Cooking the Books

(est 1904) Official journal of the Socialist Party a companion party of the World Socialist Movement www.worldsocialism.org/spgb 100 years for socialism-> -> Standard Online->->Connecting with->-> socialists->-> worldwide February 2005
Who pays income tax? One aspect of our analysis of capitalism that we have not always found easy to get across is the view that taxation is not an issue that concerns wage and salary workers since in the end it is a burden on property-holders. Now a tax dodge recently thought up and applied by some big companies such as BT, Tesco and Sainsbury’s, has made it a little less difficult to explain. At the moment, workers’ pay slips show deductions for income tax and national insurance contributions (a tax in all but name, as was recognised by the merger a couple of years ago of the DSS’s contributions section with the Inland Revenue), which are paid to the government, and, in some cases, contributions to the company pension scheme. We’ve always pointed out that these are not really paid by the employee, not even in the formal sense of personally paying the money to the government or to the pension scheme – it’s just an administrative exercise – and that what matters to them is their take-home pay, not gross pay before deductions. As far as they are concerned, their employers never really paid them in the first place the amounts deducted and might as well have paid them directly themselves. The aim of the tax dodge is to reduce the amount of national insurance contributions paid by employers, both on their own behalf and nominally on behalf of their employees. How it works is explained by Patience Wheatcroft, Business Editor of the Times (30 November) : Put simply, the scheme involves employees being persuaded to take a pay cut if their employer agrees to pay into their pension fund the amount that had been previously contributed by the employees. The result is to lower the national insurance contributions made by the employer while generally bolstering the employee’s take home pay. The thing to note is that gross pay is reduced but take-home pay remains more or less the same (maybe up by a £1 or so a week – “bolstering” is hardly the right word, as numerical examples given by the Times the previous day showed an increase, in one case, of £110 and, in another, £38 a year). The only change is that the employer pays the (in this case) pension scheme contributions directly themselves instead of “paying” them to the employee and then deducting them immediately in one and the same transaction. If they did the same thing with income tax, it would be immediately clear that, as we maintain, workers don’t pay this tax but that employers do. What workers are paid is their take-home pay. That’s what we get to live on and reproduce our working energy and skills. In fact, it’s not clear why employers don’t do this anyway. It would stop workers grumbling about the difference between their purely nominal gross pay and their take-home pay that is the effective amount they have to spend. Perhaps they want to maintain the illusion amongst workers that we do pay taxes and so have an interest in tax questions. Banks again An item on our website (www.worldsocialism.org/wsm-pages/currencies.html) on the myth that banks can “create credit” by a mere stroke of the pen has elicited a response from Belgium, from three members of a party there called Vivant. Joseph Meyer, a member of the parliament of the German-speaking region of Belgium, emailed us: “In the article ‘Major Douglas Rides Again’ the author made an incredible stupid statement, when he wrote ‘. . . banks cannot create credit-money on their own . . .’ Because the banks do this all the time, you really should publish a correcting article, in order to maintain your party’s credibility”. A key plank in Vivant’s programme is a “citizens’ basic income” for all (also favoured by the Green Party here) and it seems that they have been tempted by “funny money” theories to explain how this would be financed. Actually, the passage our correspondent gives does not appear in the article. What we argue in it is that banks cannot lend out more money than has been deposited with them, which is indeed a denial that they can “create new credit-money on their own”. What banks do every day is lend out money deposited with them, making a profit out of the difference between the rate of interest they charge and the rate they pay to depositors. The second correspondent refers us to a site of University College Dublin (www.ucd.ie/economic/teaching/macro12.ppt) on the “creation of money” which he claims backs up Vivant’s view. Despite the misleading title (banks don’t create money, just lend it), the site in fact backs up our claim since it shows clearly that, if there is a requirement that a bank must retain 10 percent of its assets in cash, and if 1000 euros are deposited with it, it can only lend out 900 euros and not 9000 (as is frequently misunderstood). True, if the 900 euros is eventually deposited in a bank, then a further 810 euros can be loaned, and if this is also eventually deposited, a further 729 euros, and so on until a total of 9000 euros is lent out, but only because in total 10,000 euros will have been deposited over the same period. In this (rather unrealistic, but not theoretically impossible) scenario which is used in all economics textbooks these days, if anybody could be said to have “created credit” it would be the depositors not the banks. It is their money that the banks re-)lend not money supposedly created by a mere stroke of the pen. The third correspondent ends his email: “you are wrong, and if socialism is your concern, you should admit [it]”. Socialism is very much our concern, but why should an accurate description of how capitalism works, in this case in relation to banks, be regarded as somehow anti-socialist? In fact, by showing how monetary reforms, whether based on accurate or inaccurate theory, cannot solve the problems facing wage and salary workers under capitalism, this confirms that the only way out is to establish the common ownership and democratic control of the means of life, with production to satisfy people’s needs and not for profit, and distribution in accordance with the principle “from each according to their ability, to each according to their needs”. As such, socialism will be a society without money and its problems. Banks will become redundant and the buildings and computer equipment they currently take up will be freed for other purposes. Back to contents page click

Banks again

An item on our website (www.worldsocialism.org/wsm-pages/currencies.html) on the myth that banks can “create credit” by a mere stroke of the pen has elicited a response from Belgium, from three members of a party there called Vivant. Joseph Meyer, a member of the parliament of the German-speaking region of Belgium, emailed us: “In the article ‘Major Douglas Rides Again’ the author made an incredible stupid statement, when he wrote ‘. . . banks cannot create credit-money on their own . . .’ Because the banks do this all the time, you really should publish a correcting article, in order to maintain your party’s credibility”.

A key plank in Vivant’s programme is a “citizens’ basic income” for all (also favoured by the Green Party here) and it seems that they have been tempted by “funny money” theories to explain how this would be financed. Actually, the passage our correspondent gives does not appear in the article. What we argue in it is that banks cannot lend out more money than has been deposited with them, which is indeed a denial that they can “create new credit-money on their own”. What banks do every day is lend out money deposited with them, making a profit out of the difference between the rate of interest they charge and the rate they pay to depositors.

The second correspondent refers us to a site of University College Dublin (www.ucd.ie/economic/teaching/macro12.ppt) on the “creation of money” which he claims backs up Vivant’s view. Despite the misleading title (banks don’t create money, just lend it), the site in fact backs up our claim since it shows clearly that, if there is a requirement that a bank must retain 10 percent of its assets in cash, and if 1000 euros are deposited with it, it can only lend out 900 euros and not 9000 (as is frequently misunderstood). True, if the 900 euros is eventually deposited in a bank, then a further 810 euros can be loaned, and if this is also eventually deposited, a further 729 euros, and so on until a total of 9000 euros is lent out, but only because in total 10,000 euros will have been deposited over the same period. In this (rather unrealistic, but not theoretically impossible) scenario which is used in all economics textbooks these days, if anybody could be said to have “created credit” it would be the depositors not the banks. It is their money that the banks re-)lend not money supposedly created by a mere stroke

of the pen.

The third correspondent ends his email: “you are wrong, and if socialism is your concern, you should admit [it]”. Socialism is very much our concern, but why should an accurate description of how capitalism works, in this case in relation to banks, be regarded as somehow anti-socialist? In fact, by showing how monetary reforms, whether based on accurate or inaccurate theory, cannot solve the problems facing wage and salary workers under capitalism, this confirms that the only way out is to establish the common ownership and democratic control of the means of life, with production to satisfy people’s needs and not for profit, and distribution in accordance with the principle “from each according to their ability, to each according to their needs”. As such, socialism will be a society without money and its problems. Banks will become redundant and the buildings and computer equipment they currently take up will be freed for other purposes.

Back to contents page click