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?


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).

15 comments for “Spot the difference

  1. Lord T
    June 14, 2011 at 8:36 pm

    Theoretically the second way we could grow our own and avoid the cost. The first way we have no option like that.

    It is behavioural changes being forced on us either way.

    • June 14, 2011 at 9:41 pm

      You could grow your own, but first you’d have to buy several acres of land from somebody who owns it, and then you’d need to pay scientists to do the extracting bit. From the point of view of the owner of the field and the scientist, it’s easy extra cash.

      • Lord T
        June 15, 2011 at 12:41 pm

        I see it in two ways.

        Tax is where they take money from you and into the treasury.
        That can be income tax, VAT, fees for government services, fines, etc.

        Then there is behavioral modification by legislation.
        Than can be burglary laws, drunken laws, etc. When the intent is to stop the behavior and it is punished by some form of punishment, which may include fines.

        Government, being insatiable, use legislation as a way to increase income by making trivial laws such as the seat belts, smoking laws which they then use to gain further taxes via fines. It is a con game. Thus burglers do not get prosecuted, while smokers get an £80 tax. 🙄

  2. PPS
    June 14, 2011 at 9:50 pm

    Do you consider all changes in legislation that trigger an extra cost to the public as a tax?
    1. Cars are required to have seat belts, car makers fit seat belts and cars are more expensive as a result. Tax or Not?
    2. Drivers are required to have insurance. Tax or not?

    Your example seems to have a subsidy element to it and the introduction(?) of a new industry(extraction labs). Is this what makes it a tax?

    Is it the utility aspect of moonlight that makes it a tax?
    Moonlight is still available for free in this example so you only need to buy cucumbers when you have a requirement for moonlight during cloud cover.

    • June 14, 2011 at 10:09 pm

      Seatbelts and insurance are an emotive issue, so let’s avoid that and look at the MOT.

      Cars have to have these every year in the UK, let’s say the cost of the MOT (over and above repairs which you would have paid for any way) is £100. There are 30 million cars on the road, so that’s income of £3 billion a year for garages.

      Other countries (i.e. Germany) have the MOT every two years, so if we had the MOT every two years, the annualised cost is £1.5 billion.

      There are (let’s say) 30,000 serious car accidents a year on UK roads, if we only had the MOT every two years, that might go up to (let’s say) 40,000.

      So avoiding 10,000 accidents a year costs car drivers (who are such a large group as to be synonymous with ‘society in general’) £1.5 billion a year. If the ‘cost’ of each individual accident (death, lifetime disability, serious injury, hospital stay, loss of earnings, damage to property) is more than £1.5 billion divided by 10,000 = £150,000, then the annual MOT is a price worth paying as we are better off as a society and it is not a tax, the MOT is a way of internalising external costs.

      If the figures are slightly different (maybe the MOT costs £200 extra each time, maybe there would be only 5,000 additional accidents a year, maybe the average cost of an accident is only £50,000) then have an annual rather than biannual MOT makes us worse off as a society and can be seen as a tax on motorists which is collected by garages.

      • PPS
        June 14, 2011 at 10:24 pm

        So, the increase in cost to each consumer is considered a tax when society is better off economically?

        • June 14, 2011 at 11:48 pm

          Nope, it’s the other way round.

          The key is to minimise ‘cost to society’. Like I said, ‘car users’ is such a large group as to be synonymous with ‘society’, bearing in mind that car users are also victims of car accidents (whether they are in their cars or pedestrians at the time of the accident).

          We could, for example, make cars undergo an MOT every month, pushing up the annualised cost by £33 billion (which is income, from the point of view of garages), which might reduce the number of accidents by 1,000 a year.

          Clearly, the average cost of an accident is not £33 million (£33 billion divided by 1,000 accidents) so this is a ‘privately collected tax’ from the point of view of garages.
          So, to paraphrase what you said, the increase in cost to each consumer is considered a tax when one sector of society (garages) is better off economically, and society in general (everybody who is not a garage – whether car driver or pedestrian) is correspondingly worse off.

  3. June 15, 2011 at 10:24 am

    To be worse off is the definition of a tax, in your book?

    • June 15, 2011 at 1:16 pm

      No, I never said that.

      If the system is set up so that people have to pay money to other people for nothing in return, or for something which didn’t belong to the payee in the first place (whether indirectly – Scenario A – or directly via the government – Scenario B), then it’s a tax.

  4. Ian F4
    June 15, 2011 at 8:26 pm

    In scenario B the “profits being equal to the direct tax” is not a constant, once open to market forces the cost to the purchaser could go down (or up even), that is a different control mechanism to some faceless government bone head making back of fag packet decisions on cost.

    The real difference is the vast army of administrators needed by scenario A which would make the tax much higher, especially when they’re not collecting tax but parading around complaining about their pensions instead.

    • June 15, 2011 at 8:34 pm

      Ian F4, what makes you think that ‘market forces’ are at play here?

      Any group of people who can get the government to force people to use their services will also be able to make sure that there are big barriers to entry (moonbeam extractors will of course have to be trained, certified and approved by the European Association of Moonbeam Extractors first before they become and Approved Supplier).

      And this group will also be able to get the government to underpin guaranteed prices to the producers (just like farmers or windmill owners etc etc).

  5. Ian F4
    June 15, 2011 at 9:19 pm

    That still does not mean the profits will equal the tax, once you’ve passed to two or more private organisations the amounts become exposed to consumer driven demand and competition, that is different from finger in the air type calculations by some government apparatchik to derive a tax amount that will always be higher than before. I’m not saying payments will be lower with private companies, but there is always the chance they could be.

    • Lord T
      June 15, 2011 at 10:34 pm

      LOL. Have you ever known a private organisation with a competitor being anywhere near the price the government would charge for the same service even if it was a direct charge rather than a tax.

      Just think about that nursery that is closing because it wasn’t making money while mothers were paying a fortune to private companies.

      Could you imagine the price of whelks if the government was running a stall?

    • June 15, 2011 at 11:26 pm

      Ian F4, this is not supposed to be a precise mathematical equation – I have no strong opinion on whether A or B is worse as both are clearly excruciatingly awful.

      My point was that in either case there is an involuntary transfer of money from ‘the general public’ to chosen recipients because of decisions made by the government, ergo both transfers are ‘tax’.

      • Lord T
        June 16, 2011 at 11:02 am


        Because the government legislates that theft is illegal I cannot steal from the suopermarket. Thus I am forced to pay for my loaf of bread instead of stealing it and thus that is a tax. 😆

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