax evadence and avoidance loopholes and is already making the Treasury work on this (which apparently they don't like). Has anyone seen anything on this?

DoodleDog I have learnt a lot through MaizieDs posts Re tax.
This documentary is absolutely brilliant at explaining it deeper.

MaizieD
I know that you’re fully aware of the information in this video but how do you post all that info. 🤷‍♀️

www.google.com/search?q=netflix+documentary+%2B+how+the+money+goes+round+%2B+uk&ie=UTF-8&oe=UTF-8&hl=en-gb&client=safari#fpstate=ive&vld=cid:3b78ec4f,vid:OYfnkLurLA8,st:0

She's kept it very quiet if it's true.

While trying to prevent tax avoidance is a worthy aim it would be useful to make taxation of the wealthy more progressive. At present, according Wren's blog (cited earlier) the very wealthy pay progressively less tax as their wealth increases. I have seen it estimated that the top 10 percentile only pay over all about 4% of their incomes from all sources in tax. This is absurd when the lower percentiles can be paying up to 30% plus of their incomes in direct and indirect taxation.

There are ways that Reeves could increase the tax take without impinging on the lower percentiles. Jam tomorrow isn't proving to be very popular with most of the UK population.

A quick Google search gives the figures that the top 10 percent of earners pay 60% of all taxes collected by government.

The top 1 percent of earners pay 30% of all taxes collected.

I can only hazard a guess that our current Chancellor does not want to rock their boats

The Tories gave away too much as vote catchers, instead of spending on infrastructure and economic develpment shooting ourselves in the foot with Brexit made it worse. Now weve hit the buffers, it’s time to claw back some of the wealth given away, it’s got to come from those with accumulated wealth. Forget billionaires or the super rich it will come from those with savings, pensions and property right down the scale.

There is no point trying to promote any magic economic theory, any welfare cuts have just been emasculated, income tax and VAT are guaranteed, whatever is spent on growth will take 10 yrs to see a real return.

It would help a lot if all benefits and social payments were means tested, we have plenty of cash in the UK why are we giving more to those who don’t need it.

GrannyGravy13

A quick Google search gives the figures that the top 10 percent of earners pay 60% of all taxes collected by government.

The top 1 percent of earners pay 30% of all taxes collected.

I can only hazard a guess that our current Chancellor does not want to ^rock their boats^

We're not talking about the top 10percent of earners' We're talking about the top 10% of wealth owners.

Income tax is not the only tax. Nor is it progressive when it comes to the upper percentiles.

^MaizieD
I know that you’re fully aware of the information in this video but how do you post all that info. 🤷‍♀️^

I don't think it would be possible to post all the info. Once you get past the relatively simple explanation of how taxation and the economy actually works you hit all sorts of complexities. People have read whole papers on discrete aspects

I'll watch the video with interest.

Keir Starmer didn't specifically rule out a wealth tax when asked in Parliament last Thursday (?). It doesn't mean he is going to bring one in though.

Looking back on what is being said about RR and tax avoidance, etc., she has apparently employed a lot of extra tax inspectors but that's the only concrete fact I can find I would like it to be true so will try and find the evidence or refute it. Rumours don't help.

, she has apparently employed a lot of extra tax inspectors

Interesting fact about tax inspectors is that, many who leave HMRC end up as 'tax consultants' advising the wealthy on tax avoidance. Because they know how it can be done..

*Good lord, Petra, that 'video' is over 2 hours long!

Most wealth is held as property or shares, shares are already taxed. Property is taxed through the rates system and then again when it is sold (except domestic), the system is already in place to change taxation of property. I’m not sure that an increase would yield much extra, if property were less attractive to own, value would fall and less CGT would be made.

Thanks Maisie. I am away just now, but will have some time to myself in a couple of days and I will read your post more carefully, and try to watch the video (thanks for that, too, petra).

David49

Most wealth is held as property or shares, shares are already taxed. Property is taxed through the rates system and then again when it is sold (except domestic), the system is already in place to change taxation of property. I’m not sure that an increase would yield much extra, if property were less attractive to own, value would fall and less CGT would be made.

A fall in property prices would mean that more people could afford to buy rather than rent. Making property less attractive to own as an investment would lead to a fall in prices and would redistribute asset wealth.

Macro-economics doesn't always have to be about total increases, but also equality and the distribution of wealth.