This Corona Lockdown has cost the UK government a whole chunk of change, about GBP 300bn. The cupboard’s going to be pretty bare for a dose of pre-electoral stimulus in 2023. The Resolution Foundation says that job subsidies could cost GBP 40bn a quarter; that’s GBP 160bn a year. But there’s a simple solution and it’ll come with a cheer from the voters that really matter to you: the working class, pro-Brexit, patriotic northerners you won over to the Tory cause in 2019. They’re the ones you need to win the 2024 General Election.
The key is the 2 million owners of UK second homes, worth GBP 1 trillion. They’re in the Top 5% by income and wealth, and they’ve benefitted from the second mortgage, second home boom of the last 30 years. That’s one trillion quid to be harvested and it simply can’t be moved. OK, wealth tax is unknown in the UK, but people have gotten pretty used to it here on the Continent.
How about a patriotic 5% “special Corona” wealth tax on second homes? That’ll earn you about GBP 50bn. Then, as we move towards election time, a second home wealth tax tapering from 5% down to 3%. That’ll scoop you another GBP 40bn a year. Legacies from the oldest Baby Boomers will add to this taxable property pile, and you’ll be able to grab some Inheritance Tax at 40% on the way through. You can apply the wealth tax retrospectively, to reduce tax dodges like passing title into the kids’ names, or incorporating. (The Americans can’t do this retrospective taxation thing, as it’s prohibited by the US Constitution since the Brits tried it before 1776).
Here is a link to the report quoted above. Here is a link to the 2nd note.
As we travel further down the road of modern monetary theory, or perhaps more correctly debt monetization, the question of how it will be paid for is becoming more urgent. Raising taxes is going to be extraordinarily unpopular, but most especially in the UK where buy to let schemes have proliferated over the last 30 years. A broad swathe of the middle class has staked their retirement on the property market.
The issue of raising taxes to fund deficits is only really going to become a problem in the event inflation picks up. This note (April 2018) from the Federal Reserve Bank of St. Louis examines why inflation picked up with debt monetization in the 1970s but has not year been a factor in this cycle. Here is a section:
Unlike during the first scenario, banks now had no incentive to use their newfound reserves to increase their lending. After all, it would be just as profitable to hold onto those reserves. In fact, at times the spread was even negative, making it more profitable to hold reserves.
As such, there was little to no upward pressure on prices. The Fed’s increased debt monetization didn’t lead banks to lend out more money than they otherwise would. Contrary to the episode from 1953 to 1974, banks could make a profit holding onto reserves, which doesn’t create new money and ultimately doesn’t have the same inflationary effects as increased lending does.
The Fed seems to have a blind spot for the inflation in services costs, like insurance and education, or the upward pressure on housing costs over the last decade. The continued strong influence of global liquidity and asset price inflation in the stock market is also a clear piece of evidence to highlight debt monetization does cause inflation.
The change in this cycle is in how inflation is measured to make sure it is understated and therefore ignored. The populist backlash is a direct response to the undercounting of inflation and the downward pressure globalization put on wage demand growth.
Quantitative easing failed in reanimating the credit creation engine in banks. With nominal rates so low banks have no incentive to lend to main street. That is part of the reason credit has been so freely available to the venture capital sector. It was one of the few places where spreads were attractive enough for lending to be viable.
Meanwhile, MMT circumvents the banking sector by putting money directly in people’s pockets in the hope they will spend and reanimate economic activity. Either governments are going to have to persist in this action or workers are going to demand higher wages. In that case additional supports will be required by companies either in the form of lax regulation, tax credits or other measures. Ultimately, we get higher inflation as prices will have to rise.
That suggests the era of wealth taxes, extremely high income taxes etc. are out there in the future but perhaps not for at least a few years because of the immediate threat of deflation. Larry Fink of Blackrock was also opining today that corporate taxes and personal taxes will have to rise. No politician is going to get elected on that platform, until the negative effects of giveaways, high inflation and profligate spending are self-evident.Back to top