"I can prove anything with statistics, except the truth"
-- Lord Canning, c. 1819
Does Canning’s aphorism still hold true, given that data collection and statistical analysis have progressed beyond all recognition in the last two hundred years? This article tests that proposition.
It is still true, because of the interests for which statistics are deployed. We know, or should know, that CPI indexation of prices fails to reflect the true rate of decline in the purchasing power of fiat currencies. That is at least a simple case of governments saving money on indexation. But being economical with the statistical truth is a far wider practice encompassing input suppression, misleading deployment, and their use to support beliefs and preferred outcomes instead of backing up properly reasoned economic and monetary a priori theory.
This article finds that the application of all these methods corrupt monetary statistics, including the three principal components of the equation of exchange. This analysis is sparked by recent changes to the definition of M1 money supply in the US.
Introduction
Monetarists have long held that there is a relationship between changes in the quantity of circulating currency and the general level of prices. It is not the only factor governing the relation, but it has been generally established to be true. So persuasive is the theoretical case, that no one — not even modern monetary theorists — deny it. We generally assume that the monetary statistics, the sheet anchor to the equation of exchange that emerged over a century ago, are reliable. But even monetary statistics whose components drop out of accounting identities end up being sliced and diced at the behest of the authorities, raising the question as to what we should regard as money at a time of unprecedented peacetime global monetary expansion. And the monetary policy planners moving the goal posts question by their actions the macroeconomic habit of relying solely on statistical evidence for predicting outcomes.
In February, the Fed changed the definition of M1 to include “Savings deposits” and “Other checkable deposits”. They are now combined and reported as “Other liquid deposits”. The effect is to increase M1 but to leave M2 unchanged, as illustrated in Figure 1.
The change accepts the reality, long recognised in the Austrian school’s definition of money supply (AMS), that depositors and banks assume savings accounts are just another form of money available for spending on day-to-day transactions. Monetary policy planners generally circumvent such considerations, looking at monetary definitions from their policy viewpoint instead of the perspective of money’s users.
For statistics junkies, there is a disadvantage in that the new M1 is only readily available as a retrospective monthly average instead of a more current weekly average. This has the effect of under recording the increase of M1 in this statistic at times of rapidly rising monetary inflation. And importantly, M1 is so much modified by these changes as to be rendered useless as a statistical record of monetary inflation.
This raises other questions, such as should we regard broad money or narrow money as the primary indicator of changes in the money supply? And, more deeply, should we ignore the statistical detail and try to understand money from an a priori analysis of the theory of exchange? This is the key difference in the approach of establishment monetarists compared with the Austrian school. Monetarists today, in common with other macroeconomic schools, test propositions by statistical correlation, thereby avoiding the necessity of sound theoretical analysis. Consequently, the definition of money rarely progresses beyond simplistic propositions. And its true use value, which is defined by less predictable human action, is ignored.
The Austrian school generally disregarded the statistical approach to money, until Murray Rothbard attempted to define circulating currency solely in the context of US monetary statistics, work that was consolidated by Joseph Salerno.[i] But slotting different monetary statistics into any combination has never been standardised, so what applies in America, which cannot be precisely defined anyway, doesn’t apply elsewhere. Nor does it when the makeup of a monetary component is altered, excluded or included, such as the current modifications to M1.
Therefore, whatever statistical evidence there is can only be used to corroborate a theoretical analysis, and not be accepted as prima facie evidence. As Lord Canning put it two centuries ago, you can prove anything with statistics but the truth.
Defining money
A theoretical approach to understanding money must start by defining it. This definition is taken from the glossary to von Mises’s Human Action:“The most commonly used medium of exchange in society. A community’s most marketable economic good, which people seek primarily for the purpose of later exchanging units of it for the goods or services they prefer. The circulating media most readily accepted for the payment for goods, services and outstanding debts. Money is an indispensable factor in the development of the division of labour and the resulting indirect exchanges upon which modern civilisation is based.”In other words, money is the medium that links production with consumption through the division of labour. It must be immediately available for that purpose. That certainly includes cash in circulation and money in the bank. Correctly, it is now argued by the Fed that because in practice savings are instantly available to bank depositors, that they are cash equivalents. But there are other important aspects of money, such as unspent government balances. Because that can be drawn down at any time, it is money as well, just as if it were money due to an ordinary depositor. But that is not included in the Fed’s definition of M1 (renamed M1 SL), which is an important omission given recent balances on the government’s general account of as much as $1.7 trillion. If, as well as savings deposits, unspent government balances had been included, M1 SL money supply would have looked more like Rothbard’s Austrian money supply (AMS) in Figure 2.
There are good theoretical grounds behind the Austrian money supply calculation, but the absence of the government’s general account in the official M1 calculation disqualifies it from being a true reflection of cash and cash alternatives available for spending. Consequently, official M1 has not yet caught up with AMS, having risen from $3,977bn in January 2020 to $18,105 exactly a year later, an increase of 355%. Over the same timescale AMS rose from $14,082 to $20,614, an increase of 46% — less dramatic perhaps, but genuine.
When it comes to managing expectations, a genuine increase in narrow money of 46% is of greater concern than a far larger increase due to changes in the statistic. This appears to be the reason for the Fed’s part-conversion to Austrian money supply. But they chose a halfway house, which signals perhaps less of a comprehension about what money represents to the wider public and more of a desire to conceal the true state of monetary affairs. And by suppressing interest rates, monetary policy attempts to increase the circulation of money which, the planners appear to believe, would otherwise sit in bank deposits unutilised. The fact that bank deposits are the backing for bank credit whose expansion is also desired escapes this line of reasoning, but that does not stop planners trying to increase the circulation of money.
The velocity myth
Even with M1 money supply at a lower figure that AMS, velocity of circulation is close to unity. Velocity is a widely accepted concept, used as a statistic to promote macroeconomic discourse. The St Louis Fed defines it as follows:
The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
This is patently untrue. For it to be correct there would be no relation between production and consumption, and consumers would somehow end up with money to spend without earning it. Money-printing might appear to satisfy this condition, because some money is produced out of thin air instead of being genuinely earned by economic actors. It does not excuse this calumny. What makes this statistical approach acceptable to neo-Keynesians is the denial of Say’s law, which describes the rationale behind the division of labour and points out that money is the most marketable intermediate good whose primary function permits production to be turned into consumption.
If there is one concept that illustrates the difference between a top-down macro-economic approach and the reality of everyday life it is concepts such as the velocity of circulation of money.
Compare the following statements:
“Whenever the interest rate on financial assets is low, the desire to hold money falls as people try to exchange it for other goods or financial assets. As a result, the velocity of circulation rises. Hence, when the money demand is low, the velocity will be high. Conversely, when the opportunity cost/alternate cost is low, money demand is high, and the velocity of circulation is low”.
- Corporate Finance Institute – What is velocity of circulation?
This is in line with monetary planners’ policy of interest rate suppression. They suppress the interest rate to encourage monetary circulation. But if this is valid, then the opposite cannot be true. Yet today, falling velocity to approximately unity with GDP has been accompanied by falling interest rates, even to the zero bound, disproving macroeconomic assumptions.
The next statement is from an economist in the classical, Austrian tradition:
“The mathematical economists refuse to start from the various individuals’ demand for and supply of money. They introduce instead the spurious notion of velocity of circulation according to the pattern of mechanics.”
- Ludwig von Mises, Human Action.
In effect, von Mises is saying it is free markets that decide how money is used, not state management of interest rates.
The mathematical economist might attempt to argue that interest rates affect the relationship between consumption and savings, with higher rates reducing immediate consumption. But that is a red herring, because GDP includes business investment and government spending financed by savings and therefore money not spent on direct consumption. To further understand the errors in the velocity concept we must delve into its origins.
The notion of velocity of circulation arose from the quantity theory of money, which links changes in the quantity of money to changes in the general level of prices. This is set out in the equation of exchange. The basic elements are money, velocity and total spending, represented by GDP. The following is the simplest of a number of ways it has been expressed:
Money x Velocity = Total Spending (or GDP)
Assuming we can measure both the quantity of money and total spending, we end up with velocity. But this does not tell us why velocity might vary: all we know is that it must vary in order to balance the equation. You could equally state that two completely unrelated metrics can be put into a mathematical equation, so long as a variable is included whose only function is to always make the equation balance. In other words, velocity is not a valid expression of the relationship between money and prices; it is merely there to balance an equation that otherwise does not exist.
Von Mises’s criticism is based on the philosopher’s logic that economics is a social and not a physical science. Therefore, mathematical relationships must be strictly confined to accounting and not be confused with resolving economic issues. Unfortunately, economists and commentators have the concept of velocity so ingrained in their thinking that this vital point escapes them.
The only apparent certainty in the equation of exchange is the quantity of money, assuming it is all recorded. No one seems to allow for unrecorded money or assets that can be assumed to be held as readily accessible cash alternatives. Furthermore, if the money is sound, as it was when the quantity theory of money was devised, one could deduce that after a time lag to allow it to fully circulate, an increase in its quantity would more directly tend to raise prices, because changes in the general level of personal liquidity in a population whose money is sound tend to be more stable than that under a fiat money regime.
Today we no longer have sound money, whose purchasing power was regulated by human preferences across national boundaries without impediment. Instead, we have fiat currencies whose purchasing power is formalised in foreign exchanges and corrupted by state intervention. An illustrative example of the consequences is given to us from the Icelandic krona, which on 8th October 2008 suddenly halved in value, which had nothing to do with changes in the quantity of money, its velocity of circulation or Iceland’s GDP.
In economic history, Iceland’s currency collapse was not an isolated event. The purchasing power of a fiat currency varies continually, even to the point of losing it altogether irrespective of changes in its quantity. The truth of the matter is that the utility of a fiat currency in the short-term is entirely dependent on the subjective opinions of individuals expressed through markets and has little to do with a mechanical quantity relationship. In this respect, merely the potential for unlimited currency issuance or a change in perceptions of the issuer’s financial stability, as Iceland discovered, can be enough to destabilise it.
According to the equation of exchange, this is not how things should work. The order of events is first you have an increase in the quantity of money and then prices rise, because monetarist logic states that prices rise as a result of the extra money being spent, not as a result of money yet to be spent. With a mechanical theory there can be no room for subjectivity.
It is therefore nonsense to conclude that velocity is a vital signal of some sort. Linking the relationship between changes in the quantity of money to the effect on prices is certainly more justified in the case of sound money, backed by and freely exchangeable into gold coin. But no material changes to the original concept have allowed for the different characteristics between sound and fiat moneys.
Monetarist theory in its current form is at the very least still a red herring until monetarists finally discover velocity is no more than a factor to make their equation balance. It is indicative of the false mechanisation of human behaviour by modern macro-economists. However, it should also be noted that it is impossible to square the concept of velocity of circulation with one simple fact of everyday life: we earn our salaries and make our profits once and we dispose of them. That’s a constant velocity of exactly one, assuming no change in cash levels over the period under consideration.
This is the irrefutable conclusion of Say’s law. But it was dismissed by Keynes in his General Theory to make way for his macroeconomic fallacies.
The implications of monetary expansion
Following Rothbard’s logic, that money and its immediately encashable equivalents in the mind’s eye of the individual are together the true money supply, we can see from Figure 2 above that in an economy whose annualised GDP is estimated at $21.5 trillion and with Austrian money supply standing at $20.6 trillion, it is 95% of all transactions, suggesting that the average economic actor holds almost a year’s worth of cash liquidity. Clearly, as a result of continual monetary expansion, the US economy is awash with money that hardly, on average, circulates.
In addition to AMS, there is credit money, which is rightly excluded, because being on the other side of a bank’s balance sheet from deposits it is not necessarily available for immediate payments — the bank can always restrict issues of undrawn credit. In this category we can also include shadow banking balances. And payments by credit card are not instantaneous, the payment for goods being deferred by up to a month, so these and similar credit facilities must be excluded as well.
Obviously, there is a link between bank credit expansion and the growth of deposits, raising the question of whether deposits so created should be included in AMS. The answer is no distinction should be made between deposits and those that result from credit expansion, because for the user all bank deposits are regarded as money, whatever their origin.
Left to free markets and sound money, money would undoubtedly be scarce, but plentiful enough to act as the medium of exchange between production and consumption. Therefore, fiat dollar money existing in the quantity that it does is the consequence of easy money policies. Rather than assuming that negative rates will stimulate the population to use it, which is undoubtedly behind official thinking, efforts should be put into considering how to reduce the danger of excess money being unexpectedly mobilised for goods.
The inconvenience of the current position is explained by von Mises’s description of money’s role as “a community’s most marketable economic good, which people seek primarily for the purpose of later exchanging units of it for the goods or services they prefer”. The risk is that substantial quantities of money will be mobilised for that function if people decide to reduce their relationship between owning money in reserve and owning goods which they do not immediately need.
But with covid lockdowns knocking out swathes of industrial production, the goods and services are not available to satisfy this potential demand. Consequently, prices can only rise significantly until the money relationship rebalances. In other words, nominal GDP, being no more than a money total, which we discuss below, will appear to rise dramatically. And with official estimates of price inflation blatantly suppressed, officially recorded “real” GDP will be declared as evidence of the success of monetary policy in rescuing the economy. But remember Canning’s aphorism: I can prove anything with statistics, except the truth…
GDP fallacies
So far, we have shown the errors in official monetary statistics and explained why velocity of circulation is meaningless. Ignorance over velocity of circulation can perhaps be understood because the reasoning behind the equation of exchange predates macroeconomics and is a belief only partially backed by reasoning. We now turn our attention to the third and final component of the equation of exchange. Ignorance cannot so easily be justified about GDP, which was invented in the 1930s, and whose only practical use is to indicate to the state the potential for tax revenues. Its role in the equation of exchange as a substitute for prices is misleading.
GDP is no more than a money total of recorded transactions during a period, usually over a year or annualised. It does not reveal the quality of transactions and economic progress as commonly supposed. It is consistent with what von Mises described as an evenly rotating economy. Again, we can refer to the glossary in his Human Action:
“An imaginary economy in which all transactions and physical conditions are repeated without change in each similar cycle of time. Everything is imagined to continue exactly as before, including all human ideas and goals. Under such fictitious constant repetitive conditions, there can be no net change in any supply or demand and therefore there cannot be any change in prices.”
By deflating it for officially recorded price inflation, GDP appears to meet all the conditions of an evenly rotating economy. Plainly, it does not accord with reality. Furthermore, if the quantity of money was constant and the balance of trade meant it was contained within a community, then that community’s GDP would also remain constant. The logic of this statement is unchallengeable.
Therefore, numerical increases in an evenly rotating economy must come from the money side. In other words, if the quantity of money and credit in an economy is increased, so will GDP. And none of its increase can be attributed to an improvement in economic conditions, because it is modelled on a constantly rotating economy. This is clearly illustrated by removing monetary expansion from the GDP statistic, as illustrated in Figure 3.
Deflating nominal GDP by broad money tells us that US GDP is indeed evenly rotating and has been doing so with not much variation for over four decades. The only notable exceptions were following the Lehman crisis when the US economy entered a brief downturn greater than the expansion of broad money, and in 2020. The latter reflects a large increase in unemployed and underemployed individuals who are still receiving direct payments from the government while locked down due to the coronavirus.
The severity of economic contraction last year was thereby concealed by the expansion of broad money. And its further expansion since the last data point (Q3 2020) will continue to mask the true depth of the economic slump. And for further confirmation, Figure 4 shows the same relationship between GDP and money supply for the UK, where similar factors are at play.
Establishment economists make no differentiation between the real economy and GDP. One never hears or reads any distinction between the two, and Mises’s evenly rotating economy is almost exclusively confined to a few unread pre-Keynesian texts. But its expansion being linked entirely to increases in the money supply reveals that its increase is completely meaningless. But then, monetary and economic policies need to deliver something to justify their existence, not to mention the livings of all the government economists and statisticians and of their opposite numbers in financial and banking institutions.
But with all the inflation money being funnelled into economies today, there can be little doubt that GDP will increase accordingly. But as the charts in Figures 3 and 4 show, with productive capacity cut, the US and UK economies are in a depression.
Canning calls out to us. Forget the statistics, just look around you.
Former Project Veritas & O’Keefe Media Group operative and Pfizer formulation analyst scientist Justin Leslie revealed previously unpublished recordings showing Pfizer’s top vaccine researchers discussing major concerns surrounding COVID-19 vaccines. Leslie delivered these recordings to Veritas in late 2021, but they were never published:
Principal scientist at Pfizer, Kanwall Gill in 2021:
“We had no idea how it’s going to look like. MRNA vaccines have been there for 50 years, but nothing went to clinical trial because MRNA have been known to have side effects.”
Featured in Leslie’s footage is Kanwal Gill, a principal scientist at Pfizer. Gill was weary of MRNA technology given its long research history yet lack of approved commercial products. She called the vaccines “sneaky,” suggesting latent side effects could emerge in time.
Gill goes on to illustrate how the vaccine formulation process was dramatically rushed under the FDA’s Emergency Use Authorization and adds that profit incentives likely played a role:
Pfizer's principal scientist in 2021:
“It takes 10 year for a vaccine to come out. It takes years of observations... we are doing everything at the same time."
"It’s going to affect my heart, and I’m going to die. And nobody’s talking about that."
Leslie recorded another colleague, Pfizer’s pharmaceutical formulation scientist Ramin Darvari, who raised the since-validated concern that repeat booster intake could damage the cardiovascular system:
Pfizer's pharmaceutical formulation scientist, Ramin Darvari, in 2021:
“They’re engineering it specifically for me to take the next one, so increasing my consumption."
“It’s going to affect my heart, and I’m going to die. And nobody’s talking about that.”
None of these claims will be shocking to hear in 2024, but it is telling that high-level Pfizer researchers were discussing these topics in private while the company assured the public of “no serious safety concerns” upon the jab’s release:
Vaccine for Children is a Different Formulation
Leslie sent me a little-known FDA-Pfizer conference — a 7-hour Zoom meeting published in tandem with the approval of the vaccine for 5 – 11 year-olds — during which Pfizer’s vice presidents of vaccine research and development, Nicholas Warne and William Gruber, discussed a last-minute change to the vaccine’s “buffer” — from “PBS” to “Tris” — to improve its shelf life. For about 30 seconds of these 7 hours, Gruber acknowledged that the new formula was NOT the one used in clinical trials (emphasis mine):
“The studies were done using the same volume… but contained the PBS buffer. We obviously had extensive consultations with the FDA and it was determined that the clinical studies were not required because, again, the LNP and the MRNA are the same and the behavior — in terms of reactogenicity and efficacy — are expected to be the same.”
According to Leslie, the tweaked “buffer” dramatically changed the temperature needed for storage: “Before they changed this last step of the formulation, the formula was to be kept at -80 degrees Celsius. After they changed the last step, we kept them at 2 to 8 degrees celsius,” Leslie told me.
The claims are backed up in the referenced video presentation:
I’m no vaccinologist but an 80-degree temperature delta — and a 5x shelf-life in a warmer climate — seems like a significant change that might warrant clinical trials before commercial release.
Despite this information technically being public, there has been virtually no media scrutiny or even coverage — and in fact, most were told the vaccine for children was the same formula but just a smaller dose — which is perhaps due to a combination of the information being buried within a 7-hour jargon-filled presentation and our media being totally dysfunctional.
Bohemian Grove?
Leslie’s 2-hour long documentary on his experience at both Pfizer and O’Keefe’s companies concludes on an interesting note: James O’Keefe attended an outing at the Bohemian Grove.
Leslie offers this photo of James’ Bohemian Grove “GATE” slip as evidence, left on his work desk atop a copy of his book, “American Muckraker”:
My thoughts on the Bohemian Grove: my good friend’s dad was its general manager for several decades. From what I have gathered through that connection, the Bohemian Grove is not some version of the Illuminati, at least not in the institutional sense.
Do powerful elites hangout there? Absolutely. Do they discuss their plans for the world while hanging out there? I’m sure it has happened. Do they have a weird ritual with a giant owl? Yep, Alex Jones showed that to the world.
My perspective is based on conversations with my friend and my belief that his father is not lying to him. I could be wrong and am open to evidence — like if boxer Ryan Garcia decides to produce evidence regarding his rape claims — and I do find it a bit strange the club would invite O’Keefe who is notorious for covertly filming, but Occam’s razor would lead me to believe the club is — as it was under my friend’s dad — run by boomer conservatives the extent of whose politics include disliking wokeness, immigration, and Biden (common subjects of O’Keefe’s work).
Therefore, I don’t find O’Keefe’s visit to the club indicative that he is some sort of Operation Mockingbird asset as Leslie tries to depict (however Mockingbird is a 100% legitimate conspiracy). I have also met James several times and even came close to joining OMG. While I disagreed with James on the significance of many of his stories — finding some to be overhyped and showy — I never doubted his conviction in them.
As for why Leslie’s story was squashed… all my sources told me it was to avoid jail time for Veritas executives.
Feel free to watch Leslie’s full documentary here and decide for yourself.
Fun fact — Justin Leslie was also the operative behind this mega-viral Project Veritas story where Pfizer’s director of R&D claimed the company was privately mutating COVID-19 behind closed doors:
BREAKING: @Pfizer Exploring "Mutating" COVID-19 Virus For New Vaccines
"Don't tell anyone this...There is a risk...have to be very controlled to make sure this virus you mutate doesn't create something...the way that the virus started in Wuhan, to be honest."#DirectedEvolutionpic.twitter.com/xaRvlD5qTo
“[…] our findings support the hypothesis that the intrauterine environment, particularly essential and non-essential metals, affect epigenetic aging biomarkers across the life course.”
Credit: 2024 Bozack et al.
“[…] our findings support the hypothesis that the intrauterine environment, particularly essential and non-essential metals, affect epigenetic aging biomarkers across the life course.”
BUFFALO, NY- March 12, 2024 – A new research paper was published inAging (listed by MEDLINE/PubMed as “Aging (Albany NY)” and “Aging-US” by Web of Science) Volume 16, Issue 4, entitled, “Associations of prenatal one-carbon metabolism nutrients and metals with epigenetic aging biomarkers at birth and in childhood in a US cohort.”
Epigenetic gestational age acceleration (EGAA) at birth and epigenetic age acceleration (EAA) in childhood may be biomarkers of the intrauterine environment. In this new study, researchers Anne K. Bozack, Sheryl L. Rifas-Shiman, Andrea A. Baccarelli, Robert O. Wright, Diane R. Gold, Emily Oken, Marie-France Hivert, and Andres Cardenas from Stanford University School of Medicine, Harvard Medical School, Harvard T.H. Chan School of Public Health, Columbia University, and Icahn School of Medicine at Mount Sinai investigated the extent to which first-trimester folate, B12, 5 essential and 7 non-essential metals in maternal circulation are associated with EGAA and EAA in early life.
“[…] we hypothesized that OCM [one-carbon metabolism] nutrients and essential metals would be positively associated with EGAA and non-essential metals would be negatively associated with EGAA. We also investigated nonlinear associations and associations with mixtures of micronutrients and metals.”
Bohlin EGAA and Horvath pan-tissue and skin and blood EAA were calculated using DNA methylation measured in cord blood (N=351) and mid-childhood blood (N=326; median age = 7.7 years) in the Project Viva pre-birth cohort. A one standard deviation increase in individual essential metals (copper, manganese, and zinc) was associated with 0.94-1.2 weeks lower Horvath EAA at birth, and patterns of exposures identified by exploratory factor analysis suggested that a common source of essential metals was associated with Horvath EAA. The researchers also observed evidence of nonlinear associations of zinc with Bohlin EGAA, magnesium and lead with Horvath EAA, and cesium with skin and blood EAA at birth. Overall, associations at birth did not persist in mid-childhood; however, arsenic was associated with greater EAA at birth and in childhood.
“Prenatal metals, including essential metals and arsenic, are associated with epigenetic aging in early life, which might be associated with future health.”
Read the full paper: DOI:https://doi.org/10.18632/aging.205602
Corresponding Author: Andres Cardenas
Corresponding Email:andres.cardenas@stanford.edu
Keywords: epigenetic age acceleration, metals, folate, B12, prenatal exposures
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About Aging:
Launched in 2009, Aging publishes papers of general interest and biological significance in all fields of aging research and age-related diseases, including cancer—and now, with a special focus on COVID-19 vulnerability as an age-dependent syndrome. Topics in Aging go beyond traditional gerontology, including, but not limited to, cellular and molecular biology, human age-related diseases, pathology in model organisms, signal transduction pathways (e.g., p53, sirtuins, and PI-3K/AKT/mTOR, among others), and approaches to modulating these signaling pathways.
Please visit our website at www.Aging-US.com and connect with us:
National insurance, income tax, VAT, capital gains tax, inheritance tax… it’s easy to get confused about the many different ways we contribute to the cost of running the country. The budget announcement is the key time each year when the government shares its financial plans with us all, and announces changes that may make a tangible difference to what you pay.
But you’ll likely be hearing a lot more about taxes in the coming months – promises to cut or raise them are an easy win (or lose) for politicians in an election year. We may even get at least one “mini-budget”.
If you’ve recently entered the workforce or the housing market, you may still be wrapping your mind around all of these terms. Here is what you need to know about the different types of taxes and how they affect you.
The UK broadly uses three ways to collect tax:
1. When you earn money
If you are an employee or own a business, taxes are deducted from your salary or profits you make. For most people, this happens in two ways: income tax, and national insurance contributions (or NICs).
If you are self-employed, you will have to pay your taxes via an annual tax return assessment. You might also have to pay taxes this way for interest you earn on savings, dividends (distribution of profits from a company or shares you own) received and most other forms of income not taxed before you get it.
VAT and excise duties are taxes on most goods and services you buy, with some exceptions like books and children’s clothing. About 20% of the total tax collected is VAT.
3. Taxes on wealth and assets
These are mainly taxes on the money you earn if you sell assets (like property or stocks) for more than you bought them for, or when you pass on assets in an inheritance. In the latter case in the UK, the recipient doesn’t pay this, it is the estate paying it out that must cover this if due. These taxes contribute only about 3% to the total tax collected.
You also likely have to pay council tax, which is set by the council you live in based on the value of your house or flat. It is paid by the user of the property, no matter if you own or rent. If you are a full-time student or on some apprenticeship schemes, you may get a deduction or not have to pay council tax at all.
This article is part of Quarter Life, a series about issues affecting those of us in our 20s and 30s. From the challenges of beginning a career and taking care of our mental health, to the excitement of starting a family, adopting a pet or just making friends as an adult. The articles in this series explore the questions and bring answers as we navigate this turbulent period of life.
Put together, these totalled almost £790 billion in 2022-23, which the government spends on public services such as the NHS, schools and social care. The government collects taxes from all sources and sets its spending plans accordingly, borrowing to make up any difference between the two.
Income tax
The amount of income tax you pay is determined by where your income sits in a series of “bands” set by the government. Almost everyone is entitled to a “personal allowance”, currently £12,570, which you can earn without needing to pay any income tax.
You then pay 20% in tax on each pound of income you earn (across all sources) from £12,570-£50,270. You pay 40% on each extra pound up to £125,140 and 45% over this. If you earn more than £100,000, the personal allowance (amount of untaxed income) starts to decrease.
If you are self-employed, the same rates apply to you. You just don’t have an employer to take this off your salary each month. Instead, you have to make sure you have enough money at the end of the year to pay this directly to the government.
The government can increase the threshold limits to adjust for inflation. This tries to ensure any wage rise you get in response to higher prices doesn’t lead to you having to pay a higher tax rate. However, the government announced in 2021 that they would freeze these thresholds until 2026 (extended now to 2028), arguing that it would help repay the costs of the pandemic.
Given wages are now rising for many to help with the cost of living crisis, this means many people will pay more income tax this coming year than they did before. This is sometimes referred to as “fiscal drag” – where lower earners are “dragged” into paying higher tax rates, or being taxed on more of their income.
National insurance
National insurance contributions (NICs) are a second “tax” you pay on your income – or to be precise, on your earned income (your salary). You don’t pay this on some forms of income, including savings or dividends, and you also don’t pay it once you reach state retirement age (currently 66).
While Jeremy Hunt, the current chancellor of the exchequer, didn’t adjust income tax meaningfully in this year’s budget, he did announce a cut to NICs. This was a surprise to many, as we had already seen rates fall from 12% to 10% on incomes higher than £242/week in January. It will now fall again to 8% from April.
While this is charged separately to income tax, in reality it all just goes into one pot with other taxes. Some, including the chancellor, say it is time to merge these two deductions and make this simpler for everyone. In his budget speech this year, Hunt said he’d like to see this tax go entirely. He thinks this isn’t fair on those who have to pay it, as it is only charged on some forms of income and on some workers.
I wouldn’t hold my breath for this to happen however, and even if it did, there are huge sums linked to NICs (nearly £180bn last year) so it would almost certainly have to be collected from elsewhere (such as via an increase in income taxes, or a lot more borrowing) to make sure the government could still balance its books.
There are likely to be further tweaks to the UK’s tax system soon, perhaps by the current government before the election – and almost certainly if there is a change of government.
Wealth taxes may be in line for a change. In the budget, the chancellor reduced capital gains taxes on sales of assets such as second properties (from 28% to 24%). These types of taxes provide only a limited amount of money to the government, as quite high thresholds apply for inheritance tax (up to £1 million if you are passing on a family home).
There are calls from many quarters though to look again at these types of taxes. Wealth inequality (the differences between total wealth held by the richest compared to the poorest) in the UK is very high (much higher than income inequality) and rising.
But how to do this effectively is a matter of much debate. A recent study suggested a one-off tax on total wealth held over a certain threshold might work. But wealth taxes are challenging to make work in practice, and both main political parties have already said this isn’t an option they are considering currently.
Andy Lymer and his colleagues at the Centre for Personal Financial Wellbeing at Aston University currently or have recently received funding for their research work from a variety of funding bodies including the UK's Money and Pension Service, the Aviva Foundation, Fair4All Finance, NEST Insight, the Gambling Commission, Vivid Housing and the ESRC, amongst others.
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