Mark Wadsworth

This is a spare 'blog in case my main 'blog at markwadsworth.blogspot.com isn't working

Spot the difference

There are those who claim that a payment only counts as ‘tax’ if it is paid to the government and dismiss my notion that there is such a thing as ‘privately collected tax’. So can anybody tell me what the big difference is between Scenario A and Scenario B?

Background

The government decides, in its infinite wisdom, that we are relying too much on natural moonlight and should be sourcing more moonbeams from cucumbers instead, because that’s a ‘sustainable’ source and is unaffected by cloud cover (or some such silly argment). It sets a target that in future, one-fifth of all moonlight should be sourced from cucumbers.

Scenario A

The government works out how much cucumber growers and moonbeam extraction labs will need to be paid (£ umpteen billion) to supply this amount of moonlight, and so it increases income tax by a couple of per cent, or adds a surcharge of £ thousands to everybody’s domestic fuel bill, and then gives this money as a subsidy to the cucumber growing and moonbeam extraction labs as a cash subsidy.

They duly produce the amount of moonlight required, which the government then sells to the general public for its market value of precisely nothing (apart from people who want romantic lighting on a cloudy night, or people lost in the mountains who need the light to see where they’re going).

That’s a publicly collected tax and a publicly paid subsidy, simple enough.

Scenario B

The government simply passes a law that people have to source one-fifth of their moonlight from this new renewable source. So people are forced to pay £ thousands a year to the extraction labs, who in turn pass on a lot to the cucumber growers.

By and large, we observe that the profits earned by these suppliers is roughly equal to the amount of the subsidy that they would have received under Scenario A, only this time, the general public does not pay extra tax to the government, which the government then pays as a subsidy to the suppliers, the £ umpteen billion goes straight from the general public to the suppliers.

The income (or extra income) which the suppliers receive can be referred to as economic rent but in the instant case, I would include it in the narrower category of ‘privately collected tax’ (most, but not all ‘economic rent’ arises because of government action, for counter-example, see e.g. Premier League footballers’ salaries).

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