07 Jan 2011
January 7, 2011

Money has to move to be of value

1 Comment

Stationary money is of no value.  It just sits there.  Doing nothing.  Achieving nothing.  Rotting away as inflation eats into it.

Money needs to move.  Stretch its legs.  Be exchanged for goods and services so that the next owner can then use it to do the same.  My neighbour gets paid a bonus (and the government gets half) and spends the money on a conservatory.  The money goes to a carpenter, an electrician and some shop keepers.  The carpenter is able to pay himself from the contract (and the government gets half) and spends some of the money in the pub.  The girl behind the bar got a tip, which she spent on some flowers… and so on.

There is a very sad misconception that in order for one person to become wealthy then someone else has to become poor.  This is because people seem to think that wealth is about money that isn’t moving.  It isn’t.  Wealth is about money that moves.  In order to get out of this recession, and for the economy to grow, we need money to be moving around.  To be paid in salaries and bonuses so that it can be spent on goods, services and taxation.

This is something that Ed Miliband claims to understand: deficit was caused by a calamitous collapse in tax revenues

Now, I’m going to let you into a secret here, so pay attention.  About a year ago, after the government had announced the new 50% tax rate but before it came into effect, I was at a meeting with the Bank of England discussing the impact of the recession on SMEs in South East England.  We discussed the impending 50% tax rate and how SMEs would act to mitigate the effect of the increase.  What was fascinating was the disclosure that both the government and the Bank of England knew that the effect of the 50% rate would be a net reduction in tax revenues.

So everyone in politics knows that we need greater tax revenues but without killing the golden goose.  The goose in this case being the controversial banker’s bonuses.  My own take is this:

Let us all remember that these bonus payments will be taxed at 40% or 50%.  Add to that the employee’s NI contribution and the employer’s NI payments and you’ll find that the majority of these bonus payments will go straight to the government.

Then you have the VAT, Alcohol Duty, Car Tax, Stamp Duty etc. payable on whatever the bankers choose to spend the bonus on.  Oh, and the added profits and salaries – with resultant tax revenues – that go to the business that supply these goods.

A viewpoint which does not appeared to be shared by many of the contributors on Robert Peston’s blog where a lot of posters seem to think that we would be better off if the financial sector left the UK:

Tax their bonuses at 90%. Call their bluff. Let them go wherever they please – they are bound to run out of countries that will put up with their activities eventually.

Bankers bonuses are a distraction – re-introduce 95%-100% tax rate at say £250,000 – we must reset our big society and ‘enforce’ an increase in equality of outcome.

Bank profits need to be taxed at 100% minimum
Bank employees (and their consultants) need to have a maximum pay cap of say 40K per year.
Watch them squeak, let them run to the airport.

Really?  You do realise that you’d end up with 99% of zero whereas right now the government is getting about 75% of a large number? Somehow you people think that we’d have more money to spend on the NHS, schools, benefits etc without the massive tax revenues that the financial sector contributes!

A few people, however, do have their heads screwed on the right way around:

If you are a builder, plumber, carpenter, electrician, glazier, plasterer (to name but a few) plying your trade in the south-east of England chances are these bank bonuses will be like rain after a drought. The sector has suffered hard the last two years. Maybe now business will start to pick up.

Thank you Damian from Horsham.

As a champion of SMEs I fully support bank bonus payments as I look forward to the increased turnover that my friends, neighbours, colleagues and associates will receive in its wake.

One Response to Money has to move to be of value
  1. Hi -makes sense. Sounds a bit like the “trickledown effect” though and Im skeptical.


Leave a Reply

Your email address will not be published. Required fields are marked *