Episode 5 April 21, 2023 Hello, here's another Letter from The Cape. Today, you will need to get a pencil and paper out because we are going to do some sums. Before though, I am reminded of the 1959 song - PAYE - from Trinidad's most famous calypso musician, King Sparrow. This was a time when the Trinidadian independence movement was in full swing and the People's National Movement led by Dr Eric Williams was developing policies to take the nation beyond colonial rule. In that song, Sparrow sings: That's the law now in Trinidad If you don't like it, well that's too bad Take your things and get out today Because all who working must pay, yes The Doctor say to pay as you earn He was, of course referring to the fact that national jurisidictions have the capacity to enforce the imposition of tax liabilities that they impose on their citizens. How does that help us understand what the capacities of our federal government are? Well, here's a little game you can play with your friends or family over dinner. One person is the government and the rest pretend that they are citizens who face that tax liability. Today, I'll be the government and you can be the citizens. Just like the Sparrow understood, the rules are, that you have to pay me 100 game tokens each day or suffer the consequences. I alone issue the game tokens. In the game of Monopoly, the game tokens are bits of paper that are distributed by the 'bank', whereas in our game, we will just write numbers down on paper to record the transactions. So, you now have a problem. You don't have any tokens! How will you get my game tokens to pay the tax and avoid those serious consequences? As Sparrow noted - 'all those working must pay'. So, I will pay you 100 tokens if you do some work around my house each day. Just pretend okay! You realise that offering your labour to the 'government' is the only way you can get my tokens and avoid the consequences. Pencils at the ready! Draw two columns - the left column for government and the right column for you. Now I pay you 100 game tokens for your work around my house, so in the right column write - 'wages 100'. Do it. You have now solved problem No. 1 - the tax liability. In the right column, also write 'taxes 100'. Then underneath write 'saving 0'. Why? You earned 100 and paid taxes of 100, so there's no tokens left. In the left column write - 'government spending 100' - because I paid you 100 tokens. Also write - 'tax revenue 100' - to record the taxes received. Then underneath write 'fiscal injection 0' - which records the net effect of my fiscal policy - spending 100 less taxes 100 equals zero. Fiscal policy is the government's spending and tax decisions. We would say the fiscal position of the government is now 'balanced'. What did you learn? That when the fiscal position is balanced, the citizens cannot accumulate any game tokens. Meaning? That saving is zero and saving is the way to accumulate wealth in terms of game tokens. Also note that I had to spend first before you could meet the tax liability. From Philosophy 101 and Aristolean Logic we know that causality occurs when one event contributes to the production of another event which lies in the future. In our case, government spending 'causes' the citizens to have the tokens that they can use to pay taxes. The spending created the income that provided you with the capacity to pay the taxes. The taxes did not and could not 'fund' the spending. I issue the tokens exclusively and can create as many as I like whenever I like. Okay. Day 2. I want more work done around the house so I increase spending on labour services to 120. In the right column write 'wages 120' under your other numbers. The taxes remain at 100 per person. Now there is more work being down and less of you are unemployed. Also write - 'taxes 100' - to record the tax payment. Then do the sum and write - 'saving 20' - because you earned 120 and only paid 100 in taxes. You now have wealth equal to 20 tokens. In the left column write - 'spending 120' and 'taxes 100'. Do the sum and write - 'fiscal injection 20'. Why? This would call this a 'fiscal or budget deficit' because the government has spent more than it has withdrawn in taxes. I prefer to call it an injection - a positive connotation - because government has injected a positive net amount of tokens into the private sector. In this case, 20 tokens that were spent were left untaxed in the private sector. Now you know that a fiscal injection (deficit) allows you to save that many tokens and increase your net wealth. Sounds good. The fiscal injection also increased employment and private incomes. Another positive. Okay. Day 3. Jim Chalmers claims we must have 'budget repair' that the government has to 'live within its means'. He proposes to cut government spending. So we follow suit and I only offer 80 tokens - a cut of 40 - which means private incomes fall by that much and there is less paid work available. There is the same amount of work to be done, but there is unemployment because I won't pay for that work in Day 3. Taxes remain at 100. In the right column write 'wages 80'. Also write - 'taxes 100'. Then do the sum and write - 'saving minus 20' - because you earned 80 and paid 100 in taxes. In the left column write - 'spending 80' and 'taxes 100'. Do the sum and write - 'fiscal injection minus 20'. So the government is now in surplus because it has spent less into the economy than it has taken out in taxes. Where did you get the tokens on Day 3 to meet your deficit of 20? You would have to run down the wealth you had accumulated on Day 2 - the savings of 20. So the government surplus has destroyed your wealth by 20 tokens. That is bad. Now, try to relate these sums to the world we live in where we are told that government surpluses are desirable and deficits are to be avoided. Think about how stupid that sort of logic is. Next time we can introduce government debt into our little pencil and paper game for more shocking revelations. Until then, bye for now and take care.